-----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, SbtTnYkDoCBDJ4VTEliHG0AEKpKUc4IJuO4eWyaQ1s41ciMsEL2ISKR2woPGE9U1 iEy5aY/5UwTdMUORbdeO8Q== 0000950005-99-000208.txt : 19990217 0000950005-99-000208.hdr.sgml : 19990217 ACCESSION NUMBER: 0000950005-99-000208 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19990216 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-Q/A SEC ACT: SEC FILE NUMBER: 000-13470 FILM NUMBER: 99543348 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-Q/A 1 FORM 10-Q/A SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q/A _X_ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 1998 Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _______________ to _______________ Commission file number 0-13470 ------------------------ NANOMETRICS INCORPORATED ------------------------------------------------------ (Exact name of registrant as specified in its charter) California 94-2276314 - ------------------------------- ------------------ (State or other jurisdiction of (I. R. S. Employer incorporation or organization) Identification No.) 310 DeGuigne Drive, Sunnyvale, CA 94086 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (408) 746-1600 --------------------- 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 ___ At October 14, 1998 there were 8,682,810 shares of common stock, no par value, issued and outstanding. 1 NANOMETRICS INCORPORATED Form 10-Q/A This Amendment on Form 10-Q/A amends the Registrant's Quarterly Report on Form 10-Q, as filed by the Registrant on November 10, 1998, and is being filed to reflect the restatement of the Registrant's Consolidated Financial Statements. See Note 2 to the Notes to Consolidated Financial Statements for a discussion of the basis for such restatement. INDEX Part I. Financial Information Page ---- Item 1. Financial Statements Consolidated Balance Sheets - September 30, 1998 (as restated) and December 31, 1997 ...... 3 Consolidated Statements of Income - Three months and nine months ended September 30, 1998 (as restated) and 1997 ................... 4 Consolidated Statements of Cash Flows Nine months ended September 30, 1998 (as restated) and 1997 .................................................... 5 Notes to Consolidated Financial Statements .................................................. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ............... 10 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K ......................... 14 Signatures ................................................................. 15 2 PART I: FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS NANOMETRICS INCORPORATED CONSOLIDATED BALANCE SHEETS (Amounts in thousands except share amounts) (Unaudited)
September 30, December 31, 1998 1997 ------------- ------------ (As Restated)* ASSETS CURRENT ASSETS: Cash and equivalents $ 2,688 $ 3,656 Short-term investments 8,920 9,595 Accounts receivable, less allowance for doubtful accounts of $412 and $413 9,517 10,225 Inventories 11,495 7,138 Deferred income taxes 1,897 2,094 Prepaid expenses and other 867 1,075 -------- -------- Total current assets 35,384 33,783 PROPERTY, PLANT AND EQUIPMENT, NET 2,182 2,187 OTHER ASSETS 1,665 273 -------- -------- TOTAL $ 39,231 $ 36,243 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 1,454 $ 1,889 Accrued payroll and related expenses 515 596 Other current liabilities 2,595 1,493 Income taxes payable 431 565 Current portion of long-term debt 367 604 -------- -------- Total current liabilities 5,362 5,147 LONG-TERM DEBT 2,189 2,568 -------- -------- Total liabilities 7,551 7,715 -------- -------- SHAREHOLDERS' EQUITY: Common stock, no par value; 25,000,000 shares authorized; 8,669,830 and 8,521,484 outstanding 13,754 13,151 Retained earnings 18,657 16,144 Accumulated translation adjustment (731) (767) -------- -------- Total shareholders' equity 31,680 28,528 -------- -------- TOTAL $ 39,231 $ 36,243 ======== ======== * See Note 2 to the Notes to Consolidated Financial Statements See Notes to Consolidated Financial Statements
3 NANOMETRICS INCORPORATED CONSOLIDATED STATEMENTS OF INCOME (Amounts in thousands, except per share amounts) (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, 1998 1997 1998 1997 -------- -------- -------- -------- (As Restated)* (As Restated)* NET REVENUES: Product sales $ 6,249 $ 8,433 $ 25,572 $ 23,475 Service 756 983 2,699 2,899 -------- -------- -------- -------- Total net revenues 7,005 9,416 28,271 26,374 -------- -------- -------- -------- COSTS AND EXPENSES: Cost of product sales 2,813 3,019 10,471 8,658 Cost of service 835 988 2,787 2,725 Research and development 886 772 3,180 2,111 Acquired in-process research and development -- -- 1,421 -- Selling 1,366 1,508 4,467 4,397 General and administrative 614 716 2,093 1,965 -------- -------- -------- -------- Total costs and expenses 6,514 7,003 24,419 19,856 -------- -------- -------- -------- OPERATING INCOME 491 2,413 3,852 6,518 -------- -------- -------- -------- OTHER INCOME (EXPENSE): Interest income 146 132 463 373 Interest expense (23) (36) (69) (85) Other, net 42 (32) (106) (38) -------- -------- -------- -------- Total other income (expense), net 165 64 288 250 -------- -------- -------- -------- INCOME BEFORE PROVISION FOR INCOME TAXES 656 2,477 4,140 6,768 PROVISION FOR INCOME TAXES 262 973 1,627 2,618 -------- -------- -------- -------- NET INCOME $ 394 $ 1,504 $ 2,513 $ 4,150 ======== ======== ======== ======== NET INCOME PER SHARE: Basic $ .05 $ .18 $ .29 $ .50 ======== ======== ======== ======== Diluted $ .04 $ .17 $ .28 $ .47 ======== ======== ======== ======== SHARES USED IN PER SHARE COMPUTATION: Basic 8,669 8,327 8,618 8,290 ======== ======== ======== ======== Diluted 9,074 9,002 9,018 8,780 ======== ======== ======== ======== * See Note 2 to the Notes to Consolidated Financial Statements See Notes to Consolidated Financial Statements
4 NANOMETRICS INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) (Unaudited)
Nine Months Ended September 30, 1998 1997 -------- -------- (As Restated)* CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,513 $ 4,150 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 191 161 Purchase of in-process research and development 1,421 -- Deferred taxes (660) 367 Changes in assets and liabilities net of effects of product line acquisition: Accounts receivable 908 (10) Inventories (2,769) (1,230) Prepaid expenses and other 136 (501) Accounts payable and other current liabilities (323) 624 Income taxes payable (29) (1,221) -------- -------- Net cash provided by (used in) operating activities 1,388 2,340 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of short-term investments (12,823) (13,547) Sales/maturities of short-term investments 13,498 10,583 Capital expenditures (170) (64) Product line acquisition (3,038) -- -------- -------- Net cash used in investing activities (2,533) (3,028) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayments of long-term debt (551) (251) Issuance of common stock 603 299 -------- -------- Net cash provided by financing activities 52 48 -------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH 125 713 -------- -------- NET CHANGE IN CASH AND EQUIVALENTS (968) 73 CASH AND EQUIVALENTS, beginning of period 3,656 1,725 -------- -------- CASH AND EQUIVALENTS, end of period $ 2,688 $ 1,798 ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest $ 73 $ 85 ======== ======== Cash paid for income taxes $ 2,223 $ 4,161 ======== ======== * See Note 2 to the Notes to Consolidated Financial Statements See Notes to Consolidated Financial Statements
6 NANOMETRICS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1 Consolidated Financial Statements The consolidated financial statements include the accounts of Nanometrics Incorporated and its wholly owned subsidiaries. All significant inter-company accounts and transactions have been eliminated. While the quarterly financial statements are unaudited, the financial statements included in this report reflect all adjustments (consisting only of normal recurring adjustments) which the Company considers necessary for a fair presentation of the results of operations for the interim periods covered and of the financial condition of the Company at the date of the interim balance sheet. The operating results for interim periods are not necessarily indicative of the operating results that may be expected for the entire year. The information included in this report should be read in conjunction with the information included in the Company's 1997 Annual Report on Form 10-K filed with the Securities and Exchange Commission. Note 2. Restatement of Quarterly Financial Statements Subsequent to the initial purchase price allocation in connection with the Optical Specialties, Inc. ("OSI") product line acquisition (see Note 4 below), the Securities and Exchange Commission ("the SEC") issued new guidance on its views regarding the valuation methodology used in determining acquired in-process research and development expensed on the date of acquisition. As a result of the new guidance, the Company has modified its methods used to value the acquired in-process research and development and other intangible assets acquired from OSI. The revised valuation is based on management estimates of the after-tax net cash flows and gives 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. As a result of the revised valuation, the amount of purchase price allocated to in-process research and development decreased from $2,036,000 to $1,421,000, and the amount ascribed to other intangible assets increased from $0 to $615,000. The consolidated financial statements as of September 30, 1998 and for the three months and nine months then ended have been restated from amounts previously reported to reflect the revised valuation of assets acquired including goodwill, core and developed technology and in-process research and development. The effects of such restatement are summarized as follows (in thousands, except per share amounts):
Three Months Ended Nine Months Ended September 30, 1998 September 30, 1998 --------------------------- -------------------------- As Previously As Previously Reported As Restated Reported As Restated -------- ----------- -------- ----------- Cost of product sales $ 2,782 $ 2,813 $10,409 $10,471 Acquired in-process research and development $ -- $ -- $ 2,036 $ 1,421 Operating income $ 522 $ 491 $ 3,299 $ 3,852 Income before provision for income taxes $ 687 $ 656 $ 3,587 $ 4,140 Provision for income taxes $ 274 $ 262 $ 1,405 $ 1,627 Net income $ 413 $ 394 $ 2,182 $ 2,513 Basic net income per share $ .05 $ .05 $ .25 $ .29 Diluted net income per share $ .05 $ .04 $ .24 $ .28
6 At September 30, 1998 ---------------------------------------- As Previously Reported As Restated ---------------------- ----------- Deferred income taxes $ 2,119 $ 1,897 Other assets $ 1,112 $ 1,665 Retained earnings $18,326 $18,657 Total shareholders' equity $31,349 $31,680 Note 3. Inventories Inventories are stated at the lower of cost (first-in, first-out) or market and consist of the following (in thousands): September 30, December 31, 1998 1997 ------- ------- Raw materials and subassemblies $ 3,790 $ 2,676 Work in process 4,226 1,528 Finished goods 3,479 2,934 ------- ------- $11,495 $ 7,138 ======= ======= Note 4. Product Line Acquisition On March 30, 1998 the Company entered into an agreement with OSI to purchase a metrology system product line and related assets used to measure the critical dimensions and overlay registration errors observed in submicron lithography. Under the agreement, the Company paid approximately $3.2 million in cash (of which $187,000 was accrued and remained unpaid as of September 30, 1998) for the assets and in-process research and development. The total purchase price and final 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: Total 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 Tangible liabilities (734) ------- $ 3,225 ======= The intangible assets are recorded within other assets in the accompanying consolidated balance sheet as of September 30, 1998 and are being amortized over a five year useful life. The valuation was based on management's estimates of the after tax net cash flows and gives 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 would 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, non-compete agreements, assembled workforce and customer relationships and sales channel. The value of core technology was explicitly 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 7 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 noted 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 a development project that had not reached technological feasibility, had no alternative future use and for which successful development was uncertain. The conclusions 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 Nanometrics and OSI. The project to complete the Metra 7000 product includes 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 the 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 this product. Significant assumptions used to determine the value of in-process research and development included several factors, including the following: (i) forecast of net cash flows that were expected to result from the development effort, using projections prepared by Nanometrics' management; and (ii) percentage complete of 77% for the Metra project estimated by considering a number of factors, including the costs invested to date relative to the expected total cost of the development effort and the amount of progress completed as of the acquisition date, on a technological basis, relative to the overall technological achievements required to achieve the inacquisition functionality of the eventual product. The technological issues were addressed by engineering representatives from both Nanometrics 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 is embodied in the in-process Metra 7000 product line and enables the development of the Metra 7000 quicker and more cost effectively. 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 consider both the status and risk associated with the respective cash flows as of the acquisition date. In addition, during the three months ended March 31, 1998, the Company hired certain former employees of OSI and incurred approximately $350,000 in related, non-recurring hiring expenses (such expenses are classified in the accompanying consolidated statement of income according to the employees' function). Note 5. Other Current Liabilities Other current liabilities consist of the following (in thousands): September 30, 1998 December 31, 1997 ------------------ ----------------- Commissions payable $ 463 $ 564 Accrued warranty 975 479 Other 1,157 450 ------ ------ $2,595 $1,493 ====== ====== 8 Note 6. Net Income Per Share The reconciliation of the share denominator used in the basic and diluted net income per share computations are as follows (in thousands):
Three Months Ended Nine Months Ended September 30 September 30 1998 1997 1998 1997 ----- ----- ----- ----- Weighted average common shares outstanding-shares used in basic net income per share computation 8,669 8,327 8,618 8,290 Dilutive effect of common stock equivalents, using the treasury stock method 405 675 400 490 ----- ----- ----- ----- Shares used in dilutive net income per share computation 9,074 9,002 9,018 8,780 ===== ===== ===== =====
During the three and nine month periods ended September 30, 1998 and 1997, 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 September 30, 1998, 71,000 such common stock options with a weighted average exercise price of $7.80 per share were excluded from the diluted net income per share computations. Note 7. Comprehensive Income In the first quarter of 1998, the Company adopted Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive Income," which requires an enterprise to report the change in net assets during the period from nonowner sources ("comprehensive income"). For the three months ended September 30, 1998 and 1997, comprehensive income, which consisted of net income for the periods and changes in accumulated translation adjustments, was $558,000 and $1,307,000, respectively. For the nine months ended September 30, 1998 and 1997, comprehensive income was $2,549,000 and $3,984,000, respectively. Note 8. New Accounting Pronouncements In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which establishes annual and interim reporting standards for an enterprise's business segments and related disclosures about its products, services, geographic areas and major customers. This statement is effective for fiscal year 1998 and adoption will not affect the Company's financial position, results of operations or cashflows. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which defines derivatives, requires that all derivatives be carried at fair value, and provides for hedging accounting when certain conditions are met. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Although the Company has not fully assessed the implications of this new statement, the Company does not believe adoption of this statement will have a material impact on the Company's financial position or results of operations. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Product Line Acquisition On March 30, 1998, the Company entered into an agreement with Optical Specialties, Inc. ("OSI") to purchase a metrology system product line and related assets to measure the critical dimensions and overlay registration errors observed in submicron lithography. Subsequent to the initial purchase price allocation, the Securities and Exchange Commission ("the SEC") issued new guidance on its views regarding the valuation methodology used in determining acquired in-process research and development expensed on the date of acquisition. As a result of the new guidance, the Company has modified its methods used to value the acquired in-process research and development and other intangible assets acquired in connection with the OSI product line acquisition. The revised valuation was based on management 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. As a result of the revised valuation, the amount of purchase price allocated to in-process research and development decreased from $2,036,000 to $1,421,000 and the amount ascribed to other intangible assets increased from $0 to $615,000. Accordingly, the Company's Consolidated Financial Statements and Management Discussion and Analysis of Financial Condition and Results of Operations have been restated to reflect such adjustments described herein and in Note 2 to the Notes to Consolidated Financial Statements. Results of Operations Total net revenues for the three months ended September 30, 1998 were $7,005,000, a decrease of $2,411,000 or 26% from the comparable period in 1997. For the nine months ended September 30, 1998, total net revenues of $28,271,000 increased by $1,897,000 or 7% from the comparable period in 1997. Product sales of $6,249,000 for the three months ended September 30, 1998, decreased $2,184,000 or 26% as compared with the same periods during 1997. This decrease resulted from a generally weakening demand for semiconductor equipment observed in the U.S., Japan and Pacific Rim countries which was offset, to some extent, by increased sales of the Company's products to magnetic disk and flat panel manufacturers. Product sales of $25,572,000 for the nine months ended September 30, 1998, increased $2,097,000 or 9% as compared with the same period during 1997. The increase in product sales resulted from stronger demand for, and increased shipments of, the Company's products during the first two quarters of 1998, especially for its automated products, particularly to customers in the Far East and Europe. Service revenue of $756,000 and $2,699,000 for the three months and nine months ended September 30, 1998, respectively, decreased $227,000 or 23% and $200,000 or 7%, respectively, as compared to the same periods in 1997. These decreases in service revenue are primarily attributable to lower sales of accessories in the U.S. and Japan. Cost of product sales as a percentage of product sales increased to 45% in the third quarter of 1998 from 36% in the third quarter of 1997 due to lower sales volume resulting in higher per unit manufacturing costs. Cost of product sales as a percentage of product sales increased to 41% in the nine months ended September 30, 1998 from 37% for the same period in 1997 primarily because of Metra sales, which had a lower gross margin than the Company's other products and underabsorbed manufacturing costs related to the start up of production on the Metra product line during the first two quarters of 1998. Cost of service as a percentage of service revenue increased to 110% in the third quarter of 1998 from 101% in the third quarter of 1997 and increased to 103% in the nine months ended September 30, 1998 from 94% for the same period in 1997 as a result of the increased cost of additional headcount associated with servicing the Company's new Metra product line that did not account for a proportional increase in service revenue. Research and development expenses for the three month and nine month periods ended September 30, 1998 increased $114,000 or 15% and $1,069,000 or 51% respectively, compared to the same periods in 1997 due primarily to the increased cost of additional headcount associated with research and development for the Company's new Metra overlay registration product line and its new Nanospec 9000 integrated dry wafer thickness metrology product line. 10 In the first quarter of 1998, the Company paid approximately $3.2 million for the assets and in-process research and development related to OSI's Metra product line. Of this purchase price, $1,421,000 related to the value of in-process research and development that had no alternative future use and was charged to expense in the accompanying consolidated statement of income for the nine months ended September 30, 1998. The Company's increase in research and development expenses discussed above is primarily attributable to efforts to bring the acquired in-process technology to completion. Selling expenses in the third quarter of 1998 decreased by $142,000 or 9% compared to the third quarter of 1997 as a result of lower commission and other expenses associated with lower sales. Selling expenses for the nine months ended September 30, 1998 increased $70,000 or 2% compared to the same period in 1997 primarily because of the increased cost of additional headcount associated with the sales and marketing of the Company's new Metra product line. General and administrative expenses for the third quarter of 1998 decreased by $102,000 or 14% compared to the third quarter of 1997 due to spending associated with the decreased level of operations in the third quarter of 1998. General and administrative expenses for the nine month period ended September 30, 1998 increased by $128,000 or 7% compared to the same period in 1997 primarily as a result of spending associated with the increased level of operations during the first two quarters of 1998. Other income (expense), net for the three month and nine month periods ended September 30, 1998 increased $101,000 or 158% and $38,000 or 15% respectively, from the comparable periods in 1997 due primarily to exchange rate gains in the third quarter of 1998 and to higher interest income in 1998. The Company reported an operating income of $491,000 and net income of $394,000 for the third quarter of 1998 compared to an operating income of $2,413,000 and net income of $1,504,000 for the same period in 1997. For the first nine months of 1998, the Company reported an operating income of $3,852,000 and net income of $2,513,000 which compared to an operating income of $6,518,000 and net income of $4,150,000 for the same period in 1997. Liquidity and Capital Resources At September 30, 1998, the Company had working capital of $30,022,000 compared to $28,636,000 at December 31, 1997. The current ratio at September 30, 1998 was 6.6 to 1. The Company believes working capital including cash and short-term investments of $11,608,000 will be sufficient to meet its needs at least through the next twelve months. Operating activities for the first nine months of 1998 provided cash of $1,388,000 primarily from net income adjusted for the in-process technology purchase of the Metra product line which was offset to some extent by increased inventory, while the net purchases of short-term investments provided $675,000, capital expenditures used $170,000, purchase of the Metra product line used $3,038,000, debt repayment used $551,000 and issuance of common stock provided $603,000. Year 2000 Issues Many computer systems are expected to experience problems handling dates around the year 2000 ("Y2K"). The Y2K issue is the result of many currently installed computer programs being written using two digits rather than four to define the applicable year. As a result, these computer programs are unable to distinguish between 21st century dates and 20th century dates and could cause computer system failures or miscalculations that result in significant business disruptions. Described below are the actions the 11 Company has taken, and plans to take, to address the potential problems resulting as systems attempt to handle dates around the millennium. State of Readiness The Company's upper management has discussed and agreed upon a comprehensive plan to address its Y2K issues. The Y2K plan includes the following activities: gathering data and taking inventory; testing systems and products to evaluate Y2K compliance; execution of remediation activities to fix non-compliant products and systems; and monitoring and testing products and systems on an ongoing basis. The major business areas impacted are: Products: Many of the Company's products incorporate computer software to control certain add-on features and functionality. The Company's products are measurement tools and Y2K issues arise in the Company's products where database functions are used (e.g. storage of measurement data). The Company has completed testing and evaluation of its products for Y2K compliance. As a result of such evaluation, the Company believes that: (i) most of its current product lines are Y2K compliant; (ii) upgrades are currently available or will be available by mid-1999 for non-Y2K compliant automated products; and (iii) as database functionality is not used in certain older obsolete products and in non-automated systems, Y2K compliance is not believed to be an issue. Procurement: Critical suppliers have been contacted and status of products and internal systems have been verified. The Company is in the process of evaluating the balance of its supplier base. This evaluation is expected to be completed by March 31, 1999. Manufacturing: The Company's assembly and test equipment is scheduled for ongoing upgrades to Y2K compliant configurations through mid-1999. The Company's primary manufacturing application software system is scheduled to be upgraded to be Y2K compliant by mid-1999. The cost of such upgrade is included in the estimate of the costs to upgrade the information technology as discussed below. Information Technology Systems ("IT"): The Company has conducted a survey of its IT hardware and software and has identified substantially all non-Y2K compliant hardware and software. The Company has purchased a Y2K upgrade license from its IT vendor and expects to implement the upgrade by mid-1999. The Company currently estimates the cost of the upgrade license and the related internal and external costs to implement will approximate $140,000. Facilities and Infrastructure: An assessment of the Y2K readiness of owned and leased assets has been performed and systems which will require upgrade or replacement include the security and card key system and the voicemail system. Costs While the Company has not yet completed the entire evaluation of the required activities to address the Y2K issues, the Company currently believes that the estimated costs of Y2K compliance efforts are not expected to be material to the Company. Risks The Company believes the most reasonably likely worst case Y2K scenarios include the following: Customers could change their buying patterns in a number of ways, including accelerating or delaying purchases of, or replacement of, the Company's products and services. The Company could experience a disruption in service to its customers as a result of the failure of third party products, including the following: third party products which are non-compliant and are incorporated into the Company's products could cause the products to fail; a breakdown in telephone, e-mail, voicemail, could impact the responsiveness of the Company's customer service department; Y2K problems at a number of the Company's suppliers including banks, telephone companies and the United 12 States Postal Service could have a pervasive impact on the Company's business as a whole; and product features that rely on date parameters (generally date dependent routings and operating reports) could malfunction. Although the Company's products are undergoing both Y2K specific, and its normal testing procedures, its products may not contain all of the necessary date code or other changes to operate in the year 2000. Any failure of such products to perform could result in: claims and lawsuits against the Company; significantly impaired customer satisfaction resulting in customers withholding cash owed to the Company and delaying or canceling orders; and managerial and technical resources being diverted away from product development and other business activities. Any of the above stated consequences, in addition to others which the Company cannot yet foresee, could have a significant adverse impact on the Company's business, operating results and financial condition. Contingency Plan The Company currently believes that its plan is adequate to address its Y2K issues, and accordingly, does not believe that it is practical to develop a comprehensive contingency plan. Based on the current plan's timeline, the Company believes that it would be able to determine the effectiveness of the current plan by mid-1999. As such, in the event that its current plan is not adequate to address the Y2K issues, the Company believes that there will be adequate time to establish and implement a contingency plan. Once a contingency plan is implemented, however, the Company cannot be certain that such a plan would prevent significant Y2K problems from having a material adverse effect on the Company's business, operating results and financial condition. Forward Looking Statements The foregoing Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements involve risks and uncertainties and actual results could differ materially as a result of a number of factors, including (i) demand for the Company's products, which is affected by factors including the cyclicality of the semiconductor, magnetic recording head and flat panel display industries served by the Company, (ii) patterns of capital spending by customers, (iii) technological changes in the markets served by the Company and its customers, (iv) market acceptance of existing and new products and product enhancements of both the Company and its customers, (v) the timing, cancellation or delay of customer orders and shipments, (vi) competition, including competitive pressure on product prices and changes in pricing by the Company's customers or suppliers, (vii) fluctuation in foreign currency exchange rates, particularly the Japanese yen, (viii) the proportion of direct sales versus sales through distributors and representatives, (ix) the timing of new product announcements and releases of products by the Company or its competitors, including the Company's ability to design, introduce and manufacture new products on a timely and cost effective basis, (x) the size and timing acquisitions of business, products or technologies and fluctuations in the availability and cost of components and subassemblies, (xi) economic downturns in Asia and the general condition of the U.S. economy, which may negatively affect sales of the Company's products and the factors set forth under "Management's Discussion and Analysis of Financial Condition and Results of Operations - Risk Factors" in the 1997 Annual Report. on form 10-K. The Company undertakes no obligation to update forward looking statements made in this report to reflect events or circumstances after the date of this report or to update reasons why actual results could differ from those anticipated in such forward-looking statements. 13 NANOMETRICS INCORPORATED PART II OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A. Exhibits * Ex. 10.1 - Amendment to and Restatement of Salary Reduction Agreement Ex. 27 - Financial Data Schedule B. Reports on Form 8-K. None. - ---------------- * Ex. 10.1 is incorporated by reference to the Company's Form 10-Q filed with the Securities and Exchange Commission on November 10, 1998. 14 NANOMETRICS INCORPORATED SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NANOMETRICS INCORPORATED (Registrant) /s/ Vincent J. Coates - ----------------------------- Vincent J. Coates Chairman of the Board /s/ John Heaton - ----------------------------- John Heaton Chief Executive Officer /s/ Paul B. Nolan - ----------------------------- Paul B. Nolan Chief Financial Officer Dated: February 16, 1999 15 EX-10.1 2 SALARY REDUCTION AGREEMENT EX-27 3 FINANCIAL DATA SCHDULE
5 1,000 9-MOS Dec-31-1998 Jan-01-1998 Sep-30-1998 2,688 8,920 9,929 412 11,495 35,384 5,306 3,124 39,231 5,362 2,189 0 0 13,754 17,926 39,231 25,572 28,271 10,471 13,258 11,161 0 69 4,140 1,627 2,513 0 0 0 2,513 .29 .28
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