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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2002
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 (I.R.S. Employer Identification No.)
of incorporation or organization)
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 25, 2003,
as reported by Nasdaq, was approximately $16,150,446. 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 because 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.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
YES [ ] NO [X]
As of June 28, 2002, the aggregate market value of the Common Stock of the
registrant held by non-affiliates was approximately $73,877,364.
As of February 25, 2003, 12,006,641 shares of the registrant's Common Stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's definitive proxy statement, to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A of the
Securities Exchange Act of 1934 in connection with the registrant's annual
meeting of shareholders to be held on May 14, 2003, are incorporated by
reference in Part III of this Form 10-K.
NANOMETRICS INCORPORATED
FORM 10-K
YEAR ENDED DECEMBER 31, 2002
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS.....................................................................................................I-1
ITEM 2. PROPERTIES..................................................................................................I-13
ITEM 3. LEGAL PROCEEDINGS...........................................................................................I-14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........................................................I-14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.......................................II-1
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA........................................................................II-1
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......................II-4
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.................................................II-15
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................................................II-16
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.......................II-36
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.........................................................III-1
ITEM 11. EXECUTIVE COMPENSATION.....................................................................................III-1
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS.............III-1
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................................................III-1
PART IV
ITEM 14. CONTROLS AND PROCEDURES.....................................................................................IV-1
ITEM 15. 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 future results of operations. Our
actual results may differ materially from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed below and in "Management's Discussion
and Analysis of Financial Condition and Results of Operations." The
forward-looking statements contained herein are made as of the date hereof, and
we assume no obligation to update such forward-looking statements or to update
reasons actual results could differ materially from those anticipated in such
forward-looking statements. When we use words such as "believe," "expect,"
"anticipate" or similar expressions, we are making forward-looking statements.
Overview
We are a leader in the design, manufacture, marketing and support of thin film,
critical dimension, surface defect inspection 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, surface
defects, 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 (overlay) of adjacent thin film
layers - a critical parameter in device production.
We have made several strategic changes in our business over the past few years
that have enabled us to further participate in these industries. 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;
o The development of a vertical integration strategy for our integrated
metrology product line; and
o The development of new technologies for advanced lithography.
Demand for our products is driven by the increasing use of thin film technology
by manufacturers of electronic products and, more recently, by the increased
adoption of both integrated metrology and Advanced Process Control (APC) by
semiconductor manufacturers. With feature sizes shrinking below 100 nanometers,
well below the wavelength of light, the need for very tight process tolerances
as well as productivity improvements in semiconductor fabrication, or fabs, are
driving the need for integrated metrology and APC. We have become a leader 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 as a solution for critical dimension measurement in
a market segment previously dominated by e-beam based scanning electron
microscope (SEM) systems that are now reaching their sensitivity limit 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. In addition, new process technologies
such as copper interconnects require that new measurement technologies be
developed in order to keep pace with these latest metrology demands. Our
integrated Copper Laser Profiler (CLP) represents a unique approach to the
problem of determining the amount of copper material removed during the Chemical
Mechanical Planarization (CMP) process. The very small footprint and throughput
of this new CLP system was achieved with the development of several new enabling
technologies for integrated metrology, including an edge-gripping wafer handling
stage with integral pre-aligner. A version of this stage was also developed for
operation within a process tool's vacuum chamber, eliminating the need to expose
the wafer's sensitive films to ambient air. This improves the throughput of the
tool during measurement and eliminates the potential damage due to excessive
wafer handling as well as exposure to outside sources of contamination. We also
announced a new Universal
I-1
Defect Inspection (UDI) system. The NanoUDI 9300, is a fully-automated 300
millimeter tool for defect and contamination detection on a wide variety of
films and surfaces. The system combines high efficiency illumination and high
resolution optics with sophisticated image processing to detect and classify
particles and defects in the sub-micron range.
Many types of thin films are used in the manufacture of several 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 growth in the sale and use of these products and the need for
tighter process control and improved productivity has created demand for our
standalone 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 almost 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, or overlay, of successive film layers, relative
to each other, across the wafer is critical for device performance and favorable
production yields.
We have been a pioneer in the field of thin film measurement and have been
instrumental in the development of many innovations for over two decades. We
have been selling metrology systems since 1977 and have an extensive installed
base with industry leading customers worldwide, including Applied Materials
Inc., Samsung, Hynix Semiconductor Inc., IBM, Intel Corporation, Micron
Technology, Inc., TSMC Ltd. and Hitachi Ltd.
Industry Characteristics
Growth
Moore's Law which, simply stated, predicts a doubling of integrated circuit
performance with a 50% reduction in manufacturing costs every 18 months, is an
important factor in determining factory investment in the semiconductor
industry. Two other important industry drivers are: (i) as users of
semiconductor chips demand increasingly higher performance, chip designs become
increasingly complex, requiring more complicated manufacturing processes and
(ii) the requirement for continually decreasing chip costs. The semiconductor
equipment industry has experienced cyclical growth with a compounded annual
growth rate of approximately 15-17% over the past 20 years. Recently, the
semiconductor industry has experienced a cyclical downturn, which began in the
fourth quarter of 2000 and has continued through 2001 and 2002. However, the
metrology market is expected to grow more rapidly than the overall semiconductor
equipment market. We believe that the convergence of 300 millimeter, copper
conductors and fast, sub-100 nanometer architecture, will drive the demand for
new metrology solutions, in which Nanometrics specializes.
In the past, demand for Internet access, personal computers, telecommunications,
and new consumer electronic products and services has fueled growth of the
semiconductor, data storage and flat panel display industries. New
communications technologies and Internet applications will likely remain as the
primary drivers in the near-term for the semiconductor industry. We believe that
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 our 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.
I-2
Semiconductor Manufacturing Process
Semiconductors are fabricated by a series of process steps on a wafer substrate
made of silicon or other material. Our thin film, critical dimension, and
overlay metrology and defect inspection systems can be used at many points
during the fabrication process to monitor and measure circuit dimensions,
layer-to-layer registration, film uniformity as well as material 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 imaging and overlay; and
o Etching of circuit elements.
Deposition. Deposition refers to placing layers of insulating or conducting
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 multiple patterns of small features on the
resulting smoothed 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 correctly polished and
achieved.
Photolithography. Photolithography is the process step that projects the
patterns of the circuits on the chip. A wafer is pre-coated with photoresist, a
light sensitive film, that must have an accurate thickness and uniformity for
exposure. Photolithography involves the projection of integrated circuit
patterns onto the photoresist after which, the photoresist is developed, leaving
unexposed areas available for etching. In order to precisely control the
photolithography process, it is necessary to verify reflectivity, film
thickness, critical dimensions and overlay registration.
Etch. Etch is a dry or wet process for selectively removing unwanted areas that
have been deposited on the surface of a wafer. A film of photoresist protects
material that needs to be left untouched by the etch to make up the circuits.
Thin film metrology systems are required to verify precision of material removal
and critical dimension achievement.
Before and after deposition, CMP, photolithography and etch, the wafer surface
is measured to determine the quality of the film or pattern and to find defects.
Measurements taken to ensure process uniformity 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 conducting 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.
I-3
Increased Use of Metrology in Manufacturing
Continually rising wafers costs are forcing semiconductor manufacturers to
re-evaluate their manufacturing strategies at all levels, from individual
process steps to fabwide process optimization. Many major semiconductor
manufacturers are adopting feed-forward and feedback of film thickness and
critical dimensions or CDs based on real-time data from metrology systems. Major
benefits of these new metrology strategies are higher manufacturing efficiencies
from reduced rework, reduced headcount to perform at the same quality level and
increased device performance. Additional benefits include device speed matching
and more precise control of the overall manufacturing process.
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 were required 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. These 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 offer a complete line of metrology systems to address the broad range of
metrology requirements of our customers. Our metrology systems can be
categorized as:
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, defect inspection 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 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.
o Tabletop systems used to manually or semi-automatically measure thin
films in engineering and low-volume production environments. We have
been a pioneer in and believe that 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.
I-4
Each of our measurement systems is 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 were one of the
first companies to ship fully automated thin film thickness measurement systems
for 300 millimeter wafers. We have also introduced new technology for the
precise thin film measurements that are dictated by sub-0.13 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 solutions 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 integrated process metrology
systems into wafer processing equipment. We supply integrated metrology
systems for Applied Materials' Mirra Mesa(TM) and 300mm Reflexion(TM) CMP
systems and the Producer QA and SE (TM) CVD systems. Recently we introduced
a revolutionary optical critical dimension (OCD) metrology system that is
incorporated in the Applied Materials' Transforma(TM) 300mm etch system for
controlling critical dimensions. The integrated metrology sales group was
established to focus on sales of integrated metrology products to both OEMs
and end-users. The integrated metrology sales group works together with our
traditional sales channels of representatives and direct employees.
Maintaining Technology Leadership. We are committed to developing advanced
metrology systems that meet the requirements of advanced semiconductor,
magnetic head and flat panel display manufacturing technology. We have an
extensive base of proprietary technology and expertise in optics, software
and systems integration. We have chosen to reduce our dependence on outside
suppliers by taking control of the manufacturing of the critical components
of our metrology systems. Key enabling technologies, such as our recently
developed edge-gripping atmospheric and vacuum wafer handling stages allow
us to provide unique products with exceptionally high quality and low
manufacturing costs to our OEM customers. We have supplemented our
capabilities by establishing strategic relationships to leverage our
technical resources and strengthen our product offerings. One such
relationship is with J.A. Woollam Company, a leading designer of
spectroscopic ellipsometer systems.
Broadening Our Technology Portfolio. We continue to add a wide range of new
measurement technologies to our expanding base of intellectual property.
The recently introduced copper metal profiler for CMP process control
combines optical profilometry with our highly successful reflectometry
technology to monitor metal removal during the chemical mechanical
planarization process. This metrology is a key requirement for the copper
damascene process, which replaces the current subtractive aluminum process
on newer semiconductor devices. We also entered the particle and defect
inspection market with the introduction of our Universal Defect Inspection
(UDI) technology. This technology has applications not only for inspection
of semiconductor wafers but also for flat panel displays for the purpose of
detecting killer defects early in the process before they cause
catastrophic yield loss.
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
current customers.
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 sources
outside of the United States, we have expanded our direct sales force in
Europe, South Korea, Taiwan and China, and will continue to expand into
additional territories as customer requirements dictate. We use selected
sales representatives and distributors in other countries in southeast Asia
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
Addressing Multiple Markets. There are broad applications of our technology
beyond the semiconductor industry. We offer a comprehensive family of
metrology systems that accurately measure thin films, critical dimensions
and overlay registration used in the semiconductor manufacturing process.
Newer products inspect for particles and defects and monitor critical metal
loss during the copper removal process. 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 that 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 (SR). Some of our systems provide complementary
spectroscopic ellipsometry (SE) to measure the thickness and optical
characteristics of films on a variety of substrates. In addition, we have both
integrated and standalone 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.
- ---------------------- ------------------------ ------------------------ ------------------------- -----------------------
System Market Substrate Size Applications Technology
- ---------------------- ------------------------ ------------------------ ------------------------- -----------------------
Automated
- ---------------------- ------------------------ ------------------------ ------------------------- -----------------------
8000X Semiconductor, 75-200mm CVD, CMP, Etch, Litho, SR, SE
Magnetic Head 200/300mm Film Thickness
- ---------------------- ------------------------ ------------------------ ------------------------- -----------------------
8300X Semiconductor, 200mm CVD, CMP, Etch, Litho, SR, SE
Magnetic Head 300mm Film Thickness
- ---------------------- ------------------------ ------------------------ ------------------------- -----------------------
9100 Semiconductor, 75-200mm CVD, CMP, Etch, Litho, SR, SE
Magnetic Head Film Thickness
- ---------------------- ------------------------ ------------------------ ------------------------- -----------------------
9200 Semiconductor 150mm CVD, CMP, Etch, Litho, SR
200mm Film Thickness
- ---------------------- ------------------------ ------------------------ ------------------------- -----------------------
9300 Semiconductor 200mm CVD, CMP, Etch, Litho, SR, SE, OCD,
300mm Film Thickness UDI, CLP
- ---------------------- ------------------------ ------------------------ ------------------------- -----------------------
5500/6500 Flat Panel Display 550mm x 650mm, Film Thickness SR
960mm x 1100mm
- ---------------------- ------------------------ ------------------------ ------------------------- -----------------------
7210 Semiconductor 200mm Overlay Imaging
- ---------------------- ------------------------ ------------------------ ------------------------- -----------------------
Integrated
- ---------------------- ------------------------ ------------------------ ------------------------- -----------------------
9000 Semiconductor 200mm CVD, CMP, SR
Film Thickness
- ---------------------- ------------------------ ------------------------ ------------------------- -----------------------
9000i Semiconductor 200mm CVD, CMP, Etch, SR, OCD
300mm Film Thickness, CD
- ---------------------- ------------------------ ------------------------ ------------------------- -----------------------
9000b Semiconductor 300mm CVD, CMP, Etch, SR
Film Thickness
- ---------------------- ------------------------ ------------------------ ------------------------- -----------------------
9010 Semiconductor 300mm CMP, SR, CLP
Film Thickness
- ---------------------- ------------------------ ------------------------ ------------------------- -----------------------
9020 Semiconductor 200mm Etch, OCD
Vacuum CD
- ---------------------- ------------------------ ------------------------ ------------------------- -----------------------
Table Top
- ---------------------- ------------------------ ------------------------ ------------------------- -----------------------
3000 Semiconductor, 75mm Film Thickness SR
Magnetic Head 150mm
- ---------------------- ------------------------ ------------------------ ------------------------- -----------------------
6100 Semiconductor 75mm Film Thickness SR
150mm
200mm
I-6
We introduced a number of new standalone and integrated products to the market
in 2002. These products include the following which are detailed in the sections
below:
o NanoUDI 9300 standalone wafer particle and defect inspection system
o 9010 integrated metrology platform for atmospheric metrology
o 9020 integrated metrology platform for in-vacuum metrology
o NanoCLP 9010 optical laser profiler for copper metal loss measurement
In addition, we introduced a wireless network configuration of our NanoNet
technology, as well as a wafer stress management option on our NanoSpec
thin-film analysis systems. Our subsidiaries in Japan and Korea also unveiled a
new flat panel display product design, as well as a 300 millimeter aerial
imaging overlay product design.
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 $900,000,
depending on substrate sizes, measurement technologies, material handling
interfaces and software options.
NanoSpec 8000X
The NanoSpec 8000X stand-alone, automated thin film measurement system is
capable of handling wafers ranging in size from 75 to 200 millimeters in
diameter. The 8000X is the basic system configuration, while the 8000XSE
includes a 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 to allow 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.
9300 Standalone Automation Platforms
The 9300 stand-alone wafer automation platform serves as a common,
universal building block and forms the basis for several fully automated
metrology systems.
I-7
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 to allow easy
transfer of measurement recipes between the integrated and stand-alone film
metrology systems.
NanoUDI 9300
The NanoUDI 9300 stand-alone, high throughput, full-wafer defect inspection
system detects and measures particles and defects as small as 0.1 microns
on 300 millimeter diameter semiconductor wafers. The system was first
introduced at SEMICON West in July 2002 and is built on the common 9300
wafer automation platform that includes the new industry standards for 300
millimeter wafer handling. The system also features a Windows NT software
platform that conforms to the newly established SEMI user interface
standard.
NanoOCD 9300
The NanoOCD 9300 stand-alone, automated metrology system is an optical
critical dimension measurement system that provides direct recipe transfer
to our integrated metrology and standalone 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 to allow 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
also is capable of measuring precisely 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 Metra 7000, in June 1998. The recently introduced
NanoOCS 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 $300,000.
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
NanoSpec 9000 is equipped with visible wavelength spectroscopic
reflectometry. The 9000 received a Photonics Circle of Excellence Award for
innovation and achievement in photonic technology.
I-8
NanoSpec 9000i
The NanoSpec 9000i is a 300mm version of the highly successful NanoSpec
9000. This metrology platform can be integrated into multiple wafer film
process steps including metal deposition, CMP, CVD, photolithography and
etch. The 9000i is also equipped with visible wavelength spectroscopic
reflectometry and can be extended into deep UV wavelengths. The 9000i will
also support the newly developed optical critical dimension (OCD)
technology for the measurement of critical dimensions on semiconductor
wafers. The system is designed for integration into semiconductor wafer
processing equipment and is used in several critical processing steps
including photolithography and etch.
NanoSpec 9000b
The NanoSpec 9000b is a BOLTS compatible, 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.
9010 Integrated Metrology Platform
The 9010 integrated metrology platform is an advanced 300 millimeter
product that supports multiple measurement technologies. The first product
offered in the series is the NanoCLP 9010 is a laser-based, optical
profiling and reflectance measurement system that incorporates the newly
developed Copper Laser Profiler (CLP) technology for the measurement of
copper metal loss during chemical mechanical planarization on semiconductor
wafers and is designed for integration into semiconductor wafer processing
equipment. The system also incorporates our unique 300 millimeter
edge-gripping wafer stage with an integral pre-aligner and was introduced
at SEMICON West in July 2002.
9020 Integrated Metrology Platform
The 9020 integrated metrology platform is an advanced, vacuum based
metrology product that supports multiple measurement technologies. The
product was first announced at SEMICON West in July, 2002 for the NanoOCD
9020, a 200 millimeter-based system that incorporates our newly developed
edge-gripping vacuum wafer stage and OCD technology for the measurement of
critical dimensions on semiconductor wafers. The system is designed for
integration into the vacuum chamber of semiconductor wafer etch processing
equipment.
Tabletop Systems
Our tabletop systems are used primarily in low-volume production environments
and in engineering labs for which automated handling and high throughput are not
required. Our tabletop product line encompasses both manual and semiautomated
models and includes systems for both film thickness and critical dimension
measurements. Our tabletop system prices range from approximately $50,000 to
$200,000, depending primarily on the degree of automation and software options
purchased.
NanoSpec 3000 and 6100
The NanoSpec tabletop systems provide a broad range of thin film
measurement solutions at a lower entry price point. The NanoSpec 3000 is a
basic, manual system while the 6100 models feature semiautomatic wafer
handling or staging.
Customers
We sell our metrology systems worldwide to many of the major semiconductor, flat
panel display and magnetic recording head manufacturers and equipment suppliers,
as well as to producers of silicon wafers and photomasks. The majority of our
systems are sold to customers located in the United States, Asia and Europe.
Three customers, Applied Materials, Hyundai and TSMC, represented 20.5%, 11.8%
and 10.0% of our total net revenues in 2000, respectively. One customer, Applied
Materials, represented 17.6% of our total net revenues in 2001. Two customers,
Applied Materials and TSMC, represented 13.8% and 10.9% of our total net
revenues in 2002, respectively.
I-9
The following is a list of our top customers, based on revenues, during 2002:
Applied Materials Micron Technology
TSMC AU Optronics
Samsung Toppoly
Hynix Semiconductor Read-Rite
SMIC TEL
Sales and Marketing
We believe that the capability for direct sales and support is essential for
developing and maintaining close customer relationships and for rapidly
responding to changing customer requirements. We provide direct sales and
support from our corporate office in California. We also have a direct sales
presence in South Korea, Taiwan, China, Europe and Japan. We use selected sales
representatives and distributors in the United States and other countries in
Asia 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 generally and with the features
and advantages of our specific products. We believe that our sales and
application engineers are skilled in working with our customers to solve complex
measurement and process problems.
Sales to customers in foreign countries constituted approximately 60.6%, 64.8%
and 69.0% of total net revenues for 2000, 2001 and 2002, respectively. Direct
exports of our metrology systems to our foreign customers and shipments to our
subsidiaries require general export licenses. See Note 12 of the Notes to
Consolidated Financial Statements for information regarding total net revenues
and long-lived assets of our foreign operations. See Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations-Risks
Related to Our Business for information regarding risks related to our foreign
operations.
Sales to customers in Japan were approximately 18.7%, 28.8% and 23.9% of total
net revenues for 2000, 2001 and 2002, respectively. Sales to customers in Taiwan
were approximately 16.8%, 14.1% and 22.7% of total net revenues for 2000, 2001
and 2002, respectively. Sales to customers in Korea were approximately 19.5%,
9.9% and 10.5% of total net revenues for 2000, 2001 and 2002, respectively.
In order to raise market awareness of our products, we advertise in trade
publications, distribute promotional materials, publish technical articles,
conduct marketing programs, issue press releases regarding new products, work
with a public relations firm and participate in industry trade shows and
conferences.
Technology
We believe that our engineering expertise, technology acquisitions, supplier
alliances and short-cycle production strategies enable us to develop and offer
advanced solutions that address industry trends. By offering common metrology
platforms that can be configured with a variety of measurement technologies, our
customers can (i) specify high performance systems not offered by other
suppliers or (ii) narrowly configure a system for a specific application as a
cost saving measure.
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.
I-10
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 below 0.1
micrometer for future requirements in both photolithography and etch
applications. OCD combines non-contact optical technology with extremely
powerful data analysis software to provide highly accurate measurement
results for line width, height and sidewall angles. This technology is
available in both standalone and integrated 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.
Optical Profilometry. We recently developed an optical profiler for the
measurement of copper metal loss during the chemical mechanical
planarization process. This technology uses the combination of an optical
interferometer and our reflectometer technology to accurately determine
metal loss, even over multiple layers during the final steps of
metallization. Our technology is a unique method for precisely and
accurately controlling this process step.
Broadband Light Scattering. Our new, broadband, white light inspection
technology is used to detect and accurately locate particles and defects on
the front and back sides of wafer surfaces, which could potentially lead to
device failures and critical yield loss during the semiconductor
manufacturing process. The technology combines a high efficiency, broadband
light source with a high resolution detection system and proprietary
digital image processing for defect and contamination detection on a wide
variety of films and surfaces. This technology can be readily extended to
other manufacturing processes, such as magnetic thin film heads and flat
panel displays and represents a new market for us.
Customer Service and Support
We believe that customer service and technical support are important factors to
distinguish us from our competitors and are essential to building and
maintaining close, long-term relationships with our customers. We provide
support to our customers with telephonic technical support access, direct
training programs and operating manuals and other technical support information.
We use our demonstration equipment for training programs, as well as for our
sales and marketing efforts. Our Technical Training department has a complete
set of metrology systems that are dedicated to customer training. We provide
warranty and post-warranty service from our corporate office in Milpitas,
California. We also have service operations based in Massachusetts, Oregon,
Pennsylvania, Idaho, Vermont, Oregon, Arizona, and Texas. Local service and
spare parts are provided in the United Kingdom by our operations in Scotland.
Service, applications, and sales support for the European continent are provided
through our operations in Italy and Germany. In Asia, service is provided by
direct offices in Japan, Korea, Taiwan, Singapore and by a new office that we
opened in 2002 in Shanghai, China. Our distributors and representatives also
provide service in other countries in Asia.
We provide a one-year warranty on parts and labor for products sold domestically
and in foreign markets. Service revenue, including sales of replacement parts,
represented approximately 8.7%, 10.4% and 17.4% of total net revenues in 2000,
2001 and 2002, respectively.
Backlog
As of December 31, 2002 our backlog was approximately $8.3 million. As of
December 31, 2001, our backlog was approximately $7.6 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 represent
systems in backlog, we do not believe that backlog is a meaningful or accurate
indication of our future revenues and performance.
Competition
The market for our metrology systems is intensely competitive and characterized
by rapidly evolving technology. We compete
I-11
on a global basis with both larger and smaller companies in the United States,
Japan, Israel and Europe. Our products 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 Therma-Wave; and overlay
measurement products from KLA-Tencor, Bio-Rad Laboratories Inc. and Schlumberger
Ltd. Many of our competitors have substantially greater financial, engineering,
manufacturing and marketing resources than we do. Significant competitive
factors in our industry 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 Corporation
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 2000, 2001 and 2002 were $9.2 million, $10.8
million and $13.8 million, and represented 13.3%, 22.6% and 39.6% of total net
revenues, respectively.
Intellectual Property
Our success depends in large part on the technical innovation of our products.
We actively pursue a program of filing patent applications to seek protection of
technologically sensitive features of our metrology systems. As of December 31,
2002, we held 19 United States patents with 36 patent applications pending, 16
of which were filed during 2002. The United States patents, issued during the
period 1986 to 2002, will expire between 2003 to 2021. 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 that are claimed to infringe
their proprietary rights. We typically refer such matters to our legal counsel.
Employees
At December 31, 2002, we employed approximately 305 persons worldwide, including
93 in research and development, 60 in manufacturing and manufacturing support,
126 in marketing, sales and field service and 26 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
I-12
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, 2002:
Name Age Position
- ---- --- --------
Vincent J. Coates........ 77 Chairman of the Board, Secretary
John D. Heaton........... 42 President, Chief Executive Officer and Director
Paul B. Nolan............ 47 Vice President and Chief Financial Officer
Roger Ingalls Jr......... 41 Vice President of Sales
Mr. Vincent J. Coates has been Chairman of the Board since Nanometrics was
founded in 1975. He has been our Secretary since February 1989. He has also
served as our Chief Executive Officer through April 1998 and and President from
our founding through May 1996, except for the period January 1986 through
February 1987 when he served exclusively as Chief Executive Officer. Mr. Coates
has also served as Chairman of the Board of Nanometrics Japan Ltd., a subsidiary
of the Company, since June 1998. Prior to his employment at Nanometrics, Mr.
Coates co-founded Coates and Welter Instrument Corporation, a designer of
electron microscopes, which company was subsequently acquired by Nanometrics.
Mr. Coates also spent over twenty years working in engineering, sales and
international operations for the Perkin-Elmer Corporation, a manufacturer of
analytical instruments. In 1995, he received an award which recognized his
contribution to the industry from Semiconductor and Equipment and Materials
International, an industry trade organization.
Mr. John D. Heaton has served as a director of Nanometrics since July 1995.
Since May 1996, he has served as our President. Since April 1998, he has also
served as our Chief Executive Officer. From May 1996 to April 1998, he served as
our Chief Operating Officer. Mr. Heaton has also served as President of
Nanometrics Japan Ltd., a subsidiary of the Company, since January 1998.
Beginning in 1978, Mr. Heaton served in various technical positions at National
Semiconductor, a semiconductor manufacturer, prior to joining the Company in
1990.
Mr. Paul B. Nolan has served as Vice President and Chief Financial Officer of
Nanometrics since March 1994. Mr. Nolan joined us Financial Analyst in March
1989, and served as Director of Finance from March 1993 to March 1994. Mr. Nolan
served as Financial Analyst at Harris Corporation, a communications equipment
company, prior to joining the Company.
Mr. Roger Ingalls Jr. has served as our Vice President of Sales since January
2002. Mr. Ingalls joined Nanometrics in March 1995, serving as Vice President
and Director of Sales and Marketing from October 1997 to February 1998, and as
Vice President and Director of Marketing from February 1998 to January 2002.
Prior to joining Nanometrics, he served as a sales engineer for Nikon Inc., a
precision optical company, from March 1993 to March 1995.
ITEM 2. PROPERTIES
Our principal manufacturing and administrative facility is located in Milpitas,
California in a 133,000 square foot building owned by the Company. We purchased
the Milpitas facility in July 2000 and moved into the facility in November 2000.
We also have sales and service offices in Texas, China, Singapore and Taiwan.
Rent expense for our facilities was approximately $233,000 for 2002.
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 own a 39,000 square foot facility in
Pyungtaek, Korea. This facility is utilized by our Korean subsidiary for sales,
service, engineering and manufacturing.
We believe that our existing facilities are adequate for our current needs and
anticipated growth.
I-13
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending against us. However, 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, 2002.
I-14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Our common stock is quoted on the Nasdaq National Market under the symbol
"NANO." The following table sets forth, for the periods indicated, the high and
low bid 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
---- ---
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
2002
First Quarter..................................... $23.10 $14.90
Second Quarter.................................... $20.35 $13.16
Third Quarter..................................... $16.33 $2.60
Fourth Quarter.................................... $6.30 $1.82
On February 25, 2003, the last reported sale price of our common stock on the
Nasdaq National Market was $3.49 per share. As of December 31, 2002, there were
approximately 146 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.
Stock Option Exchange Program
On November 12, 2002, we announced a voluntary stock option exchange program for
certain eligible employees. Under the exchange program, we offered to exchange
certain stock options to purchase an aggregate of 1,962,020 shares of our common
stock in exchange for a promise to grant new stock options, subject to certain
conditions, at a future date that is at least six months and one day after
December 16, 2002, the date of cancellation. The stock options subject to the
offer to exchange had been granted under either our 1991 stock option plan or
our 2000 employee stock option plan with exercise prices equal to or greater
than $10.00 per share. Eligible employees who elected to participate in the
exchange program were also required to exchange any other stock options,
regardless of their exercise price, that were granted to them since May 12,
2002. The number of shares of common stock subject to the new options equals 90%
of the number subject to the exchanged options. Under the exchange program,
options to purchase 1,569,020 shares of our common stock were tendered and
cancelled. We expect to grant 1,412,121 replacement options to eligible
employees in June 2003. We do not anticipate that any additional compensation
charges or variable plan accounting will result from the grant of the
replacement options. Non-employee members of our Board of Directors were not
eligible to participate in this program.
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, 2000, 2001 and 2002, and the consolidated balance sheet data as of December
31, 2001 and 2002, 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, 1998 and
1999, and the consolidated balance sheet data as of December 31, 1998, 1999 and
2000, 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,
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
(In thousands, except per share data)
Consolidated Statement of Operations Data:
Net revenues:
Product sales ........................................ $ 29,718 $ 32,162 $ 63,468 $ 42,653 $ 28,669
Service .............................................. 3,546 4,246 6,023 4,931 6,054
-------- -------- -------- -------- --------
Total net revenues ................................ 33,264 36,408 69,491 47,584 34,723
Costs and expenses:
Cost of product sales ................................ 13,002 14,606 25,082 17,949 13,237
Cost of service ...................................... 3,669 4,560 6,022 5,406 5,765
Research and development ............................. 4,206 4,658 9,238 10,760 13,765
Acquired in-process research and development ......... 1,421 -- -- -- --
Selling .............................................. 5,728 5,871 10,313 9,523 10,862
General and administrative ........................... 2,828 2,973 4,258 4,177 5,104
Goodwill impairment .................................. -- -- -- -- 1,077
-------- -------- -------- -------- --------
Total costs and expenses .......................... 30,854 32,668 54,913 47,815 49,810
Income (loss) from operations ........................... 2,410 3,740 14,578 (231) (15,087)
Other income (expense):
Interest income ...................................... 572 662 4,129 2,576 583
Interest expense ..................................... (108) (180) (76) (86) (94)
Other, net ........................................... 64 94 (150) (517) 100
-------- -------- -------- -------- --------
Total other income, net .............................. 528 576 3,903 1,973 589
-------- -------- -------- -------- --------
Income (loss) before provision (benefit) for income taxes 2,938 4,316 18,481 1,742 (14,498)
Provision (benefit) for income taxes .................... 1,108 1,682 5,942 782 (6,230)
-------- -------- -------- -------- --------
Income (loss) before cumulative effect of change in
accounting principle .................................. $ 1,830 $ 2,634 $ 12,539 $ 960 $ (8,268)
Cumulative effect of change in revenue
recognition principle (SAB 101) ....................... -- -- (1,364)* -- --
-------- -------- -------- -------- --------
Net income (loss) ....................................... $ 1,830 $ 2,634 $ 11,175 $ 960 $ (8,268)
======== ======== ======== ======== ========
Basic net income (loss) per share:
Income (loss) before cumulative effect of
change in accounting principle ........................ $ 0.21 $ 0.30 $ 1.14 $ 0.08 $ (0.70)
Cumulative effect of change in revenue
recognition principle (SAB 101) ........................ -- -- (0.12)* -- --
-------- -------- -------- -------- --------
Net income (loss) ..................................... $ 0.21 $ 0.30 $ 1.02 $ 0.08 $ (0.70)
======== ======== ======== ======== ========
Diluted net income (loss) per share:
Income (loss) before cumulative effect of
change in accounting principle ........................ $ 0.20 $ 0.28 $ 1.06 $ 0.08 $ (0.70)
Cumulative effect of change in revenue
recognition principle (SAB 101) ........................ -- -- (0.12)* -- --
-------- -------- -------- -------- --------
Net income (loss) ..................................... $ 0.20 $ 0.28 $ 0.94 $ 0.08 $ (0.70)
======== ======== ======== ======== ========
* 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,
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
Shares used in per share computation:
Basic................................................... 8,635 8,829 10,986 11,691 11,878
======== ======== ======== ======== ========
Diluted................................................. 9,041 9,393 11,845 12,161 11,878
======== ======== ======== ======== ========
December 31,
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
(In thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term investments......... $11,431 $18,140 $69,788 $47,227 $36,866
Working capital........................................... 30,621 36,021 92,420 80,171 74,776
Total assets.............................................. 39,305 46,410 144,796 142,355 134,688
Debt obligations, less current portion ................... 2,496 2,288 4,236 3,314 3,123
Total shareholders' equity................................ 32,010 38,155 127,009 129,845 124,106
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. 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 Business
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 our products. For the year
ended December 31, 2002, we derived 82.6% of our total net revenues from product
sales and 17.4% 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.
Current Trends
Changing trends in the semiconductor, flat panel display and magnetic recording
head manufacturing industries are increasing the need for metrology as a major
component of manufacturing systems. These trends include:
o Adoption of Chemical Mechanical Planarization. Manufacturers now use
CMP to flatten, or planarize, thin films to obtain the ultra-flat
surfaces required for advanced photolithography. In addition, the
introduction of new copper interconnect techniques has increased the
need for CMP. Accordingly, semiconductor manufacturers are seeking
metrology solutions that can help control the CMP process by measuring
the thin film layer to determine precisely when the appropriate
thickness has been achieved.
o Dynamic Etch Time Adjustment. Semiconductor manufacturers are
adjusting etch time on-the-fly to compensate for measured variation
and feedback is used to control the dose in lithography for the next
wafer. If not properly controlled, CD variations in high-end
microprocessors can cause some chips to run at slower speeds,
affecting their ability to command premium pricing.
o Adoption of New Types of Thin Film Materials. 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 (low k) insulating materials that require
enhanced metrology solutions for the manufacturing process.
II-4
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
processed wafers and the cost of rework is significantly higher for
these complex semiconductors and therefore, manufacturers are seeking
to use metrology solutions to increase production yields and limit the
amount of rework
o Need for Rapid Ramp of Production Efficiencies. Competitive forces
influencing semiconductor device manufacturers, such as price cutting
and shorter product life cycles, place pressure on the manufacturers
to rapidly achieve production efficiency. Semiconductor device
manufacturers are using metrology systems throughout the fab to ensure
that manufacturing processes scale rapidly, are accurate and can be
repeated on a consistent basis.
Nanometrics is committed to providing customers with solutions to the problems
they experience in these areas.
Critical Accounting Policies
The preparation of our financial statements conforms with accounting principles
generally accepted in the United States of America, which requires management to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenue, expenses and related disclosures at the date of our
financial statements. On an on-going basis, management evaluates its estimates
including those related to bad debts, inventory valuations, warranty
obligations, income taxes and intangible assets. Management bases its estimates
and judgments on historical experience and on various other factors that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
management's estimates. Our critical accounting policies include revenue
recognition, allowance for doubtful accounts, inventory valuation, warranty
accrual, income tax assets and liabilities including the deferred tax asset
valuation allowance, goodwill and stock based compensation due to the estimates
and judgments involved with each of these items.
Revenue Recognition - We recognize revenue when persuasive evidence of an
arrangement exits, delivery has occurred or services have been rendered, the
sales price is fixed or determinable, and collectibility is reasonably assured.
For product sales, this generally occurs at the time of shipment if we have met
defined customer acceptance experience levels with both the customer and the
specific type of equipment. All other product sales are recognized upon customer
acceptance. In certain geographical regions, where risk of loss and title
transfers upon customer acceptance, revenue is also recognized upon customer
acceptance. Revenue related to spare part sales is recognized on shipment and is
included as part of service revenue. Revenue related service contracts are
recognized ratably over the period under contract. Unearned maintenance and
service contract revenue is not significant and is included in deferred revenue.
Allowance for Doubtful Accounts - Our allowance for doubtful accounts is based
primarily on the magnitude and age of outstanding customer invoices in general,
as well as on the status of collections issues with specific customers. Customer
accounts are reviewed on a continuous basis.
Inventory Valuation - Inventories are stated at the lower of cost (first-in,
first-out) or market. We track the age of our unused inventory on a monthly
basis and if management determines that inventory has become obsolete or is
considered to be excess inventory, it will be written-down to its estimated
market value. Management's determination to write down inventory is generally
based on such factors as economic conditions, expected demand and obsolescence
based on engineering redesigns.
Warranty Accrual - 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. The warranty accrual is generally based on our historical warranty
repair cost patterns, including the cost of parts and labor. The warranty
accrual is reviewed and updated on a quarterly basis.
Income Tax Assets and Liabilities - We account for income taxes based on
Statement of Financial Accounting Standards (SFAS) No. 109 Accounting for Income
Taxes, whereby deferred tax assets and liabilities must be recognized using
enacted tax rates for the effect of temporary differences between the book and
tax accounting for assets and liabilities. Also, deferred tax assets must be
reduced by a valuation allowance if it is more likely than not that a portion of
the deferred tax asset will not be realized in the future. We evaluate the
deferred tax assets on a quarterly basis to determine whether or not a valuation
allowance is appropriate. Factors used in this determination include future
expected income and the underlying asset or liability which generated the
temporary tax difference.
Our income tax provision is based on estimates of our effective income tax rate
for the year. The effective tax rate is generally estimated based on the
geographic distribution of profits, the tax rates in different regions and the
availability of tax credits. If
II-5
actual results differ from our estimates, it may be necessary to record a
valuation allowance on deferred tax assets or to adjust our effective tax rate,
which could have a material effect on our financial results.
Goodwill - On January 1, 2002, we adopted SFAS No. 142, Goodwill and Other
Intangible Assets. Upon implementation of this Statement, the transition
impairment test was performed as of January 1, 2002, and no impairment loss was
recorded. SFAS No. 142 requires that goodwill be reviewed at least annually for
impairment. We elected to test our goodwill for possible impairment in the
fourth quarter of 2002. Based upon the results of the annual impairment test, we
recognized a goodwill impairment loss of $1,077,000 in the fourth quarter of
2002. The fair value of the segment was estimated using the discounted cash
flows method. As of December 31, 2002, we had no goodwill on our balance sheet.
Stock-Based Compensation - We account for stock-based compensation issued to
employees using the intrinsic value method in accordance with the provisions of
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, as allowed by SFAS No. 123, Accounting for Stock Based Compensation
as amended by SFAS No. 148, Accounting for Stock Based Compensation - Transition
and Disclosures, an Amendment of FASB Statement No. 123. Under the intrinsic
value method, we do not recognize any compensation expense, as the exercise
price of all stock options is equal to the fair market value at the time the
options are granted. We disclose the pro forma effect of recognizing
compensation expense on stock options granted to employees in the footnotes to
the consolidated financial statements.
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, 2000, 2001 and
2002:
Years Ended December 31,
2000 2001 2002
---- ---- ----
Net revenues:
Product sales ...................................................... 91.3% 89.6% 82.6%
Service ............................................................ 8.7 10.4 17.4
----- ----- -----
Total net revenues .............................................. 100.0 100.0 100.0
----- ----- -----
Cost and expenses:
Cost of product sales .............................................. 36.1 37.7 38.1
Cost of service .................................................... 8.7 11.4 16.6
Research and development ........................................... 13.3 22.6 39.6
Selling ............................................................ 14.8 20.0 31.3
General and administrative ......................................... 6.1 8.8 14.7
Goodwill impairment ................................................ -- -- 3.1
----- ----- -----
Total cost and expenses ......................................... 79.0 100.5 143.4
----- ----- -----
Income (loss) from operations .......................................... 21.0 (0.5) (43.4)
----- ----- -----
Other income (expense):
Interest income .................................................... 5.9 5.4 1.6
Interest expense ................................................... (0.1) (0.2) (0.2)
Other, net ......................................................... (0.2) (1.1) 0.3
----- ----- -----
Total other income, net ......................................... 5.6 4.1 1.7
----- ----- -----
Income (loss) before provision (benefit) for income taxes .............. 26.6 3.6 (41.7)
Provision (benefit) for income taxes ................................... 8.6 1.6 (17.9)
----- ----- -----
Income (loss) before cumulative effect of change in accounting principle 18.0 2.0 (23.8)
Cumulative effect of change in revenue recognition principle (SAB 101) . (2.0) -- --
----- ----- -----
Net income (loss) ...................................................... 16.0% 2.0% (23.8)%
===== ===== =====
II-6
Years ended December 31, 2000, 2001 and 2002
Total net revenues. Total net revenues decreased 27.0% from $47.6 million in
2001 to $34.7 million in 2002. Product sales decreased 32.8% from $42.7 million
in 2001 to $28.7 million in 2002. Unit sales of automated, integrated and
tabletop systems were each down from their 2001 levels. The decrease in product
sales resulted from reduced demand for semiconductor process control metrology
equipment in 2002, particularly in the U.S. and Asia. We believe that this
reduced demand was attributable primarily to continued overcapacity and price
pressures, particularly for DRAM products, in the semiconductor industry as well
as the continued economic slowdown in the U.S. and Japan in 2002. Service
revenue increased 22.8% from $4.9 million in 2001 to $6.1 million in 2002. The
increase in service revenue is primarily attributable to higher sales of parts
and services in the U.S. and Asia in 2002, which is partly due to a larger
installed base of systems that have passed their warranty periods.
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,
particularly 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
during 2001 discussed above. International revenues, which includes sales by our
foreign subsidiaries, constituted approximately 60.6%, 64.8% and 69.0% of total
net revenues for 2000, 2001 and 2002, respectively.
Cost of product sales. Cost of product sales as a percentage of product sales
increased from 42.1% in 2001 to 46.2% in 2002 primarily due to lower sales
volumes in 2002 resulting in higher per unit manufacturing costs, along with a
continued increase in manufacturing capacity added to our U.S. facility in 2002.
The increased manufacturing capacity is part of a strategic move to internalize
the production of key parts and components, allowing us to have greater control
over their development, delivery, quality and cost. 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 service. Cost of service as a percentage of service revenue decreased
from 109.6% in 2001 to 95.2% in 2002 primarily as a result of higher service
sales, which exceeded our costs of service in the U.S and Asia. 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.
Research and development. Research and development expenses increased 27.9% from
$10.8 million in 2001 to $13.8 million in 2002 as a result of increased
headcount and higher materials expenses used in the development of new products
in 2002, such as the NanoUDI 9300, the NanoCLP 9010, the NanoOCD 9020 and other
unreleased products. 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. 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 2002, research and development expenses represented 39.6% of
total net revenues, compared to 22.6% in 2001 and 13.3% in 2000.
Selling. Selling expenses increased 14.1% from $9.5 million in 2001 to $10.9
million in 2002 primarily due to increased headcount of sales and support
employees and an increase in related expenses for the purpose of promoting our
products to existing and potential customers. 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. In 2002, selling
expenses represented 31.3% of total net revenues, compared to 20.0% in 2001 and
14.8% in 2000.
General and administrative. General and administrative expenses increased 22.2%
from $4.2 million in 2001 to $5.1 million in 2002. This increase resulted
primarily from higher legal, patent, audit, tax and software related costs in
2002. General and administrative expenses decreased 1.9% from $4.3 million in
2000 to $4.2 million in 2001. During 2002, general and administrative expenses
represented 14.7% of total net revenues, compared to 8.8% in 2001 and 6.1% in
2000.
II-7
Goodwill impairment. On January 1, 2002, we adopted SFAS No. 142, Goodwill and
Other Intangible Assets. Upon implementation of this Statement, the transition
impairment test was performed as of January 1, 2002, and no impairment loss was
recorded. SFAS No. 142 requires that goodwill be reviewed at least annually for
impairment. We elected to test our goodwill for possible impairment in the
fourth quarter of 2002. Based upon the results of the annual impairment test, we
recognized a goodwill impairment loss of $1,077,000 in the fourth quarter of
2002. The fair value of the segment was estimated using a discounted cash flow
methodology.
Total other income, net. Total other income, net decreased 70.1% from $2.0
million in 2001 to $589,000 in 2002 primarily due to lower interest income in
2002, resulting from lower investment balances and lower interest rates. 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.
Provision for income taxes. Our effective tax rate was a benefit of 43.0% in
2002, versus an expense of 44.9% in 2001. The difference relates primarily to
the results of operations for each respective period. Our effective income tax
benefit rate was 43.0% in 2002, which exceeded the U.S. statutory rate due
primarily to state income tax benefits and the utilization of tax credits. 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. The effective income tax rate
in 2001 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
At December 31, 2002, our cash and cash equivalents and short-term investments
totaled $36.9 million compared to $47.2 million at December 31, 2001. These
funds are invested primarily in U.S. Treasury Bills. Our working capital of
$74.8 million at December 31, 2002 decreased from $80.2 million at December 31,
2001. 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 2002 used cash of $8.3 million primarily from the
net loss and lower levels of deferred income taxes, deferred revenue as well as
other current liabilities, such as accounts payable that, in part, reflected a
decline in the purchase of inventory in 2002. This decrease was partially offset
by the goodwill impairment write-off, lower inventories supporting the lower
sales level in 2002 and lower accounts receivable, resulting in part from the
decline in sales during 2002. Investing activities used $31.7 million due
primarily to net purchases of short-term investments of $28.9 million and $2.8
million in capital expenditures used primarily to expand our manufacturing
capacity in the U.S. in 2002. Financing activities provided cash of $998,000
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 in Japan.
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 in 2001. 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 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 in 2000. 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 in Japan.
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.
II-8
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. This
statement establishes accounting and reporting standards requiring that every
derivative instrument, including derivative instruments embedded in other
contracts, be recorded in the balance sheet as either an asset or liability
measured at its fair value. We adopted SFAS No. 133 effective January 1, 2001.
Adoption of SFAS No. 133 did not have a significant impact on our consolidated
financial position, results of operations or cash flows.
In June 2001, SFAS No. 141, Business Combinations, was approved by the FASB.
SFAS No. 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. We adopted SFAS No. 141 for
business combinations initiated after June 30, 2001.
On January 1, 2002, we adopted SFAS No. 142, Goodwill and Other Intangible
Assets. This Statement eliminates the amortization of goodwill and requires that
goodwill be reviewed at least annually for impairment. Upon implementation of
this Statement, the transition impairment test for goodwill was performed as of
January 1, 2002, and no impairment loss was recorded. During 2002, we recorded a
charge of $1,077,000 for impairment of goodwill in accordance with SFAS No. 142.
See Note 1 of the Notes to Consolidated Financial Statements. We had no goodwill
on our balance sheet at December 31, 2002. This Statement also requires that the
useful lives of previously recognized intangible assets be reassessed and the
remaining amortization periods be adjusted accordingly. Adoption of this
Statement did not require any adjustments to be made to the useful lives of
existing intangible assets and no reclassifications of intangible assets to
goodwill were necessary.
On January 1, 2002, we adopted SFAS No. 144, Accounting for the Impairment of
Disposal of Long-Lived Assets. SFAS No. 144 supersedes SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of,
but retains its fundamental provision for recognizing and measuring impairment
of long-lived assets to be held and used. This Statement requires that all
long-lived assets to be disposed of by sale be carried at the lower of carrying
amount of fair value less cost to sell, and that depreciation cease to be
recorded on such assets. SFAS No. 144 standardizes the accounting and
presentation requirements for all long-lived assets to be disposed of by sale,
and supersedes previous guidance for discontinued operations of business
segments. The initial adoption of this Statement did not have any impact on our
consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosures, an Amendment of FASB Statement No.
123. This Statement provides alternative methods of transition for companies who
voluntarily change to the fair value-based method of accounting for stock-based
employee compensation in accordance to SFAS No. 123, Accounting for Stock-Based
Compensation and enhances the disclosure requirements. This statement was
effective upon its issuance.
We continue to account for stock-based compensation using the intrinsic value
method in accordance with the provisions of Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees, elected under SFAS No. 123, as
amended. As a result, the adoption of this Statement did not have any impact on
our consolidated financial statements. See additional information on stock-based
compensation in Note 1 of the Notes to Consolidated Financial Statements.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (FIN 45). FIN 45 requires a guarantor to include
disclosures of certain obligations, and if applicable, at the inception of the
guarantee, recognize a liability for the fair value of other obligations
undertaken in issuing a guarantee.
The initial recognition and initial measurement provisions apply on a
prospective basis to guarantees issued or modified after December 31, 2002 and
did not have a material impact on our consolidated financial statements. The
applicable disclosures have been made.
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.
II-9
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
in the foreseeable future. Currently, the semiconductor industry is experiencing
a downturn, which has existed for the past few years. Should the downturn
continue or become more severe, 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 64.8% and
69.0% of our total net revenues in 2001 and 2002, respectively. We maintain
facilities in Japan and Korea. We anticipate that international sales will
continue to account for a significant portion of our revenues.
Our reliance on international sales and operations exposes us to foreign
political and economic risks, including:
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 52.8% and
63.3% of our total net revenues in 2001 and 2002, 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 each
year has been derived from sales to a relatively few number of customers, and we
expect this trend to continue. 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