SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q/A
X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
- - Act of 1934
For the quarterly period ended March 31, 1998 or
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Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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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
- --------------------------------------- ---------------------
(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 12, 1998 there were 8,609,784 shares of common stock, no par value,
issued and outstanding.
<PAGE>
NANOMETRICS INCORPORATED
Form 10-Q/A
This Amendment on Form 10-Q/A amends the Registrant's Quarterly Report on Form
10-Q, as filed by the Registrant on May 14, 1998, and is being filed to reflect
the restatement of the Registrant's Condensed Consolidated Financial Statements.
See Note 2 to the Notes to Condensed Consolidated Financial Statements for a
discussion of the basis for such restatement.
<TABLE>
INDEX
<CAPTION>
Part I. Financial Information Page
<S> <C> <C>
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
March 31, 1998 (as restated) and December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Income Three months ended
March 31, 1998 (as restated)
and 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows Three months ended
March 31, 1998 (as restated)
and 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Condensed Consolidated Financial
Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
</TABLE>
2
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PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
<TABLE>
NANOMETRICS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except share amounts)
(Unaudited)
<CAPTION>
March 31 December 31,
1998 1997
-------- --------
(As Restated)*
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 2,902 $ 3,656
Short-term investments 9,592 9,595
Accounts receivable, less allowance for
doubtful accounts of $412 and $413 9,829 10,225
Inventories 9,674 7,138
Deferred income taxes 1,865 2,094
Prepaid expenses and other 1,327 1,075
-------- --------
Total current assets 35,189 33,783
PROPERTY, PLANT AND EQUIPMENT, Net 2,200 2,187
OTHER ASSETS 1,684 273
-------- --------
TOTAL $ 39,073 $ 36,243
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,148 $ 1,889
Accrued payroll and related expenses 984 596
Other current liabilities 2,330 1,493
Income taxes payable 1,159 565
Current portion of long-term debt 555 604
-------- --------
Total current liabilities 7,176 5,147
LONG-TERM DEBT, Net of current portion 2,441 2,568
-------- --------
Total liabilities 9,617 7,715
-------- --------
SHAREHOLDERS' EQUITY:
Common stock, no par value; 25,000,000 shares
authorized; 8,608,116 and 8,521,484 outstanding 13,489 13,151
Retained earnings 16,768 16,144
Accumulated translation adjustment (801) (767)
-------- --------
Total shareholders' equity 29,456 28,528
-------- --------
TOTAL $ 39,073 $ 36,243
======== ========
<FN>
* See Note 2 to the Notes to Condensed Consolidated Financial Statements
See Notes to Condensed Consolidated Financial Statements
</FN>
</TABLE>
3
<PAGE>
NANOMETRICS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share amounts)
(Unaudited)
Three Months Ended
March 31,
1998 1997
-------- --------
(As Restated)*
NET REVENUES:
Product sales $ 9,618 $ 7,301
Service 920 958
-------- --------
Total net revenues 10,538 8,259
-------- --------
COSTS AND EXPENSES:
Cost of product sales 3,629 2,737
Cost of service 985 863
Research and development 1,231 674
Acquired in-process research and development 1,421 --
Selling 1,572 1,263
General and administrative 785 636
-------- --------
Total costs and expenses 9,623 6,173
-------- --------
INCOME FROM OPERATIONS 915 2,086
-------- --------
OTHER INCOME (EXPENSE):
Interest income 161 115
Interest expense (26) (25)
Other, net (9) (11)
-------- --------
Total other income, net 126 79
-------- --------
INCOME BEFORE PROVISION
FOR INCOME TAXES 1,041 2,165
PROVISION FOR INCOME TAXES 417 891
-------- --------
NET INCOME $ 624 $ 1,274
======== ========
NET INCOME PER SHARE:
Basic $ 0.07 $ 0.15
======== ========
Diluted $ 0.07 $ 0.15
======== ========
SHARES USED IN PER SHARE COMPUTATION:
Basic 8,545 8,260
======== ========
Diluted 8,978 8,673
======== ========
* See Note 2 to the Notes to Condensed Consolidated Financial Statements
See Notes to Condensed Consolidated Financial Statements
4
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<TABLE>
NANOMETRICS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
1998 1997
------- -------
(As Restated)*
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 624 $ 1,274
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 49 77
Purchase of in-process technology 1,421 --
Deferred taxes (652) (460)
Changes in assets and liabilities net of effects of product line acquisition:
Accounts receivable 642 90
Other receivables -- (48)
Inventories (959) (274)
Prepaid expenses and other (277) (25)
Accounts payable and other liabilities 574 254
Income taxes payable 699 (724)
------- -------
Net cash provided by operating activities 2,121 164
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments (1,951) (2,940)
Sales/maturities of short-term investments 1,954 1,958
Capital expenditures (85) (47)
Product line acquisition (3,038) --
------- -------
Net cash used in investing activities (3,120) (1,029)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (115) (81)
Issuance of common stock 338 11
------- -------
Net cash provided by (used in) financing activities 223 (70)
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 22 1,179
------- -------
NET CHANGE IN CASH AND EQUIVALENTS (754) 244
CASH AND EQUIVALENTS, beginning of period 3,656 1,725
------- -------
CASH AND EQUIVALENTS, end of period $ 2,902 $ 1,969
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ 26 $ 25
======= =======
Cash paid for income taxes $ 359 $ 1,622
======= =======
<FN>
* See Note 2 to the Notes to Condensed Consolidated Financial Statements
See Notes to Condensed Consolidated Financial Statements
</FN>
</TABLE>
5
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NANOMETRICS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Condensed Consolidated Financial Statements
The condensed 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 1997 Annual Report on Form 10-K filed with the
Securities and Exchange Commission.
Note 2. Restatement of Quarterly Financial Statements
Subsequent to the issuance of the Company's March 31, 1998 condensed
consolidated financial statements, the Securities and Exchange Commission ("the
SEC") issued new guidance on its views regarding the valuation methodology used
in determining acquired in-process research and development expensed on the date
of acquisition. As a result of the new guidance, the Company has modified its
methods used to value the acquired in-process research and development and other
intangible assets acquired in connection with the Optical Specialties, Inc.
("OSI") product line acquisition (see Note 4 below). The revised valuation is
based on management estimates of the after-tax net cash flows and gives explicit
consideration to the SEC's views on acquired in-process research and development
as set forth in its September 9, 1998 letter to the American Institute of
Certified Public Accountants. As a result of the revised valuation, the amount
of purchase price allocated to in-process research and development decreased
from $2,036,000 to $1,421,000, and the amount ascribed to other intangible
assets increased from $0 to $615,000.
<TABLE>
The condensed consolidated financial statements as of March 31, 1998 and for
the three months then ended have been restated from amounts previously reported
to reflect the revised valuation of assets acquired including goodwill, core and
developed technology and in-process research and development. The effects of
such restatement are summarized as follows (in thousands, except per share
amounts):
<CAPTION>
Three Months Ended
March 31, 1998
--------------
As Previously Reported As Restated
---------------------- -----------
<S> <C> <C>
Acquired in-process research and development $ 2,036 $ 1,421
Income from operations $ 300 $ 915
Income before provision for income taxes $ 426 $ 1,041
Provision for income taxes $ 171 $ 417
Net income $ 255 $ 624
Basic net income per share $ 0.03 $ 0.07
Diluted net income per share $ 0.03 $ 0.07
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
At March 31, 1998
-----------------
As Previously Reported As Restated
---------------------- -----------
<S> <C> <C>
Deferred income taxes $ 2,111 $ 1,865
Other assets $ 1,069 $ 1,684
Retained earnings $16,399 $16,768
Total shareholders' equity $29,087 $29,456
</TABLE>
<TABLE>
Note 3. Inventories
Inventories are stated at the lower of cost (first-in,first-out) or market
and consist of the following (in thousands):
<CAPTION>
March 31, December 31,
1998 1997
-------- ---------
<S> <C> <C>
Raw materials and subassemblies $ 5,942 $ 2,934
Work in process 2,705 1,528
Finished goods 1,027 2,676
-------- ---------
$ 9,674 $ 7,138
======== =========
</TABLE>
Note 4. Product Line Acquisition
On March 30, 1998 the Company entered into an agreement with 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 (of
which $187,000 was accrued and remained unpaid as of March 31, 1998) for the
assets and in-process research and development. The total purchase price and
final allocation among the tangible and intangible assets and liabilities
acquired (including acquired in-process technology) is summarized as follows (in
thousands):
Total Purchase Price:
Total cash consideration $3,225
======
Purchase Price Allocation:
Tangible assets $1,923
Intangible assets:
Core and developed technology 419
Goodwill 196
In-process research and development 1,421
Tangible liabilities (734)
------
$3,225
======
The intangible assets are recorded within other assets in the accompanying
condensed consolidated balance sheet as of March 31, 1998 and are being
amortized over a five year useful life.
The valuation was based on management's estimates of the after tax net cash
flows and gave explicit consideration to the SEC's views on acquired in-process
research and development as set forth in its September 9, 1998 letter to the
American Institute of Certified Public Accountants. Specifically, the valuation
gave consideration to the following: (i) the employment of a fair market value
premise excluding any Nanometrics-specific considerations which would result in
estimates of investment value for the subject assets; and (ii) comprehensive due
diligence concerning all potential intangible assets including
trademarks/tradenames, patents, copyrights, non-compete agreements, assembled
workforce
7
<PAGE>
and customer relationships and sales channel. The value of core technology was
explicitly addressed, with a view toward ensuring the relative allocations to
core technology and in-process research and development were consistent with the
relative contributions of each to the final product. The allocation to
in-process research and development was based on a calculation that considered
only the efforts completed as of the transaction date, and only the cash flow
associated with said completed efforts for the products currently in process.
As noted above, the Company recorded a one-time charge of $1,421,000 in the
first quarter of 1998 for acquired in-process research and development related
to a development project that had not reached technological feasibility, had no
alternative future use and for which successful development was uncertain. The
conclusions that the in-process development effort, or any material
sub-component, had no alternative future use was reached in consultation with
engineering personnel from both Nanometrics and OSI.
The project to complete the Metra 7000 product includes the completion of a
software platform design started by OSI in 1997. As of the acquisition date, the
Metra 7000 had yet to achieve technological feasibility since there was not a
working prototype with a reliable new software platform. At the time of the
acquisition, the estimated cost to complete this software and related
development was approximately $300,000. Management expects that the Metra 7000
product will be available for sale by June 1998. The Company will begin to
benefit from the acquired research and development related to this product once
it begins shipping products to customers. Failure to reach successful completion
of this product could result in impairment of the associated capitalized
intangible assets and could require the Company to accelerate the time period
over which the intangibles are being amortized, which could have a material
adverse effect on the Company's business, financial condition or result of
operations.
Significant assumptions used to determine the value of in-process research
and development included several factors, including the following: (i) forecast
of net cash flows that were expected to result from the development effort,
using projections prepared by Nanometrics' management; and (ii) percentage
complete of 77% for the Metra project estimated by considering a number of
factors, including the costs invested to date relative to the expected total
cost of the development effort and the amount of progress completed as of the
acquisition date, on a technological basis, relative to the overall
technological achievements required to achieve the intended functionality of the
eventual product. The technological issues were addressed by engineering
representatives from both Nanometrics and OSI; and when estimating the value of
the technology, the projected financial results of the acquired assets were
estimated on a stand-alone basis without any consideration to potential synergic
benefits or "investment value" related to the acquisition. Accordingly, separate
projected cash flows were prepared for both the existing as well as the
in-process Metra 7000 products. These projected results were based on the number
of units sold times average selling price less the associated costs. After
preparing the estimated cash flow from the product being developed, a portion of
this cash flow was attributed to the core technology, which is embodied in the
in-process Metra 7000 product line and enables the development of the Metra 7000
quicker and more cost effectively. When estimating the value of the developed,
core and in-process technologies, discount rates of 25%, 30% and 35%
respectively, were used. These discount rates consider both the status and risk
associated with the respective cash flows as of the acquisition date.
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 accompanying
condensed consolidated statement of income according to the employees'
function).
8
<PAGE>
Note 5. Net Income Per Share
The reconciliation of the share denominator used in the basic and diluted net
income per share computations for the three months ended March 31 are as follows
(in thousands):
1998 1997
----- -----
Weighted average common shares outstanding-shares
used in basic net income per share computations 8,545 8,260
Dilutive effect of common stock equivalents,
using the treasury stock method 433 413
----- -----
Shares used in diluted net income per share computation 8,978 8,673
===== =====
During the three months ended March 31, 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 March 31, 1998,
334,500 such common stock options with a weighted average exercise price of
$10.23 per share were excluded from the diluted net income per share
computation.
Note 6. Recently Adopted Accounting Standard
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 March 31, 1998 and
1997, comprehensive income, which consisted of net income for the periods and
changes in accumulated translation adjustments, was $590,000 and $1,094,000,
respectively.
Note 7. Recently Issued Accounting Standard
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures 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 cash flows.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 to measure the critical dimensions and overlay registration
errors observed in submicron lithography. Subsequent to the issuance of the
Company's March 31, 1998 condensed consolidated financial statements, the
Securities and Exchange Commission ("the SEC") issued new guidance on its views
regarding the valuation methodology used in determining acquired in-process
research and development expensed on the date of acquisition. As a result of the
new guidance, the Company has modified its methods used to value the acquired
in-process research and development and other intangible assets acquired in
connection with the OSI product line acquisition. The revised valuation was
based on management estimates of the after tax net cash flows and gave explicit
consideration to the SEC's views on acquired in-process research and development
as set forth in its September 9, 1998 letter to the American Institute of
Certified Public Accountants. As a result of the revised valuation, the amount
of purchase price allocated to in-process research and development decreased
from $2,036,000 to $1,421,000 and the amount ascribed to other intangible assets
increased from $0 to $615,000. Accordingly, the Company's Condensed Consolidated
Financial Statements and Management Discussion and Analysis of Financial
Condition and Results of Operations have been restated to reflect such
adjustments described herein and in Note 2 to the Notes to Condensed
Consolidated Financial Statements.
Results of Operations
Total net revenues for the first quarter of 1998 were $10,538,000, an
increase of $2,279,000 or 28% from the same quarter in 1997. Product sales of
$9,618,000 increased $2,317,000 or 32% for the first quarter of 1998 compared to
the same period in 1997 resulting from increased demand for the Company's
automated products especially to customers in the U.S., Japan and Taiwan.
Service revenue of $920,000 decreased $38,000 or 4% for the first quarter of
1998 compared to the same period in 1997. This decrease in service revenue is
primarily attributable to decreased sales of accessories in the U.S. and the Far
East in 1998.
Cost of product sales as a percentage of product sales increased slightly to
38% in the first quarter of 1998 from 37% in the first quarter of 1997 because
of the costs related to the addition of eight employees, in the first quarter of
1998, who are responsible for manufacturing the Company's new Metra product
line. Cost of service as a percentage of service revenue increased to 107% in
the first quarter of 1998 from 90% in the first quarter of 1997. This increase
was primarily attributable to the costs related to the addition of eleven
employees, in the first quarter of 1998, who are responsible for servicing the
Company's new Metra product line.
Research and development expenses for the first quarter of 1998 increased
$557,000 or 83% compared to the same period in 1997. This increase was mainly
due to the costs related to the addition of eight employees, in the first
quarter of 1998, who are 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 condensed consolidated statement of
income for the three months ended March 31, 1998.
Selling expenses for the first quarter of 1998 increased by $309,000 or 24%
compared to the same period in 1997 primarily because of the costs related to
the addition of seven employees, in the first quarter of 1998, who are
responsible for sales and marketing the Company's new Metra product line.
General and administrative expenses for the first quarter of 1998 increased
by $149,000 or 23% primarily as a result of spending associated with the
increased level of operations.
10
<PAGE>
Other income increased $47,000 or 59% during the first quarter of 1998
compared to the same period in 1997 due primarily to higher interest income in
1998, resulting from higher average levels of cash and short-term investments.
The Company's effective tax rate decreased to 40.1% in the first quarter of
1998 from 41.2% in the first quarter of 1997 primarily due to proportionately
higher income in jurisdictions with lower statutory tax rates.
Income from operations of $915,000 and net income of $624,000 in the first
quarter of 1998 included pre-tax charges of $1,421,000 for the write-off of
in-process research and development relating to the Metra overlay registration
product line acquired from OSI and $350,000 in non-recurring hiring expenses for
certain OSI employees. Excluding these charges, income from operations was
$2,686,000 and net income was $1,687,000 in the first quarter of 1998 compared
to income from operations of $2,086,000 and net income of $1,274,000 for the
same period in 1997.
Liquidity and Capital Resources
At March 31, 1998, the Company had working capital of $28,013,000 compared
to $28,636,000 at December 31, 1997. The current ratio at March 31, 1998 was 4.9
to 1. The Company believes working capital including cash and short-term
investments of $12,494,000 will be sufficient to meet its needs at least through
the next twelve months. Operating activities for the first three months of 1998
provided cash of $2,121,000 primarily from net income adjusted for the
in-process technology purchase of the Metra product line, while the purchase of
short-term investments net of sales/maturities provided $3,000, capital
expenditures used $85,000, purchase of the Metra product line used $3,038,000,
debt repayment used $115,000 and issuance of common stock provided $338,000.
Recently Issued Accounting Standard
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures 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 cash flows.
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;
11
<PAGE>
(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 March 31, 1999.
Manufacturing: The Company's assembly and test equipment is scheduled for
ongoing upgrades to Y2K compliant configurations through mid-1999. The
Company's primary manufacturing application software system is scheduled to
be upgraded to be Y2K compliant by mid-1999. The cost of such upgrade is
included in the estimate of the costs to upgrade the information technology
as discussed below.
Information Technology Systems ("IT"): The Company has conducted a survey
of its IT hardware and software and has identified substantially all
non-Y2K compliant hardware and software. The Company has purchased a Y2K
upgrade license from its IT vendor and expects to implement the upgrade by
mid-1999. The Company currently estimates the cost of the upgrade license
and the related internal and external costs to implement will approximate
$140,000.
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.
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.
12
<PAGE>
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 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.
13
<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.
14
<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: February 16, 1999
15
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