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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File No. 0-13470
NANOMETRICS INCORPORATED
(Exact name of Registrant as specified in its charter)
California 94-2276314
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
310 DeGuigne Drive
Sunnyvale, California 94086
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 746-1600
----------------
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing price of Common Stock on December 31,
2000, as reported by Nasdaq, was approximately $44,422,597. Shares of voting
stock held by each officer and director and by each person who owns 5% or more
of the outstanding voting stock have been excluded in that such persons may be
deemed to be "affiliates" as that term is defined under the rules and
regulations of the Securities Exchange Act of 1934, as amended. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of December 31, 2000, 9,163,998 shares of the registrant's Common Stock
were outstanding.
================================================================================
NANOMETRICS INCORPORATED
FORM 10-K
YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
PART I
Item 1. Business............................................................................... I-1
Item 2. Properties............................................................................. I-13
Item 3. Legal Proceedings...................................................................... I-13
Item 4. Submission of Matters to a Vote of Security Holders.................................... I-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-18
Item 8. Consolidated Financial Statements and Supplementary Data............................... II-19
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure... II-39
PART III
Item 10. Directors and Executive Officers of the Registrant..................................... III-1
Item 11. Executive Compensation................................................................. III-3
Item 12. Security Ownership of Certain Beneficial Owners and Management......................... III-9
Item 13. Certain Relationships and Related Transactions......................................... III-11
PART IV
Item 14. Exhibits, Consolidated Financial Statement Schedules, and Reports on Form 8-K.......... IV-1
PART I
ITEM 1. BUSINESS
This Business section and other parts of this Annual Report on Form 10-K
contain forward-looking statements that involve risks and uncertainties.
Forward-looking statements include information concerning our possible or
assumed future results of operations. Our actual results may differ materially
from the results discussed in the forward-looking statements. Factors that
might cause such a difference include, but are not limited to, those discussed
below and in "Management's Discussion and Analysis of Financial Condition and
Results of Operations." The forward-looking statements contained herein are
made as of the date hereof, and we assume no obligation to update such forward-
looking statements or to update reasons actual results could differ materially
from those anticipated in such forward-looking statements. When we use words
such as "believe," "expect," "anticipate" or similar expressions, we are making
forward-looking statements.
We are a leader in the design, manufacture, marketing and support of thin
film metrology systems for the semiconductor, flat panel display and magnetic
recording head industries. Our systems precisely measure a wide range of film
types deposited on substrates during manufacturing in order to control
manufacturing processes and increase production yields. Our non-contact, non-
destructive thin film measurement systems use a broad spectrum of wavelengths,
high-sensitivity optics, proprietary software and patented technology to
measure the thickness and uniformity of films deposited on silicon and other
substrates as well as their chemical composition.
Growth in the market for our products is driven by the increasing use of
thin film technology by manufacturers of electronic products. Many types of
thin films are used in the manufacture of numerous products, including
semiconductors, flat panel displays and magnetic recording heads as well as
integrated fiber optics, conventional and advanced optics, high density
optical and magnetic disks and lasers. These products require the precise
electronic, optical, magnetic and surface finish properties enabled by thin
film technology. The rapid growth in the sale and use of these products has
created significant demand for our metrology systems.
We offer a complete line of systems to address the thin film metrology
requirements of our customers. Each of our systems are equipped with
computerized mapping capability for measurement, visualization and control of
film uniformity. Our metrology systems can be categorized as follows:
. stand-alone, fully automated systems for measurements of thin films in
high-volume manufacturing operations;
. integrated systems for integration into semiconductor processing
equipment that provide virtually immediate measurements and feedback to
improve process control and increase throughput; and
. tabletop systems used to manually or semiautomatically measure thin films
in engineering and low-volume production environments.
In addition, we provide systems that are used to measure the overlay
accuracy of successive layers of semiconductor patterns on wafers in the
photolithography process. The accurate alignment of successive film layers,
relative to each other, across the wafer is critical for device performance
and favorable production yields.
We have been a pioneer in the field of thin film measurement and have been
instrumental in the development of many innovations for over two decades. We
have been selling metrology systems since 1977 and have an extensive installed
base with industry leading customers worldwide, including Applied Materials,
Hyundai, IBM, LG International, TSMC and WaferTech.
I-1
Industry Background
Growth
The semiconductor, flat panel display and magnetic recording head
industries have experienced significant growth over the past decade. This
trend is expected to continue due to rapid growth in Internet usage and
continuing demand for applications in data processing, wireless
communications, personal computers, handheld electronic devices, computer
games and other consumer electronics. Dataquest, an independent industry
research company, estimates that worldwide semiconductor sales will increase
to approximately $251 billion in 2002 from $136 billion in 1998, representing
a compound annual growth rate of 16.6%. To keep pace with the demand, capital
equipment spending by semiconductor manufacturers is estimated to reach
$75 billion in 2002 from $30 billion in 1998, representing a compound annual
growth rate of 25.7%. Similarly, according to Stanford Resources Inc., a
display market research firm, the flat panel display market is expected to
grow to $26 billion in 2004 from $14 billion in 1998, representing a compound
annual growth rate of 10.9%.
Semiconductor Manufacturing Process
Semiconductors are fabricated by a complex series of process steps on a
wafer substrate made of silicon or other material. Thin film metrology systems
are used at many points during the fabrication process to monitor and
precisely measure film thickness and uniformity as well as chemical properties
in order to maximize the yield of acceptable semiconductors. Each wafer
typically goes through a series of 100 to 500 process and metrology steps in
generally repetitive cycles.
[CHART APPEARS HERE]
[Graphical chart depicting the interaction of metrology systems with the four
primary wafer film processing steps used in semiconductor manufacturing:
deposition, CMP, photolithography and etch. A circular diagram is used to show
the movement of a bare wafer through each of the four areas, beginning with
deposition and proceeding through CMP, photolithography and etch,
respectively. Metrology systems are shown to be used both before and after
each step in this process.]
The four primary wafer film processing steps are:
. deposition;
. chemical mechanical planarization, known in our industry as CMP;
. photolithography; and
. etch.
Deposition. Deposition refers to placing layers of insulating or conductive
materials on a wafer surface in thin films that make up the circuit elements
of semiconductor devices. The four most common methods of deposition are
chemical vapor deposition, or CVD, physical vapor deposition, or PVD,
diffusion and oxidation. The control of uniformity and thickness during
deposition of these films is critical to the performance of the semiconductor
circuit.
I-2
Chemical Mechanical Planarization. CMP flattens, or planarizes, the
topography of the film surface to permit the patterning of small features on
the resulting smooth surface by the photolithography process. The CMP process
is a combination of chemical etching and mechanical polishing and commonly
uses an abrasive liquid and polishing pad. Semiconductor manufacturers need
metrology systems to control the CMP process by measuring the thin film layer
to determine precisely when the appropriate thickness has been reached.
Photolithography. Photolithography is the process step that defines the
patterns of the circuits to be built on the chip. Before photolithography, a
wafer is pre-coated with photoresist, a light sensitive film, that must have
an accurate thickness and uniformity. Photolithography involves the projection
of integrated circuit patterns onto the photoresist after which it is
developed, leaving unexposed areas available for etching. In order to
precisely control the photolithography process, it is necessary to measure
reflectivity, film thickness and overlay registration.
Etch. Etch is the process of selectively removing precise areas of thin
films that have been deposited on the surface of a wafer. The hardened
photoresist protects material that needs to be left to make up the circuits.
During etch, certain areas of the film not covered by photoresist are removed
to leave a desired circuit pattern. Thin film metrology systems are required to
verify material removal and critical dimension conformity.
Before and after deposition, CMP, photolithography and etch, the wafer
surface is measured to determine the quality of the film or pattern and find
defects. Measurements are taken to ensure process uniformity and include
thickness, width, height, roughness and other characteristics. Process control
helps avoid costly rework or misprocessing and results in higher yields for
semiconductor manufacturers.
These processing steps are typically repeated multiple times during the
fabrication process, with alternating layers of insulating and conductive
films. Depending on the specific design of a given integrated circuit, a
variety of film types and thicknesses and a number of layers can be used to
achieve desired electronic performance characteristics. The semiconductors are
then tested, separated into individual circuits, assembled and packaged into an
integrated circuit.
Flat Panel Display and Magnetic Recording Head Manufacturing Processes
Flat panel displays and magnetic recording heads are manufactured in clean
rooms using thin film processes that are similar to those used in semiconductor
manufacturing. Most flat panel displays are constructed on large glass
substrates that range in size up to 650 by 830 millimeters. Multiple magnetic
recording heads are manufactured on substrates that are typically made of an
aluminum oxide-titanium carbide alloy, two to three millimeters thick and
approximately 150 millimeters across.
Increased Use of Thin Film Metrology Systems
Manufacturers of semiconductors, flat panel displays and magnetic recording
heads are experiencing several trends that are increasing the need for thin
film metrology systems including the following:
. Growing Use of Chemical Mechanical Planarization. Manufacturers are
adopting CMP to flatten, or planarize, thin films to obtain the ultra-
flat surfaces required for advanced photolithography. In addition, the
introduction of new interconnect techniques has increased the need for
CMP. Accordingly, semiconductor manufacturers are seeking metrology
systems that can help control the CMP process by measuring the thin film
layer to determine precisely when the appropriate thickness has been
achieved.
. Adoption of New Types of Thin Films. Manufacturers are adopting new
processes and technologies that increase the importance and utilization
of thin film metrology systems. To achieve greater semiconductor device
speed, manufacturers are utilizing copper and new insulating materials
that require enhanced metrology solutions for the manufacturing process.
I-3
. Increasing Complexity of Semiconductors. Semiconductors are becoming more
complex as they operate at faster speeds with smaller feature sizes,
employ larger dies that contain more transistors and utilize increasing
numbers of manufacturing process steps. The value of process wafers and
the cost of rework is significantly higher for these complex
semiconductors and therefore, manufacturers are seeking to use metrology
systems to increase production yields and limit the amount of rework.
. Need for Rapid Ramp of Production Efficiencies. Competitive forces on
semiconductor device manufacturers, such as price cutting and shorter
product life cycles, place pressure on the manufacturers to rapidly
achieve production efficiency. Semiconductor device manufacturers are
using metrology systems throughout the fab to ensure that manufacturing
processes scale rapidly, are accurate and can be repeated on a consistent
basis.
Drive Toward Integrated Metrology
For many years, semiconductor manufacturers have sought to improve fab
efficiency by choosing systems that integrate more than one process step into a
single tool. Integrated solutions increase productivity with higher throughput,
smaller overall footprint, reduced wafer handling and faster process
development. This trend began in the mid-1980s as leading manufacturers
introduced a "cluster process tool" architecture that combined multiple
processes in separate chambers around a central wafer handling platform. More
recently, CMP systems have begun to integrate cleaning technology into a single
system in order to achieve these benefits.
Today, the same focus on increased productivity is driving the adoption of
integrated metrology for many processes, such as CMP and CVD. Until recently,
semiconductor manufacturers had to physically transport wafers from a process
tool to a separate metrology system in order to make critical measurements such
as film thickness and uniformity. Manufacturers of process equipment are
increasingly seeking to offer their customers integrated metrology in their
tools to lower costs and improve overall fab efficiency. Such tools can have
one or two metrology chambers that are integrated onto a process system, which
utilize the common automation platform so that measurements can be taken
without removing the wafers from the tool. Integrated metrology provides
semiconductor manufacturers with several benefits, including a reduction in the
number of test wafers, increased overall process throughput, faster detection
of process excursions and faults, reduced wafer handling, faster process
development and ultimately an improvement in overall equipment effectiveness.
Nanometrics Solution
We are a leader in the design, manufacture, marketing and support of thin
film metrology systems for the semiconductor, flat panel display and magnetic
recording head industries. We offer a complete line of systems to address the
thin film metrology requirements of our customers. Our metrology systems can be
categorized as follows:
. Stand-alone, fully automated systems used for measurements of thin films
in high-volume manufacturing operations. We offer a broad line of fully
automated thin film thickness measurement systems. These systems remove
the dependence on human operators by incorporating reliable wafer
handling robots and are designed to meet the speed, measurement,
performance and reliability requirements that are essential for today's
semiconductor, flat panel display and magnetic recording head
manufacturing facilities. We believe we offer the only fully automated
thin film thickness measurement systems that synergistically combine
spectroscopic ellipsometry, spectroscopic reflectometry and Fourier
transform infrared reflectometry, known in the industry as FTIR. Each of
these measurement systems are non-contact and use non-destructive
techniques to analyze and measure films. This combination of technologies
enables our systems to determine the concentration of elements, or
dopants, within a film. This is of significant importance, as many new
films used today require continuous monitoring of dopant levels and
chemical composition. Our fully automated metrology product line also
includes systems that are used to measure the overlay registration
accuracy of successive layers of semiconductor patterns on wafers in the
photolithography process.
I-4
. Integrated systems used to measure in-process wafers automatically and
quickly without having to leave the enclosed wafer processing system. In
1998, we introduced our high-speed integrated metrology system. Our
integrated metrology systems are compact and monitor a multitude of small
test points on the wafer using sophisticated pattern recognition. Our
integrated systems can be attached to film deposition, CMP, CVD, etch and
other process tools to provide rapid monitoring of films on each wafer
immediately before or after processing. Integrated systems can offer
customers significantly increased operating efficiency and equipment
utilization, lower manufacturing costs and higher throughput. Similar to
our automated metrology systems, our integrated systems can be configured
to determine the concentration of dopants within a film. We believe we
are the only supplier of integrated metrology systems with this
capability. We are currently shipping integrated systems to Applied
Materials for installation on their CMP and CVD tools.
. Tabletop systems used to manually or semiautomatically measure thin films
in engineering and low-volume production environments. We pioneered and
believe we are the leading supplier of tabletop thin film thickness
measurement systems, which are mainly used in low-volume production
environments and failure analysis and engineering labs. Our three
tabletop models have unique capabilities and several available
configurations, depending on wafer handling, range of films to be
measured, uniformity mapping and other customer needs.
Each of our thin film thickness measurement systems are equipped with
computerized readout capability for measurement, visualization and control of
film uniformity. In addition, we have developed new automated systems and
tabletop products for emerging technologies using larger substrates such as 300
millimeter wafers and larger flat panel displays. We believe that we are the
first company to ship fully automated thin film thickness measurement systems
for 300 millimeter wafers. We have also introduced new technology for the
precise thin film measurements that are dictated by sub 0.25 micron design
rules and have developed products with mini-environments that meet the latest
standards for clean, particle-free manufacturing.
Strategy
Our strategy is to offer and support, on a worldwide basis, technologically
advanced metrology systems that meet the changing manufacturing requirements of
the semiconductor, flat panel display and magnetic recording head industries as
well as other industries that use metrology systems. Key elements of our
strategy include:
Continuing to Offer Advanced Integrated Metrology Systems. We were one
of the first suppliers to offer products that integrate process metrology
systems into wafer processing equipment. We are currently the only supplier
of integrated systems that combine spectroscopic reflectometry with FTIR,
thereby providing comprehensive analysis for thin film measurement. We
intend to continue our efforts to develop the integrated metrology market
to achieve and maintain competitive advantages. In September 1998, we
entered into an OEM agreement to supply metrology systems for Applied
Materials' Mirra Mesa(TM) CMP system. In addition, in July 1999, we
introduced a metrology system that is incorporated into Applied Materials'
Producer QA(TM) CVD system. We are pursuing other OEM arrangements and will
continue to investigate other integrated metrology technologies.
Maintaining Technology Leadership. We are committed to developing
advanced metrology systems that meet the requirements of advances in thin
film manufacturing technology. We have an extensive base of proprietary
technology and expertise in optics, software and systems integration. We
have supplemented our capabilities by establishing strategic relationships
to leverage our technical resources and strengthen our product offerings.
These include relationships with Kensington Laboratories, a manufacturer of
precision robotic systems, J.A. Woollam Company, a leading designer of
spectroscopic ellipsometer systems and Midac, a provider of FTIR
technology. In December 1999, we acquired inspection and metrology
technology from Phase Metrics, a data storage equipment company, to augment
our technology portfolio.
I-5
Leveraging Existing Customer and Industry Relationships. We expect to
continue to strengthen our existing customer relationships and foster
working partnerships by providing technologically superior systems and high
levels of customer support. Our strong industry relationships have allowed
close customer collaboration that facilitated our ability to introduce new
products and applications that met customer needs. We believe that our
large customer base will continue to be an important source of new product
development ideas. Our large customer base also provides us with the
opportunity for increased sales of additional metrology systems to our
customers without the extensive effort that might otherwise be required.
Providing Worldwide Distribution and Support. We believe that a direct
sales and support capability is essential for developing and maintaining close
customer relationships and for rapidly responding to changing customer
requirements. Because a majority of our sales come from outside the United
States, we are expanding our direct sales force in South Korea and Taiwan and
will continue to expand into additional territories as customer requirements
dictate. We use selected sales representatives and distributors in other
countries in Asia, Europe and the Middle East. We intend to continue
developing our distribution network by expanding our existing offices, opening
new offices and forming additional distribution relationships. We believe that
growing our international distribution network will enhance our competitive
position.
Providing a Broad Portfolio of Metrology Systems and Technology. We
offer a comprehensive family of metrology systems that accurately measure
thin films and overlay registration used in the manufacturing process. We
offer automated and integrated systems for high-volume manufacturing
applications and tabletop systems for engineering and small fab
applications. Our products can include a wide range of accessories as well
as special hardware and software configurations to meet customer needs. We
plan to continue enhancing our products and integrating additional features
and measurement modules that will strengthen and broaden our product line.
Addressing Multiple Markets. There are broad applications of our
technology beyond the semiconductor industry. We intend to continue
developing and marketing products to address metrology requirements in the
manufacture of flat panel displays, magnetic recording heads and any other
industries that might apply our technology in the future. We believe our
diversification through multiple industry applications of our technology
increases the total available market for our products and reduces, to an
extent, our exposure to the cyclicality of any particular market.
Products
We have been a pioneer in the field of thin film metrology and have been
instrumental in the development of many innovations over the past 25 years. Our
thin film thickness measurement systems use microscope-based, non-contact
spectroscopic reflectometry. Some of our systems provide complementary
spectroscopic ellipsometry to measure the thickness and optical characteristics
of films on a variety of substrates. In addition, we offer an optional FTIR
feature on some of our products to determine other film parameters, such as the
concentration of dopants within a film. We also manufacture a line of optical
overlay registration systems that are used to determine the alignment accuracy
of successive layers of semiconductor patterns on wafers in the
photolithography process. Our products can be divided into three groups:
automated systems, integrated systems and tabletop systems.
I-6
Technology
-----------------------------------------------------
Fourier
Maximum Transform Advanced
Substrate Spectroscopic Spectroscopic Infrared Dimensional
System Market Size (mm) Reflectometry Ellipsometry Reflectometry Metrology
--------- ---------------------------- --------- ------------- ------------- ------------- -----------
Automated
8000X Semiconductor, Magnetic Head 200 X X X
8300X Semiconductor 300 X X X
9200 Semiconductor 200 X X
5500/6500 Flat Panel Display 960 by 1100 X
7000/7200 Semiconductor 200 X
- ------------------------------------------------------------------------------------------------------------
Integrated
9000i Semiconductor 200 X X
9000b Semiconductor 300 X X
- ------------------------------------------------------------------------------------------------------------
Tabletop
3000 Semiconductor, Magnetic Head 200 X
6100/6150 Semiconductor 200 X
50-2c Semiconductor, Magnetic Head 200 X
Automated Systems
Our stand-alone, fully automated metrology systems are employed in high-
volume production environments. These systems incorporate automated material
handling interface options for integration into a variety of fab automation
environments, and implement multiple measurement technologies for a broad range
of substrate sizes. Our automated systems range in price from approximately
$200,000 to $700,000 depending on substrate sizes, measurement technologies,
material handling interfaces and software options.
NanoSpec 8000X
The NanoSpec 8000X stand-alone, automated thin film measurement system is
capable of handling wafers ranging in size from 75 to 200 millimeters in
diameter. The 8000X is the basic system configuration, while the 8000XSE
includes a fully integrated spectroscopic ellipsometer for ultrathin and
multiple film stack measurement applications. In addition, an FTIR option can
be added to determine dielectric dopant concentrations. Other 8000X options
include a standard mechanical interface with mini-environment enclosures for
use in ultra-clean manufacturing facilities. The 8000X can also be configured
to handle the substrates that are used in the magnetic recording head industry.
NanoSpec 8300X
The NanoSpec 8300X stand-alone, automated thin film measurement system is
capable of handling both 200 and 300 millimeter diameter wafers. The 8300X is
the basic system configuration and can be equipped with the spectroscopic
ellipsometer and FTIR options for expanded measurement applications. This
system can also include a mini-environment enclosure and wafer load ports
compatible with industry standards. These systems conform to the new industry
standards for 300 millimeter wafer handling automation. The 8300X received a
Photonics Circle of Excellence Award for innovation and achievement in photonic
technology.
NanoSpec 9200
The NanoSpec 9200 stand-alone, automated thin film measurement system is
capable of handling wafers of 150 and 200 millimeters in diameter. We developed
this system using technologies from the NanoSpec 9000 integrated film thickness
system to be compact and to provide high wafer throughput.
I-7
NanoSpec 5500 and 6500
The NanoSpec 5500 and 6500 measure most optically transparent films used in
the manufacture of flat panel displays. The Model 5500 is fully automated and
handles large glass substrates up to 550 by 650 millimeters. This model is also
capable of precisely measuring at any site on the substrate and generating film
thickness maps, which show uniformity across the panel. The 6500 is an advanced
version of the 5500 with many proprietary software and hardware enhancements
and is capable of handling substrates up to 960 by 1100 millimeters.
Metra 7000 and 7200
In 1998, we completed an acquisition of the Metra product line from Optical
Specialties. The Metra is a stand-alone system used to measure the overlay
accuracy of successive layers of semiconductor patterns on wafers in the
photolithography process. We shipped our first automated overlay registration
system, the Metra 7000, in June 1998. The recently introduced Metra 7200
provides enhanced measurement performance and higher wafer throughput.
Integrated Systems
Our integrated metrology systems are installed inside wafer processing
equipment to provide near real-time measurements for improving process control
and increasing throughput. Our integrated systems are available for wafer sizes
up to 300 millimeters and offer deep ultraviolet, commonly referred to as DUV,
FTIR measurement technologies, in addition to spectroscopic reflectometry.
Depending on features and technologies, our integrated metrology systems range
in price from approximately $90,000 to $295,000.
NanoSpec 9000i
The NanoSpec 9000i is an ultra-compact measurement system designed for
integration into semiconductor wafer processing equipment. The system can be
used in several wafer film process steps including metal deposition, CMP, CVD,
photolithography and etch. In its basic configuration, the 9000i is equipped
with visible wavelength spectroscopic reflectometry. In 1999, the 9000i
received a Photonics Circle of Excellence Award for innovation and achievement
in photonic technology.
NanoSpec 9000b
The NanoSpec 9000b is a 300 millimeter-based system that incorporates all
the features of the 9000i. This system is interchangeable with industry
conforming load ports for simplified mechanical integration.
Tabletop Systems
Our tabletop systems are used mainly in low-volume production environments
and in engineering labs where automated handling and high throughput are not
required. Our tabletop product line encompasses both manual and semiautomated
models and includes systems for both film thickness and critical dimension
measurements. Our tabletop system prices range from approximately $50,000 to
$200,000 depending primarily on the degree of automation and software options.
NanoSpec 3000 and 6100/6150
The NanoSpec tabletop systems provide a broad range of thin film measurement
solutions at a lower entry price point. The NanoSpec 3000 is a basic, manual
system while the 6100/6150 models feature semiautomatic wafer handling or
staging.
I-8
NanoLine 50-2C
The NanoLine 50-2C is a tabletop critical dimension, or linewidth,
measurement system primarily used in low-volume production environments and
photolithography mask making shops. The system uses a high- magnification
optical system and scanning technology combined with proprietary software to
provide accurate, repeatable dimensions.
Customers
We sell our thin film metrology systems worldwide to many of the major
semiconductor, flat panel display and magnetic recording head manufacturers and
equipment suppliers, as well as producers of silicon wafers and photomasks. The
majority of our systems are sold to customers located in the United States,
Asia and Europe. One customer, IBM, represented 11.2% of our total net revenues
in 1998 and Applied Materials and TSMC represented 12.8% and 10.5% of our total
net revenues in 1999, respectively.
The following is a list of our top customers, based on revenues, during
1999:
Applied Materials Intertrade Scientific
CHI-MEI Sony
Hyundai Taiwan Semiconductor Manufacturing
Co. (TSMC)
IBM Texas Instruments
Innotech WaferTech
Sales and Marketing
We believe that a direct sales and support capability is essential for
developing and maintaining close customer relationships and for rapidly
responding to changing customer requirements. We provide direct sales support
from our corporate office in California. In addition, we have a direct sales
presence in Oregon and Texas in the United States as well as Scotland, South
Korea, Taiwan and Japan. We use selected sales representatives and distributors
in other countries in Asia, Europe and the Middle East. We intend to continue
to develop our distribution network by expanding our existing offices and
opening new offices and forming additional distribution relationships. We
believe that growing our international distribution network will enhance our
competitive position. We maintain a direct sales force of highly trained,
technically sophisticated sales engineers who are knowledgeable in the use of
metrology systems in general and the features and advantages of our products in
particular. We believe that our sales and application engineers are skilled in
working with customers to solve complex measurement and process problems.
Sales to customers in foreign countries constituted approximately 61.8% and
60.9% of total net revenues for 1998 and 1999, respectively. Direct exports of
our metrology systems to foreign customers and shipments to our subsidiaries
require general export licenses. See note 12 of the notes to consolidated
financial statements for information regarding total net revenues and long-
lived assets of our foreign operations.
In order to raise market awareness of our products, we advertise in trade
publications, distribute promotional materials, publish technical articles,
conduct marketing programs, issue press releases regarding new products, work
with a public relations firm and participate in industry trade shows and
conferences.
Technology
We believe that our engineering expertise, technology acquisitions, supplier
alliances and short-cycle production strategies enable us to develop and offer
advanced solutions that address industry trends. By offering common metrology
platforms that can be configured with a variety of measurement technologies,
our customers can specify high performance systems not offered by other
suppliers or, as a cost saving measure, they can narrowly configure a system
for a specific application.
I-9
Spectroscopic Reflectometry. We pioneered the use of micro-spot
spectroscopic reflectometry for semiconductor film metrology in the late 1970s.
Spectroscopic reflectometry uses multiple wavelengths (colors) of light to
obtain an array of data for analysis of film thickness and other film
parameters. Today's semiconductor manufacturers still depend on spectroscopic
reflectometry for most film metrology applications. Reflectometry is the
measurement of reflected light. For film metrology, a wavelength spectrum in
the visible region is commonly used. Light reflected from the surfaces of the
film and the substrate is analyzed using computers and measurement algorithms.
The analysis yields thickness information and other parameters without
contacting or destroying the film.
In the mid-1980s, we introduced a DUV reflectometer for material analysis.
In 1991, we were awarded a patent for the determination of absolute reflectance
in the ultraviolet region. This technology provides enhanced measurement
performance for thinner films and films stacked on top of one another.
Spectroscopic Ellipsometry. Like reflectometry, ellipsometry is a non-
contact and non-destructive technique used to analyze and measure films. An
ellipsometer analyzes the change in a polarized beam of light after reflection
from a film's surface and interface. Our systems are spectroscopic providing
ellipsometric data at many different wavelengths. Spectroscopic ellipsometry
provides a wealth of information about a film, yielding very accurate and
reliable measurements. In general, ellipsometers are used for thin films and
complex film stacks, whereas reflectometers are used for thicker films and
stacks.
FTIR Reflectometry. FTIR is another non-contact analytical technique used to
collect information about a film. FTIR operates in the infrared region of the
electromagnetic spectrum, which is invisible to the human eye. Our proprietary,
compact FTIR design collects a wide spectrum of infrared radiation reflected
from the film and then separates this radiation into wavelength data using
mathematical algorithms, referred to as Fourier transforms. The infrared
spectrum is useful for determining the dopants in a film. FTIR is of significant
importance to the semiconductor industry, as many new films used today require
careful monitoring of dopant levels. In addition, FTIR can be used to measure
very thick films and films that cannot be analyzed within the range of visible
or DUV reflectometry and ellipsometry.
Combined Film Analysis. By combining all three film analysis techniques
(reflectometry, ellipsometry and FTIR) onto one platform, our film metrology
systems offer a comprehensive analysis for film metrology applications.
Competitive systems generally measure only thickness and optical characteristic
of a film. Our systems measure thickness, optical characteristics and the
concentration of dopants. Beyond the performance advantage, our combined
systems require less cleanroom space and provide lower cost of ownership.
Surface Analysis. We have a variety of proprietary, non-contact and non-
destructive technologies that are used to inspect the surfaces of films and
substrates. These technologies locate and analyze abnormalities found on the
surfaces and can be adapted to metrology platforms.
Overlay Registration. Overlay registration refers to the relative alignment
of two layers in the thin film photolithographic process. Our microscope-based,
measurement technology utilizes a high magnification, low distortion imaging
system combined with proprietary software algorithms to numerically quantify
the alignment.
I-10
Customer Service and Support
We believe that customer service and technical support are important
competitive factors and are essential to building and maintaining close, long-
term relationships with our customers. We provide support to our customers with
telephonic technical support access, direct training programs and operating
manuals and other technical support information. We use our demonstration
equipment for training programs in addition to sales and marketing. We provide
warranty and post-warranty service from our corporate office in California. We
also have service operations based in Arizona, Massachusetts, Oregon,
Pennsylvania, Idaho and Texas. Local service and spare parts are provided in
the United Kingdom by our sales office in Scotland and in the rest of Europe by
distributors and sales representatives. In Asia, service is provided by direct
offices in Japan, Korea and Taiwan. Our distributors and representatives
provide service in other countries in Asia.
We provide a one-year warranty on parts and labor for products sold
domestically and in foreign markets. Service revenue, including sales of
replacement parts, represented approximately 10.7% and 11.7% of total net
revenues in 1998 and 1999, respectively.
Backlog
As of December 31, 1999, our backlog was approximately $13.4 million,
compared with approximately $1.0 million at December 31, 1998. Backlog includes
orders for products that we expect to ship within 12 months. Orders from our
customers are subject to cancellation or delay by the customer without penalty.
Historically, order cancellations and order rescheduling have not been
significant. However, orders presently in backlog could be canceled or
rescheduled. Since only a portion of our revenues for any fiscal quarter
represent systems in backlog, we do not believe that backlog is a meaningful or
accurate indication of our future revenues and performance.
Competition
The market for our metrology systems is intensely competitive and
characterized by rapidly evolving technology. We compete on a global basis with
both larger and smaller companies in the United States, Japan, Israel and
Europe. We compete primarily with: stand-alone thin film measurement products
from KLA-Tencor Corporation, Therma-Wave, Inc., Rudolph Technologies and Dai
Nippon Screen; integrated thin film measurement products from Nova Measuring
Instruments Ltd. and Online Technologies; and overlay measurement products from
KLA-Tencor Corporation, Bio-Rad Laboratories Inc. and Schlumberger Ltd. Many of
our competitors have substantially greater financial, engineering, manufacturing
and marketing resources than we do. Significant competitive factors include:
measurement technology, system performance (including automation and software
capability), ease of use, reliability, established customer bases, cost of
ownership, price and global customer service. We believe that we compete
favorably with respect to these factors, but we must continue to develop and
design new and improved products in order to maintain our competitive position.
Manufacturing
We manufacture our products in the United States, Japan and Korea. We
combine proprietary measurement components and software produced in our
facilities with components and subassemblies obtained from outside suppliers.
Certain of our products include system engineering and software development to
meet specific customer requirements. Our manufacturing operations do not
require a major investment in capital equipment.
Certain components, subassemblies and services necessary for the manufacture
of our systems are obtained from a sole supplier or limited group of suppliers.
We do not maintain any long-term supply agreements with any of our suppliers.
We are relying increasingly on outside vendors to manufacture many components
and subassemblies. We have entered into agreements with J.A. Woollam Company
for the purchase of the spectroscopic ellipsometer components and Midac
Corporation for the purchase of FTIR spectrometer components. Additionally, we
use Kensington Laboratories as our primary source of robotics components.
I-11
Research and Development
Our research and development is directed towards enhancing existing products
and developing and introducing new products to maintain technological
leadership and to meet current and evolving customer needs. Our process,
engineering, marketing, operations and management personnel have developed
close collaborative relationships with many of our customers' counterparts and
have used these relationships to identify market demands and target our
research and development to meet those demands. We are working to develop
potential applications of new and emerging technologies, including improved
metrology methods. We conduct research and development at our facilities in
California, Korea and Japan. We have extensive proprietary technology and
expertise in such areas as spectroscopic reflectometry using our patented
absolute reflectivity, robust pattern recognition and complex measurement
software algorithms. We also have extensive experience in systems integration
engineering required to design compact, highly automated systems for advanced
clean room environments. Expenditures for research and development during 1998
and 1999 were $4.2 million and $4.7 million, and represented 12.7% and 12.8% of
total net revenues, respectively.
Intellectual Property
Our success depends in large part on the technical innovation of our
products. We actively pursue a program of filing patent applications to seek
protection of technologically sensitive features of our metrology systems. We
hold a number of United States patents with several pending patents. The United
States patents, issued during the period 1983 to 1999, will expire from 2000 to
2018. While we attempt to protect our intellectual property rights through
patents and non-disclosure agreements, we believe that our success will depend
to a greater degree upon innovation, technological expertise and our ability to
adapt our products to new technology. We may not be able to protect our
technology, and competitors may be able to develop similar technology
independently. In addition, the laws of certain foreign countries may not
protect our intellectual property to the same extent as do the laws of the
United States.
From time to time we have received communications from third parties
asserting that our metrology systems infringe, or may infringe, the proprietary
rights of these third parties. We are presently discussing patent issues with
Therma-Wave, Inc. We believe that Therma-Wave's Opti-Probe product line may
infringe on a patent issued to us relating to absolute reflectance measurement.
Therma-Wave alleges that some of our thin film thickness measurement products
may infringe on a Therma-Wave patent relating to the combination of a
spectroscopic reflectometer with a spectroscopic ellipsometer. Although we
believe that none of our products infringe on a valid Therma-Wave patent, if
this matter is resolved against us, our business could be harmed. Additionally,
some customers of ours have received notices from The Lemelson Medical,
Education & Research Foundation alleging that equipment used in the manufacture
of semiconductor products infringes their patents. A number of these customers
have notified us that they are seeking indemnification from us for any damages
and expenses resulting from this matter. Certain of our customers have engaged
in litigation with the late Mr. Lemelson involving a number of his patents and
some of these cases have been settled. Although the ultimate outcome of these
matters is not presently determinable, the resolution of all such pending
matters could harm our business. These claims of infringement may lead to
protracted and costly litigation that could require us to pay substantial
damages or have the sale of our products or systems stopped by an injunction.
Infringement claims could also cause product or system delays or require us to
redesign our products or systems, and these delays could result in the loss of
substantial revenues. We may also be required to obtain a license from the third
party or cease activities utilizing the third party's proprietary rights. We may
not be able to enter into such a license or such license may not be available on
commercially reasonable terms. The loss of an infringement action or the
inability to license a third party's intellectual property could therefore
prevent our ability to sell our systems, or require us to redesign our products,
making the sale of such systems more expensive for us. We may be required to
initiate litigation in order to enforce any patents issued to or licensed by us,
or to determine the scope or validity of a third party's patent or other
proprietary rights. Any such litigation, regardless of outcome, could be
expensive and time consuming, and could subject us to significant liabilities or
require us to re-engineer our product or obtain expensive licenses from third
parties.
I-12
Employees
At December 31, 1999, we employed approximately 191 persons worldwide,
including 52 in research and development, 38 in manufacturing and manufacturing
support, 77 in marketing, sales and field service and 24 in general
administration and finance. None of these employees is represented by a union
and we have never experienced a work stoppage as a result of union actions.
Many of our employees have specialized skills of value to us. Our future
success will depend in large part upon our ability to attract and retain highly
skilled scientific, technical, managerial, financial and marketing personnel,
who are in great demand in the industry. We consider our employee relations to
be good.
ITEM 2. PROPERTIES
Our 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. We also have sales and service offices in Texas, Korea and
Taiwan. Rent expense for our facilities was approximately $867,000 for 1999.
Through our Japanese subsidiary, we own a 15,000 square foot facility in
Narita, Japan. This facility is utilized by our Japanese subsidiary for sales,
service, engineering and manufacturing. Our Japanese subsidiary also leases
three sales and service offices.
In September 1998, our Korean subsidiary entered into a two-year agreement
for manufacturing facilities that provides for payments based on a percentage
of net product sales.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending against us. We could become
involved in litigation from time to time relating to claims arising out of our
ordinary course of business.
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, 1999.
I-13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Our common stock is quoted on the Nasdaq National Market under the symbol
"NANO". The following table sets forth, for the periods indicated, the high and
low sale prices per share of our common stock as reported on the Nasdaq
National Market. These quotations represent prices between dealers and do not
include retail markups, markdowns or commissions and may not necessarily
represent actual transactions.
High Low
------ ------
1998
First Quarter.................................................. $10.75 $ 7.81
Second Quarter................................................. $10.13 $ 7.85
Third Quarter.................................................. $ 9.25 $ 3.78
Fourth Quarter................................................. $ 8.88 $ 4.31
1999
First Quarter.................................................. $ 9.88 $ 5.38
Second Quarter................................................. $ 9.63 $ 5.50
Third Quarter.................................................. $10.75 $ 6.50
Fourth Quarter................................................. $24.38 $ 8.88
On February 28, 2000, the last reported sale price of our common stock on
the Nasdaq National Market was $36.50 per share. As of December 31, 1999, there
were approximately 120 shareholders of record of our common stock.
Dividend Policy
We have never declared or paid any cash dividends on our capital stock. We
currently expect to retain future earnings, if any, for the use in the
operation and expansion of our business and do not anticipate paying any cash
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 related
notes included elsewhere in this Annual Report on Form 10-K. The consolidated
statement of operations data set forth below for the fiscal years ended December
31, 1997, 1998 and 1999, and the consolidated balance sheet data as of December
31, 1998 and 1999, have been derived from our consolidated financial statements
included elsewhere in this Annual Report on Form 10-K, and have been audited by
Deloitte & Touche LLP, independent auditors. The consolidated statement of
operations data set forth below for the fiscal years ended December 31, 1995 and
1996, and the consolidated balance sheet data as of December 31, 1995, 1996 and
1997, have been derived from our consolidated financial statements not included
in this Annual Report on Form 10-K, and have been audited by Deloitte & Touche
LLP, independent auditors. The historical results are not necessarily indicative
of results to be expected for any future period.
II-1
Years Ended December 31,
-------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- ------- -------
(In thousands, except per share data)
Consolidated Statement of
Operations Data:
Net revenues:
Product sales.................... $18,117 $24,603 $32,767 $29,718 $32,162
Service.......................... 4,642 5,733 3,890 3,546 4,246
------- ------- ------- ------- -------
Total net revenues............. 22,759 30,336 36,657 33,264 36,408
------- ------- ------- ------- -------
Costs and expenses:
Cost of product sales............ 8,189 10,109 12,092 13,002 14,606
Cost of service.................. 3,406 4,088 3,632 3,669 4,560
Research and development......... 2,631 2,754 2,986 4,206 4,658
Acquired in-process research and
development..................... -- -- -- 1,421 --
Selling.......................... 3,712 4,696 6,050 5,728 5,871
General and administrative....... 2,180 2,476 2,765 2,828 2,973
------- ------- ------- ------- -------
Total costs and expenses....... 20,118 24,123 27,525 30,854 32,668
------- ------- ------- ------- -------
Income from operations............ 2,641 6,213 9,132 2,410 3,740
------- ------- ------- ------- -------
Other income (expense):
Interest income.................. 302 390 535 572 662
Interest expense................. (152) (92) (110) (108) (180)
Other, net....................... 674 146 (175) 64 94
------- ------- ------- ------- -------
Total other income, net........ 824 444 250 528 576
------- ------- ------- ------- -------
Income before income taxes........ 3,465 6,657 9,382 2,938 4,316
Provision (benefit) for income
taxes............................ (812) 2,664 3,625 1,108 1,682
------- ------- ------- ------- -------
Net income........................ $ 4,277 $ 3,993 $ 5,757 $ 1,830 $ 2,634
======= ======= ======= ======= =======
Net income per share:
Basic............................ $ 0.56 $ 0.50 $ 0.69 $ 0.21 $ 0.30
======= ======= ======= ======= =======
Diluted.......................... $ 0.52 $ 0.47 $ 0.65 $ 0.20 $ 0.28
======= ======= ======= ======= =======
Shares used in per share
computation:
Basic............................ 7,604 8,047 8,325 8,635 8,829
======= ======= ======= ======= =======
Diluted.......................... 8,280 8,524 8,820 9,041 9,393
======= ======= ======= ======= =======
December 31,
---------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- ------- -------
(In thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term
investments.......................... $ 8,083 $ 8,382 $13,251 $11,431 $18,140
Working capital....................... 18,338 22,613 28,653 30,621 36,021
Total assets.......................... 25,167 29,964 36,243 39,305 46,410
Debt obligations, less current
portion.............................. 3,528 3,296 2,568 2,496 2,288
Total shareholders' equity............ 17,574 22,060 28,528 32,010 38,155
II-2
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with our consolidated
financial statements and the notes thereto included elsewhere in this Annual
Report on Form 10-K. Our discussion contains forward-looking statements based
upon current expectations that involve risks and uncertainties, such as our
plans, objectives and intentions. When we use words such as "believe," "expect,"
"anticipate" or similar expressions, we are making forward-looking statements.
Our actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain risk factors, including those
set forth in "Factors That May Affect Future Operating Results" and elsewhere in
this Annual Report on Form 10-K. We believe it is important to communicate our
expectations to our investors. However, there may be events in the future that
we are not able to predict accurately or over which we have no control. You
should be aware that the occurrance of the events described in these risk
factors and elsewhere in this Annual Report on Form 10-K could materially and
adversely affect our business, operating results and financial condition. We
disclaim any obligation to update information contained in any forward-looking
statement.
Overview
We are a leader in the design, manufacture, marketing and support of thin
film metrology systems for the semiconductor, flat panel display and magnetic
recording head industries. We have made several strategic changes in our
business over the past two years that have positioned us to further
participate in these markets. These changes include:
. becoming an original equipment manufacturer, or OEM, of metrology systems
that are integrated into various types of semiconductor processing
equipment;
. the development of new products that can be used for 300 millimeter wafers
and chemical mechanical planarization;
. an increased emphasis on product development, manufacturing and direct
sales in Japan and Korea;
. a shift to direct sales from third-party representatives in Asia and the
United States;
. a decision to outsource certain system components such as robotics,
enabling us to leverage our technical resources;
. the acquisition of an overlay registration product line from Optical
Specialties, Inc. in March 1998 (see "Acquisition" for more information on
the product line acquisition); and
. the acquisition of inspection and metrology technology from Phase Metrics
in December 1999.
Our business is dependent upon the capital expenditures of manufacturers of
semiconductors, flat panel displays and magnetic recording heads and their
suppliers. The demand by these manufacturers and suppliers for our products
is, in turn, dependent on the current and future market demand for
semiconductors and products utilizing semiconductors, disk drives and
computers that utilize disk drives and flat panel displays for use in laptop
computers, pagers, cell phones and a variety of other applications. The
increasing complexity of the manufacturing processes for semiconductors, flat
panel displays and magnetic recording heads is also an important factor in the
demand for our metrology systems.
We derive our revenues from product sales and services, which include sales
of accessories and service to the installed base of products. For the year
ended December 31, 1999, we derived 88.3% of our total net revenues from
product sales and 11.7% of our total net revenues from services. Revenues from
product sales and replacement and spare parts are recognized at the time of
shipment. Revenues from service work are recognized when performed. See note 1
of the notes to consolidated financial statements for more information on our
revenue recognition policy.
II-3
Results of Operations
The following table presents our consolidated statements of operations data
as a percentage of total net revenues for the years ended December 31, 1997,
1998 and 1999:
Years Ended December 31,
----------------------------
1997 1998 1999
-------- -------- --------
Net revenues:
Product sales................................... 89.4% 89.3% 88.3%
Service......................................... 10.6 10.7 11.7
-------- -------- --------
Total net revenues............................ 100.0 100.0 100.0
-------- -------- --------
Cost and expenses:
Cost of product sales........................... 33.0 39.1 40.1
Cost of service................................. 9.9 11.0 12.5
Research and development........................ 8.1 12.7 12.8
Acquired in-process research and development.... -- 4.3 --
Selling......................................... 16.5 17.2 16.1
General and administrative...................... 7.6 8.5 8.2
-------- -------- --------
Total cost and expenses....................... 75.1 92.8 89.7
-------- -------- --------
Income from operations............................ 24.9 7.2 10.3
-------- -------- --------
Other income (expense):
Interest income................................. 1.5 1.7 1.8
Interest expense................................ (0.3) (0.3) (0.5)
Other, net...................................... (0.5) 0.2 0.3
-------- -------- --------
Total other income, net....................... 0.7 1.6 1.6
-------- -------- --------
Income before income taxes........................ 25.6 8.8 11.9
Provision for income taxes........................ 9.9 3.3 4.7
-------- -------- --------
Net income........................................ 15.7% 5.5% 7.2%
======== ======== ========
Years ended December 31, 1997, 1998 and 1999
Total net revenues. Total net revenues increased 9.5% from $33.3 million in
1998 to $36.4 million in 1999. Product sales increased 8.2% from $29.7 million
in 1998 to $32.2 million in 1999. The increase in product sales resulted from
stronger demand for and increased shipments of our products, especially in the
U.S. and Asia. Service revenue increased 19.7% from $3.5 million in 1998 to
$4.2 million in 1999. The increase in service revenue is primarily attributable
to higher sales of parts, services and accessories in Asia and the U.S. in 1999
due in part to the recovery in the semiconductor market. Total net revenues
decreased 9.3% from $36.7 million in 1997 to $33.3 million in 1998. Product
sales decreased 9.3% from $32.8 million in 1997 to $29.7 million in 1998. The
decrease in product sales resulted from slower worldwide demand for and
decreased shipments of our products, especially in the U.S. and in Asia.
Service revenue decreased 8.8% from $3.9 million in 1997 to $3.5 million in
1998. The decrease in service revenue is primarily attributable to lower sales
of parts, services and accessories in Asia and the U.S. in 1998 due in part to
increased functionality and reliability of our newer products. International
revenues, which includes sales by our foreign subsidiaries, constituted
approximately 60.9%, 61.8% and 60.3% of total net revenues for 1999, 1998 and
1997, respectively. In 1998, we experienced a 12.7% decrease in domestic
revenues from $14.5 million in 1997 to $12.7 million in 1998, while
international revenues decreased 7.1% from $22.1 million in 1997 to $20.6
million in 1998.
II-4
Cost of product sales. Cost of product sales as a percentage of product
sales increased from 43.8% in 1998 to 45.4% in 1999 primarily as a result of
lower volume purchasing resulting in fewer purchasing discounts for materials
early in 1999. Cost of product sales as a percentage of product sales increased
from 36.9% in 1997 to 43.8% in 1998 primarily because of lower sales volumes in
1998 resulting in higher per unit manufacturing costs.
Cost of service. Cost of service as a percentage of service revenue
increased from 103.5% in 1998 to 107.4% in 1999 primarily as a result of
increased fixed service costs to support our growing installed based of systems
at customer locations in 1999. Cost of service as a percentage of service
revenue increased from 93.4% in 1997 to 103.5% in 1998. This increase was
primarily attributable to the decline in the sales of accessories and parts
while fixed service costs increased slightly to support our growing installed
base of systems at customer locations in 1998.
Research and development. Research and development expenses increased 10.7%
from $4.2 million in 1998 to $4.7 million in 1999 as a result of additional
headcount and a purchase of technology from Phase Metrics in the fourth quarter
of 1999. Research and development expenses increased 40.9% from $3.0 million in
1997 to $4.2 million in 1998 due to the development of our new Metra overlay
registration product line and our new NanoSpec 9000 integrated film thickness
metrology product line. We are committed to the development of new and enhanced
products and believe that new product introductions are required for us to
maintain our competitive position. During 1999, research and development
expenses represented 12.8% of total net revenues, compared to 12.7% in 1998 and
8.1% in 1997.
Acquired in-process research and development. In the first quarter of 1998,
we paid approximately $3.2 million for the assets and technology related to the
Metra product line from Optical Specialties. Of this purchase price, $1.4
million related to the value of in-process research and development that had no
alternative future use and was charged to expense during the year ended
December 31, 1998. Our increase in research and development expenses discussed
above is primarily attributable to efforts to bring the acquired in-process
technology to completion. See "Acquisition" for further discussion.
Selling. Selling expenses increased 2.5% from $5.7 million in 1998 to $5.9
million in 1999 primarily because of higher sales in 1999. Selling expenses
decreased 5.3% from $6.1 million in 1997 to $5.7 million in 1998 primarily due
to lower commission expenses and other expenses associated with lower sales
levels in 1998. In 1999 selling expenses represented 16.1% of total net
revenues, compared to 17.2% in 1998 and 16.5% in 1997.
General and administrative. General and administrative expenses increased
5.1% from $2.8 million in 1998 to $3.0 million in 1999 as a result of higher
spending associated with the increase in total net revenues. General and
administrative expenses in 1997 remained essentially unchanged from 1998 at
$2.8 million. During 1999, general and administrative expenses represented 8.2%
of total net revenues, compared to 8.5% in 1998 and 7.6% in 1997.
Total other income, net. Total other income, net increased 9.1% from
$528,000 in 1998 to $576,000 in 1999 primarily due to higher interest income in
1999. Total other income, net increased 111.2% from $250,000 in 1997 to
$528,000 in 1998 primarily due to lower exchange rate losses in 1998.
Income taxes. Our effective income tax rate increased from 37.7% in 1998 to
39.0% in 1999 primarily due to a valuation allowance established in 1999
against the net defferred tax assets of our Japanese subsidiary. Our effective
income tax rate decreased 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 effective income tax rates in 1999, 1998 and 1997 exceed the
U.S. statutory rate due primarily to state income taxes partially offset by the
realization of foreign sales corporation benefit.
II-5
Quarterly Results of Operations
The following tables present unaudited quarterly results of operations in
dollars and as a percentage of total net revenues for the eight quarters ended
December 31, 1999. We believe that all necessary adjustments, consisting only
of normal recurring adjustments, have been included in the amounts stated below
to present fairly such quarterly information. The operating results for any
quarter are not necessarily indicative of results for any subsequent period.
Quarters Ended,
--------------------------------------------------------------------------------
Mar. 31, June 30, Sep. 30, Dec. 31, Mar. 31, June 30, Sep. 30, Dec. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- -------- -------- -------- -------- -------- --------
(In thousands)
Net revenues:
Product sales.......... $ 9,618 $ 9,705 $ 6,249 $ 4,146 $ 5,265 $ 6,468 $ 8,717 $11,712
Service................ 920 1,023 756 847 924 1,055 1,104 1,163
------- ------- ------- ------- ------- ------- ------- -------
Total net revenues... 10,538 10,728 7,005 4,993 6,189 7,523 9,821 12,875
------- ------- ------- ------- ------- ------- ------- -------
Costs and expenses:
Cost of product
sales................. 3,629 4,029 2,813 2,531 2,552 2,984 3,976 5,094
Cost of service........ 985 967 835 882 1,104 1,017 1,176 1,263
Research and
development........... 1,231 1,063 886 1,026 1,016 1,094 1,099 1,449
Acquired in process
research and
development........... 1,421 -- -- -- -- -- -- --
Selling................ 1,572 1,529 1,366 1,261 1,277 1,309 1,519 1,766
General and
administrative........ 785 694 614 735 641 724 730 878
------- ------- ------- ------- ------- ------- ------- -------
Total costs and
expenses............ 9,623 8,282 6,514 6,435 6,590 7,128 8,500 10,450
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations............. 915 2,446 491 (1,442) (401) 395 1,321 2,425
Total other income
(expense), net......... 126 (3) 165 240 66 112 216 182
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before
income taxes........... 1,041 2,443 656 (1,202) (335) 507 1,537 2,607
Provision (benefit) for
income taxes........... 417 948 262 (519) (134) 203 637 976
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)....... 624 $ 1,495 $ 394 $ (683) $ (201) $ 304 $ 900 $ 1,631
======= ======= ======= ======= ======= ======= ======= =======
Net income (loss) per
share
Basic.................. $ 0.07 $ 0.17 $ 0.05 $ (0.08) $ (0.02) $ 0.03 $ 0.10 $ 0.18
Diluted................ $ 0.07 $ 0.17 $ 0.04 $ (0.08) $ (0.02) $ 0.03 $ 0.10 $ 0.17
Shares used in per share
computation
Basic.................. 8,545 8,641 8,669 8,686 8,701 8,757 8,823 9,033
Diluted................ 8,978 9,003 9,074 8,686 8,701 9,177 9,347 9,842
Quarters Ended,
--------------------------------------------------------------------------------
Mar. 31, June 30, Sep. 30, Dec. 31, Mar. 31, June 30, Sep. 30, Dec. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- -------- -------- -------- -------- -------- --------
Net revenues:
Product sales.......... 91.3% 90.5% 89.2% 83.0% 85.1% 86.0% 88.8% 91.0%
Service................ 8.7 9.5 10.8 17.0 14.9 14.0 11.2 9.0
------- ------- ------- ------- ------- ------- ------- -------
Total net revenues... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
------- ------- ------- ------- ------- ------- ------- -------
Costs and expenses:
Cost of product
sales................. 34.4 37.6 40.2 50.7 41.2 39.7 40.5 39.6
Cost of service........ 9.3 9.0 11.9 17.7 17.8 13.5 12.0 9.8
Research and
development........... 11.7 9.9 12.6 20.5 16.4 14.5 11.2 11.3
Acquired in process
research and
development........... 13.5 -- -- -- -- -- -- --
Selling................ 14.9 14.3 19.5 25.3 20.6 17.4 15.5 13.7
General and
administrative........ 7.5 6.4 8.8 14.7 10.5 9.6 7.3 6.8
------- ------- ------- ------- ------- ------- ------- -------
Total costs and
expenses............ 91.3 77.2 93.0 128.9 106.5 94.7 86.5 81.2
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations............. 8.7 22.8 7.0 (28.9) (6.5) 5.3 13.5 18.8
Total other income
(expense), net......... 1.2 0.0 2.4 4.8 1.1 1.4 2.2 1.4
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before
income taxes........... 9.9 22.8 9.4 (24.1) (5.4) 6.7 15.7 20.2
Provision (benefit) for
income taxes........... 4.0 8.9 3.8 (10.4) (2.2) 2.7 6.5 7.5
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)....... 5.9% 13.9% 5.6% (13.7)% (3.2)% 4.0% 9.2% 12.7%
======= ======= ======= ======= ======= ======= ======= =======
II-6
Total net revenues for the quarters ended September 30, 1998, December 31,
1998 and March 31, 1999 were adversely affected as a result of decreased
shipments of our products in the U.S. and Asia due primarily to slower
worldwide demand in the semiconductor industry. In the first quarter of 1998,
we paid approximately $3.2 million for the assets and technology related to the
Metra product line from Optical Specialties. Of this purchase price, $1.4
million related to the value of in-process research and development that had no
alternative future use and was charged to expense during the quarter ended
March 31, 1998. See "Acquisition" for further discussion. During the quarter
ended December 31, 1999, we benefited from a generalized recovery in the
semiconductor industry.
During each quarter we sell a relatively small number of systems, and
therefore a slight change in the timing of shipments can have a significant
impact on our quarterly results of operations. Our backlog at the beginning of
each quarter does not include all systems sales needed to achieve expected
revenues for that quarter. Consequently, we are dependent on obtaining orders
for systems to be shipped in the same quarter that the order is received.
Moreover, customers may reschedule shipments, and production difficulties could
delay shipments. Accordingly, our results of operations are subject to
significant variability from quarter to quarter and could be adversely affected
in a particular quarter if shipments for that quarter were lower than
anticipated. Because a relatively small group of customers may account for a
significant percentage of our sales in any given period, the loss of any single
customer could have a material, adverse effect on our results of operations.
We believe that our quarterly and annual revenues, expenses and operating
results could vary significantly in the future and that period-to-period
comparisons should not be relied upon as indications of future performance. We
may not sustain or increase our level of net revenues or our rate of revenue
growth on a quarterly or annual basis. We may, in some future quarter, have
operating results that will be below the expectations of stock market analysts
and investors. In such event, the price of our common stock could decline.
Acquisition
On March 30, 1998, we purchased from Optical Specialties a metrology system
product line and related assets used to measure the critical dimensions and
overlay registration errors observed in sub-micron photolithography. Under the
agreement, we paid approximately $3.2 million in cash for the assets and in-
process research and development. The total purchase price and allocation among
the tangible and intangible assets and liabilities acquired (including acquired
in-process research and development) is summarized as follows (in thousands):
Total purchase price--cash consideration................................ $3,225
======
Purchase price allocation:
Tangible assets....................................................... $1,923
Intangible assets*:
Core and developed technology....................................... 419
Goodwill............................................................ 196
In-process research and development................................... 1,421
Liabilities........................................................... (734)
------
Total purchase price allocation......................................... $3,225
======
- --------
* Intangible assets are being amortized using the straight-line method over a
five-year useful life.
The purchase price allocation and intangible valuation was based on our
estimates of the after tax net cash flows and gave explicit consideration to
the SEC's views on acquired in-process research and development as set forth in
its September 9, 1998 letter to the American Institute of Certified Public
Accountants. Specifically, the valuation gave consideration to the following:
. the employment of a fair market value premise excludes any Nanometrics-
specific considerations, which could result in estimates of investment
value for the subject assets; and
II-7
. comprehensive due diligence concerning all potential intangible assets
including trademarks/tradenames, patents, copyrights, noncompete
agreements, assembled workforce and customer relationships and sales
channel.
The value of core technology was specifically addressed, with a view toward
ensuring the relative allocations to core technology and in-process research
and development were consistent with the relative contributions of each to the
final product. The allocation to in-process research and development was based
on a calculation that considered only the efforts completed as of the
transaction date, and only the cash flow associated with these completed
efforts for the products currently in process.
As indicated above, we recorded a one-time charge of $1.4 million in the
first quarter of 1998 for acquired in-process research and development related
to the Metra 7000 development project that had not reached technological
feasibility, had no alternative future use and for which successful
development was uncertain. Our conclusion that the in-process development
effort, or any material sub-component, had no alternative future use was
reached in consultation with our engineering personnel and engineering
personnel from Optical Specialties.
The project to complete the Metra 7000 product included the completion of a
software platform design started by Optical Specialties in 1997. As of the
acquisition date, the Metra 7000 had yet to achieve technological feasibility
since there was not a working prototype with a reliable new software design.
At the time of acquisition, the estimated cost to complete this software and
related development was approximately $300,000. We began shipments of the
Metra 7000 product to a customer in June 1998 and it was at that time that we
began to benefit from the acquired research and development related to the
product.
Significant assumptions used to determine the value of in-process research
and development included several factors, including the following:
. forecast of net cash flows that were expected to result from the
development effort using projections prepared by us; and
. percentage complete of 77.0% for the Metra 7000 project estimated by
considering a number of factors, including the costs invested to date
relative to total cost of the development effort and the amount of
progress completed as of the acquisition date, on a technological basis,
relative to the overall technological achievements required to achieve
the functionality of the eventual product.
The technological issues were addressed by engineering representatives from
both us and Optical Specialties, and when estimating the value of the
technology, the projected financial results of the acquired assets were
estimated on a stand-alone basis without any consideration to potential
synergic benefits or "investment value" related to the acquisition.
Accordingly, separate projected cash flows were prepared for both the
existing as well as the in-process Metra 7000 products. These projected
results were based on the number of units sold times average selling price
less the associated costs. After preparing the estimated cash flow from the
product being developed, a portion of this cash flow was attributed to the
core technology, which was embodied in the in-process Metra 7000 product line
and enabled a quicker and more cost effective development of the Metra 7000.
When estimating the value of the developed, core and in-process technologies,
discount rates of 25.0%, 30.0% and 35.0%, respectively, were used. These
discount rates considered both the status and risk associated with the
respective cash flows as of the acquisition date.
Liquidity and Capital Resources
At December 31, 1999, our cash, cash equivalents and short-term investments
totaled $18.1 million as compared to $11.4 million at December 31, 1998.
Additionally, our working capital of $36.0 million at December 31, 1999
increased from $30.6 million at December 31, 1998. We believe our working
capital, together with the proceeds of this offering, will be sufficient to
meet our needs at least through the next twelve months.
II-8
Operating activities during 1999 provided cash of $7.1 million primarily
from net income and changes in income taxes of $2.8 million. Investing
activities used $5.9 million due to net purchases of short-term investments of
$4.8 million and $1.0 million in capital expenditures and prepaid licenses
fees. Financing activities provided cash of $816,000 primarily due to the sale
of shares under the employee stock purchase and option plans offset by the net
repayment of debt obligations in Japan of $1.3 million.
Operating activities during 1998 provided net cash of $885,000 primarily
from net income partially offset by working capital requirements. Investing
activities used cash of $3.8 million, primarily to purchase the Metra product
line, as previously discussed above, and to fund net purchases of short-term
investments. Financing activities provided cash of $801,000 resulting primarily
from the sale of shares under the employee stock purchase and option plans.
Operating activities during 1997 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
resulting from the sale of shares under the employee stock purchase and option
plans.
We have evaluated and will continue to evaluate the acquisition of products,
technologies or businesses that are complementary to our business. These
activities may result in product and business investments. For example, as
previously discussed above, in March 1998, we purchased from Optical
Specialties a metrology system product line and related assets. Under the
agreement, we paid approximately $3.2 million in cash for the assets and
technology. We funded this acquisition from our cash equivalents, short-term
investments and cash flows from operations.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires companies to
record derivatives on the balance sheet as assets or liabilities, measured at
fair value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. SFAS No. 133 will be effective for
us beginning in the first quarter of fiscal year 2001. Although we have not
fully assessed the implications of SFAS No. 133, our management does not
believe adoption of this statement will have a significant impact on our
consolidated financial position, results of operations or cash flows.
In December 1999, the Securities and Exchange Commission (SEC) released
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." This bulletin summarizes certain interpretations and practices
followed by the Division of Corporation Finance and the Office of the Chief
Accountant of the SEC in administering the disclosure requirements of the
Federal securities laws in applying generally accepted accounting principles to
revenue recognition in financial statements. Application of the accounting and
disclosures desired in the bulletin is required by the first fiscal quarter of
2000. Although we have not fully assessed the implications of SAB No. 101, our
management does not believe adoption of this bulletin will have a significant
impact on our consolidated financial position, results of operations or cash
flows.
II-9
Year 2000 Issues
Many computer systems had been expected to experience problems handling
dates for the Year 2000. The Year 2000 issue arose as a result of certain
computer programs being written using two digits rather than four to define the
applicable year. Consequently, these computer programs were unable to
distinguish between 21st century dates and 20th century dates and could have
caused computer system failures or miscalculations that could result in
significant business disruptions.
Over the past year we have been testing our systems to evaluate Year 2000
problems, executing remediation activities to fix non-compliant systems and
monitoring and testing products and systems. To date, we have not experienced
any problems complying with the Year 2000 issue and have not been informed of
any failures of our products from customers.
Factors That May Affect Future Operating Results
You should carefully consider the risks described below together with all of
the other information included in this Annual Report on Form 10-K before making
an investment decision. The risks and uncertainties described below are not the
only ones facing our company. If any of the following risks actually occurs, our
business, financial condition or operating results could be harmed. In such
case, the trading price of our common stock could decline, and you could lose
all or part of your investment.
II-10
Risks Related to Our Business
Cyclicality in the semiconductor, flat panel display and magnetic recording
head industries has led to substantial decreases in demand for our systems and
may from time to time continue to do so
Our operating results have varied significantly due to the cyclical nature of
the semiconductor, flat panel display and magnetic recording head industries.
The majority of our business depends upon the capital expenditures of
semiconductor device and capital equipment manufacturers. These manufacturers'
capital expenditures, in turn, depend upon the current and anticipated market
demand for semiconductors and products using semiconductors. The semiconductor
industry is cyclical and has historically experienced periodic downturns. These
downturns have often resulted in substantial decreases in the demand for capital
equipment, including metrology systems. We have found that the resulting
decrease in capital expenditures has typically been more pronounced than the
precipitating downturn in semiconductor device industry revenues. We expect the
cyclical nature of the semiconductor industry, and therefore, our business, to
continue. Any future downturn in the semiconductor industry will likely
seriously harm our business.
We are highly dependent on international sales and operations, which exposes
us to foreign political and economic risks
Sales to customers in foreign countries accounted for approximately 61.8%
and 60.9% of our total net revenues in 1998 and 1999, respectively. We
maintain facilities in Japan and Korea. We anticipate that international sales
will continue to account for a significant portion of our revenues.
Our reliance on international sales and operations exposes us to foreign
political and economic risks, including:
. political, social and economic instability;
. trade restrictions and changes in tariffs;
. import and export license requirements and restrictions;
. difficulties in staffing and managing international operations;
. disruptions in international transport or delivery;
. fluctuations in currency exchange rates;
. difficulties in collecting receivables; and
. potentially adverse tax consequences.
If any of these risks materialize, our international sales could decrease
and our foreign operations could suffer.
Because we derive a significant portion of our revenues from sales in Asia,
our sales and results of operations could be adversely affected by the
instability of Asian economies
Our sales to customers in Asian markets represented approximately 45.6% and
53.7% of our total net revenues in 1998 and 1999, respectively. Countries in
the Asia Pacific region, including Japan, Korea and Taiwan, each of which
accounted for a significant portion of our business in that region, have
experienced general economic weaknesses over the last several years. These
weaknesses began to adversely affect our sales to semiconductor manufacturers
located in these regions in the third and fourth quarters of 1998 and continued
through the first half of 1999. Although we have recently received increased
orders from customers in the Asia Pacific region, any further instability in the
Asian markets could harm our sales in future periods.
II-11
Our largest customers account for a significant portion of our revenues, and
our revenues would significantly decline if one or more of these customers were
to purchase significantly fewer of our systems or if they delayed or cancelled
a large order
Historically, a significant portion of our revenues in each quarter and year
has been derived from sales to relatively few customers, and we expect this
trend to continue. If any of our key customers were to purchase significantly
fewer systems, or if a large order were delayed or cancelled, our revenues
would significantly decline. In 1999, revenue from our ten largest customers
accounted for approximately 59.5% of our total net revenues. In 1998, sales to
International Business Machines Corp. accounted for 11.2% of our total net
revenues. In 1999, sales to Applied Materials and TSMC represented 12.8% and
10.5% of our total net revenues, respectively. There are only a limited number
of large companies operating in the semiconductor, flat panel display and
magnetic recording head industries. Accordingly, we expect that we will continue
to depend on a small number of large customers for a significant portion of our
revenues for at least the next several years. In addition, as large
semiconductor, flat panel display and magnetic recording head manufacturers and
suppliers seek to establish closer relationships with their suppliers, we expect
that our customer base will become even more concentrated.
The success of our product development efforts depends on our ability to
anticipate market trends and the price, performance and functionality
requirements of semiconductor device manufacturers. In order to anticipate
these trends and ensure that critical development projects proceed in a
coordinated manner, we must continue to collaborate closely with our customers.
Our relationships with our customers provide us with access to valuable
information regarding industry trends, which enables us to better plan our
product development activities. If our current relationships with our large
customers are impaired, or if we are unable to develop similar collaborative
relationships with important customers in the future, our long-term ability to
produce commercially successful systems will be impaired.
We depend on Applied Materials for sales of our integrated metrology systems,
and the loss of Applied Materials as a customer could harm our business
We believe that sales of integrated metrology systems will be an important
source of future revenues. We have entered into an agreement with Applied
Materials to supply metrology systems for Applied Materials' CMP systems,
including the Mirra Mesa(TM) CMP system. This agreement restricts us from
supplying integrated film thickness systems for use in CMP applications to any
company other than Applied Materials. This agreement is not a long-term
contract and is terminable under various circumstances within a short period of
time. Sales of our integrated metrology systems depend upon Applied Materials
selling semiconductor equipment products that include our metrology systems as
components. If Applied Materials is unable to sell such products, or if Applied
Materials chooses to focus its attention on products that do not integrate our
systems, our business could suffer. We may be unable to retain Applied
Materials as a customer. If we lose Applied Materials as a customer for any
reason, our ability to realize sales from integrated metrology systems would be
significantly diminished, which would harm our business.
Our quarterly operating results have varied in the past and probably will
continue to vary significantly in the future, which will cause volatility in
our stock price
Our quarterly operating results have varied significantly in the past and
are likely to vary in the future, which could cause our stock price to decline.
Some of the factors that may influence our operating results and subject our
stock to extreme price and volume fluctuations include:
. changes in customer demand for our systems;
. economic conditions in the semiconductor, flat panel display and magnetic
recording head industries;
II-12
. the timing, cancellation or delay of customer orders and shipments;
. market acceptance of our products and our customers' products;
. competitive pressures on product prices and changes in pricing by our
customers or suppliers;
. the timing of new product announcements and product releases by us or our
competitors and our ability to design, introduce and manufacture new
products on a timely and cost-effective basis;
. the timing of acquisitions of businesses, products or technologies;
. the levels of our fixed expenses, including research and development
costs associated with product development, relative to our revenue
levels; and
. fluctuations in foreign currency exchange rates, particularly the
Japanese yen.
Due to the foregoing factors and other factors described in this "Factors
That May Affect Future Operating Results" section, we believe that period-to-
period comparisons of our operating results are not necessarily meaningful, and
you should not view these operating results as indicators of our future
performance. If our operating results in any period fall below the expectations
of securities analysts and investors, the market price of our common stock would
likely decline.
We obtain some of the components and subassemblies included in our systems
from a single source or a limited group of suppliers, and the partial or
complete loss of one of these suppliers could cause production delays and a
substantial loss of revenue
We rely on outside vendors to manufacture many components and
subassemblies. Certain components, subassemblies and services necessary for
the manufacture of our systems are obtained from a sole supplier or limited
group of suppliers. We do not maintain any long-term supply agreements with
any of our suppliers. We have entered into arrangements with J.A. Woollam
Company for the purchase of the spectroscopic ellipsometer component, Midac
Corporation for the purchase of the FTIR spectrometer component, and
Kensington Laboratories for the robotics incorporated in our advanced
measurement systems. Our reliance on a sole or a limited group of suppliers
involves several risks, including the following:
. we may be unable to obtain an adequate supply of required components;
. we have reduced control over pricing and the timely delivery of
components and subassemblies; and
. our suppliers may be unable to develop technologically advanced products
to support our growth and development of new systems.
Because the manufacturing of certain of these components and subassemblies
involves extremely complex processes and requires long lead times, we may
experience delays or shortages caused by suppliers. We believe that
alternative sources could be obtained and qualified, if necessary, for most
sole and limited source parts. However, if we were forced to seek alternative
sources of supply or to manufacture such components or subassemblies
internally, we may be forced to redesign our systems, which could prevent us
from shipping our systems to customers on a timely basis. Some of our
suppliers have relatively limited financial and other resources. Any inability
to obtain adequate deliveries, or any other circumstance that would restrict
our ability to ship our products, could damage relationships with current and
prospective customers and could harm our business.
II-13
Our current and potential competitors have significantly greater resources
than we do, and increased competition could impair sales of our products
We operate in the highly competitive semiconductor, flat panel display and
magnetic recording head industries and face competition from a number of
companies, many of which have greater financial, engineering, manufacturing,
marketing and customer support resources than we do. As a result, our
competitors may be able to respond more quickly to new or emerging technologies
or market developments by devoting greater resources to the development,
promotion and sale of products, which could impair sales of our products.
Moreover, there has been significant merger and acquisition activity among our
competitors and potential competitors. These transactions by our competitors and
potential competitors may provide them with a competitive advantage over us by
enabling them to rapidly expand their product offerings and service capabilities
to meet a broader range of customer needs. Many of our customers and potential
customers in the semiconductor, flat panel display and magnetic recording head
industries are large companies that require global support and service for their
metrology systems.
Variations in the amount of time it takes for us to sell our systems may cause
fluctuations in our operating results, which could cause our stock price to
decline
Variations in the length of our sales cycles could cause our revenues to
fluctuate widely from period to period. Our customers generally take a long
time to evaluate our metrology systems. We expend significant resources
educating and providing information to our prospective customers regarding the
uses and benefits of our systems. The length of time it takes for us to make a
sale depends upon many factors, including:
. the efforts of our sales force and our independent sales representatives
and distributors;
. the complexity of the customer's metrology needs;
. the internal technical capabilities and sophistication of the customer;
. the customer's budgetary constraints; and
. the quality and sophistication of the customer's current processing
equipment.
Because of the number of factors influencing the sales process, the period
between our initial contact with a customer and the time when we recognize
revenue from that customer, if ever, varies widely. Our sales cycles, including
the time it takes for us to build a product to customer specifications after
receiving an order, typically range from three to six months. Sometimes our
sales cycles can be much longer, particularly with customers in Asia. During
these cycles, we commit substantial resources to our sales efforts in advance
of receiving any revenue, and we may never receive any revenue from a customer
despite our sales efforts.
If we do make a sale, our customers often purchase only one of our systems,
and then evaluate its performance for a lengthy period of time before
purchasing additional systems. The purchases are generally made by purchase
orders and not long-term contracts. The number of additional products a
customer purchases, if any, depends on many factors, including a customer's
capacity requirements. The period between a customer's initial purchase and any
subsequent purchases can vary from three months to a year or longer, and
variations in the length of this period could cause fluctuations in our
operating results and stock price.
Relatively small fluctuations in our system costs may cause our operating
results to vary significantly each quarter
During any quarter, a significant portion of our revenue is derived from the
sale of a relatively small number of systems. Our automated metrology systems
range in price from approximately $200,000 to $700,000 per system, our
integrated metrology systems range in price from approximately $90,000 to
$295,000 per system and our tabletop metrology systems range in price from
approximately $50,000 to $200,000 per system. Accordingly, a small change in
the number of systems we sell will cause significant changes in our operating
results.
II-14
We depend on orders that are received and shipped in the same quarter and
therefore have limited visibility of future product shipments
Our net sales in any given quarter depend upon a combination of orders
received in that quarter for shipment in that quarter and shipments from
backlog. Our backlog at the beginning of each quarter does not include all
systems sales needed to achieve expected revenues for that quarter.
Consequently, we are dependent on obtaining orders for systems to be shipped in
the same quarter that the order is received. Moreover, customers may reschedule
shipments, and production difficulties could delay shipments. Accordingly, we
have limited visibility of future product shipments, and our results of
operations are subject to significant variability from quarter to quarter.
Because of the high cost of switching equipment vendors in our markets, it is
sometimes difficult for us to win customers from our competitors even if our
metrology systems are superior to theirs
We believe that once a semiconductor, flat panel display or magnetic
recording head customer has selected one vendor's metrology system, the
customer generally relies upon that system and, to the extent possible,
subsequent generations of the same vendor's system, for the life of the
application. Once a vendor's metrology system has been installed, a customer
must often make substantial technical modifications and may experience downtime
in order to switch to another vendor's metrology system. Accordingly, unless
our systems offer performance or cost advantages that outweigh a customer's
expense of switching to our systems, it will be difficult for us to achieve
significant sales to that customer once it has selected another vendor's system
for an application.
If we deliver systems with defects, our credibility will be harmed and the
sales and market acceptance of our systems will decrease
Our systems are complex and sometimes have contained errors, defects and
bugs when introduced. If we deliver systems with errors, defects or bugs, our
credibility and the market acceptance and sales of our systems would be harmed.
Further, if our systems contain errors, defects or bugs, we may be required to
expend significant capital and resources to alleviate such problems. Defects
could also lead to product liability as a result of product liability lawsuits
against us or against our customers. We have agreed to indemnify our customers
in some circumstances against liability arising from defects in our systems. In
the event of a successful product liability claim, we could be obligated to pay
damages significantly in excess of our product liability insurance limits.
If we are not successful in developing new and enhanced metrology systems we
will likely lose market share to our competitors
We operate in an industry that is subject to technological changes, changes
in customer demands and the introduction of new, higher performance systems
with short product life cycles. To be competitive, we must continually design,
develop and introduce in a timely manner new metrology systems that meet the
performance and price demands of semiconductor, flat panel display and magnetic
recording head manufacturers and suppliers. We must also continue to refine our
current systems so that they remain competitive. We may experience difficulties
or delays in our development efforts with respect to new systems, and we may
not ultimately be successful in developing them. Any significant delay in
releasing new systems could adversely affect our reputation, give a competitor
a first-to-market advantage or cause a competitor to achieve greater market
share.
II-15
Successful infringement claims by third parties could result in substantial
damages, lost product sales and the loss of important intellectual property
rights by us
Our commercial success depends in part on our ability to avoid infringing or
misappropriating patents or other proprietary rights owned by third parties.
From time to time we have received communications from third parties asserting
that our products infringe, or may infringe, the proprietary rights of these
third parties. We are presently discussing patent issues with Therma-Wave, Inc.
We believe that Therma-Wave's Opti-Probe product line may infringe on a patent
issued to us relating to absolute reflectance measurement. Therma-Wave alleges
that some of our thin film thickness measurement products may infringe on a
Therma-Wave patent relating to the combination of a spectroscopic reflectometer
with a spectroscopic ellipsometer. Although we believe that none of our products
infringe on a valid Therma-Wave patent, if this matter is resolved against us,
our business could be harmed. Additionally, some customers of ours have received
notices from The Lemelson Medical, Education, & Research Foundation, a limited
partnership, alleging that equipment used in the manufacture of semiconductor
products infringes on their patents. A number of these customers have notified
us that they are seeking indemnification from us for any damages and expenses
resulting from this matter. Certain of our customers have engaged in litigation
with the late Mr. Lemelson involving a number of his patents and some of these
cases have been settled. Although the ultimate outcome of these matters is not
presently determinable, the resolution of all such pending matters could harm
our business. These claims of infringement may lead to protracted and costly
litigation that could require us to pay substantial damages or have the sale of
our products stopped by an injunction. Infringement claims could also cause
product delays or require us to redesign our products, and these delays could
result in the loss of substantial revenues. We may also be required to obtain a
license from the third party or cease activities utilizing the third party's
proprietary rights. We may not be able to enter into such a license or such
license may not be available on commercially reasonable terms. The loss of an
infringement action or the inability to license a third party's intellectual
property could therefore prevent our ability to sell our products, or require us
to redesign our products making the sale of such products more expensive for us.
We may be required to initiate litigation in order to enforce any patents issued
to or licensed by us, or to determine the scope or validity of a third party's
patent or other proprietary rights. Any such litigation, regardless of outcome,
could be expensive and time consuming, and could subject us to significant
liabilities or require us to re-engineer our product or obtain expensive
licenses from third parties.
If we fail to adequately protect our intellectual property, it will be easier
for our competitors to sell competing products
Our future success and competitive position depend in part upon our ability
to obtain and maintain proprietary technology for our principal product
families, and we rely, in part, on patent, trade secret and trademark law to
protect that technology. If we fail to adequately protect our intellectual
property, it will be easier for our competitors to sell competing products. We
own or have licensed a number of patents relating to our metrology systems, and
have filed applications for additional patents. Any of our pending patent
applications may be rejected, and we may not in the future be able to develop
additional proprietary technology that is patentable. In addition, the patents
we do own or that have been issued or licensed to us may not provide us with
competitive advantages and may be challenged by third parties. Third parties
may also design around these patents.
In addition to patent protection, we rely upon trade secret protection for
our confidential and proprietary information and technology. We routinely enter
into confidentiality agreements with our employees. However, in the event that
these agreements may be breached, we may not have adequate remedies. Our
confidential and proprietary information and technology might also be
independently developed by or become otherwise known to third parties.
II-16
We must expend a significant amount of time and resources to develop new
products, and if these products do not achieve commercial acceptance, our
operating results may suffer
We expect to spend a significant amount of time and resources to develop new
systems and refine existing systems. In light of the long product development
cycles inherent in our industry, these expenditures will be made well in
advance of the prospect of deriving revenue from the sale of new systems. Our
ability to commercially introduce and successfully market new systems is
subject to a wide variety of challenges during this development cycle that
could delay introduction of these systems. In addition, since our customers are
not obligated by long-term contracts to purchase our systems, our anticipated
product orders may not materialize, or orders that do materialize may be
cancelled. As a result, if we do not achieve market acceptance of new products,
our operating results will suffer.
We must attract and retain key personnel with relevant industry knowledge to
help support our future growth, and competition for such personnel in our
industry is intense
Our success depends to a significant degree upon the continued contributions
of our key management, engineering, sales and marketing, customer support,
finance and manufacturing personnel. We do not enter into employment contracts
with any of our key personnel. The loss of any of these key personnel, who
would be extremely difficult to replace, could harm our business and operating
results. To support our future growth, we will need to attract and retain
additional qualified employees. Competition for such personnel in our industry
is intense, and we may not be successful in attracting and retaining qualified
employees.
We manufacture all of our systems at a limited number of facilities, and any
prolonged disruption in the operations of those facilities could reduce our
revenues
We produce all of our systems in our manufacturing facilities located in
Sunnyvale, California and through our subsidiaries in Japan and Korea. Our
manufacturing processes are highly complex and require sophisticated, costly
equipment and specially designed facilities. As a result, any prolonged
disruption in the operations of our manufacturing facilities could seriously
harm our ability to satisfy our customer order deadlines. If we cannot deliver
our systems in a timely manner, our revenues will likely suffer.
If we choose to acquire new and complementary businesses, products or
technologies instead of developing them ourselves, we may be unable to complete
these acquisitions or may not be able to successfully integrate an acquired
business in a cost-effective and non-disruptive manner
Our success depends on our ability to continually enhance and broaden our
product offerings in response to changing technologies, customer demands and
competitive pressures. To this end, from time to time we have acquired
complementary businesses, products, or technologies instead of developing them
ourselves and may choose to do so in the future. We do not know if we will be
able to complete any acquisitions, or whether we will be able to successfully
integrate any acquired business, operate it profitably or retain its key
employees. Integrating any business, product or technology we acquire could be
expensive and time consuming, disrupt our ongoing business and distract our
management. In addition, in order to finance any acquisitions, we might need to
raise additional funds through public or private equity or debt financings. In
that event, we could be forced to obtain financing on terms that are not
favorable to us and, in the case of equity financing, that result in dilution
to our shareholders. If we are unable to integrate any acquired entities,
products or technologies effectively, our business will suffer. In addition,
any amortization of goodwill or other assets or charges resulting from the
costs of acquisitions could harm our business and operating results.
II-17
Our efforts to protect our intellectual property may be less effective in some
foreign countries where intellectual property rights are not as well protected
as in the United States
In 1998 and 1999, 61.8% and 60.9%, respectively, of our total net revenues
were derived from sales to customers in foreign countries, including certain
countries in Asia, such as Taiwan, Korea and Japan. The laws of some foreign
countries do not protect our proprietary rights to as great an extent as do the
laws of the United States, and many U.S. companies have encountered substantial
problems in protecting their proprietary rights against infringement in such
countries. For example, Taiwan is not a signatory of the Patent Cooperation
Treaty, which is designed to specify rules and methods for defending
intellectual property internationally. The publication of a patent in Taiwan
prior to the filing of a patent in Taiwan would invalidate the ability of a
company to obtain a patent in Taiwan. Similarly, in contrast to the United
States, where the contents of patents remain confidential during the patent
prosecution process, the contents of a patent are published upon filing, which
provides competitors an advanced view of the contents of a patent application
prior to the establishment of patent rights. If we fail to adequately protect
our intellectual property in these countries, it would be easier for our
competitors to sell competing products in those countries.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to financial market risks, which include changes in foreign
currency exchange rates and interest rates. We do not use derivative financial
instruments. Instead, we actively manage the balances of current assets and
liabilities denominated in foreign currencies to minimize currency fluctuation
risk. As a result, a hypothetical 10% change in the foreign currency exchange
rates at December 31, 1998 and 1999 would not have a material impact on our
results of operations. Our investments in marketable securities are subject to
interest rate risk but due to the short-term nature of these investments,
interest rate changes would not have a material impact on their value at
December 31, 1998 and 1999. We also have fixed rate yen denominated debt
obligations in Japan that have no interest rate risk. At December 31, 1998 and
1999, our total debt obligation was $3.8 million and $2.9 million with a long-
term portion of $2.5 million and $2.3 million, respectively. The fixed rates on
such obligations in 1998 and 1999 ranged from 1.9% to 3.4% and 1.5% to 3.4%,
respectively, and mature on various dates through May 2006. A hypothetical 10%
change in interest rates at December 31, 1998 and 1999 would not have a material
impact on our results of operation.
II-18
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 of Form 10-K is presented here in the
following order:
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report........................................................... 4
Consolidated Balance Sheets............................................................ 4
Consolidated Statements of Income...................................................... 4
Consolidated Statements of Shareholders' Equity and Comprehensive Income............... 4
Consolidated Statements of Cash Flows.................................................. 4
Notes to Consolidated Financial Statements............................................. 4
II-19
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Nanometrics Incorporated
We have audited the accompanying consolidated balance sheets of Nanometrics
Incorporated and subsidiaries as of December 31, 1998 and 1999, and the related
consolidated statements of income, shareholders' equity and comprehensive
income, and of cash flows for each of the three years in the period ended
December 31, 1999. 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 1999, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1999 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Jose, California
February 15, 2000
II-20
NANOMETRICS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
December 31,
----------------
1998 1999
------- -------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................... $ 1,518 $ 3,442
Short-term investments...................................... 9,913 14,698
Accounts receivable, net of allowances of $420 and $425 in
1998 and 1999, respectively................................ 8,458 11,435
Inventories................................................. 11,719 9,460
Deferred income taxes....................................... 1,441 1,722
Prepaid expenses and other.................................. 2,328 1,196
------- -------
Total current assets...................................... 35,377 41,953
PROPERTY, PLANT AND EQUIPMENT, Net............................ 2,481 2,998
DEFERRED INCOME TAXES......................................... 560 135
OTHER ASSETS.................................................. 887 1,324
------- -------
TOTAL ASSETS.............................................. $39,305 $46,410
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................ $ 1,395 $ 2,412
Accrued payroll and related expenses........................ 317 751
Other current liabilities................................... 1,720 1,721
Income taxes payable........................................ -- 464
Current portion of debt obligations......................... 1,324 584
------- -------
Total current liabilities................................. 4,756 5,932
DEFERRED RENT................................................. 43 35
DEBT OBLIGATIONS.............................................. 2,496 2,288
------- -------
Total liabilities......................................... 7,295 8,255
------- -------
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY:
Common stock, no par value; 25,000,000 shares authorized;
8,690,643 and 9,163,998 outstanding in 1998 and 1999,
respectively............................................... 14,170 17,277
Retained earnings........................................... 17,974 20,608
Accumulated other comprehensive income (loss)............... (134) 270
------- -------
Total shareholders' equity................................ 32,010 38,155
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................ $39,305 $46,410
======= =======
See notes to consolidated financial statements.
II-21
NANOMETRICS INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Years Ended December 31,
-------------------------
1997 1998 1999
------- ------- -------
NET REVENUES:
Product sales...................................... $32,767 $29,718 $32,162
Service............................................ 3,890 3,546 4,246
------- ------- -------
Total net revenues............................... 36,657 33,264 36,408
------- ------- -------
COSTS AND EXPENSES:
Cost of product sales.............................. 12,092 13,002 14,606
Cost of service.................................... 3,632 3,669 4,560
Research and development........................... 2,986 4,206 4,658
Acquired in-process research and development....... -- 1,421 --
Selling............................................ 6,050 5,728 5,871
General and administrative......................... 2,765 2,828 2,973
------- ------- -------
Total costs and expenses......................... 27,525 30,854 32,668
------- ------- -------
INCOME FROM OPERATIONS............................... 9,132 2,410 3,740
------- ------- -------
OTHER INCOME (EXPENSE):
Interest income.................................... 535 572 662
Interest expense................................... (110) (108) (180)
Other, net......................................... (175) 64 94
------- ------- -------
Total other income, net.......................... 250 528 576
------- ------- -------
INCOME BEFORE INCOME TAXES........................... 9,382 2,938 4,316
PROVISION FOR INCOME TAXES........................... 3,625 1,108 1,682
------- ------- -------
NET INCOME........................................... $ 5,757 $ 1,830 $ 2,634
======= ======= =======
NET INCOME PER SHARE:
Basic.............................................. $ 0.69 $ 0.21 $ 0.30
======= ======= =======
Diluted............................................ $ 0.65 $ 0.20 $ 0.28
======= ======= =======
SHARES USED IN PER SHARE COMPUTATION:
Basic.............................................. 8,325 8,635 8,829
======= ======= =======
Diluted............................................ 8,820 9,041 9,393
======= ======= =======
See notes to consolidated financial statements.
II-22
NANOMETRICS INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(In thousands, except share amounts)
Accumulated
Common Stock Other Total
----------------- Retained Comprehensive Shareholders' Comprehensive
Shares Amount Earnings Income(Loss) Equity Income
--------- ------- -------- ------------- ------------- -------------
BALANCES, January 1,
1997................... 8,258,061 $11,833 $10,387 $(160) $22,060
Comprehensive income:
Net income............. -- -- 5,757 -- 5,757 $5,757
Other comprehensive
loss, net of tax:
Foreign currency
translation
adjustments........... -- -- -- (607) (607) (607)
------
Comprehensive
income.............. -- -- -- -- -- $5,150
======
Issuance of common stock
under employee stock
purchase plan.......... 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
Comprehensive income:
Net income............. -- -- 2,634 -- 2,634 $2,634
Other comprehensive
income (loss), net of
tax:
Foreign currency
translation
adjustments........... -- -- -- 422 422 422
Unrealized loss on
investments........... -- -- -- (18) (18) (18)
------
Comprehensive
income.............. -- -- -- -- -- $3,038
======
Issuance of common stock
under employee stock
purchase plan.......... 28,937 148 -- -- 148
Issuance of common stock
under stock option
plan................... 444,418 1,936 -- -- 1,936
Tax benefit of employee
stock transactions..... -- 1,023 -- -- 1,023
--------- ------- ------- ----- -------
BALANCES, December 31,
1999................... 9,163,998 $17,277 $20,608 $ 270 $38,155
========= ======= ======= ===== =======
See notes to consolidated financial statements.
II-23
NANOMETRICS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
December 31,
----------------------------
1997 1998 1999
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................... $ 5,757 $ 1,830 $ 2,634
Reconciliation of net income to net cash
provided by operating activities:
Depreciation and amortization................ 213 298 359
Deferred rent................................ 13 26 (8)
Acquired in-process research and
development................................. -- 1,421 --
Deferred income taxes........................ (588) (573) 174
Changes in assets and liabilities, net of
effects of product line acquisition:
Accounts receivable........................ 93 2,805 (2,496)
Inventories................................ (2,322) (2,751) 2,449
Prepaid income taxes....................... -- (1,325) 1,325
Prepaid expenses and other................. (218) 93 (178)
Accounts payable, accrueds and other
current liabilities....................... 1,238 (1,355) 1,341
Income taxes payable....................... 26 416 1,462
-------- -------- --------
Net cash provided by operating
activities.............................. 4,212 885 7,062
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments............ (18,152) (17,790) (22,575)
Sales/maturities of short-term investments..... 15,214 17,472 17,760
Purchases of property, plant and equipment..... (97) (167) (511)
Other assets................................... (17) (50) (536)
Product line acquisition....................... -- (3,225) --
-------- -------- --------
Net cash used in investing activities.... (3,052) (3,760) (5,862)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt obligations..... 329 761 90
Repayments of debt obligations................. (329) (660) (1,358)
Sale of shares under employee stock purchase
and stock option plans........................ 590 700 2,084
-------- -------- --------
Net cash provided by financing
activities.............................. 590 801 816
-------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH.......... 181 (64) (92)
-------- -------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS.......... 1,931 (2,138) 1,924
CASH AND CASH EQUIVALENTS, Beginning of year..... 1,725 3,656 1,518
-------- -------- --------
CASH AND CASH EQUIVALENTS, End of year........... $ 3,656 $ 1,518 $ 3,442
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest......................... $ 117 $ 92 $ 72
======== ======== ========
Cash paid for income taxes..................... $ 4,192 $ 2,558 $ 82
======== ======== ========
See notes to consolidated financial statements.
II-24
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
1. Significant Accounting Policies
Description of Business--Nanometrics Incorporated and its wholly-owned
subsidiaries sell, design, manufacture, market and support thin film and
overlay dimension metrology systems for customers in the semiconductor, flat
panel display and magnetic recording head industries. These metrology systems
precisely measure a wide range of film types deposited on substrates during
manufacturing in order to control manufacturing processes and increase
production yields in the fabrication of integrated circuits, flat panel
displays and magnetic recording heads. The thin film metrology systems use a
broad spectrum of wavelengths, high-sensitivity optics, proprietary software
and patented technology to measure the thickness and uniformity of films
deposited on silicon and other substrates as well as their chemical
composition. The overlay metrology systems are used to measure the overlay
accuracy of successive layers of semiconductor patterns on wafers in the
photolithography process.
Basis of Presentation--The consolidated financial statements include
Nanometrics Incorporated and its wholly-owned subsidiaries (the Company). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Use of Estimates--The preparation of financial statements in conformity with
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.
Fiscal Year--The Company uses a 52/53 week fiscal year ending on the
Saturday nearest to December 31. Accordingly, fiscal years 1997, 1998 and 1999
ended on January 3, 1998, January 2, 1999, and January 1, 2000, and consisted
of 53, 52 and 52 weeks, respectively. For purposes of the consolidated
financial statements, the year end is denoted as December 31. All references to
years relate to fiscal years rather than calendar years.
Cash and Cash Equivalents--Cash and cash equivalents include cash and highly
liquid debt instruments with original maturities of three months or less when
purchased.
Short-Term Investments--Short-term investments consist of United States
Treasury bills and are stated at fair value based on quoted market prices.
Short-term investments are classified as available-for-sale based on the
Company's intended use. The difference between amortized cost and fair value
representing unrealized holding gains or losses are recorded as a component of
shareholders' equity as accumulated other comprehensive income (loss). Gains
and losses on sales of investments are determined on a specific identification
basis.
Fair Value of Financial Instruments--Financial instruments include cash
equivalents, short-term investments and debt obligations. Cash equivalents and
short-term investments are stated at fair market value based on quoted market
prices. The recorded carrying amount of the Company's debt obligations
approximates fair market value.
Inventories--Inventories are stated at the lower of cost (first-in, first-
out) or market.
II-25
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
Property, Plant and Equipment--Property, plant and equipment are stated at
cost. Depreciation is computed using straight line and accelerated methods over
the following estimated useful lives of the assets:
Building........................................................ 15--45 years
Machinery and equipment......................................... 3-- 7 years
Furniture and fixtures.......................................... 5--15 years
Leasehold improvements are amortized over the shorter of the estimated useful
lives of the improvements or the lease term.
Goodwill and Intangible Assets--The Company amortizes goodwill and acquired
intangible assets (included in other assets) using the straight-line method
over an estimated useful life of five years.
Long-Lived Assets--The Company evaluates long-lived assets for impairment
using an undiscounted cash flow method whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.
Income Taxes--Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes and
operating loss and tax credit carryforwards measured by applying currently
enacted tax laws. A valuation allowance is provided when necessary to reduce
deferred tax assets to an amount that is more likely than not to be realized.
Revenue Recognition--Revenues are recognized when persuasive evidence of an
arrangement exists, delivery has occurred or services have been rendered, the
price is fixed and determinable and collectibility is reasonably assured. For
product sales, this generally occurs at the time of shipment, and for revenues
from service work, this generally occurs when the work is performed. Revenues
from service contracts are recognized ratably over the period under contract.
The Company sells the majority of its product with a one-year repair or
replacement warranty and records a provision for estimated claims at the time
of sale.
Stock-Based Compensation--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 $217,000 for 1997 and $13,000 for 1998 and a
gain of $91,000 for 1999.
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.
Recently Issued Accounting Standards--In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. This statement requires companies to record derivatives on
the balance sheet as assets or liabilities, measured at fair value. Gains or
losses resulting from changes in the values of those derivatives would be
accounted for depending on the use of
II-26
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
the derivative and whether it qualifies for hedge accounting. SFAS No. 133 will
be effective for the Company beginning in the first quarter of fiscal year
2001. Although the Company has not fully assessed the implications of SFAS No.
133, management does not believe the adoption of this statement will have a
significant impact on the Company's consolidated financial position, results of
operations or cash flows.
In December 1999, the Securities and Exchange Commission (SEC) released
Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial
Statements. This bulletin summarizes certain interpretations and practices
followed by the Division of Corporation Finance and the Office of the Chief
Accountant of the SEC in administering the disclosure requirements of the
Federal securities laws in applying generally accepted accounting principles to
revenue recognition in financial statements. Application of the accounting and
disclosures desired in the bulletin is required by the first quarter of fiscal
2000. Although the Company has not fully assessed the implications of SAB No.
101, management does not believe adoption of this bulletin will have a
significant impact on the Company's consolidated financial position, results of
operations or cash flows.
Certain Significant Risks and Uncertainties--Financial instruments which
potentially subject the Company to concentration of credit risk consist of cash
and cash equivalents, short-term investments and accounts receivable. Cash and
cash equivalents and short-term investments are held primarily with two
financial institutions and consist primarily of cash in bank accounts and
United States Treasury bills. The Company sells its products primarily to end
users in the United States and Asia, and generally does not require its
customers to provide collateral or other security to support accounts
receivable. Management performs ongoing credit evaluations of its customers'
financial condition. The Company maintains allowances for estimated potential
bad debt losses.
The Company participates in a dynamic high technology industry and believes
that changes in any of the following areas could have a material adverse effect
on the Company's future financial position, results of operations or cash
flows; advances and trends in new technologies and industry standards;
competitive pressures in the form of new products or price reductions on
current products; changes in product mix; changes in the overall demand for
products offered by the Company; changes in third-party manufacturers; changes
in key suppliers; changes in certain strategic relationships or customer
relationships; litigation or claims against the Company based on intellectual
property, patent, product, regulatory or other factors; fluctuations in foreign
currency exchange rates; risk associated with changes in domestic and
international economic and/or political regulations; availability of necessary
components or subassemblies; disruption of manufacturing facilities; and the
Company's ability to attract and retain employees necessary to support its
growth.
The Company's customer base is highly concentrated. A relatively small
number of customers have accounted for a significant portion of the Company's
revenues. In 1999, aggregate revenue from the Company's top ten largest
customers comprised approximately 59.5% of the Company's total net revenues.
Certain components and subassemblies used in the Company's products are
purchased from a sole supplier or a limited group of suppliers. In particular,
the Company currently purchases its spectroscopic ellipsometer, Fourier
transform infrared reflectometry spectrometer and robotics used in its advanced
measurement systems from a sole supplier or a limited group of suppliers. Any
shortage or interruption in the supply of any of the components or
subassemblies used in the Company's products or the inability of the Company to
procure these components or subassemblies from alternate sources on acceptable
terms, could have a material adverse effect on the Company's business,
financial condition and results of operations.
II-27
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
2. Product Line Acquisition
On March 30, 1998, the Company purchased from Optical Specialties, Inc.
(OSI) a metrology system product line and related assets used to measure
the critical dimensions and overlay registration errors observed in
submicron photolithography. Under the agreement, the Company paid
approximately $3,225,000 in cash for the assets and in-process research and
development. The total purchase price and allocation among the tangible and
intangible assets and liabilities acquired (including acquired in-process
research and development) is summarized as 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 and 1999 of $523,000 and
$400,000, respectively (net of accumulated amortization of $92,000 and
$215,000, respectively), are recorded within other assets in the accompanying
consolidated balance sheet and are being amortized using the straight-line
method over a five-year useful life.
The purchase price allocation and intangible valuation was based on
management's estimates of the after tax net cash flows and gave explicit
consideration to the SEC's views on acquired in-process research and
development as set forth in its September 9, 1998 letter to the American
Institute of Certified Public Accountants. Specifically, the valuation gave
consideration to the following: (i) the employment of a fair market value
premise excluding any Nanometrics-specific considerations which could result in
estimates of investment value for the subject assets; and (ii) comprehensive
due diligence concerning all potential intangible assets including
trademarks/tradenames, patents, copyrights, noncompete agreements, assembled
workforce and customer relationships and sales channel. The value of core
technology was specifically addressed, with a view toward ensuring the relative
allocations to core technology and in-process research and development were
consistent with the relative contributions of each to the final product. The
allocation to in-process research and development was based on a calculation
that considered only the efforts completed as of the transaction date, and only
the cash flow associated with said completed efforts for the products currently
in process.
As indicated above, the Company recorded a one-time charge of $1,421,000 in
the first quarter of 1998 for acquired in-process research and development
related to the Metra 7000 development project that had not reached
technological feasibility, had no alternative future use and for which
successful development was uncertain. Management's conclusion that the in-
process development effort, or any material sub-component, had no alternative
future use was reached in consultation with engineering personnel from both the
Company and OSI.
The project to complete the Metra 7000 product included the completion of a
software platform design started by OSI in 1997. As of the acquisition date,
the Metra 7000 had yet to achieve technological feasibility since there was not
a working prototype with a reliable new software design. At the time of
acquisition, the
II-28
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
estimated cost to complete this software and related development was
approximately $300,000. The Company began shipments of the Metra 7000 product
to a customer in June 1998 and it was at that time that the Company began to
benefit from the acquired research and development related to the product.
Significant assumptions used to determine the value of in-process research
and development included several factors, including the following: (i) forecast
of net cash flows that were expected to result from the development effort
using projections prepared by the Company's management; (ii) percentage
complete of 77% for the Metra 7000 project estimated by considering a number of
factors, including the costs invested to date relative to total cost of the
development effort and the amount of progress completed as of the acquisition
date, on a technological basis, relative to the overall technological
achievements required to achieve the inacquisition functionality of the
eventual product. The technological issues were addressed by engineering
representatives from both the Company and OSI, and when estimating the value of
the technology, the projected financial results of the acquired assets were
estimated on a stand-alone basis without any consideration to potential
synergic benefits or "investment value" related to the acquisition.
Accordingly, separate projected cash flows were prepared for both the
existing as well as the in-process Metra 7000 products. These projected results
were based on the number of units sold times average selling price less the
associated costs. After preparing the estimated cash flow from the product
being developed, a portion of this cash flow was attributed to the core
technology, which was embodied in the in-process Metra 7000 product line and
enabled a quicker and more cost effective development of the Metra 7000. When
estimating the value of the developed, core and in-process technologies,
discount rates of 25%, 30% and 35%, respectively, were used. These discount
rates considered both the status and risk associated with the respective cash
flows as of the acquisition date.
In the first quarter of 1998, the Company also hired certain former
employees of OSI and incurred approximately $350,000 in related nonrecurring
hiring expenses. Such expenses are classified in the accompanying 1998
consolidated statement of income according to the employees' functions.
3. Inventories
Inventories consist of the following (in thousands):
December 31,
--------------
1998 1999
------- ------
Finished goods............................................... $ 5,607 $4,593
Work in process.............................................. 2,253 1,092
Raw materials and subassemblies.............................. 3,859 3,775
------- ------
Total inventories.......................................... $11,719 $9,460
======= ======
II-29
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
4. Property, Plant and Equipment
Property, plant and equipment consists of the following (in thousands):
December 31,
--------------
1998 1999
------ ------
Land......................................................... $ 949 $1,054
Building..................................................... 2,863 3,183
Machinery and equipment...................................... 1,096 1,462
Furniture and fixtures....................................... 380 446
Leasehold improvements....................................... 453 466
------ ------
5,741 6,611
Accumulated depreciation and amortization.................... (3,260) (3,613)
------ ------
Total property, plant and equipment, net..................... $2,481 $2,998
====== ======
5. Other Current Liabilities
Other current liabilities consist of the following (in thousands):
December 31,
-------------
1998 1999
------ ------
Commissions payable.......................................... $ 366 $ 247
Accrued warranty............................................. 581 482
Trade-in allowances.......................................... 262 --
Unearned revenue............................................. 65 384
Other........................................................ 446 608
------ ------
Total other current liabilities.............................. $1,720 $1,721
====== ======
6. Debt Obligations
Debt obligations consist of the following (in thousands):
December 31,
--------------
1998 1999
------ ------
1995 working capital bank loan............................... $2,292 $2,154
1996 working capital bank loan............................... 642 620
Other debt obligations....................................... 886 98
------ ------
Total...................................................... 3,820 2,872
Current portion of debt obligations.......................... (1,324) (584)
------ ------
Debt obligations............................................. $2,496 $2,288
====== ======
The 1995 working capital bank loan was obtained by the Company's Japanese
subsidiary. The loan is collateralized by receivables of the Japanese
subsidiary and is guaranteed by the parent, Nanometrics Incorporated. The loan
is denominated in Japanese yen ((Yen)220,000,000 at December 31, 1999) and
bears interest at 3.3% per annum. The loan is payable in quarterly installments
with unpaid principal and interest due in May 2005.
II-30
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
The 1996 working capital bank loan was also obtained by the Company's
Japanese subsidiary and is collateralized by land and building. The loan is
denominated in Japanese yen ((Yen)63,200,000 at December 31, 1999) and bears
interest at 3.4% per annum. The loan is payable in quarterly installments with
unpaid principal and interest due in May 2006.
Other debt obligations represent short-term borrowings by the Company's
Japanese subsidiary which are collateralized by the subsidiary's accounts
receivable. The borrowings are denominated in Japanese yen ((Yen)10,000,000 at
December 31, 1999) and bear interest at rates ranging from 1.5% to 1.625% per
annum. The outstanding borrowings and unpaid interest at December 31, 1999 were
due and paid in January 2000.
At December 31, 1999, future annual maturities of debt obligations are as
follows (in thousands):
2000................................................................. $ 584
2001................................................................. 486
2002................................................................. 486
2003................................................................. 486
2004................................................................. 486
Thereafter........................................................... 344
------
Total.............................................................. $2,872
======
7. 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 1997, 1998 and 1999 was
approximately $583,000, $693,000 and $867,000, respectively. Future minimum
lease payments under the Company's operating leases for each of the years
ending December 31 are as follows (in thousands):
2000................................................................. $ 720
2001................................................................. 627
2002................................ ................................ 197
Thereafter........................................................... 15
------
Total.............................................................. $1,559
======
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.
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.
II-31
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
8. Shareholders' Equity
Common Stock
The authorized capital stock of the Company consists of 25,000,000 common
shares, of which 22,500,000 shares have been designated "Common Stock" and
2,500,000 shares have been allocated to all other series of common shares,
collectively designated "Junior Common."
Net Income per Share
The reconciliation of the share denominator used in the basic and diluted
net income per share computations is as follows (in thousands):
Years Ended
December 31,
-----------------
1997 1998 1999
----- ----- -----
Weighted average shares outstanding--shares used in
basic net income per share computation.................. 8,325 8,635 8,829
Dilutive effect of common stock equivalents, using the
treasury stock method.................................. 495 406 564
----- ----- -----
Shares used in diluted net income per share
computation............................................ 8,820 9,041 9,393
===== ===== =====
During 1997, 1998 and 1999, the Company had common stock options outstanding
which could potentially dilute basic net income per share in the future, but
were excluded from the computation of diluted net income per share as the
common stock options' exercise prices were greater than the average market
price of the common shares for the period. At December 31, 1997, 1998 and 1999,
5,000, 248,000 and 51,000, respectively, of the Company's outstanding common
stock options with a weighted average exercise price of $10.88, $7.88 and
$19.59, respectively, per share were excluded from the diluted net income per
share computation.
Stock Option Plans
Under the 1991 Stock Option Plan (the Option Plan), as amended, the Company
may grant options to acquire up to 3,000,000 shares of common stock to
employees and consultants at prices not less than the fair market value at date
of grant for incentive stock options and not less than 50% of fair market value
for nonstatutory stock options. These options generally expire five years from
the date of grant and become exercisable as they vest, generally 33.3% upon
each anniversary of the grant, as set forth in the stock option agreements.
Under the 1991 Directors' Stock Option Plan (the Directors' Plan),
nonemployee directors of the Company are automatically granted options to
acquire 10,000 shares of common stock, at the fair market value at the date of
grant, each year that such person remains a director of the Company. Options
granted under the Directors' Plan become exercisable as they vest 33.3% upon
each anniversary of the grant and expire five years from the date of grant. The
total shares authorized under the Directors' Plan are 300,000.
II-32
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
Option activity under the plans is summarized as follows:
Outstanding Options
-------------------------------------
Weighted
Shares Number of Average
Available Shares Exercise Price
---------- --------- --------------
Balances, January 1, 1997 (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 (745,171
exercisable at a weighted average price
of $4.57).............................. 827,821 1,590,433 5.25
Exercised............................... -- (444,418) 4.36
Granted (weighted average fair value of
$6.67)................................. (455,000) 455,000 12.06
Canceled................................ 106,351 (106,351) 6.65
---------- ---------
Balances, December 31, 1999............. 479,172 1,494,664 $7.49
========== =========
During the third quarter of fiscal 1998, the Company approved the
cancellation and reissuance of outstanding options under the Company's stock
options plans. Under the program, holders of outstanding options with exercise
prices in excess of $5.13 per share were given the choice of retaining these
options or of obtaining, in substitution, new options for the same number of
shares. The new options were exercisable at a price of $5.13 per share, the
fair market value of the common stock on the reissue date. The new options
maintained the vesting schedule and expiration dates established by the
canceled option.
Additional information regarding options outstanding as of December 31, 1999
is as follows:
Options Outstanding Options Exercisable
-------------------------------- --------------------
Weighted
Average
Remaining Weighted Average
Contractual Average Weighted
Number Life Exercise Number Exercise
Range of Exercise Prices Outstanding (Years) Price Exercisable Price
- ------------------------ ----------- ----------- -------- ----------- --------
$ 2.06--$ 5.13 822,662 2.67 $4.95 582,322 $4.88
5.63-- 9.00 449,502 4.44 7.58 83,366 7.49
15.88-- 20.13 222,500 5.00 16.73 -- --
--------- -------
$ 2.06--$20.13 1,494,664 3.55 $7.49 665,688 $5.21
========= =======
II-33
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
Employee Stock Purchase Plan
Under the 1986 Employee Stock Purchase Plan (the Purchase Plan), eligible
employees are allowed to have salary withholdings of up to 10% of their base
compensation to purchase shares of common stock at a price equal to 85% of the
lower of the market value of the stock at the beginning or end of each six-
month offering period, subject to an annual limitation. Shares issued under the
plan were 24,482, 18,006 and 28,937 in 1997, 1998 and 1999 at weighted average
prices of $4.58, $6.87 and $5.10, respectively. The weighted average per share
fair values of the 1997, 1998 and 1999 awards were $4.41, $2.42 and $2.89,
respectively. At December 31, 1999, 25,894 shares were reserved for future
issuances under the Purchase Plan.
Additional Stock Plan Information
As discussed in Note 1, the Company continues to account for its stock-based
awards using the intrinsic value method in accordance with 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
No. 123, the fair value of stock-based awards to employees is calculated
through the use of option pricing models, even though such models were
developed to estimate the fair value of freely tradable, fully transferable
options without vesting restrictions, which differ significantly from the
Company's stock option awards. These models also require subjective
assumptions, including future stock price volatility and expected time to
exercise, which greatly affect the calculated values. The Company's fair value
calculations on stock-based awards under the 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 1997, 1998 and 1999; stock volatility, 80% in 1997, 1998 and 1999; risk free
interest rate, 6.1% in 1997, 5.0% in 1998 and 5.9% in 1999; and no dividends
during the expected term. The Company's calculations are based on a single
option valuation approach and forfeitures are recognized at a historical rate
of 29% for 1997 and 1998, and 24% for 1999. The Company's fair value
calculations on stock-based awards under the Purchase Plan were also made using
the Black-Scholes option pricing model with the following weighted average
assumptions: expected life, six months in 1997, 1998 and 1999; stock
volatility, 80% in 1997, 1998 and 1999; risk free interest rate, 5.5% in 1997,
5.0% in 1998 and 5.3% in 1999; and no dividends during the expected term.
If the computed fair values of the stock-based awards after 1995 had been
amortized to expense over the vesting period of the awards, pro forma net
income and net income per share, basic and diluted, would have been as follows
(in thousands except per share amounts):
Years Ended
December 31,
-------------------
1997 1998 1999
------ ----- ------
Pro forma net income.................................... $5,057 $ 807 $1,729
Pro forma net income per share:
Basic................................................. $ 0.61 $0.09 $ 0.20
Diluted............................................... $ 0.60 $0.09 $ 0.18
II-34
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
9. Income Taxes
Income before income taxes consists of the following (in thousands):
Years Ended December 31,
------------------------
1997 1998 1999
------ ------ ------
Domestic............................................. $9,644 $3,471 $3,928
Foreign.............................................. (262) (533) 388
------ ------ ------
Income before income taxes........................... $9,382 $2,938 $4,316
====== ====== ======
The provision for income taxes consists of the following (in thousands):
Years Ended December 31,
------------------------
1997 1998 1999
------ ------ ------
Current :
Federal............................................ $3,080 $ 840 $1,127
State.............................................. 884 148 186
Foreign............................................ 181 16 195
------ ------ ------
4,145 1,004 1,508
====== ====== ======
Deferred:
Federal............................................ (574) 161 71
State.............................................. 9 166 (128)
Foreign............................................ 45 (223) 231
------ ------ ------
(520) 104 174
------ ------ ------
Provision for income taxes........................... $3,625 $1,108 $1,682
====== ====== ======
Significant components of the Company's deferred tax assets are as follows
(in thousands):
December 31,
--------------
1998 1999
------ ------
Deferred tax assets--current:
Reserves and accruals not currently deductible............ $ 978 $1,307
Capitalized inventory costs............................... 201 161
Net operating loss carryforwards.......................... 246 338
Tax credit carryforwards.................................. 16 147
------ ------
Total gross deferred tax assets--current.................... 1,441 1,953
Valuation allowance......................................... -- (231)
------ ------
Total net deferred tax assets--current...................... $1,441 $1,722
------ ------
Deferred tax assets--noncurrent:
Depreciation.............................................. $ (25) $ (69)
Goodwill and capitalized acquired technology.............. 553 391
Translation adjustments................................... -- (225)
Other..................................................... 32 38
------ ------
Total net deferred tax assets--noncurrent................... $ 560 $ 135
====== ======
II-35
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
Due to continuing losses in its Japanese subsidiary during the year ended
December 31, 1999, the Company determined that it was more likely than not that
future tax benefits from the deferred tax assets of the Japanese subsidiary
would not be realized. Accordingly, as of December 31, 1999, the Company has
provided a full valuation allowance of $231,000 against the net deferred tax
assets of its Japanese subsidiary.
As of December 31, 1999, the Company has available for carryforward net
operating losses of approximately $800,000 generated by the Company's Japanese
subsidiary. The net operating loss carryforwards will expire if not utilized
beginning in the years 2002 through 2004.
Differences between income taxes computed by applying the statutory federal
income tax rate to income before income taxes and the provision for income
taxes consist of the following (in thousands):
Years Ended December 31,
------------------------
1997 1998 1999
------ ------ ------
Income taxes computed at 35% U.S. statutory rate... $3,284 $1,028 $1,511
State income taxes................................. 589 207 58
Foreign tax provision (benefit) higher than U.S.
rates............................................. -- (74) 59
Foreign sales corporation benefit.................. (274) (99) (228)
Change in valuation allowance...................... -- -- 231
Other, net......................................... 26 46 51
------ ------ ------
Provision for income taxes......................... $3,625 $1,108 $1,682
====== ====== ======
10. Profit-Sharing and Retirement and Bonus Plans
No contributions were made by the Company in 1997, 1998 and 1999 to the
Company's discretionary profit-sharing and retirement plan. The Company paid
$678,000, $688,000 and $92,000 in 1997, 1998 and 1999, respectively, under
formal discretionary cash bonus plans which cover all eligible employees.
11. Major Customers
In 1997, sales to one customer accounted for approximately 11.4% of total
revenues. In 1998, sales to another customer accounted for approximately 11.2%
of total revenues. In 1999, sales to two other customers accounted for
approximately 12.8% and 10.5% of total revenues, respectively.
At December 31, 1998, no single customer accounted for 10.0% or more of
accounts receivable. The customer accounting for 12.8% of total revenues in
1999 also accounted for 11.8% of accounts receivable, at December 31, 1999.
12. Product, Segment and Geographic Information
The Company's operating divisions consist of its geographically based
entities in the United States, Japan, South Korea and Taiwan. All such
operating divisions have similar economic characteristics, as defined in SFAS
No. 131 "Disclosures About Segments of an Enterprise and Related Information",
and accordingly, the Company operates in one reportable segment: the sale,
design, manufacture, marketing and support of thin film and overlay dimension
metrology systems. For the years ended December 31, 1997, 1998 and 1999, the
Company recorded revenue from customers throughout the United States, Canada,
Germany, the United Kingdom, Ireland, France, Italy, Sweden,
II-36
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
Israel, Japan, South Korea, China, Singapore, Hong Kong, Taiwan, Indonesia
and Malaysia. The following table summarizes total net revenues and long-lived
assets attributed to significant countries (in thousands):
Years Ended December 31,
-------------------------
1997 1998 1999
------- ------- -------
Total net revenues:
United States...................................... $14,539 $12,698 $14,225
Japan.............................................. 10,086 9,167 11,594
Korea.............................................. 5,954 2,596 2,991
Taiwan............................................. 2,583 3,404 4,967
Germany............................................ 1,763 4,784 2,340
All other.......................................... 1,732 615 291
------- ------- -------
Total net revenues*.............................. $36,657 $33,264 $36,408
======= ======= =======
December 31,
-------------
1998 1999
------ ------
Long-lived assets:
United States............................................... $1,439 $1,716
Japan....................................................... 2,419 2,569
Korea....................................................... 59 81
Taiwan...................................................... 11 91
------ ------
Total long-lived assets................................... $3,928 $4,457
====== ======
- --------
* Net revenues are attributed to countries based on the deployment and service
locations of systems.
The Company's product lines differ primarily based on the environment the
systems will be used in. Automated systems are used primarily in high-volume
production environments. Integrated systems are installed inside wafer
processing equipment to provide near real-time measurements for improving
process control and increasing throughput. Tabletop systems are used primarily
in low-volume production environments and in engineering labs where automated
handling and high throughput are not required. Sales by product type were as
follows (in thousands):
Years Ended December 31,
-------------------------
1997 1998 1999
------- ------- -------
Automated systems.................................... $21,982 $21,694 $20,885
Integrated systems................................... -- 120 3,953
Tabletop systems..................................... 10,785 7,904 7,324
------- ------- -------
Total product sales................................ $32,767 $29,718 $32,162
======= ======= =======
II-37
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
13. Selected Quarterly Financial Results (Unaudited)
The following tables set forth selected quarterly results of operations for
the years ended December 31, 1998 and 1999 (in thousands, except per share
amounts):
Quarters Ended
-----------------------------------
Mar. 31, Jun. 30, Sep. 30, Dec. 31,
1998 1998 1998 1998
-------- -------- -------- --------
Total net revenues......................... $10,538 $10,728 $7,005 $4,993
Gross profit............................... 5,924 5,732 3,357 1,580
Income (loss) from operations.............. 915 2,446 491 (1,442)
Net income (loss).......................... 624 1,495 394 (683)
Net income (loss) per share:
Basic.................................... $ 0.07 $ 0.17 $ 0.05 $(0.08)
Diluted.................................. $ 0.07 $ 0.17 $ 0.04 $(0.08)
Shares used in per share computation:
Basic.................................... 8,545 8,641 8,669 8,686
Diluted.................................. 8,978 9,003 9,074 8,686
Quarters Ended
------------------------------
Jun. Sep. Dec.
Mar. 31, 30, 30, 31,
1999 1999 1999 1999
-------- ------ ------ -------
Total net revenues.............................. $6,189 $7,523 $9,821 $12,875
Gross profit.................................... 2,533 3,522 4,669 6,518
Income (loss) from operations................... (401) 395 1,321 2,425
Net income (loss)............................... (201) 304 900 1,631
Net income (loss) per share:
Basic......................................... $(0.02) $ 0.03 $ 0.10 $ 0.18
Diluted....................................... $(0.02) $ 0.03 $ 0.10 $ 0.17
Shares used in per share computation:
Basic......................................... 8,701 8,757 8,823 9,033
Diluted....................................... 8,701 9,177 9,347 9,842
II-38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
II-39
PART III
ITEM 10. Directors and Executive Officers of the registrant
The following are our current executive officers and directors and their
ages as of December 31, 1999:
Name Age Position
---- --- --------
Vincent J. Coates........... 74 Chairman of the Board, Secretary
John D. Heaton.............. 39 President, Chief Executive Officer and Director
Paul B. Nolan............... 44 Vice President and Chief Financial Officer
Roger Ingalls Jr............ 38 Vice President and Director of Marketing
William A. McGahan.......... 33 Vice President and Chief Scientist
Nathaniel Brenner........... 73 Director
Norman V. Coates............ 50 Director
Kanegi Nagai................ 68 Director
Edmond R. Ward.............. 60 Director
Mr. Vincent Coates has been our Chairman of the Board since our founding in
1975. He has also served as our Chief Executive Officer and President from our
founding through July 1988, except for the period January 1986 through
February 1987 when he served exclusively as Chief Executive Officer. He was
elected Secretary in February 1989. He resigned the position of Chief
Executive Officer in April 1998.
Mr. Heaton joined us in September 1990 and in April 1994 was elected Vice
President of Engineering and General Manager. In July 1995, he was appointed
to the Board of Directors and became General Manager. He has been President
since May 1996 and was elected Chief Executive Officer in April 1998. Mr.
Heaton served in various technical roles at National Semiconductor from 1978
to 1990 prior to joining us.
Mr. Nolan joined us in March 1989 and in March 1994 was elected Vice
President and Chief Financial Officer. Mr. Nolan served as Senior Financial
Analyst at Harris Corporation prior to joining us.
Mr. Ingalls has been employed by Nanometrics since March 1995 and was
elected Vice President in October 1997. He was appointed Director of Marketing
in February 1998. During his employment at Nanometrics, Mr. Ingalls has served
as U.S. Sales and Product Manager, and most recently Director of North
American Sales. Prior to joining Nanometrics, he served as a sales engineer
for Nikon Inc. from March 1993 to March 1995.
Dr. McGahan joined us in October 1995 and was elected Vice President in
October 1997 and Chief Scientist in December 1999. He served as Director of
Research and Development from January 1999 to December 1999. From January 1998
to January 1999, Dr. McGahan served as Director of Engineering. Prior to that,
he served as Applications Engineering Manager from October 1996 to October
1997 and as Advanced Metrology Development Manager from October 1995 to
October 1996. From September 1987 to October 1995, Dr. McGahan served as an
engineer for the J.A. Woollam Co., Inc., a manufacturer of spectroscopic
ellipsometers. Dr. McGahan has published 46 papers relating to ellipsometry
magneto-optics and thermal characterization of materials.
Mr. Brenner has served as one of our directors since June 1986. He joined
Beckman Instruments, Inc. in 1976 where he held the positions of Program
Manager, Marketing Manager (Instruments) and General Manager (Spectroscopy).
In 1992, Mr. Brenner retired from Beckman Instruments, Inc.
Mr. Norman V. Coates has served as one of our directors since May 1988. He
has operated Gem of the River Produce, a farming and produce packing operation
in Orleans, California, as a sole proprietor since 1978. He has also been
manager of the Boise Creek Farm operation since 1985 and a manager of Coates
Vineyards since 1997.
III-1
Mr. Nagai has served as one of our directors since May 1996. Mr. Nagai also
served us as a consultant from August 1995 until June 1998. From January 1990
to April 1995, Mr. Nagai was the President and Chief Executive Officer of Cybeq
Systems, a semiconductor equipment supplier. From 1983 to 1989, Mr. Nagai held
a number of management positions with the Mitsubishi Bank (currently the Bank
of Tokyo-Mitsubishi) and the Mitsubishi Materials Corporation.
Mr. Ward has served as one of our directors since August 1999. Since August
1999, Mr. Ward has been a General Partner of Virtual Founders. From April 1992
to June 1997, Mr. Ward was the Vice President of Technology at Silicon Valley
Group Inc.
Mr. Vincent Coates is the father of Mr. Norman Coates, one of our directors.
There are no other family relationships among any of our executive officers and
directors. All directors hold office until the next annual meeting of
shareholders and until their successors have been elected and qualified.
Officers are elected by and serve at the discretion of the Board of Directors.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Exchange Act requires our executive officers and
directors, and persons who own more than ten percent of a registered class of
our equity securities, to file reports of ownership and changes in ownership
with the Securities and Exchange Commission ("SEC") and the Nasdaq National
Market. Executive officers, directors and greater than 10% shareholders are
required by SEC regulation to furnish us with copies of all Section 16(a) forms
they file. Based solely on our review of the copies of such forms received by
us, or written representations from certain reporting persons, we believe that
during fiscal 1999 all filing requirements applicable to our executive officers
and directors and greater than 10% shareholders were complied with, except that
the Vincent J. Coates Separate Property Trust, U/D/T dated August 7, 1981 and
the Vincent J. Coates 1999 Charitable Trust UTA dated December 17, 1999, both
greater than 10% shareholders, each filed one report on Form 3 late.
III-2
ITEM 11. EXECUTIVE COMPENSATION
Executive Compensation
The following table sets forth the compensation earned by our chief
executive officer and by our next most highly compensated executive officers
(collectively, the "Named Officers") during the past three fiscal years:
Summary Compensation Table
Long Term
Compensation
Annual Compensation Awards
---------------------------------- -------------
Securities
Underlying
Fiscal Year Salary Bonus Options (#)
----------- -------- ------ -----------
John D. Heaton....................................... 1999 $ 241,445 $ 5,338 50,000
President and Chief Executive Officer 1998 $ 206,668 $ 21,098 100,000
1997 $ 219,061 $ 45,261 75,000
Vincent J. Coates.................................... 1999 $ 204,800 $ -- --
Chairman of the Board and Secretary 1998 $ 215,231 $ 10,431 --
1997 $ 238,776 $ 47,405 --
Roger Ingalls Jr..................................... 1999 $ 178,529 $ 3,203 --
Vice President and Director of Marketing 1998 $ 209,178 $ 14,723 19,000
1997 $ 222,900 $ 22,642 25,000
William Fate......................................... 1999 $ 177,767 $ 2,925 --
Former Vice President and Director of 1998 $ 212,058 $ 13,442 19,000
International Sales 1997 $ 189,053 $ 21,630 4,000
William A. McGahan................................... 1999 $ 174,896 $ 3,681 --
Vice President and Chief Scientist 1998 $ 151,315 $ 15,934 38,000
1997 $ 143,390 $ 26,218 30,000
III-3
Paul B. Nolan........................................ 1999 $ 120,870 $ 2,643 --
Vice President and Chief Financial Officer 1998 $ 123,232 $ 13,809 --
1997 $ 135,551 $ 29,378 40,000
Stock Options Granted in the Fiscal Year Ended December 31, 1999
The following table sets forth information with respect to stock options
granted during the fiscal year ended December 31, 1999 to each of the Named
Officers. All options were granted under our 1991 Stock Option Plan.
The potential realizable value amounts in the last two columns of the
following chart represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. The assumed 5%
and 10% annual rates of stock price appreciation from the date of grant to the
end of the option term are provided in accordance with rules of the SEC and do
not represent our estimate or projection of the future common stock price.
Actual gains, if any, on stock option exercises are dependent on the future
performance of the common stock, overall market conditions and the option
holder's continued employment through the vesting period.
Option Grants in Last Fiscal Year
Individual Grants
------------------------------------------- Potential Realized
Number of % of Total Value at Assumed Annual Rates
Securities Options of Stock Price Appreciation for
Underlying Granted to Option Term
Options Employees Exercise -------------------------------
Name Granted in Fiscal Price Expiration
------ (#) (1) Year (2) ($/Sh) Date 5% ($) 10% ($)
------------ ---------- -------- ----------- ------------------------------
John D. Heaton............................. 50,000 11.0% 6.94 5/28/04 95,835 211,771
Vincent J. Coates.......................... -- -- -- -- -- --
Roger Ingalls Jr........................... -- -- -- -- -- --
William Fate............................... -- -- -- -- -- --
William A. McGahan......................... -- -- -- -- -- --
Paul B. Nolan.............................. -- -- -- -- -- --
- -----------------
(1) All options granted to the Named Officers in 1999 were granted at exercise
prices equal to the fair market value of our common stock on the dates of
grant. Historically, options granted become exercisable at the rate of 33%
on the first anniversary date of the option grant and 33% of the option
shares become exercisable each full year thereafter, such that full vesting
occurs three years after the date of grant. Options lapse after 5 years or
90 days after termination of employment.
(2) Based on 455,000 options granted during the fiscal year ended December 31,
1999.
III-4
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table sets forth the number of shares acquired upon the
exercise of stock options during 1999 and the number of shares covered by both
exercisable and unexercisable stock options held by each of the Named Officers
at December 31, 1999.
Number of Securities Value of Unexercised
Underlying Unexercisable In-the-Money Options
Shares Options At Fiscal Year-End (#) At Fiscal Year-End ($) (2)
Acquired on Value Realized ($) ------------------------------ ----------------------------
Exercise (#) (1) Exercisable Unexercised Exercisable Unexercisable
------------ ------------------- ------------- -------------- -------------- -------------
John D. Heaton.............. -- -- 126,668 141,667 1,906,687 2,034,380
Vincent J. Coates........... -- -- -- -- -- --
Roger Ingalls Jr............ 25,000 416,375 32,999 21,001 481,507 285,557
William Fate................ 27,999 150,981 -- -- -- --
William A. McGahan.......... 25,000 193,505 29,332 33,668 416,453 458,144
Paul B. Nolan............... 25,000 264,725 61,666 13,334 960,640 200,010
- -----------------------
(1) The value realized upon exercise is (i) the fair market value of our common
stock on the date of exercise, less the option exercise price per share,
multiplied by (ii) the number of shares underlying the options exercised.
(2) The value of unexercised options is (i) the fair market value of our common
stock on December 31, 1999 ($20.13 per share), less the option exercise
price of in-the-money options, multiplied by (ii) the number of shares
underlying such options.
Compensation of Directors
Directors who are not also our employees receive an annual retainer fee of
$5,000 plus $1,000 for each Board of Directors and committee meeting attended
(unless the Board and committee meeting take place on the same day, in which
case such directors receive a $1,000 fee) and are eligible to participate in our
1991 Director Option Plan as amended April 1994.
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements
Pursuant to the terms of an agreement dated May 1, 1985 between us and
Vincent J. Coates, the terms of which were then amended and restated in August
1996 and again effective April 1998, we are obligated, in the event Mr. Coates
is required to resign as Chairman of the Board under certain circumstances, to
continue to pay Mr. Coates his salary and benefits for five years from the date
of such resignation.
In April 1998, we entered into an agreement with Mr. Heaton in which we
agree to pay Mr. Heaton his usual annual salary (excluding bonuses) for a period
of one year from the date that he is required or requested for any reason not
involving good cause to involuntarily relinquish his positions as Chief
Executive Officer and President and as a director. If Mr. Heaton leaves us
voluntarily or if he is asked to leave under certain circumstances, no such
severance pay shall be awarded.
Report on Repricing of Options
The following table summarizes stock options granted to our executive
officers of that have been repriced during the past ten years.
III-5
Ten-Year Option Repricings
Number of Market Length of
Securities Price of Exercise Original
Underlying Stock at Price at New Option Term
Options Time of Time of Exercise Remaining at
Repricing Repriced Repricing Repricing Price Date of
Name Date (#) ($) ($) ($) Repricing
- -------------------------------------------- --------- ------------ ------------ --------- ----------- ------------------
John D. Heaton.............................. 9/15/98 16,668 5.125 5.25 5.125 2 years 2 months
President and Chief 9/15/98 75,000 5.125 10.22 5.125 3 years 11 months
Executive Officer 9/15/98 100,000 5.125 8.63 5.125 4 years 7 months
Roger Ingalls Jr............................ 9/15/98 25,000 5.125 6.13 5.125 1 year 11 months
Vice President and Director 9/15/98 5,000 5.125 5.25 5.125 2 years 2 months
of Marketing 9/15/98 25,000 5.125 10.22 5.125 3 years 11 months
William Fate................................ 9/15/98 15,000 5.125 6.13 5.125 1 year 11 months
Former Vice President and Director 9/15/98 9,000 5.125 5.25 5.125 2 years 2 months
of International Sales 9/15/98 4,000 5.125 10.22 5.125 3 years 11 months
William A. McGahan.......................... 9/15/98 20,000 5.125 5.88 5.125 2 years 4 months
Vice President and 9/15/98 30,000 5.125 10.22 5.125 3 years 11 months
Chief Scientist 9/15/98 10,000 5.125 8.63 5.125 4 years 7 months
9/15/98 3,000 5.125 8.50 5.125 4 years 9 months
Paul B. Nolan............................... 9/15/98 5,000 5.125 5.25 5.125 2 years 2 months
Vice President and Chief 9/15/98 40,000 5.125 10.22 5.125 3 years 11 months
Financial Officer
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of the Board of Directors of Nanometrics
Incorporated consisted of Nathaniel Brenner, Norman V. Coates and, until April
14, 1999, Clifford F. Smedley. No member of the Compensation Committee of our
Board serves as a member of the board of directors or compensation committee of
any entity that has one or more executive officers serving as a member of our
Board of Directors or Compensation Committee.
Report of the Compensation Committee and Stock Option Committee of the Board of
Directors
The following is the report of the Compensation Committee and the Stock
Option Committee of the Board of Directors describing compensation policies and
rationales applicable to our executive officers with respect to the compensation
paid to such executive officers for the fiscal year ended December 31, 1999.
The information contained in such report shall not be deemed to be "soliciting
material" or to be "filed" with the Securities and Exchange Commission, nor
shall such information be incorporated by reference into any future filing under
the Securities Act or Exchange Act, except to the extent that we specifically
incorporate it by reference into such filing.
General. The Compensation Committee is responsible for making
recommendations to the Board of Directors with respect to cash compensation
levels for our executive officers. During 1999, the Stock Option Committee was
responsible for determining levels of equity-based compensation for our
executive officers and other key personnel.
III-6
Compensation Philosophy. The Compensation Committee makes recommendations
as to the salaries of the executive officers by considering (i) the salaries of
executive officers in similar positions at comparably-sized peer companies, (ii)
our financial performance over the past year based upon revenues and operating
results and (iii) the achievement of individual performance goals related to
each executive officer's duties and areas of responsibility. The Compensation
Committee makes recommendations as to the levels of cash bonuses awarded to our
executive officers and views such bonuses as being an integral part of our
performance-based compensation program. Such bonuses are based on our profits
and are determined as a percentage of the executive salaries.
Equity-Based Compensation. The Stock Option Committee views stock options
as an important part of our long-term, performance-based compensation program.
The Stock Option Committee bases grants of stock options to our executive
officers under our 1991 Stock Option Plan (as amended through May 15, 1997) upon
such Committee's estimation of each executive's contribution to the long-term
growth and profitability of our company. The 1991 Stock Option Plan is intended
to provide additional incentives to the executive officers to maximize
shareholder value. Options are granted under the 1991 Stock Option Plan at the
then-current market price and are generally subject to three-year vesting
periods to encourage key employees to remain with us.
Compensation of President and Chief Executive Officer. The compensation of
our President and Chief Executive Officer was based upon the same criteria
described above. Specifically, the Compensation Committee considered several
factors as important in determining such compensation including progress toward
meeting the corporate plan and the objectives set for the President and Chief
Executive Officer during his tenure in the current fiscal year as well as
progress toward attaining longer range goals as a result of his leadership. In
recognition of his progress toward meeting corporate goals and to remain
competitive, based on a survey of other CEO salaries, the compensation of our
President and Chief Executive Officer was increased to an annual salary of
$250,000.
STOCK OPTION COMMITTEE COMPENSATION COMMITTEE
Nathaniel Brenner Nathaniel Brenner
Norman V. Coates Norman V. Coates
Clifford F. Smedley, until April 14, 1999
III-7
Performance Graph
Set forth below is a line graph comparing the annual percentage change in
the cumulative return to the shareholders of our Common Stock with the
cumulative return of the Nasdaq U.S. Index and the Hambrecht & Quist Technology
Index for the period commencing on January 1, 1995 and ending on December 31,
1999. The information contained in the performance graph shall not be deemed to
be "soliciting material" or to be "filed" with the Securities and Exchange
Commission, nor shall such information be incorporated by reference into any
future filing under the Securities Act or Exchange Act, except to the extent
that the Company specifically incorporates it by reference into such filing.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG NANOMETRICS INCORPORATED, THE NASDAQ STOCK MARKET (U.S.) INDEX
AND THE HAMBRECHT & QUIST TECHNOLOGY INDEX
[GRAPHIC OMITTED]
The following descriptive data is supplied in accordance with Rule 304(d)
of Regulation S-T
12/94 12/95 12/96 12/97 12/98 12/99
Nanometrics Incorporated 100 1,311 844 1,456 1,389 3,578
Nasdaq Stock Market (U.S.) 100 140 172 209 292 541
Hambrecht & Quist Technology 100 149 178 236 369 811
* $100 invested on 12/31/94 in Stock or Index--including reinvestment of
dividends. Fiscal year ending December 31.
III-8
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table presents information with respect to beneficial
ownership of our common stock as of December 31, 1999 by:
. each person who beneficially owns more than 5% of the common stock;
. each of our executive officers;
. each of our directors; and
. all executive officers and directors as a group.
The applicable percentage of ownership for each shareholder is based on
9,163,998 shares of common stock outstanding as of December 31, 1999.
Ownership (1)
-------------------------------
Beneficial Owner Number of Shares Percentage
- ----------------------------------------------------------- -------------------------------
Vincent J. Coates (2)...................................... 5,388,774 58.8%
c/o Nanometrics Incorporated
310 DeGuigne Drive
Sunnyvale, CA 94086
Putnam Investments, Inc. (3)............................... 833,840 9.1%
One Post Office Square
Boston, MA 02109
FMR Corp. (4).............................................. 700,000 7.6%
82 Devonshire Street
Boston, MA 02109
Nathaniel Brenner (5)...................................... 55,999 *
Norman V. Coates (6)....................................... 38,049 *
John D. Heaton (7)......................................... 126,668 1.4%
Paul B. Nolan (8).......................................... 61,666 *
Kanegi Nagai (9)........................................... 13,999 *
Roger Ingalls Jr. (10)..................................... 32,999 *
William A. McGahan (11).................................... 29,332 *
Edmond R. Ward............................................. 0 *
All officers and directors as a group (9 persons) (12)..... 5,747,486 60.6%
- -----------------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the SEC.
The number of shares beneficially owned by a person includes shares of
common stock subject to options held by that person that are currently
exercisable or exercisable within 60 days of December 31, 1999. Such share
issuable pursuant to such options are deemed outstanding for computing the
percentage ownership of the person holding such options but are not deemed
outstanding for the purposes of computing the percentage ownership of each
other person.
III-9
(2) Includes 4,388,654 shares of common stock held of record by the Vincent J.
Coates Separate Property Trust, U/D/T dated August 7, 1981, for which Mr.
Coates acts as trustee, and 1,000,000 shares of common stock held of record
by the Vincent J. Coates 1999 Charitable Trust UTA dated December 17, 1999
for which Mr. Coates acts as trustee.
(3) According to a Schedule 13G filed with the Securities Exchange Commission
on or about February 17, 2000, Putnam Investments, Inc. ("PI") may be
deemed to be the beneficial owner of 833,840 shares of common stock. PI is
identified as a Parent Holding Company on its Schedule 13G.
(4) According to a Schedule 13G filed with the Securities Exchange Commission on
or about February 11, 2000, FMR Corp. ("FMR") may be deemed to be the
beneficial owner of 700,000 shares of common stock. FMR is identified as a
Parent Holding Company on its Schedule 13G.
(5) Includes 26,000 shares of common stock held of record by the N&J Brenner
Living Trust, for which Mr. Brenner and his spouse act as trustees, for the
benefit of members of Mr. Brenner's immediate family, and 29,999 shares of
common stock issuable upon exercise of outstanding options exercisable
within 60 days of December 31, 1999.
(6) Includes an aggregate of 8,050 shares held as trustee on the behalf of other
family members and 29,999 shares of common stock issuable upon exercise of
outstanding options exercisable within 60 days of December 31, 1999.
(7) Includes 126,668 shares of common stock issuable upon exercise of
outstanding options exercisable within 60 days of December 31, 1999.
(8) Includes 61,666 shares of common stock issuable upon exercise of outstanding
options exercisable within 60 days of December 31, 1999.
(9) Includes 13,999 shares of common stock issuable upon exercise of outstanding
options exercisable within 60 days of December 31, 1999.
(10) Includes 32,999 shares of common stock issuable upon exercise of
outstanding options exercisable within 60 days of December 31, 1999.
(11) Includes 29,332 shares of common stock issuable upon exercise of
outstanding options exercisable within 60 days of December 31, 1999.
(12) Includes 324,662 shares of common stock issuable upon exercise of
outstanding options exercisable within 60 days of December 31, 1999.
III-10
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We are the beneficiary of an insurance policy on the life of Vincent J.
Coates in a face amount of $8,000,000. Annual premiums, which are paid by us,
totaled $200,000 for fiscal 1999 and are fixed at $200,000 per year upon
continuation of the policy. In the event of termination of the policy, any cash
surrender value would belong to Mr. Coates. We have entered into an agreement
with Mr. Coates providing that in the event of Mr. Coates's death, his estate
has the option to cause the Company to use the proceeds of the policy to
purchase shares of our Common Stock owned by the estate at their then fair
market value. The estate is not obligated under the terms of the agreement to
exercise the option. If the option is not exercised, we would retain the
proceeds of the insurance. The purpose of this agreement is to provide Mr.
Coates' estate, at its option, the opportunity to obtain cash to pay estate
taxes without having to raise all of such money from sales in the open market.
Additional relationships and related transactions are set forth above in
"Item 11. Executive Compensation" under the heading "Employment Contracts and
Termination of Employment and Change-in-Control Arrangements."
III-11
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) 1. Consolidated Financial Statements.
See Index to Consolidated Financial Statements at Item 8 on page II-19
of this report.
2. Consolidated Financial Statement Schedules.
The following consolidated financial statement schedules of Nanometrics
Incorporated are filed as part of this report and should be read in conjunction
with the Consolidated Financial Statements of Nanometrics Incorporated:
Schedule Page
-------- ----
II - Valuation and Qualifying Accounts............................... IV-4
Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be set forth
therein is included in the Consolidated Financial Statements or notes thereto.
(b) Reports on Form 8-K. We did not file any reports on Form 8-K during
the quarter ended December 31, 1999.
(c) Exhibits.
The following exhibits are filed with this Annual Report on Form 10-K:
Exhibit
Number Description
---------- ---------------------------------------------------------
3.1(1) Restated and Amended Articles of Incorporation of
Registrant filed July 7, 1982
3.2(1) Certificate of Amendment of Articles of Incorporation
filed January 31, 1983
3.3(1) Certificate of Amendment of Articles of Incorporation
filed July 28, 1983
3.4(1) Certificate of Amendment of Certificate of Determination
of Preferences of Series
B Common Stock filed September 13, 1983
3.5(1) Certificate of Amendment of Articles of Incorporation
filed September 13, 1983
3.6(2) Certificate of Amendment of Articles of Incorporation
filed December 3, 1984
3.7(2) Certificate of Correction of Certificate of Amendment of
Certificate of Determination of Preferences of Series B
Common Stock filed March 19, 1985
3.8(2) Certificate of Amendment of Articles of Incorporation
filed June 27, 1988
3.9(2) Bylaws
4.1(1) Form of Common Stock Certificate
10.1(2) Form of Indemnification of Agreement for Directors &
Officers
10.2 Employee Stock Purchase Plan, as amended through March
1998
10.3(3) 1991 Stock Option Plan, as amended through May 15, 1997
10.4 1991 Director Option Plan as amended April 1994
10.5(5) Amendment to and Restatement of Redemption Agreement
dated March 4, 1993 between Vincent J. Coates and
Registrant
10.6(2) Consulting Agreement dated as of September 15, 1997
between the Registrant and Kanegi Nagai, as amended
10.7(2) Reverse Split Dollar Insurance Agreement and Collateral
Assignment dated March 15, 1993 between the Registrant
and Vincent J. Coates
IV-1
Exhibit
Number Description
---------- ---------------------------------------------------------
10.8(2) Lease Agreement dated February 25, 1992 between PM-DE and
the Registrant, First Addendum to Lease dated February
22, 1992 and First Amendment to Lease dated April 24,
1997
10.9(2) Loan Agreement between Japan Development Bank and
Nanometrics Japan k.k.
10.10(2) Loan Agreement and Guarantee dated June 5, 1995 between
Mitsubishi Bank, Limited and Nanometrics Japan Ltd.
21(2) Subsidiaries of Registrant
23.1 Independent Auditors' Consent
23.2 Independent Auditors' Report on Schedule
24 Power of Attorney (see page IV-3)
------------------
(1) Incorporated by reference to exhibits filed with Registrant's
Registration Statement on Form S-1 (File No. 2-93949), which
became effective November 28, 1984.
(2) Incorporated by reference to the Registrant's 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.
(d) Consolidated Financial Statements and Schedules.
See Item 14(a) above.
IV-2
SIGNATURES
Pursuant to the requirements Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 2, 2000
NANOMETRICS INCORPORATED
By: /s/ Paul B. Nolan
--------------------------------
Paul B. Nolan
Chief Financial Officer and Vice President
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints John D. Heaton and Paul B. Nolan jointly
and severally, his attorneys-in-fact, each with the power of substitution, for
him in any and all capacities, to sign any and all amendments to this Report on
Form 10-K, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that said attorneys-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1934, this Report on
Form 10-K has been signed below by the following persons on behalf of the
registrant on the 2nd day of March, 2000 in the capacities indicated.
Signature Title
--------- -----
/s/ John D. Heaton President, Chief Executive Officer and Director
- ---------------------------------------------------- (Principal Executive Officer)
John D. Heaton
/s/ Paul B. Nolan Chief Financial Officer and Vice President
- ---------------------------------------------------- (Principal Financial and Accounting Officer)
Paul B. Nolan
/s/ Vincent J. Coates Chairman of the Board
- ----------------------------------------------------
Vincent J. Coates
/s/ Nathaniel Brenner Director
- ----------------------------------------------------
Nathaniel Brenner
/s/ Norman V. Coates Director
- ----------------------------------------------------
Norman V. Coates
/s/ Kanegi Nagai Director
- ----------------------------------------------------
Kanegi Nagai
/s/ Edmond R. Ward Director
- ----------------------------------------------------
Edmond R. Ward
IV-3
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, 1999................. $420,000 $5,000 $ 0 $425,000
-------- ------ ------- --------
December 31, 1998................. $413,000 $7,000 $ 0 $420,000
-------- ------ ------- --------
December 31, 1997................. $419,000 $ 0 $(6,000) $413,000
-------- ------ ------- --------
IV-4