-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FV+eFwc8bfg6W3OhQp5E1cTQ/rNXGOS7apZXHquA3k98ymayNP4YVmiX5/sIjyrL eJNOm66md21SU3zw2EMpFw== 0000950005-01-000414.txt : 20010402 0000950005-01-000414.hdr.sgml : 20010402 ACCESSION NUMBER: 0000950005-01-000414 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NANOMETRICS INC CENTRAL INDEX KEY: 0000704532 STANDARD INDUSTRIAL CLASSIFICATION: MEASURING & CONTROLLING DEVICES, NEC [3829] IRS NUMBER: 942276314 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-13470 FILM NUMBER: 1586671 BUSINESS ADDRESS: STREET 1: 310 DEGUIGNE DR CITY: SUNNYVALE STATE: CA ZIP: 94086 BUSINESS PHONE: 4087461600 MAIL ADDRESS: STREET 1: 310 DEGUIGNE DRIVE CITY: SUNNYVALE STATE: CA ZIP: 94086 10-K 1 0001.txt FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ Commission File No. 0-13470 NANOMETRICS INCORPORATED (Exact name of Registrant as specified in its charter) California 94-2276314 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 1550 Buckeye Drive Milpitas, California 95035 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (408) 435-9600 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing price of Common Stock on February 28, 2001, as reported by Nasdaq, was approximately $104,973,223. Shares of voting stock held by each officer and director and by each person who owns 5% or more of the outstanding voting stock have been excluded in that such persons may be deemed to be "affiliates" as that term is defined under the rules and regulations of the Securities Exchange Act of 1934, as amended. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of February 28, 2001, 11,616,840 shares of the registrant's Common Stock were outstanding. NANOMETRICS INCORPORATED FORM 10-K YEAR ENDED DECEMBER 31, 2000 TABLE OF CONTENTS PART I Item 1. Business...................................................... I-1 Item 2. Properties.................................................... I-13 Item 3. Legal Proceedings............................................. I-13 Item 4. Submission of Matters to a Vote of Security Holders........... I-14 PART II Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.......................................... II-1 Item 6. Selected Consolidated Financial Data.......................... II-1 Item 7. Management's Discussion and Analysis of Financial Condition and Results Of Operations.................................... II-4 Item 7A. Quantitative and Qualitative Disclosures about Market Risk.... II-15 Item 8. Consolidated Financial Statements and Supplementary Data...... II-16 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure..................................... II-36 PART III Item 10. Directors and Executive Officers of the Registrant............ III-1 Item 11. Executive Compensation........................................ III-1 Item 12. Security Ownership of Certain Beneficial Owners and Management................................................... III-1 Item 13. Certain Relationships and Related Transactions................ III-1 PART IV Item 14. Exhibits, Consolidated Financial Statement Schedules, and Reports on Form 8-K.......................................... IV-1 PART I Item 1. Business This Business section and other parts of this Annual Report on Form 10-K contain forward-looking statements that involve risks and uncertainties. Forward-looking statements include information concerning our possible or assumed future results of operations. Our actual results may differ materially from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed below and in "Management's Discussion and Analysis of Financial Condition and Results of Operations." The forward-looking statements contained herein are made as of the date hereof, and we assume no obligation to update such forward- looking statements or to update reasons actual results could differ materially from those anticipated in such forward-looking statements. When we use words such as "believe," "expect," "anticipate" or similar expressions, we are making forward-looking statements. We are a leader in the design, manufacture, marketing and support of thin film metrology systems for the semiconductor, flat panel display and magnetic recording head industries. Our systems precisely measure a wide range of film types deposited on substrates during manufacturing in order to control manufacturing processes and increase production yields. Our non-contact, non- destructive thin film measurement systems use a broad spectrum of wavelengths, high-sensitivity optics, proprietary software and patented technology to measure the thickness and uniformity of films deposited on silicon and other substrates as well as their chemical composition. Growth in the market for our products is driven by the increasing use of thin film technology by manufacturers of electronic products. Many types of thin films are used in the manufacture of numerous products, including semiconductors, flat panel displays and magnetic recording heads as well as integrated fiber optics, conventional and advanced optics, high density optical and magnetic disks and lasers. These products require the precise electronic, optical, magnetic and surface finish properties enabled by thin film technology. The rapid growth in the sale and use of these products has created significant demand for our metrology systems. We offer a complete line of systems to address the thin film metrology requirements of our customers. Each of our systems are equipped with computerized mapping capability for measurement, visualization and control of film uniformity. Our metrology systems can be categorized as follows: * stand-alone, fully automated systems for measurements of thin films in high-volume manufacturing operations; * integrated systems for integration into semiconductor processing equipment that provide virtually immediate measurements and feedback to improve process control and increase throughput; and * tabletop systems used to manually or semiautomatically measure thin films in engineering and low-volume production environments. In addition, we provide systems that are used to measure the overlay accuracy of successive layers of semiconductor patterns on wafers in the photolithography process. The accurate alignment of successive film layers, relative to each other, across the wafer is critical for device performance and favorable production yields. We have been a pioneer in the field of thin film measurement and have been instrumental in the development of many innovations for over two decades. We have been selling metrology systems since 1977 and have an extensive installed base with industry leading customers worldwide, including Applied Materials, Hyundai, IBM, Intel, TSMC and Hitachi. I-1 Industry Background Growth The increasing demand for Internet access, personal computers, telecommunications, and new consumer electronic products and services have fueled growth of the semiconductor, data storage and flat panel display industries. In addition, integrated circuits and related components have increased in performance and lowered in price, contributing to the growth. Significant growth has occurred over the past ten years, however, these industries are cyclical in nature and are characterized by short periods of over and under supply. During an over supply cycle, capital expenditures for manufacturing and monitoring systems decline. These expenditures increase during an under supply cycle. Consumer desire for high performance electronics, drives technology advancement in semiconductor design and manufacturing and, in turn, promotes the purchasing of capital equipment featuring the latest advances in technology. The two significant factors affecting demand for the Company's measurement systems are: (i) new construction or refurbishment of manufacturing facilities, which, in turn, depends on the current and anticipated market demand for semiconductors, disk drives, flat panel displays, and products that use such components, and (ii) the increasing complexity of the manufacturing process as a result of the demand for higher performance semiconductors, magnetic recording heads and flat panel displays. Semiconductor Manufacturing Process [GRAPHIC] Semiconductors are fabricated by a complex series of process steps on a wafer substrate made of silicon or other material. Thin film metrology systems are used at many points during the fabrication process to monitor and precisely measure film thickness and uniformity as well as chemical properties in order to maximize the yield of acceptable semiconductors. Each wafer typically goes through a series of 100 to 500 process and metrology steps in generally repetitive cycles. The four primary wafer film processing steps are: * deposition; * chemical mechanical planarization, known in our industry as CMP; * photolithography; and * etch. Deposition. Deposition refers to placing layers of insulating or conductive materials on a wafer surface in thin films that make up the circuit elements of semiconductor devices. The four most common methods of deposition are chemical vapor deposition (CVD), physical vapor deposition (PVD), diffusion and oxidation. The control of uniformity and thickness during deposition of these films is critical to the performance of the semiconductor circuit. 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 1,100 millimeters. Multiple magnetic recording heads are manufactured on substrates that are typically made of an aluminum oxide-titanium carbide alloy, two to three millimeters thick and approximately 150 millimeters across. Increased Use of Thin Film Metrology Systems Changing trends in the semiconductor, flat panel display and magnetic recording head manufacturing industries are increasing the need for thin film metrology systems. These trends include the following: * Growing Use of Chemical Mechanical Planarization. Manufacturers are adopting CMP to flatten, or planarize, thin films to obtain the ultra- flat surfaces required for advanced photolithography. In addition, the introduction of new interconnect techniques has increased the need for CMP. Accordingly, semiconductor manufacturers are seeking metrology systems that can help control the CMP process by measuring the thin film layer to determine precisely when the appropriate thickness has been achieved. * Adoption of New Types of Thin Films. Manufacturers are adopting new processes and technologies that increase the importance and utilization of thin film metrology systems. To achieve greater semiconductor device speed, manufacturers are utilizing copper and new insulating materials that require enhanced metrology solutions for the manufacturing process. I-3 * Increasing Complexity of Semiconductors. Semiconductors are becoming more complex as they operate at faster speeds with smaller feature sizes, employ larger dies that contain more transistors and utilize increasing numbers of manufacturing process steps. The value of process wafers and the cost of rework is significantly higher for these complex semiconductors and therefore, manufacturers are seeking to use metrology systems to increase production yields and limit the amount of rework. * Need for Rapid Ramp of Production Efficiencies. Competitive forces on semiconductor device manufacturers, such as price cutting and shorter product life cycles, place pressure on the manufacturers to rapidly achieve production efficiency. Semiconductor device manufacturers are using metrology systems throughout the fab to ensure that manufacturing processes scale rapidly, are accurate and can be repeated on a consistent basis. Drive Toward Integrated Metrology For many years, semiconductor manufacturers have sought to improve fab efficiency by choosing systems that integrate more than one process step into a single tool. Integrated solutions increase productivity with higher throughput, smaller overall footprint, reduced wafer handling and faster process development. This trend began in the mid-1980s as leading manufacturers introduced a "cluster process tool" architecture that combined multiple processes in separate chambers around a central wafer handling platform. More recently, CMP systems have begun to integrate cleaning technology into a single system in order to achieve these benefits. Today, the same focus on increased productivity is driving the adoption of integrated metrology for many processes, such as CMP and CVD. Until recently, semiconductor manufacturers had to physically transport wafers from a process tool to a separate metrology system in order to make critical measurements such as film thickness and uniformity. Manufacturers of process equipment are increasingly seeking to offer their customers integrated metrology in their tools to lower costs and improve overall fab efficiency. Such tools can have one or two metrology chambers that are integrated onto a process system, which utilize the common automation platform so that measurements can be taken without removing the wafers from the tool. Integrated metrology provides semiconductor manufacturers with several benefits, including a reduction in the number of test wafers, increased overall process throughput, faster detection of process excursions and faults, reduced wafer handling, faster process development and ultimately an improvement in overall equipment effectiveness. Nanometrics Solution We are a leader in the design, manufacture, marketing and support of thin film metrology systems for the semiconductor, flat panel display and magnetic recording head industries. We offer a complete line of systems to address the thin film metrology requirements of our customers. Our metrology systems can be categorized as follows: * Stand-alone, fully automated systems used for measurements of thin films in high-volume manufacturing operations. We offer a broad line of fully automated thin film thickness measurement systems. These systems remove the dependence on human operators by incorporating reliable wafer handling robots and are designed to meet the speed, measurement, performance and reliability requirements that are essential for today's semiconductor, flat panel display and magnetic recording head manufacturing facilities. We believe we offer the only fully automated thin film thickness measurement systems that synergistically combine spectroscopic ellipsometry, spectroscopic reflectometry and Fourier transform infrared reflectometry, known in the industry as FTIR. Each of these measurement systems are non-contact and use non-destructive techniques to analyze and measure films. Our fully automated metrology product line also includes systems that are used to measure the overlay registration accuracy of successive layers of semiconductor patterns on wafers in the photolithography process. I-4 * Integrated systems used to measure in-process wafers automatically and quickly without having to leave the enclosed wafer processing system. In 1998, we introduced our high-speed integrated metrology system. Our integrated metrology systems are compact and monitor a multitude of small test points on the wafer using sophisticated pattern recognition. Our integrated systems can be attached to film deposition, CMP, CVD, etch and other process tools to provide rapid monitoring of films on each wafer immediately before or after processing. Integrated systems can offer customers significantly increased operating efficiency and equipment utilization, lower manufacturing costs and higher throughput.. We are currently shipping integrated systems to Applied Materials for installation on their CMP and CVD tools. * Tabletop systems used to manually or semiautomatically measure thin films in engineering and low-volume production environments. We pioneered and believe we are the leading supplier of tabletop thin film thickness measurement systems, which are mainly used in low-volume production environments and failure analysis and engineering labs. Our tabletop models have unique capabilities and several available configurations, depending on wafer handling, range of films to be measured, uniformity mapping and other customer needs. Each of our thin film thickness measurement systems are equipped with computerized readout capability for measurement, visualization and control of film uniformity. In addition, we have developed new automated systems and tabletop products for emerging technologies using larger substrates such as 300 millimeter wafers and larger flat panel displays. We believe that we are the first company to ship fully automated thin film thickness measurement systems for 300 millimeter wafers. We have also introduced new technology for the precise thin film measurements that are dictated by sub 0.18 micron design rules and have developed products with mini-environments that meet the latest standards for clean, particle-free manufacturing. Strategy Our strategy is to offer and support, on a worldwide basis, technologically advanced metrology systems that meet the changing manufacturing requirements of the semiconductor, flat panel display and magnetic recording head industries as well as other industries that use metrology systems. Key elements of our strategy include: Continuing to Offer Advanced Integrated Metrology Systems. We were one of the first suppliers to offer products that integrate process metrology systems into wafer processing equipment. We intend to continue our efforts to develop the integrated metrology market to achieve and maintain competitive advantages. In September 1998, we entered into an OEM agreement to supply metrology systems for Applied Materials' Mirra Mesa(TM) CMP system. In addition, in July 1999, we introduced a metrology system that is incorporated into Applied Materials' Producer QA(TM) CVD system. We continue to sell these products and we are pursuing other OEM arrangements and will continue to investigate other integrated metrology technologies. Maintaining Technology Leadership. We are committed to developing advanced metrology systems that meet the requirements of advances in thin film manufacturing technology. We have an extensive base of proprietary technology and expertise in optics, software and systems integration. We have supplemented our capabilities by establishing strategic relationships to leverage our technical resources and strengthen our product offerings. These include relationships with Kensington Laboratories, a manufacturer of precision robotic systems, J.A. Woollam Company, a leading designer of spectroscopic ellipsometer systems and Midac, a provider of FTIR technology. In December 1999, we acquired inspection and metrology technology from Phase Metrics, a data storage equipment company, to augment our technology portfolio. I-5 Leveraging Existing Customer and Industry Relationships. We expect to continue to strengthen our existing customer relationships and foster working partnerships by providing technologically superior systems and high levels of customer support. Our strong industry relationships have allowed close customer collaboration that facilitates our ability to introduce new products and applications that meet customer needs. We believe that our large customer base will continue to be an important source of new product development ideas. Our large customer base also provides us with the opportunity for increased sales of additional metrology systems to our customers without the extensive effort that might otherwise be required. Providing Worldwide Distribution and Support. We believe that a direct sales and support capability is essential for developing and maintaining close customer relationships and for rapidly responding to changing customer requirements. Because a majority of our sales come from outside the United States, we are expanding our direct sales force in South Korea and Taiwan and will continue to expand into additional territories as customer requirements dictate. We use selected sales representatives and distributors in other countries in Asia, Europe and the Middle East. We intend to continue developing our distribution network by expanding our existing offices, opening new offices and forming additional distribution relationships. We believe that growing our international distribution network will enhance our competitive position. Providing a Broad Portfolio of Metrology Systems and Technology. We offer a comprehensive family of metrology systems that accurately measure thin films and overlay registration used in the manufacturing process. We offer automated and integrated systems for high-volume manufacturing applications and tabletop systems for engineering and small fab applications. Our products can include a wide range of accessories as well as special hardware and software configurations to meet customer needs. We plan to continue enhancing our products and integrating additional features and measurement modules that will strengthen and broaden our product line. Addressing Multiple Markets. There are broad applications of our technology beyond the semiconductor industry. We intend to continue developing and marketing products to address metrology requirements in the manufacture of flat panel displays, magnetic recording heads and any other industries that might apply our technology in the future. We believe our diversification through multiple industry applications of our technology increases the total available market for our products and reduces, to an extent, our exposure to the cyclicality of any particular market. Products We have been a pioneer in the field of thin film metrology and have been instrumental in the development of many innovations over the past 25 years. Our thin film thickness measurement systems use microscope-based, non-contact spectroscopic reflectometry. Some of our systems provide complementary spectroscopic ellipsometry to measure the thickness and optical characteristics of films on a variety of substrates. In addition, we offer an optional FTIR feature on some of our products to measure epi-silicon thickness and determine other film parameters. We also manufacture a line of optical overlay registration systems that are used to determine the alignment accuracy of successive layers of semiconductor patterns on wafers in the photolithography process. Our products can be divided into three groups: automated systems, integrated systems and tabletop systems. I-6
Technology ----------------------------------------------------------- Fourier Maximum Transform Advanced Substrate Spectroscopic Spectroscopic Infrared Dimensional System Market Size (mm) Reflectometry Ellipsometry Reflectometry Metrology - ------ ------ --------- ------------- ------------ ------------- ---------- Automated 8000X Semiconductor, Magnetic Head 200 X X X 8300X Semiconductor 300 X X X 9100 Semiconductor, Magnetic Head 200 X X X 9200 Semiconductor 200 X 9300 Semiconductor 300 X X X 5500/6500 Flat Panel Display 960 by 1100 X 7000/7200 Semiconductor 200 X Integrated 9000i Semiconductor 200 X 9000b Semiconductor 300 X Tabletop 3000 Semiconductor, Magnetic Head 200 X 6100 Semiconductor 200 X
Automated Systems Our stand-alone, fully automated metrology systems are employed in high-volume production environments. These systems incorporate automated material handling interface options for integration into a variety of fab automation environments, and implement multiple measurement technologies for a broad range of substrate sizes. Our automated systems range in price from approximately $200,000 to $700,000 depending on substrate sizes, measurement technologies, material handling interfaces and software options. NanoSpec 8000X The NanoSpec 8000X stand-alone, automated thin film measurement system is capable of handling wafers ranging in size from 75 to 200 millimeters in diameter. The 8000X is the basic system configuration, while the 8000XSE includes a fully integrated spectroscopic ellipsometer for ultrathin and multiple film stack measurement applications. In addition, an FTIR option can be added to measure the thickness of epi-silicon. Other 8000X options include a standard mechanical interface with mini-environment enclosures for use in ultra-clean manufacturing facilities. The 8000X can also be configured to handle the substrates that are used in the magnetic recording head industry. NanoSpec 8300X The NanoSpec 8300X stand-alone, automated thin film measurement system is capable of handling both 200 and 300 millimeter diameter wafers. The 8300X is the basic system configuration and can be equipped with the spectroscopic ellipsometer and FTIR options for expanded measurement applications. This system can also include a mini-environment enclosure and wafer load ports compatible with industry standards. These systems conform to the new industry standards for 300 millimeter wafer handling automation. The 8300X received a Photonics Circle of Excellence Award for innovation and achievement in photonic technology. NanoSpec 9100 The NanoSpec 9100 stand-alone, automated thin film measurement system is capable of handling wafers ranging in size from 75 to 200 millimeters in diameter. The 9100 can be configured with a deep ultraviolet (DUV) to near infrared (NIR) spectroscopic ellipsometer for ultrathin, multiple film stack and DUV lithography measurement applications. In addition, an FTIR option can be added to measure the thickness of epi-silicon. Other 9100 options include a standard mechanical interface with mini-environment enclosures for use in ultra-clean manufacturing facilities. The system also features a I-7 Windows NT software platform that conforms to the newly establish SEMI user interface standard. The 9100 can also be configured to handle the substrates that are used in the magnetic recording head industry. We developed the 9100 using technologies from the integrated film thickness systems allowing easy transfer of measurement recipes between the integrated and stand-alone film metrology systems. NanoSpec 9200 The NanoSpec 9200 stand-alone, automated thin film measurement system is capable of handling wafers of 150 and 200 millimeters in diameter. We developed this system using technologies from the NanoSpec 9000 integrated film thickness system to be compact and to provide high wafer throughput. NanoSpec 9300 The NanoSpec 9300 stand-alone, automated thin film measurement system is capable of handling both 200 and 300 millimeter diameter wafers. The 9300 can be configured with a DUV to NIR spectroscopic ellipsometer for ultrathin, multiple film stack and DUV lithography measurement applications. In addition, an FTIR option can be added to measure the thickness of epi-silicon. This system can also include a mini-environment enclosure and wafer load ports compatible with industry standards. The 9300 conforms to the new industry standards for 300 millimeter wafer handling automation and features a Windows NT software platform that conforms to the newly establish SEMI user interface standard. We developed the 9300 using technologies from the integrated film thickness systems allowing easy transfer of measurement recipes between the integrated and stand-alone film metrology systems. NanoSpec 5500 and 6500 The NanoSpec 5500 and 6500 measure most optically transparent films used in the manufacture of flat panel displays. The Model 5500 is fully automated and handles large glass substrates up to 550 by 650 millimeters. This model is also capable of precisely measuring at any site on the substrate and generating film thickness maps, which show uniformity across the panel. The 6500 is an advanced version of the 5500 with many proprietary software and hardware enhancements and is capable of handling substrates up to 960 by 1100 millimeters. Metra 7000 and 7200 In 1998, we completed an acquisition of the Metra product line from Optical Specialties. The Metra is a stand-alone system used to measure the overlay accuracy of successive layers of semiconductor patterns on wafers in the photolithography process. We shipped our first automated overlay registration system, the Metra 7000, in June 1998. The recently introduced Metra 7200 provides enhanced measurement performance and higher wafer throughput. Integrated Systems Our integrated metrology systems are installed inside wafer processing equipment to provide near real-time measurements for improving process control and increasing throughput. Our integrated systems are available for wafer sizes up to 300 millimeters and offer deep ultraviolet, commonly referred to as DUV, FTIR measurement technologies, in addition to spectroscopic reflectometry. Depending on features and technologies, our integrated metrology systems range in price from approximately $80,000 to $295,000. NanoSpec 9000i The NanoSpec 9000i is an ultra-compact measurement system designed for integration into semiconductor wafer processing equipment. The system can be used in several wafer film process steps including metal deposition, CMP, CVD, photolithography and etch. In its basic configuration, the 9000i is equipped with visible wavelength spectroscopic reflectometry. In 1999, the 9000i received a Photonics Circle of Excellence Award for innovation and achievement in photonic technology. I-8 NanoSpec 9000b The NanoSpec 9000b is a 300 millimeter-based system that incorporates all the features of the 9000i. This system is interchangeable with industry conforming load ports for simplified mechanical integration. Tabletop Systems Our tabletop systems are used mainly in low-volume production environments and in engineering labs where automated handling and high throughput are not required. Our tabletop product line encompasses both manual and semiautomated models and includes systems for both film thickness and critical dimension measurements. Our tabletop system prices range from approximately $50,000 to $200,000 depending primarily on the degree of automation and software options. NanoSpec 3000 and 6100 The NanoSpec tabletop systems provide a broad range of thin film measurement solutions at a lower entry price point. The NanoSpec 3000 is a basic, manual system while the 6100 models feature semiautomatic wafer handling or staging. Customers We sell our thin film metrology systems worldwide to many of the major semiconductor, flat panel display and magnetic recording head manufacturers and equipment suppliers, as well as producers of silicon wafers and photomasks. The majority of our systems are sold to customers located in the United States, Asia and Europe. One customer, IBM, represented 11.2% of our total net revenues in 1998. Two customers, Applied Materials and TSMC, represented 12.8% and 10.5% of our total net revenues in 1999, respectively. Three customers, Applied Materials, Hyundai and TSMC, represented 20.5%, 11.8% and 10% of our total net revenues in 2000, respectively. The following is a list of our top customers, based on revenues, during 2000: Applied Materials Intertrade Scientific Hyundai Nortel TSMC Samsung Innotech Dongbu Lucent RF Microdevices Sales and Marketing We believe that a direct sales and support capability is essential for developing and maintaining close customer relationships and for rapidly responding to changing customer requirements. We provide direct sales support from our corporate office in California. In addition, we have a direct sales presence in Oregon and Texas in the United States as well as South Korea, Taiwan and Japan. We use selected sales representatives and distributors in other countries in Asia, Europe and the Middle East. We intend to continue to develop our distribution network by expanding our existing offices and opening new offices and forming additional distribution relationships. We believe that growing our international distribution network will enhance our competitive position. We maintain a direct sales force of highly trained, technically sophisticated sales engineers who are knowledgeable in the use of metrology systems in general and the features and advantages of our products in particular. We believe that our sales and application engineers are skilled in working with customers to solve complex measurement and process problems. Sales to customers in foreign countries constituted approximately 60.9% and 60.6% of total net revenues for 1999 and 2000, respectively. Direct exports of our metrology systems to foreign customers and shipments to our subsidiaries require general export licenses. See note 12 of the notes to consolidated financial statements for information regarding total net revenues and long- lived assets of our foreign operations. In order to raise market awareness of our products, we advertise in trade publications, distribute promotional materials, publish technical articles, conduct marketing programs, issue press releases regarding new products, work with a public relations firm and participate in industry trade shows and conferences. I-9 Technology We believe that our engineering expertise, technology acquisitions, supplier alliances and short-cycle production strategies enable us to develop and offer advanced solutions that address industry trends. By offering common metrology platforms that can be configured with a variety of measurement technologies, our customers can specify high performance systems not offered by other suppliers or, as a cost saving measure, they can narrowly configure a system for a specific application. Spectroscopic Reflectometry. We pioneered the use of micro-spot spectroscopic reflectometry for semiconductor film metrology in the late 1970s. Spectroscopic reflectometry uses multiple wavelengths (colors) of light to obtain an array of data for analysis of film thickness and other film parameters. Today's semiconductor manufacturers still depend on spectroscopic reflectometry for most film metrology applications. Reflectometry is the measurement of reflected light. For film metrology, a wavelength spectrum in the visible region is commonly used. Light reflected from the surfaces of the film and the substrate is analyzed using computers and measurement algorithms. The analysis yields thickness information and other parameters without contacting or destroying the film. In the mid-1980s, we introduced a DUV reflectometer for material analysis. In 1991, we were awarded a patent for the determination of absolute reflectance in the ultraviolet region. This technology provides enhanced measurement performance for thinner films and films stacked on top of one another. Spectroscopic Ellipsometry. Like reflectometry, ellipsometry is a non- contact and non-destructive technique used to analyze and measure films. An ellipsometer analyzes the change in a polarized beam of light after reflection from a film's surface and interface. Our systems are spectroscopic providing ellipsometric data at many different wavelengths. Spectroscopic ellipsometry provides a wealth of information about a film, yielding very accurate and reliable measurements. In general, ellipsometers are used for thin films and complex film stacks, whereas reflectometers are used for thicker films and stacks. FTIR Reflectometry. FTIR is another non-contact analytical technique used to collect information about a film. FTIR operates in the infrared region of the electromagnetic spectrum, which is invisible to the human eye. Our proprietary, compact FTIR design collects a wide spectrum of infrared radiation reflected from the film and then separates this radiation into wavelength data using mathematical algorithms, referred to as Fourier transforms. The infrared spectrum is useful for determining epi-silicon film thickness. In addition, FTIR can be used to measure very thick films. Combined Film Analysis. By combining all three film analysis techniques (reflectometry, ellipsometry and FTIR) onto one platform, our film metrology systems offer a comprehensive analysis for film metrology applications. Competitive systems generally measure only thickness and optical characteristics of a film. Our systems measure thickness, optical characteristics and the concentration of dopants. Beyond the performance advantage, our combined systems require less cleanroom space and provide lower cost of ownership. Surface Analysis. We have a variety of proprietary, non-contact and non- destructive technologies that are used to inspect the surfaces of films and substrates. These technologies locate and analyze abnormalities found on the surfaces and can be adapted to metrology platforms. Overlay Registration. Overlay registration refers to the relative alignment of two layers in the thin film photolithographic process. Our microscope-based, measurement technology utilizes a high magnification, low distortion imaging system combined with proprietary software algorithms to numerically quantify the alignment. I-10 Customer Service and Support We believe that customer service and technical support are important competitive factors and are essential to building and maintaining close, long- term relationships with our customers. We provide support to our customers with telephonic technical support access, direct training programs and operating manuals and other technical support information. We use our demonstration equipment for training programs in addition to sales and marketing. We provide warranty and post-warranty service from our corporate office in California. We also have service operations based in Arizona, Massachusetts, Oregon, Pennsylvania, Idaho and Texas. Local service and spare parts are provided in the United Kingdom by our sales office in Scotland and in the rest of Europe by distributors and sales representatives. In Asia, service is provided by direct offices in Japan, Korea, Taiwan and by a new service office that we opened in Singapore in 2000. Our distributors and representatives provide service in other countries in Asia. We provide a one-year warranty on parts and labor for products sold domestically and in foreign markets. Service revenue, including sales of replacement parts, represented approximately 11.7% and 8.7% of total net revenues in 1999 and 2000, respectively. Backlog As of December 31, 2000, our backlog was approximately $27.2 million, which includes approximately $7.8 million related to changes in accounting principle (SAB 101) (See Note 1 to Consolidated Financial Statements). As of December 31, 1999 our backlog was approximately $13.4 million. Backlog includes orders for products that we expect to ship within 12 months. Orders from our customers are subject to cancellation or delay by the customer without penalty. Historically, order cancellations and order rescheduling have not been significant. However, orders presently in backlog could be canceled or rescheduled. Since only a portion of our revenues for any fiscal quarter represent systems in backlog, we do not believe that backlog is a meaningful or accurate indication of our future revenues and performance. Competition The market for our metrology systems is intensely competitive and characterized by rapidly evolving technology. We compete on a global basis with both larger and smaller companies in the United States, Japan, Israel and Europe. We compete primarily with: stand-alone thin film measurement products from KLA-Tencor Corporation, Therma-Wave, Inc., Rudolph Technologies and Dai Nippon Screen; integrated thin film measurement products from Nova Measuring Instruments Ltd. and Online Technologies; and overlay measurement products from KLA-Tencor Corporation, Bio-Rad Laboratories Inc. and Schlumberger Ltd. Many of our competitors have substantially greater financial, engineering, manufacturing and marketing resources than we do. Significant competitive factors include: measurement technology, system performance (including automation and software capability), ease of use, reliability, established customer bases, cost of ownership, price and global customer service. We believe that we compete favorably with respect to these factors, but we must continue to develop and design new and improved products in order to maintain our competitive position. Manufacturing We manufacture our products in the United States, Japan and Korea. We combine proprietary measurement components and software produced in our facilities with components and subassemblies obtained from outside suppliers. Certain of our products include system engineering and software development to meet specific customer requirements. Our manufacturing operations do not require a major investment in capital equipment. Certain components, subassemblies and services necessary for the manufacture of our systems are obtained from a sole supplier or limited group of suppliers. We do not maintain any long-term supply agreements with any of our suppliers. We are relying increasingly on outside vendors to manufacture many components and subassemblies. We have entered into an agreement with J.A. Woollam Company for the purchase of the spectroscopic ellipsometer components. Additionally, we use Kensington Laboratories as our primary source of robotics components. I-11 Research and Development Our research and development is directed towards enhancing existing products and developing and introducing new products to maintain technological leadership and to meet current and evolving customer needs. Our process, engineering, marketing, operations and management personnel have developed close collaborative relationships with many of our customers' counterparts and have used these relationships to identify market demands and target our research and development to meet those demands. We are working to develop potential applications of new and emerging technologies, including improved metrology methods. We conduct research and development at our facilities in California, Korea and Japan. We have extensive proprietary technology and expertise in such areas as spectroscopic reflectometry using our patented absolute reflectivity, robust pattern recognition and complex measurement software algorithms. We also have extensive experience in systems integration engineering required to design compact, highly automated systems for advanced clean room environments. Expenditures for research and development during 1998, 1999 and 2000 were $4.2 million, $4.7 million and $9.2 million, and represented 12.7%, 12.8% and 13.3% of total net revenues, respectively. Intellectual Property Our success depends in large part on the technical innovation of our products. We actively pursue a program of filing patent applications to seek protection of technologically sensitive features of our metrology systems. We hold a number of United States patents with several pending patents. The United States patents, issued during the period 1984 to 2000, will expire from 2001 to 2019. While we attempt to protect our intellectual property rights through patents and non-disclosure agreements, we believe that our success will depend to a greater degree upon innovation, technological expertise and our ability to adapt our products to new technology. We may not be able to protect our technology, and competitors may be able to develop similar technology independently. In addition, the laws of certain foreign countries may not protect our intellectual property to the same extent as do the laws of the United States. From time to time we receive communications from third parties asserting that our metrology systems may contain design features which are claimed to infringe their proprietary rights. We typically refer such matters to our legal council. I-12 Employees At December 31, 2000, we employed approximately 252 persons worldwide, including 77 in research and development, 42 in manufacturing and manufacturing support, 109 in marketing, sales and field service and 24 in general administration and finance. None of these employees is represented by a union and we have never experienced a work stoppage as a result of union actions. Many of our employees have specialized skills of value to us. Our future success will depend in large part upon our ability to attract and retain highly skilled scientific, technical, managerial, financial and marketing personnel, who are in great demand in the industry. We consider our employee relations to be good. Executive Officers of the Registrant The following are our current executive officers and their ages as of December 31, 2000: Name Age Position ---- --- -------- Vincent J. Coates....... 75 Chairman of the Board, Secretary John D. Heaton.......... 40 President, Chief Executive Officer and Director Paul B. Nolan........... 45 Vice President and Chief Financial Officer Roger Ingalls Jr........ 39 Vice President and Director of Marketing Mr. Vincent Coates has been our Chairman of the Board since our founding in 1975. He has also served as our Chief Executive Officer and President from our founding through July 1988, except for the period January 1986 through February 1987 when he served exclusively as Chief Executive Officer. He was elected Secretary in February 1989. He resigned the position of Chief Executive Officer in April 1998. Mr. Heaton joined us in September 1990 and in April 1994 was elected Vice President of Engineering and General Manager. In July 1995, he was appointed to the Board of Directors and became General Manager. He has been President since May 1996 and was elected Chief Executive Officer in April 1998. Mr. Heaton served in various technical roles at National Semiconductor from 1978 to 1990 prior to joining us. Mr. Nolan joined us in March 1989 and in March 1994 was elected Vice President and Chief Financial Officer. Mr. Nolan served as Financial Analyst at Harris Corporation prior to joining us. Mr. Ingalls has been employed by Nanometrics since March 1995 and was elected Vice President in October 1997. He was appointed Director of Marketing in February 1998. During his employment at Nanometrics, Mr. Ingalls has served as U.S. Sales and Product Manager, and most recently Director of North American Sales. Prior to joining Nanometrics, he served as a sales engineer for Nikon Inc. from March 1993 to March 1995. ITEM 2. PROPERTIES Our principal manufacturing and administrative facility is located in Milpitas, California in a 133,000 square foot building owned by the Company. We purchased the Milpitas facility in July 2000 and moved into the facility in November 2000. We also have sales and service offices in Texas, Korea and Taiwan. Rent expense for our facilities was approximately $1,190,000 for 2000. Through our Japanese subsidiary, we own a 15,000 square foot facility in Narita, Japan. This facility is utilized by our Japanese subsidiary for sales, service, engineering and manufacturing. Our Japanese subsidiary also leases three sales and service offices. In September 1998, our Korean subsidiary entered into a two-year agreement for manufacturing facilities that provides for payments based on a percentage of net product sales. ITEM 3. LEGAL PROCEEDINGS There are no material legal proceedings pending against us. We could become involved in litigation from time to time relating to claims arising out of our ordinary course of business. I-13 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the quarter ended December 31, 2000. I-14 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS Our common stock is quoted on the Nasdaq National Market under the symbol "NANO". The following table sets forth, for the periods indicated, the high and low sale prices per share of our common stock as reported on the Nasdaq National Market. These quotations represent prices between dealers and do not include retail markups, markdowns or commissions and may not necessarily represent actual transactions. High Low ---- --- 1999 First Quarter ...................... $ 9.88 $ 5.38 Second Quarter ..................... $ 9.63 $ 5.50 Third Quarter ...................... $ 10.75 $ 6.50 Fourth Quarter ..................... $ 24.38 $ 8.88 2000 First Quarter ...................... $ 52.13 $ 18.13 Second Quarter ..................... $ 49.75 $ 19.75 Third Quarter ...................... $ 63.88 $ 28.88 Fourth Quarter ..................... $ 54.50 $ 10.63 On February 28, 2001, the last reported sale price of our common stock on the Nasdaq National Market was $15.50 per share. As of December 31, 2000, there were approximately 120 shareholders of record of our common stock. Dividend Policy We have never declared or paid any cash dividends on our capital stock. We currently expect to retain future earnings, if any, for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. Use of Proceeds In March 2000, we received net proceeds of approximately $72.4 million in cash from a secondary offering. A portion of the proceeds from this secondary offering were used to finance the purchase and improvement of our new facility in Milpitas and the remainder was invested in U. S. government backed securities. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. The consolidated statement of operations data set forth below for the fiscal years ended December 31, 1998, 1999 and 2000, and the consolidated balance sheet data as of December 31, 1999 and 2000, have been derived from our consolidated financial statements included elsewhere in this Annual Report on Form 10-K, and have been audited by Deloitte & Touche LLP, independent auditors. The consolidated statement of operations data set forth below for the fiscal years ended December 31, 1996 and 1997, and the consolidated balance sheet data as of December 31, 1996, 1997 and 1998, have been derived from our audited consolidated financial statements not included in this Annual Report on Form 10-K. The historical results are not necessarily indicative of results to be expected for any future period. II-1
Years Ended December 31, -------------------------------------------------------- 1996 1997 1998 1999 2000* -------- -------- -------- -------- -------- (In thousands, except per share data) Consolidated Statement of Operations Data: Net revenues: Product sales ................................ $ 24,603 $ 32,767 $ 29,718 $ 32,162 $ 63,468 Service ...................................... 5,733 3,890 3,546 4,246 6,023 -------- -------- -------- -------- -------- Total net revenues ........................ 30,336 36,657 33,264 36,408 69,491 -------- -------- -------- -------- -------- Costs and expenses: Cost of product sales ........................ 10,109 12,092 13,002 14,606 25,082 Cost of service .............................. 4,088 3,632 3,669 4,560 6,022 Research and development ..................... 2,754 2,986 4,206 4,658 9,238 Acquired in-process research and development -- -- 1,421 -- -- Selling ...................................... 4,696 6,050 5,728 5,871 10,313 General and administrative ................... 2,476 2,765 2,828 2,973 4,258 -------- -------- -------- -------- -------- Total costs and expenses .................. 24,123 27,525 30,854 32,668 54,913 -------- -------- -------- -------- -------- Income from operations ......................... 6,213 9,132 2,410 3,740 14,578 -------- -------- -------- -------- -------- Other income (expense): Interest income .............................. 390 535 572 662 4,129 Interest expense ............................. (92) (110) (108) (180) (76) Other, net ................................... 146 (175) 64 94 (150) -------- -------- -------- -------- -------- Total other income, net ................... 444 250 528 576 3,903 -------- -------- -------- -------- -------- Income before income taxes ..................... 6,657 9,382 2,938 4,316 18,481 Provision for income taxes ..................... 2,664 3,625 1,108 1,682 5,942 -------- -------- -------- -------- -------- Income before cumulative effect of change in accounting principle ........................ $ 3,993 $ 5,757 $ 1,830 $ 2,634 $ 12,539 Cumulative effect of change in revenue recognition principle (SAB 101) ............. -- -- -- -- (1,364) -------- -------- -------- -------- -------- Net Income ..................................... $ 3,993 $ 5,757 $ 1,830 $ 2,634 $ 11,175 ======== ======== ======== ======== ======== Basic net income (loss) per share: Income before cumulative effect of change in accounting principle .............. $ 0.50 $ 0.69 $ 0.21 $ 0.30 $ 1.14 Cumulative effect of change in revenue recognition principle (SAB 101) .............. -- -- -- -- (0.12) -------- -------- -------- -------- -------- Net income ................................... $ 0.50 $ 0.69 $ 0.21 $ 0.30 $ 1.02 ======== ======== ======== ======== ======== Diluted net income (loss) per share: Income before cumulative effect of change in accounting principle .............. $ 0.47 $ 0.65 $ 0.20 $ 0.28 $ 1.06 Cumulative effect of change in revenue recognition principle (SAB 101) .............. -- -- -- -- (0.12) -------- -------- -------- -------- -------- Net income ................................... $ 0.47 $ 0.65 $ 0.20 $ 0.28 $ 0.94 ======== ======== ======== ======== ======== Shares used in per share computation: Basic ........................................ 8,047 8,325 8,635 8,829 10,986 ======== ======== ======== ======== ======== Diluted ...................................... 8,524 8,820 9,041 9,393 11,845 ======== ======== ======== ======== ========
- ---------- * Refer to discussions on SAB 101 in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations". II-2
December 31, ---------------------------------------------------- 1996 1997 1998 1999 2000 -------- -------- -------- -------- -------- (In thousands) Consolidated Balance Sheet Data: Cash, cash equivalents and short-term investments $ 8,382 $ 13,251 $ 11,431 $ 18,140 $ 69,788 Working capital ................................. 22,613 28,653 30,621 36,021 92,420 Total assets .................................... 29,964 36,243 39,305 46,410 144,796 Debt obligations, less current portion .......... 3,296 2,568 2,496 2,288 4,236 Total shareholders' equity ...................... 22,060 28,528 32,010 38,155 127,009
II-3 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K. Our discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives and intentions. When we use words such as "believe," "expect," "anticipate" or similar expressions, we are making forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain risk factors, including those set forth in "Factors That May Affect Future Operating Results" and elsewhere in this Annual Report on Form 10-K. We believe it is important to communicate our expectations to our investors. However, there may be events in the future that we are not able to predict accurately or over which we have no control. You should be aware that the occurrance of the events described in these risk factors and elsewhere in this Annual Report on Form 10-K could materially and adversely affect our business, operating results and financial condition. We disclaim any obligation to update information contained in any forward-looking statement. Overview We are a leader in the design, manufacture, marketing and support of thin film metrology systems for the semiconductor, flat panel display and magnetic recording head industries. We have made several strategic changes in our business over the past two years that have positioned us to further participate in these markets. These changes include: * becoming an original equipment manufacturer, or OEM, of metrology systems that are integrated into various types of semiconductor processing equipment; * the development of new products that can be used for 300 millimeter wafers and chemical mechanical planarization; * an increased emphasis on product development, manufacturing and direct sales in Japan and Korea; * a shift to direct sales from third-party representatives in Asia and the United States; * a decision to outsource certain system components such as robotics, enabling us to leverage our technical resources; * the acquisition of an overlay registration product line from Optical Specialties, Inc. in March 1998 (see "Acquisition" for more information on the product line acquisition); and * the acquisition of inspection and metrology technology from Phase Metrics in December 1999. Our business is dependent upon the capital expenditures of manufacturers of semiconductors, flat panel displays and magnetic recording heads and their suppliers. The demand by these manufacturers and suppliers for our products is, in turn, dependent on the current and future market demand for semiconductors and products utilizing semiconductors, disk drives and computers that utilize disk drives and flat panel displays for use in laptop computers, pagers, cell phones and a variety of other applications. The increasing complexity of the manufacturing processes for semiconductors, flat panel displays and magnetic recording heads is also an important factor in the demand for our metrology systems. We derive our revenues from product sales and services, which include sales of accessories and service to the installed base of products. For the year ended December 31, 2000, we derived 91.3% of our total net revenues from product sales and 8.7% of our total net revenues from services. Revenues from product sales and replacement and spare parts are generally recognized at the time of shipment. Revenues from service work are recognized when performed. In certain geographical regions where risk of loss and title do not transfer upon shipment, payments received are recorded as deferred revenue and recognized upon customer acceptance. See note 1 of the notes to consolidated financial statements for more information on our revenue recognition policy. II-4 Results of Operations The following table presents our consolidated statements of operations data as a percentage of total net revenues for the years ended December 31, 1998, 1999 and 2000: Years Ended December 31, ----------------------- 1998 1999 2000 ----- ----- ----- Net revenues: Product sales ................................... 89.3% 88.3% 91.3% Service ......................................... 10.7 11.7 8.7 ----- ----- ----- Total net revenues ........................... 100.0 100.0 100.0 ----- ----- ----- Cost and expenses: Cost of product sales ........................... 39.1 40.1 36.1 Cost of service ................................. 11.0 12.5 8.7 Research and development ........................ 12.7 12.8 13.3 Acquired in-process research and development .... 4.3 -- -- Selling ......................................... 17.2 16.1 14.8 General and administrative ...................... 8.5 8.2 6.1 ----- ----- ----- Total cost and expenses ...................... 92.8 89.7 79.0 ----- ----- ----- Income from operations .............................. 7.2 10.3 21.0 ----- ----- ----- Other income (expense): Interest income ................................. 1.7 1.8 5.9 Interest expense ................................ (0.3) (0.5) (0.1) Other, net ...................................... 0.2 0.3 (0.2) ----- ----- ----- Total other income, net ...................... 1.6 1.6 5.6 ----- ----- ----- Income before income taxes .......................... 8.8 11.9 26.6 Provision for income taxes .......................... 3.3 4.7 8.6 ----- ----- ----- Income before cumulative effect of change in accounting principle ........................... 5.5 7.2 18.0 Cumulative effect of change in revenue recognition principle (SAB 101) ................... -- -- (2.0) ----- ----- ----- Net income .......................................... 5.5% 7.2% 16.0% ===== ===== ===== Years ended December 31, 1998, 1999 and 2000 Total net revenues. Total net revenues increased 90.9% from $36.4 million in 1999 to $69.5 million in 2000. Product sales increased 97.3% from $32.2 million in 1999 to $63.5 million in 2000. The increase in product sales resulted from stronger demand for our products, especially in the U.S. and Asia. The change in accounting principle (SAB 101) had the impact of lowering both the product sales and the total net revenues by approximately $5.0 million in 2000. Service revenue increased 41.8% from $4.2 million in 1999 to $6.0 million in 2000. The increase in service revenue is primarily attributable to higher sales of parts and services in the U.S. and Asia in 2000 due in part to the continued growth in the semiconductor market. Total net revenues increased 9.5% from $33.3 million in 1998 to $36.4 million in 1999. Product sales increased 8.2% from $29.7 million in 1998 to $32.2 million in 1999. The increase in product sales resulted from stronger demand for and increased shipments of our products, especially in the U.S. and Asia. Service revenue increased 19.7% from $3.5 million in 1998 to $4.2 million in 1999. The increase in service revenue is primarily attributable to higher sales of parts, services and accessories in Asia and the U.S. in 1999 due in part to the recovery in the semiconductor market. International revenues, which includes sales by our foreign subsidiaries, constituted approximately 61.8%, 60.9% and 60.6% of total net revenues for 1998, 1999 and 2000, respectively. II-5 Cost of product sales. Cost of product sales as a percentage of product sales decreased from 45.4% in 1999 to 39.5% in 2000 primarily because of higher sales volumes in 2000 resulting in lower per unit manufacturing costs. The change in accounting principle (SAB 101) had the impact of lowering the cost of product sales as a percentage of product sales from approximately 40.4% in 2000. Cost of product sales as a percentage of product sales increased from 43.8% in 1998 to 45.4% in 1999 primarily as a result of lower volume purchasing resulting in fewer purchasing discounts for materials early in 1999. Cost of service. Cost of service as a percentage of service revenue decreased from 107.4% in 1999 to 100.0% in 2000 primarily as a result of higher service sales in the U.S and Asia. Cost of service as a percentage of service revenue increased from 103.5% in 1998 to 107.4% in 1999 primarily as a result of increased fixed service costs to support our growing installed based of systems at customer locations in 1999. Research and development. Research and development expenses increased 98.3% from $4.7 million in 1999 to $9.2 million in 2000 as a result of additional headcount and higher materials expenses in 2000. Research and development expenses increased 10.7% from $4.2 million in 1998 to $4.7 million in 1999 as a result of additional headcount and a purchase of technology from Phase Metrics in the fourth quarter of 1999. We are committed to the development of new and enhanced products and believe that new product introductions are required for us to maintain our competitive position. During 2000, research and development expenses represented 13.3% of total net revenues, compared to 12.8% in 1999 and 12.7% in 1998. Acquired in-process research and development. In the first quarter of 1998, we paid approximately $3.2 million for the assets and technology related to the Metra product line from Optical Specialties. Of this purchase price, $1.4 million related to the value of in-process research and development that had no alternative future use and was charged to expense during the year ended December 31, 1998. See "Acquisition" for further discussion. Selling. Selling expenses increased 75.7% from $5.9 million in 1999 to $10.3 million in 2000 primarily because of higher sales and related expenses including headcount and commissions in 2000. Selling expenses increased 2.5% from $5.7 million in 1998 to $5.9 million in 1999 primarily because of higher sales in 1999. In 2000 selling expenses represented 14.8% of total net revenues, compared to 16.1% in 1999 and 17.2% in 1998. General and administrative. General and administrative expenses increased 43.2% from $3.0 million in 1999 to $4.3 million in 2000 as a result of higher spending associated with the increase in total net revenues. General and administrative expenses increased 5.1% from $2.8 million in 1998 to $3.0 million in 1999 as a result of higher spending associated with the increase in total net revenues. During 2000, general and administrative expenses represented 6.1% of total net revenues, compared to 8.2% in 1999 and 8.5% in 1998. Total other income, net. Total other income, net increased 577.6% from $576,000 in 1999 to $3.9 million in 2000 primarily due to higher interest income in 2000. Total other income, net increased 9.1% from $528,000 in 1998 to $576,000 in 1999 primarily due to higher interest income in 1999. Provision for income taxes. Our effective income tax rate decreased from 39.0% in 1999 to 32.2% in 2000 primarily due to an R&D tax credit taken in 2000 and reversal of the valuation allowance related to our Japanese subsidiary. Our effective income tax rate increased from 37.7% in 1998 to 39.0% in 1999 primarily due to a valuation allowance established in 1999 against the net deferred tax assets of our Japanese subsidiary. The effective income tax rates in 2000, 1999 and 1998 exceed the U.S. statutory rate due primarily to state income taxes partially offset by the realization of foreign sales corporation benefit. Cumulative effect of change in revenue recognition principle (SAB 101). The cumulative effect of $1.4 million is the net result of recording $2.5 million in net revenues, which were previously recorded in 1999, offset by $1.1 million in related costs and expenses. II-6 Acquisition On March 30, 1998, we purchased from Optical Specialties a metrology system product line and related assets used to measure the critical dimensions and overlay registration errors observed in sub-micron photolithography. Under the agreement, we paid approximately $3.2 million in cash for the assets and in-process research and development. The total purchase price and allocation among the tangible and intangible assets and liabilities acquired (including acquired in-process research and development) is summarized as follows (in thousands): Total purchase price--cash consideration ............................ $ 3,225 ======= Purchase price allocation: Tangible assets ................................................. $ 1,923 Intangible assets*: Core and developed technology ................................ 419 Goodwill ..................................................... 196 In-process research and development ............................. 1,421 Liabilities ..................................................... (734) ------- Total purchase price allocation ..................................... $ 3,225 ======= - ---------- * Intangible assets are being amortized using the straight-line method over a five-year useful life. The purchase price allocation and intangible valuation was based on our estimates of the after tax net cash flows and gave explicit consideration to the SEC's views on acquired in-process research and development as set forth in its September 9, 1998 letter to the American Institute of Certified Public Accountants. Specifically, the valuation gave consideration to the following: * the employment of a fair market value premise excludes any Nanometrics- specific considerations, which could result in estimates of investment value for the subject assets; and * comprehensive due diligence concerning all potential intangible assets including trademarks/tradenames, patents, copyrights, noncompete agreements, assembled workforce and customer relationships and sales channel. The value of core technology was specifically addressed, with a view toward ensuring the relative allocations to core technology and in-process research and development were consistent with the relative contributions of each to the final product. The allocation to in-process research and development was based on a calculation that considered only the efforts completed as of the transaction date, and only the cash flow associated with these completed efforts for the products currently in process. As indicated above, we recorded a one-time charge of $1.4 million in the first quarter of 1998 for acquired in-process research and development related to the Metra 7000 development project that had not reached technological feasibility, had no alternative future use and for which successful development was uncertain. Our conclusion that the in-process development effort, or any material sub-component, had no alternative future use was reached in consultation with our engineering personnel and engineering personnel from Optical Specialties. The project to complete the Metra 7000 product included the completion of a software platform design started by Optical Specialties in 1997. As of the acquisition date, the Metra 7000 had yet to achieve technological feasibility since there was not a working prototype with a reliable new software design. At the time of acquisition, the estimated cost to complete this software and related development was approximately $300,000. We began shipments of the Metra 7000 product to a customer in June 1998 and it was at that time that we began to benefit from the acquired research and development related to the product. Significant assumptions used to determine the value of in-process research and development included several factors, including the following: II-7 * forecast of net cash flows that were expected to result from the development effort using projections prepared by us; and * percentage complete of 77.0% for the Metra 7000 project estimated by considering a number of factors, including the costs invested to date relative to total cost of the development effort and the amount of progress completed as of the acquisition date, on a technological basis, relative to the overall technological achievements required to achieve the functionality of the eventual product. The technological issues were addressed by engineering representatives from both us and Optical Specialties, and when estimating the value of the technology, the projected financial results of the acquired assets were estimated on a stand-alone basis without any consideration to potential synergic benefits or "investment value" related to the acquisition. Accordingly, separate projected cash flows were prepared for both the existing as well as the in-process Metra 7000 products. These projected results were based on the number of units sold times average selling price less the associated costs. After preparing the estimated cash flow from the product being developed, a portion of this cash flow was attributed to the core technology, which was embodied in the in-process Metra 7000 product line and enabled a quicker and more cost effective development of the Metra 7000. When estimating the value of the developed, core and in-process technologies, discount rates of 25.0%, 30.0% and 35.0%, respectively, were used. These discount rates considered both the status and risk associated with the respective cash flows as of the acquisition date. Liquidity and Capital Resources At December 31, 2000, our cash, cash equivalents and short-term investments totaled $69.8 million as compared to $18.1 million at December 31, 1999. Additionally, our working capital of $92.4 million at December 31, 2000 increased from $36.0 million at December 31, 1999. We believe our working capital, including cash, cash equivalents and short-term investments, will be sufficient to meet our needs at least through the next twelve months. We have begun construction of a new facility for our Korean subsidiary and have committed approximately $2,136,000 in relation to this construction, of which $1,484,000 has been paid as of December 31, 2000. We have also begun construction on a new facility for our Japanese subsidiary and have committed approximately $3,437,000 in purchase commitments relating to this construction. Operating activities during 2000 provided cash of $9.5 million primarily from net income and increased accounts payable and other current liabilities offset partially by higher accounts receivable and inventory levels. Investing activities used $73.4 million due to net purchases of short-term investments of $38.1 million and $35.3 million in capital expenditures used for the purchase and improvement of our building in Milpitas, California. Financing activities provided cash of $77.5 million primarily from a public offering of common stock in March 2000, the issuance of debt obligations and the sale of shares under the employee stock purchase and option plans offset by the net repayment of debt obligations. Operating activities during 1999 provided cash of $7.1 million primarily from net income and changes in income taxes of $2.8 million. Investing activities used $5.9 million due to net purchases of short-term investments of $4.8 million and $1.0 million in capital expenditures and prepaid licenses fees. Financing activities provided cash of $816,000 primarily due to the sale of shares under the employee stock purchase and option plans offset by the net repayment of debt obligations in Japan of $1.3 million. Operating activities during 1998 provided net cash of $885,000 primarily from net income partially offset by working capital requirements. Investing activities used cash of $3.8 million, primarily to purchase the Metra product line, as previously discussed above, and to fund net purchases of short-term investments. Financing activities provided cash of $801,000 resulting primarily from the sale of shares under the employee stock purchase and option plans. We have evaluated and will continue to evaluate the acquisition of products, technologies or businesses that are complementary to our business. These activities may result in product and business investments. For example, as previously discussed above, in March 1998, we purchased from Optical Specialties a metrology system product line and related assets. Under the agreement, we paid approximately $3.2 million in cash for the assets and technology. We funded this acquisition from our cash equivalents, short-term investments and cash flows from operations. II-8 New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. SFAS No. 133 will be effective for us beginning in the first quarter of fiscal year 2001. We have assessed the implications of adopting SFAS No. 133, and adoption of this statement will not have a significant impact on our consolidated financial position, results of operations or cash flows. In December 1999, the Securities and Exchange Commission (SEC) released Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements." This bulletin summarizes certain interpretations and practices followed by the Division of Corporation Finance and the Office of the Chief Accountant of the SEC in administering the disclosure requirements of the Federal securities laws in applying generally accepted accounting principles to revenue recognition in financial statements. Application of the accounting and disclosures desired in the bulletin was required by the fourth fiscal quarter of 2000 and the effects are required to be recorded through a retroactive, cumulative-effect adjustment as of the beginning of the fiscal year, with a restatement of all prior interim quarters in the year. We implemented SAB No. 101 during the fourth quarter of fiscal 2000, which resulted in a cumulative effect of change in revenue recognition principle in the amount of $1.4 million. The impact of SAB No. 101 on our revenues and costs are described in Management's Discussion and Analysis of Financial Condition and Results of Operations. Factors That May Affect Future Operating Results You should carefully consider the risks described below together with all of the other information included in this Annual Report on Form 10-K before making an investment decision. The risks and uncertainties described below are not the only ones facing our company. If any of the following risks actually occurs, our business, financial condition or operating results could be harmed. In such case, the trading price of our common stock could decline, and you could lose all or part of your investment. Risks Related to Our Business Cyclicality in the semiconductor, flat panel display and magnetic recording head industries has led to substantial decreases in demand for our systems and may from time to time continue to do so Our operating results have varied significantly due to the cyclical nature of the semiconductor, flat panel display and magnetic recording head industries. The majority of our business depends upon the capital expenditures of semiconductor device and capital equipment manufacturers. These manufacturers' capital expenditures, in turn, depend upon the current and anticipated market demand for semiconductors and products using semiconductors. The semiconductor industry is cyclical and has historically experienced periodic downturns. These downturns have often resulted in substantial decreases in the demand for capital equipment, including metrology systems. We have found that the resulting decrease in capital expenditures has typically been more pronounced than the downturn in semiconductor device industry revenues. We expect the cyclical nature of the semiconductor industry, and therefore, our business, to continue. Currently, the semiconductor industry is suffering a downturn. Should the downturn continue, our business and results of operations could suffer. We are highly dependent on international sales and operations, which exposes us to foreign political and economic risks Sales to customers in foreign countries accounted for approximately 60.9% and 60.6% of our total net revenues in 1999 and 2000, respectively. We maintain facilities in Japan and Korea. We anticipate that international sales will continue to account for a significant portion of our revenues. Our reliance on international sales and operations exposes us to foreign political and economic risks, including: * political, social and economic instability; II-9 * trade restrictions and changes in tariffs; * import and export license requirements and restrictions; * difficulties in staffing and managing international operations; * disruptions in international transport or delivery; * fluctuations in currency exchange rates; * difficulties in collecting receivables; and * potentially adverse tax consequences. If any of these risks materialize, our international sales could decrease and our foreign operations could suffer. Because we derive a significant portion of our revenues from sales in Asia, our sales and results of operations could be adversely affected by the instability of Asian economies Our sales to customers in Asian markets represented approximately 53.7% and 55.0% of our total net revenues in 1999 and 2000, respectively. Countries in the Asia Pacific region, including Japan, Korea and Taiwan, each of which accounted for a significant portion of our business in that region, have experienced general economic weaknesses over the last several years. These weaknesses began to adversely affect our sales to semiconductor manufacturers located in these regions in the third and fourth quarters of 1998 and continued through the first half of 1999. Although we have received increased orders in 2000 from customers in the Asia Pacific region, any further instability in the Asian markets could harm our sales in future periods. Our largest customers account for a significant portion of our revenues, and our revenues would significantly decline if one or more of these customers were to purchase significantly fewer of our systems or if they delayed or cancelled a large order Historically, a significant portion of our revenues in each quarter and year has been derived from sales to relatively few customers, and we expect this trend to continue. If any of our key customers were to purchase significantly fewer systems, or if a large order were delayed or cancelled, our revenues would significantly decline. In 2000, sales to Applied Materials, Hyundai and TSMC accounted for 20.5%, 11.8% and 10.0% of our total net revenues, respectively. In 1999, sales to Applied Materials and TSMC represented 12.8% and 10.5% of our total net revenues, respectively. There are only a limited number of large companies operating in the semiconductor, flat panel display and magnetic recording head industries. Accordingly, we expect that we will continue to depend on a small number of large customers for a significant portion of our revenues for at least the next several years. In addition, as large semiconductor, flat panel display and magnetic recording head manufacturers and suppliers seek to establish closer relationships with their suppliers, we expect that our customer base will become even more concentrated. The success of our product development efforts depends on our ability to anticipate market trends and the price, performance and functionality requirements of semiconductor device manufacturers. In order to anticipate these trends and ensure that critical development projects proceed in a coordinated manner, we must continue to collaborate closely with our customers. Our relationships with our customers provide us with access to valuable information regarding industry trends, which enables us to better plan our product development activities. If our current relationships with our large customers are impaired, or if we are unable to develop similar collaborative relationships with important customers in the future, our long-term ability to produce commercially successful systems will be impaired. We depend on Applied Materials for sales of our integrated metrology systems, and the loss of Applied Materials as a customer could harm our business We believe that sales of integrated metrology systems will be an important source of future revenues. Sales of our integrated metrology II-10 systems depend upon Applied Materials selling semiconductor equipment products that include our metrology systems as components. If Applied Materials is unable to sell such products, or if Applied Materials chooses to focus its attention on products that do not integrate our systems, our business could suffer. We may be unable to retain Applied Materials as a customer. If we lose Applied Materials as a customer for any reason, our ability to realize sales from integrated metrology systems would be significantly diminished, which would harm our business. Our quarterly operating results have varied in the past and probably will continue to vary significantly in the future, which will cause volatility in our stock price Our quarterly operating results have varied significantly in the past and are likely to vary in the future, which could cause our stock price to decline. Some of the factors that may influence our operating results and subject our stock to extreme price and volume fluctuations include: * changes in customer demand for our systems; * economic conditions in the semiconductor, flat panel display and magnetic recording head industries; * the timing, cancellation or delay of customer orders and shipments; * market acceptance of our products and our customers' products; * competitive pressures on product prices and changes in pricing by our customers or suppliers; * the timing of new product announcements and product releases by us or our competitors and our ability to design, introduce and manufacture new products on a timely and cost-effective basis; * the timing of acquisitions of businesses, products or technologies; * the levels of our fixed expenses, including research and development costs associated with product development, relative to our revenue levels; and * fluctuations in foreign currency exchange rates, particularly the Japanese yen. Due to the foregoing factors and other factors described in this "Factors That May Affect Future Operating Results" section, we believe that period-to- period comparisons of our operating results are not necessarily meaningful, and you should not view these operating results as indicators of our future performance. If our operating results in any period fall below the expectations of securities analysts and investors, the market price of our common stock would likely decline. We obtain some of the components and subassemblies included in our systems from a single source or a limited group of suppliers, and the partial or complete loss of one of these suppliers could cause production delays and a substantial loss of revenue We rely on outside vendors to manufacture many components and subassemblies. Certain components, subassemblies and services necessary for the manufacture of our systems are obtained from a sole supplier or limited group of suppliers. We do not maintain any long-term supply agreements with any of our suppliers. We have entered into arrangements with J.A. Woollam Company for the purchase of the spectroscopic ellipsometer component, Midac Corporation for the purchase of the FTIR spectrometer component, and Kensington Laboratories for the robotics incorporated in our advanced measurement systems. Our reliance on a sole or a limited group of suppliers involves several risks, including the following: * we may be unable to obtain an adequate supply of required components; * we have reduced control over pricing and the timely delivery of components and subassemblies; and * our suppliers may be unable to develop technologically advanced products to support our growth and development of new systems. Because the manufacturing of certain of these components and subassemblies involves extremely complex processes and requires long lead times, we may experience delays or shortages caused by suppliers. We believe that alternative sources could be obtained and qualified, if necessary, for most sole and limited source parts. However, if we were forced to seek alternative sources of supply or to manufacture such components or subassemblies internally, we may be forced to redesign our systems, which could prevent us from shipping our systems to customers on a timely basis. Some of our suppliers have relatively limited financial and other resources. Any inability to obtain adequate deliveries, or any other circumstance that would restrict our ability to ship our products, could damage relationships with current and prospective customers and could harm our business. II-11 Our current and potential competitors have significantly greater resources than we do, and increased competition could impair sales of our products We operate in the highly competitive semiconductor, flat panel display and magnetic recording head industries and face competition from a number of companies, many of which have greater financial, engineering, manufacturing, marketing and customer support resources than we do. As a result, our competitors may be able to respond more quickly to new or emerging technologies or market developments by devoting greater resources to the development, promotion and sale of products, which could impair sales of our products. Moreover, there has been significant merger and acquisition activity among our competitors and potential competitors. These transactions by our competitors and potential competitors may provide them with a competitive advantage over us by enabling them to rapidly expand their product offerings and service capabilities to meet a broader range of customer needs. Many of our customers and potential customers in the semiconductor, flat panel display and magnetic recording head industries are large companies that require global support and service for their metrology systems. Variations in the amount of time it takes for us to sell our systems may cause fluctuations in our operating results, which could cause our stock price to decline Variations in the length of our sales cycles could cause our revenues to fluctuate widely from period to period. Our customers generally take a long time to evaluate our metrology systems. We expend significant resources educating and providing information to our prospective customers regarding the uses and benefits of our systems. The length of time it takes for us to make a sale depends upon many factors, including: * the efforts of our sales force and our independent sales representatives and distributors; * the complexity of the customer's metrology needs; * the internal technical capabilities and sophistication of the customer; * the customer's budgetary constraints; and * the quality and sophistication of the customer's current processing equipment. Because of the number of factors influencing the sales process, the period between our initial contact with a customer and the time when we recognize revenue from that customer, if ever, varies widely. Our sales cycles, including the time it takes for us to build a product to customer specifications after receiving an order, typically range from three to six months. Sometimes our sales cycles can be much longer, particularly with customers in Asia. During these cycles, we commit substantial resources to our sales efforts in advance of receiving any revenue, and we may never receive any revenue from a customer despite our sales efforts. If we do make a sale, our customers often purchase only one of our systems, and then evaluate its performance for a lengthy period of time before purchasing additional systems. The purchases are generally made by purchase orders and not long-term contracts. The number of additional products a customer purchases, if any, depends on many factors, including a customer's capacity requirements. The period between a customer's initial purchase and any subsequent purchases can vary from three months to a year or longer, and variations in the length of this period could cause fluctuations in our operating results and stock price. Relatively small fluctuations in our system costs may cause our operating results to vary significantly each quarter During any quarter, a significant portion of our revenue is derived from the sale of a relatively small number of systems. Our automated metrology systems range in price from approximately $200,000 to $700,000 per system, our integrated metrology systems range in price from approximately $80,000 to $295,000 per system and our tabletop metrology systems range in price from approximately $50,000 to $200,000 per system. Accordingly, a small change in the number of systems we sell will cause significant changes in our operating results. We depend on orders that are received and shipped in the same quarter and therefore our results of operations may be subject to significant variability from quarter to quarter. II-12 Our net sales in any given quarter depend upon a combination of orders received in that quarter for shipment in that quarter and shipments from backlog. Our backlog at the beginning of each quarter does not include all systems sales needed to achieve expected revenues for that quarter. Consequently, we are dependent on obtaining orders for systems to be shipped in the same quarter that the order is received. Moreover, customers may reschedule shipments, and production difficulties could delay shipments. Accordingly, we have limited visibility of future product shipments, and our results of operations may be subject to significant variability from quarter to quarter. Because of the high cost of switching equipment vendors in our markets, it is sometimes difficult for us to win customers from our competitors even if our metrology systems are superior to theirs We believe that once a semiconductor, flat panel display or magnetic recording head customer has selected one vendor's metrology system, the customer generally relies upon that system and, to the extent possible, subsequent generations of the same vendor's system, for the life of the application. Once a vendor's metrology system has been installed, a customer must often make substantial technical modifications and may experience downtime in order to switch to another vendor's metrology system. Accordingly, unless our systems offer performance or cost advantages that outweigh a customer's expense of switching to our systems, it will be difficult for us to achieve significant sales to that customer once it has selected another vendor's system for an application. If we deliver systems with defects, our credibility will be harmed and the sales and market acceptance of our systems will decrease Our systems are complex and sometimes have contained errors, defects and bugs when introduced. If we deliver systems with errors, defects or bugs, our credibility and the market acceptance and sales of our systems would be harmed. Further, if our systems contain errors, defects or bugs, we may be required to expend significant capital and resources to alleviate such problems. Defects could also lead to product liability as a result of product liability lawsuits against us or against our customers. We have agreed to indemnify our customers in some circumstances against liability arising from defects in our systems. In the event of a successful product liability claim, we could be obligated to pay damages significantly in excess of our product liability insurance limits. If we are not successful in developing new and enhanced metrology systems we will likely lose market share to our competitors We operate in an industry that is subject to technological changes, changes in customer demands and the introduction of new, higher performance systems with short product life cycles. To be competitive, we must continually design, develop and introduce in a timely manner new metrology systems that meet the performance and price demands of semiconductor, flat panel display and magnetic recording head manufacturers and suppliers. We must also continue to refine our current systems so that they remain competitive. We may experience difficulties or delays in our development efforts with respect to new systems, and we may not ultimately be successful in developing them. Any significant delay in releasing new systems could adversely affect our reputation, give a competitor a first-to-market advantage or cause a competitor to achieve greater market share. Successful infringement claims by third parties could result in substantial damages, lost product sales and the loss of important intellectual property rights by us Our commercial success depends in part on our ability to avoid infringing or misappropriating patents or other proprietary rights owned by third parties. Our intellectual property may infringe or be infringed upon by third parties despite our efforts to protect it, which would threaten our future success and competitive position Our future success and competitive position depend in part upon our ability to obtain and maintain proprietary technology for our principal product families, and we rely, in part, on patent, trade secret and trademark law to protect that technology. If we fail to adequately protect our intellectual property, it will be easier for our competitors to sell competing products. We own or have licensed a number of patents relating to our metrology systems, and have filed applications for additional patents. Any of our pending patent applications may be rejected, and we may not in the future be able to develop additional proprietary technology that is patentable. In addition, the patents we do own or that have been issued or licensed to us may not provide us with competitive advantages and may be challenged by third parties. Third parties may also design around these patents. II-13 In addition to patent protection, we rely upon trade secret protection for our confidential and proprietary information and technology. We routinely enter into confidentiality agreements with our employees. However, in the event that these agreements may be breached, we may not have adequate remedies. Our confidential and proprietary information and technology might also be independently developed by or become otherwise known to third parties. We may be required to initiate litigation in order to enforce any patents issued to or licensed by us, or to determine the scope or validity of a third party's patent or other proprietary rights. Any such litigation, regardless of outcome, could be expensive and time consuming, and could subject us to significant liabilities or require us to re-engineer our product or obtain expensive licenses from third parties. We must expend a significant amount of time and resources to develop new products, and if these products do not achieve commercial acceptance, our operating results may suffer We expect to spend a significant amount of time and resources to develop new systems and refine existing systems. In light of the long product development cycles inherent in our industry, these expenditures will be made well in advance of the prospect of deriving revenue from the sale of new systems. Our ability to commercially introduce and successfully market new systems is subject to a wide variety of challenges during this development cycle that could delay introduction of these systems. In addition, since our customers are not obligated by long-term contracts to purchase our systems, our anticipated product orders may not materialize, or orders that do materialize may be cancelled. As a result, if we do not achieve market acceptance of new products, our operating results will suffer. We must attract and retain key personnel with relevant industry knowledge to help support our future growth, and competition for such personnel in our industry is intense Our success depends to a significant degree upon the continued contributions of our key management, engineering, sales and marketing, customer support, finance and manufacturing personnel. We do not enter into employment contracts with any of our key personnel. The loss of any of these key personnel, who would be extremely difficult to replace, could harm our business and operating results. To support our future growth, we will need to attract and retain additional qualified employees. Competition for such personnel in our industry is intense, and we may not be successful in attracting and retaining qualified employees. We manufacture all of our systems at a limited number of facilities, and any prolonged disruption in the operations of those facilities could reduce our revenues We produce all of our systems in our manufacturing facilities located in Milpitas, California and through our subsidiaries in Japan and Korea. Our manufacturing processes are highly complex and require sophisticated, costly equipment and specially designed facilities. As a result, any prolonged disruption in the operations of our manufacturing facilities could seriously harm our ability to satisfy our customer order deadlines. Our Milpitas facility is currently subject to electrical blackouts as a consequence of a shortage of available electrical power in California. In the event these blackouts continue or increase in severity, they could disrupt the operations of our facility. If we cannot deliver our systems in a timely manner, due to a business interruption, our revenues will likely suffer. If we choose to acquire new and complementary businesses, products or technologies instead of developing them ourselves, we may be unable to complete these acquisitions or may not be able to successfully integrate an acquired business in a cost-effective and non-disruptive manner Our success depends on our ability to continually enhance and broaden our product offerings in response to changing technologies, customer demands and competitive pressures. To this end, from time to time we have acquired complementary businesses, products, or technologies instead of developing them ourselves and may choose to do so in the future. We do not know if we will be able to complete any acquisitions, or whether we will be able to successfully integrate any acquired business, operate it profitably or retain its key employees. Integrating any business, product or technology we acquire could be expensive and time consuming, disrupt our ongoing business and distract our management. In addition, in order to finance any acquisitions, we might need to raise additional funds through public or private equity or debt financings. In that event, we could be forced to obtain financing on terms that are not favorable to us and, in the case of equity financing, that result in dilution to our shareholders. If we are unable to integrate any acquired entities, products or technologies effectively, our business will suffer. In addition, any amortization of goodwill or other assets or charges resulting from the costs of acquisitions could harm our business and operating results. II-14 Our efforts to protect our intellectual property may be less effective in some foreign countries where intellectual property rights are not as well protected as in the United States In 1999 and 2000, 60.9% and 60.6%, respectively, of our total net revenues were derived from sales to customers in foreign countries, including certain countries in Asia, such as Taiwan, Korea and Japan. The laws of some foreign countries do not protect our proprietary rights to as great an extent as do the laws of the United States, and many U.S. companies have encountered substantial problems in protecting their proprietary rights against infringement in such countries. If we fail to adequately protect our intellectual property in these countries, it would be easier for our competitors to sell competing products in those countries. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to financial market risks, which include changes in foreign currency exchange rates and interest rates. We do not use derivative financial instruments. Instead, we actively manage the balances of current assets and liabilities denominated in foreign currencies to minimize currency fluctuation risk. As a result, a hypothetical 10% change in the foreign currency exchange rates at December 31, 1999 and 2000 would not have a material impact on our results of operations. Our investments in marketable securities are subject to interest rate risk but due to the short-term nature of these investments, interest rate changes would not have a material impact on their value at December 31, 1999 and 2000. We also have fixed rate yen denominated debt obligations in Japan that have no interest rate risk. At December 31, 1999 and 2000, our total debt obligation was $2.9 million and $5.2 million with a long-term portion of $2.3 million and $4.2 million, respectively. A hypothetical 10% change in interest rates at December 31, 2000 would not have a material impact on our results of operation. II-15 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by Item 8 of Form 10-K is presented here in the following order: INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page ---- Independent Auditors' Report............................................ II-17 Consolidated Balance Sheets............................................. II-18 Consolidated Statements of Income....................................... II-19 Consolidated Statements of Shareholders' Equity and Comprehensive Income.................................................. II-20 Consolidated Statements of Cash Flows................................... II-21 Notes to Consolidated Financial Statements.............................. II-22 II-16 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of Nanometrics Incorporated We have audited the accompanying consolidated balance sheets of Nanometrics Incorporated and subsidiaries as of December 31, 1999 and 2000, and the related consolidated statements of income, shareholders' equity and comprehensive income, and of cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Nanometrics Incorporated and subsidiaries at December 31, 1999 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. DELOITTE & TOUCHE LLP San Jose, California February 15, 2001 II-17 NANOMETRICS INCORPORATED CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts)
December 31, --------------------- ASSETS 1999 2000 --------- --------- Current assets: Cash and cash equivalents ................................................. $ 3,442 $ 16,934 Short-term investments .................................................... 14,698 52,854 Accounts receivable, net of allowances of $425 and $418 in 1999 and 2000, respectively ............................................................ 11,435 14,319 Inventories ............................................................... 9,460 15,753 Deferred income taxes ..................................................... 1,722 2,760 Prepaid expenses and other ................................................ 1,196 3,351 --------- --------- Total current assets .............................................. 41,953 105,971 Property, plant and equipment, net .......................................... 2,998 37,223 Deferred income taxes ....................................................... 135 227 Other assets ................................................................ 1,324 1,375 --------- --------- Total assets ................................................................ $ 46,410 $ 144,796 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable .......................................................... $ 2,412 $ 4,625 Accrued payroll and related expenses ...................................... 751 1,610 Deferred revenue .......................................................... 384 3,015 Other current liabilities ................................................. 1,337 3,049 Income taxes payable ...................................................... 464 331 Current portion of debt obligations ....................................... 584 921 --------- --------- Total current liabilities ........................................ 5,932 13,551 Deferred rent ............................................................... 35 -- Debt obligations ............................................................ 2,288 4,236 --------- --------- Total liabilities ................................................ 8,255 17,787 --------- --------- Commitments and contingencies (Note 7) Shareholders' equity: Common stock, no par value; 25,000,000 shares authorized; 9,163,998 and 11,607,839 outstanding in 1999 and 2000, respectively .... 17,277 95,929 Retained earnings ......................................................... 20,608 31,783 Accumulated other comprehensive income (loss) ............................. 270 (703) --------- --------- Total shareholders' equity ....................................... 38,155 127,009 --------- --------- Total liabilities and shareholders' equity .................................. $ 46,410 $ 144,796 ========= =========
See notes to consolidated financial statements. II-18 NANOMETRICS INCORPORATED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts)
Years Ended December 31, -------------------------------- 1998 1999 2000 -------- -------- -------- Net revenues: Product sales .......................................................... $ 29,718 $ 32,162 $ 63,468 Service ................................................................ 3,546 4,246 6,023 -------- -------- -------- Total net revenues ............................................. 33,264 36,408 69,491 -------- -------- -------- Costs and expenses: Cost of product sales .................................................. 13,002 14,606 25,082 Cost of service ........................................................ 3,669 4,560 6,022 Research and development ............................................... 4,206 4,658 9,238 Acquired in-process research and development ........................... 1,421 -- -- Selling ................................................................ 5,728 5,871 10,313 General and administrative ............................................. 2,828 2,973 4,258 -------- -------- -------- Total costs and expenses ........................................ 30,854 32,668 54,913 -------- -------- -------- Income from operations ................................................... 2,410 3,740 14,578 -------- -------- -------- Other income (expense): Interest income ........................................................ 572 662 4,129 Interest expense ....................................................... (108) (180) (76) Other, net ............................................................. 64 94 (150) -------- -------- -------- Total other income, net ........................................ 528 576 3,903 -------- -------- -------- Income before income taxes ............................................... 2,938 4,316 18,481 Provision for income taxes ............................................... 1,108 1,682 5,942 -------- -------- -------- Income before cumulative effect of change in accounting principle ........ 1,830 2,634 12,539 Cumulative effect of change in revenue recognition principle (SAB 101) ... -- -- (1,364) -------- -------- -------- Net income ............................................................... $ 1,830 $ 2,634 $ 11,175 ======== ======== ======== Basic net income (loss) per share: Income before cumulative effect of change in accounting principle ...... $ 0.21 $ 0.30 $ 1.14 Cumulative effect of change in revenue recognition principle (SAB 101) . -- -- (0.12) -------- -------- -------- Net income ............................................................. $ 0.21 $ 0.30 $ 1.02 ======== ======== ======== Diluted net income (loss) per share: Income before cumulative effect of change in accounting principle ...... $ 0.20 $ 0.28 $ 1.06 Cumulative effect of change in revenue recognition principle (SAB 101) . -- -- (0.12) -------- -------- -------- Net income ............................................................. $ 0.20 $ 0.28 $ 0.94 ======== ======== ======== Shares used in per share computation: Basic .................................................................. 8,635 8,829 10,986 ======== ======== ======== Diluted ................................................................ 9,041 9,393 11,845 ======== ======== ========
See notes to consolidated financial statements. II-19 NANOMETRICS INCORPORATED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (In thousands, except share amounts)
Accumulated Common Stock Other Total Compre- ----------------------- Retained Comprehensive Shareholders' hensive Shares Amount Earnings Income (Loss) Equity Income ---------- ---------- ---------- ---------- ---------- ---------- Balances, January 1, 1998 ........................ 8,521,484 $ 13,151 $ 16,144 $ (767) $ 28,528 Comprehensive income: Net income ..................................... -- -- 1,830 -- 1,830 $ 1,830 Other comprehensive income, net of tax - foreign currency translation adjustments ............. -- -- -- 633 633 633 ---------- Comprehensive income .................. -- -- -- -- -- $ 2,463 ========== Issuance of common stock under employee stock purchase plan .................................. 18,006 124 -- -- 124 Issuance of common stock under stock option plan . 151,153 576 -- -- 576 Tax benefit of employee stock transactions ....... -- 319 -- -- 319 ---------- ---------- ---------- ---------- ---------- Balances, December 31, 1998 ...................... 8,690,643 14,170 17,974 (134) 32,010 Comprehensive income: Net income ..................................... -- -- 2,634 -- 2,634 $ 2,634 Other comprehensive income (loss), net of tax: Foreign currency translation adjustments ..... -- -- -- 422 422 422 Unrealized loss on investments ............... -- -- -- (18) (18) (18) ---------- Comprehensive income .................. -- -- -- -- -- $ 3,038 ========== Issuance of common stock under employee stock purchase plan .................................. 28,937 148 -- -- 148 Issuance of common stock under stock option plan . 444,418 1,936 -- -- 1,936 Tax benefit of employee stock transactions ....... -- 1,023 -- -- 1,023 ---------- ---------- ---------- ---------- ---------- Balances, December 31, 1999 ...................... 9,163,998 17,277 20,608 270 38,155 Comprehensive income: Net income ..................................... -- -- 11,175 -- 11,175 $ 11,175 Other comprehensive income (loss), net of tax: Foreign currency translation adjustments ..... -- -- -- (981) (981) (981) Unrealized gain on investments ............... -- -- -- 8 8 8 ---------- Comprehensive income .................. -- -- -- -- -- $ 10,202 ========== Proceeds from common stock issuances, net of $700 of issuance costs .............................. 2,012,500 72,367 -- -- 72,367 Issuance of common stock under employee stock purchase plan .................................. 16,507 261 -- -- 261 Issuance of common stock under stock option plan . 414,834 2,158 -- -- 2,158 Tax benefit of employee stock transactions ....... -- 3,866 -- -- 3,866 ---------- ---------- ---------- ---------- ---------- Balances, December 31, 2000 ...................... 11,607,839 $ 95,929 $ 31,783 $ (703) $ 127,009 ========== ========== ========== ========== ==========
See notes to consolidated financial statements. II-20 NANOMETRICS INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
December 31, ----------------------------------- 1998 1999 2000 --------- --------- --------- Cash flows from operating activities: Net income ................................................... $ 1,830 $ 2,634 $ 11,175 Reconciliation of net income to net cash provided by operating activities: Depreciation and amortization .............................. 298 359 727 Deferred rent .............................................. 26 (8) (35) Acquired in-process research and development ............... 1,421 -- -- Loss on sale of property ................................... -- -- 54 Deferred income taxes ...................................... (573) 174 (1,130) Changes in assets and liabilities, net of effects of product line acquisition: Accounts receivable ...................................... 2,805 (2,496) (3,372) Inventories .............................................. (2,751) 2,449 (6,913) Prepaid income taxes ..................................... (1,325) 1,325 (221) Prepaid expenses and other ............................... 93 (178) (2,078) Accounts payable, accrueds and other current liabilities . (1,420) 1,022 4,675 Deferred revenue ......................................... 65 319 3,544 Income taxes payable ..................................... 416 1,462 3,115 --------- --------- --------- Net cash provided by operating activities ........... 885 7,062 9,541 --------- --------- --------- Cash flows from investing activities: Purchases of short-term investments .......................... (17,790) (22,575) (114,046) Sales/maturities of short-term investments ................... 17,472 17,760 75,898 Purchases of property, plant and equipment ................... (167) (511) (35,284) Other assets ................................................. (50) (536) (2) Product line acquisition ..................................... (3,225) -- -- --------- --------- --------- Net cash used in investing activities ............... (3,760) (5,862) (73,434) --------- --------- --------- Cash flows from financing activities: Net proceeds from common stock issuance ...................... -- -- 72,367 Proceeds from issuance of debt obligations ................... 761 90 3,187 Repayments of debt obligations ............................... (660) (1,358) (457) Sale of shares under employee stock purchase and stock option plans ......................................... 700 2,084 2,419 --------- --------- --------- Net cash provided by financing activities ........... 801 816 77,516 --------- --------- --------- Effect of exchange rate changes on cash ........................ (64) (92) (131) --------- --------- --------- Net change in cash and cash equivalents ........................ (2,138) 1,924 13,492 Cash and cash equivalents, beginning of year ................... 3,656 1,518 3,442 --------- --------- --------- Cash and cash equivalents, end of year ......................... $ 1,518 $ 3,442 $ 16,934 ========= ========= ========= Supplemental disclosure of cash flow information: Cash paid for interest ....................................... $ 92 $ 72 $ 78 ========= ========= ========= Cash paid for income taxes ................................... $ 2,558 $ 82 $ 3,497 ========= ========= =========
See notes to consolidated financial statements. II-21 NANOMETRICS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1998, 1999 and 2000 1. Significant Accounting Policies Description of Business - Nanometrics Incorporated and its wholly-owned subsidiaries sell, design, manufacture, market and support thin film and overlay dimension metrology systems for customers in the semiconductor, flat panel display and magnetic recording head industries. These metrology systems precisely measure a wide range of film types deposited on substrates during manufacturing in order to control manufacturing processes and increase production yields in the fabrication of integrated circuits, flat panel displays and magnetic recording heads. The thin film metrology systems use a broad spectrum of wavelengths, high-sensitivity optics, proprietary software and patented technology to measure the thickness and uniformity of films deposited on silicon and other substrates as well as their chemical composition. The overlay metrology systems are used to measure the overlay accuracy of successive layers of semiconductor patterns on wafers in the photolithography process. Basis of Presentation - The consolidated financial statements include Nanometrics Incorporated and its wholly-owned subsidiaries (the Company). All significant intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Fiscal Year - The Company uses a 52/53 week fiscal year ending on the Saturday nearest to December 31. Accordingly, fiscal years 1998, 1999 and 2000 all consisted of 52 weeks and ended on January 2, 1999, January 1, 2000 and December 30, 2000, respectively. For convenience in the accompanying consolidated financial statements, the year end is denoted as December 31. Cash and Cash Equivalents - Cash and cash equivalents include cash and highly liquid debt instruments with original maturities of three months or less when purchased. Short-Term Investments - Short-term investments consist of United States Treasury bills and are stated at fair value based on quoted market prices. Short-term investments are classified as available-for-sale based on the Company's intended use. The difference between amortized cost and fair value representing unrealized holding gains or losses are recorded as a component of shareholders' equity as accumulated other comprehensive income (loss). Gains and losses on sales of investments are determined on a specific identification basis. Fair Value of Financial Instruments - Financial instruments include cash equivalents, short-term investments and debt obligations. Cash equivalents and short-term investments are stated at fair market value based on quoted market prices. The recorded carrying amount of the Company's debt obligations approximates fair market value. Inventories - Inventories are stated at the lower of cost (first-in, first-out) or market. Property, Plant and Equipment - Property, plant and equipment are stated at cost. Depreciation is computed using straight line and accelerated methods over the following estimated useful lives of the assets: Building and improvements......................... 15 - 40 years Machinery and equipment........................... 3 - 7 years Furniture and fixtures............................ 5 - 15 years Leasehold improvements are amortized over the shorter of the estimated useful lives of the improvements or the lease term. Goodwill and Intangible Assets - The Company amortizes goodwill and acquired intangible assets (included in other assets) using the straight-line method over an estimated useful life of five years. II-22 Long-Lived Assets - The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When the sum of the undiscounted future net cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount, an impairment loss would be measured based on the discounted cash flows compared to the carrying amount. No impairment charge has been recorded in any of the periods presented. Income Taxes - Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and operating loss and tax credit carryforwards measured by applying currently enacted tax laws. A valuation allowance is provided when necessary to reduce deferred tax assets to an amount that is more likely than not to be realized. Comprehensive Income - Accumulated other comprehensive income (loss) consists of the following (in thousands): December 31, ---------------- 1999 2000 ----- ----- Accumulated unrealized gains on available-for-sale securities, net ................................. $ 20 $ 28 Accumulated translation adjustments, net .......... 250 (731) ----- ----- Accumulated other comprehensive income (loss) ..... $ 270 $(703) ===== ===== Revenue Recognition - Revenues are recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed and determinable and collectibility is reasonably assured. For product sales, this generally occurs at the time of shipment, and for revenues from service work, this generally occurs when the work is performed. Revenues from service contracts are recognized ratably over the period under contract. The Company sells the majority of its product with a one-year repair or replacement warranty and records a provision for estimated claims at the time of sale. In certain geographical regions where risk of loss and title transfers upon customer acceptance, payments received are recorded as deferred revenue and recognized as revenue upon customer acceptance. In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB 101), Revenue Recognition in Financial Statements, which summarizes certain views of the SEC staff in applying generally accepted accounting principles to revenue recognition in the financial statements. SAB 101 clarified delivery criteria, which affected the Company's revenue recognition policy. The Company applied the provisions of SAB 101 in the quarter ended December 31, 2000, retroactive as of the beginning of the fiscal year. Accordingly, the accompanying consolidated statement of income for the year ended December 31, 2000, is reflected in accordance with SAB 101. Had the Company applied the provisions of SAB 101 at the beginning of 1998, unaudited pro forma results of operations for 1998 and 1999 would have been as follows (in thousands, except per share amounts): 1998 1999 ------ ------ Net income as reported .......................... $1,830 $2,634 Pro forma adjustment for the change in accounting principle applied retroactively .... (628) (509) ------ ------ Pro forma net income ............................ $1,202 $2,125 ====== ====== Basic net income per share as reported .......... $ 0.21 $ 0.30 Pro forma effect of change per share ............ (0.07) (0.06) ------ ------ Pro forma basic net income per share ............ $ 0.14 $ 0.24 ====== ====== Diluted net income per share as reported ........ $ 0.20 $ 0.28 Pro forma effect of change per share ............ (0.07) (0.05) ------ ------ Pro forma diluted net income per share .......... $ 0.13 $ 0.23 ====== ====== The impact of adoption of SAB 101 in fiscal 2000 resulted in $7.8 million of revenue being deferred to future periods. In addition, the impact of adoption of SAB 101 resulted in a cumulative effect of $1.4 million resulting from the recognition of certain historic 1999 revenues in 2000. II-23 The Company's net income for the year ended December 31, 2000, under its revenue recognition policies prior to the adoption of SAB 101, would have been approximately $13.6 million, and basic and diluted earnings per share would have been $1.24 and $1.15, respectively. Stock-Based Compensation - The Company accounts for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees. Foreign Currency - The functional currencies of the Company's foreign subsidiaries are the local currencies. Accordingly, translation adjustments for the subsidiaries have been included in shareholders' equity. Gains and losses from transactions denominated in currencies other than the functional currencies of the Company or its subsidiaries are included in other income (expense) and consist of a loss of $13,000 for 1998, a gain of $91,000 for 1999 and a loss of $30,000 for 2000. Net Income Per Share - Basic net income per share excludes dilution and is computed by dividing net income by the number of weighted average common shares outstanding for the period. Diluted net income per share reflects the potential dilution from outstanding dilutive stock options (using the treasury stock method) and shares issuable under the employee stock purchase plan. Reclassifications - Certain reclassifications have been made to the prior years' financial statement presentations to conform to the current year presentation. Such reclassifications had no impact on consolidated net income or retained earnings. Recently Issued Accounting Standards - In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement establishes accounting and reporting standards requiring that every derivative instrument, including derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value. The Company is required to adopt SFAS No. 133 effective January 1, 2001. Management has completed its evaluation of the effects of adopting SFAS No. 133 and does not expect the adoption to have a significant impact on the consolidated financial position, results of operations or cash flows of the Company. Certain Significant Risks and Uncertainties - Financial instruments which potentially subject the Company to concentration of credit risk consist of cash and cash equivalents, short-term investments and accounts receivable. Cash and cash equivalents and short-term investments are held primarily with two financial institutions and consist primarily of cash in bank accounts and United States Treasury bills. The Company sells its products primarily to end users in the United States and Asia, and generally does not require its customers to provide collateral or other security to support accounts receivable. Management performs ongoing credit evaluations of its customers' financial condition. The Company maintains allowances for estimated potential bad debt losses. The Company participates in a dynamic high technology industry and believes that changes in any of the following areas could have a material adverse effect on the Company's future financial position, results of operations or cash flows: advances and trends in new technologies and industry standards; competitive pressures in the form of new products or price reductions on current products; changes in product mix; changes in the overall demand for products offered by the Company; changes in third-party manufacturers; changes in key suppliers; changes in certain strategic relationships or customer relationships; litigation or claims against the Company based on intellectual property, patent, product, regulatory or other factors; fluctuations in foreign currency exchange rates; risk associated with changes in domestic and international economic and/or political regulations; availability of necessary components or subassemblies; disruption of manufacturing facilities; and the Company's ability to attract and retain employees necessary to support its growth. The Company's customer base is highly concentrated. A relatively small number of customers have accounted for a significant portion of the Company's revenues. In 2000, aggregate revenue from the Company's top ten largest customers consisted of 58% of the Company's total net revenues. Certain components and subassemblies used in the Company's products are purchased from a sole supplier or a limited group of suppliers. In particular, the Company currently purchases its spectroscopic ellipsometer, Fourier transform infrared reflectometry spectrometer and robotics used in its advanced measurement systems from a sole supplier or a limited group of suppliers. Any shortage or interruption in the supply of any of the components or subassemblies used in the Company's products or the inability of the Company to procure these components or subassemblies from alternate sources on acceptable terms, could have a material adverse effect on the Company's business, financial condition and results of operations. II-24 2. Product Line Acquisition On March 30, 1998, the Company purchased from Optical Specialties, Inc. (OSI) a metrology system product line and related assets used to measure the critical dimensions and overlay registration errors observed in submicron photolithography. Under the agreement, the Company paid $3,225,000 in cash for the assets and in-process research and development. The total purchase price and allocation among the tangible and intangible assets and liabilities acquired (including acquired in-process research and development) is summarized as follows (in thousands): Total purchase price - cash consideration ................. $3,225 ====== Purchase price allocation: Tangible assets ......................................... $1,923 Intangible assets: Core and developed technology ......................... 419 Goodwill .............................................. 196 In-process research and development ..................... 1,421 Liabilities ............................................. (734) ------ Total purchase price allocation ........................... $3,225 ====== Net intangible assets as of December 31, 1999 and 2000 of $400,000 and $277,000, respectively (net of accumulated amortization of $215,000 and $338,000, respectively), are recorded within other assets in the accompanying consolidated balance sheet and are being amortized using the straight-line method over a five-year useful life. The purchase price allocation and intangible valuation was based on management's estimates of the after tax net cash flows and gave explicit consideration to the SEC's views on acquired in-process research and development as set forth in its September 9, 1998 letter to the American Institute of Certified Public Accountants. Specifically, the valuation gave consideration to the following: (i) the employment of a fair market value premise excluding any Nanometrics-specific considerations which could result in estimates of investment value for the subject assets; and (ii) comprehensive due diligence concerning all potential intangible assets including trademarks/tradenames, patents, copyrights, noncompete agreements, assembled workforce and customer relationships and sales channel. The value of core technology was specifically addressed, with a view toward ensuring the relative allocations to core technology and in-process research and development were consistent with the relative contributions of each to the final product. The allocation to in-process research and development was based on a calculation that considered only the efforts completed as of the transaction date, and only the cash flow associated with said completed efforts for the products currently in process. As indicated above, the Company recorded a one-time charge of $1,421,000 in the first quarter of 1998 for acquired in-process research and development related to the Metra 7000 development project that had not reached technological feasibility, had no alternative future use and for which successful development was uncertain. Management's conclusion that the in-process development effort, or any material sub-component, had no alternative future use was reached in consultation with engineering personnel from both the Company and OSI. The project to complete the Metra 7000 product included the completion of a software platform design started by OSI in 1997. As of the acquisition date, the Metra 7000 had yet to achieve technological feasibility since there was not a working prototype with a reliable new software design. At the time of acquisition, the estimated cost to complete this software and related development was approximately $300,000. The Company began shipments of the Metra 7000 product to a customer in June 1998 and it was at that time that the Company began to benefit from the acquired research and development related to the product. II-25 Significant assumptions used to determine the value of in-process research and development included several factors, including the following: (i) forecast of net cash flows that were expected to result from the development effort using projections prepared by the Company's management; (ii) percentage complete of 77% for the Metra 7000 project estimated by considering a number of factors, including the costs invested to date relative to total cost of the development effort and the amount of progress completed as of the acquisition date, on a technological basis, relative to the overall technological achievements required to achieve the in acquisition functionality of the eventual product. The technological issues were addressed by engineering representatives from both the Company and OSI, and when estimating the value of the technology, the projected financial results of the acquired assets were estimated on a stand-alone basis without any consideration to potential synergic benefits or "investment value" related to the acquisition. Accordingly, separate projected cash flows were prepared for both the existing as well as the in-process Metra 7000 products. These projected results were based on the number of units sold times average selling price less the associated costs. After preparing the estimated cash flow from the product being developed, a portion of this cash flow was attributed to the core technology, which was embodied in the in-process Metra 7000 product line and enabled a quicker and more cost effective development of the Metra 7000. When estimating the value of the developed, core and in-process technologies, discount rates of 25%, 30% and 35%, respectively, were used. These discount rates considered both the status and risk associated with the respective cash flows as of the acquisition date. In the first quarter of 1998, the Company also hired certain former employees of OSI and incurred $350,000 in related nonrecurring hiring expenses. Such expenses are classified in the accompanying 1998 consolidated statement of income according to the employees' functions. 3. Inventories Inventories consist of the following (in thousands): December 31, --------------------- 1999 2000 ------- ------- Raw materials and subassemblies .......... $ 3,775 $ 8,126 Work in process .......................... 1,092 1,434 Finished goods ........................... 4,593 6,193 ------- ------- Total inventories ........................ $ 9,460 $15,753 ======= ======= 4. Property, Plant and Equipment Property, plant and equipment consists of the following (in thousands): December 31, -------------------- 1999 2000 -------- -------- Land ......................................... $ 1,054 $ 16,462 Building and improvements .................... 3,183 17,700 Machinery and equipment ...................... 1,462 1,712 Furniture and fixtures ....................... 446 849 Construction in progress ..................... -- 3,397 Leasehold improvements ....................... 466 12 -------- -------- 6,611 40,132 Accumulated depreciation and amortization .... (3,613) (2,909) -------- -------- Total property, plant and equipment, net ..... $ 2,998 $ 37,223 ======== ======== II-26 5. Other Current Liabilities Other current liabilities consist of the following (in thousands): December 31, ------ ------ 1999 2000 ------ ------ Commissions payable ........................ $ 247 $1,249 Accrued warranty ........................... 482 809 Other ...................................... 608 991 ------ ------ Total other current liabilities ............ $1,337 $3,049 ====== ====== 6. Debt Obligations Debt obligations consist of the following (in thousands): December 31, -------------------- 1999 2000 ------- ------- 1995 working capital bank loan ............. $ 2,154 $ 1,575 1996 working capital bank loan ............. 620 470 2000 working capital bank loan ............. -- 2,625 Other debt obligations ..................... 98 487 ------- ------- Total ...................................... 2,872 5,157 Current portion of debt obligations ........ (584) (921) ------- ------- Debt obligations ........................... $ 2,288 $ 4,236 ======= ======= The 1995 working capital bank loan was obtained by the Company's Japanese subsidiary. The loan is collateralized by receivables of the Japanese subsidiary and is guaranteed by the parent, Nanometrics Incorporated. The loan is denominated in Japanese yen ((Y)180,000,000 at December 31, 2000) and bears interest at 3.3% per annum. The loan is payable in quarterly installments with unpaid principal and interest due in May 2005. The 1996 working capital bank loan was obtained by the Company's Japanese subsidiary and is collateralized by land and building. The loan is denominated in Japanese yen ((Y)53,600,000 at December 31, 2000) and bears interest at 3.4% per annum. The loan is payable in quarterly installments with unpaid principal and interest due in May 2006. The 2000 working capital bank loan was obtained by the Company's Japanese subsidiary and is collateralized by land and building. The loan is denominated in Japanese yen ((Y)300,000,000 at December 31, 2000) and bears interest at 2.1% per annum. The loan is payable in quarterly installments with unpaid principal and interest due in November 2010. Other debt obligations represent short-term borrowings by the Company's Japanese subsidiary which are collateralized by the subsidiary's accounts receivable. The borrowings are denominated in Japanese yen ((Y)55,762,000 at December 31, 2000) and bear interest at 1.625% per annum. The outstanding borrowings and unpaid interest at December 31, 2000 were due and paid in January 2001. At December 31, 2000, future annual maturities of debt obligations are as follows (in thousands): 2001 ....................................................... $ 921 2002 ....................................................... 435 2003 ....................................................... 526 2004 ....................................................... 799 2005 ....................................................... 623 Thereafter ................................................. 1,853 ------ Total ...................................................... $5,157 ====== II-27 7. Commitments and Contingencies The Company leases manufacturing and administrative facilities and certain equipment under noncancellable operating leases. The Company's corporate headquarters facility lease was terminated in November 2000 when corporate headquarters moved into a newly purchased facility. Rent expense for 1998, 1999 and 2000 was approximately $693,000, $867,000 and $1,221,000, respectively. Future minimum lease payments under the Company's operating leases for each of the years ending December 31 are as follows (in thousands): 2001 ....................................................... $ 169 2002 ....................................................... 78 2003 ....................................................... 75 2004 ....................................................... 33 2005 ....................................................... 21 Thereafter ................................................. 14 ------ Total ...................................................... $ 390 ====== In September 1998, the Company's Korean subsidiary entered into a lease agreement for manufacturing facilities. The lease payments are based on a percentage of net product sales, as defined. The lease is expected to be terminated in February 2001, in conjunction with the completion of the new facility. The Company has begun construction of new facilities for its Japanese and Korean subsidiaries. The Company has committed $3,437,000 and $2,136,000, respectively, in relation to this construction, of which a total of $1,484,000 has been paid as of December 31, 2000. Pursuant to a 1985 agreement, as amended, if the Company's Chairman of the Board is involuntarily removed from his position, the Company is required to continue his salary and related benefits for a period of five years from such date, at his option. The high technology industry is characterized by frequent claims and related litigation regarding patent and other intellectual property rights. The Company is a party to various claims, legal actions and complaints of this nature. Although the ultimate outcome of these matters is not presently determinable, management believes that the resolution of all such pending matters will not have a material adverse effect on the Company's financial position, results of operations or cash flows. 8. Shareholders' Equity Common Stock The authorized capital stock of the Company consists of 25,000,000 common shares, of which 22,500,000 shares have been designated "Common Stock" and 2,500,000 shares have been allocated to all other series of common shares, collectively designated "Junior Common." Net Income per Share The reconciliation of the share denominator used in the basic and diluted net income per share computations is as follows (in thousands):
Years Ended December 31, ------ ------ ------ 1998 1999 2000 ------ ------ ------ Weighted average shares outstanding - shares used in basic net income per share computation .............. 8,635 8,829 10,986 Dilutive effect of common stock equivalents, using the treasury stock method ..................... 406 564 859 ------ ------ ------ Shares used in diluted net income per share computation 9,041 9,393 11,845 ====== ====== ======
II-28 During 1998, 1999 and 2000, the Company had common stock options outstanding which could potentially dilute basic net income per share in the future, but were excluded from the computation of diluted net income per share as the common stock options' exercise prices were greater than the average market price of the common shares for the period. At December 31, 1998, 1999 and 2000, 248,000, 51,000 and 738,700, respectively, of the Company's outstanding common stock options with weighted average exercise prices of $7.88, $19.59 and $35.58, respectively, per share were excluded from the diluted net income per share computation. Stock Option Plans Under the 1991 Stock Option Plan (the 1991 Option Plan), as amended, the Company may grant options to acquire up to 3,000,000 shares of common stock to employees and consultants at prices not less than the fair market value at date of grant for incentive stock options and not less than 50% of fair market value for nonstatutory stock options. These options generally expire five years from the date of grant and become exercisable as they vest, generally 33.3% upon each anniversary of the grant, as set forth in the stock option agreements. The 1991 Option Plan expires in July 2001. Under the 1991 Directors' Stock Option Plan (the 1991 Directors' Plan), nonemployee directors of the Company are automatically granted options to acquire 10,000 shares of common stock, at the fair market value at the date of grant, each year that such person remains a director of the Company. Options granted under the Directors' Plan become exercisable as they vest 33.3% upon each anniversary of the grant and expire five years from the date of grant. The total shares authorized under the 1991 Directors' Plan are 300,000. The 1991 Directors' Plan expires in July 2001. Under the 2000 Stock Option Plan (the 2000 Option Plan), the Company may grant options to acquire up to 1,250,000 shares of common stock to employees and consultants at prices not less than the fair market value at date of grant for incentive and nonstatutory stock options. These options generally expire ten years from the date of grant, or a shorter term as provided by the stock option agreement and become exercisable as they vest, generally 33.3% upon each anniversary of the grant, as set forth in the stock option agreements. The 2000 Option Plan is the successor to the 1991 Option Plan, and all options existing under the 1991 Option Plan will continue to be governed by existing terms until exercise, cancellation or expiration. Under the 2000 Directors' Stock Option Plan (the 2000 Directors' Plan), nonemployee directors of the Company are automatically granted options to acquire 10,000 shares of common stock, at the fair market value at the date of grant, each year that such person remains a director of the Company. Options granted under the Directors' Plan become exercisable as they vest 33.3% upon each anniversary of the grant and expire five years from the date of grant. The total shares authorized under the 2000 Directors' Plan are 250,000. The 2000 Directors' Plan is the successor plan to the 1991 Directors' Plan, and all options existing under the 1991 Directors' Plan will continue to be governed by existing terms until exercise, cancellation or expiration. II-29 Option activity under the plans is summarized as follows:
Outstanding Options ----------------------------------------- Weighted Shares Number of Average Available Shares Exercise Price ---------- ---------- -------------- Balances, January 1, 1998 (503,267 exercisable at a weighted average price of $4.32) ....... 1,236,046 1,333,361 $ 6.37 Exercised ...................................... -- (151,153) 3.81 Granted (weighted average fair value of $1.88) . (1,395,174) 1,395,174 6.14 Canceled ....................................... 986,949 (986,949) 8.24 ---------- ---------- Balances, December 31, 1998 (745,171 exercisable at a weighted average price of $4.57) ....... 827,821 1,590,433 5.25 Exercised ...................................... -- (444,418) 4.36 Granted (weighted average fair value of $6.67) . (455,000) 455,000 12.06 Canceled ....................................... 106,351 (106,351) 6.65 ---------- ---------- Balances, December 31, 1999 (665,688 exercisable at a weighted average price of $5.21) ........ 479,172 1,494,664 7.49 Additional shares added through 2000 Option Plan and 2000 Directors' Plan ..................... 1,500,000 -- -- Exercised ...................................... -- (414,834) 5.20 Granted (weighted average fair value of $17.34) (886,700) 886,700 31.23 Canceled ....................................... 99,506 (99,506) 17.74 ---------- ---------- Balances, December 31, 2000 .................... 1,191,978 1,867,024 $18.73 ========== ==========
During the third quarter of fiscal 1998, the Company approved the cancellation and reissuance of outstanding options under the Company's stock option plans. Under the program, holders of outstanding options with exercise prices in excess of $5.13 per share were given the choice of retaining these options or of obtaining, in substitution, new options for the same number of shares. The new options were exercisable at a price of $5.13 per share, the fair market value of the common stock on the reissue date. The new options maintained the vesting schedule and expiration dates established by the canceled options. Additional information regarding options outstanding as of December 31, 2000 is as follows:
Options Outstanding Options Exercisable -------------------------------------- --------------------- Weighted Average Weighted Weighted Remaining Average Average Range of Number Contractual Exercise Number Exercise Exercise Prices Outstanding Life (Years) Price Exercisable Price --------------- ----------- ------------ ----- ----------- ----- $ 4.31 - $ 5.63 498,806 2.30 $ 5.12 430,633 $ 5.11 6.63 - 9.00 330,185 3.60 7.73 153,785 7.78 12.86 - 17.63 254,333 6.44 14.98 50,278 15.95 20.13 30.88 400,700 8.04 26.17 -- -- 34.69 47.63 383,000 5.47 40.65 -- -- ---------- -------- $ 4.31 - $47.63 1,867,024 4.98 $ 18.73 634,696 $ 6.62 ========== ========
II-30 Employee Stock Purchase Plan Under the 1986 Employee Stock Purchase Plan (the Purchase Plan), eligible employees are allowed to have salary withholdings of up to 10% of their base compensation to purchase shares of common stock at a price equal to 85% of the lower of the market value of the stock at the beginning or end of each six-month offering period, subject to an annual limitation. Shares issued under the plan were 18,006, 28,937 and 16,507 in 1998, 1999 and 2000 at weighted average prices of $6.87, $5.10 and $15.83, respectively. The weighted average per share fair values of the 1998, 1999 and 2000 awards were $2.42, $2.89 and $14.67, respectively. At December 31, 2000, 159,387 shares were reserved for future issuances under the Purchase Plan. Additional Stock Plan Information As discussed in Note 1, the Company accounts for its stock-based awards using the intrinsic value method in accordance with APB No. 25, Accounting for Stock Issued to Employees, and its related interpretations. Accordingly, no compensation expense has been recognized in the accompanying consolidated financial statements for employee stock arrangements. SFAS No. 123, Accounting for Stock-Based Compensation, requires the disclosure of pro forma net income and net income per share had the Company adopted the fair value method. Under SFAS No. 123, the fair value of stock-based awards to employees is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which differ significantly from the Company's stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The Company's fair value calculations on stock-based awards under the 1991 and 2000 Option Plans and the 1991 and 2000 Directors' Plans were made using the Black-Scholes option pricing model with the following weighted average assumptions: expected life, three years from the date of grant in 1998, 1999 and 2000; stock volatility, 80% in 1998, 1999 and 2000; risk free interest rate, 5.0% in 1998, 5.9% in 1999 and 6.4% in 2000; and no dividends during the expected term. The Company's calculations are based on a single option valuation approach and forfeitures are recognized at a historical rate of 29% for 1998, 24% for 1999 and 26% for 2000. The Company's fair value calculations on stock-based awards under the Purchase Plan were also made using the Black-Scholes option pricing model with the following weighted average assumptions: expected life, six months in 1998, 1999 and 2000; stock volatility, 80% in 1998, 1999 and 2000; risk free interest rate, 5.0% in 1998, 5.3% in 1999 and 6.1% in 2000; and no dividends during the expected term. If the computed fair values of the stock-based awards had been amortized to expense over the vesting period of the awards, pro forma net income and net income per share, basic and diluted, would have been as follows (in thousands, except per share amounts): Years Ended December 31, ------------------------- 1998 1999 2000 ------ ------ ------ Pro forma net income ..................... $ 807 $1,729 $8,200 Pro forma net income per share: Basic .................................. $ 0.09 $ 0.20 $ 0.75 Diluted ................................ $ 0.09 $ 0.18 $ 0.69 9. Income Taxes Income (loss) before income taxes consists of the following (in thousands): Years Ended December 31, -------------------------------- 1998 1999 2000 ------- ------- ------- Domestic ........................ $ 3,471 $ 3,928 $16,476 Foreign ......................... (533) 388 2,005 ------- ------- ------- Income before income taxes ...... $ 2,938 $ 4,316 $18,481 ======= ======= ======= II-31 The provision (benefit) for income taxes consists of the following (in thousands): Years Ended December 31, ------------------------------- 1998 1999 2000 ------- ------- ------- Current: Federal ........................ $ 840 $ 1,127 $ 5,875 State .......................... 148 186 807 Foreign ........................ 16 195 390 ------- ------- ------- 1,004 1,508 7,072 ------- ------- ------- Deferred: Federal ........................ 161 71 (536) State .......................... 166 (128) (29) Foreign ........................ (223) 231 (565) ------- ------- ------- 104 174 (1,130) ------- ------- ------- Provision for income taxes ....... $ 1,108 $ 1,682 $ 5,942 ======= ======= ======= Significant components of the Company's deferred tax assets are as follows (in thousands): December 31, ------------------ 1999 2000 ------- ------- Deferred tax assets - current: Reserves and accruals not currently deductible $ 1,307 $ 2,282 Capitalized inventory costs .................. 161 350 Net operating loss carryforwards ............. 338 -- Tax credit carryforwards ..................... 147 128 ------- ------- Total gross deferred tax assets - current ...... 1,953 2,760 Valuation allowance ............................ (231) -- ------- ------- Total net deferred tax assets - current ........ $ 1,722 $ 2,760 ======= ======= Deferred tax assets - noncurrent: Depreciation ................................. $ (69) $ (54) Goodwill and capitalized acquired technology . 391 320 Translation adjustments ...................... (225) (39) Other ........................................ 38 -- ------- ------- Total net deferred tax assets - noncurrent ..... $ 135 $ 227 ======= ======= As of December 31, 2000, the Company had available for carryforward research and experimental tax credits for federal income tax purposes of $128,000. Federal research and experimentation carryforwards expire in 2020. The decrease of $231,000 in the valuation allowance during the year ended December 31, 2000 was the result of positive income and the usage of previously created net operating losses. II-32 Differences between income taxes computed by applying the statutory federal income tax rate to income before income taxes and the provision for income taxes consist of the following (in thousands):
Years Ended December 31, ----------------------------- 1998 1999 2000 ------- ------- ------- Income taxes computed at 35% U.S. statutory rate ..... $ 1,028 $ 1,511 $ 6,468 State income taxes ................................... 207 58 820 Foreign tax provision (benefit) higher than U.S. rates (74) 59 (312) Foreign sales corporation benefit .................... (99) (228) (471) Change in valuation allowance ........................ -- 231 (231) Utilization of tax credits ........................... -- -- (385) Other, net ........................................... 46 51 53 ------- ------- ------- Provision for income taxes ........................... $ 1,108 $ 1,682 $ 5,942 ======= ======= =======
10. Profit-Sharing, Retirement and Bonus Plans No contributions were made by the Company in 1998, 1999 and 2000 to the Company's discretionary profit-sharing and retirement plan. The Company paid $688,000, $92,000 and $1,217,000 in 1998, 1999 and 2000, respectively, under formal discretionary cash bonus plans which cover all eligible employees. 11. Major Customers In 1998, sales to one customer accounted for 11.2% of total net revenues. In 1999, sales to two other customers accounted for 12.8% and 10.5% of total net revenues, respectively. In 2000, sales to two of the same customers and one other customer accounted for 20.5%, 11.8% and 10.0% of total revenues, respectively. At December 31, 1998, no single customer accounted for 10.0% or more of accounts receivable. The customer accounting for 12.8% of total net revenues in 1999 also accounted for 11.8% of accounts receivable at December 31, 1999. At December 31, 2000, the customer accounting for 10.0% of total net revenues also accounted for 12.4% of accounts receivable. 12. Product, Segment and Geographic Information The Company's operating divisions consist of its geographically based entities in the United States, Japan, South Korea and Taiwan. All such operating divisions have similar economic characteristics, as defined in SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, and accordingly, the Company operates in one reportable segment: the sale, design, manufacture, marketing and support of thin film and overlay dimension metrology systems. For the years ended December 31, 1998, 1999 and 2000, the Company recorded revenue from customers throughout the United States, Canada, Germany, the United Kingdom, Ireland, France, Italy, Sweden, Israel, Japan, South Korea, China, Singapore, Hong Kong, Taiwan, Indonesia and Malaysia. The following table summarizes total net revenues and long-lived assets attributed to significant countries (in thousands): II-33 Years Ended December 31, --------------------------------- 1998 1999 2000 ------- ------- ------- Total net revenues: United States ............... $12,698 $14,225 $27,391 Japan ....................... 9,167 11,594 13,028 Korea ....................... 2,596 2,991 13,532 Taiwan ...................... 3,404 4,967 11,652 Germany ..................... 4,784 2,340 1,491 All other ................... 615 291 2,397 ------- ------- ------- Total net revenues* ........... $33,264 $36,408 $69,491 ======= ======= ======= December 31, -------------------- 1999 2000 ------- ------- Long-lived assets: United States ........................... $ 1,716 $32,599 Japan ................................... 2,569 4,485 Korea ................................... 81 1,696 Taiwan .................................. 91 45 ------- ------- Total long-lived assets ................... $ 4,457 $38,825 ======= ======= ---------- * Net revenues are attributed to countries based on the deployment and service locations of systems. The Company's product lines differ primarily based on the environment the systems will be used in. Automated systems are used primarily in high-volume production environments. Integrated systems are installed inside wafer processing equipment to provide near real-time measurements for improving process control and increasing throughput. Tabletop systems are used primarily in low-volume production environments and in engineering labs where automated handling and high throughput are not required. Sales by product type were as follows (in thousands): Years Ended December 31, --------------------------------- 1998 1999 2000 ------- ------- ------- Automated systems ............. $21,694 $20,885 $38,441 Integrated systems ............ 120 3,953 13,680 Tabletop systems .............. 7,904 7,324 11,347 ------- ------- ------- Total product sales ........... $29,718 $32,162 $63,468 ======= ======= ======= 13. Selected Quarterly Financial Results (Unaudited) As discussed in Note 1 to the consolidated financial statements, the Company adopted a change in accounting principle related to SAB No. 101, Revenue Recognition in Financial Statements, in the quarter ended December 31, 2000, retroactive to the beginning of fiscal year 2000. The retroactive application of this change resulted in a cumulative effect of $1,364,000 in the first quarter of 2000 as well as a change to the presentation of historical 2000 quarterly results of operations. II-34 The following tables set forth selected quarterly results of operations for the years ended December 31, 1999 and 2000 (in thousands, except per share amounts):
Quarters Ended ---------------------------------------- Mar. 31, Jun. 30, Sep. 30, Dec. 31, 1999 1999 1999 1999 ------- ------- ------- ------- Total net revenues .................. $ 6,189 $ 7,523 $ 9,821 $12,875 Gross profit ........................ 2,533 3,522 4,669 6,518 Income (loss) from operations ....... (401) 395 1,321 2,425 Net income (loss) ................... (201) 304 900 1,631 Net income (loss) per share: Basic ............................. $ (0.02) $ 0.03 $ 0.10 $ 0.18 Diluted ........................... $ (0.02) $ 0.03 $ 0.10 $ 0.17 Shares used in per share computation: Basic ............................. 8,701 8,757 8,823 9,033 Diluted ........................... 8,701 9,177 9,347 9,842 Quarters Ended ---------------------------------------- Mar. 31, Jun. 30, Sep. 30, Dec. 31, 2000 2000 2000 2000 ------- ------- ------- ------- Total net revenues $16,316 $16,690 $19,300 $17,185 Gross profit 8,487 9,185 11,377 9,338 Income from operations 3,383 3,409 5,412 2,374 Net income 901 2,950 4,024 3,300 Net income per share: Basic $ 0.09 $ 0.26 $ 0.35 $ 0.29 Diluted $ 0.08 $ 0.24 $ 0.33 $ 0.28 Shares used in per share computation: Basic 9,693 11,295 11,393 11,563 Diluted 10,880 12,415 12,100 11,986
* * * * * II-35 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable II-36 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The sections entitled "Election of Directors" and "Compliance with Section 16(a)" appearing in the Registrant's proxy statement for the annual meeting of shareholders for the year ended December 31, 2000, sets forth certain information which is incorporated by reference. Certain information with respect to persons who are executive officers of the Registrant is set forth under the caption "Business-Executive Officers of the Registrant" in Part I of this report. ITEM 11. EXECUTIVE COMPENSATION The section entitled "Executive Compensation" appearing in the Registrant's proxy statement for the annual meeting of shareholders for the year ended December 31, 2000, sets forth certain information with respect to the compensation of management of the Registrant and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The section entitled "Election of Directors" appearing in the Registrant's proxy statement for the annual meeting of shareholders for the year ended December 31, 2000, sets forth certain information with respect to the ownership of the Registrant's Common Stock and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The section entitled "Transactions with Management" appearing in the Registrant's proxy statement for the annual meeting of shareholders for the year ended December 31, 2000, sets forth certain information with respect to certain business relationships and transactions between the Registrant and its directors and officers and is incorporated herein by reference. III-1 PART IV ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Consolidated Financial Statements. See Index to Consolidated Financial Statements at Item 8 on page II-19 of this report. 2. Consolidated Financial Statement Schedules. The following consolidated financial statement schedules of Nanometrics Incorporated are filed as part of this report and should be read in conjunction with the Consolidated Financial Statements of Nanometrics Incorporated: Schedule Page -------- ---- II - Valuation and Qualifying Accounts......................... IV-4 Schedules not listed above have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the Consolidated Financial Statements or notes thereto. (b) Reports on Form 8-K. We did not file any reports on Form 8-K during the quarter ended December 31, 2000. (c) Exhibits. The following exhibits are filed with this Annual Report on Form 10-K: Exhibit Number Description ------ ----------- 3.1(1) Restated and Amended Articles of Incorporation of Registrant filed July 7, 1982 3.2(1) Certificate of Amendment of Articles of Incorporation filed January 31, 1983 3.3(1) Certificate of Amendment of Articles of Incorporation filed July 28, 1983 3.4(1) Certificate of Amendment of Certificate of Determination of Preferences of Series B Common Stock filed September 13, 1983 3.5(1) Certificate of Amendment of Articles of Incorporation filed September 13, 1983 3.6(2) Certificate of Amendment of Articles of Incorporation filed December 3, 1984 3.7(2) Certificate of Correction of Certificate of Amendment of Certificate of Determination of Preferences of Series B Common Stock filed March 19, 1985 3.8(2) Certificate of Amendment of Articles of Incorporation filed June 27, 1988 3.9(2) Bylaws 3.10 Certificate of Amendment of Amended and Restated Bylaws of Nanometrics Incorporated 4.1(1) Form of Common Stock Certificate 10.1(2) Form of Indemnification of Agreement for Directors & Officers 10.2(4) Employee Stock Purchase Plan, as amended through March 1998 10.3(3) 1991 Stock Option Plan, as amended through May 15, 1997 10.4 1991 Director Option Plan as amended April 1994 IV-1 10.5(5) Amendment to and Restatement of Redemption Agreement dated March 4, 1993 between Vincent J. Coates and Registrant 10.6(2) Consulting Agreement dated as of September 15, 1997 between the Registrant and Kanegi Nagai, as amended 10.7(2) Reverse Split Dollar Insurance Agreement and Collateral Assignment dated March 15, 1993 between the Registrant and Vincent J. Coates 10.8(2) Lease Agreement dated February 25, 1992 between PM-DE and the Registrant, First Addendum to Lease dated February 22, 1992 and First Amendment to Lease dated April 24, 1997 10.9(2) Loan Agreement between Japan Development Bank and Nanometrics Japan k.k. 10.10(2) Loan Agreement and Guarantee dated June 5, 1995 between Mitsubishi Bank, Limited and Nanometrics Japan Ltd. 10.11(4) Nanometrics Incorporated 2000 Employee Stock Option Plan and form of Stock Option Agreement 10.12(4) Nanometrics Incorporated 2000 Director Stock Option Plan and form of Stock Option Agreement 21(2) Subsidiaries of Registrant 23.1 Independent Auditors' Consent 23.2 Independent Auditors' Report on Schedule 24 Power of Attorney (see page IV-3) ---------- (1) Incorporated by reference to exhibits filed with Registrant's Registration Statement on Form S-1 (File No. 2-93949), which became effective November 28, 1984. (2) Incorporated by reference to the Registrant's Annual Report on Form 10-K (file number 000-13470) filed on April 1, 1998. (3) Incorporated by reference to Exhibit 4.1 filed with Registrant's Registration Statement on Form S-8 (File No. 333-33583) filed on August 14, 1997. (4) Incorporated by reference to exhibits filed with Registrant's Registration Statement on Form S-8 (file number 333-40866) filed on July 7, 2000. (5) Incorporated by reference to Exhibit 10.10 filed with Registrant's Annual Report on Form 10-K dated March 29, 1993. (d) Consolidated Financial Statements and Schedules. See Item 14(a) above. IV-2 SIGNATURES Pursuant to the requirements Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: March 30, 2001 NANOMETRICS INCORPORATED By: /s/ Paul B. Nolan ------------------------------------------ Paul B. Nolan Chief Financial Officer and Vice President POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints John D. Heaton and Paul B. Nolan jointly and severally, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any and all amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1934, this Report on Form 10-K has been signed below by the following persons on behalf of the registrant on the 30th day of March, 2001 in the capacities indicated. Signature Title --------- ----- /s/ John D. Heaton President, Chief Executive Officer and Director - --------------------------- (Principal Executive Officer) John D. Heaton /s/ Paul B. Nolan Chief Financial Officer and Vice President - --------------------------- (Principal Financial and Accounting Officer) Paul B. Nolan /s/ Vincent J. Coates Chairman of the Board - --------------------------- Vincent J. Coates /s/ Nathaniel Brenner Director - --------------------------- Nathaniel Brenner /s/ Norman V. Coates Director - --------------------------- Norman V. Coates /s/ William Oldham Director - --------------------------- William Oldham /s/ Edmond R. Ward Director - --------------------------- Edmond R. Ward Schedule II NANOMETRICS INCORPORATED VALUATION AND QUALIFYING ACCOUNTS Allowance for Doubtful Accounts Balance at Charged to Deductions- Balance beginning costs and write-offs at end Year Ended of period expenses of accounts of period ---------- --------- -------- ----------- --------- December 31, 1998........... $413,000 $7,000 $ 0 $420,000 -------- ------ ------ -------- December 31, 1999........... $420,000 $5,000 $ 0 $425,000 -------- ------ ------ -------- December 31, 2000........... $425,000 $ 0 $7,000 $418,000 -------- ------ ------ -------- EX-3.10 2 0002.txt CERTIFICATE OF AMENDMENT EXHIBIT 3.10 CERTIFICATE OF AMENDMENT OF AMENDED AND RESTATED BYLAWS OF NANOMETRICS INCORPORATED The undersigned, Vincent J. Coates, hereby certifies that he is the duly elected, qualified and acting Chairman and Secretary of Nanometrics Incorporated. The undersigned further certifies that the Amended and Restated Bylaws of Nanometrics Incorporated, comprised of twenty-five (25) pages which were ratified by the Board of Directors of Nanometrics Incorporated at a meeting of such Board held on May 31, 1999, were amended by such Board held at a meeting on August 3, 2000 as follows: RESOLVED: That the fixed number of directors of the Company is hereby increased from six to seven. RESOLVED FURTHER: That the proper officers of the Company be, and they hereby are, authorized, empowered and directed to amend the Bylaws of the Corporation to increase the fixed number of directors from six to seven. Therefore, by this Certificate, the undersigned hereby amends such Bylaws by modifying the second sentence of Article III, Section 3.2, to increase the fixed number of directors from six to seven and restating Article III, Section 3.2, as follows: 3.2 NUMBER OF DIRECTORS: The number of directors of the corporation shall be not less than five (5) nor more than seven (7). The exact number of directors shall be seven (7) until changed, within the limits specified above, by a bylaw amending this Section 3.2, duly adopted by the bard of directors or by the shareholders. The indefinite number of directors may be changed, or a definite number may be fixed without provision for an indefinite number, by a duly adopted amendment to the articles of incorporation or by an amendment to this bylaw duly adopted by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that an amendment reducing the fixed number or the minimum number of directors to a number less than five (5) cannot be adopted if the votes cast against its adoption at a meeting, or the shares not consenting in the case of an action by written consent, are equal to more than sixteen and two-thirds percent (16-2/3%) of the outstanding shares entitled to vote thereon. No amendment may change the stated maximum number of authorized directors to a number greater than two (2) times the stated minimum number of directors minus one (1). No reduction of the authorized number of directors shall have the effect of removing any director before that director's term of office expires. IN WITNESS WHEREOF, the undersigned has hereunto set his hand and affixed the Corporate Seal to this Certificate amending the Bylaws of Nanometrics Incorporated, which is effective August 3, 2000. - ------------------------------- Vincent J. Coates Chairman and Secretary EX-23.1 3 0003.txt INDEPENDENT AUDITORS' CONSENT EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 33-8518, 33-43913, 333-33583 and 333-40866 of Nanometrics Incorporated on Form S-8 of our report dated February 15, 2001, appearing in this Annual Report on Form 10-K of Nanometrics Incorporated for the year ended December 31, 2000. Deloitte & Touche LLP San Jose, California March 27, 2001 EX-23.2 4 0004.txt INDEPENDENT AUDITORS' REPORT ON SCHEDULE EXHIBIT 23.2 INDEPENDENT AUDITORS' REPORT ON SCHEDULE To the Board of Directors and Shareholders of Nanometrics, Incorporated We have audited the consolidated financial statements of Nanometrics Incorporated as of December 31, 1999 and 2000, and for each of the three years in the period ended December 31, 2000, and have issued our report thereon dated February 15, 2001. Our audits also included the financial statement schedule listed in Item 14(a)(2). This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. Deloitte & Touche LLP San Jose, California February 15, 2001 -----END PRIVACY-ENHANCED MESSAGE-----