SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 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 March 31, 1999 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 number 0-13470
NANOMETRICS INCORPORATED
------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 94-2276314
------------------------------- ------------------
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
310 DeGuigne Drive, Sunnyvale, CA 94086
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (408) 746-1600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
At April 14, 1999 there were 8,750,580 shares of common stock, no par value,
issued and outstanding.
<PAGE>
NANOMETRICS INCORPORATED
INDEX
Part I. Financial Information Page
----
Item 1. Financial Statements
Consolidated Balance Sheets -
March 31, 1999 and December 31, 1998 ........................ 3
Consolidated Statements of Operations -
Three months ended March 31, 1999 and 1998 ................ 4
Consolidated Statements of Cash Flows -
Three months ended March 31, 1999 and 1998 ................ 5
Notes to Consolidated Financial Statements ................. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations .............. 8
Item 3. Quantitative and Qualitative Disclosures
about Market Risk ........................................... 11
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K ............................ 12
Signatures ................................................................. 13
2
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
<TABLE>
NANOMETRICS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except share amounts)
(Unaudited)
<CAPTION>
March 31, December 31,
ASSETS 1999 1998
-------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,996 $ 1,518
Short-term investments 9,897 9,913
Accounts receivable, net of
allowances of $417 and $420 6,592 8,458
Inventories 10,756 11,719
Deferred income taxes 1,438 1,441
Prepaid expenses and other 1,815 2,328
-------- --------
Total current assets 34,494 35,377
PROPERTY, PLANT AND EQUIPMENT, Net 2,324 2,481
DEFERRED INCOME TAXES 573 560
OTHER ASSETS 811 887
-------- --------
TOTAL $ 38,202 $ 39,305
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 907 $ 1,395
Accrued payroll and related expenses 617 317
Other current liabilities 1,562 1,720
Current portion of debt obligations 992 1,324
-------- --------
Total current liabilities 4,078 4,756
DEFERRED RENT 50 43
DEBT OBLIGATIONS 2,246 2,496
-------- --------
Total liabilities 6,374 7,295
-------- --------
SHAREHOLDERS' EQUITY:
Common stock, no par value; 25,000,000 shares
authorized; 8,736,785 and 8,690,643 outstanding 14,309 14,170
Retained earnings 17,773 17,974
Accumulated other comprehensive loss (254) (134)
-------- --------
Total shareholders' equity 31,828 32,010
-------- --------
TOTAL $ 38,202 $ 39,305
======== ========
<FN>
See Notes to Consolidated Financial Statements
</FN>
</TABLE>
3
<PAGE>
<TABLE>
NANOMETRICS INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share amounts)
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
1999 1998
-------- --------
<S> <C> <C>
NET REVENUES:
Product sales $ 5,265 $ 9,618
Service 924 920
-------- --------
Total net revenues 6,189 10,538
-------- --------
COSTS AND EXPENSES:
Cost of product sales 2,552 3,629
Cost of service 1,104 985
Research and development 1,016 1,231
Acquired in-process research and development -- 1,421
Selling 1,277 1,572
General and administrative 641 785
-------- --------
Total costs and expenses 6,590 9,623
-------- --------
INCOME (LOSS) FROM OPERATIONS (401) 915
-------- --------
OTHER INCOME (EXPENSE):
Interest income 138 161
Interest expense (21) (26)
Other, net (51) (9)
-------- --------
Total other income, net 66 126
-------- --------
INCOME (LOSS) BEFORE INCOME TAXES (335) 1,041
PROVISION (BENEFIT) FOR INCOME TAXES (134) 417
-------- --------
NET INCOME (LOSS) $ (201) $ 624
======== ========
NET INCOME (LOSS) PER SHARE:
Basic $ (0.02) $ 0.07
======== ========
Diluted $ (0.02) $ 0.07
======== ========
SHARES USED IN PER SHARE COMPUTATION:
Basic 8,701 8,545
======== ========
Diluted 8,701 8,978
======== ========
<FN>
See Notes to Consolidated Financial Statements
</FN>
</TABLE>
4
<PAGE>
<TABLE>
NANOMETRICS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
1999 1998
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (201) $ 624
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 51 49
Deferred rent 7 7
Purchase of in-process technology -- 1,421
Deferred taxes 10 (652)
Changes in assets and liabilities, net of effects of product line acquisition:
Accounts receivable 1,582 642
Inventories 881 (959)
Prepaid income taxes 745 --
Prepaid expenses and other (237) (253)
Accounts payable and other liabilities (322) 567
Income taxes payable -- 699
------- -------
Net cash provided by operating activities 2,516 2,145
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments (2,984) (1,951)
Sales/maturities of short-term investments 3,000 1,954
Capital expenditures (23) (85)
Other assets 53 (24)
Product line acquisition -- (3,038)
------- -------
Net cash provided by (used in) investing activities 46 (3,144)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (364) (115)
Issuance of common stock 139 338
------- -------
Net cash provided by (used in) financing activities (225) 223
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 141 22
------- -------
NET CHANGE IN CASH AND EQUIVALENTS 2,478 (754)
CASH AND EQUIVALENTS, beginning of period 1,518 3,656
------- -------
CASH AND EQUIVALENTS, end of period $ 3,996 $ 2,902
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 56 $ 26
======= =======
Cash paid for income taxes $ -- $ 359
======= =======
<FN>
See Notes to Consolidated Financial Statements
</FN>
</TABLE>
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
intercompany accounts and transactions have been eliminated.
While the quarterly financial statements are unaudited, the financial
statements included in this report reflect all adjustments (consisting only of
normal recurring adjustments) which the Company considers necessary for a fair
presentation of the results of operations for the interim periods covered and of
the financial condition of the Company at the date of the interim balance sheet.
The operating results for interim periods are not necessarily indicative of the
operating results that may be expected for the entire year. The information
included in this report should be read in conjunction with the information
included in the Company's 1998 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):
March 31, December 31,
1999 1998
------- -------
Raw materials and subassemblies $ 5,751 $ 3,859
Work in process 2,198 2,253
Finished goods 2,807 5,607
------- -------
$10,756 $11,719
======= =======
Note 3. Other Current Liabilities
Other current liabilities consist of the following (in thousands):
March 31, 1999 December 31, 1998
-------------- -----------------
Commissions payable $ 347 $ 366
Accrued warranty 527 581
Other 688 773
------ ------
$1,562 $1,720
====== ======
Note 4. Net Income (Loss) Per Share
The reconciliation of the share denominator used in the basic and
diluted net income (loss) per share computations for the three months ended
March 31 are as follows (in thousands):
1999 1998
----- -----
Weighted average common shares outstanding-shares
used in basic net income per share computations 8,701 8,545
Dilutive effect of common stock equivalents,
using the treasury stock method -- 433
----- -----
Shares used in diluted net income per share computation 8,701 8,978
===== =====
6
<PAGE>
During the three months ended March 31, 1999 and 1998, the Company had
common stock options outstanding which could potentially dilute basic net income
(loss) per share in the future, but were excluded from the computation of
diluted net income (loss) per share as the common stock options' exercise prices
were greater than the average market price of the common shares for the period.
Additionally, for the three months ended March 31, 1999, common stock options
outstanding with exercise prices less than the average market price of the
common shares were also excluded from the computation of diluted net loss per
share as their effect would be antidilutive in the loss period. At March 31,
1999, 1,579,582 common stock options with a weighted average exercise price of
$5.36 per share were excluded from the diluted net loss per share computation.
Note 5. Comprehensive Income (Loss)
Comprehensive income (loss), which consisted of net income (loss) and
changes in accumulated translation adjustments, was $(321,000) for the three
months ended March 31, 1999 compared to $590,000 for the same period in 1998.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
Total net revenues for the first quarter of 1999 were $6,189,000, a
decrease of $4,349,000 or 41% from the same quarter in 1998. Product sales of
$5,265,000 decreased $4,353,000 or 45% for the first quarter of 1999 compared to
the same period in 1998 primarily resulting from decreased shipments of the
Company's products in the U.S. and Far East due primarily to slower worldwide
demand in the semiconductor industry. Service revenue of $924,000 increased
$4,000 in the first quarter of 1999 compared to the same period in 1998.
Cost of product sales as a percentage of product sales increased to 48%
in the first quarter of 1999 from 38% in the first quarter of 1998 primarily
because of lower sales volume in 1999 resulting in higher per unit manufacturing
costs. Cost of service as a percentage of service revenue increased to 119% in
the first quarter of 1999 from 107% in the first quarter of 1998. This increase
was primarily attributable to higher fixed service costs needed to support the
Company's growing installed base of systems at customer locations.
Research and development expenses for the first quarter of 1999
decreased $215,000 or 17% compared to the same period in 1998. The higher level
of cost in the first quarter of 1998 was mainly due to one time costs related to
the addition of new employees who were responsible for research and development
of 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 research and development related to OSI's
Metra product line. Of this purchase price, $1,421,000 related to the value of
in-process research and development that had no alternative future use and was
charged to expense in the accompanying consolidated statement of operations for
the three months ended March 31, 1998.
Selling expenses for the first quarter of 1999 decreased by $295,000 or
19% compared to the same period in 1998 primarily because of lower commission
expenses and other expenses associated with lower sales levels in the first
quarter of 1999.
General and administrative expenses for the first quarter of 1999
decreased by $144,000 or 18% compared to the same period in 1999 primarily as a
result of lower spending associated with the decreased level of operations.
Other income, net decreased $60,000 or 48% during the first quarter of
1999 compared to the same period in 1998 due primarily to lower interest income
and higher royalty expenses in the first quarter of 1999.
For the first quarter of 1999, the Company recorded an income tax
benefit at an effective tax rate of 40% based on its evaluation of its annual
effective tax rate.
The Company's loss from operations was $401,000 and net loss was
$201,000 or $0.02 per diluted share in the first quarter of 1999 compared to
income from operations of $915,000 and net income of $624,000 or $0.07 per
diluted share in the first quarter of 1998.
Liquidity and Capital Resources
At March 31, 1999, the Company had working capital of $30,416,000
compared to $30,621,000 at December 31, 1998. The current ratio at March 31,
1999 was 8.5 to 1. The Company believes working capital including cash, cash
equivalents and short-term investments of $13,893,000 will be sufficient to meet
its needs at least through the next twelve months. Operating activities for the
first three months of 1999 provided cash of $2,516,000 primarily from lower
accounts receivable and inventory, while the sales/maturities of short-term
investments net of purchases provided
8
<PAGE>
$16,000, capital expenditures used $23,000, debt repayment used $364,000 and
issuance of common stock provided $139,000.
Year 2000 Issues
Many computer systems are expected to experience problems handling dates around
the year 2000 ("Y2K"). The Y2K issue is the result of many currently installed
computer programs being written using two digits rather than four to define the
applicable year. As a result, these computer programs are unable to distinguish
between 21st century dates and 20th century dates and could cause computer
system failures or miscalculations that result in significant business
disruptions. Described below are the actions the Company has taken, and plans to
take, to address the potential problems resulting as systems attempt to handle
dates around the millennium.
State of Readiness The Company's upper management has discussed and agreed upon
a comprehensive plan to address its Y2K issues. The Y2K plan includes the
following activities: gathering data and taking inventory; testing systems and
products to evaluate Y2K compliance; execution of remediation activities to fix
non-compliant products and systems; and monitoring and testing products and
systems on an ongoing basis. The major business areas impacted are:
Products: Many of the Company's products incorporate computer software
to control certain add-on features and functionality. The Company's
products are measurement tools and Y2K issues arise in the Company's
products where database functions are used (e.g. storage of measurement
data). The Company has completed testing and evaluation of its products
for Y2K compliance. As a result of such evaluation, the Company
believes that: (i) most of its current product lines are Y2K compliant;
(ii) upgrades are currently available or will be available by mid-1999
for non-Y2K compliant automated products; and (iii) as database
functionality is not used in certain older obsolete products and in
non-automated systems, Y2K compliance is not believed to be an issue.
Procurement: Critical suppliers have been contacted and status of
products and internal systems have been verified. The Company is in the
process of evaluating the balance of its supplier base. This evaluation
is expected to be completed by May 31, 1999.
Manufacturing: The Company believes that its assembly and test
equipment and its primary manufacturing application software system are
now Y2K compliant.
Information Technology Systems ("IT"): The Company has purchased a Y2K
upgrade license from its IT vendor and has installed the upgrade in its
IT system.
Facilities and Infrastructure: An assessment of the Y2K readiness of
owned and leased assets has been performed and systems which will
require upgrade or replacement include the security and card key system
and the voicemail system.
Costs While the Company has not yet completed the entire evaluation of the
required activities to address the Y2K issues, the Company currently believes
that the estimated costs of Y2K compliance efforts are not expected to be
material to the Company.
Risks The Company believes the most reasonably likely worst case Y2K scenarios
include the following:
Customers could change their buying patterns in a number of ways, including
accelerating or delaying purchases of, or replacement of, the Company's products
and services.
9
<PAGE>
The Company could experience a disruption in service to its customers as a
result of the failure of third party products, including the following: third
party products which are non-compliant and are incorporated into the Company's
products could cause the products to fail; a breakdown in telephone, e-mail,
voicemail, could impact the responsiveness of the Company's customer service
department; Y2K problems at a number of the Company's suppliers including banks,
telephone companies and the United States Postal Service could have a pervasive
impact on the Company's business as a whole; and product features that rely on
date parameters (generally date dependent routings and operating reports) could
malfunction.
Although the Company's products are undergoing both Y2K specific, and its normal
testing procedures, its products may not contain all of the necessary date code
or other changes to operate in the year 2000. Any failure of such products to
perform could result in: claims and lawsuits against the Company; significantly
impaired customer satisfaction resulting in customers withholding cash owed to
the Company and delaying or canceling orders; and managerial and technical
resources being diverted away from product development and other business
activities.
Any of the above stated consequences, in addition to others which the Company
cannot yet foresee, could have a significant adverse impact on the Company's
business, operating results and financial condition.
Contingency Plan The Company currently believes that its plan is adequate to
address its Y2K issues, and accordingly, does not believe that it is practical
to develop a comprehensive contingency plan. Based on the current plan's
timeline, the Company believes that it would be able to determine the
effectiveness of the current plan by mid-1999. As such, in the event that its
current plan is not adequate to address the Y2K issues, the Company believes
that there will be adequate time to establish and implement a contingency plan.
Once a contingency plan is implemented, however, the Company cannot be certain
that such a plan would prevent significant Y2K problems from having a material
adverse effect on the Company's business, operating results and financial
condition.
Forward Looking Statements
The foregoing Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, and Section 21E of the Securities
Exchange Act of 1934. These statements involve risks and uncertainties and
actual results could differ materially as a result of a number of factors
including customer 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 or delay of customer orders and
shipments, competition, including competitive pressures on product prices and
changes in pricing by the Company's customers or suppliers, fluctuations 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 businesses, 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 1998 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.
10
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to financial market risks, which include changes
in foreign currency exchange rates and interest rates. The Company does not use
derivative financial instruments. Instead, the Company actively manages the
balances of current assets and liabilities denominated in foreign currencies to
minimize currency fluctuation risk. As a result, a 10% change in the foreign
currency exchange rates would not have a material impact on the Company's
results of operations. The Company's investments in marketable securities are
subject to interest rate risk but due to the short-term nature of these
investments, interest rate changes would not have a material impact on their
value. The Company also has fixed rate debt obligations in Japan that are
subject to interest rate risk. At March 31, 1999, the Company's total debt
obligation was $3,238,000 while the long-term portion was $2,246,000. The
Company does not actively manage the risk associated with these obligations
because the impact of interest rate changes would not have a material impact on
the Company's results of operations.
11
<PAGE>
NANOMETRICS INCORPORATED
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
Ex. 27 - Financial Data Schedule
B. Reports on Form 8-K.
None.
12
<PAGE>
NANOMETRICS INCORPORATED
SIGNATURES
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: May 11, 1999
13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 3,996
<SECURITIES> 9,897
<RECEIVABLES> 7,009
<ALLOWANCES> 417
<INVENTORY> 10,756
<CURRENT-ASSETS> 34,494
<PP&E> 5,521
<DEPRECIATION> 3,197
<TOTAL-ASSETS> 38,202
<CURRENT-LIABILITIES> 4,078
<BONDS> 2,246
0
0
<COMMON> 14,309
<OTHER-SE> 17,519
<TOTAL-LIABILITY-AND-EQUITY> 38,202
<SALES> 5,265
<TOTAL-REVENUES> 6,189
<CGS> 2,552
<TOTAL-COSTS> 3,656
<OTHER-EXPENSES> 2,934
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21
<INCOME-PRETAX> (335)
<INCOME-TAX> (134)
<INCOME-CONTINUING> (201)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (201)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
