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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1998 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
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 No.)
310 DeGuigne Drive, Sunnyvale, California
94086 (Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (408) 746-1600
-------------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
--------------------------
Title of Class
Indicate by check mark whether the 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 Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
The aggregate market value of the voting stock held by non-affiliates
of the Registrant as of March 5, 1999: $18,756,224 based upon the last sales
price reported for such date. For purposes of this disclosure, shares of common
stock held by officers, directors or persons who hold more than 5% of the
outstanding shares of common stock of the Registrant have been excluded in that
such persons may be deemed to be "affiliates" as that term is defined under the
rules and regulations promulgated under the Securities Exchange Act of 1934, as
amended. This determination of affiliate status is not necessarily a conclusive
determination for other purposes.
The number of shares outstanding of the Registrant's common stock as of
March 5, 1999 was 8,702,118.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III is incorporated by reference to
the definitive Proxy Statement for the Annual Meeting of Shareholders of the
Company for the year ended December 31, 1998 which will be filed with the
Securities and Exchange Commission no later than 120 days after December 31,
1998.
NANOMETRICS INCORPORATED
ANNUAL REPORT -- Form 10-K
TABLE OF CONTENTS
PAGE
----
Part I
Item 1. Business .................................................... I-1
Item 2. Properties .................................................. I-12
Item 3. Legal Proceedings ........................................... I-12
Item 4. Submission of Matters to a Vote of Security Holders ......... I-13
Part II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters ....................................... II-1
Item 6. Selected Consolidated Financial Data ........................ II-1
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ....................... II-3
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk .................................................... II-14
Item 8. Financial Statements and Supplementary Data ................. II-15
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ....................... II-35
Part III
Item 10. Directors and Executive Officers of the Registrant .......... III-1
Item 11. Executive Compensation ...................................... III-1
Item 12. Security Ownership of Certain Beneficial Owners
and Management ............................................ III-1
Item 13. Certain Relationships and Related Transactions .............. III-1
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K ................................................ IV-1
Signatures ................................................................ V-1
(ii)
PART I
ITEM 1. BUSINESS
The Company
Nanometrics, Inc. ("Nanometrics" or the "Company") was incorporated in
January 1975 as a California Corporation. The Company is a leader in the design,
manufacture, marketing, and support of process monitoring systems for the
semiconductor, data storage, and flat panel display industries. The Company's
primary products are thin film measurement/analysis and overlay metrology
systems. These products are used to analyze manufacturing quality at critical
steps in production and to provide feedback for production control or
notification of out-of-control processes. The Company has been selling
measurement systems since 1977 and has an extensive installed base of systems
with customers worldwide, including major manufactures of integrated circuits
(IC), flat panel displays, and read-write heads for data storage.
Industry Background
Growth
The increasing demand for internet access, personal computers,
telecommunications, and new consumer electronic products and services have
fueled growth of the semiconductor, data storage and flat panel display
industries. In addition, integrated circuits and related components have
increased in performance and lowered in price, contributing to the growth.
Significant growth has occurred over the past ten years, however, these
industries are cyclical in nature and are characterized by short periods of over
and under supply. During an over supply cycle, capital expenditures for
manufacturing and monitoring systems decline and increase during an under supply
cycle. Consumer desire for high performance electronics, drives technology
advancement in semiconductor design and manufacturing and, in turn, promotes the
purchasing of capital equipment featuring the latest advances in technology. The
two significant factors affecting demand for the Company's measurement systems
are: (i) new construction or refurbishment of manufacturing facilities, which,
in turn, depends on the current and anticipated market demand for
semiconductors, disk drives, flat panel displays, and products that use such
components, and (ii) the increasing complexity of the manufacturing process as a
result of the demand for higher performance semiconductors, magnetic recording
heads and flat panel displays.
Semiconductor Manufacturing Process
Semiconductors are fabricated by a complex series of process steps on a
wafer substrate made of silicon or other semiconductor material. Each wafer
typically goes through a series of 100 to 500 process steps in generally
repetitive cycles. Three primary categories of wafer film processing steps are
deposition, photolithography and etch. During deposition, layers of conductive
or insulating films are deposited on each wafer. Control of the uniformity and
the thickness during deposition of these films is important to the ultimate
performance of the semiconductor circuit. During photolithography, the wafer is
precoated with photoresist, a light sensitive film that must have an accurate
thickness and uniformity. Individual integrated circuit patterns are then
optically projected onto the photoresist after which it is developed, leaving
open areas. During etch, certain areas of the film, not covered by the
photoresist are removed to leave the desired circuit pattern. These steps are
typically repeated many times during the fabrication process, with alternating
layers of conducting and insulating films being deposited each time to form a
multitude of identical "dies" on each wafer. These are final tested, separated
into individual die and assembled into an integrated circuit ready for
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use. Depending on the specific design of a given integrated circuit, a variety
of film types or film thicknesses (which can range from less than 2nm to greater
than 2,500nm) can be used to achieve desired electronic performance
characteristics.
Semiconductor circuits are becoming more complex, operating faster with
smaller feature sizes, and employing larger dies that contain more transistors
and that require increasing numbers of manufacturing process steps.
Manufacturers are adopting new processes and technologies that increase the
importance and utilization of measurement systems. For example, to achieve
greater semiconductor device speed, manufacturers are utilizing thinner films
with different properties that require more frequent and accurate measurement
during the manufacturing process. Increases in the number of layers, along with
the use of thinner films have necessitated the utilization of new manufacturing
processes, such as chemical mechanical polishing ("CMP"). Accordingly,
semiconductor manufacturers are seeking systems that can help the manufacturing
process by measuring the thickness of the layer being polished to determine
precisely when the appropriate film thickness has been achieved in the CMP
process. Furthermore, as manufacturers migrate to new production standards such
as the 300 mm wafer and higher levels of cleanliness and automation in the
fabrication facility, they require film measurement systems that can accommodate
these new standards. Semiconductor manufacturers demand measurement systems that
meet specifications for accuracy at a low cost of ownership. Cost of ownership
is estimated by cost per wafer inspected over a five-year period, which is
dependent upon system price, mean time between failure, throughput, operating
costs, footprint (space occupied in the fab), servicing and maintenance costs
and other factors.
Magnetic Recording Head Manufacturing Process
The magnetic recording head manufacturing process is similar to the
semiconductor fabrication process. Magnetic recording heads are used to read and
write data stored on hard disk drives. The head is a critical component in the
drive structure and determines the data storage capacity. Multiple heads are
manufactured on wafer-like pucks of various sizes that are round or square and
typically made of an aluminum oxide-titanium carbide combination, 2 to 3 mm
thick. The head structures are then built up in a series of thin film
depositions and patterning steps involving mainly ultra-thin metals and
dielectric films. The thickness of each film in the stack must be measured and
controlled to very tight tolerances for optimum performance. Magnetic recording
head manufacturers demand high throughput film measurement systems that meet
specifications for accuracy at a low cost of ownership.
Flat Panel Display Manufacturing Process
Flat panel displays are manufactured in clean rooms using processes
that are similar to those used in semiconductor manufacturing. Flat panel
displays use thin film technology, and most displays are constructed on large
glass substrates that range in size up to 650 mm x 830 mm. Future designs are
expected to require panels as large as one meter square. These manufacturing
processes are monitored in part by thin film measurement systems that measure
the thickness and uniformity of various thin films specific to flat panel
displays. Manufacturers of flat panel displays demand automated thin film
measurement systems that handle large glass substrates and place them in
position for measurement of various films during manufacturing.
Process Monitoring
Manufacturers of semiconductors, magnetic recording heads and flat
panel displays use a variety of measurement systems to monitor and control key
dimensions and other physical properties during the manufacture of such
products. Some physical properties measured include film thickness, film stress,
line width, overlay, resistivity, step height, and surface roughness. Film
thickness and film composition is a critical component of these manufacturing
processes because deviations from
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thickness and composition specifications of film layers could result in impaired
performance of the semiconductor, magnetic recording head or flat panel display.
Similarly, overlay registration, which refers to the alignment of one
lithographic process over another, is also a critical process component since
misalignment of layers results in impaired or non-functional devices.
Manufacturers rely upon accurate measurement systems to promptly detect and
minimize process deviations to increase production yields. With each new
generation of product, tighter tolerances increase the need for accurate film
thickness, film composition, and overlay measurement.
Strategy
The Company's objective is to increase its market share in the
measurement and inspection segments of the semiconductor, data storage, and flat
panel display industries and continue to strengthen its position as a leading
supplier of process monitoring equipment. The key components of the Company's
strategy are as follows:
Leadership in Technology--The Company's markets are characterized by
rapid changes in technology. The Company's ability to remain competitive will
depend in part upon its ability to respond to technological change and develop
new and enhanced systems. A key factor in the Company's growth has been the
introduction of new products, such, as the NanoSpec 8000 and 6500. The recent
introduction of Fourier transform infrared (FTIR) capability, is an example of
aggressive technology leadership. The NanoSpec 8000 is now available with FTIR,
making it the only system having three distinctly different technologies
providing full film characterization.
Develop Emerging Markets--The incorporation of process monitoring
systems into wafer processing equipment has become a developing market for the
Company. Nanometrics is the first major supplier of film analysis equipment to
offer a product line for this emerging market. The Company will continue its
efforts to develop this market to achieve and maintain competitive superiority.
In September 1998, an OEM agreement was initiated between the Company and
Applied Materials to supply film analysis systems for Applied's Mirra CMP
system. The Company is pursuing other OEM arrangements and continues to
investigate other integrated metrology technologies.
Expand International Presence--A significant portion of the Company's
revenue is generated from the Asian markets with additional growth opportunity
still existing. Japan, Korea, and Taiwan represent a significant portion of the
world's capacity for semiconductor manufacturing. Nanometrics established itself
in the Japanese market by creating a wholly-owned subsidiary in the mid-1980s to
support sales, service and manufacturing. The Company has also established
subsidiaries in Taiwan and Korea over the last few years. To further bolster
commitment to the Korean market, the Company established a manufacturing
facility with its Korean subsidiary in late 1998. The Korean operation will
manufacture the Company's Metra product line.
High Margin Manufacturing--Nanometrics uses strategic partners for the
manufacture of some major subassemblies which concentrates the Company's efforts
on design, manufacture of proprietary assemblies, system integration, and
quality assurance. The Company believes that the use of suppliers helps to
reduce costs while allowing its own facility to act as a reservoir to increase
capacity as required. This strategy allows the Company to focus on the design of
key technologies that create high levels of product differentiation and also
enables the rapid introduction of new products and features. Nanometrics is
careful about supplier selection and works closely with suppliers to ensure
appropriate cost and quality. The Company's suppliers are leaders in their
respective fields.
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Products
Nanometrics has been a pioneer in the field of thin film measurement
and has been instrumental in the development of many innovations for over 20
years. The Company's products are manufactured using proprietary optical,
robotic, computer, and software technologies. Measurement techniques used in the
Company's film measurement systems are non-contact spectroscopic reflectometry,
spectroscopic ellipsometry, and Fourier transform infrared reflectometry (FTIR).
The primary applications are in the semiconductor, magnetic recording head, and
flat panel displays industries. The Company's film measurement products can be
divided into three groups: automated systems, table-top systems, and integrated
systems. The automated systems are employed in high volume production
environments. The table-top systems are used mainly in low volume production
environments where automated sample handling and high throughput are not
required and where cost is a major consideration. The integrated systems are
designed to be an integral component of a particular piece of process equipment,
such as a film deposition or CMP system, where immediate feedback of film
properties is beneficial.
Automated Systems
NanoSpec 8000 Series for Semiconductor and Magnetic Head Manufacturers
Introduced in late 1994, the NanoSpec 8000 Series has developed, over
the past few years, into the most powerful film analysis system currently
available for production use. The 8000 Series is available in a 200mm platform
(NanoSpec 8000/8000X) that handles substrates ranging from 75-200mm and a 300mm
platform (NanoSpec 8300X) that handles 200 and 300mm substrates. The systems can
be configured with deep ultra-violet (DUV) to visible (VIS) reflectometry,
spectroscopic ellipsometry (SE), and Fourier transform infrared (FTIR)
reflectometry. Spectroscopic ellipsometry was first offered on the 8000 Series
in 1996 while FTIR was introduced in 1998. The NanoSpec 8000 Series is the only
system currently available with all three measurement techniques, making it the
only single-solution system capable of determining thickness (t), index of
refraction (n), extinction coefficient (k), and dielectric dopant concentration
(c). These systems are offered with a variety of other options, such as: pattern
recognition for user-free operation, GEM/SECS for communication between system
and factory computers, front-opening unified pods (FOUP) for 300mm factory
automation, standard mechanical interface (SMIF) for factories using
mini-environments, and a host of other options.
With the introduction of the 8300X in 1996, the Company believes that
it was the first to introduce a fully-automated product for thin film
measurement on 300 mm wafers. In addition, it is also believed the Company
currently has the largest installed base of 300mm film analysis systems. The
8300XSE received a Photonics Spectra Magazine Circle of Excellence Award as one
of the most technically innovative products in 1996. The Company has installed
approximately 200 NanoSpec 8000 Series systems since mid-1995.
Metra Series for Semiconductor Manufacturers
In March of 1998, the Company announced that it had completed the
acquisition of the Optical Specialties Inc. Metra(R) Overlay Metrology Product.
Integrated circuits are made by building-up a series of patterned films on a
silicon wafer, using high resolution photolithography and other complex
processes. It is essential that successive layers be accurately aligned, one
relative to the other, across the wafer. Excessive errors in alignment can
result in device malfunction, and therefore poor production yields. The Metra
system is used to measure and map these overlay errors after each
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lithography step. As circuit features shrink, and overlay registration
requirements become more stringent, the Company anticipates that the need for
these tools could grow rapidly in the next few years.
The Metra system is fully automated, and consists of a robotic wafer
handler, a precision X-Y stage, a high accuracy microscope with image capture,
pattern recognition, and auto-focus. At the heart of the Metra system is a
proprietary software algorithm called Digital Image Folding (DIF), which,
through the use of alignment targets within the wafer patterning, is responsible
for determining the degree of misalignment from one process layer to the next.
NanoSpec 5500 and 6500 for Flat Panel Display Manufacturers
The 5500 and 6500 systems were engineered and are manufactured by the
Company's subsidiary in Japan. The 5500 and 6500 are both fully automated and
can measure most optically transparent films used in the manufacture of flat
panel displays. The 5500 handles large glass substrates up to 550 mm x 650 mm.
This model is also capable of precisely measuring the thickness of virtually all
films used in the manufacture of flat panel displays at any site on the
substrate in a 20 micron spot and generating film thickness maps, which show
uniformity across the panel. The 6500 is an advanced version of the 5500, with
many proprietary software and hardware improvements, and is capable of handling
650 mm x 830 mm or larger substrates.
Table Top Models for Semiconductor, Magnetic Recording Head, Flat Panel Display
Manufacturers and Other Thin Film Applications
The table top family of products provides a broad range of thin film
measurement solutions at a low entry price point to manufacturers of
semiconductors, magnetic recording heads, flat panel displays and other film
applications. The principal market for the Company's table top products is the
semiconductor industry, including device manufacturers and equipment materials
suppliers to this industry. With unique capabilities and several available
configurations, each model allows manufacturers to create custom measurement
programs used in developing new technology.
Integrated Systems for Semiconductor Manufacturers
NanoSpec 9000
The system, introduced in 1998, has been designed to be integrated into
various types of semiconductor processing equipment, in order to provide
virtually immediate feedback regarding film properties, and allow for the
tighter process control required in advanced semiconductor processes. The basic
system uses a non-contact solid-state spectroscopic reflectometer to measure the
thickness, uniformity, and optical constants of various films and film stacks
used in semiconductor processing. The system includes: visible
spectrophotometer, programmable wafer stage, wafer pre-aligner, pattern
recognition, and auto-focus mechanisms. One of the key features of the 9000 is
its high speed, which allows the system to be used directly in production
without reducing the throughput of the entire process.
In September of 1998, the Company entered into an OEM agreement with
Applied Materials, Inc. to supply film measurement systems for the Mirra(R) CMP
system. The terms of the agreement give Applied Materials exclusive rights to
integrate the NanoSpec 9000 for dry-in/dry-out CMP
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applications. The Company believes the NanoSpec 9000 to be the first integrated
film measurement system available for this application.
Customers
Nanometrics sells its measurement systems worldwide to many of the
major semiconductor, magnetic recording head and flat panel display
manufacturers, as well as manufacturers of production equipment and materials
for these industries. Sales to International Business Machines Corp. represented
11% of the Company's total net revenues in 1998. Sales to Anam Electronics
represented 11% of the Company's total net revenues in 1997. No single customer
represented more than 10% of the Company's total net revenues in 1996.
Sales and Marketing
The Company believes that a direct sales and support capability is
essential for developing and maintaining close customer relationships and for
rapidly responding to changing customer requirements. Nanometrics provides
direct sales support from its corporate office in California. In addition, the
Company has a direct sales presence in Oregon and Texas in the United States, as
well as Japan, South Korea, Taiwan and the United Kingdom. The Company also uses
sales representatives and distributors in Asia, Europe, and the United States.
Nanometrics intends to continue developing its distribution network by expanding
its existing offices and opening new offices and forming additional distribution
relationships. The Company believes that growing its international distribution
network will enhance its competitive position. The Company maintains a direct
sales force of highly trained, technically sophisticated sales engineers who are
knowledgeable in the use of thin film measurement systems and the features and
advantages of the Company's products. In addition, the Company believes that its
sales and application engineers are skilled in working with customers to solve
complex measurement and process problems.
International sales, which includes sales by the Company's foreign
subsidiaries constituted approximately 61.8%, 60.3%, and 52.5% of total net
revenues for 1998, 1997, and 1996 respectively. Direct exports of the Company's
film measurement systems to foreign customers and shipments to its subsidiaries
require general export licenses. See "Management's Discussion and Analysis of
Financial Condition and Results of Operation-Factors That May Affect Future
Operating Results."
In order to raise market awareness of its products, the Company
advertises in trade publications, distributes promotional materials, publishes
technical articles, conducts marketing programs, issues press releases regarding
new products and participates in industry trade shows and conferences.
Customer Service and Support
The Company believes that customer service and technical support are
important competitive factors and are essential to building and maintaining
close, long-term relationships with its customers. The Company provides support
to its customers with site visits, telephonic technical support, direct training
programs and operating manuals and other technical support information. The
Company uses its demonstration equipment for training programs in addition to
sales and marketing.
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Nanometrics provides warranty and post-warranty service from its corporate
office in California. The Company also has service operations based in Arizona,
Massachusetts, Oregon, Pennsylvania and Texas. Local service and spare parts are
provided by the Company in the United Kingdom and by distributors and sales
representatives in the rest of Europe. In Asia, service is provided directly by
offices in Japan, Korea and Taiwan. The Company's distributors and
representatives provide service in other countries in Asia.
Nanometrics provides a one year service warranty on parts and labor for
products. Revenues from post-warranty services (service revenue), including
sales of replacement parts, represented approximately 10.7%, 10.6%, and 18.9% of
total net revenues in 1998, 1997 and 1996, respectively.
Backlog
As of December 31, 1998, the Company's backlog was approximately $1.0
million. Backlog includes orders for products that the Company expects to ship
within 12 months. Orders from the Company's customers are subject to
cancellation or delay by the customer with minimal penalties. Historically,
order cancellations and order rescheduling have not been significant. However,
there can be no assurance that orders presently in backlog will not be canceled
or rescheduled. Since only a portion of the Company's revenues for any quarter
represent systems in backlog, the Company does not believe that backlog is a
meaningful or accurate indication of its future revenues and performance. See
"Risk factors-Dependence on Limited Systems Sales; Backlog."
Competition
The market for film thickness measurement systems is subject to intense
competitive pressure and characterized by rapidly evolving technology. The
Company competes on a global basis with both larger and smaller companies in the
United States, Japan and Europe. The Company competes primarily with thin film
measurement products from KLA-Tencor Corporation, Therma-Wave Inc., Rudolph
Technologies, Dai Nippon Screen, Toray Industries, Nova Measuring Instruments,
Filmetrics, and On-Line Technologies, as well as overlay metrology products from
KLA-Tencor, BioRad Laboratories, and Schlumberger. Many of the Company's
competitors have substantially greater financial, engineering, manufacturing and
marketing resources than the Company. Significant competitive factors include
technical capabilities, system performance (including automation and software
capability), ease of use, reliability, established customer bases, cost of
ownership, price and global customer service. The Company believes that it
competes favorably with respect to these factors but must continue to develop
and design new and improved products in order to maintain its competitive
position.
The Company expects its competitors to continue to improve the design
and performance of their current products and to introduce new products with
improved price and performance characteristics. For example, the Company expects
to face increased competition in the emerging market for 300 mm thin film
measurement systems. New product introductions and enhancements by the Company's
competitors could cause a decline in sales or loss of market acceptance of the
Company's systems. There can be no assurance that the Company will be able to
compete successfully against current or future competitors. Increased
competitive pressure could lead to reduced demand and lower prices for the
Company's products, thereby materially adversely affecting the Company's
business, financial condition and results of operations. See "Management's
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Discussion and Analysis of Financial Condition and Results of Operation-Factors
That May Affect Future Operating Results-Highly Competitive Industry and Impact
of Industry Consolidation."
Manufacturing
The Company manufactures its product in the United States, Japan, and
Korea, by combining proprietary measurement components and software produced in
its facility with components and subassemblies obtained from outside suppliers.
The Company tests all systems prior to shipment. Certain of the Company's
products include system engineering and software development to meet specific
customer requirements. The Company's manufacturing operations do not require a
major investment in capital equipment.
The Company is relying increasingly on outside vendors to manufacture
many components and subassemblies. Certain components, subassemblies and
services necessary for the manufacture of the Company's systems are obtained
from a sole supplier or limited group of suppliers. The Company's reliance on a
sole or limited group of suppliers involves several risks, including a potential
inability to obtain an adequate supply of required components, reduced control
of pricing and timely delivery of components and subassemblies and suppliers'
potential inability to develop technologically advanced products to support the
Company's growth and development of new systems. Because manufacturing of
certain of these components and subassemblies involves extremely complex
processes and requires long lead times, there can be no assurances that delays
or shortages caused by suppliers will not occur in the future. The Company
believes that alternative sources could be obtained and qualified, if necessary,
for most sole and limited source parts. However, if the Company were forced to
seek alternative sources of supply or to manufacture such components or
subassemblies internally; it may be required to redesign its systems, which
could prevent the Company from shipping its systems to its customers on a timely
basis. Certain of the Company's suppliers have relatively limited financial
resources. Any inability to obtain adequate deliveries or any other circumstance
that would restrict the Company's ability to ship its products, could damage
relationships with current and prospective customers and could have a material
adverse impact on the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operation-Factors That May Affect Future Operating Results-Sole or
Limited Sources of Supply; Reliance on Subcontractors; Complexity in
Manufacturing Process."
Research and Development
The Company's current research and development efforts are directed
toward enhancing existing products and developing and introducing new products
to maintain technological leadership and to meet current and evolving customer
needs. The Company is working to develop potential applications of new and
emerging technologies, including improved methods of thin film measurement.
These efforts are conducted at its facilities in California and the Japanese
subsidiary. The Company has an extensive base of proprietary technology and
expertise in areas such as spectrophotometry using its patented absolute
reflectivity, robust pattern recognition, and complex measurement software
algorithms. The Company also has extensive experience in systems integration
engineering required to design compact, highly automated systems for advanced
clean room environments. The Company's process, engineering, marketing,
operations and management personnel have developed close collaborative
relationships with many of their customers'
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counterparts and have used these relationships to identify market demands and
target the Company's research and development to meet those demands.
Expenditures for research and development during 1998, 1997, and 1996 were $4.2
million, $3.0 million and $2.8 million, respectively, and represented 12.6%,
8.1% and 9.1% of total net revenues, respectively.
The success of the Company in developing, introducing and selling new
and enhanced systems depends upon a variety of factors, including product
selections, timely and efficient completion of product design and development,
timely and efficient implementation of manufacturing and assembly process,
effective sales and marketing and product performance. Because new product
development commitments must be made well in advance of sales, new product
decisions must anticipate both the future demand for the products under
development and the equipment required to produce such products. If new products
have reliability or quality problems, reduced orders, higher manufacturing costs
and additional service warranty expense may result. There can be no assurance
that the Company will be successful in selecting, developing, manufacturing and
marketing new products or in enhancing and marketing existing products. If the
Company does not successfully introduce new products, the Company's business,
financial condition and results of operations will be materially adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operation-Factors That May Affect Future Operating Results-Rapid
Technological Change; Importance of Timely Product Introduction."
Intellectual Property
The Company's success depends in large part on the technical innovation
of its products. Nanometrics actively pursues a program of filing patent
applications to seek protection of technologically sensitive features of its
product. The Company holds a number of United States patents and additional
patents in Japan and Europe. The United States patents, issued during the period
1982 to 1998, will expire from 1999 to 2015. While the Company attempts to
protect its intellectual property rights through patents, trademarks, copyrights
and non-disclosure agreements, it believes that its success will depend to a
greater degree upon innovation, technological expertise and its ability to adapt
its products to new technology. There can be no assurance that the Company will
be able to protect its technology or that competitors will not be able to
develop similar technology independently. In addition, the laws of certain
foreign countries may not protect the Company's intellectual property to the
same extent as do the laws of United States.
The validity of the Company's patents has not been adjudicated by any
court. Competitors may bring legal challenges to the validity of one or more of
these patents, or attempt to circumvent the patents. No assurance can be given
that the Company's patents will be sufficiently broad to protect the Company's
technology, nor that any existing or future patents will not be challenged,
invalidated or circumvented, or that the rights granted thereunder will provide
meaningful competitive advantages to the Company. Furthermore, there can be no
assurance that others will not independently develop similar products, duplicate
the Company's products, or if patents are issued to the Company, design around
such patents. The Company does not believe there is any infringement by its
products of any patents or proprietary rights of others. However, there can be
no assurance that such infringements do not exist or will not occur in the
future. As is typical in the semiconductor industry, the Company has from time
to time received, and may in the future receive, communications alleging
possible infringement of patents or other intellectual property rights of
others. The Company investigates all such notices and responds as appropriate.
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Some customers of the Company have received notices of infringement
from The Lemelson Medical, Education, & Research Foundation, A Limited
Partnership, alleging equipment used in the manufacture of semiconductor
products infringes their patents. A number of these customers have notified the
Company that they may seek indemnification from the Company for any damages and
expenses resulting from this matter. Certain of the Company's customers had
engaged in litigation with the late Mr. Lemelson involving a number of his
patents, and some of these cases have been settled. Although the ultimate
outcome of these matters is not presently determinable, there can be no
assurance that the resolution of all such pending matters will not have a
material adverse effect on the Company's business, financial condition and
result of operations. Based on industry practice, the Company believes that in
most cases it could obtain any necessary licenses or other rights on
commercially reasonable terms, but no assurance can be given that licenses would
be available or would be on acceptable terms, that litigation would not ensue or
that damages for any past infringement would not be assessed. Litigation may be
necessary in the future to enforce patents issued to the Company, to protect
trade secrets or know-how owned by the Company, to defend the Company against
claimed infringement of the rights of others or to determine the scope and
validity of the proprietary rights of others. Any such litigation could result
in substantial cost and diversion of effort by the Company, which could have a
material adverse effect on the Company's business, financial condition and
results of operations. Moreover, adverse determinations in such litigation could
result in the Company's loss of proprietary rights, subject the Company to
significant liabilities to third parties, require the Company to seek licenses
from third parties or prevent the Company from manufacturing or selling its
products. The failure to obtain necessary licenses or other rights or litigation
arising out of infringement claims could have material adverse effect on the
Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation-Factors That May Affect Future Operating Results-Uncertainty of
Intellectual Property Rights."
Employees
At December 31, 1998, the Company employed 178 persons worldwide on a
full-time basis, including 39 in research and development, 32 in manufacturing
and manufacturing support, 88 in marketing, sales and field service and 19 in
general administration and finance. None of these employees is represented by a
union. Many of the Company's employees have specialized skills of value to the
Company. Nanometrics' future success will depend in large part upon its ability
to attract and retain highly skilled, scientific, technical, managerial,
financial and marketing personnel, who are in great demand in the industry.
Nanometrics considers its employee relations to be good.
Executive Officers of the Registrant
The executive officers of the Company are as follows:
Name Age Position with the Company
---- --- -------------------------
Vincent J. Coates 74 Chairman of the Board, Secretary
John Heaton 39 Director, President and Chief Executive
Officer
Paul B. Nolan 44 Vice President and Chief Financial Officer
I-10
William N. Fate 36 Vice President and Director of
International Sales
Roger Ingalls Jr. 37 Vice President and Director of Marketing
William A. McGahan 32 Vice President and Director of Advanced
Engineering
Mr. Vincent Coates has been Chairman of the Board since the Company was
founded. He has also served as Chief Executive Officer and President from the
founding through July 1988 except for the period January 1986 through February
1987 when he served exclusively as Chief Executive Officer. He was elected
Secretary in February 1989. He resigned the position of Chief Executive Officer
in June 1998.
Mr. Heaton joined the Company in September 1990, and in April 1994 he
was elected Vice President of Engineering and General Manager. In July 1995 he
was appointed to the Board of Directors. He was elected President and Chief
Executive Officer in April 1998. Mr. Heaton served in various technical roles at
National Semiconductor from 1978 to 1990 prior to joining the Company.
Mr. Nolan joined the Company in March 1989 and in March 1994 he was
elected Vice President and Chief Financial Officer. Mr. Nolan served as Senior
Financial Analyst at Harris Corporation prior to joining the Company.
Mr. Fate has been employed by Nanometrics since July 1993 and was
elected Vice President and Director of International Sales in October 1997. From
July 1993 through July 1996, he served in various engineering and sales
management positions at the Company. Since July 1996 he has held the title of
Director of International Sales. Mr. Fate worked as an engineer at National
Semiconductor between 1983 and 1992.
Mr. Ingalls has been employed by Nanometrics since March 1995 and was
elected Vice President in October 1997, and was appointed Director of Marketing
in February 1998. During his employment at Nanometrics, Mr. Ingalls has served
as U.S. Sales and Product Manager, and most recently Director of North American
Sales. Prior to joining Nanometrics he served as a sales engineer for Nikon Inc.
from March 1993 to March 1995.
Mr. McGahan, Ph.D. was elected Vice President in October 1997. He
served as Applications Engineering Manager from October 1996 to October 1997.
Prior to that, Dr. McGahan served as Advanced Metrology Development Manager from
October 1995 to October 1996. From September 1987 to October 1995, Dr. McGahan
served as an engineer for the J.A. Woollam Co., Inc., a manufacturer of
spectroscopic ellipsometers. Dr. McGahan has published 46 papers relating to
ellipsometry magneto-optics and thermal characterization of materials.
Mr. Vincent Coates is the father of Mr. Norman Coates, a director of
the Company. There are no other family relationships among any of the executive
officers and directors of the Company. All directors hold office until the next
annual meeting of shareholders of the Company and until their successors have
been elected and qualified. Officers are elected by and serve at the discretion
of the Board of Directors.
I-11
ITEM 2. PROPERTIES
The Company's principal manufacturing and administrative facility is
located in Sunnyvale, California in a leased building with approximately 35,000
square feet. The lease on this building began in May 1992 and is scheduled to
expire in April 2002. The Company also leases warehouse facilities in Sunnyvale,
California and sales and service offices in Texas, Korea and Taiwan. Rent
expense for the Company's facilities was approximately $693,000 in 1998.
The Company, through its Japanese subsidiary, owns a 15,000 square foot
facility in Narita, Japan. This facility is utilized by the Company's Japanese
subsidiary for sales, service, engineering and manufacturing. The Company's
Japanese subsidiary also leases three sales offices.
In September 1998, the Company's Korean subsidiary entered into a
two-year lease agreement for manufacturing facilities. The lease payments are
based on a percentage of net product sales, as defined. To date, no rent expense
has been incurred under the lease.
ITEM 3. LEGAL PROCEEDINGS
Some customers of the Company have received notices of infringement
from The Lemelson Medical, Education, & Research Foundation, A Limited
Partnership, alleging that equipment used in the manufacture of semiconductor
products infringes their patents. A number of these customers have notified the
Company that they may seek indemnification from the Company for any damages and
expenses resulting from this matter. Certain of the Company's customers have
engaged in litigation with the late Mr. Lemelson involving a number of his
patents and some of these cases have been settled. Although the ultimate outcome
of these matters is not presently determinable, there can be no assurance that
the resolution of all such pending matters will not have a material adverse
effect on the Company's business, financial condition or results of operations.
Based on industry practice, the Company believes that in most cases it could
obtain any necessary licenses or other rights on commercially reasonable terms,
but no assurance can be given that licenses would be available or would be on
acceptable terms, that litigation would not ensue or that damages for any past
infringement would not be assessed. Litigation may be necessary in the future to
enforce patents issued to the Company, to protect trade secrets of know-how
owned by the Company, to defend the Company against claimed infringement of the
right of others or to determine the scope and validity of the proprietary rights
of others. Any such litigation could result in substantial cost and diversion of
effort by the Company, which could have a material adverse effect on the
Company's business, financial condition and results of operations. Moreover, an
adverse determination in such litigation could result in the Company's loss of
proprietary rights, subject the Company to significant liabilities to third
parties, require the Company to seek licenses from third parties or prevent the
Company from manufacturing or selling its products. The failure to obtain
necessary licenses or other rights or litigation arising out of infringement
claims could have an adverse material effect on the Company's business,
financial condition and results of operations.
I-12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
quarter ended December 31, 1998.
I-13
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS
The Company's Common Stock is traded on The Nasdaq Stock Market under
the symbol "NANO". The following table sets forth, for the periods indicated,
the range of high and low sale prices as reported on the Nasdaq Stock Market.
December 31 and January 2 were the last trading days of the 1998 and 1997 fiscal
years.
Year ended December 31, 1998 1997
- ----------------------- ---- ----
High Low High Low
---- --- ---- ---
First Quarter $ 10.75 $ 7.81 $ 7.75 $ 4.63
Second Quarter 10.13 7.85 7.38 4.63
Third Quarter 9.25 3.78 14.25 6.75
Fourth Quarter 8.88 4.31 13.38 7.69
As of March 5, 1999, there were approximately 130 shareholders of
record and approximately 2,000 beneficial shareholders. The last sale price
reported on the Nasdaq Stock Market on March 5, 1999 was $7.75 per share.
The Company has never paid cash dividends. It is the present policy of
the Company's Board of Directors to retain earnings to finance expansion of the
Company's operations, and the Company does not expect to pay dividends in the
foreseeable future.
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 Notes
thereto included elsewhere in this Annual Report on Form 10-K. The balance sheet
information as of December 31, 1998 and 1997 and the statement operations data
set forth below for 1998, 1997, and 1996 are derived from the audited
consolidated financial statements included elsewhere in this Annual Report on
Form 10-K. The balance sheet information as of December 31, 1996, 1995 and 1994
and the statement of operations data for 1995 and 1994 are derived from audited
consolidated financial statements of the Company not included herein.
II-1
Years Ended December 31,
Statements of Operations Data --------------------------------------------------------
- ----------------------------- (In thousands, except per share data)
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Net revenues:
Product sales $ 29,718 $ 32,767 $ 24,603 $ 18,117 $ 9,655
Service 3,546 3,890 5,733 4,642 3,924
-------- -------- -------- -------- --------
Total net revenues 33,264 36,657 30,336 22,759 13,579
-------- -------- -------- -------- --------
Cost and expenses:
Cost of product sales 13,002 12,092 10,109 8,189 5,128
Cost of service 3,669 3,632 4,088 3,406 2,862
Research and development 4,206 2,986 2,754 2,631 2,405
Acquired in-process research and
development 1,421 -- -- -- --
Selling 5,728 6,050 4,696 3,712 2,946
General and administrative 2,828 2,765 2,476 2,180 2,469
-------- -------- -------- -------- --------
Total costs and expenses 30,854 27,525 24,123 20,118 15,810
-------- -------- -------- -------- --------
Income (loss) from operations 2,410 9,132 6,213 2,641 (2,231)
-------- -------- -------- -------- --------
Other income (expense):
Interest income 572 535 390 302 93
Interest expense (108) (110) (92) (152) (49)
Other, net 64 (175) 146 674 141
-------- -------- -------- -------- --------
Total other income, net 528 250 444 824 185
-------- -------- -------- -------- --------
Income (loss) before income taxes 2,938 9,382 6,657 3,465 (2,046)
Provision (benefit) for income taxes 1,108 3,625 2,664 (812) 28
-------- -------- -------- -------- --------
Net income (loss) $ 1,830 $ 5,757 $ 3,993 $ 4,277 $ (2,074)
======== ======== ======== ======== ========
Net income (loss) per share:
Basic $ .21 $ 0.69 $ 0.50 $ 0.56 $ (0.28)
======== ======== ======== ======== ========
Diluted $ .20 $ 0.65 $ 0.47 $ 0.52 $ (0.28)
======== ======== ======== ======== ========
Shares used in per share computation:
Basic 8,635 8,325 8,047 7,604 7,304
======== ======== ======== ======== ========
Diluted 9,041 8,820 8,524 8,280 7,304
======== ======== ======== ======== ========
As of December 31
---------------------------------------------------
(In thousands)
Balance Sheet Data 1998 1997 1996 1995 1994
- ------------------ ---- ---- ---- ---- ----
Cash, cash equivalents and
short-term investments $11,431 $13,251 $ 8,382 $ 8,083 $ 2,628
Working capital 30,621 28,653 22,613 18,338 10,205
Total assets 39,305 36,243 29,964 25,167 15,786
Debt Obligations 2,496 2,568 3,296 3,528 421
Shareholders' equity 32,010 28,528 22,060 17,574 12,995
II-2
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
Nanometrics is a leading manufacturer of thin film measurement systems
for the electronics industry. The Company's primary customers are manufacturers
of semiconductors, magnetic recording heads and flat panel displays.
Nanometrics' film measurement systems use wide wavelength range, high
sensitivity optics, proprietary computer software and patented technology to
measure thickness, uniformity and chemical properties of film deposited on
silicon and other substrates. The primary applications of these systems is to
precisely monitor production processes employed in the fabrication of integrated
circuits, magnetic recording heads used in disk drives and flat panel displays
commonly used in laptop computers. The Company has made several strategic
changes in the business over the past several years, which have positioned the
Company to further participate in these markets. Such changes include: (i) a
shift to direct sales from third-party representatives in Asia, the United
Kingdom and the United States, (ii) an increased emphasis on product
development, manufacturing and direct sales in Japan, (iii) a decision to
outsource certain system components such as robotics, enabling the Company to
leverage its technical resources, (iv) the development of new products for the
semiconductor, magnetic recording head and flat panel display markets including
products that can be used for 300mm wafers and chemical mechanical polishing,
and (v) the acquisition of the overlay registration product line (see Note 2 of
Notes to Consolidated Financial Statements). These changes have contributed to
revenue growth from $13.6 million in 1994 to $33.3 million in 1998. As a result
of the current semiconductor industry downturn, revenues in the second half of
1998 decreased approximately 44% from the first half of the year resulting in an
overall decline for the year of 9% compared to 1997.
The Company's business is dependent upon the capital expenditures of
manufacturers of: (i) semiconductors, (ii) magnetic recording heads for the
read/write function on disk drives, and (iii) flat panel displays. The demand by
such manufacturers is, in turn, dependent on the current and future market
demand for (i) semiconductors and products utilizing semiconductors, (ii) disk
drives and computers that utilize disk drives, and (iii) flat panel displays for
use in laptop computers, pagers, cell phones, and a variety of other
applications where portability and low power consumption are important. The
increasing complexity of the manufacturing processes for semiconductors,
magnetic recording heads, and flat panel displays is also an important factor in
the demand for the Company's thin film measurement products. The Company
believes that its diversification through multiple industry applications of its
technology increases the total available market for its products and reduces, to
an extent, its exposure to the cyclicality of any individual industry segment.
For example, in fiscal 1996, a decline in sales to manufacturers of
semiconductors was offset by increased sales to manufacturers of magnetic
recording heads and flat panel displays. However, the prolonged economic
downturn in Asia has affected the Company's markets and has contributed to the
current semiconductor slowdown which has had an adverse impact on the Company's
1998 operations. A high degree of uncertainty exists regarding the length and
severity of the current industry downturn. For this and other reasons, the
Company's results of operations for 1998 are not necessarily indicative of
future operating results.
The Company derives its revenues from product sales and service, which
includes sales of accessories and service to the installed base of products. In
1998, the Company derived 89.3% of its total net revenues from product sales and
10.7% of its total net revenues from services. Revenues from product sales and
replacement and spare parts are recognized at the time of shipment.
II-3
Revenues from service work are recognized when performed. See Note 1 of Notes to
Consolidated Financial Statements.
The Company derives a substantial portion of its revenues from the sale
of a relatively small number of systems. As a result, a small change in the
number of systems actually shipped may cause significant changes in revenues in
any particular quarter. The Company's backlog at the beginning of a quarter
typically does not include all sales required to achieve the Company's revenue
objective for that quarter. Moreover, all customer purchase orders are subject
to cancellation or rescheduling by the customer with minimal penalties.
Consequently, the Company depends on shipping products in the same quarter that
the purchase order is received. The failure of the Company to receive
anticipated orders or delays in shipments may cause quarterly net revenues to
fall significantly short of the Company's objectives, which would adversely
affect the Company's business, financial condition and results of operations.
The Company believes that its quarterly and annual revenues, expenses
and operating results could vary significantly in the future and that
period-to-period comparisons should not be relied upon as indications of future
performance. There can be no assurance that the Company will grow in future
periods or that it will sustain its level of net revenues or its rate of revenue
growth on a quarterly or annual basis. The Company may, in some future quarter,
have operating results that will be below the expectations of stock market
analysts and investors. In such event, the price of the Company's Common Stock
would be materially adversely affected. See "Factors That May Affect Future
Operating Results-Significant Fluctuations in Operating Results."
Results of Operations
Total Net Revenues. Total net revenues decreased 9.3% from $36.7
million in 1997 to $33.3 million in 1998. Product sales decreased by 9.3% from
$32.8 million in 1997 to $29.7 million in 1998. The decrease in product sales
resulted from slower worldwide demand for and decreased shipments of the
Company's products, especially in the U.S. and in the Far East. Service revenue
decreased 8.8% from $3.9 million in 1997 to $3.5 million in 1998. The decrease
in service revenue is primarily attributable to lower sales of parts, services
and accessories in Asia and the U.S. in 1998 due in part to increased
functionality and reliability of the Company's newer products. Total net
revenues increased 20.8% from $30.3 million in 1996 to $36.7 million in 1997.
Product sales increased by 33.2% from $24.6 million in 1996 to $32.8 million in
1997. The increase in product sales resulted from stronger worldwide demand for
and increased shipments of the Company's products, especially its automated
products. Service revenue decreased 32.1% from $5.7 million in 1996 to $3.9
million in 1997. The decrease in service revenue is primarily attributable to
lower sales of parts, services and accessories in Asia and the U.S. in 1997 due
in part to increased functionality and reliability of the Company's new
products. International revenues, which includes sales by the Company's foreign
subsidiaries, constituted approximately 61.8%, 60.3% and 52.5% of total net
revenues for 1998, 1997 and 1996, respectively. In 1998, the Company experienced
a 12.7% decrease in domestic revenues from $14.5 million in 1997 to $12.7
million in 1998, while international revenues decreased 7.0% from $22.1 million
in 1997 to $20.6 million in 1998. The Company's 1997 domestic revenues of $14.5
million remained consistent with $14.4 million in 1996, while 1997 international
revenues increased 39.0% from $15.9 million in 1996 to $22.1 million in 1997.
Gross Profit. The product gross profit margin decreased from 63.1% in
1997 to 56.2% in 1998. The decrease was caused primarily by lower sales volumes
in 1998 resulting in higher per unit manufacturing costs. The service gross
profit margin decreased from 6.6% in 1997 to a loss of 3.5% in 1998. The
decrease was primarily attributable to the decline in the sales of accessories
and parts
II-4
while fixed service costs increased slightly to support the Company's growing
installed base of systems at customer locations in 1998. Product gross profit
margin increased from 58.9% in 1996 to 63.1% in 1997. The increase was caused
primarily by higher sales volumes in 1997 resulting in lower per unit
manufacturing costs. The service gross margin decreased from 28.7% in 1996 to
6.6% in 1997. The decrease was primarily attributable to the decline in the
sales of accessories and upgrades while fixed service costs increased to support
the Company's growing installed base of systems at customer locations in 1997.
Research and Development. Research and development expenses increased
40.9% from $3.0 million in 1997 to $4.2 million in 1998 due to the development
of the Company's new Metra overlay registration product line and its new
NanoSpec 9000 integrated dry wafer thickness metrology product line. Research
and development expenses increased by 8.4% from $2.8 million in 1996 to $3.0
million in 1997. The Company is committed to the development of new and enhanced
products and believes that new product introductions are required for the
Company to maintain its competitive position. During 1998, research and
development expenses represented 12.6% of total net revenues, compared to 8.1%
and 9.1% in 1997 and 1996, respectively.
Acquired In-Process Research and Development. In the first quarter of
1998, the Company paid approximately $3.2 million for the assets and technology
related to the Metra product line from Optical Specialties Inc. Of this purchase
price, $1,421,000 related to the value of in-process research and development
that had no alternative future use and was charged to expense in the
accompanying consolidated statement of income for the year ended December 31,
1998. The Company's increase in research and development expenses discussed
above is primarily attributable to efforts to bring the acquired in-process
technology to completion.
Selling. Selling expenses decreased 5.3% from $6.1 million in 1997 to
$5.7 million in 1998 primarily because of lower commission expenses and other
expenses associated with lower sales levels in 1998. Selling expenses increased
28.8% from $4.7 million in 1996 to $6.1 million in 1997 primarily because of
higher commission expenses resulting from higher sales levels, the addition of
sales and marketing staff and the opening of an office in Scotland in 1997.
During 1998 selling expenses represented 17.2% of total net revenues, compared
to 16.5% and 15.5% in 1997 and 1996, respectively.
General and Administrative. General and administrative expenses in 1998
remained essentially unchanged from 1997 at $2.8 million. General and
administrative expenses increased 11.7% from $2.5 million in 1996 to $2.8
million in 1997 as a result of higher spending associated with the increase in
total net revenues. During 1998 general and administrative expenses represented
8.5% of total net revenues, compared to 7.5% and 8.2% in 1997 and 1996,
respectively.
Total Other Income, Net. Total other income, net increased 111.2% from
$250,000 in 1997 to $528,000 in 1998 primarily due to lower exchange rate losses
in 1998. Total other income, net decreased 43.7% from $444,000 in 1996 to
$250,000 in 1997 primarily due to higher royalty income and exchange rate gains
in the prior year.
Income Taxes. The Company's effective income tax rate decreased from
38.6% in 1997 to 37.7% in 1998 primarily as a result of income tax benefits
realized from net operating losses in foreign tax jurisdictions. The Company's
effective income tax rate decreased from 40.0% in 1996 to 38.6% in 1997
primarily due to an increased benefit from the Company's foreign sales
corporation. The effective income tax rates in 1998, 1997 and 1996 exceed the
U.S. statutory rate due primarily to state income taxes partially offset by
realization of foreign sales corporation benefit.
II-5
Income. The Company's income from operations was $2.4 million and net
income was $1.8 million or $0.20 per diluted share in 1998 compared to income
from operations of $9.1 million and net income of $5.8 million or $0.65 per
diluted share in 1997 and an income from operations of $6.2 million and net
income of $4.0 million or $0.47 per diluted share in 1996. The impact of
inflation on the Company's results of operations has not been significant.
Liquidity and Capital Resources
At December 31, 1998, the Company had working capital of $30.6 million
compared to $28.7 million at December 31, 1997. The current ratio at December
31, 1998 was 7.4 to 1. The Company believes working capital including cash, cash
equivalents and short-term investments of $11.4 million will be sufficient to
meet its needs at least through the next twelve months. Operating activities
during 1998 provided net cash of $885,000 primarily from net income partially
offset by working capital requirements. Investing activities used cash of $3.8
million, primarily to purchase the Metra product line (see Note 2 of Notes to
Consolidated Financial Statements) and to fund net purchases of short-term
investments. Financing activities provided cash of $801,000 primarily from the
sale of shares under the employee stock purchase and option plans.
During 1997, operating activities provided net cash of $4.2 million
primarily from net income partially offset by working capital requirements.
Investing activities used cash of $3.1 million, primarily to purchase short-term
investments in the U.S. Financing activities provided cash of $590,000 from the
sale of shares under the employee stock purchase and option plans. During 1996,
operating activities provided cash of $356,000 primarily from net income
partially offset by working capital requirements. Investing activities used cash
of $2.6 million, primarily from the purchase of short-term investments in the
U.S. Financing activities provided cash of $358,000 primarily from the sale of
shares under the employee stock purchase and option plans.
The Company has evaluated and will continue to evaluate the acquisition
of products, technologies or businesses that are complementary to the Company's
business. These activities may result in product and business investments. For
example, as discussed in Note 2 of Notes to Consolidated Financial Statements,
in March 1998, the Company purchased from Optical Specialties, Inc. a metrology
system product line and related assets. Under the agreement, the Company paid
approximately $3.2 million in cash for the assets and technology. The Company
funded this acquisition from its cash equivalents, short-term investments and
cash flows from operations.
Recently Issued Accounting Standard
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Gains or losses resulting from changes in the values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. SFAS No. 133 will be effective for the Company's
fiscal year ending December 31, 2000. Management believes that this statement
will not have a significant impact on the Company's financial position, results
of operations or cash flows.
II-6
Information With Respect To Forward-Looking Statements
This report contains statements that constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1993, as
amended (the "Securities Act"), and Section 21E if the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). The words "expect," "estimate,"
"anticipate," "predict," `believe," and similar expressions and variations
thereof are intended to identify forward-looking statements. Such statements
appear in a number of places in this report and include statements regarding the
intent, belief or current expectations of the Company with respect to, among
other things: (i) trends affecting the Company's financial condition or results
of operation; (ii) the Company's financing plans; and (iii) the Company's
business and growth strategies. Any such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties, and actual
results may differ materially from those projected in the forward-looking
statements as a result of various factors. The accompanying information
contained in this report including without limitation, the information set forth
below under "Factors That May Affect Future Operating Results," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business," identify important factors that could cause such differences. The
Company undertakes no obligation to publicly update or revise forward looking
statements made in this report to reflect events or circumstances after the date
of this report or to reflect the occurrence of unanticipated events.
Factors That May Affect Future Operating Results
The following risk factors should be considered by shareholders of and
by potential investors in the Company in evaluating the Company, its business,
financial condition and business prospects.
Significant Fluctuations in Operating Results. The Company's operating
results have fluctuated significantly in the past and may fluctuate
significantly in the future. The Company anticipates that the factors that may
affect its future operating results include the following: customer demand for
the Company's products, which is affected by factors including the cyclicality
of the semiconductor, magnetic recording head and flat panel display industries
served by the Company, patterns of capital spending by customers, technological
changes in the markets served by the Company and its customers, market
acceptance of products of both the Company and its customers, the timing,
cancellation or delay of customer orders and shipments, competition, including
competitive pressures on product prices and changes in pricing by the Company's
customers or suppliers, fluctuations in foreign currency exchange rates,
particularly the Japanese yen, the proportion of direct sales versus sales
through distributors and representatives, market acceptance of new and enhanced
versions of the Company's products, the timing of new product announcements and
releases of products by the Company or its competitors, including the Company's
ability to design, introduce and manufacture new products on a timely and cost
effective basis, the size and timing of acquisitions of businesses, products or
technologies and fluctuations in the availability and cost of components and
subassemblies. Gross margins may vary materially from quarter to quarter or year
to year, based on a number of factors, including the mix and average selling
prices of products sold and the absorption of fixed operating costs.
The impact of the factors listed above and other factors on the
Company's revenues, financial condition and operating results in any future
period cannot be forecasted with any degree of certainty. Based upon these
factors, the Company believes that its quarterly and annual revenues, expenses
and operating results could vary significantly in the future and that
period-to-period comparisons should not be relied upon as indications of future
performance. There can be no assurance that the Company will grow in future
periods or that it will sustain its level of revenues or its rate of revenue
growth on a quarterly or annual basis. It is possible that, in some future
quarter, the Company's operating results could be below the expectations of
stock market analysts and
II-7
investors. In such event, the price of the Company's Common Stock could be
materially adversely affected.
Dependence on Limited Number of Systems Sales; Backlog. The Company
derives a substantial portion of its revenues from the sale of a relatively
small number of systems. As a result, a small change in the number of systems
actually shipped may cause significant changes in revenues in any particular
quarter. Customer purchase orders may be subject to cancellation or delay by the
customers with minimal penalties. Moreover, the Company's backlog at the
beginning of a quarter typically does not include all sales required to achieve
the Company's revenue objective for that quarter. Consequently, the Company
depends to an extent on shipping products in the same quarter that the purchase
order is received. The failure of the Company to receive anticipated orders or
delays in shipments may cause quarterly net revenues to fall significantly short
of the Company's objectives, which would adversely affect the Company's
business, financial condition and results of operations.
Cyclicality of Customer Industries. The Company's business depends in
large part upon the capital equipment expenditures of semiconductor
manufacturers, which in turn depends on the current and anticipated market
demand for integrated circuits and products utilizing integrated circuits. In
addition, the Company's business depends upon the construction of new
semiconductor fabrication facilities and improvements to existing fabrication
facilities to reduce unit costs or to respond to technological innovation. The
semiconductor industry has been cyclical in nature and historically has
experienced periodic downturns. Such downturns are characterized by diminished
product demand, erosion of average selling prices and production over-capacity.
During downturns, manufacturers typically defer or cancel orders for equipment
to conserve cash and reduce expenses. There can be no assurance that the
Company's business, financial condition and results of operations will not be
adversely affected by future downturns in the semiconductor industry. In the
past, the Company has offset declines in orders of its products from the
semiconductor industry with increased sales to manufacturers of magnetic
recording heads and flat panel displays; however, the Company has not been able
to do so in the current semiconductor downturn. In addition, the magnetic
recording head and flat panel display industries are subject to similar cyclical
conditions that could materially affect the market for the Company's products
and the Company's business, financial condition and results of operations. The
Company may also experience substantial period-to-period fluctuations in future
operating results due to such industry conditions or events occurring in the
general economy. Even during periods of reduced revenues, in order to remain
competitive the Company will be required to continue to invest in research and
development and to maintain extensive ongoing worldwide customer service and
support capability, which could have a material adverse impact on the Company's
business financial condition and results of operations during industry downturns
or other periods of reduced revenues.
Lengthy Sales Cycle; Difficulties in Displacing Entrenched Competitors.
Sales of the Company's systems depend, in significant part, upon the decision of
prospective customers to increase their existing production capacity by building
and equipping new fabrication facilities or expanding existing facilities,
either of which typically involves a significant capital commitment. In view of
the significant investment involved in a system purchase, the Company may
experience delays in obtaining purchase orders while the customer plans for such
expansion, evaluates various thin film measurement systems of the Company and
its competitors and receive purchase approvals. Due to these and other factors,
the Company's systems typically have lengthy sales cycles during which the
Company may expend substantial funds and management effort. In addition, lengthy
sales cycles subject the Company to a number of significant risks, including
inventory obsolescence and fluctuations in operating results over which the
Company has little or no control. Customers often evaluate several suppliers'
systems before deciding on the type of thin film measurement system to use. The
Company believes that the customer generally relies upon that system for the
specific production line application and frequently will attempt to consolidate
its other thin film measurement system requirements with the same supplier.
Accordingly, the Company expects to experience
II-8
difficulty in selling to a particular customer for a significant period of time
if that customer already uses a competitor's thin film measurement system.
Highly Competitive Industry. The market for thin film measurement
systems is subject to intense competitive pressure and characterized by rapidly
evolving technology. The Company competes on a global basis with both larger and
smaller companies in the United States, Japan and Europe. The Company competes
primarily with thin film measurement products from KLA-Tencor Corporation,
Therma-Wave Inc., Rudolph Technologies, Dai Nippon Screen, Toray Industries,
Nova Measuring Instruments, and On-Line Technologies, as well as overlay
metrology products from KLA-Tencor, BioRad Laboratories, and Schlumberger. Many
of the Company's competitors have substantially greater financial, engineering,
manufacturing and marketing resources than the Company.
The Company expects its competitors to continue to improve the design
and performance of their current products and to introduce new products with
improved price and performance characteristics. For example, the Company expects
to face increased competition in the emerging market for 300 mm thin film
measurement systems. New product introductions and enhancements by the Company's
competitors could cause a significant decline in sales or loss of market
acceptance of the Company's systems. There can be no assurance that Company will
be able to compete successfully against current or future competitors. Increased
competitive pressure could lead to reduced demand and lower prices for the
Company's products, thereby materially adversely affecting the Company's
business, financial condition and results of operations.
Risks Associated with International Operations; Recent Economic Trends
in Asia. International revenues accounted for approximately 61.8% of the
Company's total net revenues for 1998. The Company anticipates that
international revenues will continue to account for a substantial portion of its
total net revenues in the foreseeable future. The Company's international
operations are subject to risks inherent in the conduct of international
business, including unexpected changes in regulatory requirements, exchange
rates, import or export requirements, tariffs and other barriers, political and
economic instability, limited intellectual property protection, difficulties in
collecting payments due from sales agents or customers, difficulties in managing
distributors or representatives, difficulties in staffing and managing foreign
subsidiary operations and potentially adverse tax consequences. Furthermore,
downturns in foreign capital markets could affect the Company's international
customers, which could have a material adverse effect on the Company's business,
financial condition and results of operations.
Recent economic trends, particularly in the Asia-Pacific marketplace,
have caused a heightened awareness of the impact of this portion of the world's
economy can have on the overall economy. As the Asia-Pacific market currently
represents a significant portion of the world's buying power, and approximately
46.5% of the Company's 1998 sales are to this region, changes in this area's
economic growth rate may impact suppliers of product in that market, which could
have a material adverse impact on the Company's business, financial condition
and results of operations. In addition, the future performance of the Company
will be dependent, in part, upon its ability to continue to compete successfully
in Asia, one of the largest markets for the Company's products. The Company's
ability to compete in this area in the future is dependent upon the continuation
of favorable trading relationships between the region (especially Japan, Korea
and Taiwan) and the United States and the continuing ability of the Company to
maintain satisfactory relationships with customers and potential customers in
the region. In addition, the Japanese market, which is important to the
Company's sales, has historically been difficult for non-Japanese companies to
penetrate. Although the Company has had a direct presence in Japan since 1985,
there can be no assurance that the Company will be able to maintain or improve
its competitive position in Japan.
Approximately 27.6% of the Company's total net revenues for 1998 were
generated by the Company's Japanese subsidiary and are denominated in Japanese
yen. A significant fluctuation in the exchange rate between the yen and the U.S.
dollar could result in a significant gain or loss being recorded in the
Company's consolidated statement of income. A decline in the exchange rate of
the
II-9
yen against the U.S. dollar would result in a decrease in consolidated total net
revenues and consolidated net income, whereas an increase in the exchange rate
of the yen against the U. S. dollar would result in an increase in consolidated
total net revenues and consolidated net income. Generally, a change in the
exchange rate would have a similar impact on the consolidated net income
associated with accounts due between the U.S. parent and the Japanese
subsidiary. The Company's international revenues in countries except Japan are
denominated in U.S. dollars and sales to customers may be affected by
fluctuations in exchange rates which could increase the sales price in local
currencies of the Company's products. Since the Company does not currently
engage in currency exchange rate hedging transactions, there can be no assurance
that fluctuations in currency exchange rates in the future will not have a
material adverse effect on the Company's business, financial condition and
results of operations. See Item 7A. "Quantitative and Qualitative Disclosures
About Market Risk."
Rapid Technological Change; Importance of Timely Product Introduction.
The film measurement industry is subject to rapid technological change and new
product introductions and enhancements. The Company believes that a key factor
in its growth in the past four years has been the success of new product
introductions, including the Model 8000 and Model 5500 introduced in 1995. A key
factor in the Company's ability to achieve continued growth will be the market
success of recent new product introductions, including products for 300 mm
wafers, overlay registration and integrated thin film measurements. The
Company's ability to remain competitive will depend in part upon its ability to
respond to technological change and develop new and enhanced systems and to
introduce these systems at competitive prices and in a timely and cost-effective
manner. New product introductions may contribute to fluctuations in quarterly
operating results, since customers may defer ordering product from the Company's
existing product line in anticipation of the introduction of the new product or
product enhancement. In addition, new product introductions or enhancements of
existing products by the Company's competitors could cause a decline in sales or
loss of market acceptance of the Company's existing products. The success of the
Company in developing, introducing and selling new and enhanced systems depends
upon a variety of factors, including product selections, timely and efficient
completion of product design and development, timely and efficient
implementation of manufacturing and assembly processes, effective sales and
marketing and product performance. Because new product development commitments
must be made well in advance of sales, new product decisions must anticipate
both the future demand for the products under development and the equipment
required to produce such products. If new products have reliability or quality
problems, reduced orders, higher manufacturing costs and additional service and
warranty expenses may result. There can be no assurance that the Company will be
successful in selecting, developing, manufacturing and marketing new products or
in enhancing existing products. If the Company does not successfully introduce
new products, the Company's business, financial condition and results of
operations could be materially adversely affected.
Uncertainty of Intellectual Property Rights. The Company's future
success and competitive position depends in large part on the Company's ability
to obtain and maintain certain proprietary technology used in its systems. The
Company relies on a combination of patents, trademarks, copyrights, trade secret
laws and confidentiality procedures to protect its proprietary rights. There can
be no assurance that the Company will be able to protect its technology or that
competitors will not be able to develop similar technology independently. In
addition, the laws of certain foreign countries may not protect the Company's
intellectual property rights to the extent as do the laws of the United States.
The validity of the Company's patents has not been adjudicated by any
court. Competitors may bring legal challenges to the validity of one or more of
these patents, or attempt to circumvent the patents. There can be no assurance
that Company's patents will be sufficiently broad to protect the Company's
technology, or that any existing or future patents will not be challenged,
invalidated or circumvented, or that the rights granted thereunder will provide
meaningful competitive advantages to the Company. Furthermore, there can be no
assurance that others will not
II-10
independently develop similar products, duplicate the Company's products, or if
patents are issued to the Company, design around such patents. The Company does
not believe that its products infringe any patents or proprietary rights of
others. However, there can be no assurance that such infringements do not exist
or will not occur in the future. As is typical in the high technology industry,
the Company has from time to time received, and may in the future receive,
communications alleging possible infringement of patents or other intellectual
property rights of others. The Company investigates all such notices and
responds as appropriate.
Some customers of the Company have received notices of infringement
from The Lemelson Medical, Education, & Research Foundation, A Limited
Partnership, alleging that equipment used in the manufacture of semiconductor
products infringes their patents. A number of these customers have notified the
Company that they may seek indemnification from the Company for any damages and
expenses resulting from this matter. Certain of the Company's customers have
engaged in litigation with the late Mr. Lemelson involving a number of his
patents and some of these cases have been settled. Although the ultimate outcome
of these matters is not presently determinable, there can be no assurance that
the resolution of all such pending matters will not have a material adverse
effect on the Company's business, financial condition or results of operations.
Based on industry practice, the Company believes that in most cases it could
obtain any necessary licenses or other rights on commercially reasonable terms,
but no assurance can be given that licenses would be available or would be on
acceptable terms, that litigation would not ensue or that damages for any past
infringement would not be assessed. Litigation may be necessary in the future to
enforce patents issued to the Company, to protect trade secrets of know-how
owned by the Company, to defend the Company against claimed infringement of the
right of others or to determine the scope and validity of the proprietary rights
of others. Any such litigation could result in substantial cost and diversion of
effort by the Company, which could have a material adverse effect on the
Company's business, financial condition and results of operations. Moreover,
adverse determination in such litigation could result in the Company's loss of
proprietary rights, subject the Company to significant liabilities to third
parties, require the Company to seek licenses from third parties or prevent the
Company from manufacturing or selling its products. The failure to obtain
necessary licenses or other rights or litigation arising out of infringement
claims could have adverse material effect on the Company's business, financial
condition and results of operations.
Sole or Limited Sources of Supply; Reliance on Subcontractors;
Complexity in Manufacturing Processes. The Company is relying increasingly on
outside vendors to manufacture many components and subassemblies. Certain
components, subassemblies and services necessary for the manufacture of the
Company's systems are obtained from a sole supplier or limited group of
suppliers. For example, the Company relies on Kensington Laboratories for the
robotics incorporated in the Company's automated systems. The Company does not
maintain any long-term supply agreements with Kensington Laboratories or any of
its suppliers. The Company has entered into an agreement with J.A. Woollam
Company for the spectroscopic ellipsometer component incorporated in the
Company's advanced measurement systems. The Company's reliance on sole or a
limited group of suppliers involves several risks, including a potential
inability to obtain an adequate supply of required components, reduced control
of pricing and timely delivery of components and subassemblies and suppliers'
potential inability to develop technologically advanced products to support the
Company's growth and development of new systems. Because the manufacturing of
certain of these components and subassemblies involves extremely complex process
and requires long lead times, there can be no assurance that delays or shortages
caused by suppliers will not occur in the future. The Company believes that
alternative sources could be obtained and qualified, if necessary, for most sole
and limited source parts. However, if the Company were forced to seek
alternative sources of supply or to manufacture such components or subassemblies
internally, it may be required to redesign its systems, which could prevent the
Company from shipping its systems to its customers on a timely basis. Certain of
the Company's suppliers have relatively limited financial and other resources.
Any inability to obtain adequate
II-11
deliveries or any other circumstance that would restrict the Company's ability
to ship its products, could damage relationships with current and prospective
customers and could have a material adverse impact on the Company's business,
financial condition and results of operations.
Information Systems and the Year 2000. Many computer systems are
expected to experience problems handling dates around the year 2000 ("Y2K"). The
Y2K issue is the result of many currently installed computer programs being
written using two digits rather than four to define the applicable year. As a
result, these computer programs are unable to distinguish between 21st century
dates and 20th century dates and could cause computer system failures or
miscalculations that result in significant business disruptions. Described below
are the actions the Company has taken, and plans to take, to address the
potential problems resulting as systems attempt to handle dates around the
millennium.
State of Readiness The Company's upper management has discussed and agreed upon
a comprehensive plan to address its Y2K issues. The Y2K plan includes the
following activities: gathering data and taking inventory; testing systems and
products to evaluate Y2K compliance; execution of remediation activities to fix
non-compliant products and systems; and monitoring and testing products and
systems on an ongoing basis. The major business areas impacted are:
Products: Many of the Company's products incorporate computer software to
control certain add-on features and functionality. The Company's products
are measurement tools and Y2K issues arise in the Company's products where
database functions are used (e.g. storage of measurement data). The Company
has completed testing and evaluation of its products for Y2K compliance. As
a result of such evaluation, the Company believes that: (i) most of its
current product lines are Y2K compliant; (ii) upgrades are currently
available or will be available by mid-1999 for non-Y2K compliant automated
products; and (iii) as database functionality is not used in certain older
obsolete products and in non-automated systems, Y2K compliance is not
believed to be an issue.
Procurement: Critical suppliers have been contacted and status of products
and internal systems has been verified. The Company is in the process of
evaluating the balance of its supplier base. This evaluation is expected to
be completed by May 31, 1999.
Manufacturing: The Company's assembly and test equipment is scheduled for
ongoing upgrades to Y2K compliant configurations through mid-1999. The
Company's primary manufacturing application software system is scheduled to
be upgraded to be Y2K compliant by mid-1999. The cost of such upgrade is
included in the estimate of the costs to upgrade the information technology
as discussed below.
Information Technology Systems ("IT"): The Company has conducted a survey
of its IT hardware and software and has identified substantially all
non-Y2K compliant hardware and software. The Company has purchased a Y2K
upgrade license from its IT vendor and expects to implement the upgrade by
mid-1999. The Company currently estimates the cost of the upgrade license
and the related internal and external costs to implement will approximate
$140,000.
Facilities and Infrastructure: An assessment of the Y2K readiness of owned
and leased assets has been performed and systems which will require upgrade
or replacement include the security and card key system and the voicemail
system.
Costs While the Company has not yet completed the entire evaluation of the
required activities to address the Y2K issues, the Company currently believes
that the estimated costs of Y2K compliance efforts are not expected to be
material to the Company.
II-12
Risks The Company believes the most reasonably likely worst case Y2K scenarios
include the following:
Customers could change their buying patterns in a number of ways, including
accelerating or delaying purchases of, or replacement of, the Company's products
and services.
The Company could experience a disruption in service to its customers as a
result of the failure of third party products, including the following: third
party products which are non-compliant and are incorporated into the Company's
products could cause the products to fail; a breakdown in telephone, e-mail,
voicemail, could impact the responsiveness of the Company's customer service
department; Y2K problems at a number of the Company's suppliers including banks,
telephone companies and the United States Postal Service could have a pervasive
impact on the Company's business as a whole; and product features that rely on
date parameters (generally date dependent routings and operating reports) could
malfunction.
Although the Company's products are undergoing both Y2K specific, and its normal
testing procedures, its products may not contain all of the necessary date code
or other changes to operate in the year 2000. Any failure of such products to
perform could result in: claims and lawsuits against the Company; significantly
impaired customer satisfaction resulting in customers withholding cash owed to
the Company and delaying or canceling orders; and managerial and technical
resources being diverted away from product development and other business
activities.
Any of the above stated consequences, in addition to others which the Company
cannot yet foresee, could have a significant adverse impact on the Company's
business, operating results and financial condition.
Contingency Plan The Company currently believes that its plan is adequate to
address its Y2K issues, and accordingly, does not believe that it is practical
to develop a comprehensive contingency plan. Based on the current plan's
timeline, the Company believes that it would be able to determine the
effectiveness of the current plan by mid-1999. As such, in the event that its
current plan is not adequate to address the Y2K issues, the Company believes
that there will be adequate time to establish and implement a contingency plan.
Once a contingency plan is implemented, however, the Company cannot be certain
that such a plan would prevent significant Y2K problems from having a material
adverse effect on the Company's business, operating results and financial
condition.
Dependence Upon Key Employees. Because of the specialized nature of the
Company's business, the Company's future performance depends upon the continued
service of members of the Company's senior management and other key research and
development and sales and marketing personnel. The loss of any of such persons
could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company does not have employment
contracts with any of its employees in the United States. The Company believes
that its future success will depend upon it continuing ability to identify,
attract, train and retain highly skilled managerial, technical, sales and
marketing personnel in key areas worldwide. Hiring for such personnel is highly
competitive. There can be no assurance that the Company will be able to continue
to attract, assimilate and retain the qualified personnel necessary for the
development of its business. The failure to recruit additional key personnel in
a timely manner, or the failure to retain new or current personnel, would have a
material adverse effect on the Company's business, financial condition and
results of operations.
II-13
Impact of Industry Consolidation. The Company believes that the thin
film measurement system market is undergoing a period of consolidation, which
could impact the Company's future success. A number of suppliers have been
acquired by larger equipment manufacturers. For example, in 1997 KLA Corporation
acquired a competitor of the Company, Tencor Corporation, to form KLA-Tencor
Corporation. The Company believes that similar acquisitions and business
combinations involving competitors and potential competitors of the Company may
occur in the future. Such acquisitions could adversely impact the Company's
competitive position by enabling the Company's competitors and potential
competitors to expand their product offerings and provide direct customer
support worldwide, which could afford them an advantage in meeting customers'
needs, particularly with those customers that seek to consolidate their capital
equipment requirements with the same vendor. The greater resources, including
financial, marketing and support resources, of competitors engaged in these
acquisitions could permit them to accelerate the development and
commercialization of new competitive products and the marketing of existing
competitive products to their larger installed bases. Accordingly, such business
combinations and acquisitions by competitors and potential competitors could
have a material adverse effect on the Company's business, financial condition
and results of operations. In addition, the Company has in the past considered
consolidation with other companies and could consider such consolidations in the
future in order to enhance the Company's competitive position or respond to
competitive pressures.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to financial market risks, which include changes
in foreign currency exchange rates and interest rates. The Company does not use
derivative financial instruments. Instead, the Company actively manages the
balances of current assets and liabilities denominated in foreign currencies to
minimize currency fluctuation risk. As a result, a 10% change in the foreign
currency exchange rates would not have a material impact on the Company's
results of operations. The Company's investments in marketable securities are
subject to interest rate risk but due to the short-term nature of these
investments, interest rate changes would not have a material impact on their
value. The Company also has fixed rate debt obligations in Japan that are
subject to interest rate risk. At December 31, 1998, the Company's total debt
obligation was $3,820,000 while the long-term portion is $2,496,000. The Company
does not actively manage the risk associated with these obligations because the
impact of interest rate changes would not have a material impact on the
Company's results of operations.
II-14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements filed herewith are listed in the index in Item 14.
II-15
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Nanometrics Incorporated:
We have audited the accompanying consolidated balance sheets of Nanometrics
Incorporated and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of income, shareholders' equity and comprehensive
income, and cash flows for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Nanometrics Incorporated and
subsidiaries at December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Jose, California
February 16, 1999
II-16
NANOMETRICS INCORPORATED
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997 (In thousands, except share amounts)
- --------------------------------------------------------------------------------
ASSETS 1998 1997
CURRENT ASSETS:
Cash and cash equivalents $ 1,518 $ 3,656
Short-term investments 9,913 9,595
Accounts receivable, net of
allowances of $420 and $413
In 1998 and 1997, respectively
8,458 10,225
Inventories 11,719 7,138
Deferred income taxes 1,441 2,094
Prepaid expenses and other 2,328 1,075
-------- --------
Total current assets 35,377 33,783
PROPERTY, PLANT AND EQUIPMENT, Net 2,481 2,187
DEFERRED INCOME TAXES 560 13
OTHER ASSETS 887 260
-------- --------
TOTAL $ 39,305 $ 36,243
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,395 $ 1,889
Accrued payroll and related expenses 317 596
Other current liabilities 1,720 1,476
Income taxes payable -- 565
Current portion of debt obligations 1,324 604
-------- --------
Total current liabilities 4,756 5,130
DEFERRED RENT 43 17
DEBT OBLIGATIONS 2,496 2,568
-------- --------
Total liabilities 7,295 7,715
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY:
Common stock, no par value;
25,000,000 shares authorized;
8,690,643 and 8,521,484 outstanding
in 1998 and 1997, respectively 14,170 13,151
Retained earnings 17,974 16,144
Accumulated other comprehensive loss (134) (767)
-------- --------
Total shareholders' equity 32,010 28,528
-------- --------
TOTAL $ 39,305 $ 36,243
======== ========
See notes to consolidated financial statements
II-17
NANOMETRICS INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(In thousands, except per share amounts)
- --------------------------------------------------------------------------------
1998 1997 1996
NET REVENUES:
Product sales $ 29,718 $ 32,767 $ 24,603
Service 3,546 3,890 5,733
-------- -------- --------
Total net revenues 33,264 36,657 30,336
-------- -------- --------
COSTS AND EXPENSES:
Cost of product sales 13,002 12,092 10,109
Cost of service 3,669 3,632 4,088
Research and development 4,206 2,986 2,754
Acquired in-process research and development 1,421 -- --
Selling 5,728 6,050 4,696
General and administrative 2,828 2,765 2,476
-------- -------- --------
Total costs and expenses 30,854 27,525 24,123
-------- -------- --------
INCOME FROM OPERATIONS 2,410 9,132 6,213
-------- -------- --------
OTHER INCOME (EXPENSE):
Interest income 572 535 390
Interest expense (108) (110) (92)
Other, net 64 (175) 146
-------- -------- --------
Total other income, net 528 250 444
-------- -------- --------
INCOME BEFORE INCOME TAXES 2,938 9,382 6,657
PROVISION FOR INCOME TAXES 1,108 3,625 2,664
-------- -------- --------
NET INCOME $ 1,830 $ 5,757 $ 3,993
======== ======== ========
NET INCOME PER SHARE:
Basic $ 0.21 $ 0.69 $ 0.50
======== ======== ========
Diluted $ 0.20 $ 0.65 $ 0.47
======== ======== ========
SHARES USED IN PER SHARE COMPUTATION:
Basic 8,635 8,325 8,047
======== ======== ========
Diluted 9,041 8,820 8,524
======== ======== ========
See notes to consolidated financial statements
II-18
NANOMETRICS INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(In thousands, except share amounts)
- -------------------------------------------------------------------------------------------------------------------------------
Accumulated
Common Stock Other Total Compre-
-------------------------- Retained Comprehensive Shareholders' hensive
Shares Amount Earnings Income (loss) Equity Income
BALANCES, January 1, 1996 $7,883,910 $ 10,983 $ 6,394 $ 197 $ 17,574
Comprehensive income:
Net income -- -- 3,993 -- 3,993 $ 3,993
Other comprehensive income, net of tax:
Foreign currency translation
adjustments -- -- -- (357) (357) (357)
----------
Comprehensive income -- -- -- -- -- $ 3,636
==========
Issuance of common stock under
employee stock purchase plan 25,627 115 -- -- 115
Issuance of common stock under
stock option plan 348,524 233 -- -- 233
Tax benefit of employee stock
transactions -- 502 -- -- 502
---------- ---------- ---------- ---------- ----------
BALANCES, December 31, 1996 8,258,061 11,833 10,387 (160) 22,060
Comprehensive income:
Net income -- -- 5,757 -- 5,757 5,757
Other comprehensive income, net of tax:
Foreign currency translation
adjustments -- -- -- (607) (607) (607)
----------
Comprehensive income -- -- -- -- -- $ 5,150
==========
Issuance of common stock under
employee stock purchase plan 24,482 112 -- -- 112
Issuance of common stock under
stock option plan 238,941 478 -- -- 478
Tax benefit of employee stock
transactions -- 728 -- -- 728
---------- ---------- ---------- ---------- ----------
BALANCES, December 31, 1997 8,521,484 13,151 16,144 (767) 28,528
Comprehensive income:
Net income -- -- 1,830 -- 1,830 $ 1,830
Other comprehensive income, net of tax:
Foreign currency translation
adjustments -- -- -- 633 633 633
----------
Comprehensive income -- -- -- -- -- $ 2,463
==========
Issuance of common stock under
employee stock purchase plan 18,006 124 -- -- 124
Issuance of common stock under
stock option plan 151,153 576 -- -- 576
Tax benefit of employee stock
transactions -- 319 -- -- 319
---------- ---------- ---------- ---------- ----------
BALANCES, December 31, 1998 $8,690,643 $ 14,170 $ 17,974 $ (134) 32,010
========== ========== ========== ========== ==========
See notes to consolidated financial statements
II-19
NANOMETRICS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (In thousands)
- -----------------------------------------------------------------------------------------------------
1998 1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,830 $ 5,757 $ 3,993
Reconciliation of net income to net cash provided by
operating activities:
Depreciation and amortization 298 213 309
Deferred rent 26 13 --
Acquired in-process research and development 1,421 -- --
Deferred income taxes (573) (588) 263
Changes in assets and liabilities, net of effects of product
line acquisition:
Accounts receivable 2,805 93 (4,031)
Inventories (2,751) (2,322) (1,228)
Prepaid income taxes (1,325) -- --
Prepaid expenses and other 93 (218) (458)
Accounts payable, accrueds and other current liabilities (1,355) 1,238 111
Income taxes payable 416 26 1,397
-------- -------- --------
Net cash provided by operating activities 885 4,212 356
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (17,790) (18,152) (12,522)
Sales/maturities of short-term investments 17,472 15,214 10,321
Purchases of property, plant and equipment (167) (97) (270)
Other assets (50) (17) (128)
Product line acquisition (3,225) -- --
-------- -------- --------
Net cash used in investing activities (3,760) (3,052) (2,599)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt obligations 761 329 762
Repayments of debt obligations (660) (329) (752)
Sale of shares under employee stock purchase and
option plans 700 590 348
-------- -------- --------
Net cash provided by financing activities 801 590 358
-------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (64) 181 (15)
-------- -------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS (2,138) 1,931 (1,900)
CASH AND CASH EQUIVALENTS, Beginning of year 3,656 1,725 3,625
-------- -------- --------
CASH AND CASH EQUIVALENTS, End of year $ 1,518 $ 3,656 $ 1,725
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 92 $ 117 $ 118
======== ======== ========
Cash paid for income taxes $ 2,558 $ 4,192 $ 715
======== ======== ========
See notes to consolidated financial statements.
II-20
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Description of Business - Nanometrics Incorporated (the "Company") is a
manufacturer of film thickness and overlay/critical dimension metrology
systems. The Company's primary customers are manufacturers of
semiconductors, flat panel displays and disk drives. These film
measurement systems combine proprietary computer software and patented
optic technology to measure film thickness and uniformity as well as
chemical composition. The primary application of these systems is to
precisely monitor production processes employed in the fabrication of
integrated circuits, magnetic recording heads used in disk drives and flat
panel displays most commonly used in laptop computers.
Basis of Presentation - The consolidated financial statements include the
Company 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 generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Reclassifications - Certain prior year amounts in the accompanying
consolidated financial statements have been reclassified to conform to
current year presentation. These reclassifications had no effect on the
results of operations or financial position for any year presented.
Fiscal Year - The Company uses a 52/53 week fiscal year ending on the
Saturday nearest to December 31. Accordingly, fiscal years 1998, 1997 and
1996 ended on January 2, 1999, January 3, 1998 and December 28, 1996, and
consisted of 52, 53 and 52 weeks, respectively. For purposes of the
consolidated financial statements, the year end is denoted as December 31.
All references to years relate to fiscal years rather than calendar years.
Cash and 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. While the Company's intent is to hold such debt securities
to maturity, they are classified as available-for-sale as the Company may
sell the securities prior to maturity in order to take advantage of market
conditions. Available-for-sale securities at December 31, 1998 are stated
at cost which approximates fair market value. Realized gains and losses
are determined based on the specific identification method.
Fair Value of Financial Instruments - Financial instruments include cash
equivalents, short-term investments and debt obligations. Cash equivalents
are stated at fair market value based on quoted market prices. Short-term
investments are stated at cost which approximates fair market value. The
recorded carrying amount of the Company's debt obligations approximates
fair market value.
II-21
Inventories - Inventories are stated at the lower of cost (first-in,
first-out) or market.
Property, Plant and Equipment - Property, plant and equipment are stated
at cost. Depreciation is computed using straight line and accelerated
methods over the estimated useful lives of the assets ranging from three
to 45 years. Leasehold improvements are amortized over the shorter of the
estimated useful lives of the improvements or the lease term.
Goodwill and Intangible Assets - The Company amortizes goodwill and
intangible assets (included in other assets) using the straight-line
method over an estimated useful life of five years.
Long-Lived Assets - The Company evaluates long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable.
Income Taxes - Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for
income tax purposes, and tax credit carryforwards.
Revenue Recognition - Revenues from product sales are recognized at the
time of shipment. Revenues from service work is recognized when performed.
Revenue from service contracts is recognized ratably over the period of
the contract. The Company sells the majority of its products with a
one-year repair or replacement warranty and records a provision for
estimated claims at the time of sale.
Stock-Based Compensation - The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees."
Foreign Currency - The functional currencies of the Company's foreign
subsidiaries are the local currencies. Accordingly, translation
adjustments for the subsidiaries have been included in shareholders'
equity. Gains and losses from transactions denominated in currencies other
than the functional currencies of the Company or its subsidiaries are
included in other income and expense and consist of losses of $13,000 for
1998, $217,000 for 1997 and a gain of $39,000 for 1996, respectively.
Comprehensive Income - In 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income,"
which requires an enterprise to report, by major components and as a
single total, the change in net assets during the period from nonowner
sources. Comprehensive income for the years ended December 31, 1998, 1997
and 1996 has been disclosed within the consolidated statements of
shareholders' equity and comprehensive income.
Net Income Per Share - Basic net income per share excludes dilution and is
computed by dividing net income by the number of weighted average common
shares outstanding for the period. Diluted net income per share reflects
the potential dilution from outstanding dilutive stock options (using the
treasury stock method) and shares issuable under the employee stock
purchase plan.
Geographic Operating Information - In 1998, the Company adopted SFAS No.
131, "Disclosures About Segments of an Enterprise and Related
Information," which establishes annual and interim reporting standards for
an enterprise's business segments and related disclosures about its
products, services, geographic areas and major customers. The Company
operates in one reportable segment (Note 12).
II-22
Recently Issued Accounting Standard - In June 1998, the Financial
Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires companies to
record derivatives on the balance sheet as assets or liabilities, measured
at fair value. Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. SFAS No. 133
will be effective for the Company's fiscal year ending December 31, 2000.
Management believes that this statement will not have a significant impact
on the Company's financial position, results of operations or cash flows.
Certain Significant Risks and Uncertainties - Financial instruments which
potentially subject the Company to concentration of credit risk consist of
cash and cash equivalents, short-term investments and accounts receivable.
Cash and cash equivalents and short-term investments are held primarily
with two financial institutions and consist primarily of cash in bank
accounts and United States Treasury bills. The Company sells its products
primarily to end users in the United States and Asia, and generally does
not require its customers to provide collateral or other security to
support accounts receivable. Management performs ongoing credit
evaluations of its customers' financial condition. The Company maintains
allowances for estimated potential bad debt losses.
The Company participates in a dynamic high technology industry and
believes that changes in any of the following areas could have a material
adverse effect on the Company's future financial position, results of
operations or cash flows; advances and trends in new technologies and
industry standards; competitive pressures in the form of new products or
price reductions on current products; changes in product mix; changes in
the overall demand for products offered by the Company; changes in
third-party manufacturers; changes in key suppliers; changes in certain
strategic relationships or customer relationships; litigation or claims
against the Company based on intellectual property, patent, product,
regulatory or other factors; fluctuations in foreign currency exchange
rates; risk associated with changes in domestic and international economic
and/or political regulations; availability of necessary components; risks
associated with year 2000 compliance; and the Company's ability to attract
and retain employees necessary to support its growth.
Certain components used in the Company's products are purchased only from
one source. In particular, the Company currently purchases its robotics
used in its automated systems and its spectroscopic ellipsometer used in
its advanced measurement systems from separate single sources of supply.
Any shortage or interruption in the supply of any of the components used
in the Company's products or the inability of the Company to procure these
components from alternate sources on acceptable terms, could have a
material adverse effect on the Company's business, financial condition and
results of operations.
II-23
2. PRODUCT LINE ACQUISITION
On March 30, 1998, the Company purchased from Optical Specialties, Inc.
("OSI") a metrology system product line and related assets used to measure
the critical dimensions and overlay registration errors observed in
submicron lithography. Under the agreement, the Company paid approximately
$3.2 million in cash for the assets and in-process research and
development. The total purchase price and allocation among the tangible
and intangible assets and liabilities acquired (including acquired
in-process research and development) is summarized as follows (in
thousands):
Total purchase price - cash consideration $3,225
======
Purchase price allocation:
Tangible assets $1,923
Intangible assets:
Core and developed technology 419
Goodwill 196
In-process research and development 1,421
Liabilities (734)
------
Total purchase price allocation $3,225
======
Net intangible assets as of December 31, 1998 of $523,000 are recorded
within other assets in the accompanying consolidated balance sheet and are
being amortized using the straight-line method over a five-year useful
life.
The purchase price allocation and intangible valuation was based on
management's estimates of the after tax net cash flows and gave explicit
consideration to the Securities and Exchange Commission's views on
acquired in-process research and development as set forth in its September
9, 1998 letter to the American Institute of Certified Public Accountants.
Specifically, the valuation gave consideration to the following: (i) the
employment of a fair market value premise excluding any
Nanometrics-specific considerations which could result in estimates of
investment value for the subject assets; and (ii) comprehensive due
diligence concerning all potential intangible assets including
trademarks/tradenames, patents, copyrights, noncompete agreements,
assembled workforce and customer relationships and sales channel. The
value of core technology was specifically addressed, with a view toward
ensuring the relative allocations to core technology and in-process
research and development were consistent with the relative contributions
of each to the final product. The allocation to in-process research and
development was based on a calculation that considered only the efforts
completed as of the transaction date, and only the cash flow associated
with said completed efforts for the products currently in process.
As indicated above, the Company recorded a one-time charge of $1,421,000
in the first quarter of 1998 for acquired in-process research and
development related to the Metra 7000 development project that had not
reached technological feasibility, had no alternative future use and for
which successful development was uncertain. Management's conclusion that
the in-process development effort, or any material sub-component, had no
alternative future use was reached in consultation with engineering
personnel from both the Company and OSI.
The project to complete the Metra 7000 product included the completion of
a software platform design started by OSI in 1997. As of the acquisition
date, the Metra 7000 had yet to achieve technological feasibility since
there was not a working prototype with a reliable new software design. At
the time of acquisition, the estimated cost to complete this software and
related development was approximately $300,000. The Company began
shipments of the Metra 7000 product to a customer in June 1998 and it
II-24
was at that time that the Company began to benefit from the acquired
research and development related to the product.
Significant assumptions used to determine the value of in-process research
and development included several factors, including the following: (i)
forecast of net cash flows that were expected to result from the
development effort using projections prepared by the Company's management;
(ii) percentage complete of 77% for the Metra 7000 project estimated by
considering a number of factors, including the costs invested to date
relative to total cost of the development effort and the amount of
progress completed as of the acquisition date, on a technological basis,
relative to the overall technological achievements required to achieve the
inacquisition functionality of the eventual product. The technological
issues were addressed by engineering representatives from both the Company
and OSI, and when estimating the value of the technology, the projected
financial results of the acquired assets were estimated on a stand-alone
basis without any consideration to potential synergic benefits or
"investment value" related to the acquisition. Accordingly, separate
projected cash flows were prepared for both the existing as well as the
in-process Metra 7000 products. These projected results were based on the
number of units sold times average selling price less the associated
costs. After preparing the estimated cash flow from the product being
developed, a portion of this cash flow was attributed to the core
technology, which was embodied in the in-process Metra 7000 product line
and enabled a quicker and more cost effective development of the Metra
7000. When estimating the value of the developed, core and in-process
technologies, discount rates of 25%, 30% and 35%, respectively, were used.
These discount rates considered both the status and risk associated with
the respective cash flows as of the acquisition date.
In the first quarter of 1998, the Company also hired certain former
employees of OSI and incurred approximately $350,000 in related
nonrecurring hiring expenses. Such expenses are classified in the
accompanying consolidated statement of income according to the employees'
functions.
3. INVENTORIES
Inventories at December 31 consist of the following (in thousands):
1998 1997
Finished goods $ 5,607 $2,934
Work in process 2,253 1,528
Raw materials and subassemblies 3,859 2,676
------- ------
Total inventories $11,719 $7,138
======= ======
II-25
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31 consists of the following (in
thousands):
1998 1997
Land $ 949 $ 813
Building 2,863 2,455
Machinery and equipment 1,096 1,243
Furniture and fixtures 380 404
Leasehold improvements 453 273
------- -------
5,741 5,188
Accumulated depreciation and amortization (3,260) (3,001)
------- -------
Property, plant and equipment, net $ 2,481 $ 2,187
======= =======
5. OTHER CURRENT LIABILITIES
Other current liabilities at December 31 consist of the following (in
thousands):
1998 1997
Commissions payable $ 366 $ 564
Accrued warranty 581 462
Trade-in allowances 262 205
Other 511 245
------- ------
Total other current liabilities $ 1,720 $ 1,476
======= =======
6. INCOME TAXES
Income (loss) before income taxes for the years ended December 31 consists
of the following (in thousands):
1998 1997 1996
Domestic $3,471 $9,644 $6,305
Foreign (533) (262) 352
------ ------ ------
Income before income taxes $2,938 $9,382 $6,657
====== ====== ======
II-26
The provision for income taxes for the years ended December 31 consists of
the following (in thousands):
1998 1997 1996
Current:
Federal $ 840 $ 3,080 $ 1,583
State 148 884 354
Foreign 16 181 304
------- ------- -------
1,004 4,145 2,241
------- ------- -------
Deferred:
Federal 161 (574) 287
State 166 9 186
Foreign (223) 45 (50)
------- ------- -------
104 (520) 423
------- ------- -------
Provision for income taxes $ 1,108 $ 3,625 $ 2,664
======= ======= =======
Significant components of the Company's deferred tax assets at December 31
are as follows (in thousands):
1998 1997
Deferred tax assets - current:
Reserves and accruals not currently deductible $ 978 $1,905
Capitalized inventory costs 201 123
Net operating loss carryforwards 246 35
Tax credit carryforwards 16 31
------ ------
Total deferred tax assets - current $1,441 $2,094
====== ======
Deferred tax assets - noncurrent:
Depreciation $ (25) $ 13
Goodwill and capitalized acquired technology 553 -
Other 32 -
------ ------
Total deferred tax assets - noncurrent $ 560 $ 13
====== ======
As of December 31, 1998, the Company had available for carryforward net
operating losses of approximately $512,000 generated by the Company's
Japanese subsidiary. The net operating loss carryforwards will expire if
not utilized beginning in the years 2002 through 2003.
Differences between income taxes computed by applying the statutory
federal income tax rate to income before income taxes and the provision
for income taxes for the years ended December 31 consist of the following
(in thousands):
1998 1997 1996
Income taxes computed at 35% U.S. statutory rate $ 1,028 $ 3,284 $ 2,330
State income taxes 207 589 356
Foreign tax provision (benefit) higher than U.S. rates (74) -- 60
Foreign sales corporation benefit (99) (274) (205)
Nondeductible expenses 75 94 87
Other, net (29) (68) 36
------- ------- -------
Provision for income taxes $ 1,108 $ 3,625 $ 2,664
======= ======= =======
II-27
7. DEBT OBLIGATIONS
Debt obligations at December 31 consist of the following (in thousands):
1998 1997
1995 working capital bank loan $ 2,292 $2,266
1996 working capital bank loan 642 604
Other debt obligations 886 302
------- ------
Total 3,820 3,172
Current portion of debt obligations (1,324) (604)
------- ------
Debt obligations $ 2,496 $2,568
======= ======
The 1995 working capital bank loan was obtained by the Company's Japanese
subsidiary. The loan is secured by receivables of the Japanese subsidiary
and is guaranteed by the parent, Nanometrics Incorporated. The loan is
denominated in Japanese yen ((Y)260,000,000 at December 31, 1998) and
bears interest at 3.3% per annum. The loan is payable in quarterly
installments with unpaid principal and interest due in May 2005.
The 1996 working capital bank loan was also obtained by the Company's
Japanese subsidiary and is secured by land and building. The loan is
denominated in Japanese yen ((Y)72,800,000 at December 31, 1998) and bears
interest at 3.4% per annum. The loan is payable in quarterly installments
with unpaid principal and interest due in May 2006.
At December 31, 1998, other debt obligations represent short-term
borrowings by the Company's Japanese subsidiary. The borrowings are
secured by the subsidiary's accounts receivable. The borrowings are
denominated in Japanese yen ((Y)100,634,000 at December 31, 1998) and bear
interest at 1.5% per annum. The borrowings and any unpaid interest are due
in February 1999. At December 31, 1997, other debt obligations represented
unsecured borrowings by the Company's Japanese subsidiary pursuant to an
overdraft facility which bore interest at 1.925% per annum. No amounts are
outstanding under the facility at December 31, 1998.
At December 31, 1998, future annual maturities of debt obligations are as
follows (in thousands):
1999 $ 1,324
2000 437
2001 437
2002 437
2003 437
Thereafter 748
-------
Total $ 3,820
=======
II-28
8. COMMITMENTS AND CONTINGENCIES
The Company leases manufacturing and administrative facilities and certain
equipment under noncancellable operating leases. The Company's current
primary facility lease expires in April 2002. Rent expense for 1998, 1997
and 1996 was approximately $693,000, $583,000 and $483,000, respectively.
Future minimum lease payments under the Company's operating leases for
each of the years ending December 31 are as follows (in thousands):
1999 $ 653
2000 648
2001 600
2002 193
------
Total $2,094
======
In September 1998, the Company's Korean subsidiary entered into a two-year
lease agreement for manufacturing facilities. The lease payments are based
on a percentage of net product sales, as defined. To date, no rent expense
has been incurred under the lease.
Pursuant to a 1985 agreement, as amended, if the Company's Chairman of the
Board is involuntarily removed from his position, the Company is required
to continue his salary and related benefits for a period of five years
from such date, at his option.
The high technology industry is characterized by frequent claims and
related litigation regarding patent and other intellectual property
rights. The Company is a party to various claims, legal actions and
complaints of this nature. Although the ultimate outcome of these matters
is not presently determinable, management believes that the resolution of
all such pending matters will not have a material adverse effect on the
Company's financial position, results of operations or cash flows.
9. SHAREHOLDERS' EQUITY
Common Stock
The authorized capital stock of the Company consists of 25,000,000 common
shares, of which 22,500,000 shares have been designated "Common Stock" and
2,500,000 shares have been allocated to all other series of common shares,
collectively designated "Junior Common."
Net Income per Share
The reconciliation of the share denominator used in the basic and diluted
net income per share computations for the years ended December 31 are as
follows (in thousands):
1998 1997 1996
Weighted average shares outstanding - shares used in
basic net income per share computation 8,635 8,325 8,047
Dilutive effect of common stock equivalents,
using the treasury stock method 406 495 477
----- ----- -----
Shares used in diluted net income per share computation 9,041 8,820 8,524
===== ===== =====
II-29
During 1998, 1997 and 1996, the Company had common stock options
outstanding which could potentially dilute basic net income per share in
the future, but were excluded from the computation of diluted net income
per share as the common stock options' exercise prices were greater than
the average market price of the common shares for the period. At December
31, 1998, 248,000 such common stock options with a weighted average
exercise price of $7.88 per share were excluded from the diluted net
income per share computation.
Stock Option Plans
Under the 1991 Stock Option Plan (the "Option Plan"), as amended, the
Company may grant options to purchase 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
ratably generally over a period of three years as set forth in the stock
option agreements.
Under the 1991 Directors' Stock Option Plan (the "Directors' Plan"),
nonemployee directors of the Company are automatically granted options to
purchase 10,000 shares of common stock, at the fair market value at the
date of grant, each year that such person remains a director of the
Company. Options granted under the Directors' Plan become exercisable
ratably over a period of three years and expire five years from the date
of grant. The total shares authorized under the Directors' Plan are
300,000.
Option activity under the plans is summarized as follows:
Outstanding Options
--------------------------------------
Weighted
Shares Number of Average
Available Shares Exercise Price
Balances, January 1, 1996 (372,312
exercisable at a weighted average price
of $0.63) 427,300 1,229,572 $ 2.77
Exercised -- (348,524) 0.67
Granted (weighted average fair value of $3.61) (308,500) 308,500 5.36
Canceled 91,607 (91,607) 3.69
---------- ---------
Balances, December 31, 1996 (348,514
exercisable at a weighted average price
of $2.91) 210,407 1,097,941 4.08
Additional shares reserved 1,500,000 -- --
Exercised -- (238,941) 2.00
Granted (weighted average fair value of $5.17) (488,500) 488,500 9.33
Canceled 14,139 (14,139) 4.46
---------- ---------
Balances, December 31, 1997 (503,267
exercisable at a weighted average price
of $4.32) 1,236,046 1,333,361 6.37
Exercised -- (151,153) 3.81
Granted (weighted average fair value of $1.88) (1,395,174) 1,395,174 6.14
Canceled 986,949 (986,949) 8.24
---------- ---------
Balances, December 31, 1998 827,821 1,590,433 $ 5.25
========== =========
II-30
During the third quarter of fiscal 1998, the Company approved the
cancellation and reissuance of outstanding options under the Company's
stock options plans. Under the program, holders of outstanding options
with exercise prices in excess of $5.13 per share were given the choice of
retaining these options or of obtaining, in substitution, new options for
the same number of shares. The new options are exercisable at a price of
$5.13 per share, the fair market value of the common stock on the reissue
date. The new options maintain the vesting schedule and expiration dates
established by the canceled option, except that each such option shall not
be exercisable, except upon the optionee's death, disability, involuntary
termination without good cause or a change in control of the Company
before April 1, 1999.
Additional information regarding options outstanding as of December 31,
1998 is as follows:
Options Outstanding Options Exercisable
----------------------------------------- -------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (Years) Price Exercisable Price
$0.56 - $0.56 50,839 1.0 $ 0.56 50,839 $ 0.56
$2.06 - $5.13 1,206,094 3.4 4.86 647,272 4.66
$5.25 - $8.63 333,500 4.6 7.39 47,060 7.74
--------- ---------
$0.56 - $8.63 1,590,433 3.6 $ 5.25 745,171 $ 4.57
========= =========
Employee Stock Purchase Plan
Under the 1986 Employee Stock Purchase Plan (the "Purchase Plan"),
eligible employees are allowed to have salary withholdings of up to 10% of
their base compensation to purchase shares of common stock at a price
equal to 85% of the lower of the market value of the stock at the
beginning or end of each six-month offering period, subject to an annual
limitation. Shares issued under the plan were 18,006, 24,482 and 25,627 in
1998, 1997 and 1996 at weighted average prices of $6.87, $4.58 and $4.49,
respectively. The weighted average per share fair values of the 1998, 1997
and 1996 awards were $2.42, $4.41 and $5.16, respectively. At December 31,
1998, 54,831 shares were reserved for future issuances under the Purchase
Plan.
Additional Stock Plan Information
As discussed in Note 1, the Company continues to account for its
stock-based awards using the intrinsic value method in accordance with APB
No. 25, "Accounting for Stock Issued to Employees" and its related
interpretations. Accordingly, no compensation expense has been recognized
in the accompanying consolidated financial statements for employee stock
arrangements.
SFAS No. 123, "Accounting for Stock-Based Compensation" requires the
disclosure of pro forma net income and net income per share had the
Company adopted the fair value method as of the beginning of fiscal 1995.
Under SFAS 123, the fair value of stock-based awards to employees is
calculated through the use of option pricing models, even though such
models were developed to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which significantly
differ from the Company's stock option awards. These models also require
subjective assumptions, including future stock price volatility and
expected time to exercise, which greatly affect the calculated values. The
Company's fair value calculations on stock-based awards under the Option
Plan and the Directors' Plan were made using the Black-Scholes option
pricing model with the following weighted average assumptions: expected
life, three years from the date of grant in 1998 and 1997 and four years
from the
II-31
date of grant in 1996; stock volatility, 80% in 1998 and 1997 and 90% in
1996; risk free interest rate, 5.0% in 1998, 6.1% in 1997 and 6.0% in
1996; and no dividends during the expected term. The Company's
calculations are based on a single option valuation approach and
forfeitures are recognized at a historical rate of 29% per year. The
Company's fair value calculations on stock-based awards under the Purchase
Plan were also made using the Black-Scholes option pricing model with the
following weighted average assumptions: expected life, six months in 1998,
1997 and 1996; stock volatility, 80% in 1998 and 1997 and 90% in 1996;
risk free interest rate, 5.0% in 1998, 5.5% in 1997 and 5.6% in 1996; and
no dividends during the expected term.
If the computed fair values of the 1998, 1997 and 1996 awards had been
amortized to expense over the vesting period of the awards, pro forma net
income and net income per share, basic and diluted, would have been as
follows in the years ended December 31 (in thousands except per share
amounts):
1998 1997 1996
Pro forma net income $ 807 $5,057 $3,576
Pro forma net income per share:
Basic $ 0.09 $ 0.61 $ 0.44
Diluted $ 0.09 $ 0.60 $ 0.43
The impact of outstanding stock options granted prior to 1995 have been
excluded from the pro forma calculations; accordingly, the 1998, 1997 and
1996 pro forma adjustments are not indicative of future period pro forma
adjustments, when the calculation will apply to all applicable stock-based
compensation arrangements.
10. PROFIT-SHARING AND RETIREMENT AND BONUS PLANS
No contributions were made by the Company in 1998, 1997 and 1996 to the
Company's discretionary profit-sharing and retirement plan. The Company
paid $688,000, $678,000 and $523,000 in 1998, 1997 and 1996, respectively,
under formal discretionary cash bonus plans which cover all eligible
employees.
11. MAJOR CUSTOMERS
In 1998, sales to one customer accounted for approximately 11% of total
revenues. In 1997, sales to another customer accounted for approximately
11% of total revenues. In 1996, no single customer accounted for 10% or
more of total revenues. At December 31, 1998, no single customer accounted
for 10% or more of accounts receivable. At December 31, 1997, one customer
accounted for 10% of accounts receivable.
12. SEGMENT AND GEOGRAPHIC INFORMATION
As discussed in Note 1, the Company follows the requirements of SFAS No.
131, "Disclosures about Segments of an Enterprise and Related
Information." The Company's operating segments consist of its
geographically based entities in the United States, Japan, South Korea and
Taiwan. All such operating segments have similar economic characteristics,
as defined in SFAS No. 131, and accordingly, the Company operates in one
reportable segment: the design, development, manufacturing, marketing and
sales of film thickness and overlay/critical dimension metrology systems.
For the years ended December 31, 1998, 1997 and 1996, the Company recorded
revenue from customers throughout the United States, Canada, Germany, the
United Kingdom, Ireland, France, Italy, Sweden, Israel, Japan, South
Korea, China, Singapore, Hong Kong, Taiwan, Indonesia and Malaysia. The
following table
II-32
summarizes total net revenues and long-lived assets attributed to
significant countries as of and for the years ended December 31 (in
thousands).
1998 1997 1996
Total net revenues:
United States $12,698 $14,539 $14,421
Japan 9,167 10,086 9,454
Korea 2,596 5,954 4,163
Taiwan 3,404 2,583 842
Germany 4,784 1,763 1,235
All other 615 1,732 221
-------- ------- -------
Total net revenues* $33,264 $36,657 $30,336
======= ======= =======
Long-lived assets:
United States $ 1,439 $ 309 $ 397
Japan 2,419 2,134 2,462
Korea 59 11 15
Taiwan 11 6 --
-------- ------- -------
Total long-lived assets $ 3,928 $ 2,460 $ 2,874
======= ======= =======
* Net revenues are attributed to countries based on the deployment and
service locations of systems.
II-33
13. SELECTED QUARTERLY FINANCIAL RESULTS (UNAUDITED)
The following tables set forth selected quarterly results of operations
for the years ended December 31, 1998 and 1997 (in thousands, except per
share amounts):
Quarters Ended
------------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
1998 1998 1998 1998
Total net revenues $ 10,538 $ 10,728 $ 7,005 $ 4,993
Gross Profit 5,924 5,732 3,357 1,580
Income (loss) from operations 915 2,446 491 (1,442)
Net income (loss) 624 1,495 394 (683)
Net income (loss) per share:
Basic $ 0.07 $ 0.17 $ 0.05 (0.08)
Diluted $ 0.07 $ 0.17 $ 0.04 (0.08)
Shares used in per share computation:
Basic 8,545 8,641 8,669 8,686
Diluted 8,978 9,003 9,074 8,686
-----------------------------------------
Quarters Ended
-----------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
1997 1997 1997 1997
Total net revenues $ 8,259 $ 8,699 $ 9,416 $ 10,283
Gross Profit 4,659 4,923 5,409 5,942
Income from operations 2,086 2,019 2,413 2,614
Net income 1,273 1,373 1,504 1,607
Net income per share:
Basic $ 0.15 $ 0.17 $ 0.18 $ 0.19
Diluted $ 0.15 $ 0.16 $ 0.17 $ 0.18
Shares used in per share computation:
Basic 8,260 8,282 8,327 8,431
Diluted 8,673 8,665 9,002 8,940
* * * * *
II-34
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
II-35
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The section entitled "Election of Directors" appearing in the
Registrant's proxy statement for the annual meeting of shareholders for the year
ended December 31, 1998, sets forth certain information with respect to the
directors of the Registrant and is incorporated herein by reference. Certain
information with respect to persons who are or may be deemed to be executive
officers of the Registrant is set forth under the caption "Business-Executive
Officers of the Registrant" in Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
The section entitled "Executive Compensation" appearing in the
Registrant's proxy statement for the annual meeting of shareholders for the year
ended December 31, 1998, sets forth certain information with respect to the
compensation of management of the Registrant and is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section entitled "Election of Directors" appearing in the
Registrant's proxy statement for the annual meeting of shareholders for the year
ended December 31, 1998, sets forth certain information with respect to the
ownership of the Registrant's Common Stock and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section entitled "Transactions with Management" appearing in the
Registrant's proxy statement for the annual meeting of shareholders for the year
ended December 31, 1998, sets forth certain information with respect to certain
business relationships and transactions between the Registrant and its directors
and officers and is incorporated herein by reference.
III-1
PART IV
ITEM 14. EXHIBITS FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
1. Financial Statements. The following Consolidated Financial
Statements of Nanometrics Incorporated and Independent
Auditors' Report are filed as part of this Annual Report.
Independent Auditors' Report
Consolidated Balance Sheets, as of December 31, 1998 and 1997
For the years ended December 31, 1998, 1997 and 1996:
Consolidated Statements of Income
Consolidated Statements of Shareholders' Equity and
Comprehensive Income
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. Financial Statements Schedules. The following consolidated
financial statement schedules of Nanometrics Incorporated are
filed as part of this Report and should be read in conjunction
with the Consolidated Financial Statements of Nanometrics
Incorporated.
Financial Statement Schedules for the years ended December 31, 1998,
1997 and 1996.
Schedule Page
-------- ----
II - Valuation and Qualifying Accounts .............. S-1
Schedules not filed herein are omitted because of the absence
of conditions under which they are required or because the
information called for is shown in the consolidated financial
statements or notes thereto.
(b) Reports on Form 8-K:
None
3. Exhibits.
3.1(1) Restated and Amended Articles of Incorporation of
Registrant filed July 7, 1982.
IV-1
3.2(1) Certificate of Amendment of Articles of Incorporation
filed January 31, 1983.
3.3(1) Certificate of Amendment of Articles of Incorporation
filed July 28, 1983.
3.4(1) Certificate of Amendment of Certificate of
Determination of Preferences of Series B Common Stock
filed September 13, 1983.
3.5(1) Certificate of Amendment of Articles of Incorporation
filed September 13, 1983.
3.6(2) Certificate of Amendment of Articles of Incorporation
filed December 3, 1984.
3.7(2) Certificate of Correction of Certificate of Amendment
of Certificate of Determination of Preferences of
Series B Common Stock filed March 19, 1985.
3.8(2) Certificate of Amendment of Articles of Incorporation
filed June 27, 1988.
3.9(2) Bylaws
4.1(1) Form of Common Stock Certificate
10.1(2) Form of Indemnification Agreement for Directors &
Officers
10.2(2) 1986 Employee Stock Purchase Plan, as amended through
April 1997
10.3(3) 1991 Stock Option Plan, as amended through May 15, 1997
10.4(4) 1991 Director Option Plan
10.5(5) Amendment to and Restatement of Redemption Agreement
dated March 4, 1993 between Vincent J. Coates and
Registrant
10.6(2) Consulting Agreement dated as of September 15, 1997
between the Registrant and Kanegi Nagai, as amended
10.7(2) Reverse Split Dollar Insurance Agreement and Collateral
Assignment dated March 15, 1993 between the Registrant
and Vincent J. Coates
10.8(2) Lease Agreement dated February 25, 1992 between PM-DE
and the Registrant, first Addendum to Lease dated
February 22, 1992 and First Amendment to Lease dated
April 24, 1997
10.9(2) Loan Agreement between Japan Development Bank and
Nanometrics Japan
10.10(2) Loan Agreement and Guarantee dated June 5, 1995 between
Mitsubishi Bank, Limited and Nanometrics Japan Ltd.
21 Subsidiaries of Registrant
23 Independent Auditors' Consent and Report on Schedule
IV-2
24 Power of Attorney (see page V-1).
27 Financial Data Schedule for the Year Ended December 31,
1998
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 Registration Statement on
Form 10-K 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 Exhibit 4.2 filed with Registrant's
Registration Statement on Form S-8 (file number 33-43913) filed on November
14, 1991.
5) Incorporated by reference to exhibit 10.10 filed with Registrant's Form
10-K dated March 29, 1993.
IV-3
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
NANOMETRICS INCORPORATED
Date: March 31, 1999 By: /s/VINCENT J. COATES
---------------------------
Vincent J. Coates, Chairman and
Secretary
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Vincent J. Coates, jointly and severally,
his attorneys-in-fact, each with full power of substitution, for him in any and
all capacities, to sign any amendments to this Report on Form 10-K, and to file
the same with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed by the following persons on behalf of the
registrant in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/VINCENT J. COATES Chairman of the Board and March 31, 1999
- ------------------------- Secretary
(Vincent J. Coates)
/s/PAUL B. NOLAN Chief Financial Officer March 31, 1999
- ------------------------- (Principal Accounting and
(Paul B. Nolan) Financial Officer)
/s/JOHN D. HEATON Director, President and March 31, 1999
- ------------------------- Chief Executive Officer
(John D. Heaton)
/s/NORMAN V. COATES Director March 31, 1999
- -------------------------
(Norman V. Coates)
/s/NATHANIEL BRENNER Director March 31, 1999
- -------------------------
(Nathaniel Brenner)
/s/KANEGI NAGAI Director March 31, 1999
- -------------------------
(Kanegi Nagai)
/s/CLIFFORD F. SMEDLEY Director March 31, 1999
- -------------------------
(Clifford F. Smedley)
V-1
SCHEDULE II
NANOMETRICS INCORPORATED
VALUATION AND QUALIFYING ACCOUNTS
Allowance for Doubtful Accounts
Balance at Charged to Deductions- Balance
beginning costs and write-offs at end
Year Ended of period expenses of accounts of period
--------- -------- ----------- ---------
December 31, 1998 ......... $413,000 $ 7,000 $ 0 $420,000
======== ======== ======== ========
December 31, 1997 ......... $419,000 $ 0 $ (6,000) $413,000
======== ======== ======== ========
December 31, 1996 ......... $380,000 $ 39,000 $ 0 $419,000
======== ======== ======== ========
S-1