Back to GetFilings.com
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, 2001
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 26, 2002,
as reported by Nasdaq, was approximately $75,841,950. 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 26, 2002, 11,788,866 shares of the registrant's Common Stock were
outstanding.
NANOMETRICS INCORPORATED
FORM 10-K
YEAR ENDED DECEMBER 31, 2001
TABLE OF CONTENTS
PART I
Item 1. Business............................................................................................... I-1
Item 2. Properties............................................................................................. I-13
Item 3. Legal Proceedings...................................................................................... I-13
Item 4. Submission of Matters to a Vote of Security Holders.................................................... I-13
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters.................................. II-1
Item 6. Selected Consolidated Financial Data................................................................... II-1
Item 7. Management's Discussion and Analysis of Financial Condition and Results Of Operations.................. II-4
Item 7A. Quantitative and Qualitative Disclosures about Market Risk............................................. II-14
Item 8. Consolidated Financial Statements and Supplementary Data............................................... II-15
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure................... II-34
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. In some cases,
forward-looking statements can be identified by words such as "believe,"
"expect," "anticipate," "plan," "potential," "continue," or similar expressions.
Overview
We are a leader in the design, manufacture, marketing and support of thin film,
critical dimension and overlay 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 metrology systems use a broad spectrum of
wavelengths, high-sensitivity optics, proprietary software and patented
technology to measure the thickness, critical dimensions, optical constants and
uniformity of films and structures deposited on silicon and other substrates. In
addition, we have microscope and software-based technology for measuring the
relative alignment of adjacent thin film layers - a critical parameter in device
production.
Growth in the market for our products is driven by the increasing use of thin
film technology by manufacturers of electronic products, and more recently by
the increasingly widespread adoption of both Integrated Metrology and Advanced
Process Control (APC) by semiconductor manufacturers. With feature sizes
shrinking below 130nm, the need for very tight process tolerances as well as
productivity improvement from the billion-plus dollar factories are driving the
need for Integrated Metrology and APC. We have taken a leadership position in
innovating and designing an optical critical dimension (OCD) measurement system.
Our integrated OCD solution is increasingly being viewed not only as an enabling
technology for APC, but also a solution for critical dimension measurement in
that market segment previously dominated by e-beam-based SEM systems that are
now reaching their limit of performance for these smaller circuit dimensions.
The compact size and speed of this new, OCD technology enables the measurement
system to be fully integrated into the process tool thus providing a complete,
feed forward and feedback APC solution for wafer-to-wafer closed loop control.
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 and the need
for tighter process control and improved productivity has created significant
demand for our stand-alone and integrated metrology systems.
We offer a complete line of systems to address the metrology requirements of our
customers. Each of our systems is equipped with computerized mapping capability
for measurement, visualization and control of film uniformity, layer-to-layer
circuit alignment and critical dimensions. Our metrology systems can be
categorized as follows:
o stand-alone, fully automated systems for high-volume manufacturing
operations;
o integrated systems for integration into semiconductor processing
equipment that provide virtually immediate measurements and feedback
to improve process control and increase throughput; and
o tabletop systems used to provide manual or semi-automatic measurements
for 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.
I-1
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,
Samsung, Hyundai, IBM, Intel, TSMC and Hitachi.
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 decreased in price, contributing to this 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
[FLOWCHART OMITTED]
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:
o deposition;
o chemical mechanical planarization, known in our industry as CMP;
o photolithography; and
o etch.
I-2
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.
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, critical dimensions 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 developed and 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 metrology systems.
These trends include the following:
o 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 nterconnect 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.
o 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, low dielectric constant insulating materials that require
enhanced metrology solutions for the manufacturing process.
I-3
o 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.
o 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 fabrication process or 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, CVD, lithography and etch.
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,
critical dimension and overlay metrology systems for the semiconductor, flat
panel display and magnetic recording head industries. We offer a complete line
of systems to address a broad range of metrology requirements of our customers.
Our metrology systems can be categorized as follows:
o Stand-alone, fully automated systems used for the characterization and
measurement of thin films in high-volume manufacturing operations. We
offer a broad line of fully automated thin film thickness, critical
dimension and overlay 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. 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 critical dimensions and overlay
registration accuracy of successive layers of semiconductor patterns
on wafers in the photolithography process.
o Integrated systems are 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, lithography, 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,
CVD and etch tools.
I-4
o Tabletop systems are 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 measurement systems are equipped with computerized readout
capability for measurement, visualization and control of film uniformity and
thickness, critical dimensions and overlay. 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 also have introduced
new technology for the precise thin film measurements that are dictated by sub
0.13 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. Most
recently, in July 2001, we introduced a revolutionary optical critical
dimension (OCD) metrology system that is incorporated in the Applied
Materials' Transforma etch system for controlling critical dimensions. 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 Newport, a manufacturer of precision
robotic systems, and J.A. Woollam Company, a leading designer of
spectroscopic ellipsometer systems. In December 1999, we acquired inspection
and metrology technology from Phase Metrics, a data storage equipment
company, to augment our technology portfolio. In June 2001, we acquired a
key patent from IBM for critical dimension measurement, which covers the
development of our integrated OCD metrology system.
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 of the
United States, we are expanding our direct sales force in South Korea,
Taiwan and southeast Asia, 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.
I-5
Providing a Broad Portfolio of Metrology Systems and Technology. We offer a
comprehensive family of metrology systems that accurately measure thin
films, critical dimensions 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 have both integrated and
stand-alone optical critical metrology systems to measure critical dimensions of
patterns on semiconductor wafers. 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.
Technology
--------------------------------------------------------------
Optical
Maximum Critical Advanced
Substrate Spectroscopic Spectroscopic Dimension Overlay
System Market Size (mm) Reflectometry Ellipsometry Metrology Metrology
- ---------------- ------------------------------ --------------- --------------- -------------- --------------- ---------------
Automated
8000X Semiconductor, Magnetic Head 200 X X
8300X Semiconductor 300 X X
9100 Semiconductor, Magnetic Head 200 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
9000 Semiconductor 200 X
9000b Semiconductor 300 X
NanoOCD 9000 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 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.
I-6
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 spectroscopic ellipsometer for ultra-thin and multiple film stack
measurement applications. 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 for expanded measurement applications. This system can also
include a mini-environment enclosure and wafer load ports compatible with
industry standards. 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. Other 9100 options include a
standard mechanical interface with mini-environment enclosures for use in
ultra-clean manufacturing facilities. The system also features a 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.
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 established 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 9300is
The NanoSpec 9300is stand-alone, automated thin film measurement system is a
DUV-visible spectroscopic reflectometer based system that provides direct
recipe transfer to Nanometrics Integrated Metrology and stand-alone systems.
This system can also include a mini-environment enclosure and wafer load
ports compatible with industry standards. The 9300is also conforms to the
new industry standards for 300 millimeter wafer handling automation and
features a Windows NT software platform that conforms to the newly
established SEMI user interface standard. We developed the 9300is using the
same measurement technology from the integrated film thickness system
allowing direct transfer of measurement recipes between the integrated and
stand-alone film metrology systems.
I-7
NanoOCD 9300
The NanoOCD 9300 stand-alone, automated metrology system is an optical
critical dimension measurement system that provides direct recipe transfer
to Nanometrics Integrated Metrology and stand-alone systems. This system can
also include a mini-environment enclosure and wafer load ports compatible
with industry standards. The NanoOCD 9300 also conforms to the new industry
standards for 300 millimeter wafer handling automation and features a
Windows NT software platform that conforms to the newly established SEMI
user interface standard. We developed the NanoOCD 9300 using the same
measurement technology from the integrated OCD system allowing direct
transfer of measurement recipes between the integrated and stand-alone OCD
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 NanoOCS 7200 Series
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 7000, in June 1998. The recently introduced 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
measurement technology, in addition to spectroscopic reflectometry and optical
critical dimension measurement technologies. Depending on features and
technologies, our integrated metrology systems range in price from approximately
$80,000 to $295,000.
NanoSpec 9000
The NanoSpec 9000 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 9000 is
equipped with visible wavelength spectroscopic reflectometry. In 1999, the
9000 received a Photonics Circle of Excellence Award for innovation and
achievement in photonic technology.
NanoSpec 9000b
The NanoSpec 9000b is a 300 millimeter-based system that incorporates all
the features of the 9000. This system is interchangeable with industry
conforming load ports for simplified mechanical integration.
NanoOCD 9000
The NanoOCD 9000 is a 300 millimeter-based system that incorporates the
newly developed OCD technology for the measurement of critical dimension on
semiconductor wafers, and is designed for integration into semiconductor
wafer processing equipment. The system can be used in several critical
processing steps including photolithography and etch.
I-8
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 semi-automated
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 NanoSpec 6100 models feature semi-automatic wafer handling
or staging.
Customers
We sell our 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. 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. One customer, Applied Materials, represented 17.6% of our total
net revenues in 2001.
The following is a list of our top customers, based on revenues, during 2001:
Applied Materials Veonis
Samsung UMC
Seiko Epson Hitachi
IBM Chi Mei
1st Silicon Read-Rite
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. We have a direct sales presence in
South Korea, Taiwan and Japan. We use selected sales representatives and
distributors in the United States and 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%, 60.6%
and 64.8% of total net revenues for 1999, 2000 and 2001, respectively. Direct
exports of our metrology systems to foreign customers and shipments to our
subsidiaries require general export licenses. See note 11 of the notes to
consolidated financial statements for information regarding total net revenues
and long-lived assets of our foreign operations.
In order to raise market awareness of our products, we advertise in trade
publications, distribute promotional materials, publish technical articles,
conduct marketing programs, issue press releases regarding new products, work
with a public relations firm and participate in industry trade shows and
conferences.
I-9
Technology
We believe that our engineering expertise, technology acquisitions, supplier
alliances and short-cycle production strategies enable us to develop and offer
advanced solutions that address industry trends. By offering common metrology
platforms that can be configured with a variety of measurement technologies, our
customers can specify high performance systems not offered by other suppliers
or, as a cost saving measure, they can narrowly configure a system for a
specific application.
Spectroscopic Reflectometry. We pioneered the use of micro-spot
spectroscopic reflectometry for semiconductor film metrology in the late
1970s. Spectroscopic reflectometry uses multiple wavelengths (colors) of
light to obtain an array of data for analysis of film thickness and other
film parameters. Today's semiconductor manufacturers still depend on
spectroscopic reflectometry for most film metrology applications.
Reflectometry is the measurement of reflected light. For film metrology, a
wavelength spectrum in the visible region is commonly used. Light reflected
from the surfaces of the film and the substrate is analyzed using computers
and measurement algorithms. The analysis yields thickness information and
other parameters without contacting or destroying the film.
In the mid-1980s, we introduced a DUV reflectometer for material analysis.
In 1991, we were awarded a patent for the determination of absolute
reflectance in the ultraviolet region. This technology provides enhanced
measurement performance for thinner films and films stacked on top of one
another.
Spectroscopic Ellipsometry. Like reflectometry, ellipsometry is a non-
contact and non-destructive technique used to analyze and measure films. An
ellipsometer analyzes the change in a polarized beam of light after
reflection from a film's surface and interface. Our systems are
spectroscopic providing ellipsometric data at many different wavelengths.
Spectroscopic ellipsometry provides a wealth of information about a film,
yielding very accurate and reliable measurements. In general, ellipsometers
are used for thin films and complex film stacks, whereas reflectometers are
used for thicker films and stacks.
Optical Critical Dimension Technology. Our OCD technology is a patented
critical dimension measurement technology that is used to precisely
determine the dimensions on the semiconductor wafer that directly control
the resulting performance of the integrated circuit devices. This
non-destructive CD measurement technology is compatible with the current
0.13 micrometer manufacturing technology and is extendible to below future
0.1 micrometer requirements in both the photolithography and etch process
applications. OCD combines non-contact optical technology with extremely
powerful data analysis software to provide highly accurate measurements
results for line width, height and sidewall angles. This technology is
available in both standalone and integrated platforms.
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.
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 through
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 Massachusetts, Oregon, Pennsylvania,
Idaho, Vermont and Texas. We provide local service and spare parts in the United
Kingdom through our 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.
I-10
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 8.7% and 10.4% of total net revenues in 2000 and 2001,
respectively.
Backlog
As of December 31, 2001 our backlog was approximately $7.6 million. As of
December 31, 2000, our backlog was approximately $27.2 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. As only a portion of our revenues for any fiscal quarter is
represented by 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 Sensys which was recently acquired by Therma-Wave; and overlay measurement
products from KLA-Tencor Corporation, Accent Technologies 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
have entered into an agreement with J.A. Woollam Company for the purchase of the
spectroscopic ellipsometer components. Additionally, we use Newport as our
primary source of robotics components.
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
continue to add to our intellectual property, most recently in the areas of
critical dimension measurement and integrated metrology. 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 1999, 2000 and 2001 were $4.7 million, $9.2
million and $10.8 million, and represented 12.8%, 13.3% and 22.6% of total net
revenues, respectively.
I-11
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 1985 to 2001, will expire from 2002 to 2020. 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 counsel.
Employees
At December 31, 2001, we employed approximately 280 persons worldwide, including
81 in research and development, 55 in manufacturing and manufacturing support,
119 in marketing, sales and field service and 25 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, 2001:
Name Age Position
Vincent J. Coates........................... 76 Chairman of the Board, Secretary
John D. Heaton.............................. 41 President, Chief Executive Officer and Director
Paul B. Nolan............................... 46 Vice President and Chief Financial Officer
Roger Ingalls Jr............................ 40 Vice President and Director of Sales
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. John 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. 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, a semiconductor manufacturer, from 1978 to 1990
prior to joining us.
Mr. Paul 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, an international communications equipment company, prior to
joining us.
Mr. Roger Ingalls has been employed by us since March 1995 and was elected Vice
President in October 1997. During his employment with us, Mr. Ingalls has served
as U.S. Sales and Product Manager, and most recently Director of North American
Sales. Prior to joining us, he served as a sales engineer for Nikon Inc., a
photo equipment manufacturer, from March 1993 to March 1995.
I-12
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, Singapore and Taiwan. Rent
expense for our facilities was approximately $302,000 for 2001.
Through our Japanese subsidiary, we own a 50,000 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.
Through our Korean subsidiary, we built in 2001 a 39,000 square foot facility in
Pyungtaek, Korea. This facility is utilized by our Korean subsidiary for sales,
service, engineering and manufacturing.
We are not now operating at full capacity in our current facilities, which are
adequate for our business and will continue to meet our utilization needs into
the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending against us. We could become
involved in litigation from time to time relating to claims arising out of our
ordinary course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter ended
December 31, 2001.
I-13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Our common stock is quoted on the Nasdaq National Market under the symbol
"NANO." The following table sets forth, for the periods indicated, the high and
low sale prices per share of our common stock as reported on the Nasdaq National
Market. These quotations represent prices between dealers and do not include
retail markups, markdowns or commissions and may not necessarily represent
actual transactions.
High Low
---- ---
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
2001
First Quarter........................................... $22.31 $12.38
Second Quarter.......................................... $32.95 $13.50
Third Quarter........................................... $36.66 $13.00
Fourth Quarter.......................................... $27.65 $14.71
On February 26, 2002, the last reported sale price of our common stock on the
Nasdaq National Market was $16.15 per share. As of December 31, 2001, there were
approximately 122 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.
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, 1999, 2000 and 2001, and the consolidated balance sheet data as of December
31, 2000 and 2001, 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, 1997 and
1998, and the consolidated balance sheet data as of December 31, 1997, 1998 and
1999, 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,
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
(In thousands, except per share data)
Consolidated Statement of Operations Data:
Net revenues:
Product sales...................................... $32,767 $29,718 $32,162 $63,468 $42,653
Service............................................ 3,890 3,546 4,246 6,023 4,931
------- ------- ------- ------- -------
Total net revenues.............................. 36,657 33,264 36,408 69,491 47,584
------- ------- ------- ------- -------
Costs and expenses:
Cost of product sales.............................. 12,092 13,002 14,606 25,082 17,949
Cost of service.................................... 3,632 3,669 4,560 6,022 5,406
Research and development........................... 2,986 4,206 4,658 9,238 10,760
Acquired in-process research and development ...... -- 1,421 -- -- --
Selling............................................ 6,050 5,728 5,871 10,313 9,523
General and administrative......................... 2,765 2,828 2,973 4,258 4,177
------- ------- ------- ------- -------
Total costs and expenses........................ 27,525 30,854 32,668 54,913 47,815
------- ------- ------- ------- -------
Income (loss) from operations........................ 9,132 2,410 3,740 14,578 (231)
------- ------- ------- ------- -------
Other income (expense):
Interest income.................................... 535 572 662 4,129 2,576
Interest expense................................... (110) (108) (180) (76) (86)
Other, net......................................... (175) 64 94 (150) (517)
------- ------- ------- ------- -------
Total other income, net......................... 250 528 576 3,903 1,973
------- ------- ------- ------- -------
Income before income taxes........................... 9,382 2,938 4,316 18,481 1,742
Provision for income taxes........................... 3,625 1,108 1,682 5,942 782
------- ------- ------- ------- -------
Income before cumulative effect of change in
accounting principle.............................. $5,757 $1,830 $2,634 $12,539 $960
Cumulative effect of change in revenue
recognition principle (SAB 101)................... - - - (1,364)* -
------- ------- ------- ------- -------
Net Income........................................... $5,757 $1,830 $2,634 $11,175 $960
======= ======= ======= ======= =======
Basic net income (loss) per share:
Income before cumulative effect of
change in accounting principle.................... $0.69 $0.21 $0.30 $1.14 $0.08
Cumulative effect of change in revenue
recognition principle (SAB 101).................... - - - (0.12)* -
------- ------- ------- ------- -------
Net income......................................... $0.69 $0.21 $0.30 $1.02 $0.08
======= ======= ======= ======= =======
Diluted net income (loss) per share:
Income before cumulative effect of
change in accounting principle.................... $0.65 $0.20 $0.28 $1.06 $0.08
Cumulative effect of change in revenue
recognition principle (SAB 101).................... - - - (0.12)* -
------- ------- ------- ------- -------
Net income......................................... $0.65 $0.20 $0.28 $0.94 $0.08
======= ======= ======= ======= =======
* Refer to discussions on SAB 101 in Item 7. "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
II-2
Years Ended December 31,
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
Shares used in per share computation:
Basic.............................................. 8,325 8,635 8,829 10,986 11,691
===== ===== ===== ====== ======
Diluted............................................ 8,820 9,041 9,393 11,845 12,161
===== ===== ===== ====== ======
December 31,
-------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
(In thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term investments $13,251 $11,431 $18,140 $69,788 $47,227
Working capital............................................ 28,653 30,621 36,021 92,420 80,171
Total assets............................................... 36,243 39,305 46,410 144,796 142,355
Debt obligations, less current portion..................... 2,568 2,496 2,288 4,236 3,314
Total shareholders' equity................................. 28,528 32,010 38,155 127,009 129,845
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. In some cases, forward-looking statements can
be identified by words such as "believe," "expect," "anticipate," "plan,"
"potential," "continue" or similar expressions. 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 occurrence 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 three years that have enabled us to further participate
in these markets. These changes include:
o becoming an original equipment manufacturer, or OEM, of metrology
systems that are integrated into various types of semiconductor
processing equipment;
o the development of new products that can be used for 300 millimeter
wafers and chemical mechanical planarization;
o an increased emphasis on product development, manufacturing and direct
sales in Japan and Korea;
o a shift to direct sales from third-party representatives in Asia and
the United States;
o a decision to outsource certain system components such as robotics,
enabling us to leverage our technical resources; and
o 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, 2001, we derived 89.6% of our total net revenues from product
sales and 10.4% 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 regarding our revenue recognition policy.
Critical Accounting Policies
Revenue Recognition - Revenues are recognized when persuasive evidence of an
arrangement exists, delivery has occurred or services have been rendered, the
price is fixed and determinable and collectibility is reasonably assured. For
product sales, this generally occurs at the time of shipment, and for revenues
from service work, this generally occurs when the work is performed. Revenues
from service contracts are recognized ratably over the period under contract. We
sell the majority of our products with a one-year repair or replacement warranty
and record a provision for estimated claims at the time of sale.
II-4
In certain geographical regions where risk of loss and title transfers upon
customer acceptance, payments received are recorded as deferred revenue and
recognized as revenue upon customer acceptance.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB 101), Revenue Recognition in Financial Statements,
which summarizes certain views of the SEC staff in applying generally accepted
accounting principles to revenue recognition in the financial statements. SAB
101 clarified delivery criteria, which affected our revenue recognition policy.
We applied the provisions of SAB 101 in the quarter ended December 31, 2000,
retroactive as of the beginning of the fiscal year. Accordingly, the
accompanying consolidated statements of income for the year ended December 31,
2000 and 2001, is reflected in accordance with SAB 101. The impact of adoption
of SAB 101 in fiscal 2000 resulted in $7.8 million of revenue being deferred to
future periods. In addition, the impact of adoption of SAB 101 resulted in a
cumulative effect of $1.4 million resulting from the recognition of certain
historic 1999 revenues in 2000.
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, 1999, 2000 and
2001:
Years Ended December 31,
------------------------
1999 2000 2001
---- ---- ----
Net revenues:
Product sales............................................................ 88.3% 91.3% 89.6%
Service.................................................................. 11.7 8.7 10.4
----- ----- -----
Total net revenues.................................................... 100.0 100.0 100.0
----- ----- -----
Cost and expenses:
Cost of product sales.................................................... 40.1 36.1 37.7
Cost of service.......................................................... 12.5 8.7 11.4
Research and development................................................. 12.8 13.3 22.6
Selling.................................................................. 16.1 14.8 20.0
General and administrative............................................... 8.2 6.1 8.8
----- ----- -----
Total cost and expenses............................................... 89.7 79.0 100.5
----- ----- -----
Income (loss) from operations................................................ 10.3 21.0 (0.5)
----- ----- -----
Other income (expense):
Interest income.......................................................... 1.8 5.9 5.4
Interest expense......................................................... (0.5) (0.1) (0.2)
Other, net............................................................... 0.3 (0.2) (1.1)
----- ----- -----
Total other income, net............................................... 1.6 5.6 4.1
----- ----- -----
Income before income taxes................................................... 11.9 26.6 3.6
Provision for income taxes................................................... 4.7 8.6 1.6
----- ----- -----
Income before cumulative effect of change in accounting principle............ 7.2 18.0 2.0
Cumulative effect of change in revenue recognition principle (SAB 101)....... - (2.0) -
----- ----- -----
Net income................................................................... 7.2% 16.0% 2.0%
===== ===== =====
II-5
Years ended December 31, 1999, 2000 and 2001
Total net revenues. Total net revenues decreased 31.5% from $69.5 million in
2000 to $47.6 million in 2001. Product sales decreased 32.8% from $63.5 million
in 2000 to $42.7 million in 2001. Unit sales of automated, integrated and
tabletop systems were each down from their 2000 levels. The decrease in product
sales resulted from reduced demand for semiconductor process control metrology
equipment in 2001, especially in the U.S. and Asia. We believe that this reduced
demand was attributable primarily to overcapacity in the semiconductor industry
as well as the economic slowdown in the U.S. and Japan in 2001. Service revenue
decreased 18.1% from $6.0 million in 2000 to $4.9 million in 2001. The decrease
in service revenue is primarily attributable to lower sales of parts and
services in the U.S. and Asia in 2001 due in part to the decline in the
semiconductor market discussed above. 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. However, this was offset by the change in accounting principle (SAB 101)
which 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. International revenues, which includes sales by our foreign
subsidiaries, constituted approximately 60.9%, 60.6% and 64.8% of total net
revenues for 1999, 2000 and 2001, respectively.
Cost of product sales. Cost of product sales as a percentage of product sales
increased from 39.5% in 2000 to 42.1% in 2001 primarily because of lower sales
volumes in 2001 resulting in higher per unit manufacturing costs along with
increased manufacturing capacity added to our U.S. facility in 2001. 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% to 39.5% in 2000.
Cost of service. Cost of service as a percentage of service revenue increased
from 100.0% in 2000 to 109.6% in 2001 primarily as a result of lower service
sales in the U.S and Asia and the addition of service personnel in Singapore.
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.
Research and development. Research and development expenses increased 16.5% from
$9.2 million in 2000 to $10.8 million in 2001 as a result of additional
headcount and higher materials expenses used in the development of new products
in 2001. 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. 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 2001, research and development
expenses represented 22.6% of total net revenues, compared to 13.3% in 2000 and
12.8% in 1999.
Selling. Selling expenses decreased 7.7% from $10.3 million in 2000 to $9.5
million in 2001 primarily because of lower sales and related expenses including
commissions in 2001. 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. In 2001, selling expenses
represented 20.0% of total net revenues, compared to 14.8% in 2000 and 16.1% in
1999.
General and administrative. General and administrative expenses decreased 1.9%
from $4.3 million in 2000 to $4.2 million in 2001. 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.
During 2001, general and administrative expenses represented 8.8% of total net
revenues, compared to 6.1% in 2000 and 8.2% in 1999.
Total other income, net. Total other income, net decreased 49.4% from $3.9
million in 2000 to $2.0 million in 2001 primarily due to lower interest income
in 2001. 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.
II-6
Provision for income taxes. Our effective income tax rate increased from 32.2%
in 2000 to 44.9% in 2001 primarily due to profits earned by our Japanese
subsidiary that could not be offset against losses from our other subsidiaries.
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. The effective income tax rates in
2001 and 1999 exceeded the U.S. statutory rate due primarily to foreign tax
provision higher than U.S. rates and changes in the valuation allowance
partially offset by the realization of foreign sales corporation benefit while
in 2000 the effective rate was lower than the U.S. statutory rate due primarily
to utilization of tax credits, higher foreign sales corporation benefit and
change in valuation allowance offset by higher state income tax.
Cumulative effect of change in revenue recognition principle (SAB 101). The
cumulative effect of $1.4 million in 2000 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.
Liquidity and Capital Resources
On December 31, 2001, our cash, cash equivalents and short-term investments
totaled $47.2 million as compared to $69.8 million at December 31, 2000. These
funds are invested primarily in U.S. Treasury Bills. Our working capital of
$80.2 million at December 31, 2001 decreased from $92.4 million at December 31,
2000. We believe that 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.
Operating activities during 2001 used cash of $7.1 million primarily from
increased inventory and lower other current liabilities offset partially by
lower accounts receivable resulting from reduced sales levels in 2001. Investing
activities provided $36.3 million due primarily to net sales of short-term
investments of $52.9 million offset to some extent by $13.2 million in capital
expenditures used to improve our facilities and to expand our manufacturing
capacity. Financing activities provided cash of $501,000 primarily from the sale
of shares under the employee stock purchase and option plans offset to some
extent by the net repayment of debt obligations related to mortgages in Japan.
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 related to mortgages in Japan.
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 related to mortgages in Japan of $1.3 million.
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 which may affect our
cash position and working capital balances.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) 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 was effective for us beginning in
the first quarter of fiscal year 2001. The adoption of this statement did 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
II-7
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."
In June 2001, the FASB issued SFAS No. 141, Business Combinations and SFAS No.
142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that all
business combinations initiated after June 30, 2001 be accounted for under the
purchase method and addresses the initial recognition and measurement of
goodwill and other intangible assets acquired in a business combination. SFAS
No. 142 addresses the initial recognition and measurement of intangible assets
acquired outside of a business combination and the accounting for goodwill and
other intangible assets subsequent to their acquisition. SFAS No. 142 provides
that intangible assets with finite useful lives be amortized and that goodwill
and intangible assets with indefinite lives will not be amortized, but will
rather be tested at least annually for impairment. Nanometrics will adopt SFAS
No. 142 for its fiscal year beginning January 1, 2002. Upon adoption of SFAS No.
142, Nanometrics will stop the amortization of goodwill with an expected net
carrying value of $1,181,000 at the date of adoption and annual amortization of
$288,000 that resulted from business combinations completed prior to the
adoption of SFAS No. 141. Goodwill acquired subsequent to June 30, 2001 will not
be amortized.
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
Accounting for the impairment or Disposal of Long-Lived Assets. This statement
retains a majority of the requirements of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and
addresses certain implementation issues. SFAS No. 144 is effective for
Nanometrics' fiscal year beginning January 1, 2002. Although Nanometrics has not
fully assessed the implications of SFAS NO. 144, Nanometrics does not believe
the adoption of this statement will have a significant impact on the
consolidated financial position, results of operations or cash flows.
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 that we face. 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 experiencing 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 60.6%
and 64.8% of our total net revenues in 2000 and 2001, respectively. We
maintain facilities in Japan and Korea. We anticipate that international
sales will continue to account for a significant portion of our revenues.
II-8
Our reliance on international sales and operations exposes us to foreign
political and economic risks, including:
o political, social and economic instability;
o trade restrictions and changes in tariffs;
o import and export license requirements and restrictions;
o difficulties in staffing and managing international operations;
o disruptions in international transport or delivery;
o fluctuations in currency exchange rates;
o difficulties in collecting receivables; and
o 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 55.0% and
52.8% of our total net revenues in 2000 and 2001, 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 past year which has
adversely affected our sales to semiconductor manufacturers located in these
regions and 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 2001, sales to Applied
Materials accounted for 17.6% of our total net revenues. In 2000, sales to
Applied Materials, Hyundai and TSMC accounted for 20.5%, 11.8% and 10.0% of
our total net revenues. 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 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.
II-9
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:
o changes in customer demand for our systems;
o economic conditions in the semiconductor, flat panel display and
magnetic recording head industries;
o the timing, cancellation or delay of customer orders and shipments;
o market acceptance of our products and our customers' products;
o competitive pressures on product prices and changes in pricing by our
customers or suppliers;
o 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;
o the timing of acquisitions of businesses, products or technologies;
o the levels of our fixed expenses, including research and development
costs associated with product development, relative to our revenue
levels; and
o 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 and Newport 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:
o we may be unable to obtain an adequate supply of required components;
o we have reduced control over pricing and the timely delivery of
components and subassemblies; and
o 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-10
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 long
periods of 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 that it
takes for us to complete a sale depends upon many factors, including:
o the efforts of our sales force and our independent sales
representatives and distributors;
o the complexity of the customer's metrology needs;
o the internal technical capabilities and sophistication of the
customer;
o the customer's budgetary constraints; and
o 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 that 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 $300,000 per system and our tabletop metrology systems range in price
from approximately $50,000 to $200,000 per system. Accordingly, a small
change in the number of systems we sell will cause significant changes in
our operating results.
II-11
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.
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 attract 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.
There can be no assurance that our new products do not infringe any valid
intellectual property rights.
II-12
Our intellectual property may infringe or be infringed upon by third parties
despite our efforts to protect it, which could 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.
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 ou