<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 1998
--------------
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______________ to _______________
Commission file number 0-13470
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NANOMETRICS INCORPORATED
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(Exact name of registrant as specified in its charter)
California 94-2276314
------------------------------- -------------------
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
310 DeGuigne Drive, Sunnyvale, CA 94086
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(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (408)746-1600
-------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [_]
At July 14, 1998 there were 8,663,998 shares of common stock, no par value,
issued and outstanding.
1
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NANOMETRICS INCORPORATED
INDEX
Page
----
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets -
June 30, 1998 and December 31, 1997................3
Consolidated Statements of Income -
Three months and six months ended
June 30, 1998 and 1997.............................4
Consolidated Statements of Cash Flows -
Six months ended June 30, 1998
and 1997...........................................5
Notes to Consolidated Financial
Statements.........................................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......8
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security
Holders............................................10
Item 6. Exhibits and Reports on Form 8-K...................10
Signatures.......................................................11
2
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PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
NANOMETRICS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT SHARE AMOUNTS)
June 30, December 31,
1998 1997
ASSETS (Unaudited)
----------- ------------
CURRENT ASSETS:
Cash and equivalents $ 933 $ 3,656
Short-term investments 9,872 9,595
Accounts receivable, less allowance for
doubtful accounts of $410 and $413 11,379 10,225
Inventories 10,746 7,138
Prepaid and deferred income taxes 2,115 2,094
Prepaid expenses and other 760 1,075
------- -------
Total current assets 35,805 33,783
PROPERTY, PLANT AND EQUIPMENT, NET 2,112 2,187
OTHER ASSETS 1,098 273
------- -------
TOTAL $39,015 $36,243
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,062 $ 1,889
Accrued payroll and related expenses 618 596
Other current liabilities 2,447 1,493
Income taxes payable 359 565
Current portion of long-term debt 600 604
------- -------
Total current liabilities 6,086 5,147
LONG-TERM DEBT 2,185 2,568
------- -------
Total liabilities 8,271 7,715
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SHAREHOLDERS' EQUITY:
Common stock, no par value; 25,000,000 shares
authorized; 8,663,998 and 8,521,484 outstanding 13,726 13,151
Retained earnings 17,913 16,144
Accumulated translation adjustment (895) (767)
------- -------
Total shareholders' equity 30,744 28,528
------- -------
TOTAL $39,015 $36,243
======= =======
See Notes to Consolidated Financial Statements
3
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NANOMETRICS INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
-------- -------- ------- -------
<S> <C> <C> <C> <C>
NET REVENUES:
Product sales $ 9,705 $7,741 $19,323 $15,042
Service 1,023 958 1,943 1,916
------- ------ ------- -------
Total net revenues 10,728 8,699 21,266 16,958
------- ------ ------- -------
COSTS AND EXPENSES:
Cost of product sales 3,998 2,902 7,627 5,639
Cost of service 967 874 1,952 1,737
Research and development 1,063 665 2,294 1,339
Acquired in-process research and
development - - 2,036 -
Selling 1,529 1,626 3,101 2,889
General and administrative 694 613 1,479 1,249
------- ------ ------- -------
Total costs and expenses 8,251 6,680 18,489 12,853
------- ------ ------- -------
OPERATING INCOME 2,477 2,019 2,777 4,105
OTHER INCOME (EXPENSE):
Interest income 156 126 317 241
Interest expense (20) (24) (46) (49)
Other, net (139) 5 (148) (6)
------- ------ ------- -------
Total other income (expense), net (3) 107 123 186
------- ------ ------- -------
INCOME BEFORE PROVISION
FOR INCOME TAXES 2,474 2,126 2,900 4,291
PROVISION FOR INCOME TAXES 960 753 1,131 1,644
------- ------ ------- -------
NET INCOME $ 1,514 $1,373 $ 1,769 $ 2,647
======= ====== ======= =======
NET INCOME PER SHARE:
Basic $ .18 $ .17 $ .21 $ .32
======= ====== ======= =======
Diluted $ .17 $ .16 $ .20 $ .31
======= ====== ======= =======
SHARES USED IN PER SHARE
COMPUTATION:
Basic 8,641 8,282 8,593 8,282
======= ====== ======= =======
Diluted 9,003 8,665 8,991 8,669
======= ====== ======= =======
</TABLE>
See Notes to Consolidated Financial Statements
4
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NANOMETRICS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,769 $ 2,646
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 100 148
Purchase of in-process technology 2,036 -
Deferred taxes (902) (58)
Changes in assets and liabilities:
Accounts receivable (3,038) 2,227
Other receivables (3) (135)
Inventories (2,081) (1,208)
Prepaid expenses and other 255 (354)
Accounts payable and other liabilities 265 506
Income taxes payable (101) (1,272)
-------- --------
Net cash provided by (used in) operating activities (1,700) 2,500
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments (11,126) (12,590)
Sales/maturities of short-term investments 10,849 10,608
Capital expenditures (123) (81)
Product line acquisition (3,038) -
-------- --------
Net cash used in investing activities (3,438) (2,063)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (204) (167)
Issuance of common stock 575 157
-------- --------
Net cash provided by financing activities 371 (10)
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 2,044 611
-------- --------
NET CHANGE IN CASH AND EQUIVALENTS (2,723) 1,038
CASH AND EQUIVALENTS, beginning of period 3,656 1,725
-------- --------
CASH AND EQUIVALENTS, end of period $ 933 $ 2,763
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 49 $ 49
======== ========
Cash paid for income taxes $ 2,122 $ 3,679
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE>
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Consolidated Financial Statements
The consolidated financial statements include the accounts of Nanometrics
Incorporated and its wholly owned subsidiaries. All significant inter-company
accounts and transactions have been eliminated.
While the quarterly financial information is unaudited, the financial
statements included in this report reflect all adjustments (consisting only of
normal recurring adjustments) which the Company considers necessary for a fair
presentation of the results of operations for the interim periods covered and of
the financial condition of the Company at the date of the interim balance sheet.
The operating results for interim periods are not necessarily indicative of the
operating results that may be expected for the entire year. The information
included in this report should be read in conjunction with the information
included in the Company's 1997 Annual Report on Form 10-K filed with the
Securities and Exchange Commission.
Note 2. Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
and consist of the following (in thousands):
June 30, December 31,
1998 1997
-------- ------------
Raw materials and subassemblies $ 6,667 $2,934
Work in process 2,428 1,528
Finished goods 1,651 2,676
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$10,746 $7,138
======= ======
Note 3. Product Line Acquisition
On March 30, 1998 the Company entered into an agreement with Optical
Specialties, Inc. ("OSI") to purchase a metrology system product line and
related assets used to measure the critical dimensions and overlay registration
errors observed in submicron lithography. Under the agreement, the Company paid
approximately $3.2 million in cash for the assets and in-process technology.
The purchase price was allocated on the basis of the estimated fair value of the
assets acquired and liabilities assumed as follows (in thousands):
Fair value of tangible assets acquired $1,923
In-process research and development 2,036
Liabilities assumed (734)
------
Purchase consideration $3,225
======
In addition, during the three months ended March 31, 1998, the Company hired
certain former employees of OSI and incurred approximately $350,000 in related,
non-recurring hiring expenses (such expenses are classified in the statement of
income according to the employees' function).
Note 4. Other Current Liabilities
Other current liabilities consist of the following (in thousands):
June 30, 1998 December 31, 1997
------------- -----------------
Commissions payable $ 528 $ 564
Accrued warranty 1,026 479
Other 893 450
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$2,447 $1,493
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6
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Note 5. Net Income Per Share
The reconciliation of the share denominator used in the basic and diluted net
income per share computations are as follows (in thousands) :
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding-shares used in basic
net income per share computation 8,641 8,282 8,593 8,282
Dilutive effect of common stock equivalents,
using the treasury stock method 362 383 398 387
------- ------- ------- -------
Shares used in dilutive net income
per share computation 9,003 8,665 8,991 8,669
======= ======= ======= =======
</TABLE>
During the three and six month periods ended June 30, 1998 and 1997, the
Company had common stock options outstanding which could potentially dilute
basic net income per share in the future, but were excluded from the computation
of diluted net income per share as the common stock options' exercise prices
were greater than the average market price of the common shares for the period.
At June 30, 1998, 380,500 such common stock options with a weighted average
exercise price of $10.20 per share were excluded from the diluted net income per
share computations.
Note 6. Comprehensive Income
In the first quarter of 1998, the Company adopted Statement of Financial
Accounting Standard No. 130, "Reporting Comprehensive Income," which requires an
enterprise to report the change in net assets during the period from nonowner
sources ("comprehensive income") . For the three months ended June 30, 1998 and
1997, comprehensive income, which consisted of net income for the periods and
changes in accumulated translation adjustments, was $1,420,000 and $1,584,000,
respectively. For the six months ended June 30, 1998 and 1997, comprehensive
income was $1,641,000 and $2,678,000, respectively.
Note 7. Recently Issued Accounting Standard
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information," which
establishes annual and interim reporting standards for an enterprise's business
segments and related disclosures about its products, services, geographic areas
and major customers. This statement is effective for fiscal year 1998 and
adoption will not affect the Company's financial position, results of operations
or cashflows.
Note 8. New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which defines
derivatives, requires that all derivatives be carried at fair value, and
provides for hedging accounting when certain conditions are met. This statement
is effective for all fiscal quarters of fiscal years beginning after June 15,
1999. Although the Company has not fully assessed the implications of this new
statement, the Company does not believe adoption of this statement will have a
material impact on the Company's financial position or results of operations.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
Total net revenues for the three months ended June 30, 1998 were
$10,728,000, an increase of $2,029,000 or 23% from the comparable period in
1997. For the six months ended June 30, 1998, total revenues of $21,266,000
increased by $4,308,000 or 25% from the comparable period in 1997. Product
sales of $9,705,000 and $19,323,000 for the three months and six months ended
June 30, 1998, respectively, increased $1,964,000 or 25% and $4,281,000 or 28%,
respectively, as compared with the same periods during 1997. The increases in
product sales resulted from stronger demand for, and increased shipments of, the
Company's products, especially its automated products, particularly from
customers in the Far East and Europe. In addition, sales of the recently
acquired Metra product contributed $1,400,000 to revenues in the second quarter
of 1998. Service revenue of $1,023,000 and $1,943,000 for the three months and
six months ended June 30, 1998, respectively, increased $65,000 or 7% and
$27,000 or 1%, respectively, as compared to the same periods in 1997. These
increases in service revenue are primarily attributable to higher sales of
accessories in the U.S.
Cost of product sales as a percentage of product sales increased to 41% in
the second quarter of 1998 from 37% in the second quarter of 1997 and increased
to 39% in the six months ended June 30, 1998 from 37% for the same period in
1997 primarily because of Metra sales which had a lower gross margin than the
Company's other products and underabsorbed manufacturing costs related to the
start up of production on the Metra product line. Cost of service as a
percentage of service revenue increased to 95% in the second quarter of 1998
from 91% in the second quarter of 1997 and increased to 100% in the six months
ended June 30, 1998 from 91% for the same period in 1997 as a result of the
increased cost of additional headcount associated with servicing the Company's
new Metra product line.
Research and development expenses for the three month and six month periods
ended June 30, 1998 increased $398,000 or 60% and $955,000 or 71% respectively,
compared to the same periods in 1997 due primarily to the increased cost of
additional headcount associated with research and development for the Company's
new Metra product line.
In the first quarter of 1998, the Company paid approximately $3.2 million
for the assets and in-process technology related to OSI's Metra product line.
Of this purchase price, $2,036,000 related to the value of in-process technology
that had no alternative future use and was charged to expense in the
accompanying statement of income for the six months ended June 30, 1998.
Selling expenses in the second quarter of 1998 decreased by $97,000 or 6%
compared to the second quarter of 1997 when the mix of products sold included
more sales by outside sales representatives which resulted in higher
commissions. Selling expenses for the six months ended June 30, 1998 increased
$212,000 or 7% compared to the same period in 1997 primarily because of the
increased cost of additional headcount associated with the sales and marketing
of the Company's new Metra product line.
General and administrative expenses for the three month and six month
periods ended June 30, 1998 increased by $81,000 or 13% and $230,000 or 18%,
respectively, compared to the same periods in 1997 primarily as a result of
spending associated with the increased level of operations.
Other income (expense), net for the three month and six month periods ended
June 30, 1998 decreased $110,000 or 103% and $63,000 or 34% respectively, from
the comparable periods in 1997 due primarily to royalty costs and exchange rate
losses.
8
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The Company reported an operating income of $2,477,000 and net income of
$1,514,000 for the second quarter of 1998 compared to an operating income of
$2,019,000 and net income of $1,373,000 for the same period in 1997. For the
first six months of 1998, the Company reported an operating income of $2,777,000
and net income of $1,769,000 which compared to an operating income of $4,105,000
and net income of $2,647,000 for the same period in 1997.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At June 30, 1998, the Company had working capital of $29,719,000 compared to
$28,636,000 at December 31, 1997. The current ratio at June 30, 1998 was 5.9 to
1. The Company believes working capital including cash and short-term
investments of $10,805,000 will be sufficient to meet its needs at least through
the next twelve months. Operating activities for the first six months of 1998
used cash of $1,700,000 primarily from increased accounts receivable and
inventory which were offset to some extent by net income adjusted for the in-
process technology purchase of the Metra product line, while the net purchases
of short-term investments used $277,000, capital expenditures used $123,000,
purchase of the Metra product line used $3,038,000, debt repayment used $204,000
and issuance of common stock provided $575,000.
The foregoing Management Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, and Section 21E of the Securities
Exchange Act of 1934. These statements involve risks and uncertainties and
actual results could differ materially as a result of a number of factors
including demand for the company's products, which is affected by factors
including the cyclicality of the semiconductor, magnetic recording head and flat
panel display industries served by the Company, patterns of capital spending by
customers, technological changes in the markets served by the Company and its
customers, market acceptance of products of both the Company and its customers,
the timing, cancellation of delay of customer orders and shipments, competition,
including competitive pressure on product prices and changes in pricing by the
Company's customers or suppliers, fluctuation in foreign currency exchange rates
particularly the Japanese yen, the proportion of direct sales versus sales
through distributors and representatives, market acceptance of new and enhanced
versions of the Company's products, the timing of new product announcements and
releases of products by the Company or its competitors, including the Company's
ability to design, introduce and manufacture new products on a timely and cost
effective basis, the size and timing acquisitions of business, products or
technologies and fluctuations in the availability and cost of components and
subassemblies and the factors set forth under "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Risk Factors" in the
1997 Annual Report. on form 10-K. The Company undertakes no obligation to
update forward looking statements made in this report to reflect events or
circumstances after the date of this report or to update reasons why actual
results could differ from those anticipated in such forward-looking statements.
9
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NANOMETRICS INCORPORATED
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A. The annual meeting of shareholders was held on June 18, 1998.
B. The following directors were elected to the board of directors:
Vincent J. Coates
Nathaniel Brenner
Norman V. Coates
John D. Heaton
Clifford F. Smedley
Kanegi Nagai
C. The following matters were voted upon at the annual meeting:
For Against Abstain
--------- --------- -------
1. To elect the following directors
to serve for the ensuing year:
Vincent J. Coates, Chairman 7,318,208 0 3,500
Nathaniel Brenner, Director 7,320,208 0 1,500
Norman V. Coates, Director 7,305,008 0 16,700
John D. Heaton, Director 7,318,167 0 3,541
Clifford F. Smedley, Director 7,320,208 0 1,500
Kanegi Nagai, Director 7,320,208 0 1,500
2. To ratify the appointment of
Deloitte & Touche LLP as independent
auditors for the fiscal year ending
December 31, 1998. 7,319,438 0 2,270
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
Ex. 27 - Financial Data Schedule
B. Reports on Form 8-K.
None.
10
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NANOMETRICS INCORPORATED
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NANOMETRICS INCORPORATED
(Registrant)
/s/ Vincent J. Coates
- ---------------------
Vincent J. Coates
Chairman of the Board
/s/ John Heaton
- ---------------
John Heaton
Chief Executive Officer
/s/ Paul B. Nolan
- -----------------
Paul B. Nolan
Chief Financial Officer
Dated: August 11, 1998
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 933
<SECURITIES> 9,872
<RECEIVABLES> 11,789
<ALLOWANCES> 410
<INVENTORY> 10,746
<CURRENT-ASSETS> 35,805
<PP&E> 5,115
<DEPRECIATION> 3,003
<TOTAL-ASSETS> 39,015
<CURRENT-LIABILITIES> 6,086
<BONDS> 2,185
0
0
<COMMON> 13,726
<OTHER-SE> 17,018
<TOTAL-LIABILITY-AND-EQUITY> 39,015
<SALES> 19,323
<TOTAL-REVENUES> 21,266
<CGS> 7,627
<TOTAL-COSTS> 9,579
<OTHER-EXPENSES> 8,910
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 46
<INCOME-PRETAX> 2,900
<INCOME-TAX> 1,131
<INCOME-CONTINUING> 1,769
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,769
<EPS-PRIMARY> .21
<EPS-DILUTED> .20
</TABLE>
