UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File No. 0-13470
NANOMETRICS INCORPORATED
(Exact name of Registrant as specified in its charter)
California 94-2276314
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1550 Buckeye Drive
Milpitas, California 95035
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 435-9600
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
Indicate by check mark whether the Registrant (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 [ ]
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 the 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, based upon the closing price of Common Stock on February 28, 2001,
as reported by Nasdaq, was approximately $104,973,223. Shares of voting stock
held by each officer and director and by each person who owns 5% or more of the
outstanding voting stock have been excluded in that such persons may be deemed
to be "affiliates" as that term is defined under the rules and regulations of
the Securities Exchange Act of 1934, as amended. This determination of affiliate
status is not necessarily a conclusive determination for other purposes.
As of February 28, 2001, 11,616,840 shares of the registrant's Common Stock were
outstanding.
NANOMETRICS INCORPORATED
FORM 10-K
YEAR ENDED DECEMBER 31, 2000
TABLE OF CONTENTS
PART I
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-14
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 7. Management's Discussion and Analysis of Financial Condition
and Results Of Operations.................................... II-4
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.... II-15
Item 8. Consolidated Financial Statements and Supplementary Data...... II-16
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure..................................... II-36
PART III
Item 10. Directors and Executive Officers of the Registrant............ III-1
Item 11. Executive Compensation........................................ III-1
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................... III-1
Item 13. Certain Relationships and Related Transactions................ III-1
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." The forward-looking statements contained herein are made as of the
date 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 thin film
metrology systems for the semiconductor, flat panel display and magnetic
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 increase production yields. Our non-contact, non-
destructive thin film measurement 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 well as their chemical composition.
Growth in the market for our products is driven by the increasing use of thin
film technology by manufacturers of electronic products. Many types of thin
films are used in the manufacture of numerous products, including
semiconductors, flat panel displays and magnetic recording heads 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:
* stand-alone, fully automated systems for measurements of thin films in
high-volume manufacturing operations;
* integrated systems for integration into semiconductor processing
equipment that provide virtually immediate measurements and feedback
to improve process control and increase 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 the overlay accuracy of
successive 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, Intel, TSMC and Hitachi.
I-1
Industry Background
Growth
The increasing demand for Internet access, personal computers,
telecommunications, and new consumer electronic products and services have
fueled growth of the semiconductor, data storage and flat panel display
industries. In addition, integrated circuits and related components have
increased in performance and lowered in price, contributing to the growth.
Significant growth has occurred over the past ten years, however, these
industries are cyclical in nature and are characterized by short periods of over
and under supply. During an over supply cycle, capital expenditures for
manufacturing and monitoring systems decline. These expenditures increase during
an under supply cycle. Consumer desire for high performance electronics, drives
technology advancement in semiconductor design and manufacturing and, in turn,
promotes the purchasing of capital equipment featuring the latest advances in
technology. The two significant factors affecting demand for the Company's
measurement systems are: (i) new construction or refurbishment of manufacturing
facilities, which, in turn, depends on the current and anticipated market demand
for semiconductors, disk drives, flat panel displays, and products that use such
components, and (ii) the increasing complexity of the manufacturing process as a
result of the demand for higher performance semiconductors, magnetic recording
heads and flat panel displays.
Semiconductor Manufacturing Process
[GRAPHIC]
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.
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 circuit elements of
semiconductor devices. The four most common methods of deposition are chemical
vapor deposition (CVD), physical vapor deposition (PVD), diffusion and
oxidation. The control of uniformity and thickness during deposition of these
films is critical to the performance of the semiconductor circuit.
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Chemical Mechanical Planarization. CMP flattens, or planarizes, the topography
of the film surface to permit 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 1,100 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
Changing trends in the semiconductor, flat panel display and magnetic recording
head manufacturing industries are increasing the need for thin film metrology
systems. These trends include 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 metrology 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 one
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 throughput, faster detection of process
excursions and faults, reduced wafer handling, faster process development and
ultimately an improvement in overall equipment effectiveness.
Nanometrics Solution
We are a leader in the design, manufacture, marketing and support of thin film
metrology systems for the semiconductor, flat panel display and magnetic
recording head industries. We offer a complete line of systems to address the
thin film metrology requirements of our 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 are 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. 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.. 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 mainly used in
low-volume production environments and failure analysis and
engineering labs. Our tabletop models have unique capabilities and
several available configurations, depending on wafer handling, range
of films to be 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
film 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 0.18 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, flat panel display and magnetic recording head industries 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 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 continue to sell these products and 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, a leading designer of spectroscopic ellipsometer
systems and Midac, a provider of FTIR technology. In December 1999, we acquired
inspection and metrology technology from Phase Metrics, a data storage equipment
company, to augment our technology portfolio.
I-5
Leveraging Existing Customer and Industry Relationships. We expect to continue
to strengthen our existing customer relationships and foster working
partnerships by providing technologically superior systems and high levels of
customer support. Our strong industry relationships have allowed close customer
collaboration that facilitates our ability to introduce new products and
applications that meet 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 modules that will
strengthen and broaden our product line.
Addressing Multiple Markets. There are broad applications of our technology
beyond the semiconductor industry. We intend to continue developing and
marketing products to address metrology requirements in the manufacture of flat
panel displays, magnetic recording heads and any other industries that might
apply our technology in the future. We believe our diversification through
multiple industry applications of our technology increases the total 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 field of thin film metrology and have been
instrumental in the development of many 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 measure the thickness and optical characteristics
of films on a variety of substrates. In addition, we offer an optional FTIR
feature on some of our products to measure epi-silicon thickness and determine
other film parameters. We also manufacture a line of optical overlay
registration systems that are used to determine the alignment accuracy of
successive layers of semiconductor patterns on wafers in the photolithography
process. Our products can be divided 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
9100 Semiconductor, Magnetic Head 200 X X X
9200 Semiconductor 200 X
9300 Semiconductor 300 X X X
5500/6500 Flat Panel Display 960 by 1100 X
7000/7200 Semiconductor 200 X
Integrated
9000i Semiconductor 200 X
9000b Semiconductor 300 X
Tabletop
3000 Semiconductor, Magnetic Head 200 X
6100 Semiconductor 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
$700,000 depending on substrate sizes, measurement technologies, material
handling interfaces and software options.
NanoSpec 8000X
The NanoSpec 8000X stand-alone, automated thin film measurement system is
capable of handling wafers ranging in size from 75 to 200 millimeters in
diameter. The 8000X is the basic system configuration, while the 8000XSE
includes a fully integrated spectroscopic ellipsometer for ultrathin and
multiple film stack measurement applications. In addition, an FTIR option can be
added to measure the thickness of epi-silicon. 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 200 and 300 millimeter diameter wafers. The 8300X is
the basic system configuration and can be equipped with the spectroscopic
ellipsometer and FTIR 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 9100
The NanoSpec 9100 stand-alone, automated thin film measurement system is capable
of handling wafers ranging in size from 75 to 200 millimeters in diameter. The
9100 can be configured with a deep ultraviolet (DUV) to near infrared (NIR)
spectroscopic ellipsometer for ultrathin, multiple film stack and DUV
lithography measurement applications. In addition, an FTIR option can be added
to measure the thickness of epi-silicon. Other 9100 options include a standard
mechanical interface with mini-environment enclosures for use in ultra-clean
manufacturing facilities. The system also features a
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Windows NT software platform that conforms to the newly establish SEMI user
interface standard. The 9100 can also be configured to handle the substrates
that are used in the magnetic recording head industry. We developed the 9100
using technologies from the integrated film thickness systems allowing easy
transfer of measurement recipes between the integrated and stand-alone film
metrology systems.
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 be compact and to provide high wafer throughput.
NanoSpec 9300
The NanoSpec 9300 stand-alone, automated thin film measurement system is capable
of handling both 200 and 300 millimeter diameter wafers. The 9300 can be
configured with a DUV to NIR spectroscopic ellipsometer for ultrathin, multiple
film stack and DUV lithography measurement applications. In addition, an FTIR
option can be added to measure the thickness of epi-silicon. This system can
also include a mini-environment enclosure and wafer load ports compatible with
industry standards. The 9300 conforms to the new industry standards for 300
millimeter wafer handling automation and features a Windows NT software platform
that conforms to the newly establish SEMI user interface standard. We developed
the 9300 using technologies from the integrated film thickness systems allowing
easy transfer of measurement recipes between the integrated and stand-alone film
metrology systems.
NanoSpec 5500 and 6500
The NanoSpec 5500 and 6500 measure most optically transparent films used in the
manufacture of flat panel displays. The Model 5500 is 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 substrate and generating film
thickness maps, which show uniformity across the panel. The 6500 is an advanced
version of the 5500 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
photolithography 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 $80,000 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 Excellence Award for innovation and achievement in
photonic technology.
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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 handling and high throughput are not
required. Our tabletop product line encompasses both manual and semiautomated
models and includes systems for 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
The NanoSpec tabletop systems provide a broad range of thin film measurement
solutions at a lower entry price point. The NanoSpec 3000 is a basic, manual
system while the 6100 models feature semiautomatic wafer handling or staging.
Customers
We sell our thin film metrology systems worldwide to many of the major
semiconductor, flat panel display and magnetic recording head manufacturers and
equipment suppliers, as well as producers of silicon wafers and photomasks. The
majority of our systems are sold to customers located in the United States, Asia
and Europe. One customer, IBM, represented 11.2% of our total net revenues in
1998. Two customers, Applied Materials and TSMC, represented 12.8% and 10.5% of
our total net revenues in 1999, respectively. Three customers, Applied
Materials, Hyundai and TSMC, represented 20.5%, 11.8% and 10% of our total net
revenues in 2000, respectively.
The following is a list of our top customers, based on revenues, during 2000:
Applied Materials Intertrade Scientific
Hyundai Nortel
TSMC Samsung
Innotech Dongbu
Lucent RF Microdevices
Sales and Marketing
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. We provide direct sales support
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 South Korea, Taiwan
and Japan. We use selected sales representatives and distributors in other
countries in Asia, Europe and the Middle 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 in
particular. We believe that our sales and application engineers are skilled in
working with customers to solve complex measurement and process problems.
Sales to customers in foreign countries constituted approximately 60.9% and
60.6% of total net revenues for 1999 and 2000, respectively. Direct exports of
our metrology systems to foreign customers and shipments to our subsidiaries
require general export licenses. See note 12 of the notes to consolidated
financial statements for information regarding total net revenues and long-
lived assets of our foreign operations.
In 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 participate in industry trade shows and
conferences.
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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.
Spectroscopic Reflectometry. We pioneered the use of micro-spot spectroscopic
reflectometry for semiconductor film metrology in the late 1970s. Spectroscopic
reflectometry uses multiple wavelengths (colors) of light to obtain an array of
data for analysis of film thickness and other 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 epi-silicon film thickness. In addition, FTIR
can be used to measure very thick films.
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 characteristics
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 training 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 our corporate office in California. We
also have service operations based in Arizona, Massachusetts, Oregon,
Pennsylvania, Idaho and Texas. Local service and spare parts are provided in the
United Kingdom by our sales office in Scotland and in the rest of Europe by
distributors and sales representatives. In Asia, service is provided by direct
offices in Japan, Korea, Taiwan and by a new service office that we opened in
Singapore in 2000. Our distributors and representatives provide service in other
countries in Asia.
We provide a one-year warranty on parts and labor for products sold domestically
and in foreign markets. Service revenue, including sales of replacement parts,
represented approximately 11.7% and 8.7% of total net revenues in 1999 and 2000,
respectively.
Backlog
As of December 31, 2000, our backlog was approximately $27.2 million, which
includes approximately $7.8 million related to changes in accounting principle
(SAB 101) (See Note 1 to Consolidated Financial Statements). As of December 31,
1999 our backlog was approximately $13.4 million. 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
The 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 United States, Japan, Israel and Europe. We compete
primarily with: stand-alone thin film measurement products from KLA-Tencor
Corporation, Therma-Wave, Inc., Rudolph Technologies and Dai Nippon Screen;
integrated thin film measurement products from Nova Measuring Instruments Ltd.
and Online Technologies; and overlay measurement products from KLA-Tencor
Corporation, Bio-Rad Laboratories Inc. and Schlumberger Ltd. Many of our
competitors have substantially greater financial, engineering, manufacturing and
marketing resources than we do. Significant competitive factors include:
measurement technology, system performance (including automation and software
capability), ease of use, reliability, established customer bases, cost of
ownership, price and global customer service. We believe that we compete
favorably with respect to these factors, but we must continue to develop and
design new and improved products in order to maintain our competitive position.
Manufacturing
We manufacture our products in the United States, Japan and Korea. We combine
proprietary measurement components and software produced in our facilities with
components and subassemblies obtained from outside suppliers. Certain of our
products include system engineering and software development 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
subassemblies. We have entered into an agreement with J.A. Woollam Company for
the purchase of the spectroscopic ellipsometer components. Additionally, we use
Kensington Laboratories as our primary source of robotics components.
I-11
Research and Development
Our research and development is directed towards enhancing existing products and
developing and introducing new products to maintain technological leadership and
to meet 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 identify 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 metrology
methods. We conduct research and development at our 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
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 1998, 1999 and 2000 were $4.2
million, $4.7 million and $9.2 million, and represented 12.7%, 12.8% and 13.3%
of total net revenues, respectively.
Intellectual Property
Our success depends in large part on the technical innovation of our products.
We actively pursue a program of filing patent applications to seek protection of
technologically sensitive features of our metrology systems. We hold a number of
United States patents with several pending patents. The United States patents,
issued during the period 1984 to 2000, will expire from 2001 to 2019. 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 receive communications from third parties asserting that
our metrology systems may contain design features which are claimed to infringe
their proprietary rights. We typically refer such matters to our legal council.
I-12
Employees
At December 31, 2000, we employed approximately 252 persons worldwide, including
77 in research and development, 42 in manufacturing and manufacturing support,
109 in marketing, sales and field service and 24 in general administration and
finance. None of these employees is represented by a union and we have never
experienced a work stoppage as a result of union actions. Many of our employees
have specialized skills of value to us. Our future success will depend in large
part upon our ability to attract and retain highly skilled scientific,
technical, managerial, financial and marketing personnel, who are in great
demand in the industry. We consider our employee relations to be good.
Executive Officers of the Registrant
The following are our current executive officers and their ages as of December
31, 2000:
Name Age Position
---- --- --------
Vincent J. Coates....... 75 Chairman of the Board, Secretary
John D. Heaton.......... 40 President, Chief Executive Officer and Director
Paul B. Nolan........... 45 Vice President and Chief Financial Officer
Roger Ingalls Jr........ 39 Vice President and Director of Marketing
Mr. Vincent Coates has been our Chairman of the Board since our founding in
1975. 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 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.
ITEM 2. PROPERTIES
Our principal manufacturing and administrative facility is located in Milpitas,
California in a 133,000 square foot building owned by the Company. We purchased
the Milpitas facility in July 2000 and moved into the facility in November 2000.
We also have sales and service offices in Texas, Korea and Taiwan. Rent expense
for our facilities was approximately $1,190,000 for 2000.
Through our Japanese subsidiary, we own a 15,000 square foot facility in Narita,
Japan. This facility is utilized by our 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 facilities that provides for payments based on a percentage of net
product sales.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending against us. We could become
involved in litigation from time to time relating to claims arising out of our
ordinary course of business.
I-13
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, 2000.
I-14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Our common stock is quoted on the Nasdaq National Market under the symbol
"NANO". The following table sets forth, for the periods indicated, the high and
low sale prices per share of our common stock as reported on the Nasdaq National
Market. These quotations represent prices between dealers and do not include
retail markups, markdowns or commissions and may not necessarily represent
actual transactions.
High Low
---- ---
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
2000
First Quarter ...................... $ 52.13 $ 18.13
Second Quarter ..................... $ 49.75 $ 19.75
Third Quarter ...................... $ 63.88 $ 28.88
Fourth Quarter ..................... $ 54.50 $ 10.63
On February 28, 2001, the last reported sale price of our common stock on the
Nasdaq National Market was $15.50 per share. As of December 31, 2000, there were
approximately 120 shareholders of record of our common stock.
Dividend Policy
We have never declared or paid any cash dividends on our capital stock. We
currently expect to retain future earnings, if any, for use in the operation and
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future.
Use of Proceeds
In March 2000, we received net proceeds of approximately $72.4 million in cash
from a secondary offering. A portion of the proceeds from this secondary
offering were used to finance the purchase and improvement of our new facility
in Milpitas and the remainder was invested in U. S. government backed
securities.
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, 1998, 1999 and 2000, and the consolidated balance sheet data as of December
31, 1999 and 2000, 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, 1996 and
1997, and the consolidated balance sheet data as of December 31, 1996, 1997 and
1998, have been derived from our audited consolidated financial statements not
included in this Annual Report on Form 10-K. The historical results are not
necessarily indicative of results to be expected for any future period.
II-1
Years Ended December 31,
--------------------------------------------------------
1996 1997 1998 1999 2000*
-------- -------- -------- -------- --------
(In thousands, except per share data)
Consolidated Statement of Operations Data:
Net revenues:
Product sales ................................ $ 24,603 $ 32,767 $ 29,718 $ 32,162 $ 63,468
Service ...................................... 5,733 3,890 3,546 4,246 6,023
-------- -------- -------- -------- --------
Total net revenues ........................ 30,336 36,657 33,264 36,408 69,491
-------- -------- -------- -------- --------
Costs and expenses:
Cost of product sales ........................ 10,109 12,092 13,002 14,606 25,082
Cost of service .............................. 4,088 3,632 3,669 4,560 6,022
Research and development ..................... 2,754 2,986 4,206 4,658 9,238
Acquired in-process research and development -- -- 1,421 -- --
Selling ...................................... 4,696 6,050 5,728 5,871 10,313
General and administrative ................... 2,476 2,765 2,828 2,973 4,258
-------- -------- -------- -------- --------
Total costs and expenses .................. 24,123 27,525 30,854 32,668 54,913
-------- -------- -------- -------- --------
Income from operations ......................... 6,213 9,132 2,410 3,740 14,578
-------- -------- -------- -------- --------
Other income (expense):
Interest income .............................. 390 535 572 662 4,129
Interest expense ............................. (92) (110) (108) (180) (76)
Other, net ................................... 146 (175) 64 94 (150)
-------- -------- -------- -------- --------
Total other income, net ................... 444 250 528 576 3,903
-------- -------- -------- -------- --------
Income before income taxes ..................... 6,657 9,382 2,938 4,316 18,481
Provision for income taxes ..................... 2,664 3,625 1,108 1,682 5,942
-------- -------- -------- -------- --------
Income before cumulative effect of change in
accounting principle ........................ $ 3,993 $ 5,757 $ 1,830 $ 2,634 $ 12,539
Cumulative effect of change in revenue
recognition principle (SAB 101) ............. -- -- -- -- (1,364)
-------- -------- -------- -------- --------
Net Income ..................................... $ 3,993 $ 5,757 $ 1,830 $ 2,634 $ 11,175
======== ======== ======== ======== ========
Basic net income (loss) per share:
Income before cumulative effect of
change in accounting principle .............. $ 0.50 $ 0.69 $ 0.21 $ 0.30 $ 1.14
Cumulative effect of change in revenue
recognition principle (SAB 101) .............. -- -- -- -- (0.12)
-------- -------- -------- -------- --------
Net income ................................... $ 0.50 $ 0.69 $ 0.21 $ 0.30 $ 1.02
======== ======== ======== ======== ========
Diluted net income (loss) per share:
Income before cumulative effect of
change in accounting principle .............. $ 0.47 $ 0.65 $ 0.20 $ 0.28 $ 1.06
Cumulative effect of change in revenue
recognition principle (SAB 101) .............. -- -- -- -- (0.12)
-------- -------- -------- -------- --------
Net income ................................... $ 0.47 $ 0.65 $ 0.20 $ 0.28 $ 0.94
======== ======== ======== ======== ========
Shares used in per share computation:
Basic ........................................ 8,047 8,325 8,635 8,829 10,986
======== ======== ======== ======== ========
Diluted ...................................... 8,524 8,820 9,041 9,393 11,845
======== ======== ======== ======== ========
- ----------
* Refer to discussions on SAB 101 in Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
II-2
December 31,
----------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
(In thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term investments $ 8,382 $ 13,251 $ 11,431 $ 18,140 $ 69,788
Working capital ................................. 22,613 28,653 30,621 36,021 92,420
Total assets .................................... 29,964 36,243 39,305 46,410 144,796
Debt obligations, less current portion .......... 3,296 2,568 2,496 2,288 4,236
Total shareholders' equity ...................... 22,060 28,528 32,010 38,155 127,009
II-3
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 result of certain risk factors, including those
set forth in "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 events 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 semiconductor, 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 components 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 demand for our metrology
systems.
We derive our revenues from product sales and services, which include sales of
accessories and service to the installed base of products. For the year ended
December 31, 2000, we derived 91.3% of our total net revenues from product sales
and 8.7% of our total net revenues from services. Revenues from product sales
and replacement and spare parts are generally recognized at the time of
shipment. Revenues from service work are recognized when performed. In certain
geographical regions where risk of loss and title do not transfer upon shipment,
payments received are recorded as deferred revenue and recognized upon customer
acceptance. See note 1 of the notes to consolidated financial statements for
more information on our revenue recognition policy.
II-4
Results of Operations
The following table presents our consolidated statements of operations data as a
percentage of total net revenues for the years ended December 31, 1998, 1999 and
2000:
Years Ended December 31,
-----------------------
1998 1999 2000
----- ----- -----
Net revenues:
Product sales ................................... 89.3% 88.3% 91.3%
Service ......................................... 10.7 11.7 8.7
----- ----- -----
Total net revenues ........................... 100.0 100.0 100.0
----- ----- -----
Cost and expenses:
Cost of product sales ........................... 39.1 40.1 36.1
Cost of service ................................. 11.0 12.5 8.7
Research and development ........................ 12.7 12.8 13.3
Acquired in-process research and development .... 4.3 -- --
Selling ......................................... 17.2 16.1 14.8
General and administrative ...................... 8.5 8.2 6.1
----- ----- -----
Total cost and expenses ...................... 92.8 89.7 79.0
----- ----- -----
Income from operations .............................. 7.2 10.3 21.0
----- ----- -----
Other income (expense):
Interest income ................................. 1.7 1.8 5.9
Interest expense ................................ (0.3) (0.5) (0.1)
Other, net ...................................... 0.2 0.3 (0.2)
----- ----- -----
Total other income, net ...................... 1.6 1.6 5.6
----- ----- -----
Income before income taxes .......................... 8.8 11.9 26.6
Provision for income taxes .......................... 3.3 4.7 8.6
----- ----- -----
Income before cumulative effect of change
in accounting principle ........................... 5.5 7.2 18.0
Cumulative effect of change in revenue
recognition principle (SAB 101) ................... -- -- (2.0)
----- ----- -----
Net income .......................................... 5.5% 7.2% 16.0%
===== ===== =====
Years ended December 31, 1998, 1999 and 2000
Total net revenues. Total net revenues increased 90.9% from $36.4 million in
1999 to $69.5 million in 2000. Product sales increased 97.3% from $32.2 million
in 1999 to $63.5 million in 2000. The increase in product sales resulted from
stronger demand for our products, especially in the U.S. and Asia. The change in
accounting principle (SAB 101) had the impact of lowering both the product sales
and the total net revenues by approximately $5.0 million in 2000. Service
revenue increased 41.8% from $4.2 million in 1999 to $6.0 million in 2000. The
increase in service revenue is primarily attributable to higher sales of parts
and services in the U.S. and Asia in 2000 due in part to the continued growth in
the semiconductor market. 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 resulted
from stronger demand for and increased shipments of our products, especially in
the U.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. International revenues,
which includes sales by our foreign subsidiaries, constituted approximately
61.8%, 60.9% and 60.6% of total net revenues for 1998, 1999 and 2000,
respectively.
II-5
Cost of product sales. Cost of product sales as a percentage of product sales
decreased from 45.4% in 1999 to 39.5% in 2000 primarily because of higher sales
volumes in 2000 resulting in lower per unit manufacturing costs. The change in
accounting principle (SAB 101) had the impact of lowering the cost of product
sales as a percentage of product sales from approximately 40.4% in 2000. Cost of
product sales as a percentage of product sales increased from 43.8% in 1998 to
45.4% in 1999 primarily as a result of lower volume purchasing resulting in
fewer purchasing discounts for materials early in 1999.
Cost of service. Cost of service as a percentage of service revenue decreased
from 107.4% in 1999 to 100.0% in 2000 primarily as a result of higher service
sales in the U.S and Asia. 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.
Research and development. Research and development expenses increased 98.3% from
$4.7 million in 1999 to $9.2 million in 2000 as a result of additional headcount
and higher materials expenses in 2000. Research and development expenses
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. We are committed to the development of new and enhanced
products and believe that new product introductions are required for us to
maintain our competitive position. During 2000, research and development
expenses represented 13.3% of total net revenues, compared to 12.8% in 1999 and
12.7% in 1998.
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 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. See "Acquisition" for further discussion.
Selling. Selling expenses increased 75.7% from $5.9 million in 1999 to $10.3
million in 2000 primarily because of higher sales and related expenses including
headcount and commissions in 2000. Selling expenses increased 2.5% from $5.7
million in 1998 to $5.9 million in 1999 primarily because of higher sales in
1999. In 2000 selling expenses represented 14.8% of total net revenues, compared
to 16.1% in 1999 and 17.2% in 1998.
General and administrative. General and administrative expenses increased 43.2%
from $3.0 million in 1999 to $4.3 million in 2000 as a result of higher spending
associated with the increase in total net revenues. General and administrative
expenses increased 5.1% from $2.8 million in 1998 to $3.0 million in 1999 as a
result of higher spending associated with the increase in total net revenues.
During 2000, general and administrative expenses represented 6.1% of total net
revenues, compared to 8.2% in 1999 and 8.5% in 1998.
Total other income, net. Total other income, net increased 577.6% from $576,000
in 1999 to $3.9 million in 2000 primarily due to higher interest income in 2000.
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.
Provision for income taxes. Our effective income tax rate decreased from 39.0%
in 1999 to 32.2% in 2000 primarily due to an R&D tax credit taken in 2000 and
reversal of the valuation allowance related to our Japanese subsidiary. 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
deferred tax assets of our Japanese subsidiary. The effective income tax rates
in 2000, 1999 and 1998 exceed the U.S. statutory rate due primarily to state
income taxes partially offset by the realization of foreign sales corporation
benefit.
Cumulative effect of change in revenue recognition principle (SAB 101). The
cumulative effect of $1.4 million is the net result of recording $2.5 million in
net revenues, which were previously recorded in 1999, offset by $1.1 million in
related costs and expenses.
II-6
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
* 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:
II-7
* 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, 2000, our cash, cash equivalents and short-term investments
totaled $69.8 million as compared to $18.1 million at December 31, 1999.
Additionally, our working capital of $92.4 million at December 31, 2000
increased from $36.0 million at December 31, 1999. We believe our working
capital, including cash, cash equivalents and short-term investments, will be
sufficient to meet our needs at least through the next twelve months. We have
begun construction of a new facility for our Korean subsidiary and have
committed approximately $2,136,000 in relation to this construction, of which
$1,484,000 has been paid as of December 31, 2000. We have also begun
construction on a new facility for our Japanese subsidiary and have committed
approximately $3,437,000 in purchase commitments relating to this construction.
Operating activities during 2000 provided cash of $9.5 million primarily from
net income and increased accounts payable and other current liabilities offset
partially by higher accounts receivable and inventory levels. Investing
activities used $73.4 million due to net purchases of short-term investments of
$38.1 million and $35.3 million in capital expenditures used for the purchase
and improvement of our building in Milpitas, California. Financing activities
provided cash of $77.5 million primarily from a public offering of common stock
in March 2000, the issuance of debt obligations and the sale of shares under the
employee stock purchase and option plans offset by the net repayment of debt
obligations.
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 $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
net income partially offset by 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 $801,000 resulting primarily
from the sale of shares under the employee stock purchase and option plans.
We have evaluated and will continue to evaluate the acquisition of products,
technologies or businesses that are complementary to our business. These
activities may result in product and business investments. For 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.
II-8
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. We have assessed the implications of
adopting SFAS No. 133, and adoption of this statement will not 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 was required by the fourth fiscal quarter of
2000 and the effects are required to be recorded through a retroactive,
cumulative-effect adjustment as of the beginning of the fiscal year, with a
restatement of all prior interim quarters in the year. We implemented SAB No.
101 during the fourth quarter of fiscal 2000, which resulted in a cumulative
effect of change in revenue recognition principle in the amount of $1.4 million.
The impact of SAB No. 101 on our revenues and costs are described in
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
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 before making an
investment decision. The risks and uncertainties described below are not the
only ones facing our company. If any of the following risks actually occurs, our
business, financial condition or operating results could be harmed. In such
case, the trading price of our common stock could decline, and you could lose
all or part of your investment.
Risks Related to Our Business
Cyclicality in the 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 varied 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
downturn in semiconductor device industry revenues. We expect the cyclical
nature of the semiconductor industry, and therefore, our business, to continue.
Currently, the semiconductor industry is suffering a downturn. Should the
downturn continue, our business and results of operations could suffer.
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 60.9% and
60.6% of our total net revenues in 1999 and 2000, 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;
II-9
* 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 53.7% and
55.0% of our total net revenues in 1999 and 2000, 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 received increased orders in 2000 from customers
in the Asia Pacific region, any further instability in the Asian markets could
harm our sales in future periods.
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 2000, sales to Applied Materials, Hyundai and TSMC
accounted for 20.5%, 11.8% and 10.0% of our total net revenues, respectively. 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. Sales of our integrated metrology
II-10
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 are
likely to vary in the future, which could cause our stock price to decline. Some
of the factors that may influence our operating results and subject our stock to
extreme price and volume fluctuations include:
* changes in customer demand for our systems;
* economic conditions in the semiconductor, flat panel display and
magnetic recording head industries;
* the timing, cancellation or delay of customer orders and shipments;
* market acceptance of our products and our customers' products;
* competitive pressures on product prices and changes in pricing by our
customers or suppliers;
* the timing of new product announcements and product releases by us or
our competitors and our ability to design, introduce and manufacture
new products on a timely and cost-effective basis;
* the timing of acquisitions of businesses, products or technologies;
* the levels of our fixed expenses, including research and development
costs associated with product development, relative to our revenue
levels; and
* fluctuations in foreign currency exchange rates, particularly the
Japanese yen.
Due to the foregoing factors and other factors described in 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 you
should not view these operating results as indicators of our future performance.
If our operating results in any period fall below the expectations of securities
analysts and investors, the market price of our common stock would likely
decline.
We obtain some of the components and subassemblies included in our systems from
a single source or a limited group of suppliers, and the partial or complete
loss of one of these suppliers could cause production delays and a substantial
loss of revenue
We rely on outside vendors to manufacture many components and subassemblies.
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
have entered into arrangements with J.A. Woollam Company for 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 a sole or a
limited group of suppliers involves several risks, including the following:
* we may be unable to obtain an adequate supply of required components;
* we have reduced control over pricing and the timely delivery of
components and subassemblies; and
* our suppliers may be unable to develop technologically advanced
products to support our growth and development of new systems.
Because the manufacturing of certain of these components and subassemblies
involves extremely complex processes and requires long lead times, we may
experience delays or shortages caused by suppliers. 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 supply
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 our ability to ship our products,
could damage relationships with current and prospective customers and could harm
our business.
II-11
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 $80,000 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.
We depend on orders that are received and shipped in the same quarter and
therefore our results of operations may be subject to significant variability
from quarter to quarter.
II-12
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 may be
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.
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.
Our intellectual property may infringe or be infringed upon by third parties
despite our efforts to protect it, which would threaten our future success and
competitive position
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.
II-13
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. 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.
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
Milpitas, 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. Our Milpitas facility
is currently subject to electrical blackouts as a consequence of a shortage of
available electrical power in California. In the event these blackouts continue
or increase in severity, they could disrupt the operations of our facility. If
we cannot deliver our systems in a timely manner, due to a business
interruption, 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-14
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 1999 and 2000, 60.9% and 60.6%, 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. 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, 1999 and 2000 would not have a material impact on our
results of operations. Our investments in marketable securities are subject to
interest rate risk but due to the short-term nature of these investments,
interest rate changes would not have a material impact on their value at
December 31, 1999 and 2000. We also have fixed rate yen denominated debt
obligations in Japan that have no interest rate risk. At December 31, 1999 and
2000, our total debt obligation was $2.9 million and $5.2 million with a
long-term portion of $2.3 million and $4.2 million, respectively. A hypothetical
10% change in interest rates at December 31, 2000 would not have a material
impact on our results of operation.
II-15
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 of Form 10-K is presented here in the
following order:
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report............................................ II-17
Consolidated Balance Sheets............................................. II-18
Consolidated Statements of Income....................................... II-19
Consolidated Statements of Shareholders' Equity and
Comprehensive Income.................................................. II-20
Consolidated Statements of Cash Flows................................... II-21
Notes to Consolidated Financial Statements.............................. II-22
II-16
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
of Nanometrics Incorporated
We have audited the accompanying consolidated balance sheets of Nanometrics
Incorporated and subsidiaries as of December 31, 1999 and 2000, and the related
consolidated statements of income, shareholders' equity and comprehensive
income, and of cash flows for each of the three years in the period ended
December 31, 2000. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, 1999 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2000 in conformity with accounting principles generally accepted in the
United States of America.
DELOITTE & TOUCHE LLP
San Jose, California
February 15, 2001
II-17
NANOMETRICS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
December 31,
---------------------
ASSETS 1999 2000
--------- ---------
Current assets:
Cash and cash equivalents ................................................. $ 3,442 $ 16,934
Short-term investments .................................................... 14,698 52,854
Accounts receivable, net of allowances of $425 and $418 in 1999 and 2000,
respectively ............................................................ 11,435 14,319
Inventories ............................................................... 9,460 15,753
Deferred income taxes ..................................................... 1,722 2,760
Prepaid expenses and other ................................................ 1,196 3,351
--------- ---------
Total current assets .............................................. 41,953 105,971
Property, plant and equipment, net .......................................... 2,998 37,223
Deferred income taxes ....................................................... 135 227
Other assets ................................................................ 1,324 1,375
--------- ---------
Total assets ................................................................ $ 46,410 $ 144,796
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .......................................................... $ 2,412 $ 4,625
Accrued payroll and related expenses ...................................... 751 1,610
Deferred revenue .......................................................... 384 3,015
Other current liabilities ................................................. 1,337 3,049
Income taxes payable ...................................................... 464 331
Current portion of debt obligations ....................................... 584 921
--------- ---------
Total current liabilities ........................................ 5,932 13,551
Deferred rent ............................................................... 35 --
Debt obligations ............................................................ 2,288 4,236
--------- ---------
Total liabilities ................................................ 8,255 17,787
--------- ---------
Commitments and contingencies (Note 7)
Shareholders' equity:
Common stock, no par value; 25,000,000 shares authorized;
9,163,998 and 11,607,839 outstanding in 1999 and 2000, respectively .... 17,277 95,929
Retained earnings ......................................................... 20,608 31,783
Accumulated other comprehensive income (loss) ............................. 270 (703)
--------- ---------
Total shareholders' equity ....................................... 38,155 127,009
--------- ---------
Total liabilities and shareholders' equity .................................. $ 46,410 $ 144,796
========= =========
See notes to consolidated financial statements.
II-18
NANOMETRICS INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Years Ended December 31,
--------------------------------
1998 1999 2000
-------- -------- --------
Net revenues:
Product sales .......................................................... $ 29,718 $ 32,162 $ 63,468
Service ................................................................ 3,546 4,246 6,023
-------- -------- --------
Total net revenues ............................................. 33,264 36,408 69,491
-------- -------- --------
Costs and expenses:
Cost of product sales .................................................. 13,002 14,606 25,082
Cost of service ........................................................ 3,669 4,560 6,022
Research and development ............................................... 4,206 4,658 9,238
Acquired in-process research and development ........................... 1,421 -- --
Selling ................................................................ 5,728 5,871 10,313
General and administrative ............................................. 2,828 2,973 4,258
-------- -------- --------
Total costs and expenses ........................................ 30,854 32,668 54,913
-------- -------- --------
Income from operations ................................................... 2,410 3,740 14,578
-------- -------- --------
Other income (expense):
Interest income ........................................................ 572 662 4,129
Interest expense ....................................................... (108) (180) (76)
Other, net ............................................................. 64 94 (150)
-------- -------- --------
Total other income, net ........................................ 528 576 3,903
-------- -------- --------
Income before income taxes ............................................... 2,938 4,316 18,481
Provision for income taxes ............................................... 1,108 1,682 5,942
-------- -------- --------
Income before cumulative effect of change in accounting principle ........ 1,830 2,634 12,539
Cumulative effect of change in revenue recognition principle (SAB 101) ... -- -- (1,364)
-------- -------- --------
Net income ............................................................... $ 1,830 $ 2,634 $ 11,175
======== ======== ========
Basic net income (loss) per share:
Income before cumulative effect of change in accounting principle ...... $ 0.21 $ 0.30 $ 1.14
Cumulative effect of change in revenue recognition principle (SAB 101) . -- -- (0.12)
-------- -------- --------
Net income ............................................................. $ 0.21 $ 0.30 $ 1.02
======== ======== ========
Diluted net income (loss) per share:
Income before cumulative effect of change in accounting principle ...... $ 0.20 $ 0.28 $ 1.06
Cumulative effect of change in revenue recognition principle (SAB 101) . -- -- (0.12)
-------- -------- --------
Net income ............................................................. $ 0.20 $ 0.28 $ 0.94
======== ======== ========
Shares used in per share computation:
Basic .................................................................. 8,635 8,829 10,986
======== ======== ========
Diluted ................................................................ 9,041 9,393 11,845
======== ======== ========
See notes to consolidated financial statements.
II-19
NANOMETRICS INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(In thousands, except share amounts)
Accumulated
Common Stock Other Total Compre-
----------------------- Retained Comprehensive Shareholders' hensive
Shares Amount Earnings Income (Loss) Equity Income
---------- ---------- ---------- ---------- ---------- ----------
Balances, January 1, 1998 ........................ 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 .................................. 18,006 124 -- -- 124
Issuance of common stock under stock option plan . 151,153 576 -- -- 576
Tax benefit of employee stock transactions ....... -- 319 -- -- 319
---------- ---------- ---------- ---------- ----------
Balances, December 31, 1998 ...................... 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 .................................. 28,937 148 -- -- 148
Issuance of common stock under stock option plan . 444,418 1,936 -- -- 1,936
Tax benefit of employee stock transactions ....... -- 1,023 -- -- 1,023
---------- ---------- ---------- ---------- ----------
Balances, December 31, 1999 ...................... 9,163,998 17,277 20,608 270 38,155
Comprehensive income:
Net income ..................................... -- -- 11,175 -- 11,175 $ 11,175
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments ..... -- -- -- (981) (981) (981)
Unrealized gain on investments ............... -- -- -- 8 8 8
----------
Comprehensive income .................. -- -- -- -- -- $ 10,202
==========
Proceeds from common stock issuances, net of $700
of issuance costs .............................. 2,012,500 72,367 -- -- 72,367
Issuance of common stock under employee stock
purchase plan .................................. 16,507 261 -- -- 261
Issuance of common stock under stock option plan . 414,834 2,158 -- -- 2,158
Tax benefit of employee stock transactions ....... -- 3,866 -- -- 3,866
---------- ---------- ---------- ---------- ----------
Balances, December 31, 2000 ...................... 11,607,839 $ 95,929 $ 31,783 $ (703) $ 127,009
========== ========== ========== ========== ==========
See notes to consolidated financial statements.
II-20
NANOMETRICS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
December 31,
-----------------------------------
1998 1999 2000
--------- --------- ---------
Cash flows from operating activities:
Net income ................................................... $ 1,830 $ 2,634 $ 11,175
Reconciliation of net income to net cash provided by
operating activities:
Depreciation and amortization .............................. 298 359 727
Deferred rent .............................................. 26 (8) (35)
Acquired in-process research and development ............... 1,421 -- --
Loss on sale of property ................................... -- -- 54
Deferred income taxes ...................................... (573) 174 (1,130)
Changes in assets and liabilities, net of effects of product
line acquisition:
Accounts receivable ...................................... 2,805 (2,496) (3,372)
Inventories .............................................. (2,751) 2,449 (6,913)
Prepaid income taxes ..................................... (1,325) 1,325 (221)
Prepaid expenses and other ............................... 93 (178) (2,078)
Accounts payable, accrueds and other current liabilities . (1,420) 1,022 4,675
Deferred revenue ......................................... 65 319 3,544
Income taxes payable ..................................... 416 1,462 3,115
--------- --------- ---------
Net cash provided by operating activities ........... 885 7,062 9,541
--------- --------- ---------
Cash flows from investing activities:
Purchases of short-term investments .......................... (17,790) (22,575) (114,046)
Sales/maturities of short-term investments ................... 17,472 17,760 75,898
Purchases of property, plant and equipment ................... (167) (511) (35,284)
Other assets ................................................. (50) (536) (2)
Product line acquisition ..................................... (3,225) -- --
--------- --------- ---------
Net cash used in investing activities ............... (3,760) (5,862) (73,434)
--------- --------- ---------
Cash flows from financing activities:
Net proceeds from common stock issuance ...................... -- -- 72,367
Proceeds from issuance of debt obligations ................... 761 90 3,187
Repayments of debt obligations ............................... (660) (1,358) (457)
Sale of shares under employee stock purchase and
stock option plans ......................................... 700 2,084 2,419
--------- --------- ---------
Net cash provided by financing activities ........... 801 816 77,516
--------- --------- ---------
Effect of exchange rate changes on cash ........................ (64) (92) (131)
--------- --------- ---------
Net change in cash and cash equivalents ........................ (2,138) 1,924 13,492
Cash and cash equivalents, beginning of year ................... 3,656 1,518 3,442
--------- --------- ---------
Cash and cash equivalents, end of year ......................... $ 1,518 $ 3,442 $ 16,934
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest ....................................... $ 92 $ 72 $ 78
========= ========= =========
Cash paid for income taxes ................................... $ 2,558 $ 82 $ 3,497
========= ========= =========
See notes to consolidated financial statements.
II-21
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1998, 1999 and 2000
1. Significant Accounting Policies
Description of Business - Nanometrics Incorporated and its wholly-owned
subsidiaries sell, design, manufacture, market and support thin film and
overlay dimension metrology systems 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 in order to control manufacturing processes
and increase production yields in the fabrication of integrated circuits,
flat panel displays and 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 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 - The consolidated financial statements include
Nanometrics Incorporated and its wholly-owned subsidiaries (the Company).
All significant intercompany accounts and transactions have been eliminated
in consolidation.
Use of Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America 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.
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 1998, 1999 and
2000 all consisted of 52 weeks and ended on January 2, 1999, January 1,
2000 and December 30, 2000, respectively. For convenience in the
accompanying consolidated financial statements, the year end is denoted as
December 31.
Cash and 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 - Short-term investments consist of United States
Treasury bills and are stated at fair value based on quoted market prices.
Short-term investments are classified as available-for-sale based on the
Company's intended use. The difference between amortized cost and fair
value representing unrealized holding gains or losses are recorded as a
component of shareholders' 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 fair market value based on quoted
market prices. The recorded carrying amount of the Company's debt
obligations approximates fair market value.
Inventories - Inventories are stated at the lower of cost (first-in,
first-out) or market.
Property, Plant and 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:
Building and improvements......................... 15 - 40 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.
II-22
Long-Lived Assets - The Company evaluates long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. When the sum of the undiscounted
future net cash flows expected to result from the use of the asset and its
eventual disposition is less than its carrying amount, an impairment loss
would be measured based on the discounted cash flows compared to the
carrying amount. No impairment charge has been recorded in any of the
periods presented.
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.
Comprehensive Income - Accumulated other comprehensive income (loss)
consists of the following (in thousands):
December 31,
----------------
1999 2000
----- -----
Accumulated unrealized gains on available-for-sale
securities, net ................................. $ 20 $ 28
Accumulated translation adjustments, net .......... 250 (731)
----- -----
Accumulated other comprehensive income (loss) ..... $ 270 $(703)
===== =====
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. In certain geographical
regions where risk of loss and title transfers upon customer acceptance,
payments received are recorded as deferred revenue and recognized as
revenue upon customer acceptance.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB 101), Revenue Recognition in Financial Statements,
which summarizes certain views of the SEC staff in applying generally
accepted accounting principles to revenue recognition in the financial
statements. SAB 101 clarified delivery criteria, which affected the
Company's revenue recognition policy. The Company applied the provisions of
SAB 101 in the quarter ended December 31, 2000, retroactive as of the
beginning of the fiscal year. Accordingly, the accompanying consolidated
statement of income for the year ended December 31, 2000, is reflected in
accordance with SAB 101. Had the Company applied the provisions of SAB 101
at the beginning of 1998, unaudited pro forma results of operations for
1998 and 1999 would have been as follows (in thousands, except per share
amounts):
1998 1999
------ ------
Net income as reported .......................... $1,830 $2,634
Pro forma adjustment for the change in
accounting principle applied retroactively .... (628) (509)
------ ------
Pro forma net income ............................ $1,202 $2,125
====== ======
Basic net income per share as reported .......... $ 0.21 $ 0.30
Pro forma effect of change per share ............ (0.07) (0.06)
------ ------
Pro forma basic net income per share ............ $ 0.14 $ 0.24
====== ======
Diluted net income per share as reported ........ $ 0.20 $ 0.28
Pro forma effect of change per share ............ (0.07) (0.05)
------ ------
Pro forma diluted net income per share .......... $ 0.13 $ 0.23
====== ======
The impact of adoption of SAB 101 in fiscal 2000 resulted in $7.8 million
of revenue being deferred to future periods. In addition, the impact of
adoption of SAB 101 resulted in a cumulative effect of $1.4 million
resulting from the recognition of certain historic 1999 revenues in 2000.
II-23
The Company's net income for the year ended December 31, 2000, under its
revenue recognition policies prior to the adoption of SAB 101, would have
been approximately $13.6 million, and basic and diluted earnings per share
would have been $1.24 and $1.15, respectively.
Stock-Based Compensation - The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to
Employees.
Foreign Currency - 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 currencies of the Company or its subsidiaries are included in
other income (expense) and consist of a loss of $13,000 for 1998, a gain of
$91,000 for 1999 and a loss of $30,000 for 2000.
Net Income Per Share - Basic net income per share excludes dilution and is
computed by dividing net income by the number of weighted average common
shares outstanding for the period. Diluted net income per share reflects
the potential dilution from outstanding dilutive stock options (using the
treasury stock method) and shares issuable under the employee stock
purchase plan.
Reclassifications - Certain reclassifications have been made to the prior
years' financial statement presentations to conform to the current year
presentation. Such reclassifications had no impact on consolidated net
income or retained earnings.
Recently Issued Accounting Standards - 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 establishes accounting and reporting standards
requiring that every derivative instrument, including derivative
instruments embedded in other contracts, be recorded in the balance sheet
as either an asset or liability measured at its fair value. The Company is
required to adopt SFAS No. 133 effective January 1, 2001. Management has
completed its evaluation of the effects of adopting SFAS No. 133 and does
not expect the adoption to have a significant impact on the consolidated
financial position, results of operations or cash flows of the Company.
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 held 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 2000, aggregate revenue from the Company's top ten
largest customers consisted of 58% of the Company's total net revenues.
Certain components and subassemblies used in the 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-24
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
$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 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
======
Net intangible assets as of December 31, 1999 and 2000 of $400,000 and
$277,000, respectively (net of accumulated amortization of $215,000 and
$338,000, respectively), are recorded within other assets in the
accompanying consolidated 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 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: (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 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.
II-25
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 in
acquisition 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 $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
Inventories consist of the following (in thousands):
December 31,
---------------------
1999 2000
------- -------
Raw materials and subassemblies .......... $ 3,775 $ 8,126
Work in process .......................... 1,092 1,434
Finished goods ........................... 4,593 6,193
------- -------
Total inventories ........................ $ 9,460 $15,753
======= =======
4. Property, Plant and Equipment
Property, plant and equipment consists of the following (in thousands):
December 31,
--------------------
1999 2000
-------- --------
Land ......................................... $ 1,054 $ 16,462
Building and improvements .................... 3,183 17,700
Machinery and equipment ...................... 1,462 1,712
Furniture and fixtures ....................... 446 849
Construction in progress ..................... -- 3,397
Leasehold improvements ....................... 466 12
-------- --------
6,611 40,132
Accumulated depreciation and amortization .... (3,613) (2,909)
-------- --------
Total property, plant and equipment, net ..... $ 2,998 $ 37,223
======== ========
II-26
5. Other Current Liabilities
Other current liabilities consist of the following (in thousands):
December 31,
------ ------
1999 2000
------ ------
Commissions payable ........................ $ 247 $1,249
Accrued warranty ........................... 482 809
Other ...................................... 608 991
------ ------
Total other current liabilities ............ $1,337 $3,049
====== ======
6. Debt Obligations
Debt obligations consist of the following (in thousands):
December 31,
--------------------
1999 2000
------- -------
1995 working capital bank loan ............. $ 2,154 $ 1,575
1996 working capital bank loan ............. 620 470
2000 working capital bank loan ............. -- 2,625
Other debt obligations ..................... 98 487
------- -------
Total ...................................... 2,872 5,157
Current portion of debt obligations ........ (584) (921)
------- -------
Debt obligations ........................... $ 2,288 $ 4,236
======= =======
The 1995 working capital bank loan was obtained by the Company's Japanese
subsidiary. The loan is collateralized by receivables of the Japanese
subsidiary and is guaranteed by the parent, Nanometrics Incorporated. The
loan is denominated in Japanese yen ((Y)180,000,000 at December 31, 2000)
and bears interest at 3.3% per annum. The loan is payable in quarterly
installments with unpaid principal and interest due in May 2005.
The 1996 working capital bank loan was obtained by the Company's Japanese
subsidiary and is collateralized by land and building. The loan is
denominated in Japanese yen ((Y)53,600,000 at December 31, 2000) and bears
interest at 3.4% per annum. The loan is payable in quarterly installments
with unpaid principal and interest due in May 2006.
The 2000 working capital bank loan was obtained by the Company's Japanese
subsidiary and is collateralized by land and building. The loan is
denominated in Japanese yen ((Y)300,000,000 at December 31, 2000) and bears
interest at 2.1% per annum. The loan is payable in quarterly installments
with unpaid principal and interest due in November 2010.
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 ((Y)55,762,000
at December 31, 2000) and bear interest at 1.625% per annum. The
outstanding borrowings and unpaid interest at December 31, 2000 were due
and paid in January 2001.
At December 31, 2000, future annual maturities of debt obligations are as
follows (in thousands):
2001 ....................................................... $ 921
2002 ....................................................... 435
2003 ....................................................... 526
2004 ....................................................... 799
2005 ....................................................... 623
Thereafter ................................................. 1,853
------
Total ...................................................... $5,157
======
II-27
7. Commitments and Contingencies
The Company leases manufacturing and administrative facilities and certain
equipment under noncancellable operating leases. The Company's corporate
headquarters facility lease was terminated in November 2000 when corporate
headquarters moved into a newly purchased facility. Rent expense for 1998,
1999 and 2000 was approximately $693,000, $867,000 and $1,221,000,
respectively. Future minimum lease payments under the Company's operating
leases for each of the years ending December 31 are as follows (in
thousands):
2001 ....................................................... $ 169
2002 ....................................................... 78
2003 ....................................................... 75
2004 ....................................................... 33
2005 ....................................................... 21
Thereafter ................................................. 14
------
Total ...................................................... $ 390
======
In September 1998, the Company's Korean subsidiary entered into a lease
agreement for manufacturing facilities. The lease payments are based on a
percentage of net product sales, as defined. The lease is expected to be
terminated in February 2001, in conjunction with the completion of the new
facility.
The Company has begun construction of new facilities for its Japanese and
Korean subsidiaries. The Company has committed $3,437,000 and $2,136,000,
respectively, in relation to this construction, of which a total of
$1,484,000 has been paid as of December 31, 2000.
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 of
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, results of operations or cash flows.
8. Shareholders' 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,
------ ------ ------
1998 1999 2000
------ ------ ------
Weighted average shares outstanding - shares used in
basic net income per share computation .............. 8,635 8,829 10,986
Dilutive effect of common stock equivalents,
using the treasury stock method ..................... 406 564 859
------ ------ ------
Shares used in diluted net income per share computation 9,041 9,393 11,845
====== ====== ======
II-28
During 1998, 1999 and 2000, 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, 1998, 1999 and 2000, 248,000, 51,000 and 738,700, respectively, of the
Company's outstanding common stock options with weighted average exercise
prices of $7.88, $19.59 and $35.58, respectively, per share were excluded
from the diluted net income per share computation.
Stock Option Plans
Under the 1991 Stock Option Plan (the 1991 Option Plan), as amended, the
Company may grant options to acquire up to 3,000,000 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 as they vest,
generally 33.3% upon each anniversary of the grant, as set forth in the
stock option agreements. The 1991 Option Plan expires in July 2001.
Under the 1991 Directors' Stock Option Plan (the 1991 Directors' Plan),
nonemployee directors of the Company are automatically granted options to
acquire 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 under the Directors' Plan become exercisable as they vest
33.3% upon each anniversary of the grant and expire five years from the
date of grant. The total shares authorized under the 1991 Directors' Plan
are 300,000. The 1991 Directors' Plan expires in July 2001.
Under the 2000 Stock Option Plan (the 2000 Option Plan), the Company may
grant options to acquire up to 1,250,000 shares of common stock to
employees and consultants at prices not less than the fair market value at
date of grant for incentive and nonstatutory stock options. These options
generally expire ten years from the date of grant, or a shorter term as
provided by the stock option agreement and become exercisable as they vest,
generally 33.3% upon each anniversary of the grant, as set forth in the
stock option agreements. The 2000 Option Plan is the successor to the 1991
Option Plan, and all options existing under the 1991 Option Plan will
continue to be governed by existing terms until exercise, cancellation or
expiration.
Under the 2000 Directors' Stock Option Plan (the 2000 Directors' Plan),
nonemployee directors of the Company are automatically granted options to
acquire 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 under the Directors' Plan become exercisable as they vest
33.3% upon each anniversary of the grant and expire five years from the
date of grant. The total shares authorized under the 2000 Directors' Plan
are 250,000. The 2000 Directors' Plan is the successor plan to the 1991
Directors' Plan, and all options existing under the 1991 Directors' Plan
will continue to be governed by existing terms until exercise, cancellation
or expiration.
II-29
Option activity under the plans is summarized as follows:
Outstanding Options
-----------------------------------------
Weighted
Shares Number of Average
Available Shares Exercise Price
---------- ---------- --------------
Balances, January 1, 1998 (503,267 exercisable
at a weighted average price of $4.32) ....... 1,236,046 1,333,361 $ 6.37
Exercised ...................................... -- (151,153) 3.81
Granted (weighted average fair value of $1.88) . (1,395,174) 1,395,174 6.14
Canceled ....................................... 986,949 (986,949) 8.24
---------- ----------
Balances, December 31, 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 (665,688 exercisable
at a weighted average price of $5.21) ........ 479,172 1,494,664 7.49
Additional shares added through 2000 Option Plan
and 2000 Directors' Plan ..................... 1,500,000 -- --
Exercised ...................................... -- (414,834) 5.20
Granted (weighted average fair value of $17.34) (886,700) 886,700 31.23
Canceled ....................................... 99,506 (99,506) 17.74
---------- ----------
Balances, December 31, 2000 .................... 1,191,978 1,867,024 $18.73
========== ==========
During the third quarter of fiscal 1998, the Company approved the
cancellation and reissuance of outstanding options under the Company's
stock option 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 options.
Additional information regarding options outstanding as of December 31,
2000 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 Price
--------------- ----------- ------------ ----- ----------- -----
$ 4.31 - $ 5.63 498,806 2.30 $ 5.12 430,633 $ 5.11
6.63 - 9.00 330,185 3.60 7.73 153,785 7.78
12.86 - 17.63 254,333 6.44 14.98 50,278 15.95
20.13 30.88 400,700 8.04 26.17 -- --
34.69 47.63 383,000 5.47 40.65 -- --
---------- --------
$ 4.31 - $47.63 1,867,024 4.98 $ 18.73 634,696 $ 6.62
========== ========
II-30
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-month offering period, subject to an annual limitation. Shares
issued under the plan were 18,006, 28,937 and 16,507 in 1998, 1999 and 2000
at weighted average prices of $6.87, $5.10 and $15.83, respectively. The
weighted average per share fair values of the 1998, 1999 and 2000 awards
were $2.42, $2.89 and $14.67, respectively. At December 31, 2000, 159,387
shares were reserved for future issuances under the Purchase Plan.
Additional Stock Plan Information
As discussed in Note 1, the Company accounts for its stock-based awards
using the intrinsic value method in accordance with APB No. 25, Accounting
for Stock Issued to Employees, and its related interpretations.
Accordingly, no compensation expense has been recognized in the
accompanying consolidated financial statements for employee stock
arrangements.
SFAS No. 123, Accounting for Stock-Based Compensation, requires the
disclosure of pro forma net income and net income per share had the Company
adopted the fair value method. 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 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 1991 and 2000 Option Plans and the 1991 and 2000
Directors' Plans were made using the Black-Scholes option pricing model
with the following weighted average assumptions: expected life, three years
from the date of grant in 1998, 1999 and 2000; stock volatility, 80% in
1998, 1999 and 2000; risk free interest rate, 5.0% in 1998, 5.9% in 1999
and 6.4% in 2000; 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% for 1998, 24% for
1999 and 26% for 2000. 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 1998, 1999 and 2000; stock volatility, 80% in
1998, 1999 and 2000; risk free interest rate, 5.0% in 1998, 5.3% in 1999
and 6.1% in 2000; and no dividends during the expected term.
If the computed fair values of the stock-based 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 as follows (in
thousands, except per share amounts):
Years Ended December 31,
-------------------------
1998 1999 2000
------ ------ ------
Pro forma net income ..................... $ 807 $1,729 $8,200
Pro forma net income per share:
Basic .................................. $ 0.09 $ 0.20 $ 0.75
Diluted ................................ $ 0.09 $ 0.18 $ 0.69
9. Income Taxes
Income (loss) before income taxes consists of the following (in thousands):
Years Ended December 31,
--------------------------------
1998 1999 2000
------- ------- -------
Domestic ........................ $ 3,471 $ 3,928 $16,476
Foreign ......................... (533) 388 2,005
------- ------- -------
Income before income taxes ...... $ 2,938 $ 4,316 $18,481
======= ======= =======
II-31
The provision (benefit) for income taxes consists of the following
(in thousands):
Years Ended December 31,
-------------------------------
1998 1999 2000
------- ------- -------
Current:
Federal ........................ $ 840 $ 1,127 $ 5,875
State .......................... 148 186 807
Foreign ........................ 16 195 390
------- ------- -------
1,004 1,508 7,072
------- ------- -------
Deferred:
Federal ........................ 161 71 (536)
State .......................... 166 (128) (29)
Foreign ........................ (223) 231 (565)
------- ------- -------
104 174 (1,130)
------- ------- -------
Provision for income taxes ....... $ 1,108 $ 1,682 $ 5,942
======= ======= =======
Significant components of the Company's deferred tax assets are as follows
(in thousands):
December 31,
------------------
1999 2000
------- -------
Deferred tax assets - current:
Reserves and accruals not currently deductible $ 1,307 $ 2,282
Capitalized inventory costs .................. 161 350
Net operating loss carryforwards ............. 338 --
Tax credit carryforwards ..................... 147 128
------- -------
Total gross deferred tax assets - current ...... 1,953 2,760
Valuation allowance ............................ (231) --
------- -------
Total net deferred tax assets - current ........ $ 1,722 $ 2,760
======= =======
Deferred tax assets - noncurrent:
Depreciation ................................. $ (69) $ (54)
Goodwill and capitalized acquired technology . 391 320
Translation adjustments ...................... (225) (39)
Other ........................................ 38 --
------- -------
Total net deferred tax assets - noncurrent ..... $ 135 $ 227
======= =======
As of December 31, 2000, the Company had available for carryforward
research and experimental tax credits for federal income tax purposes of
$128,000. Federal research and experimentation carryforwards expire in
2020.
The decrease of $231,000 in the valuation allowance during the year ended
December 31, 2000 was the result of positive income and the usage of
previously created net operating losses.
II-32
Differences between income taxes computed by applying the statutory federal
income tax rate to income before income taxes and the provision for income
taxes consist of the following (in thousands):
Years Ended December 31,
-----------------------------
1998 1999 2000
------- ------- -------
Income taxes computed at 35% U.S. statutory rate ..... $ 1,028 $ 1,511 $ 6,468
State income taxes ................................... 207 58 820
Foreign tax provision (benefit) higher than U.S. rates (74) 59 (312)
Foreign sales corporation benefit .................... (99) (228) (471)
Change in valuation allowance ........................ -- 231 (231)
Utilization of tax credits ........................... -- -- (385)
Other, net ........................................... 46 51 53
------- ------- -------
Provision for income taxes ........................... $ 1,108 $ 1,682 $ 5,942
======= ======= =======
10. Profit-Sharing, Retirement and Bonus Plans
No contributions were made by the Company in 1998, 1999 and 2000 to the
Company's discretionary profit-sharing and retirement plan. The Company
paid $688,000, $92,000 and $1,217,000 in 1998, 1999 and 2000, respectively,
under formal discretionary cash bonus plans which cover all eligible
employees.
11. Major Customers
In 1998, sales to one customer accounted for 11.2% of total net revenues.
In 1999, sales to two other customers accounted for 12.8% and 10.5% of
total net revenues, respectively. In 2000, sales to two of the same
customers and one other customer accounted for 20.5%, 11.8% and 10.0% of
total revenues, respectively.
At December 31, 1998, no single customer accounted for 10.0% or more of
accounts receivable. The customer accounting for 12.8% of total net
revenues in 1999 also accounted for 11.8% of accounts receivable at
December 31, 1999. At December 31, 2000, the customer accounting for 10.0%
of total net revenues also accounted for 12.4% of accounts receivable.
12. Product, Segment and Geographic Information
The Company's operating divisions consist of its geographically based
entities in the United States, Japan, South Korea and Taiwan. All such
operating divisions have similar economic characteristics, as defined in
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,
1998, 1999 and 2000, the Company recorded revenue from customers throughout
the United States, Canada, Germany, the United Kingdom, Ireland, France,
Italy, Sweden, Israel, Japan, South Korea, China, Singapore, Hong Kong,
Taiwan, Indonesia and Malaysia. The following table summarizes total net
revenues and long-lived assets attributed to significant countries (in
thousands):
II-33
Years Ended December 31,
---------------------------------
1998 1999 2000
------- ------- -------
Total net revenues:
United States ............... $12,698 $14,225 $27,391
Japan ....................... 9,167 11,594 13,028
Korea ....................... 2,596 2,991 13,532
Taiwan ...................... 3,404 4,967 11,652
Germany ..................... 4,784 2,340 1,491
All other ................... 615 291 2,397
------- ------- -------
Total net revenues* ........... $33,264 $36,408 $69,491
======= ======= =======
December 31,
--------------------
1999 2000
------- -------
Long-lived assets:
United States ........................... $ 1,716 $32,599
Japan ................................... 2,569 4,485
Korea ................................... 81 1,696
Taiwan .................................. 91 45
------- -------
Total long-lived assets ................... $ 4,457 $38,825
======= =======
----------
* 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,
---------------------------------
1998 1999 2000
------- ------- -------
Automated systems ............. $21,694 $20,885 $38,441
Integrated systems ............ 120 3,953 13,680
Tabletop systems .............. 7,904 7,324 11,347
------- ------- -------
Total product sales ........... $29,718 $32,162 $63,468
======= ======= =======
13. Selected Quarterly Financial Results (Unaudited)
As discussed in Note 1 to the consolidated financial statements, the
Company adopted a change in accounting principle related to SAB No. 101,
Revenue Recognition in Financial Statements, in the quarter ended December
31, 2000, retroactive to the beginning of fiscal year 2000. The retroactive
application of this change resulted in a cumulative effect of $1,364,000 in
the first quarter of 2000 as well as a change to the presentation of
historical 2000 quarterly results of operations.
II-34
The following tables set forth selected quarterly results of operations for
the years ended December 31, 1999 and 2000 (in thousands, except per share
amounts):
Quarters Ended
----------------------------------------
Mar. 31, Jun. 30, Sep. 30, Dec. 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
Quarters Ended
----------------------------------------
Mar. 31, Jun. 30, Sep. 30, Dec. 31,
2000 2000 2000 2000
------- ------- ------- -------
Total net revenues $16,316 $16,690 $19,300 $17,185
Gross profit 8,487 9,185 11,377 9,338
Income from operations 3,383 3,409 5,412 2,374
Net income 901 2,950 4,024 3,300
Net income per share:
Basic $ 0.09 $ 0.26 $ 0.35 $ 0.29
Diluted $ 0.08 $ 0.24 $ 0.33 $ 0.28
Shares used in per share computation:
Basic 9,693 11,295 11,393 11,563
Diluted 10,880 12,415 12,100 11,986
* * * * *
II-35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
II-36
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The sections entitled "Election of Directors" and "Compliance with Section
16(a)" appearing in the Registrant's proxy statement for the annual meeting of
shareholders for the year ended December 31, 2000, sets forth certain
information which is incorporated by reference. Certain information with respect
to persons who are executive officers of the Registrant is set forth under the
caption "Business-Executive Officers of the Registrant" in Part I of this
report.
ITEM 11. EXECUTIVE COMPENSATION
The section entitled "Executive Compensation" appearing in the Registrant's
proxy statement for the annual meeting of shareholders for the year ended
December 31, 2000, sets forth certain information with respect to the
compensation of management of the Registrant and is incorporated herein by
reference.
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 for the year ended December 31,
2000, sets forth certain information with respect to the ownership of the
Registrant's Common Stock and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section entitled "Transactions with Management" appearing in the
Registrant's proxy statement for the annual meeting of shareholders for the year
ended December 31, 2000, sets forth certain information with respect to certain
business relationships and transactions between the Registrant and its directors
and officers and is incorporated herein by reference.
III-1
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) 1. Consolidated Financial Statements.
See Index to Consolidated Financial Statements at Item 8 on page II-19 of
this report.
2. Consolidated Financial Statement Schedules.
The following consolidated financial statement schedules of Nanometrics
Incorporated are filed as part of this report and should be read in
conjunction with the Consolidated Financial Statements of Nanometrics
Incorporated:
Schedule Page
-------- ----
II - Valuation and Qualifying Accounts......................... IV-4
Schedules not listed above have been omitted because they are not applicable or
are not required or the information required to be set forth therein is included
in the Consolidated Financial Statements or notes thereto.
(b) Reports on Form 8-K. We did not file any reports on Form 8-K during
the quarter ended December 31, 2000.
(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
3.10 Certificate of Amendment of Amended and Restated Bylaws of
Nanometrics Incorporated
4.1(1) Form of Common Stock Certificate
10.1(2) Form of Indemnification of Agreement for Directors &
Officers
10.2(4) 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
IV-1
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
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.
10.11(4) Nanometrics Incorporated 2000 Employee Stock Option Plan and
form of Stock Option Agreement
10.12(4) Nanometrics Incorporated 2000 Director Stock Option Plan and
form of Stock Option Agreement
21(2) Subsidiaries of Registrant
23.1 Independent Auditors' Consent
23.2 Independent Auditors' Report on Schedule
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) Incorporated by reference to the Registrant's Annual Report on Form
10-K (file number 000-13470) filed on April 1, 1998.
(3) Incorporated by reference to Exhibit 4.1 filed with Registrant's
Registration Statement on Form S-8 (File No. 333-33583) filed on
August 14, 1997.
(4) Incorporated by reference to exhibits filed with Registrant's
Registration Statement on Form S-8 (file number 333-40866) filed on
July 7, 2000.
(5) Incorporated by reference to Exhibit 10.10 filed with Registrant's
Annual Report on Form 10-K dated March 29, 1993.
(d) Consolidated Financial Statements and Schedules.
See Item 14(a) above.
IV-2
SIGNATURES
Pursuant to the requirements 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 30, 2001
NANOMETRICS INCORPORATED
By: /s/ Paul B. Nolan
------------------------------------------
Paul B. Nolan
Chief Financial Officer and Vice President
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints John D. Heaton and Paul B. Nolan jointly and
severally, his attorneys-in-fact, each with the 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 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 Act of 1934, this Report on Form
10-K has been signed below by the following persons on behalf of the registrant
on the 30th day of March, 2001 in the capacities indicated.
Signature Title
--------- -----
/s/ 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. Coates Chairman of the Board
- ---------------------------
Vincent J. Coates
/s/ Nathaniel Brenner Director
- ---------------------------
Nathaniel Brenner
/s/ Norman V. Coates Director
- ---------------------------
Norman V. Coates
/s/ William Oldham Director
- ---------------------------
William Oldham
/s/ Edmond R. Ward Director
- ---------------------------
Edmond R. Ward
Schedule II
NANOMETRICS INCORPORATED
VALUATION AND QUALIFYING ACCOUNTS
Allowance for Doubtful Accounts
Balance at Charged to Deductions- Balance
beginning costs and write-offs at end
Year Ended of period expenses of accounts of period
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December 31, 1998........... $413,000 $7,000 $ 0 $420,000
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December 31, 1999........... $420,000 $5,000 $ 0 $425,000
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December 31, 2000........... $425,000 $ 0 $7,000 $418,000
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