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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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.
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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
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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.
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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.
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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:
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* 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.
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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.
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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 cus