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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 January 3, 2004
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 number: 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. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [_] No [X]
As of June 30, 2003, the last business day of our most recently completed second
fiscal quarter, the aggregate market value of the Common Stock of the registrant
held by non-affiliates was approximately $32,624,826. 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 because 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 March 24, 2004, 12,199,611 shares of the registrant's Common Stock were
outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's definitive proxy statement, to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A of the
Securities Exchange Act of 1934 in connection with the registrant's annual
meeting of shareholders to be held on May 26, 2004, are incorporated by
reference in Part III of this Form 10-K.
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NANOMETRICS INCORPORATED
FORM 10-K
YEAR ENDED JANUARY 3, 2004
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS.........................................................................................I-1
ITEM 2. PROPERTIES......................................................................................I-16
ITEM 3. LEGAL PROCEEDINGS...............................................................................I-17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............................................I-17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS...........................II-1
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA............................................................II-2
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...........II-4
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....................................II-17
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................................II-18
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...........II-39
ITEM 9A. CONTROLS AND PROCEDURES........................................................................II-39
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 AND RELATED
SHAREHOLDER MATTERS...........................................................................III-1
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................................III-1
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.........................................................III-1
PART IV
ITEM 15. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K...................IV-1
-ii-
Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements that involve
risks and uncertainties. These forward-looking statements include, but are not
limited to, statements regarding trends in demand in our industry, the increased
use of metrology in manufacturing, the drive toward integrated metrology and the
broadening of our technology portfolio. Words such as "believe," "expect,"
"anticipate" or similar expressions, are indicative of forward-looking
statements.
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 outlined in Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Risks Related to Our
Business," below. 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.
Trademarks
We have registered the following trademarks with the U.S. Patent and Trademark
Office: Nanometrics(R), NanoSpec(R), Integrated Metrology(R), NanoOCD(R),
Metra(R), NanoNet(R), OCD(R) and others. Additionally, we use a variety of other
trademarks and trade names such as Atlas, NanoCLP and the Nanometrics logo. All
other brand names, trade names and trademarks mentioned herein are the property
of their respective holders.
PART I
ITEM 1. BUSINESS
Overview
We are a leader in the design, manufacture, and marketing of high-performance
process control metrology systems used in the manufacture of
semiconductors/integrated circuits and flat panel displays. Our metrology
systems (i) measure various thin film properties, critical circuit dimensions
and layer-to-layer circuit alignment (overlay) and (ii) inspect for surface
defects during various steps of the manufacturing process, enabling
semiconductor and integrated circuit manufacturers to improve yields, increase
productivity and lower their manufacturing costs. The relative alignment of
sequentially patterned thin film layers is critical to device production.
We believe that process control metrology is growing at a greater rate than
other segments of the process equipment market. As films become thinner, film
materials more exotic, and circuit dimensions and overlay requirements more
demanding, metrology continues to grow in importance, especially as wafers
become larger and more expensive to manufacture. We expect these factors will
drive the demand for our high-end, standalone metrology products.
Additional demands on process tool manufacturers for better film uniformity,
tighter dimensional control, tool-to-tool matching and within-tool chamber
uniformity is driving the need for integrated process control metrology. These
new tool requirements will drive the need to place metrology inside the process
tool for real-time, integrated, process control metrology, using both feed
forward and feedback of the collected metrology data to control the process
equipment.
We have made several strategic changes in our business model to enable us to
further address these metrology trends. These changes include:
o The formation of three separate departmentalized groups to focus
specifically on our standalone, integrated and flat panel display (FPD)
metrology markets.
o An emphasis on becoming the leading supplier of metrology systems that
are integrated into various types of semiconductor processing
equipment;
o The development of new 300 millimeter wafer platforms for advanced
standalone and integrated metrology;
o The outsourcing of certain system components, such as robotics,
enabling us to leverage our technical resources;
o The implementation of an in-house manufacturing strategy for our
products; and
o The development of new measurement technologies for advanced
lithography and film deposition.
Demand for our products is driven by the increasing use of multiple thin film
technology by manufacturers of electronic products and, more recently, by the
increased adoption of both integrated metrology and advanced process control
(APC) by semiconductor manufacturers. With feature sizes shrinking below 100
nanometers, well below the wavelength of light, the need for very tight process
tolerances as well as productivity improvements in semiconductor fabrication, or
fabs, are driving the need for integrated metrology and APC. Our innovative
Optical Critical Dimension ("OCD(R)") measurement system is being increasingly
viewed not only as an enabling technology for APC, but also as a solution for
critical dimension measurement.
We recently combined our deep ultraviolet ("DUV") reflectometry technology with
the OCD technology in a single, integrated metrology module, the NanoOCD/DUV
9010. The compact size and speed of this new OCD/DUV technology enables the
measurement system to be fully integrated into the customer's process tool, thus
providing a complete, feed forward and feedback APC solution for wafer-to-wafer
closed loop control. By measuring the critical dimensions of developed
photoresist and then adjusting the final etched dimensions of a silicon
gate-etch process by
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feeding this information back into the process and trimming the resist, the
device manufacturer is able to achieve the maximum possible microprocessor
speed. In addition, new semiconductor process technologies, such as copper
interconnects, require that new measurement technologies be developed in order
to keep pace with the latest metrology demands. Our new, combined integrated
metrology module represents a unique solution to the problem of measuring the
remaining oxide film thickness as well as the loss of material over arrays of
copper lines during the chemical mechanical planarization ("CMP") process.
Our OCD technology has also proven to be applicable to the emerging requirements
for advanced lithography measurements such as the characterization of critical
dimensions and film thicknesses on masks and reticles which are comprised of
square glass substrates. We introduced the NanoOCD 9010M, the first integrated
metrology system for these square glass substrates.
Our integrated Copper Laser Profiler (CLP) also represents a unique approach to
the problem of determining the amount of copper material removed during the CMP
process. The very small footprint and high throughput of our CLP systems were
achieved with several new enabling technologies for integrated metrology,
including an edge-gripping wafer handling stage with integral pre-aligner. We
developed the enabling technologies to meet the needs of our customers. A
version of our edge-gripping wafer handling stage was also developed for
operation within a process tool's vacuum chamber, eliminating the need to expose
the wafer's sensitive films to ambient air. This innovation improves the
throughput of the tool during measurement and eliminates the potential for
damage due to excessive wafer handling and exposure to outside sources of
contamination.
We successfully beta tested the new Universal Defect Inspection (UDI) system at
an integrated device manufacturer (IDM). The NanoUDI technology can be
configured as either a standalone, fully automated 300-millimeter system or an
integrated module for defect and contamination detection on a wide variety of
films and surfaces. The system combines high efficiency illumination and
high-resolution optics with sophisticated image processing to detect and
classify particles and defects in the sub-micron range.
Many types of thin films are used in the manufacture of products, such as
semiconductor integrated circuits and flat panel displays. These products
require the precise electronic, optical and surface properties enabled by thin
film metrology. The growth in the sale and use of these products and the need
for tighter process control and improved productivity has created increased
demand for our advanced standalone and integrated metrology systems.
We offer a complete line of systems to address the metrology requirements of our
customers. Each of our systems is equipped with computerized mapping capability
for measurement, visualization and control of film uniformity, layer-to-layer
circuit alignment and critical dimensions. Our metrology systems can be
categorized as follows:
o Stand-alone, fully automated systems for high-volume manufacturing
operations;
o Integrated systems for integration into semiconductor processing
equipment that provide real-time measurements and feedback to improve
process control and increase throughput; and
o Tabletop systems used to provide manual or semi-automatic measurements
for engineering and low-volume production environments.
We also 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, or overlay, 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 and innovator in the field of metrology 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 Inc., Samsung, Hynix Semiconductor Inc., IBM, Intel Corporation,
Micron Technology, Inc., TSMC Ltd., Renesas, Chi Mei, AU Optronics and Hannstar.
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Industry Characteristics
Growth
Moore's Law which, simply stated, predicts a doubling of integrated circuit
performance with a 50% reduction in manufacturing costs every 18 months, is an
important factor in determining factory investment in the semiconductor
industry. Two important industry drivers are: (i) the increasing complexity of
chip designs as users of semiconductor chips demand increasingly higher
performance and require more complicated manufacturing processes and (ii) the
market pressure for lower cost chips. The semiconductor equipment industry has
experienced cyclical growth with a compounded annual growth rate of
approximately 15-17% over the past 20 years. Recently, the semiconductor
industry experienced an exceptionally long, cyclical downturn, which began in
2000 and continued through the better part of 2003. We believe that the
convergence of 300-millimeter wafer size, copper interconnects and fast, sub-100
nanometer architecture will drive the demand for new metrology solutions, such
as those that we offer.
In the past, demand for Internet access, personal computers, telecommunications,
and new consumer electronic products and services has fueled growth of the
semiconductor, data storage and flat panel display industries. New display
technologies, consumer electronics, automotive electronics and personal
computers will likely continue as the primary drivers in the near-term for the
semiconductor industry. We believe that 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 our 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 and flat panel displays.
Semiconductor Manufacturing Process
Semiconductors are fabricated by a series of process steps on a wafer substrate
made of silicon or other material. Our thin film, critical dimension, overlay
metrology and defect inspection systems can be used at many points during the
fabrication process to monitor and measure circuit dimensions, layer-to-layer
registration and film uniformity as well as material 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:
o Deposition;
o Chemical Mechanical Planarization, known in our industry as CMP;
o Photolithography imaging and overlay; and
o Etching of circuit elements.
Deposition. Deposition refers to placing layers of insulating or conducting
materials on a wafer surface in thin films that make up the circuit elements of
semiconductor devices. Common methods of deposition include chemical vapor
deposition (CVD), plasma-enhanced chemical vapor deposition (PECVD) and physical
vapor deposition (PVD). Diffusion and oxidation are also used to create or
define thin films. The control of uniformity and thickness during the formation
of these films is critical to the performance of the semiconductor circuit.
Chemical Mechanical Planarization. CMP flattens, or planarizes, the topography
of the film surface to permit the multiple patterns of small features on the
resulting smoothed 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 correctly polished and
achieved.
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Photolithography. Photolithography is the process step that projects the
patterns of the circuits on the chip. A wafer is pre-coated with photoresist, a
light sensitive film, that must have an accurate thickness and uniformity for
exposure. Photolithography involves the optical projection of integrated circuit
patterns onto the photoresist after which, the photoresist is developed, leaving
unexposed areas available for etching. In order to precisely control the
photolithography process, it is necessary to verify reflectivity, film
thickness, critical dimensions and overlay registration.
Etch. Etch is a dry or wet process for selectively removing unwanted areas that
have been deposited on the surface of a wafer. A film of developed photoresist
protects material that needs to be left untouched by the etch to make up the
circuits. Thin film metrology systems are required to verify precision of
material removal and critical dimension achievement.
Before and after deposition, CMP, photolithography and etch, the wafer surface
is measured to determine the quality of the film or pattern and to find defects.
Measurements taken to ensure process uniformity 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 conducting 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 Manufacturing Processes
Flat panel displays 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 currently range in size
up to 1,200 x 1,300 millimeters and should increase to up to 1,870 x 2,200
millimeters by the end of 2004.
Increased Use of Metrology in Manufacturing
We believe that continually rising wafer costs are forcing semiconductor
manufacturers to re-evaluate their manufacturing strategies at all levels, from
individual process steps to fabwide process optimization. Many major
semiconductor manufacturers are adopting feed-forward and feedback of film
thickness and critical dimensions, or CDs, based on real-time data from
metrology systems. Major benefits of these new metrology strategies are higher
manufacturing efficiencies from reduced rework, reduced headcount to perform at
the same quality level and increased device performance. Additional benefits
include device speed matching and more precise control of the overall
manufacturing process.
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 metrology solutions increase productivity with higher
throughput, smaller overall product footprints, 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.
Today, the same focus on increased productivity is driving the adoption of
integrated metrology for many processes, such as planarization, deposition,
lithography and etch. Until recently, semiconductor manufacturers were required
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. These 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
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process throughput, faster detection of process excursions and faults, reduced
wafer handling, faster process development and ultimately an improvement in
overall equipment effectiveness.
Nanometrics Offerings
We offer a complete line of metrology systems to address the broad range of
metrology requirements of our customers.
Our metrology systems can be categorized as:
o Stand-alone, fully automated systems used for the characterization and
measurement of thin films in high-volume manufacturing operations. We
offer a broad line of fully automated thin film thickness, critical
dimension, defect inspection and overlay 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 and flat panel display
manufacturing facilities. Each of these measurement systems is
non-contact and uses non-destructive techniques to analyze and measure
films. Our fully automated metrology product line also includes systems
that are used to measure the critical dimensions and overlay
registration accuracy of successive layers of semiconductor patterns on
wafers in the photolithography process.
o 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,
planarization, lithography, 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 anticipate continuing to
ship integrated systems to many original equipment manufacturers for
installation on their planarization, deposition, litho and etch tools.
o Tabletop systems used to manually or semi-automatically measure thin
films in engineering and low-volume production environments. We have
been a pioneer in and believe that 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 measurement systems is equipped with computerized readout capability
for measurement, visualization and control of film uniformity and thickness,
critical dimensions and overlay. 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 were one of the
first companies 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-100nm 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 solutions that meet the changing manufacturing requirements
of the semiconductor and flat panel display 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 supply integrated
metrology systems for Applied Materials' Mirra Mesa(TM) and 300mm
Reflexion(TM) CMP systems and the Producer QA and SE (TM) CVD systems.
Our optical critical dimension (OCD) metrology system is incorporated
in the Applied Materials' Transforma(TM) 300mm etch system for
controlling critical dimensions. The introduction of the
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first combined OCD/DUV integrated metrology product has allowed us to
penetrate additional OEM suppliers of etch processing and CMP
equipment, including Hitachi High Tech (HHT), Dainippon Screen (DNS)
and Ebara. Our integrated metrology sales group continues to focus on
sales of integrated metrology products to both OEMs and end-users.
Maintaining Technology Leadership. We are committed to developing
advanced metrology systems that meet the requirements of advanced
semiconductor, magnetic head and flat panel display manufacturing
technology. We have an extensive array of proprietary technology and
expertise in optics, software and systems integration. We have chosen
to reduce our dependence on outside suppliers by taking control of the
manufacturing of the critical components of our metrology systems. Key
enabling technologies, such as our recently developed edge-gripping
wafer handling stages, allow us to provide unique products with
exceptionally high quality and low manufacturing costs to our OEM
customers.
Broadening Our Technology Portfolio. We intend to continue to add a
wide range of new measurement technologies to our expanding base of
intellectual property. We recently introduced a single integrated
module combining OCD and DUV technologies, which has enabled us to
perform critical erosion and film thickness/array measurements for the
oxide and copper metal CMP processes. In addition, our copper/metal
profiler for CMP process control combines optical profile measurement
or profilometry with our highly successful reflectometry technology to
monitor metal removal during the chemical mechanical planarization
process. These metrologies are key requirements for the copper
damascene process, which replaces the current subtractive aluminum
process on newer semiconductor devices.
We also participate in the particle and defect inspection market with
our Universal Defect Inspection (UDI) technology. This technology has
applications not only for inspection of semiconductor wafers but also
for flat panel displays for the purpose of detecting killer defects
early in the process before they cause catastrophic yield loss.
Our OCD technology has also been applied to advanced photolithography
processes with the introduction of the OCD 9010M for mask and reticle
measurement and characterization. This new product has already
successfully correlated the interrelationships between film thickness
and critical dimension parameters. The OCD technology has also been
successfully extended to perform overlay/registration measurements. Our
new diffraction-based overlay (DBO) technology will provide
lithographers with wafer overlay control well beyond the requirements
of the 65-nanometer node of the International Technology Roadmap for
Semiconductors (ITRS) through the year 2010.
Leveraging Existing Customer and Industry Relationships. We expect to
continue to strengthen our existing customer relationships and foster
working partnerships with semiconductor equipment manufacturers by
providing technologically superior systems and high levels of customer
support. Our strong industry relationships have allowed close customer
collaboration which, in return, facilitates our ability to introduce
new products and applications in response to 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 current customers.
Providing Worldwide Distribution and Support. We believe that a direct
sales and support capability is beneficial for developing and
maintaining close customer relationships and for rapidly responding to
changing customer requirements. Because a majority of our sales come
from sources outside of the United States, we have expanded our direct
sales force in Europe, South Korea, Taiwan and China, and will continue
to expand into additional territories as customer requirements dictate.
We use selected sales representatives and distributors in other
countries in Southeast Asia and the Middle East. We intend to monitor
our distribution network by evaluating our existing and new offices, as
well as forming additional distribution relationships as needed. We
believe that growing our international distribution network as well as
our increased focus on direct sales domestically can enhance our
competitive position.
Addressing Multiple Markets. There are broad applications of our
technology beyond the semiconductor industry. We currently offer a
comprehensive family of metrology systems that accurately measure thin
films, critical dimensions and overlay registration used in
manufacturing process. Newer products inspect for particles and defects
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and monitor critical metal loss during the copper removal process. We
intend to continue developing and marketing products to address
metrology requirements in the manufacture of flat panel displays and
any other industries that might apply our technology in the future. We
believe that diversification of our technology through applications
across multiple industries increases the total available market for our
products and reduces, to an extent, our exposure to the cyclicality of
any particular market.
Broadening of our OEM Customer Base. We believe that our OEM customer
base will become an increasingly important aspect of our business. We
recently added Ebara, Hitachi and Dainippon Screen to our list of OEM
design wins which, together with our strong OEM position with Applied
Materials, will allow us to capitalize on this rapidly growing market
segment. The creation of our new, OEM integrated metrology sales group
will provide additional focus on this market opportunity and is
expected to result in increasing acceptance of our products in this
sector.
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 (i) specify high performance systems not easily offered by other
suppliers and (ii) narrowly configure a system for a specific application as a
cost saving measure.
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 for
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.
Optical Critical Dimension Technology. Our OCD technology is a critical
dimension measurement technology that is used to precisely determine
the dimensions on the semiconductor wafer that directly control the
resulting performance of the integrated circuit devices. Our
non-destructive, OCD measurement technology is compatible with the
current 130nm manufacturing technology and can be extended below 100nm
for future requirements in both photo-lithography and etch
applications. OCD combines non-contact optical technology with
extremely powerful data analysis software to provide highly accurate
measurement results for line width, height and sidewall angles. This
technology is available in both standalone and integrated 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.
Diffraction-Based Overlay Registration. We introduced diffraction-based
overlay metrology at the prestigious SPIE Conference on
Microlithography in February 2003, as an alternative solution for
overlay technology nodes
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below 90 nanometers. This novel technique extracts overlay alignment
error from our broadband OCD technology using specially designed
diffraction targets in real-time. The technique is based on
spectroscopy rather than imaging, is much more robust than aerial
imaging methods, and the total measurement uncertainty is about six
times smaller than traditional techniques. This new technology is
capable of meeting the advanced design requirements of the 45nm
process. A major advantage of the diffraction technique is that the
measurement targets can be produced that match the dimensions of the
circuits being manufactured, thus providing the immediate benefit of
looking at the overlay performance of features that closely resemble
the circuit features.
Optical Profilometry. We developed the optical profiler for the
measurement of copper metal loss during the chemical mechanical
planarization process. This technology uses the combination of an
optical interferometer and our reflectometer technology to accurately
determine metal loss, even over multiple layers during the final steps
of metallization. Our technology is a unique method for precisely and
accurately controlling this semiconductor manufacturing process step.
Extreme Dark Field (EDF) Imaging Technology. Our new, dark field
inspection technology is used to detect and accurately locate particles
and defects on the front and back sides of wafer surfaces, which could
potentially lead to device failures and critical yield loss during the
semiconductor manufacturing process. The technology combines a high
efficiency, broadband light source with a high-resolution detection
system and proprietary digital image processing for defect and
contamination detection on a wide variety of films and surfaces. We
believe that this technology can be readily extended to other
manufacturing processes.
Products
Our thin film thickness measurement systems use microscope-based, non-contact
spectroscopic reflectometry (SR). Some of our systems provide complementary
spectroscopic ellipsometry (SE) to measure the thickness and optical
characteristics of films on a variety of substrates. In addition, we offer both
integrated and standalone optical critical metrology systems to measure critical
dimensions of patterns on semiconductor wafers. 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 stand-alone systems, integrated systems and tabletop systems.
- ------------------------- ------------------------ ----------------------- ------------------------- ----------------------
Platform Market Substrate Size Applications Technology
- ------------------------- ------------------------ ----------------------- ------------------------- ----------------------
Automated/Stand Alone
- ------------------------- ------------------------ ----------------------- ------------------------- ----------------------
9100 Semiconductor, 75-200mm CVD, CMP, Etch, Litho, SR, SE
Magnetic Head Film Thickness
- ------------------------- ------------------------ ----------------------- ------------------------- ----------------------
9200 Semiconductor 150mm CVD, CMP, Etch, Litho, SR
200mm Film Thickness
- ------------------------- ------------------------ ----------------------- ------------------------- ----------------------
9300 Semiconductor 200mm CVD, CMP, Etch, Litho, SR, SE, OCD/SE, UDI,
300mm Film Thickness CLP
- ------------------------- ------------------------ ----------------------- ------------------------- ----------------------
550mm x 650mm, 1100mm
6500 Flat Panel Display x 1250mm 1200mm x Film Thickness SR, SE
1300mm
- ------------------------- ------------------------ ----------------------- ------------------------- ----------------------
7210 Semiconductor 200mm Overlay Imaging
- ------------------------- ------------------------ ----------------------- ------------------------- ----------------------
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- ------------------------- ------------------------ ----------------------- ------------------------- ----------------------
Platform Market Substrate Size Applications Technology
- ------------------------- ------------------------ ----------------------- ------------------------- ----------------------
Integrated
- ------------------------- ------------------------ ----------------------- ------------------------- ----------------------
9000 Semiconductor 200mm CVD, CMP, Film Thickness SR
- ------------------------- ------------------------ ----------------------- ------------------------- ----------------------
9000i Semiconductor 200mm CVD, CMP, Etch, Film SR, OCD
300mm Thickness, CD
- ------------------------- ------------------------ ----------------------- ------------------------- ----------------------
9000b Semiconductor 300mm CVD, CMP, Etch, Film SR
Thickness
- ------------------------- ------------------------ ----------------------- ------------------------- ----------------------
9010 Semiconductor 300mm CMP, CVD, Etch, Litho OCD/SR, CLP, UDI
Film Thickness, CD
- ------------------------- ------------------------ ----------------------- ------------------------- ----------------------
9020 Semiconductor 200mm Etch, Vacuum CD OCD
- ------------------------- ------------------------ ----------------------- ------------------------- ----------------------
Table Top
- ------------------------- ------------------------ ----------------------- ------------------------- ----------------------
3000 Semiconductor, 75mm Film Thickness SR
Magnetic Head 150mm
- ------------------------- ------------------------ ----------------------- ------------------------- ----------------------
6100 Semiconductor 75mm Film Thickness SR
150mm
200mm
- ------------------------- ------------------------ ----------------------- ------------------------- ----------------------
We have recently introduced several new standalone and integrated products to
the market. These products include the following:
o Nanometrics Atlas Advanced Metrology System combining multiple
metrology technologies in a standalone device
o Nanometrics 9300 combined standalone OCD/SE film characterization
system
o Nanometrics FLX standalone flexible metrology system for development
and support of all integrated technologies
o NanoOCD/DUV 9010 integrated metrology platform for both optical
critical dimension and film thickness metrology
o NanoOCD 9010M integrated metrology platform for mask and reticle
measurement
Additionally, our subsidiaries in Japan and Korea unveiled a new flat panel
display product and a 300-millimeter aerial imaging overlay product.
Automated/Stand-Alone Systems
Our stand-alone, fully automated metrology systems are employed in high-volume
production environments. These systems incorporate automated material handling
interface options for 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 $900,000,
depending on substrate sizes, measurement technologies, material handling
interfaces and software options.
Nanometrics Atlas
The new Nanometrics Atlas high-performance metrology system combines up
to five metrology technologies on a single platform, providing
increased measurement capabilities in a small footprint design for
reduced cost of ownership. The system is capable of housing up to five
metrology technologies including polarized, normal incidence
spectroscopic ellipsometry for linewidth profile and critical
dimensions, spectroscopic reflectometry for films and film stacks, UV
and deep UV spectroscopic ellipsometry for ultra-thin films and film
characterization, diffraction-based overlay technology for
layer-to-layer registration measurement, and film stress/wafer bow
measurements. The Atlas offers high accuracy, high precision metrology
for wafer characterization and can be configured for 200mm and 300mm
wafer sizes. The system is also compatible with NanoNet, an optional
software
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package that enables users to synchronize standalone and integrated
metrology systems for remote process setup and monitoring.
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
ultra-thin, multiple film stack and DUV lithography measurement
applications. Other 9100 options include a standard mechanical
interface with mini-environment enclosures for use in ultra-clean
manufacturing facilities. The system also features a Windows NT
software platform that conforms to the newly establish SEMI user
interface standard. The 9100 can also be configured to handle the
substrates. We developed the 9100 using technologies from the
integrated film thickness systems to allow 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.
9300 Standalone Automation Platforms
The 9300 stand-alone wafer automation platform serves as a common,
universal building block and forms the basis for several fully
automated metrology systems.
Nanometrics 9300
The enhanced Nanometrics 9300 advanced metrology system
combines two metrology technologies on a single metrology
platform. This enhanced platform now includes optical critical
dimension (OCD) measurement capability. Using the
spectroscopic ellipsometer (SE), customers can determine
optical film properties and then feed them directly to the OCD
measurement recipes to optimize sensitivity for all line width
and profile measurements. Having these two technologies on the
same tool also reduces the time and potential error loss
associated with having to determine the film optical
properties on a separate tool.
NanoSpec 9300
The NanoSpec 9300 stand-alone, automated thin film measurement
system is capable of handling both 200 and 300-millimeter
diameter wafers. The NanoSpec 9300 can be configured with a
DUV to NIR spectroscopic ellipsometer for ultra-thin, multiple
film stack and DUV lithography measurement applications. This
system can also include a mini-environment enclosure and wafer
load ports compatible with industry standards. The NanoSpec
9300 conforms to the new industry standards for 300-millimeter
wafer handling automation and features a Windows NT software
platform that conforms to the SEMI user interface standard. We
developed the NanoSpec 9300 using technologies from the
integrated film thickness systems to allow easy transfer of
measurement recipes between the integrated and stand-alone
film metrology systems.
NanoUDI 9300
The NanoUDI 9300 stand-alone, high throughput, full-wafer
defect inspection system detects and measures particles and
defects as small as 0.05 microns on 300-millimeter diameter
semiconductor wafers. The NanoUDI 9300 was first introduced at
SEMICON West in July 2002 and is built on the common 9300
wafer automation platform that conforms to the new industry
standards for 300 millimeter wafer handling. The NanoUDI 9300
also features a Windows NT software platform that conforms to
the SEMI user interface standard.
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NanoOCD 9300
The NanoOCD 9300 stand-alone, automated metrology system is an
optical critical dimension measurement system that enables
direct recipe transfer between our integrated metrology and
standalone systems using our NanoNet networking software. This
system can also include a mini-environment enclosure and wafer
load ports compatible with industry standards. The NanoOCD
9300 also conforms to the new industry standards for 300
millimeter wafer handling automation and features a Windows NT
software platform that conforms to the newly established SEMI
user interface standard. We developed the NanoOCD 9300 using
the same measurement technology from the integrated OCD system
to allow direct transfer of measurement recipes between the
integrated and stand-alone OCD metrology systems.
Nanometrics FLX
The newest standalone metrology platform, the Nanometrics FLX
flexible metrology system, is designed to support up to four
integrated metrology modules simultaneously - the tool can
mix-and-match any combination of modules to form a complete
metrology solution for lithography, planarization, etch and
deposition processes. This capability accelerates process
development through parallel development of integrated
metrology solutions. The Nanometrics FLX is a flexible,
cost-efficient, high-throughput 300-mm standalone metrology
system based on Nanometrics' proven integrated metrology
solutions. The system offers industry-leading throughput of
250-500 wafers per hour fueled by dual multi-axis
wafer-handling robots.
NanoSpec 5500 and 6500
The NanoSpec 5500 and 6500 measure optically transparent films that are
used in the manufacture of flat panel displays. The model 5500 is fully
automated and handles substrates up to 550 by 650 millimeters. This
model is also capable of measuring at any site on the substrate and
generating film thickness maps, which show film thickness uniformity
across the panel. The NanoSpec 6500 is an advanced version of the
NanoSpec 5500 with additional proprietary software and hardware
enhancements and is capable of handling generation 5 substrates up to
1,200 by 1,300 millimeters. Recent product enhancements include the
integration of ultra-violet (UV) spectroscopic reflectometry for the
measurement of low temperature, deposited poly-silicon films and UV to
near infra-red (NIR) spectroscopic ellipsometry (SE) for the
measurement of multilayer film stacks and improved measurement
precision. Product development is also well underway for handling
generation 6 (1,500 x 1,800 millimeter) and generation 7 (1,870 x 2,200
millimeter) substrates.
NanoOCS 7200 Series
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 NanoOCS 7210 provides enhanced measurement performance and
higher wafer throughput and replaces the Metra line of products.
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 DUV measurement technology, in addition to
spectroscopic reflectometry and optical critical dimension measurement
technologies. Our integrated metrology systems range in price from approximately
$80,000 to $300,000 depending on features and technology.
NanoSpec 9000
The NanoSpec 9000 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,
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planarization, chemical vapor photolithography and etch. In its basic
configuration, the NanoSpec 9000 is equipped with visible wavelength
spectroscopic reflectometry.
NanoSpec 9000i
The NanoSpec 9000i is a 300mm version of the NanoSpec 9000. This
metrology platform can be integrated into multiple wafer film process
steps including metal deposition, planarization, chemical vapor
deposition, photolithography and etch. The NanoSpec 9000i is also
equipped with visible wavelength spectroscopic reflectometry and can be
extended into deep ultraviolet wavelengths. The NanoSpec 9000i will
also support the newly developed optical critical dimension (OCD)
technology for the measurement of critical dimensions on semiconductor
wafers. The system is designed for integration into semiconductor wafer
processing equipment and used in several critical processing steps
including photolithography and etch.
NanoSpec 9000b
The NanoSpec 9000b is a SEMI BOLTS compatible, 300 millimeter based
system that incorporates all the features of the NanoSpec 9000. By
conforming to the industry standard BOLTS mounting system, the NanoSpec
9000b is interchangeable with industry conforming load ports for
simplified mechanical integration.
9010 Integrated Metrology Platform
The 9010 integrated metrology platform is an advanced 300 -millimeter
product that supports multiple measurement technologies. The first
product offered on this platform was the NanoCLP 9010 is a laser-based,
optical profiling and reflectance measurement system that incorporates
the newly developed Copper Laser Profiler (CLP) technology for the
measurement of copper metal loss during planarization on semiconductor
wafers and is designed for integration into semiconductor wafer
processing equipment. The second product offered on this platform was
the NanoUDI, Universal Defect Inspection system. The NanoUDI 9010 is an
integrated metrology, full-wafer defect inspection system that detects
and measures particles and defects as small as 0.1 microns on
300-millimeter diameter semiconductor wafers. The 9010 integrated
metrology platform also incorporates our unique 300-millimeter
edge-gripping wafer stage with an integral pre-aligner.
NanoOCD 9010M
The NanoOCD 9010M was introduced in the third quarter of 2003, and is
the first optical critical dimension (OCD) integrated metrology tool
for masks and reticles. The NanoOCD 9010M utilizes our
production-proven OCD metrology, and enables non-destructive, real-time
measurement and profiling of critical features on photomasks and
reticles without the limitations and drawbacks associated with CD-SEM
metrology. Current CD-SEM technology appears to be reaching its
theoretical limits for making critical dimension measurements on these
substrates. Photoresist-on-chrome-on-glass features found on reticles
and masks suffer severe charging during CD-SEM metrology making
critical dimension measurements impossible. OCD is a non-destructive
technology that provides information not available from CD-SEM
measurements.
NanoOCD/DUV 9010
The NanoOCD/DUV 9010 was also introduced in the third quarter of 2003,
and is the first integrated metrology tool to combine two measurement
technologies on a single platform. The NanoOCD/DUV 9010 incorporates
both ultra violet optical critical dimension (OCD) spectroscopic
ellipsometry and deep ultra violet (DUV) spectroscopic reflectometry.
The NanoOCD/DUV 9010 provides thin film and film stack thickness
measurements on pads as well as oxide, nitride and trench profile
measurements on arrays in a single tool. The combined technologies
provide a complete measurement solution over the entire range of
measurement requirements for each process step. This complete metrology
capability can be utilized across a number of lithography, deposition,
copper planarization, dielectric planarization, poly-Si etch and
dielectric etch applications.
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NanoOCD 9020 Integrated Metrology Platform
The 9020 integrated metrology platform is an advanced, vacuum based
metrology product that supports multiple measurement technologies. The
NanoOCD 9020 is a 200 millimeter-based system that incorporates our
newly developed edge-gripping vacuum wafer stage and OCD technology for
the measurement of critical dimensions on semiconductor wafers. The
system is designed for integration into the vacuum chamber of
semiconductor wafer etch processing equipment.
Tabletop Systems
Our tabletop systems are used primarily in low-volume production environments
and in engineering labs for which automated handling and high throughput are not
required. Our tabletop product line encompasses both manual and semi automated
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
purchased.
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 metrology systems worldwide to many of the major semiconductor and
flat panel display manufacturers and equipment suppliers, as well as to
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,
Applied Materials represented 17.6% of our total net revenues in 2001. Two
customers, Applied Materials, and TSMC represented 13.8% and 10.9% of our total
net revenues in 2002. Two customers, Applied Materials and Hynix Semiconductor,
represented 15.4% and 12.0% of our total net revenues in 2003, respectively.
The following is a list of our top ten customers, based on revenues, during
2003:
Applied Materials Tricenti Technology Inc. (TTI)
Hynix Semiconductor AU Optronics
Samsung Hannstar
Powerchip Semiconductor Manufacturing International
ChiMei Corporation (SMIC)
Wacker
Sales and Marketing
We believe that the capability for direct sales and support is beneficial for
developing and maintaining close customer relationships and for rapidly
responding to changing customer requirements. We provide direct sales and
support from our corporate office in California. We also have a direct sales
presence in South Korea, Taiwan, China, Europe and Japan. We use selected sales
representatives and distributors in the United States and other countries in
Asia and the Middle East. We intend to continue to monitor our distribution
network, our existing and new offices as well as forming additional distribution
relationships when needed. We believe that growing our international
distribution network can 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 generally and with the features
and advantages of our specific products. We believe that our sales and
application engineers are skilled in working with our customers to solve complex
measurement and process problems.
Sales to customers in foreign countries constituted approximately 64.8%, 69.0%
and 74.8% of total net revenues for 2001, 2002 and 2003, respectively. Direct
exports of our metrology systems to our foreign customers and shipments to
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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. See Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations-Risks
Related to Our Business for information regarding risks related to our foreign
operations.
Sales to customers located in Japan, Taiwan and Korea, as a percentage of total
net revenues, were as follows:
2001 2002 2003
---- ---- ----
Japan ....................... 28.8% 23.9% 24.8%
Taiwan ...................... 14.1% 22.7% 21.5%
Korea ....................... 9.9% 10.5% 21.8%
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. We also maintain a website at www.nanometrics.com.
Customer Service and Support
We believe that customer service and technical support are important factors to
distinguish us from our competitors 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, as well as for our
sales and marketing efforts. Our Technical Training department has a complete
set of metrology systems that are dedicated to customer training. We provide
warranty and post-warranty service from our corporate office in Milpitas,
California. We also have service operations based in Pennsylvania, Vermont,
Arizona, and Texas. Local service and spare parts are provided in the United
Kingdom by our operations in Scotland. Service, applications, and sales support
for the European continent are provided through our operations in Italy and
Germany. In Asia, service is provided by direct offices in Japan, Korea, Taiwan,
Singapore and by a new office that we opened in 2002 in Shanghai, China. Our
distributors and representatives also 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 10.4%, 17.4% and 16.9% of total net revenues in 2001,
2002 and 2003, respectively.
Backlog
As of December 31, 2003 our backlog was approximately $9.1 million. As of
December 31, 2002, our backlog was approximately $8.3 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. As 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. Our
products compete primarily with: stand-alone thin film measurement products from
KLA-Tencor Corporation, Therma-Wave, Inc. and Rudolph Technologies; integrated
thin film measurement products from Nova Measuring Instruments Ltd., KLA-Tencor
and Therma-Wave; and overlay measurement products from KLA-Tencor and Accent
Optical Technologies. Many of our competitors have substantially greater
financial, engineering, manufacturing and marketing resources than we do.
Significant competitive factors in our industry include: performance of
proprietary measurement technology; system performance, including automation and
software capability; ease of use; reliability; established
I-14
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 technology produced in our facilities with components
and subassemblies obtained from outside suppliers. Our manufacturing operations
do not require us to make any additional major investments 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 long-term supply agreements with any of our suppliers.
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 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 continue to
add to our intellectual property portfolio, most recently in the areas of
critical dimension measurement and integrated metrology. 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 2001, 2002 and 2003 were $10.8 million, $13.8
million and $13.4 million, and represented 22.6%, 39.6% and 32.2% 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. As of December 31,
2003, we held 24 United States patents with 38 patent applications pending, 10
of which were filed during 2003. The United States patents, issued during the
period 1987 to 2003, will expire between 2004 and 2022. 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 that are claimed to infringe
their proprietary rights. We typically refer such matters to our legal counsel.
Employees
At December 31, 2003, we employed approximately 310 persons worldwide, including
97 in research and development, 54 in manufacturing and manufacturing support,
134 in marketing, sales and field service and 25 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 that are 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.
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Executive Officers of the Registrant
The following are our current executive officers and their ages as of December
31, 2003:
Name Age Position
---- --- --------
Vincent J. Coates....... 78 Chairman of the Board, Secretary
John D. Heaton.......... 43 President, Chief Executive Officer and Director
Paul B. Nolan........... 48 Vice President and Chief Financial Officer
Roger Ingalls Jr........ 42 Vice President of Sales
Mr. Vincent J. Coates has been Chairman of the Board since Nanometrics was
founded in 1975. He has been our Secretary since February 1989. He has also
served as our Chief Executive Officer through April 1998 and President from our
founding through May 1996, except for the period January 1986 through February
1987 when he served exclusively as Chief Executive Officer. Mr. Coates has also
served as Chairman of the Board of Nanometrics Japan Ltd., a subsidiary of the
Company, since June 1998. Prior to his employment at Nanometrics, Mr. Coates
co-founded Coates and Welter Instrument Corporation, a designer of electron
microscopes, which company was subsequently acquired by Nanometrics. Mr. Coates
also spent over twenty years working in engineering, sales and international
operations for the Perkin-Elmer Corporation, a manufacturer of analytical
instruments. In 1995, he received an award that recognized his contribution to
the industry from Semiconductor and Equipment and Materials International, an
industry trade organization.
Mr. John D. Heaton has served as a director of Nanometrics since July 1995.
Since May 1996, he has served as our President. Since April 1998, he has also
served as our Chief Executive Officer. From May 1996 to April 1998, he served as
our Chief Operating Officer. Mr. Heaton has also served as President of
Nanometrics Japan Ltd., a subsidiary of the Company, since January 1998.
Beginning in 1978, Mr. Heaton served in various technical positions at National
Semiconductor, a semiconductor manufacturer, prior to joining the Company in
1990.
Mr. Paul B. Nolan has served as Vice President and Chief Financial Officer of
Nanometrics since March 1994. Mr. Nolan joined us as a Financial Analyst in
March 1989, and served as Director of Finance from March 1993 to March 1994. Mr.
Nolan served as Financial Analyst at Harris Corporation, a communications
equipment company, prior to joining the Company.
Mr. Roger Ingalls Jr. has served as our Vice President of Sales since January
2002. Mr. Ingalls joined Nanometrics in March 1995, serving as Vice President
and Director of Sales and Marketing from October 1997 to February 1998, and as
Vice President and Director of Marketing from February 1998 to January 2002.
Prior to joining Nanometrics, he served as a sales engineer for Nikon Inc., a
precision optical company, 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 lease and rent locations in Texas, China, Singapore and Taiwan as sales
and service offices. Rent expense for our facilities was approximately $270,000
for 2003.
Through our Japanese subsidiary, we own a 50,000 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 Japan.
Through our Korean subsidiary, we own a 39,000 square foot facility in
Pyungtaek, Korea. This facility is utilized by our Korean subsidiary for sales,
service, engineering and manufacturing.
We believe that our existing facilities, which are currently utilized at or near
capacity, are suitable and adequate for our current needs and anticipated
growth.
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ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending against us.
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
January 3, 2004.
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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 bid 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
---- ---
2002
First Quarter.............................. $23.10 $14.90
Second Quarter............................. $20.35 $13.16
Third Quarter.............................. $16.33 $2.60
Fourth Quarter............................. $6.30 $1.82
2003
First Quarter.............................. $6.11 $2.85
Second Quarter............................. $7.49 $3.88
Third Quarter.............................. $15.89 $6.15
Fourth Quarter............................. $17.41 $10.63
On March 24, 2004, the last reported sale price of our common stock on the
Nasdaq National Market was $14.56 per share, and there were approximately 123
shareholders of record.
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.
Equity Compensation Plan Information
The following table gives information about the common stock that may be issued
under all of our existing equity compensation plans as of December 31, 2003.
- -------------------------------- ----------------------------- ----------------------------- ------------------------------
Plan category Number of securities to be Weighted-average exercise Number of securities
issued upon exercise of price of outstanding remaining available for
outstanding options, options, warrants and rights future issuance under equity
warrants and rights compensation plans
(excluding securities
reflected in column (a))
(a) (b) (c)
- -------------------------------- ----------------------------- ----------------------------- ------------------------------
Equity compensation plans
approved by security holders 1,773,711 $ 11.62 608,089
- -------------------------------- ----------------------------- ----------------------------- ------------------------------
Equity compensation plans not
approved by security holders 1,141,485 $ 7.13 58,515
- -------------------------------- ----------------------------- ----------------------------- ------------------------------
Total 2,915,196 $ 9.86 666,604
- -------------------------------- ----------------------------- ----------------------------- ------------------------------
Under the 2002 Nonstatutory Stock Option Plan, which was approved by our board
of directors, we may grant options to acquire up to 1,200,000 shares of common
stock to employees and consultants at prices determined by the Plan
administrator at the date of grant. These options generally expire seven years
from the date of grant, or a shorter term as provided by the stock option
agreement and become exercisable as they vest as set forth in the stock option
agreements.
II-1
Stock Option Exchange Program
On November 12, 2002, we announced a voluntary stock option exchange program for
certain eligible employees. Under the exchange program, we offered to exchange
certain stock options to purchase an aggregate of 1,962,020 shares of our common
stock in exchange for a promise to grant new stock options, subject to certain
conditions, at a future date that is at least six months and one day after
December 16, 2002, the date of cancellation. The stock options subject to the
offer to exchange had been granted under either our 1991 stock option plan or
our 2000 employee stock option plan with exercise prices equal to or greater
than $10.00 per share. Eligible employees who elected to participate in the
exchange program were required to exchange all other stock options, regardless
of their exercise price, that were granted to them after May 12, 2002 and before
replacement options were granted. The number of shares of common stock subject
to the new options equaled 90% of the number subject to the exchanged options.
Under the exchange program, options to purchase 1,569,020 shares of our common
stock were tendered and cancelled. On June 17, 2003, we granted 1,398,621
replacement options to eligible employees. There were no compensation charges or
variable plan accounting resulting from the grant of the replacement options.
Non-employee members of our Board of Directors were not eligible to participate
in this program.
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.
II-2
Years Ended December 31,
------------------------------------------------------------------------
1999 2000 2001 2002 2003
---------- ---------- ---------- ---------- ----------
(in thousands, except per share data)
Consolidated Statement of Operations Data:
Net revenues:
Product sales......................... $ 32,162 $ 63,468 $ 42,653 $ 28,669 $ 34,592
Service............................... 4,246 6,023 4,931 6,054 7,010
---------- ---------- ---------- ---------- ----------
Total net revenues.................. 36,408 69,491 47,584 34,723 41,602
Costs and expenses:
Cost of product sales................. 14,606 25,082 17,949 13,237 17,691
Cost of service....................... 4,560 6,022 5,406 5,765 6,620
Research and development.............. 4,658 9,238 10,760 13,765 13,399
Selling............................... 5,871 10,313 9,523 10,862 11,496
General and administrative............ 2,973 4,258 4,177 5,104 4,689
Goodwill impairment................... -- -- -- 1,077 --
---------- ---------- ---------- ---------- ----------
Total costs and expenses............ 32,668 54,913 47,815 49,810 53,895
Income (loss) from operations............ 3,740 14,578 (231) (15,087) (12,293)
Other income (expense):
Interest income....................... 662 4,129 2,576 583 397
Interest expense...................... (180) (76) (86) (94) (96)
Other, net............................ 94 (150) (517) 100 385
---------- ---------- ---------- ---------- ----------
Total other income, net............. 576 3,903 1,973 589 686
---------- ---------- ---------- ---------- ----------
Income (loss) before provision (benefit)
for income taxes...................... 4,316 18,481 1,742 (14,498) (11,607)
Provision (benefit) for income taxes..... 1,682 5,942 782 (6,230) 5,860
---------- ---------- ---------- ---------- ----------
Income (loss) before cumulative effect
of change in accounting principle..... $ 2,634 $ 12,539 $ 960 $ (8,268) $ (17,467)
Cumulative effect of change in revenue
recognition principle (SAB 101)....... -- (1,364) -- -- --
---------- ---------- ---------- ---------- ----------
Net income (loss)........................ $ 2,634 $ 11,175 $ 960 $ (8,268) $ (17,467)
========== ========== ========== ========== ==========
Basic net income (loss) per share:
Income (loss) before cumulative
effect of change in accounting
principle........................... $ 0.30 $ 1.14 $ 0.08 $ (0.70) $ (1.45)
Cumulative effect of change in
revenue recognition principle (SAB
101)................................ -- (0.12) -- -- --
---------- ---------- ---------- ---------- ----------
Net income (loss)........................ $ 0.30 $ 1.02 $ 0.08 $ (0.70) $ (1.45)
========== ========== ========== ========== ==========
Diluted net income (loss) per share:
Income (loss) before cumulative
effect of change in accounting
principle........................... $ 0.28 $ 1.06 $ 0.08 $ (0.70) $ (1.45)
Cumulative effect of change in
revenue recognition principle (SAB
101)................................ -- (0.12) -- -- --
---------- ---------- ---------- ---------- ----------
Net income (loss)........................ $ 0.28 $ 0.94 $ 0.08 $ (0.70) $ (1.45)
========== ========== ========== ========== ==========
Shares used in per share computation:
Basic................................. 8,829 10,986 11,691 11,878 12,043
========== ========== ========== ========== ==========
Diluted............................... 9,393 11,845 12,161 11,878 12,043
========== ========== ========== ========== ==========
II-3
December 31,
------------------------------------------------------------------------
1999 2000 2001 2002 2003
---------- ---------- ---------- ---------- ----------
(in thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term
investments......................... $ 18,140 $ 69,788 $ 47,227 $ 36,866 $ 29,892
Working capital....................... 36,021 92,420 80,171 74,776 59,587
Total assets.......................... 46,410 144,796 142,355 134,688 121,740
Debt obligations, less current portion 2,288 4,236 3,314 3,123 2,648
Total shareholders' equity............ 38,155 127,009 129,845 124,106 108,441
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. In some cases, forward-looking statements can
be identified by words such as "believe," "expect," "anticipate," "plan,"
"potential," "continue" or similar expressions. 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 occurrence 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.
We use a 52/53 week fiscal year ending on the Saturday nearest to December 31.
Accordingly, fiscal years 2001, 2002 consisted of 52 weeks and ended on December
29, 2001 and December 28, 2002, respectively, and 2003 consisted of 53 weeks and
ended on January 3, 2004. For convenience, our year end is denoted as December
31 in the following discussion.
Overview
We are a pioneer in the field of metrology systems for the semiconductor and
flat panel display manufacturing industries. Our systems are designed to
precisely measure a wide range of film types deposited on substrates during
manufacturing in order to control manufacturing processes and increase
production yields.
Capital expenditures by manufacturers of semiconductors and flat panel displays
and their suppliers are critical to our success. The demand by these
manufacturers and suppliers for products is driven by the current and expected
market demand for (i) semiconductors and products utilizing semiconductors; disk
drives and computers that utilize disk drives; and (ii) 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 and flat panel displays is also an important factor in the demand
for our innovative metrology systems. We anticipate that increased demand for
devices incorporating smaller components along with some of our recent product
innovations will result in increased demand for our products.
We derive our revenues from product sales and services, which include sales of
accessories and service to the installed base of our products. For the year
ended December 31, 2003, we derived 83.1% of our total net revenues from product
sales and 16.9% of our total net revenues from services.
Current Trends
Changing trends in the semiconductor and flat panel display manufacturing
industries are increasing the need for metrology as a major component of
manufacturing systems. These trends include:
o Adoption of Chemical Mechanical Planarization. Manufacturers now use
chemical mechanical planarization or CMP to flatten, or planarize, thin
films to obtain the ultra-flat surfaces required for advanced
photolithography. In addition, the introduction of new copper
interconnect techniques has increased the need for CMP processes.
Accordingly, semiconductor manufacturers are seeking metrology
solutions that can help
II-4
control the CMP process by precisely measuring thin film layers to
determine exactly when the appropriate thickness has been achieved.
o Dynamic Etch Time Adjustment. Semiconductor manufacturers are adjusting
etch time on-the-fly to compensate for measured, incoming CD variation
and using feedback to control the lithography step for the next wafer.
If not properly controlled, variations in the transistor's critical
gate dimension in high-end microprocessors can cause some chips to run
at slower speeds, affecting their ability to command premium pricing.
o Adoption of New Types of Thin Film Materials. 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,
low dielectric constant (low k) insulating materials. Enhanced
metrology solutions in the manufacturing process are required to
characterize these materials.
o Copper Interconnect Technology. The need for ever increasing device
circuit speed coupled with lower power consumption has pushed
semiconductor device manufacturers to begin the replacement of the
subtractive aluminum interconnect process with copper damascene
technology. This new copper processing technology has driven the need
for new metrology techniques such as non-destructive laser profiling
and the use of optical critical dimension (OCD) technology for control
of the copper process.
o Increasing Complexity of Semiconductors. Semiconductors are becoming
more complex. They operate at faster speeds; have smaller feature
sizes, employ larger dies that contain more transistors and utilize
increasing numbers of manufacturing process steps. The value of
processed wafers and the cost of rework is significantly higher for the
more complex semiconductors and therefore, manufacturers are seeking to
use metrology solutions to increase production yields and limit the
amount of rework required on complex chips.
o Need for Rapid Ramp of Production Efficiencies. Competitive forces
influencing semiconductor device manufacturers, such as price-cutting
and shorter product life cycles, place pressure on manufacturers to
rapidly achieve production efficiency. 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.
Critical Accounting Policies
The preparation of our financial statements conforms with accounting principles
generally accepted in the United States of America, which requires management to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenue, expenses and related disclosures at the date of our
financial statements. On an on-going basis, management evaluates its estimates
including those related to bad debts, inventory valuations, warranty
obligations, income taxes and intangible assets. Management bases its estimates
and judgments on historical experience and on various other factors that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
management's estimates. Our critical accounting policies include revenue
recognition, allowance for doubtful accounts, inventory valuation, warranty
accrual, income tax assets and liabilities including the deferred tax asset
valuation allowance, goodwill and stock based compensation due to the estimates
and judgments involved with each of these items.
Revenue Recognition - We recognize revenue when persuasive evidence of an
arrangement exits, delivery has occurred or services have been rendered, the
sales price is fixed or determinable, and collectibility is reasonably assured.
For product sales, this occurs at the time of shipment if we have met defined
customer acceptance experience levels with both the customer and the specific
type of equipment. All other product sales are recognized upon customer
acceptance. In certain geographical regions, where risk of loss and title
transfers upon customer acceptance, revenue is also recognized upon customer
acceptance. Revenue related to spare part sales is recognized on shipment and is
included as part of service revenue. Revenue related service contracts are
recognized ratably over the period under contract. Unearned maintenance and
service contract revenue is not significant and is included in deferred revenue.
II-5
Allowance for Doubtful Accounts - Our allowance for doubtful accounts is based
primarily on the magnitude and age of outstanding customer invoices in general,
as well as on the status of collections issues with specific customers. Customer
accounts are reviewed on a continuous basis.
Inventory Valuation - Inventories are stated at the lower of cost (first-in,
first-out) or market. We track the age of our unused inventory on a monthly
basis and if management determines that inventory has become obsolete or is
considered to be excess inventory, it will be written-down to its estimated
market value. Management's determination to write down inventory is generally
based on such factors as economic conditions, expected demand and obsolescence
based on engineering redesigns.
Warranty Accrual - We sell the majority of our products with a one-year repair
or replacement warranty and record a provision for estimated claims at the time
of sale. The warranty accrual is generally based on our historical warranty
repair cost patterns, including the cost of parts and labor. The warranty
accrual is reviewed and updated on a quarterly basis.
Income Tax Assets and Liabilities - We account for income taxes based on
Statement of Financial Accounting Standards (SFAS) No. 109 Accounting for Income
Taxes, whereby deferred tax assets and liabilities must be recognized using
enacted tax rates for the effect of temporary differences between the book and
tax accounting for assets and liabilities. Also, deferred tax assets must be
reduced by a valuation allowance if it is more likely than not that a portion of
the deferred tax asset will not be realized in the future. We evaluate the
deferred tax assets on a quarterly basis to determine whether or not a valuation
allowance is appropriate. Factors used in this determination include future
expected income and the underlying asset or liability which generated the
temporary tax difference.
Our income tax provision is based on estimates of our effective income tax rate
for the year. The effective tax rate is generally estimated based on the
geographic distribution of profits, the tax rates in different regions and the
availability of tax credits.
Goodwill - On January 1, 2002, we adopted SFAS No. 142, Goodwill and Other
Intangible Assets. Upon implementation of this Statement, the transition
impairment test was performed as of January 1, 2002, and no impairment loss was
recorded. SFAS No. 142 requires that goodwill be reviewed at least annually for
impairment. We elected to test our goodwill for possible impairment in the
fourth quarter of 2002. Based upon the results of the annual impairment test, we
recognized a goodwill impairment loss of $1,077,000 in the fourth quarter of
2002. The fair value of the segment was estimated using the discounted cash
flows method. As of December 31, 2003, we had no goodwill on our balance sheet.
Stock-Based Compensation - We account for stock-based compensation issued to
employees using the intrinsic value method in accordance with the provisions of
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, as allowed by SFAS No. 123, Accounting for Stock Based Compensation
as amended by SFAS No. 148, Accounting for Stock Based Compensation - Transition
and Disclosures, an Amendment of FASB Statement No. 123. Under the intrinsic
value method, we do not recognize any compensation expense, as the exercise
price of all stock options is equal to the fair market value at the time the
options are granted. We disclose the pro forma effect of recognizing
compensation expense on stock options granted to employees in the footnotes to
the consolidated financial statements.
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, 2001, 2002 and
2003:
II-6
Years Ended December 31,
--------------------------------------
2001 2002 2003
------- ------- -------
Net revenues:
Product sales........................................................ 89.6% 82.6% 83.1%
Service.............................................................. 10.4 17.4 16.9
------- ------- -------
Total net revenues................................................. 100.0 100.0 100.0
------- ------- -------
Cost and expenses:
Cost of product sales................................................ 37.7 38.1 42.5
Cost of service...................................................... 11.4 16.6 15.9
Research and development............................................. 22.6 39.6 32.2
Selling.............................................................. 20.0 31.3 27.6
General and administrative........................................... 8.8 14.7 11.3
Goodwill impairment.................................................. -- 3.1 --
------- ------- -------
Total cost and expenses............................................ 100.5 143.4 129.5
------- ------- -------
Loss from operations.................................................... (0.5) (43.4) (29.5)
------- ------- -------
Other income (expense):
Interest income...................................................... 5.4 1.6 1.0
Interest expense..................................................... (0.2) (0.2) (0.2)
Other, net........................................................... (1.1) 0.3 0.9
------- ------- -------
Total other income, net............................................ 4.1 1.7 1.6
------- ------- -------
Income (loss) before provision (benefit) for income taxes............... 3.6 (41.7) (27.9)
Provision (benefit) for income taxes.................................... 1.6 (17.9) 14.1
------- ------- -------
Net income (loss)....................................................... 2.0% (23.8)% (42.0)%
======= ======= =======
Years ended December 31, 2001, 2002 and 2003
Total net revenues. Total net revenues increased 19.8% from $34.7 million in
2002 to $41.6 million in 2003. Product sales increased 20.7% from $28.7 million
in 2002 to $34.6 million in 2003. Unit sales of existing automated and
integrated systems increased from their 2002 levels. Additionally, our new
products, such as the NanoOCD 9010 integrated product also contributed to our
revenues. The increase in product sales resulted from greater demand for
semiconductor process control metrology equipment and flat panel display
equipment, particularly in Asia. We believe that this increased demand was
attributable primarily to customers adding capacity in semiconductor production
facilities as demand for semiconductors increased as a result of the economic
recoveries in the U.S. and Japan in 2003. Service revenue increased 15.8% from
$6.1 million in 2002 to $7.0 million in 2003. The increase in service revenue is
primarily attributable to higher sales of parts and services in the U.S. and
Asia in 2003, which we believe is due in part to recently increased demand for
semiconductors at a time when capital expenditures by equipment manufacturers
have been reduced, resulting in increased utilization of older systems by
customers.
Total net revenues decreased 27.0% from $47.6 million in 2001 to $34.7 million
in 2002. Product sales decreased 32.8% from $42.7 million in 2001 to $28.7
million in 2002. Unit sales of automated, integrated and tabletop systems were
each down from their 2001 levels. The decrease in product sales resulted from
reduced demand for semiconductor process control metrology equipment in 2002,
particularly in the U.S. and Asia. We believe that this reduced demand was
attributable primarily to continued overcapacity and price pressures,
particularly for DRAM products, in the semiconductor industry as well as the
continued economic slowdown in the U.S. and Japan in 2002. Service revenue
increased 22.8% from $4.9 million in 2001 to $6.1 million in 2002. The increase
in service revenue is primarily attributable to higher sales of parts and
services in the U.S. and Asia in 2002, which is partly due to a larger installed
base of systems that have passed their warranty periods. International revenues,
which include sales by our foreign subsidiaries, constituted approximately
64.8%, 69.0% and 74.8% of total net revenues for 2001, 2002 and 2003,
respectively.
Cost of product sales. Cost of product sales as a percentage of product sales
increased from 46.2% in 2002 to 51.1% in 2003 due in part to lower sales prices
on older products and higher costs associated with an increase in manufacturing
II-7
capacity added to our U.S. facility. The increased manufacturing capacity is
part of a continuing strategic plan to internalize the production of key parts
and components, allowing us to have greater control over their development,
delivery, quality and cost. Cost of product sales as a percentage of product
sales increased from 42.1% in 2001 to 46.2% in 2002 primarily due to lower sales
volumes in 2002 resulting in higher per unit manufacturing costs, along with
increased manufacturing capacity added to our U.S. facility in 2002.
Cost of service. Cost of service as a percentage of service revenue decreased
from 95.2% in 2002 to 94.4% in 2003 primarily as a result of higher service
sales that exceeded the increase in the associated variable cost of service
sales in 2003 while our fixed costs remained relatively stable. Cost of service
as a percentage of service revenue decreased from 109.6% in 2001 to 95.2% in
2002 primarily as a result of higher service sales, which exceeded our costs of
service in the United States and Asia.
Research and development. Research and development expenses decreased 2.7% from
$13.8 million in 2002 to $13.4 million in 2003 as a result of lower expenses
associated with lower usage of materials used in the development of new products
in 2003. Research and development expenses increased 27.9% from $10.8 million in
2001 to $13.8 million in 2002 as a result of increased headcount and higher
expenses for materials used in the development of new products in 2002, such as
the NanoUDI 9300, the NanoCLP 9010, the NanoOCD 9020 and other products. 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.
Selling. Selling expenses increased 5.8% from $10.9 million in 2002 to $11.5
million in 2003 primarily due to increased headcount of sales and support
employees and related expenses particularly in the Far East in an effort to
fully participate in the growth opportunities in that region. Selling expenses
increased 14.1% from $9.5 million in 2001 to $10.9 million in 2002 primarily due
to increased headcount of sales and support employees and an increase in related
expenses for the purpose of promoting our products to existing and potential
customers.
General and administrative. General and administrative expenses decreased 8.1%
from $5.1 million in 2002 to $4.7 million in 2003. This decrease resulted
primarily from lower accounting software implementation costs in 2003. General
and administrative expenses increased 22.2% from $4.2 million in 2001 to $5.1
million in 2002. This increase resulted primarily from higher legal, patent,
audit, tax and accounting software implementation costs in 2002.
Goodwill impairment. On January 1, 2002, we adopted SFAS No. 142, Goodwill and
Other Intangible Assets. Upon implementation of this Statement, the transition
impairment test was performed as of January 1, 2002, and no impairment loss was
recorded. SFAS No. 142 requires that goodwill be reviewed at least annually for
impairment. We elected to test our goodwill for possible impairment in the
fourth quarter of 2002. Based upon the results of the annual impairment test, we
recognized a goodwill impairment loss of $1,077,000 in the fourth quarter of
2002. The fair value of the segment was estimated using a discounted cash flow
methodology.
Total other income, net. Total other income, net decreased 70.1% from $2.0
million in 2001 to $589,000 in 2002 primarily due to lower interest income in
2002, resulting from lower investment balances and lower interest rates.
Provision for income taxes. Our effective tax rate was an expense of 50.5% in
2003, versus a benefit of 43.0% in 2002. The tax expense in 2003 resulted
primarily from a provision for income taxes of approximately $6.0 million which
primarily represents a charge to record a valuation allowance against deferred
income tax assets. The charge was taken as a result of pretax losses incurred
over the past several quarters coupled with uncertainty about future expected
income, making it more likely than not that the deferred tax asset would not be
realized. Our effective income tax benefit rate was 43.0% in 2002, which
exceeded the domestic statutory rate due primarily to state income tax benefits
and the utilization of tax credits. Our effective income tax rate decreased from
44.9% in 2001 to 43.0% in 2002 primarily due to profits earned by our Japanese
subsidiary that could not be offset against losses from our other subsidiaries
in 2001. The effective income tax rate in 2001 exceeded the domestic statutory
rate due primarily to a foreign tax provision higher than rates in the United
States and changes in the valuation allowance partially offset by the
realization of foreign sales corporation benefit.
II-8
Liquidity and Capital Resources
At December 31, 2003, our cash and cash equivalents and short-term investments
totaled $29.9 million compared to $36.9 million at December 31, 2002. These
funds are invested primarily in U.S. Treasury Bills. Our working capital of
$59.6 million at December 31, 2003 decreased from $74.8 million at December 31,
2002. We believe that 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.
Operating activities used $7.1 million in cash in 2001, $8.3 million in 2002 and
$6.2 million in 2003. The cash usage in 2002 and 2003 resulted primarily from
the net loss in those years offset by the effect of non-cash expenses. We also
experienced higher levels of accounts receivables in 2003 resulting from
increased sales towards the end of 2003. The use of cash from operating
activities in 2001 resulted primarily from net income offset by lower accounts
receivable attributable to lower sales levels during the previous year.
Investing activities provided $36.3 million of cash in 2001, used $31.7 million
of cash in 2002 and provided $6.0 million of cash in 2003. The timing of the
purchase and initial maturities of U.S. Treasury Bills in 2002 resulted in their
classification as cash and cash equivalents instead of as short-term
investments. Our capital expenditures, net of retirements, were $13.2 million in
2001, $2.8 million in 2002 and $990,000 in 2003. These expenditures were used
primarily to continue the process of internalizing our manufacturing capacity in
the United States through, for example, the purchase of a machine shop,
machining equipment and improvements to our building. This internalization
process is nearing completion. When our internalization process is completed,
the amount of cash needed for capital expenditures should decrease.
Financing activities provided cash of $501,000 in 2001, $998,000 in 2002 and
$655,000 in 2003 primarily resulting from the sale of shares under our stock
option plans, offset to some extent by the net repayment of debt obligations by
our Japanese subsidiary.
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, which may affect our
cash position and working capital balances.
The following table summarizes our contractual cash obligations as of December
31, 2003, and the effect such obligations are expected to have on liquidity and
cash flow in future periods.
Less than More than
Total 1 Year 1-3 Years 3-5 Years 5 Years
----- ------ --------- --------- -------
Debt obligations .......... $3,805 $1,157 $1,107 $ 778 $ 763
Operating leases .......... 240 136 85 17 2
Other long-term liabilities 133 -- 133 -- --
We have no off-balance sheet financing arrangements.
Recent Accounting Pronouncements
We operate in multiple locations domestically and internationally. As such,
certain facilities are leased under operating lease agreements.
In April 2003, the Financial Accounting Standards Board (FASB) issued SFAS 149,
Amendment of Statement 133 on Derivative Instruments and Hedging Activities,
which amends and clarifies accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities under SFAS 133, Accounting for Derivative Instruments and Hedging
Activities.
SFAS 149 was effective for contracts entered into or modified after June 30,
2003, except as noted below, and for hedging relationships designated after June
30, 2003. The guidance was to be applied prospectively. The provisions of
II-9
SFAS 149 that relate to SFAS 133 Implementation Issues that were effective for
fiscal quarters that began prior to June 15, 2003 continue to be applied in
accordance with their respective effective dates. The adoption of SFAS 149 did
not have a material effect on our consolidated financial position, results of
operations or cash flows.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosures, an Amendment of FASB Statement No.
123. This Statement provides alternative methods of transition for companies who
voluntarily change to the fair value-based method of accounting for stock-based
employee compensation in accordance to SFAS No. 123, Accounting for Stock-Based
Compensation and enhances the disclosure requirements. This statement was
effective upon its issuance.
We continue to account for stock-based compensation using the intrinsic value
method in accordance with the provisions of Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees, elected under SFAS No. 123, as
amended. As a result, the adoption of this Statement did not have any impact on
our consolidated financial statements. See additional information on stock-based
compensation in Note 1 of the Notes to Consolidated Financial Statements.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (FIN 45). FIN 45 requires a guarantor to include
disclosures of certain obligations, and if applicable, at the inception of the
guarantee, recognize a liability for the fair value of other obligations
undertaken in issuing a guarantee. The initial recognition and initial
measurement provisions apply on a prospective basis to guarantees issued or
modified after December 31, 2002 and did not have a material impact on our
consolidated financial statements. The applicable disclosures have been made.
We adopted Emerging Issues Task Force ("EITF") Issue No. 00-21, "Revenue
arrangements with Multiple Deliverables", which requires companies to determine
whether an arrangement involving multiple deliverables contains more than one
unit of accounting. In applying EITF Issue No. 00-21, revenue arrangements with
multiple deliverables should be divided into separate units of accounts, if the
deliverables in the arrangement meet certain criteria. Arrangement consideration
should be allocated among the separate units of accounting based on their
relative fair values. This issue was effective for revenue arrangements entered
into in fiscal periods beginning after June 15, 2003. There was no impact on our
results of operations or financial position as a result of adopting EITF Issue
No. 00-21.
The FASB issued Interpretation No. 46 ("FIN 46"), "Consolidation of Variable
Interest Entities," in January 2003, and a revised interpretation of FIN 46
("FIN 46-R") in December 2003. FIN 46 requires certain variable interest
entities ("VIEs") to be consolidated by the primary beneficiary of the entity if
the equity investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. The provisions of FIN 46 are effective immediately
for all arrangements entered into after January 31, 2003. Since January 31,
2003, we have not invested in any entities we believe are variable interest
entities for which Nanometrics is the primary beneficiary. We are required to
adopt the provisions of FIN 46-R for those arrangements in the second quarter of
fiscal 2004. For arrangements entered into prior to February 1, 2003, we are
required to adopt the provisions of FIN 46-R in the first quarter of fiscal
2004. We do not expect the adoption of FIN 46-R to have an impact on our
financial position, results of operations or cash flows.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity, which requires
that certain financial instruments be presented as liabilities that were
previously presented as equity or as temporary equity. Such instruments include
mandatory redeemable preferred and common stock, and certain options and
warrants. SFAS No. 150 is effective for financial instruments entered into or
modified after May 31, 2003 and was effective at the beginning of the first
interim period beginning after June 15, 2003. In November 2003, the FASB issued
FASB Staff Position ("FSP") No. 150-3, Effective Date, Disclosures, and
Transition for Mandatorily Redeemable Financial Instruments of Certain Nonpublic
Entities and Certain Mandatorily Redeemable Noncontrolling Interests under SFAS
No. 150, which defers the effective date for various provisions of SFAS No. 150.
We believe that we have properly classified and measured in our balance sheets
and disclosed in our consolidated financial statements financial instruments
with characteristics of both liabilities and equity.
II-10
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 that we face. 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 and flat panel display 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 for period to period
due to the cyclical nature of the semiconductor and flat panel display
industries. The majority of our business depends upon the capital
expenditures of semiconductor device and 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 semiconductor
manufacturing 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 in the foreseeable future.
Currently, the semiconductor industry may be emerging from a downturn,
which has existed for the past few years. Should this trend reverse and
the downturn resume, our business and results of operations would
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 63.3%
and 72.7% of our total net revenues in 2002 and 2003, 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 past year, which has adversely affected our sales to
semiconductor manufacturers located in these regions and could harm our
sales in future periods.
We depend on Applied Materials and other OEM suppliers for sales of our
integrated metrology systems, and the loss of Applied Materials or any
of our other OEM suppliers 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
systems depend upon the ability of Applied Materials to sell
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. If we were to
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 largest customers account for a substantial portion of our revenue,
and our revenue would materially 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
each year has been derived from sales to a relatively few number of
customers, and we expect this trend to continue. There are only a
limited number of large companies operating in the semiconductor and
flat panel display 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. 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 2003, sales to Applied Materials
accounted
II-11
for 15.4% and sales to Hynix accounted for 12.0% of our total net
revenues, respectively. In 2002, sales to Applied Materials accounted
for 13.8% and sales to TSMC accounted for 10.9% of our total net
revenues, respectively.
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 could be
adversely affected.
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
69.0% and 74.8% of our total net revenues in 2002 and 2003,
respectively. We maintain facilities in Japan and Korea. We anticipate
that international sales will continue to account for a significant
portion of our revenues. International sales and operations carry
inherent risks such as: regulatory limitations imposed by foreign
governments, obstacles to the protection of our intellectual property,
fluctuations in currency exchange rates, political, military and
terrorism risks, disruptions or delays in shipments caused by customs
brokers or other government agencies, unexpected changes in regulatory
requirements, tariffs, customs, duties and other trade barriers,
difficulties in staffing and managing foreign operations, and
potentially adverse tax consequences resulting from changes in tax
laws.
If any of these risks materialize and we are unable to manage them, our
international sales and operations would suffer.
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 volatility 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:
o changes in customer demand for our systems;
o economic conditions in the semiconductor and flat panel
display industries;
o the timing, cancellation or delay of customer orders and
shipments;
o market acceptance of our products and our customers' products;
o competitive pressures on product prices and changes in pricing
by our customers or suppliers;
o 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;
o the timing of acquisitions of businesses, products or
technologies;
o the levels of our fixed expenses, including research and
development costs associated with product development,
relative to our revenue levels; and
o fluctuations in foreign currency exchange rates, particularly
the Japanese yen.
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.
II-12
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 significant 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 incorporated in our advanced measurement
systems. Our reliance on a sole or a limited group of suppliers
involves several risks, including the following:
o we may be unable to obtain an adequate supply of required
components;
o we have reduced control over pricing and the timely delivery
of components and subassemblies; and
o our suppliers may be unable to develop technologically
advanced products to support our growth and development of new
systems.
Some of our suppliers have relatively limited financial and other
resources. 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 our
suppliers. If we were forced to seek alternative sources of supply or
to manufacture such components or subassemblies internally, we could be
forced to redesign our systems, which could cause production delays and
prevent us from shipping our systems to customers on a timely basis.
Any inability to obtain adequate deliveries from our suppliers, or any
other circumstance that would restrict our ability to ship our
products, could damage relationships with current and prospective
customers, harm our business and result in significant loss of revenue.
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 and flat panel
display 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 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 and flat panel display industries are
large companies that require global support and service for their
metrology systems. Some of our larger or more geographically diverse
competitors might be better equipped to provide this global support.
Variations in the amount of time it takes for us to sell our systems
may cause fluctuations in our operating results, which could adversely
affect our stock price.
Variations in the length of our sales cycles could cause our revenues
to fluctuate widely from period to period. Our customers generally take
long periods of 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 that it takes for us to complete a sale depends upon
many factors, including:
o the efforts of our sales force and our independent sales
representatives and distributors;
o the complexity of the customer's metrology needs;
o the internal technical capabilities and sophistication of the
customer;
o the customer's budgetary constraints; and
II-13
o 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 at
which we recognize revenue from that customer, if at all, 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. Occasionally our sales cycles can be
much longer, particularly with customers in Asia who may require longer
evaluation periods. During the sales 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 complete a sale, 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
through purchase orders rather than through long-term contracts. The
number of additional products that 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 is unpredictable and can vary from three months to a year or
longer. Variations in the length of this period could cause
fluctuations in our operating results, which could adversely affect our
stock price.
Relatively small fluctuations in our system prices 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
$900,000 per system, our integrated metrology systems range in price
from approximately $80,000 to $300,000 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 or types of
systems that we sell could 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.
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 into 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 attract customers from our
competitors even if our metrology systems are superior to theirs.
We believe that once a semiconductor or flat panel display 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 from that customer once it has
selected another vendor's system for an application.
If we deliver systems with defects, our credibility will be harmed, the
sales and market acceptance of our systems will decrease and we could
expend significant capital and resources as a result of such defects.
Our systems are complex and have occasionally 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
II-14
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 and flat panel display 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.
Lack of market acceptance for our new products may affect our ability
to generate revenue and may harm our business.
We have recently introduced several new products to market including
the Nano OCD/DUV 9010, the Nanometrics 9300 and the Nano OCD 9010M. We
have invested substantial time and resources into the development of
the products. However, we cannot accurately predict the future level of
acceptance of our new products by our customers. As a result, we may
not be able to generate anticipated revenue from sales of these
products. While we anticipate that our new products will become an
increasingly larger component of our business, their failure to gain
acceptance with our customers could materially harm our business.
Additionally, if our new products do gain market acceptance, our
ability to sell our existing products may be impeded. As a result,
there can be no assurance that the introduction of these products will
be commercially successful or that these products will result in
significant additional revenues or improved operating margins in future
periods.
Successful infringement claims by third parties could result in
substantial damages, lost product sales and the loss of important
intellectual property rights by us.
Our commercial success depends in part on our ability to avoid
infringing or misappropriating patents or other proprietary rights
owned by third parties. From time to time we may receive communications
from third parties asserting that our metrology systems may contain
design features, which are claimed to infringe on their proprietary
rights. There can be no assurance that our new or current products do
not infringe any valid intellectual property rights.
Our intellectual property may be infringed upon by third parties
despite our efforts to protect it, which could threaten our future
success and competitive position and adversely affect our operating
results.
Our future success and competitive position depend in part upon our
ability to obtain and maintain proprietary technology for our principal
product families, and we rely, in part, on patent, trade secret and
trademark law to protect that technology. If we fail to adequately
protect our intellectual property, it will be easier for our
competitors to sell competing products. We own or have licensed a
number of patents relating to our metrology systems, and have filed
applications for additional patents. Any of our pending patent
applications may be rejected, and we may not in the future be able to
develop additional proprietary technology that is patentable. In
addition, the patents we do own or that have been issued or licensed to
us may not provide us with competitive advantages and may be challenged
by third parties. Third parties may also design around these patents.
In addition to patent protection, we rely upon trade secret protection
for our confidential and proprietary information and technology. We
routinely enter into confidentiality agreements with our employees.
However, in the event that these agreements may be breached, we may not
have adequate remedies. Our confidential and proprietary
II-15
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, any of which would
adversely affect our business and operating results.
We must attract and retain key personnel with relevant industry
knowledge to help support our future growth.
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 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 ongoing, 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. A significant portion of our operations is located in
Japan and Korea, which may be subject to regional political and
economic instability.
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 achieve this, 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 that 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 may be required 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 an 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.
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 2002 and 2003, 69.0% and 74.8%, 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.
II-16
Continuing economic and political instability could affect our business
and results of operations.
The ongoing threat of terrorism targeted at the United States or other
regions where we conduct business increases the uncertainty in our
markets and the economy in general. This uncertainty is likely to
result in continued economic stagnation, which would harm our business.
In addition, increased international political instability may hinder
our ability to do business by increasing our costs of operations. For
example, our transportation costs, insurance costs and sales efforts
may become more expensive as a result of geopolitical tension. These
tensions may also negatively affect our suppliers and customers. If
this international economic and political instability continues or
increases, our business and results of operations could be harmed.
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, 2002 and 2003 would not have a material impact on our
results of operations. Our investments in marketable securities are subject to
interest rate risk. However, due to the short-term nature of these investments,
interest rate changes would not have a material impact on their value at
December 31, 2002 and 2003. We also have fixed rate yen denominated debt
obligations in Japan that have no interest rate risk. At December 31, 2002 and
2003, our total debt obligation was $3.9 million and $3.8 million, respectively,
with a long-term portion of $3.1 million and $2.6 million, respectively. A
hypothetical 10% change in interest rates at December 31, 2003 would not have a
material impact on our results of operations.
II-17
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-19
Consolidated Balance Sheets........................................................................ II-20
Consolidated Statements of Operations.............................................................. II-21
Consolidated Statements of Shareholders' Equity and Comprehensive Income (Loss).................... II-22
Consolidated Statements of Cash Flows.............................................................. II-23
Notes to Consolidated Financial Statements......................................................... II-24
II-18
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 (the "Company") as of December 31, 2002 and 2003,
and the related consolidated statements of operations, shareholders' equity and
comprehensive income (loss), and cash flows for each of the three years in the
period ended December 31, 2003. Our audits also included the financial statement
schedule listed in Item 15(a)(2). These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule 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 as of December 31, 2002 and 2003, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2003 in conformity with accounting principles generally accepted in
the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note 1 to the financial statements, in 2002 the Company changed
its method of accounting for goodwill and other intangible assets to conform to
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets."
Deloitte & Touche LLP
San Jose, California
March 29, 2004
II-19
NANOMETRICS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
December 31,
---------------------------------
2002 2003
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents.............................................. $ 7,967 $ 7,949
Short-term investments................................................. 28,899 21,943
Accounts receivable, net of allowances of $566 and $576 in 2002 and
2003, respectively.................................................. 9,021 14,522
Inventories............................................................ 25,847 24,264
Deferred income taxes.................................................. 6,840 --
Prepaid expenses and other............................................. 2,803 1,015
----------- -----------
Total current assets................................................ 81,377 69,693
Property, plant and equipment, net........................................ 50,050 49,738
Intangible assets......................................................... 1,748 1,322
Other assets.............................................................. 1,513 987
----------- -----------
Total assets........................................................ $ 134,688 $ 121,740
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................................... $ 1,708 $ 2,047
Accrued payroll and related expenses................................... 1,004 1,593
Deferred revenue....................................................... 1,396 2,345
Other current liabilities.............................................. 1,574 1,436
Income taxes payable................................................... 139 1,528
Current portion of debt obligations.................................... 780 1,157
----------- -----------
Total current liabilities........................................... 6,601 10,106
Deferred income taxes and other long-term liabilities..................... 858 545
Debt obligations.......................................................... 3,123 2,648
----------- -----------
Total liabilities.................................................... 10,582 13,299
----------- -----------
Commitments and contingencies (Note 6)
Shareholders' equity:
Common stock, no par value; 50,000,000 shares authorized; 12,006,641
and 12,166,016 outstanding in 2002 and 2003, respectively........... 99,911 101,099
Retained earnings...................................................... 24,475 7,008
Accumulated other comprehensive loss................................... (280) 334
----------- -----------
Total shareholders' equity.......................................... 124,106 108,441
----------- -----------
Total liabilities and shareholders' equity................................ $ 134,688 $ 121,740
=========== ===========
See notes to consolidated financial statements.
II-20
NANOMETRICS INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
Years Ended December 31,
---------------------------------------
2001 2002 2003
-------- -------- --------
Net revenues:
Product sales...................................................... $ 42,653 $ 28,669 $ 34,592
Service............................................................ 4,931 6,054 7,010
-------- -------- --------
Total net revenues............................................... 47,584 34,723 41,602
-------- -------- --------
Costs and expenses:
Cost of product sales.............................................. 17,949 13,237 17,691
Cost of service.................................................... 5,406 5,765 6,620
Research and development........................................... 10,760 13,765 13,399
Selling............................................................ 9,523 10,862 11,496
General and administrative......................................... 4,177 5,104 4,689
Goodwill impairment................................................ -- 1,077 --
-------- -------- --------
Total costs and expenses .......................................... 47,815 49,810 53,895
Loss from operations............................................. (231) (15,087) (12,293)
-------- -------- --------
Other income (expense):
Interest income.................................................... 2,576 583 397
Interest expense................................................... (86) (94) (96)
Other, net......................................................... (517) 100 385
-------- -------- --------
Total other income, net.......................................... 1,973 589 686
-------- -------- --------
Income (loss) before provisions (benefit) for income taxes.............. 1,742 (14,498) (11,607)
Provision (benefit) for income taxes.................................... 782 (6,230) 5,860
-------- -------- --------
Net income (loss)....................................................... $ 960 $ (8,268) $(17,467)
======== ======== ========
Basic net income (loss) per share:
Net income (loss).................................................. $ 0.08 $ (0.70) $ (1.45)
======== ======== ========
Diluted net income (loss) per share:
Net income (loss).................................................. $ 0.08 $ (0.70) $ (1.45)
======== ======== ========
Shares used in per share computation:
Basic.............................................................. 11,691 11,878 12,043
======== ======== ========
Diluted............................................................ 12,161 11,878 12,043
======== ======== ========
See notes to consolidated financial statements.
II-21
NANOMETRICS INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND
COMPREHENSIVE INCOME (LOSS)
(In thousands, except share amounts)
Accumulated
Common Stock Comprehensive Total
------------------------ Retained Other Shareholders' Comprehensive
Shares Amount Earnings Income (Loss) Equity Income (Loss)
---------- ---------- ---------- ---------- ---------- ----------
Balances, December 31, 2000 ................ 11,607,839 $ 95,929 $ 31,783 $ (703) $ 127,009
Comprehensive income:
Net income .............................. -- -- 960 -- 960 $ 960
Other comprehensive loss, net of
tax:
Foreign currency translation
adjustments ........................ -- -- -- (698) (698) (698)
Unrealized loss on investments ........ -- -- -- (28) (28) (28)
----------
Comprehensive income ............... -- -- -- -- -- $ 234
==========
Other stock issued ......................... 12,813 214 -- -- 214
Issuance of common stock under
employee stock purchase plan ............ 33,845 453 -- -- 453
Issuance of common stock under
stock option plan ....................... 132,536 914 -- -- 914
Tax benefit of employee stock
transactions ............................ -- 1,021 -- -- 1,021
---------- ---------- ---------- ---------- ----------
Balances, December 31, 2001 ................ 11,787,033 98,531 32,743 (1,429) 129,845
Comprehensive loss:
Net loss ................................ -- -- (8,268) (8,268) $ (8,268)
Other comprehensive income, net
of tax:
Foreign currency translation
adjustments ........................ -- -- -- 1,148 1,148 1,148
Unrealized gain on investments ........ -- -- -- 1 1 1
----------
Comprehensive loss ................. -- -- -- -- -- $ (7,119)
==========
Issuance of common stock under
employee stock purchase plan ............ 125,403 568 -- -- 568
Issuance of common stock under
stock option plan ....................... 94,205 578 -- -- 578
Tax benefit of employee stock
transactions ............................ -- 234 -- -- 234
---------- ---------- ---------- ---------- ----------
Balances, December 31, 2002 ................ 12,006,641 99,911 24,475 (280) 124,106
Comprehensive loss:
Net loss ................................ -- -- (17,467) -- (17,467) $ (17,467)
Other comprehensive income, net
of tax:
Foreign currency translation
adjustments ........................ -- -- -- 614 614 614
----------
Comprehensive loss ................. -- -- -- -- -- $ (16,853)
==========
Issuance of common stock under
stock option plan ....................... 159,375 1,188 -- -- 1,188
---------- ---------- ---------- ---------- ----------
Balances, December 31, 2003 ................ 12,166,016 $ 101,099 $ 7,008 $ 334 $ 108,441
========== ========== ========== ========== ==========
See notes to consolidated financial statements.
II-22
NANOMETRICS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
December 31,
-----------------------------------------
2001 2002 2003
---------- ----------- -----------
Cash flows from operating activities:
Net income (loss).................................................... $ 960 $ (8,268) $ (17,467)
Reconciliation of net income (loss) to net cash used in operating
activities:
Depreciation and amortization..................................... 1,681 2,405 2,506
Goodwill impairment............................................... -- 1,077 --
Loss on sale/disposal of property................................. 7 -- --
Deferred income taxes............................................. (1,212) (1,945) 6,007
Changes in assets and liabilities:
Accounts receivable............................................. 4,630 558 (4,630)
Inventories..................................................... (11,259) 1,006 2,042
Prepaid income taxes............................................ 1,939 (37) 2,195
Prepaid expenses and other...................................... (797) (378) 155
Accounts payable, accrued and other current liabilities......... (3,335) (1,813) 794
Deferred revenue................................................ (717) (961) 778
Income taxes payable............................................ 986 86 1,374
---------- ----------- -----------
Net cash used in operating activities......................... (7,117) (8,270) (6,246)
---------- ----------- -----------
Cash flows from investing activities:
Purchases of short-term investments.................................. (112,146) (65,899) (71,044)
Sales/maturities of short-term investments........................... 165,000 37,000 78,000
Purchases of property, plant and equipment........................... (13,178) (2,767) (990)
Other assets......................................................... (3,373) -- 28
---------- ----------- -----------
Net cash provided by (used in) investing activities........... 36,303 (31,666) 5,994
---------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of debt obligations........................... -- 268 285
Repayments of debt obligations....................................... (866) (416) (818)
Sale of shares under employee stock purchase and stock option plans.. 1,367 1,146 1,188
---------- ----------- -----------
Net cash provided by financing activities..................... 501 998 655
---------- ----------- -----------
Effect of exchange rate changes on cash................................. 606 (322) (421)
---------- ----------- -----------
Net change in cash and cash equivalents................................. 30,293 (39,260) (18)
Cash and cash equivalents, beginning of year............................ 16,934 47,227 7,967
---------- ----------- -----------
Cash and cash equivalents, end of year.................................. $ 47,227 $ 7,967 $ 7,949
========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest............................................... $ 103 $ 96 $ 96
========== =========== ===========
Cash paid (received) for income taxes, net........................... $ 2,402 $ (4,634) $ (3,955)
========== =========== ===========
See notes to consolidated financial statements.
II-23
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2001, 2002, and 2003
1. Significant Accounting Policies
Description of Business - Nanometrics Incorporated and its wholly-owned
subsidiaries design, manufacture, market, sell and support thin film,
optical critical dimension and overlay dimension metrology systems for
customers in the semiconductor and flat panel display 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 and flat panel displays. 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. Our optical
critical dimension technology is a patented critical dimension
measurement technology that is used to precisely determine the
dimensions on the semiconductor wafer that directly control the
resulting performance of the integrated circuit devices. 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. 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 - Nanometrics uses a 52/53 week fiscal year ending on the
Saturday nearest to December 31. Accordingly, fiscal years 2001, 2002
consisted of 52 weeks and ended on December 29, 2001 and December 28,
2002, respectively and 2003 consisted of 53 weeks and ended on January
3, 2004. 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, mature in April 2004, and are stated at fair
value based on quoted market prices. Short-term investments are
classified as available-for-sale based on Nanometrics' 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 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
Nanometrics' debt obligations approximates fair market value.
Inventories - Inventories are stated at the lower of cost (first-in,
first-out) or market.
II-24
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............................... 6 - 40 years
Machinery and equipment................................. 4 - 17 years
Furniture and fixtures.................................. 5 - 20 years
Intangible Assets - Nanometrics amortizes acquired intangible assets
(included in other assets) using the straight-line method over an
estimated useful life of five to seven years.
Goodwill - On January 1, 2002, Nanometrics adopted Statement of
Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other
Intangible Assets. This Statement eliminates the amortization of
goodwill and requires that goodwill be reviewed at least annually for
impairment. Upon implementation of this Statement, the transition
impairment test for goodwill was performed as of January 1, 2002, and
no impairment loss was recorded. SFAS No. 142 requires that goodwill be
reviewed at least annually for impairment. Nanometrics elected to test
its goodwill for possible impairment in the fourth quarter of 2002.
Based upon the results of the annual impairment test, Nanometrics
recognized a goodwill impairment loss of $1,077,000 in the fourth
quarter of 2002. The fair value of the segment was estimated using a
discounted cash flow methodology. Nanometrics had no goodwill on its
balance sheet at December 31, 2002 or 2003. A reconciliation of
previously reported net income and net income (loss) per share to the
amounts adjusted for the exclusion of goodwill amortization, net of
related income tax effect, is as follows (in thousands, except per
share amounts):
Year Ended December 31,
----------------------------------------
2001 2002 2003
--------- --------- ---------
Reported net income (loss)......................................... $ 960 $ (8,268) $ (17,467)
Add goodwill amortization, net of tax.............................. 68 -- --
--------- --------- ---------
Adjusted net income (loss)......................................... $ 1,028 $ (8,268) $ (17,467)
========= ========= =========
Basic net income (loss) per share on reported net income (loss).... $ 0.08 $ (0.70) $ (1.45)
Goodwill amortization, net of tax.................................. 0.01 -- --
--------- --------- ---------
Adjusted net income (loss)......................................... $ 0.09 $ (0.70) $ (1.45)
========= ========= =========
Diluted net income (loss) per share on reported net income (loss).. $ 0.08 $ (0.70) $ (1.45)
Goodwill amortization, net of tax.................................. 0.01 -- --
--------- --------- ---------
Adjusted net income (loss)......................................... $ 0.09 $ (0.70) $ (1.45)
========= ========= =========
This Statement also requires that the useful lives of previously
recognized intangible assets be reassessed and the remaining
amortization periods be adjusted accordingly. Adoption of this
Statement did not require any adjustments to be made to the useful
lives of existing intangible assets and no reclassifications of
intangible assets to goodwill were necessary.
Long-Lived Assets - On January 1, 2002, Nanometrics adopted SFAS No.
144, Accounting for the Impairment of Disposal of Long-Lived Assets.
SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed of, but retains
its fundamental provision for recognizing and measuring impairment of
long-lived assets to be held and used. This Statement requires that all
long-lived assets to be disposed of by sale be carried at the lower of
carrying amount of fair value less cost to sell, and that depreciation
cease to be recorded on such assets. SFAS No. 144 standardizes the
accounting and presentation requirements for all long-lived assets to
be disposed of by sale, and supersedes previous guidance for
discontinued operations of business segments. The initial adoption of
this Statement did not have any impact of the consolidated financial
statements of Nanometrics. 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
II-25
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.
Accumulated Other Comprehensive Loss - Accumulated other comprehensive
loss consists of the following (in thousands):
December 31,
------------------------------
2002 2003
--------- ---------
Accumulated unrealized gains on available-for-sale securities, net...... $ 1 $ 1
Accumulated translation adjustments, net................................ (281) 333
--------- ---------
Accumulated other comprehensive loss.................................... $ (280) $ 334
========= =========
Revenue Recognition - Nanometrics recognizes revenue when persuasive
evidence of an arrangement exits, delivery has occurred or services
have been rendered, the seller's price is fixed or determinable, and
collectibility is reasonably assured. For product sales, this generally
occurs at the time of shipment if Nanometrics has met defined customer
acceptance experience levels with both the customer and the specific
type of equipment. All other product sales are recognized upon customer
acceptance. In certain geographical regions where risk of loss and
title transfers upon customer acceptance, revenue is recognized upon
customer acceptance. Revenue related to spare part sales is recognized
on shipment and is included as part of service revenue. Revenue related
service contracts is recognized ratably over the period under contract.
Unearned maintenance and service contract revenue is not significant
and is included in deferred revenue.
Warranties - In November 2002, the Financial Accounting Standards Board
("FASB") issued Interpretation No. 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees
of Indebtedness of Other ("FIN 45"). FIN 45 requires a guarantor to
include disclosures of certain obligations, and if applicable, at the
inception of the guarantee, recognize a liability for the fair value of
other obligations undertaken in issuing a guarantee.
The initial recognition and initial measurement provisions apply on a
prospective basis to guarantees issued or modified after December 31,
2002 and did not have a material impact on Nanometrics' consolidated
financial statements.
Nanometrics sells the majority of its products with a one-year repair
or replacement warranty and records a provision for estimated claims at
the time of sale. Components of the warranty accrual, which are
included in the accompanying consolidated balance sheets as other
current liabilities, are as follows:
Balance as of January 1, 2003.................................. $ 261,000
Actual warranty costs.......................................... (160,000)
Revision to existing warranty.................................. (303,000)
Provision for warranty......................................... 715,000
----------
Balance as of December 31, 2003................................ $ 513,000
==========
Guarantees - In addition to product warranties, Nanometrics, from time
to time, in the normal course of business, indemnifies certain
customers with whom it enters into contractual relationships.
Nanometrics has agreed to hold the other party harmless against third
party claims that Nanometrics' products, when used for their intended
purpose(s), infringe the intellectual property rights of such third
party or other claims made against certain parties. It is not possible
to determine the maximum potential amount of liability under these
indemnification obligations due to the limited history of prior
indemnification claims and the unique facts and circumstances that are
likely to be involved in each particular claim. Historically,
Nanometrics has not made payments under these obligations and no
liabilities have been recorded for these obligations on the balance
sheets as of December 31, 2002 and 2003.
II-26
Stock-Based Compensation - In December 2002, the FASB issued SFAS No.
148, Accounting for Stock-Based Compensation - Transition and
Disclosures, an Amendment of FASB Statement No. 123. This Statement
provides alternative methods of transition for companies who
voluntarily change to the fair value-based method of accounting for
stock-based employee compensation in accordance with SFAS No. 123,
Accounting for Stock-Based Compensation and enhances the disclosure
requirements. This statement was effective upon its issuance. The
adoption of this Statement did not have any impact on the consolidated
financial statements of Nanometrics.
Nanometrics continues to account for stock-based compensation using the
intrinsic value method in accordance with the provision of Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, as allowed by SFAS No. 123, Accounting for Stock Based
Compensation as amended by SFAS No. 148, Accounting for Stock Based
Compensation - Transition and Disclosures, an Amendment of FASB
Statement No. 123. Under the intrinsic value method, Nanometrics does
not recognize any compensation expense, as the exercise price of all
stock options is equal to the fair market value at the time the options
are granted. Had compensation expense been recognized using the fair
value-based method under SFAS No. 123, Nanometrics' pro forma
consolidated income (loss) and income (loss) per share would have been
as follows (in thousands, except per share amounts):
Year Ended December 31,
---------------------------------------
2001 2002 2003
--------- --------- ---------
Net income (loss):
As reported....................................................... $ 960 $ (8,268) $ (17,467)
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards, net
of related tax effects......................................... (3,659) (4,692) (8,521)
--------- --------- ---------
Pro forma............................................................ $ (2,699) $ (12,960) $ (25,988)
========= ========= =========
Basic net income (loss) per share:
As reported....................................................... $ 0.08 $ (0.70) $ (1.45)
Pro forma......................................................... (0.23) (1.09) (2.16)
Diluted net income (loss) per share:
As reported....................................................... 0.08 (0.70) (1.45)
Pro forma......................................................... (0.23) (1.09) (2.16)
Foreign Currency - The functional currencies of Nanometrics' 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 Nanometrics or its subsidiaries
are included in other income (expense) and consist of a loss of
$614,000 in 2001 and gains of $154,000 and $424,000 in 2002 and 2003,
respectively.
Net Income Per Share - Basic net income (loss) per share excludes
dilution and is computed by dividing net income (loss) by the number of
weighted average common shares outstanding for the period. Diluted net
income (loss) 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. During the
years ended December 31, 2002 and 2003, diluted net loss per share
excludes common equivalent shares outstanding, as their effect is
antidilutive. The reconciliation of the share denominator used in the
basic and diluted net income per share computations is as follows (in
thousands):
Year Ended December 31,
-------------------------------------
2001 2002 2003
------- ------- -------
Weighted average shares outstanding - shares used in basic net
income per share computation...................................... 11,691 11,878 12,043
Dilutive effect of common stock equivalents, using the treasury
stock method...................................................... 470 -- --
------- ------- -------
Shares used in diluted net income per share computation.............. 12,161 11,878 12,043
======= ======= =======
II-27
For the years ended December 31, 2001, 2002 and 2003, diluted net loss
per share excluded common equivalent shares outstanding of 901,917,
1,410,594 and 2,915,196, respectively, as their effect was
antidilutive.
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 the
consolidated statements of operations or retained earnings.
Recently Issued Accounting Pronouncements
In April 2003, the Financial Accounting Standards Board (FASB) issued
SFAS 149, Amendment of Statement 133 on Derivative Instruments and
Hedging Activities, which amends and clarifies accounting for
derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under SFAS 133,
Accounting for Derivative Instruments and Hedging Activities.
SFAS 149 was effective for contracts entered into or modified after
June 30, 2003, except as noted below, and for hedging relationships
designated after June 30, 2003. The guidance was to be applied
prospectively. The provisions of SFAS 149 that relate to SFAS 133
Implementation Issues that were effective for fiscal quarters that
began prior to June 15, 2003 continue to be applied in accordance with
their respective effective dates. The adoption of SFAS 149 did not have
a material effect on our consolidated financial position, results of
operations or cash flows.
The Company adopted Emerging Issues Task Force ("EITF") Issue No.
00-21, "Revenue arrangements with Multiple Deliverables", which
requires companies to determine whether an arrangement involving
multiple deliverables contains more than one unit of accounting. In
applying EITF Issue No. 00-21, revenue arrangements with multiple
deliverables should be divided into separate units of accounts, if the
deliverables in the arrangement meet certain criteria. Arrangement
consideration should be allocated among the separate units of
accounting based on their relative fair values. This issue was
effective for revenue arrangements entered into in fiscal periods
beginning after June 15, 2003. There was no impact on our results of
operations or financial position as a result of adopting EITF Issue No.
00-21.
The FASB issued Interpretation No. 46 ("FIN 46"), "Consolidation of
Variable Interest Entities," in January 2003, and a revised
interpretation of FIN 46 ("FIN 46-R") in December 2003. FIN 46 requires
certain variable interest entities ("VIEs") to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity
do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other
parties. The provisions of FIN 46 are effective immediately for all
arrangements entered into after January 31, 2003. Since January 31,
2003, Nanometrics has not invested in any entities it believes are
variable interest entities for which Nanometrics is the primary
beneficiary. For arrangements entered into prior to February 1, 2003,
Nanometrics is required to adopt the provisions of FIN 46-R in the
first quarter of fiscal 2004. Nanometrics does not expect the adoption
of FIN 46-R to have an impact on the financial position, results of
operations or cash flows of Nanometrics.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity, which requires that certain financial instruments be presented
as liabilities that were previously presented as equity or as temporary
equity. Such instruments include mandatory redeemable preferred and
common stock, and certain options and warrants. SFAS No. 150 is
effective for financial instruments entered into or modified after May
31, 2003 and was effective at the beginning of the first interim period
beginning after June 15, 2003. In November 2003, the FASB issued FASB
Staff Position ("FSP") No. 150-3, Effective Date, Disclosures, and
Transition for Mandatorily Redeemable Financial Instruments of Certain
Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling
Interests under SFAS No. 150, which defers the effective date for
various provisions of SFAS No. 150. Nanometrics believes that it has
properly classified and measured in its balance sheets and disclosed in
its consolidated financial statements financial instruments with
characteristics of both liabilities and equity.
Certain Significant Risks and Uncertainties - Financial instruments
which potentially subject Nanometrics to concentration of credit risk
consist of cash and cash equivalents, short-term investments and
accounts receivable
II-28
(see Note 10). 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. Nanometrics
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. Nanometrics maintains allowances for estimated potential bad
debt losses.
Nanometrics participates in a dynamic high technology industry and
believes that changes in any of the following areas could have a
material adverse effect on Nanometrics' 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
Nanometrics; changes in third-party manufacturers; changes in key
suppliers; changes in certain strategic relationships or customer
relationships; litigation or claims against Nanometrics 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 Nanometrics' ability to
attract and retain employees necessary to support its growth.
Nanometrics' customer base is highly concentrated. A relatively small
number of customers have accounted for a significant portion of
Nanometrics' revenues. In 2003, aggregate revenue from Nanometrics' top
ten largest customers consisted of 51.8% of Nanometrics' total net
revenues.
Certain components and subassemblies used in Nanometrics' products are
purchased from a sole supplier or a limited group of suppliers. In
particular, Nanometrics currently purchases its spectroscopic
ellipsometer 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 Nanometrics' products or the inability of Nanometrics to
procure these components or subassemblies from alternate sources on
acceptable terms, could have a material adverse effect on Nanometrics'
business, financial condition and results of operations.
Related Party Transactions - As of December 31, 2003, Nanometrics had
outstanding long-term notes to one officer and three employees in the
amount of $447,000. The note to the officer bears interest at 6% per
annum and is due in October 2004. The notes to two employees bear no
interest and are due July 2004 and February 2006. The remaining note to
an employee bears 5% interest and is due in 2006. Two notes for $76,000
are classified as other assets on the balance sheet and the remaining
$371,000 is classified as prepaid expenses and other.
During 2003, Nanometrics purchased a vehicle from an officer for
$17,000.
2. Inventories
Inventories consist of the following (in thousands):
December 31,
------------------------
2002 2003
------- -------
Raw materials and subassemblies .............. $18,353 $15,450
Work in process .............................. 4,733 4,506
Finished goods ............................... 2,761 4,308
------- -------
Total inventories ............................ $25,847 $24,264
======= =======
II-29
3. Property, Plant and Equipment
Property, plant and equipment consists of the following (in thousands):
December 31,
-----------------------
2002 2003
-------- --------
Land ............................................. $ 16,716 $ 16,856
Building and improvements ........................ 31,261 32,217
Machinery and equipment .......................... 6,326 6,625
Furniture and fixtures ........................... 1,429 1,681
Construction in progress ......................... -- 200
-------- --------
55,732 57,579
Accumulated depreciation and amortization ........ (5,682) (7,841)
-------- --------
Total property, plant and equipment, net ......... $ 50,050 $ 49,738
======== ========
4. Other Current Liabilities
Other current liabilities consist of the following (in thousands):
December 31,
----------------------
2002 2003
------ ------
Commissions payable ............................ $ 291 $ 32
Accrued warranty ............................... 261 513
Accrued professional services .................. 169 254
Other .......................................... 853 637
------ ------
Total other current liabilities ................ $1,574 $1,436
====== ======
5. Debt Obligations
Debt obligations consist of the following (in thousands):
December 31,
-----------------------
2002 2003
------- -------
1995 working capital bank loan ................. $ 834 $ 561
1996 working capital bank loan ................. 287 232
2000 working capital bank loan ................. 2,502 2,708
Other debt obligations ......................... 280 304
------- -------
Total .......................................... 3,903 3,805
Current portion of debt obligations ............ (780) (1,157)
------- -------
Debt obligations ............................... $ 3,123 $ 2,648
======= =======
The 1995 working capital bank loan was obtained by Nanometrics'
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)60,000,000 at
December 31, 2003) and bears interest at 2.9% 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 Nanometrics'
Japanese subsidiary and is collateralized by land and building. The
loan is denominated in Japanese yen ((Y)24,800,000 at December 31,
2003) 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 Nanometrics'
Japanese subsidiary and is collateralized by land and building. The
loan is denominated in Japanese yen ((Y)289,600,000 at December 31,
2003) 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 Nanometrics'
Japanese subsidiary which are collateralized by the subsidiary's
accounts receivable. The borrowings are denominated in Japanese yen and
bear interest at 2.74% per annum.
II-30
At December 31, 2003, future annual maturities of debt obligations are
as follows (in thousands):
2004................................................... $ 1,157
2005................................................... 666
2006................................................... 441
2007................................................... 389
2008................................................... 389
Thereafter............................................. 763
--------
Total.................................................. $ 3,805
========
6. Commitments and Contingencies
Nanometrics' leases manufacturing and administrative facilities and
certain equipment under noncancellable operating leases. Rent expense
for 2001, 2002, and 2003 was approximately $302,000, $233,000, and
$414,000, respectively. Future minimum lease payments under
Nanometrics' operating leases for each of the years ending December 31
are as follows (in thousands):
2004................................................... $ 136
2005................................................... 67
2006................................................... 18
2007................................................... 10
2008................................................... 7
Thereafter............................................. 2
--------
Total.................................................. $ 240
========
In September 1998, Nanometrics' 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 was terminated
in February 2001.
Pursuant to a 1985 agreement, as amended, if Nanometrics' Chairman of
the Board is involuntarily removed from his position, Nanometrics is
required to continue his salary and related benefits for a period of
five years from such date.
7. Shareholders' Equity
Common Stock
The authorized capital stock of Nanometrics consists of 50,000,000
common shares, of which 50,000,000 shares have been designated "Common
Stock."
Stock Option Plans
Under the 1991 Stock Option Plan (the 1991 Option Plan), as amended,
Nanometrics 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 expired in July 2001.
Under the 1991 Directors' Stock Option Plan (the 1991 Directors' Plan),
nonemployee directors of Nanometrics 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
Nanometrics. 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
II-31
grant. The total shares authorized under the 1991 Directors' Plan are
300,000. The 1991 Directors' Plan expired in July 2001.
Under the 2000 Stock Option Plan (the 2000 Option Plan), as amended,
Nanometrics may grant options to acquire up to 2,450,000 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 seven 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 Nanometrics 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
Nanometrics. Options granted under the Directors' Plan become
exercisable as they vest 33.3% upon each anniversary of the grant and
expire seven 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.
Under the 2002 Nonstatutory Stock Option Plan (the 2002 Option Plan),
Nanometrics may grant options to acquire up to 1,200,000 shares of
common stock to employees and consultants at prices determined by the
2002 Option Plan administrator at the date of grant. These options
generally expire seven years from the date of grant, or a shorter term
as provided by the stock option agreement and become exercisable as
they vest as set forth in the stock option agreements.
During the fourth quarter of 2002, Nanometrics offered to cancel
qualifying options to purchase up to 1,962,020 shares of Nanometrics
common stock granted under the 2000 Option Plan and the 1991 Option
Plan. Qualifying options included only those options with an exercise
price of greater than or equal to $10.00 per share. Nanometrics granted
all participating employees options equal to 90% of the options
cancelled on June 17, 2003 at the then fair value of the common stock.
Nanometrics cancelled options to purchase 1,569,020 shares and issued
options to purchase 1,398,621 shares on June 17, 2003.
Outstanding Options
--------------------------------------------
Weighted
Shares Number of Average
Available Shares Exercise Price
---------- ----------- --------------
Option activity under the plans is summarized as follows:
Balances, December 31, 2000 (634,696 exercisable at a weighted
average price of $6.62)..................................... 1,191,978 1,867,024 $ 18.73
Exercised...................................................... -- (132,536) 6.90
Expired........................................................ (40,744) -- --
Granted (weighted average fair value of $9.45)................. (780,250) 780,250 18.14
Canceled....................................................... 91,516 (91,516) 21.01
---------- -----------
Balances, December 31, 2001 (1,017,033 exercisable at a
weighted average price of $13.91)........................... 462,500 2,423,222 19.11
Additional shares added through 2002 Option Plan............... 1,200,000 -- --
Exercised...................................................... -- (94,205) 6.13
Granted (weighted average fair value of $8.57)................. (937,100) 937,100 14.58
Canceled....................................................... 1,855,523 (1,855,523) 21.15
---------- -----------
Balances, December 31, 2002 (839,095 exercisable at a weighted
average price of $13.39).................................... 2,580,923 1,410,594 14.27
Exercised...................................................... -- (159,375) 7.46
Granted (weighted average fair value of $2.70)................. (2,030,495) 2,030,495 6.67
Canceled (including 250,342 shares under the terminated 1991
Option Plan)................................................ 116,176 (366,518) 10.16
---------- -----------
Balances, December 31, 2003.................................... 666,604 2,915,196 $ 9.86
========== ===========
II-32
Additional information regarding options outstanding as of December 31,
2003 is as follows:
Options Outstanding Options Exercisable
---------------------------------------------- -----------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Number Contractual Average Number Average
Exercise Prices Outstanding Life (Years) Exercise Price Exercisable Exercise Price
--------------- ----------- ------------ -------------- ----------- --------------
$ 3.14 - $ 5.70 1,498,778 6.27 $ 5.58 129,031 $ 5.50
6.33 - 9.00 584,052 4.67 7.50 154,171 7.36
12.86 - 23.50 714,366 4.27 16.82 267,717 17.99
25.24 - 47.63 118,000 1.78 33.85 77,285 34.48
---------- ----------
$ 3.14 - $ 47.63 2,915,196 4.90 $ 9.86 628,204 $ 14.84
========== ==========
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 33,845 and 125,403
in 2001 and 2002, respectively, at weighted average prices of $13.39
and $4.53, respectively. The weighted average per share fair values of
the 2001 and 2002 awards were $5.94 and $1.26, respectively. During the
fourth quarter of fiscal year 2002, the Board of Directors terminated
the Purchase Plan effective September 28, 2002.
Under the 2003 Employee Stock Purchase Plan (the 2003 Stock 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. Nanometrics may grant up to 750,000 shares under the
2003 Stock Plan. No shares were issued under the plan in 2003.
Additional Stock Plan Information
As discussed in Note 1, Nanometrics 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.
Also as discussed in Note 1, Nanometrics adopted the provisions of SFAS
No. 148, which amends SFAS No. 123 as stated. Under SFAS No. 123, as
amended, 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 Nanometrics' 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. Nanometrics' fair value calculations on stock-based awards
under the 1991 and 2001 Option Plans and the 1991 and 2001 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 2001, 2002, and 2003; stock volatility, 80% in
2001 and 2002, and 90% in 2003; risk free interest rate, 4.2% in 2001,
3.4% in 2002 and 2.4% in 2003; and no dividends during the expected
term. Nanometrics' calculations are based on a single option valuation
approach and forfeitures are recognized at a historical rate of 24% for
2001, 30% for 2002, and 25% for 2003. Nanometrics' 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 2001; stock
volatility, 80% in 2001, risk free
II-33
interest rate, 3.1% in 2001; and no dividends during the expected term.
There were no options outstanding under the Purchase Plan in 2002 and
2003. See Note 1, Stock-Based Compensation, for the disclosure of the
pro forma effects of SFAS No. 123. Nanometrics' 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 2003; stock volatility, 90%
in 2003, risk free interest rate 1.2% in 2003 and no dividends during
the expected term.
8. Income Taxes
Income (loss) before provision (benefit) for income taxes consists of
the following (in thousands):
Years Ended December 31,
------------------------------------
2001 2002 2003
-------- -------- --------
Domestic ............................. $ (1,516) $(11,751) $(11,637)
Foreign .............................. 3,258 (2,747) 30
-------- -------- --------
Income (loss) before income taxes .... $ 1,742 $(14,498) $(11,607)
======== ======== ========
The provision (benefit) for income taxes consists of the following (in
thousands):
Years Ended December 31,
---------------------------------
2001 2002 2003
------- ------- -------
Current:
Federal .............................. 1,136 $(4,847) $ (553)
State ................................ 439 266 4
Foreign .............................. 419 296 402
------- ------- -------
1,994 (4,285) (147)
------- ------- -------
Deferred:
Federal .............................. (1,073) (506) 3,700
State ................................ (437) (1,480) 2,306
Foreign .............................. 298 41 1
------- ------- -------
(1,212) (1,945) 6,007
------- ------- -------
Provision (benefit) for income taxes .... $ 782 $(6,230) $ 5,860
======= ======= =======
Significant components of Nanometrics' deferred tax assets and
liabilities are as follows (in thousands):
December 31,
-------------------
2002 2003
------- -------
Deferred tax assets - current:
Reserves and accruals not currently deductible ...... $ 2,369 $ 3,551
Capitalized inventory costs ......................... 696 774
Tax credit carryforwards ............................ 3,835 4,717
------- -------
Total gross deferred tax assets - current .............. 6,900 9,042
Valuation allowance .................................... (60) (9,042)
------- -------
Total net deferred tax assets - current ................ $ 6,840 $ --
======= =======
Deferred tax assets (liabilities) noncurrent:
Reserves and accruals ............................... $ 58 $ --
Net operating loss carryforwards .................... 892 4,596
Depreciation ........................................ (2,357) (2,537)
Goodwill and capitalized technology ................. 934 2,724
Translation adjustments ............................. (25) (412)
------- -------
Total net deferred tax assets (liabilities) - noncurrent (498) 4,371
Valuation allowance .................................... (360) (4,783)
------- -------
Total net deferred tax assets (liabilities) - noncurrent $ (858) $ (412)
======= =======
II-34
As of December 31, 2003, Nanometrics had net operating loss
carryforwards for federal income tax purposes of approximately
$11,958,000, which expire after 2023.
As of December 31, 2003, Nanometrics had available for carryforward
research and experimental tax credits, minimum tax credits and foreign
tax credits for federal income tax purposes of $2,493,000, $329,000,
$565,000, respectively. Federal credit carryforwards begin to expire
after 2006.
As of December 31, 2003, Nanometrics had available for carryforward
state credits of $1,969,000, as well as net operating loss
carryforwards for state income tax purposes of $2,503,000. State
credits and state net operating loss carryforwards begin to expire
after 2009 and 2013, respectively.
Nanometrics had available for carryforward a net operating loss for
Korean income tax purposes of $690,000 as of December 31, 2003. Net
operating loss carry forwards expire after 2005.
Differences between income taxes computed by applying the statutory
federal income tax rate to income before income taxes and the provision
(benefit) for income taxes consist of the following (in thousands):
Years Ended December 31,
----------------------------------
2001 2002 2003
-------- -------- --------
Income taxes computed at U.S. statutory rate $ 610 $ (5,074) $ (4,062)
State income taxes ......................... 1 (790) (1,394)
Foreign tax provision higher than U.S. rates 134 178 426
Foreign sales corporation benefit .......... -- (80) (11)
Change in valuation allowance .............. 342 77 13,405
Tax credits ................................ (450) (746) (1,323)
Other, net ................................. 145 205 (1,181)
-------- -------- --------
Provision (benefit) for income taxes ....... $ 782 $ (6,230) $ 5,860
======== ======== ========
Nanometrics' Korean subsidiary was granted a seven-year tax holiday in
1999 by the Korean government for having established a high-tech
manufacturing operation in Korea, which expires in 2006. There has been
no aggregate net tax effect of the tax holiday for the Korean
subsidiary because their net losses have offset net income during the
period of the tax holiday.
9. Bonus Plans
Nanometrics paid $416,000, $0, and $0 in 2001, 2002, and 2003,
respectively, under formal discretionary cash bonus plans which cover
all eligible employees.
10. Major Customers
In 2001, sales to Applied Materials accounted for 17.6% of total net
revenues. In 2002, sales to Applied Materials accounted for 13.8% and
sales to TSMC accounted for 10.9% of total net revenues. In 2003, sales
to Applied Materials accounted for 15.4% and sales to Hynix
Semiconductor accounted for 12.0% of total net revenues.
At December 31, 2001 and 2002, no single customer accounted for 10% or
more of accounts receivable. At December 31, 2003, two customers
accounted for 15.2% and 10.4% of accounts receivable, respectively.
11. Intangible Assets
Intangible assets are recorded at cost, less accumulated amortization.
Intangible assets as of December 31, 2002 and 2003 consist of (in
thousands):
II-35
Gross Net
Carrying Accumulated Intangible
2003 Amount Amortization Assets
------ ------------ ------
Technology .................. $2,709 $1,466 $1,243
Other ....................... 250 171 79
------ ------ ------
Total ....................... $2,959 $1,637 $1,322
====== ====== ======
Gross Net
Carrying Accumulated Intangible
2002 Amount Amortization Assets
------ ------------ ------
Technology................... $2,709 $1,090 $1,619
Other........................ 250 121 129
------ ------ ------
Total........................ $2,959 $1,211 $1,748
====== ====== ======
The estimated future amortization expense is as follows (in thousands):
Fiscal Years
------------
2004.......................................................... $ 397
2005.......................................................... 285
2006.......................................................... 256
2007.......................................................... 256
2008.......................................................... 128
-------
Total amortization............................................... $ 1,322
=======
Amortization is computed using the straight-line method over a weighted
average period of seven years for purchased technology and five years
for other intangible items. Amortization for the years ended December
31, 2003 and 2002 were $426,000 and $490,0000, respectively.
12. Product, Segment and Geographic Information
Nanometrics' 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, Nanometrics operates in one
reportable segment: the sale, design, manufacture, marketing and
support of thin film, optical critical dimension and overlay dimension
metrology systems. For the years ended December 31, 2001, 2002, and
2003, Nanometrics recorded revenue from customers throughout North
America, Europe and Asia. The following table summarizes total net
revenues and long-lived assets attributed to significant countries (in
thousands):
Years Ended December 31,
---------------------------------------
2001 2002 2003
------- ------- -------
Total net revenues:
United States ............... $16,752 $10,770 $10,504
Japan ....................... 13,712 8,284 10,319
Korea ....................... 4,693 3,647 9,063
Taiwan ...................... 6,727 7,898 8,935
Germany ..................... 2,018 378 299
All other ................... 3,682 3,746 2,482
------- ------- -------
Total net revenues* ............ $47,584 $34,723 $41,602
======= ======= =======
II-36
December 31,
-------------------------
2002 2003
------- -------
Long-lived assets:
United States ........................... $42,989 $41,914
Japan ................................... 6,787 7,225
Korea ................................... 3,367 3,240
Taiwan .................................. 168 39
------- -------
Total long-lived assets .................... $53,311 $52,418
======= =======
* Net revenues are attributed to countries based on the deployment and
service locations of systems.
Nanometrics' 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,
---------------------------------------
2001 2002 2003
------- ------- -------
Automated systems .............. $27,416 $19,969 $25,620
Integrated systems ............. 7,527 4,155 6,106
Tabletop systems ............... 7,710 4,545 2,866
------- ------- -------
Total product sales ............ $42,653 $28,669 $34,592
======= ======= =======
13. Selected Quarterly Financial Results (Unaudited)
The following tables set forth selected quarterly results of operations
for the years ended December 31, 2002 and 2003 (in thousands, except
per share amounts):
Quarters Ended
-----------------------------------------------
Mar. 31, Jun. 30, Sep. 30, Dec. 31,
2002 2002 2002 2002
-------- -------- -------- --------
Total net revenues ............................ $ 8,025 $ 8,392 $ 8,569 $ 9,737
Gross profit .................................. 3,976 3,909 3,840 3,996
Loss from operations .......................... (2,547) (3,088) (3,915) (5,537)
Net loss ...................................... (1,547) (1,702) (1,816) (3,203)
Net loss per share, basic and diluted ......... $ (0.13) $ (0.14) $ (0.15) $ (0.27)
Shares used in per share computation, basic and
diluted .................................... 11,790 11,837 11,886 11,998
Quarters Ended
------------------------------------------------
Mar. 31, Jun. 30, Sep. 30, Dec. 31,
2003 2003 2003 2003
-------- -------- -------- --------
Total net revenues ............................. $ 9,350 $ 9,734 $ 10,131 $ 12,387
Gross profit ................................... 3,805 3,299 4,167 6,020
Loss from operations ........................... (3,637) (4,033) (3,187) (1,436)
Net loss ....................................... (9,584)* (4,083) (2,996) (804)
Net loss per shares, basic and diluted ......... $ (0.80) $ (0.34) $ (0.25) $ (0.07)
Shares used in per share computations, basic and
diluted ..................................... 12,007 12,008 12,033 12,122
* Includes a $6,020 charge to record a valuation allowance against
deferred income tax assets.
II-37
* * * * *
II-38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Nanometrics maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the periodic reports filed
by Nanometrics with the Securities and Exchange Commission (the "Commission") is
recorded, processed, summarized and reported within the time periods specified
in the rules and forms of the Commission and that such information is
accumulated and communicated to Nanometrics' management. In designing and
evaluating the disclosure controls and procedures, Nanometrics' management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives and management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
Based on their most recent evaluation, Nanometrics' Chief Executive Officer and
Chief Financial Officer have concluded that the Company's disclosure controls
and procedures (as defined in Rules 13a-15e and 15d-15e of the Securities
Exchange Act of 1934, as amended) are effective as of the end of the period
covered by this Annual Report Form 10-K. There were not any significant changes
in internal controls or in other factors that could significantly affect these
internal controls during the fourth quarter.
II-39
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The sections titled "Election of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance" appearing in the Registrant's proxy statement
for the annual meeting of shareholders for the year ended January 3, 2004 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.
We have adopted a code of ethics, entitled the Code of Business Conduct and
Ethics, that applies to our employees, including our chief executive officer and
chief financial officer. The Code of Business Conduct and Ethics is posted on
our website, www.nanometrics.com.
ITEM 11. EXECUTIVE COMPENSATION
The section titled "Executive Compensation" appearing in the Registrant's proxy
statement for the annual meeting of shareholders for the year ended January 3,
2004 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 AND
RELATED SHAREHOLDER MATTERS
The section titled "Election of Directors" appearing in the Registrant's proxy
statement for the annual meeting of shareholders for the year ended January 3,
2004 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 titled "Transactions with Management" appearing in the Registrant's
proxy statement for the annual meeting of shareholders for the year ended
January 3, 2004 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.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is incorporated by reference and will be
set forth under the heading "Relationship with Independent Public Accountants"
to be included in the Company's Proxy Statement for the 2004 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A within 120 days after the end of our most recent fiscal year.
III-1
PART IV
ITEM 15. 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-16
of this Annual Report on Form 10-K.
2. Consolidated Financial Statement Schedules.
The following consolidated financial statement schedules of Nanometrics
Incorporated are filed as part of this Annual Report on Form 10-K 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 furnished a Report on Form 8-K disclosing our
earnings release on October 23, 2003.
(c) Exhibits.
The following exhibits are filed with this Annual Report on Form 10-K:
Exhibit No. Description
- ----------- -----------
3.1(8) Amended and Restated Articles of Incorporation of Nanometrics
Incorporated.
3.2(2) Bylaws of Nanometrics Incorporated.
3.3(5) 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.
(Management contract required to be filed pursuant to Item 15(c)
of this report.)
10.2(3) 1991 Stock Option Plan, as amended through May 15, 1997.
10.3(6) 1991 Director Option Plan.
10.4(2) Loan Agreement between Japan Development Bank and Nanometrics
Japan k.k.
10.5(2) Loan Agreement and Guarantee dated June 5, 1995 between
Mitsubishi Bank, Limited and Nanometrics Japan Ltd.
10.6(4) Nanometrics Incorporated 2000 Employee Stock Option Plan and form
of Stock Option Agreement.
10.7(4) Nanometrics Incorporated 2000 Director Stock Option Plan and form
of Stock Option Agreement.
10.8(7) Nanometrics Incorporated 2002 Nonstatutory Stock Option Plan and
form of Stock Option Agreement.
14 Code of Business Conduct and Ethics
IV-1
Exhibit No. Description
- ----------- -----------
21(2) Subsidiaries of Registrant.
23.1 Independent Auditors' Consent.
24 Power of Attorney (see page IV-3).
31.1 Certificate of Chief Executive Officer
31.2 Certificate of Chief Financial Officer.
32.1 Certificate of Chief Executive Officer and Chief Financial
Officer.
(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 No. 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 No. 333-40866) filed
on July 7, 2000.
(5) Incorporated by reference to Exhibit 3.10 filed with
Registrant's Annual Report on Form 10-K dated March 30, 2001.
(6) Incorporated by reference to Exhibit 4.2 filed with
Registrant's Registration Statement on Form S-8 (File No.
33-43913) filed on November 14, 1991.
(7) Incorporated by reference to Exhibit 4.1 filed with the
registrant's Registration Statement on Form S-8 (File No.
333-101137) filed on November 11, 2002.
(8) Incorporated by reference to registrant's Annual Report on
Form 10-K for the year ended December 31, 2002 (File No.
000-13470) filed on March 28, 2003.
(d) Consolidated Financial Statements and Schedules.
See Item 15(a) of this Annual Report on Form 10-K above.
IV-2
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities 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 31, 2004
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 Exchange Act of 1934, this Report
on Form 10-K has been signed below by the following persons on behalf of the
registrant on the 31st day of March, 2004 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/ William Oldham Director
- ---------------------------
William Oldham
/s/ Edmond R. Ward Director
- ---------------------------
Edmond R. Ward
IV-3
SCHEDULE II
NANOMETRICS INCORPORATED
VALUATION AND QUALIFYING ACCOUNTS
Allowance for Doubtful Accounts Receivable
Balance at Charged to Deductions- Balance
beginning costs and write-offs at end
Year Ended of period expenses of accounts of period
- ---------- --------- -------- ----------- ---------
December 31, 2001 ...... $418,000 $150,000 $ 6,000 $562,000
-------- -------- -------- --------
December 31, 2002 ...... $562,000 $ 4,000 $ 0 $566,000
-------- -------- -------- --------
December 31, 2003 ...... $566,000 $ 10,000 $ 0 $576,000
-------- -------- -------- --------
IV-4