<PAGE>
As filed with the Securities and Exchange Commission on March 2, 2000
Registration No. 333-95115
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-2
REGISTRATION STATEMENT
Under
The Securities Act of 1933
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NANOMETRICS INCORPORATED
(Exact name of Registrant as specified in its charter)
-----------
California 3829 94-2276314
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification Number)
incorporation or Classification Code
organization) Number)
310 DeGuigne Drive
Sunnyvale, California 94086
(408) 746-1600
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
-----------
Paul Nolan
Chief Financial Officer
Nanometrics Incorporated
310 DeGuigne Drive
Sunnyvale, California 94086
(408) 746-1600
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
-----------
Copies to:
Barry E. Taylor, Esq. Nora L. Gibson, Esq.
Craig D. Norris, Esq. Laura M. de Petra, Esq.
Steven Liu, Esq. Lora D. Blum, Esq.
Eric R. Barnett, Esq. Shelley E. Wharton, Esq.
Wilson Sonsini Goodrich & Rosati Brobeck, Phleger & Harrison LLP
Professional Corporation One Market, Spear Street Tower
650 Page Mill Road San Francisco, CA 94105
Palo Alto, CA 94304 (415) 442-0900
(650) 493-9300
-----------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item
(11)(a)(1) of this Form, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
Calculation of Registration Fee
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<TABLE>
<CAPTION>
Title of Each Class Proposed Proposed Maximum Amount of
of Securities to Be Amount to Be Maximum Offering Aggregate Offering Registration Fee
Registered Registered (1) Price Per Share (2) Price (2)
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<S> <C> <C> <C> <C>
Common Stock, no par
value................. 4,025,000 shares $21.53 $86,663,281 $22,880(3)
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</TABLE>
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(1) Includes 525,000 shares that the Underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purposes of calculating the registration fee in
accordance with Rule 457(c) of the Securities Act of 1933, as amended.
(3) Previously paid.
-----------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities, and it is not soliciting an offer to buy +
+these securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MARCH 2, 2000
PROSPECTUS
3,500,000 Shares
[LOGO OF NANOMETRICS INCORPORATED]
Common Stock
$ per share
--------
We are selling 1,750,000 shares of our common stock, and the selling
shareholders named in this prospectus are selling 1,750,000 shares. We will not
receive any proceeds from the sale of shares by the selling shareholders. The
underwriters named in this prospectus may purchase up to additional 525,000
shares of common stock from us and a selling shareholder under certain
circumstances.
Our common stock is quoted on the Nasdaq National Market under the symbol
"NANO". The last reported sale price of our common stock on the Nasdaq National
Market on February 28, 2000, was $36.50 per share.
--------
Investing in our common stock involves certain risks. See "Risk Factors"
beginning on page 6.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
--------
<TABLE>
<CAPTION>
Per Share Total
--------- ------
<S> <C> <C>
Public Offering Price $ $
Underwriting Discount $ $
Proceeds to Nanometrics (before expenses) $ $
Proceeds to the Selling Shareholders (before expenses) $ $
</TABLE>
The underwriters are offering the shares subject to various conditions. The
underwriters expect to deliver the shares to purchasers on or about ,
2000.
--------
Salomon Smith Barney
Wit SoundView
Tucker Anthony Cleary Gull
Needham & Company, Inc.
, 2000
<PAGE>
You should rely only on the information contained in or incorporated by
reference in this prospectus. We have not authorized anyone to provide you with
different information. We are not making an offer of these securities in any
state where the offer is not permitted. You should not assume that the
information provided by this prospectus is accurate as of any date other than
the date on the front of this prospectus.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
Special Note Regarding Forward-Looking Statements........................ 14
Use of Proceeds.......................................................... 15
Price Range of Common Stock.............................................. 15
Dividend Policy.......................................................... 15
Capitalization........................................................... 16
Selected Consolidated Financial Data..................................... 17
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 19
Business................................................................. 27
Management............................................................... 39
Principal and Selling Shareholders....................................... 41
Description of Capital Stock............................................. 43
Underwriting............................................................. 44
Legal Matters............................................................ 46
Experts.................................................................. 46
Available information.................................................... 46
Incorporation of Information by Reference................................ 46
Index to Consolidated Financial Statements............................... F-1
</TABLE>
References in this prospectus, and the documents incorporated by reference
in this prospectus, to "Nanometrics," "we," "our" and "us" refer to Nanometrics
Incorporated, a California corporation, and its subsidiaries. We maintain a
website at http://www.nanometrics.com. Information contained in our website
does not constitute part of this prospectus.
Nanometrics Incorporated and the names of our systems are tradenames or
trademarks of Nanometrics. This prospectus also contains trademarks and
tradenames of other companies.
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering, including "Risk Factors" and our consolidated financial statements
and notes to those statements appearing elsewhere in this prospectus and
incorporated by reference.
Nanometrics Incorporated
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 non-contact, non-
destructive thin film measurement systems use a broad spectrum of wavelengths,
high-sensitivity optics, proprietary software and patented technology to
measure the thickness and uniformity of films deposited on silicon and other
substrates as well as their chemical composition.
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,
Hyundai, IBM, LG International, TSMC and WaferTech.
Thin film metrology systems are used at many points during the manufacturing
process, including before and after deposition, chemical mechanical
planarization, or CMP, photolithography and etch. During thin film metrology, a
wafer surface is measured to determine the quality of the film or pattern and
find defects. Measurements are taken to ensure process uniformity and include
thickness, width, height, roughness and other characteristics. Several trends
are increasing the need for thin film metrology systems, including:
. growing use of chemical mechanical planarization;
. adoption on new types of thin films;
. increasing complexity of semiconductors; and
. need for rapid ramp of production efficiencies.
We offer a complete line of systems to address the thin film metrology
requirements of our customers. Our metrology systems can be categorized as
follows:
. Stand-alone, fully automated systems for measurements of thin films in
high-volume manufacturing operations. We offer a broad line of fully
automated thin film thickness 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 of today's semiconductor, flat
panel display and magnetic recording head manufacturing facilities. We
believe we offer the only fully automated film thickness measurement
systems that are able to determine the concentration of elements, or
dopants, within a film. This is of significant importance, as many new
films today require continuous monitoring of dopant levels and chemical
composition. Our fully automated metrology product line also includes
systems that are used to measure overlay registration accuracy of
successive layers of semiconductor patterns on wafers in the
photolithography process.
. Integrated systems used to measure in-process wafers automatically and
quickly without having to leave the enclosed wafer processing system. Our
high-speed, integrated metrology systems are compact and monitor a
multitude of small test points on the wafer using sophisticated pattern
recognition. These systems can be attached to film deposition, CMP, etch
and other process tools to provide rapid monitoring of films on each
wafer immediately before or after processing. Our integrated systems
offer customers significantly increased
3
<PAGE>
operating efficiency and equipment utilization, lower manufacturing costs
and higher throughput. Similar to our automated metrology systems, our
integrated systems can be configured to determine the concentration of
dopants within a film. We believe we are the only supplier of integrated
metrology systems with this capability. We are currently shipping
integrated systems to Applied Materials for installation on their Mirra
Mesa(TM) CMP system and Producer QA(TM) chemical vapor deposition, or
CVD, system.
. Tabletop systems used to manually or semiautomatically measure thin films
in engineering and low-volume production environments. We pioneered and
believe we are the leading supplier of tabletop thin film thickness
measurement systems. 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.
Our strategy is to offer and support, on a worldwide basis, technologically
advanced metrology systems that meet the changing manufacturing requirements of
the semiconductor, flat panel display and magnetic recording head industries as
well as other industries that use metrology systems. Key elements of our
strategy include:
. continuing to offer advanced integrated metrology systems;
. maintaining technology leadership;
. leveraging existing customer and industry relationships;
. providing worldwide distribution and support;
. providing a broad portfolio of metrology systems and technology; and
. addressing multiple markets.
Our principal manufacturing and administrative facility is located in
Sunnyvale, California, and we have wholly owned subsidiaries in Japan and Korea
for manufacturing, sales and service. We are incorporated under the laws of the
state of California. Our principal executive offices are located at 310
DeGuigne Drive, Sunnyvale, California 94086 and our telephone number is (408)
746-1600.
The Offering
The following information is based upon shares outstanding as of December
31, 1999. It excludes, as of December 31, 1999, 1,494,664 shares of common
stock subject to outstanding options at a weighted average exercise price of
$7.49 per share and 479,172 shares of common stock available for future grants
under our stock option and stock purchase plans.
<TABLE>
<S> <C>
Common shares offered by Nanometrics.... 1,750,000 shares
Common shares offered by the selling
shareholders........................... 1,750,000 shares
Common shares to be outstanding after
the offering........................... 10,913,998 shares
Use of proceeds......................... We intend to use the proceeds of
this offering for working capital and
other general corporate purposes.
See "Use of Proceeds."
Nasdaq National Market symbol........... NANO
</TABLE>
4
<PAGE>
Summary Consolidated Financial Data
(In thousands, except per share data)
The information under "As Adjusted" in the balance sheet data below reflect
the receipt of the estimated net proceeds from the sale of 1,750,000 shares of
common stock by us in this offering at an assumed public offering price of
$36.50 per share.
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1996 1997 1998 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Total net revenues............................. $30,336 $36,657 $33,264 $36,408
Gross profit................................... 16,139 20,933 16,593 17,242
Income from operations......................... 6,213 9,132 2,410 3,740
Net income..................................... 3,993 5,757 1,830 2,634
Net income per share:
Basic........................................ $ 0.50 $ 0.69 $ 0.21 $ 0.30
Diluted...................................... $ 0.47 $ 0.65 $ 0.20 $ 0.28
Shares used in per share computation:
Basic........................................ 8,047 8,325 8,635 8,829
Diluted...................................... 8,524 8,820 9,041 9,393
</TABLE>
<TABLE>
<CAPTION>
Quarters Ended
----------------------------------------------------------------------
June Dec.
Mar. 31, 30, Sep. 30, 30, Mar. 31, June 30, Sep. 30, Dec. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- ------- -------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total net revenues...... $10,538 $10,728 $7,005 $ 4,993 $6,189 $7,523 $9,821 $12,875
Gross profit............ 5,924 5,732 3,357 1,580 2,533 3,522 4,669 6,518
Income (loss) from
operations............. 915 2,446 491 (1,442) (401) 395 1,321 2,425
Net income (loss)....... 624 1,495 394 (683) (201) 304 900 1,631
Net income (loss) per
share
Basic................. $ 0.07 $ 0.17 $ 0.05 $ (0.08) $(0.02) $ 0.03 $ 0.10 $ 0.18
Diluted............... $ 0.07 $ 0.17 $ 0.04 $ (0.08) $(0.02) $ 0.03 $ 0.10 $ 0.17
Shares used in per share
computation
Basic................. 8,545 8,641 8,669 8,686 8,701 8,757 8,823 9,033
Diluted............... 8,978 9,003 9,074 8,686 8,701 9,177 9,347 9,842
</TABLE>
<TABLE>
<CAPTION>
December 31,
1999
----------------
As
Actual Adjusted
------- --------
<S> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and short-term investments.............. $18,140 $77,383
Working capital................................................ 36,021 95,264
Total assets................................................... 46,410 105,653
Debt obligations, less current obligations..................... 2,288 2,288
Total shareholders' equity..................................... 38,155 97,398
</TABLE>
5
<PAGE>
RISK FACTORS
You should carefully consider the risks described below together with all
of the other information included in or incorporated by reference into this
prospectus before making an investment decision. The risks and uncertainties
described below are not the only ones facing our company. If any of the
following risks actually occurs, our business, financial condition or
operating results could be harmed. In such case, the trading price of our
common stock could decline, and you could lose all or part of your investment.
Risks Related to Our Business
Cyclicality in the semiconductor, flat panel display and magnetic recording
head industries has led to substantial decreases in demand for our systems and
may from time to time continue to do so
Our operating results have varied significantly due to the cyclical nature
of the semiconductor, flat panel display and magnetic recording head
industries. The majority of our business depends upon the capital expenditures
of semiconductor device and capital equipment manufacturers. These
manufacturers' capital expenditures, in turn, depend upon the current and
anticipated market demand for semiconductors and products using
semiconductors. The semiconductor industry is cyclical and has historically
experienced periodic downturns. These downturns have often resulted in
substantial decreases in the demand for capital equipment, including metrology
systems. We have found that the resulting decrease in capital expenditures has
typically been more pronounced than the precipitating downturn in
semiconductor device industry revenues. We expect the cyclical nature of the
semiconductor industry, and therefore, our business, to continue. Any future
downturn in the semiconductor industry will likely seriously harm our
business.
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 61.8%
and 60.9% of our total net revenues in 1998 and 1999, 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:
. political, social and economic instability;
. trade restrictions and changes in tariffs;
. import and export license requirements and restrictions;
. difficulties in staffing and managing international operations;
. disruptions in international transport or delivery;
. fluctuations in currency exchange rates;
. difficulties in collecting receivables; and
. 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 45.6% and
53.7% of our total net revenues in 1998 and 1999, 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 last several years. These
weaknesses began to adversely affect our sales
6
<PAGE>
to semiconductor manufacturers located in these regions in the third and fourth
quarters of 1998 and continued through the first half of 1999. Although we have
recently received increased orders from customers in the Asia Pacific region,
any further instability in the Asian markets could harm our sales in future
periods.
Our largest customers account for a significant portion of our revenues, and
our revenues would significantly decline if one or more of these customers were
to purchase significantly fewer of our systems or if they delayed or cancelled
a large order
Historically, a significant portion of our revenues in each quarter and year
has been derived from sales to relatively few customers, and we expect this
trend to continue. If any of our key customers were to purchase significantly
fewer systems, or if a large order were delayed or cancelled, our revenues
would significantly decline. In 1999, revenue from our ten largest customers
accounted for approximately 59.5% of our total net revenues. In 1998, sales to
International Business Machines Corp. accounted for 11.2% of our total net
revenues. In 1999, sales to Applied Materials and TSMC represented 12.8% and
10.5% of our total net revenues, respectively. There are only a limited number
of large companies operating in the semiconductor, flat panel display and
magnetic recording head industries. Accordingly, we expect that we will
continue to depend on a small number of large customers for a significant
portion of our revenues for at least the next several years. In addition, as
large semiconductor, flat panel display and magnetic recording head
manufacturers and suppliers seek to establish closer relationships with their
suppliers, we expect that our customer base will become even more concentrated.
The success of our product development efforts depends on our ability to
anticipate market trends and the price, performance and functionality
requirements of semiconductor device manufacturers. In order to anticipate
these trends and ensure that critical development projects proceed in a
coordinated manner, we must continue to collaborate closely with our customers.
Our relationships with our customers provide us with access to valuable
information regarding industry trends, which enables us to better plan our
product development activities. If our current relationships with our large
customers are impaired, or if we are unable to develop similar collaborative
relationships with important customers in the future, our long-term ability to
produce commercially successful systems will be impaired.
We depend on Applied Materials for sales of our integrated metrology systems,
and the loss of Applied Materials as a customer could harm our business
We believe that sales of integrated metrology systems will be an important
source of future revenues. We have entered into an agreement with Applied
Materials to supply metrology systems for Applied Materials' CMP systems,
including the Mirra Mesa(TM) CMP system. This agreement restricts us from
supplying integrated film thickness systems for use in CMP applications to any
company other than Applied Materials. This agreement is not a long-term
contract and is terminable under various circumstances within a short period of
time. Sales of our integrated metrology systems depend upon Applied Materials
selling semiconductor equipment products that include our metrology systems as
components. If Applied Materials is unable to sell such products, or if Applied
Materials chooses to focus its attention on products that do not integrate our
systems, our business could suffer. We may be unable to retain Applied
Materials as a customer. If we lose Applied Materials as a customer for any
reason, our ability to realize sales from integrated metrology systems would be
significantly diminished, which would harm our business.
Our quarterly operating results have varied in the past and probably will
continue to vary significantly in the future, which will cause volatility in
our stock price
Our quarterly operating results have varied significantly in the past and
are likely to vary in the future, which could cause our stock price to decline.
Some of the factors that may influence our operating results and subject our
stock to extreme price and volume fluctuations include:
. changes in customer demand for our systems;
. economic conditions in the semiconductor, flat panel display and magnetic
recording head industries;
7
<PAGE>
. the timing, cancellation or delay of customer orders and shipments;
. market acceptance of our products and our customers' products;
. competitive pressures on product prices and changes in pricing by our
customers or suppliers;
. the timing of new product announcements and product releases by us or our
competitors and our ability to design, introduce and manufacture new
products on a timely and cost-effective basis;
. the timing of acquisitions of businesses, products or technologies;
. the levels of our fixed expenses, including research and development
costs associated with product development, relative to our revenue
levels; and
. fluctuations in foreign currency exchange rates, particularly the
Japanese yen.
Due to the foregoing factors and other factors described in this "Risk
Factors" section, we believe that period-to-period comparisons of our
operating results are not necessarily meaningful, and you should not view
these operating results as indicators of our future performance. If our
operating results in any period fall below the expectations of securities
analysts and investors, the market price of our common stock would likely
decline.
We obtain some of the components and subassemblies included in our systems
from a single source or a limited group of suppliers, and the partial or
complete loss of one of these suppliers could cause production delays and a
substantial loss of revenue
We rely on outside vendors to manufacture many components and
subassemblies. Certain components, subassemblies and services necessary for
the manufacture of our systems are obtained from a sole supplier or limited
group of suppliers. We do not maintain any long-term supply agreements with
any of our suppliers. We have entered into arrangements with J.A. Woollam
Company for the purchase of the spectroscopic ellipsometer component, Midac
Corporation for the purchase of the FTIR spectrometer component, and
Kensington Laboratories for the robotics incorporated in our advanced
measurement systems. Our reliance on a sole or a limited group of suppliers
involves several risks, including the following:
. we may be unable to obtain an adequate supply of required components;
. we have reduced control over pricing and the timely delivery of
components and subassemblies; and
. our suppliers may be unable to develop technologically advanced products
to support our growth and development of new systems.
Because the manufacturing of certain of these components and subassemblies
involves extremely complex processes and requires long lead times, we may
experience delays or shortages caused by suppliers. We believe that
alternative sources could be obtained and qualified, if necessary, for most
sole and limited source parts. However, if we were forced to seek alternative
sources of supply or to manufacture such components or subassemblies
internally, we may be forced to redesign our systems, which could prevent us
from shipping our systems to customers on a timely basis. Some of our
suppliers have relatively limited financial and other resources. Any inability
to obtain adequate deliveries, or any other circumstance that would restrict
our ability to ship our products, could damage relationships with current and
prospective customers and could harm our business.
Our current and potential competitors have significantly greater resources
than we do, and increased competition could impair sales of our products
We operate in the highly competitive semiconductor, flat panel display and
magnetic recording head industries and face competition from a number of
companies, many of which have greater financial, engineering, manufacturing,
marketing and customer support resources than we do. As a result, our
competitors
8
<PAGE>
may be able to respond more quickly to new or emerging technologies or market
developments by devoting greater resources to the development, promotion and
sale of products, which could impair sales of our products. Moreover, there has
been significant merger and acquisition activity among our competitors and
potential competitors. These transactions by our competitors and potential
competitors may provide them with a competitive advantage over us by enabling
them to rapidly expand their product offerings and service capabilities to meet
a broader range of customer needs. Many of our customers and potential
customers in the semiconductor, flat panel display and magnetic recording head
industries are large companies that require global support and service for
their metrology systems.
Variations in the amount of time it takes for us to sell our systems may cause
fluctuations in our operating results, which could cause our stock price to
decline
Variations in the length of our sales cycles could cause our revenues to
fluctuate widely from period to period. Our customers generally take a long
time to evaluate our metrology systems. We expend significant resources
educating and providing information to our prospective customers regarding the
uses and benefits of our systems. The length of time it takes for us to make a
sale depends upon many factors, including:
. the efforts of our sales force and our independent sales representatives
and distributors;
. the complexity of the customer's metrology needs;
. the internal technical capabilities and sophistication of the customer;
. the customer's budgetary constraints; and
. the quality and sophistication of the customer's current processing
equipment.
Because of the number of factors influencing the sales process, the period
between our initial contact with a customer and the time when we recognize
revenue from that customer, if ever, varies widely. Our sales cycles, including
the time it takes for us to build a product to customer specifications after
receiving an order, typically range from three to six months. Sometimes our
sales cycles can be much longer, particularly with customers in Asia. During
these cycles, we commit substantial resources to our sales efforts in advance
of receiving any revenue, and we may never receive any revenue from a customer
despite our sales efforts.
If we do make a sale, our customers often purchase only one of our systems,
and then evaluate its performance for a lengthy period of time before
purchasing additional systems. The purchases are generally made by purchase
orders and not long-term contracts. The number of additional products a
customer purchases, if any, depends on many factors, including a customer's
capacity requirements. The period between a customer's initial purchase and any
subsequent purchases can vary from three months to a year or longer, and
variations in the length of this period could cause fluctuations in our
operating results and stock price.
Relatively small fluctuations in our system costs may cause our operating
results to vary significantly each quarter
During any quarter, a significant portion of our revenue is derived from the
sale of a relatively small number of systems. Our automated metrology systems
range in price from approximately $200,000 to $700,000 per system, our
integrated metrology systems range in price from approximately $90,000 to
$295,000 per system and our tabletop metrology systems range in price from
approximately $50,000 to $200,000 per system. Accordingly, a small change in
the number of systems we sell will cause significant changes in our operating
results.
We depend on orders that are received and shipped in the same quarter and
therefore have limited visibility of future product shipments
Our net sales in any given quarter depend upon a combination of orders
received in that quarter for shipment in that quarter and shipments from
backlog. Our backlog at the beginning of each quarter does not
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include all systems sales needed to achieve expected revenues for that quarter.
Consequently, we are dependent on obtaining orders for systems to be shipped in
the same quarter that the order is received. Moreover, customers may reschedule
shipments, and production difficulties could delay shipments. Accordingly, we
have limited visibility of future product shipments, and our results of
operations are subject to significant variability from quarter to quarter.
Because of the high cost of switching equipment vendors in our markets, it is
sometimes difficult for us to win customers from our competitors even if our
metrology systems are superior to theirs
We believe that once a semiconductor, flat panel display or magnetic
recording head customer has selected one vendor's metrology system, the
customer generally relies upon that system and, to the extent possible,
subsequent generations of the same vendor's system, for the life of the
application. Once a vendor's metrology system has been installed, a customer
must often make substantial technical modifications and may experience downtime
in order to switch to another vendor's metrology system. Accordingly, unless
our systems offer performance or cost advantages that outweigh a customer's
expense of switching to our systems, it will be difficult for us to achieve
significant sales to that customer once it has selected another vendor's system
for an application.
If we deliver systems with defects, our credibility will be harmed and the
sales and market acceptance of our systems will decrease
Our systems are complex and sometimes have contained errors, defects and
bugs when introduced. If we deliver systems with errors, defects or bugs, our
credibility and the market acceptance and sales of our systems would be harmed.
Further, if our systems contain errors, defects or bugs, we may be required to
expend significant capital and resources to alleviate such problems. Defects
could also lead to product liability as a result of product liability lawsuits
against us or against our customers. We have agreed to indemnify our customers
in some circumstances against liability arising from defects in our systems. In
the event of a successful product liability claim, we could be obligated to pay
damages significantly in excess of our product liability insurance limits.
If we are not successful in developing new and enhanced metrology systems we
will likely lose market share to our competitors
We operate in an industry that is subject to technological changes, changes
in customer demands and the introduction of new, higher performance systems
with short product life cycles. To be competitive, we must continually design,
develop and introduce in a timely manner new metrology systems that meet the
performance and price demands of semiconductor, flat panel display and magnetic
recording head manufacturers and suppliers. We must also continue to refine our
current systems so that they remain competitive. We may experience difficulties
or delays in our development efforts with respect to new systems, and we may
not ultimately be successful in developing them. Any significant delay in
releasing new systems could adversely affect our reputation, give a competitor
a first-to-market advantage or cause a competitor to achieve greater market
share.
Successful infringement claims by third parties could result in substantial
damages, lost product sales and the loss of important intellectual property
rights by us
Our commercial success depends in part on our ability to avoid infringing or
misappropriating patents or other proprietary rights owned by third parties.
From time to time we have received communications from third parties asserting
that our products infringe, or may infringe, the proprietary rights of these
third parties. We are presently discussing patent issues with Therma-Wave, Inc.
We believe that Therma-Wave's Opti-Probe product line may infringe on a patent
issued to us relating to absolute reflectance measurement. Therma-Wave alleges
that some of our thin film thickness measurement products may infringe on a
Therma-Wave patent relating to the
10
<PAGE>
combination of a spectroscopic reflectometer with a spectroscopic ellipsometer.
Although we believe that none of our products infringe on a valid Therma-Wave
patent, if this matter is resolved against us, our business could be harmed.
Additionally, some customers of ours have received notices from The Lemelson
Medical, Education, & Research Foundation, a limited partnership, alleging that
equipment used in the manufacture of semiconductor products infringes on their
patents. A number of these customers have notified us that they are seeking
indemnification from us for any damages and expenses resulting from this
matter. Certain of our customers have engaged in litigation with the late Mr.
Lemelson involving a number of his patents and some of these cases have been
settled. Although the ultimate outcome of these matters is not presently
determinable, the resolution of all such pending matters could harm our
business. These claims of infringement may lead to protracted and costly
litigation that could require us to pay substantial damages or have the sale of
our products stopped by an injunction. Infringement claims could also cause
product delays or require us to redesign our products, and these delays could
result in the loss of substantial revenues. We may also be required to obtain a
license from the third party or cease activities utilizing the third party's
proprietary rights. We may not be able to enter into such a license or such
license may not be available on commercially reasonable terms. The loss of an
infringement action or the inability to license a third party's intellectual
property could therefore prevent our ability to sell our products, or require
us to redesign our products making the sale of such products more expensive for
us. We may be required to initiate litigation in order to enforce any patents
issued to or licensed by us, or to determine the scope or validity of a third
party's patent or other proprietary rights. Any such litigation, regardless of
outcome, could be expensive and time consuming, and could subject us to
significant liabilities or require us to re-engineer our product or obtain
expensive licenses from third parties.
If we fail to adequately protect our intellectual property, it will be easier
for our competitors to sell competing products
Our future success and competitive position depend in part upon our ability
to obtain and maintain proprietary technology for our principal product
families, and we rely, in part, on patent, trade secret and trademark law to
protect that technology. If we fail to adequately protect our intellectual
property, it will be easier for our competitors to sell competing products. We
own or have licensed a number of patents relating to our metrology systems, and
have filed applications for additional patents. Any of our pending patent
applications may be rejected, and we may not in the future be able to develop
additional proprietary technology that is patentable. In addition, the patents
we do own or that have been issued or licensed to us may not provide us with
competitive advantages and may be challenged by third parties. Third parties
may also design around these patents.
In addition to patent protection, we rely upon trade secret protection for
our confidential and proprietary information and technology. We routinely enter
into confidentiality agreements with our employees. However, in the event that
these agreements may be breached, we may not have adequate remedies. Our
confidential and proprietary information and technology might also be
independently developed by or become otherwise known to third parties.
We must expend a significant amount of time and resources to develop new
products, and if these products do not achieve commercial acceptance, our
operating results may suffer
We expect to spend a significant amount of time and resources to develop new
systems and refine existing systems. In light of the long product development
cycles inherent in our industry, these expenditures will be made well in
advance of the prospect of deriving revenue from the sale of new systems. Our
ability to commercially introduce and successfully market new systems is
subject to a wide variety of challenges during this development cycle that
could delay introduction of these systems. In addition, since our customers are
not obligated by long-term contracts to purchase our systems, our anticipated
product orders may not materialize, or orders that do materialize may be
cancelled. As a result, if we do not achieve market acceptance of new products,
our operating results will suffer.
11
<PAGE>
We must attract and retain key personnel with relevant industry knowledge to
help support our future growth, and competition for such personnel in our
industry is intense
Our success depends to a significant degree upon the continued contributions
of our key management, engineering, sales and marketing, customer support,
finance and manufacturing personnel. We do not enter into employment contracts
with any of our key personnel. The loss of any of these key personnel, who
would be extremely difficult to replace, could harm our business and operating
results. To support our future growth, we will need to attract and retain
additional qualified employees. Competition for such personnel in our industry
is intense, and we may not be successful in attracting and retaining qualified
employees.
We manufacture all of our systems at a limited number of facilities, and any
prolonged disruption in the operations of those facilities could reduce our
revenues
We produce all of our systems in our manufacturing facilities located in
Sunnyvale, California and through our subsidiaries in Japan and Korea. Our
manufacturing processes are highly complex and require sophisticated, costly
equipment and specially designed facilities. As a result, any prolonged
disruption in the operations of our manufacturing facilities could seriously
harm our ability to satisfy our customer order deadlines. If we cannot deliver
our systems in a timely manner, our revenues will likely suffer.
If we choose to acquire new and complementary businesses, products or
technologies instead of developing them ourselves, we may be unable to complete
these acquisitions or may not be able to successfully integrate an acquired
business in a cost-effective and non-disruptive manner
Our success depends on our ability to continually enhance and broaden our
product offerings in response to changing technologies, customer demands and
competitive pressures. To this end, from time to time we have acquired
complementary businesses, products, or technologies instead of developing them
ourselves and may choose to do so in the future. We do not know if we will be
able to complete any acquisitions, or whether we will be able to successfully
integrate any acquired business, operate it profitably or retain its key
employees. Integrating any business, product or technology we acquire could be
expensive and time consuming, disrupt our ongoing business and distract our
management. In addition, in order to finance any acquisitions, we might need to
raise additional funds through public or private equity or debt financings. In
that event, we could be forced to obtain financing on terms that are not
favorable to us and, in the case of equity financing, that result in dilution
to our shareholders. If we are unable to integrate any acquired entities,
products or technologies effectively, our business will suffer. In addition,
any amortization of goodwill or other assets or charges resulting from the
costs of acquisitions could harm our business and operating results.
Our efforts to protect our intellectual property may be less effective in some
foreign countries where intellectual property rights are not as well protected
as in the United States
In 1998 and 1999, 61.8% and 60.9%, respectively, of our total net revenues
were derived from sales to customers in foreign countries, including certain
countries in Asia, such as Taiwan, Korea and Japan. The laws of some foreign
countries do not protect our proprietary rights to as great an extent as do the
laws of the United States, and many U.S. companies have encountered substantial
problems in protecting their proprietary rights against infringement in such
countries. For example, Taiwan is not a signatory of the Patent Cooperation
Treaty, which is designed to specify rules and methods for defending
intellectual property internationally. The publication of a patent in Taiwan
prior to the filing of a patent in Taiwan would invalidate the ability of a
company to obtain a patent in Taiwan. Similarly, in contrast to the United
States, where the contents of patents remain confidential during the patent
prosecution process, the contents of a patent are published upon filing, which
provides competitors an advanced view of the contents of a patent application
prior to the establishment of patent rights. If we fail to adequately protect
our intellectual property in these countries, it would be easier for our
competitors to sell competing products in those countries.
12
<PAGE>
Risks Relating to this Offering
Our stock price is volatile and our stock is thinly traded, which could cause
investors to lose a substantial part of their investments in our stock
The stock market in general, and the stock prices of technology companies in
particular, have recently experienced volatility which has often been unrelated
to the operating performance of any particular company or companies. In 1999,
our stock price reached a high of $24.38 and a low of $5.38. Our stock price
could decline regardless of our actual operating performance and investors
could lose a substantial part of their investments as a result of industry or
market-based fluctuations. In addition, our stock has traditionally traded
thinly. If an active public market for our stock does not develop, or if such a
market is not sustained after this offering, it may be difficult to resell our
stock.
The market price of our common stock will likely fluctuate in response to a
number of factors including the following:
. our failure to meet the performance estimates of securities analysts;
. changes in financial estimates of our revenues and operating results or
buy/sell recommendations by securities analysts;
. the timing of announcements by us or our competitors of significant
products, contracts or acquisitions; and
. general stock market conditions.
One shareholder will continue to have significant influence over our business
after this offering, and could delay, deter or prevent a change of control or
other business combination
Upon completion of this offering, Vincent J. Coates will beneficially own
approximately 33.3% of our outstanding stock, or 30.2% if the underwriters'
option to purchase additional shares is exercised in full. Mr. Coates is also
our Chairman of the Board of Directors. The interests of this shareholder may
not always coincide with our interests or those of our other shareholders. By
virtue of his stock ownership and board representation, this shareholder will
continue to have a significant influence over all matters submitted to our
board and our shareholders, and will be able to exercise significant control
over our business, policies and affairs. Through the concentration of voting
power, the shareholder could cause us to take actions that we would not
consider absent his influence, or could delay, deter or prevent a change of
control of our company or other business combination that might otherwise be
beneficial to our public shareholders.
Shares eligible for future sale may negatively affect our stock price
If our shareholders sell substantial amounts of common stock (including
shares issued upon the exercise of options) in the public market following this
offering, the market price of our common stock could fall. The perception that
such sales may occur could cause the market price of our common stock to fall
on or before the date those shares are first eligible for sale. Such sales also
might make it more difficult for us to sell securities in the future at a time
and price that we deem appropriate. Upon completion of this offering, we have
outstanding approximately 10,913,998 shares of common stock (based upon shares
outstanding as of December 31, 1999), assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options after December 31,
1999. Of these shares, all of the 3,500,000 shares sold in this offering and
approximately 1,666,512 additional shares will be freely tradeable.
Additionally, approximately 5,747,486 shares will be eligible for sale in the
public market 90 days after the date of this prospectus upon expiration of
lock-up agreements with the underwriters.
13
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this prospectus and in the
documents that are incorporated by reference in this prospectus, all of which
are subject to risks and uncertainties. Forward-looking statements include
information concerning our possible or assumed future results of operations.
Also, when we use words such as "believe," "expect," "anticipate" or similar
expressions, we are making forward-looking statements. You should note that an
investment in our common stock involves certain risks and uncertainties that
could affect our future financial results. Our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth in "Risk Factors" and
elsewhere in this prospectus.
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. The risk factors described in the
preceding pages, as well as any cautionary language in this prospectus, provide
examples of risks, uncertainties and events that may cause our actual results
to differ materially from the expectations we describe in our forward-looking
statements. Before you invest in our common stock, you should be aware that the
occurrence of the events described in these risk factors and elsewhere in this
prospectus could materially and adversely affect our business, operating
results and financial condition.
14
<PAGE>
USE OF PROCEEDS
The net proceeds we will receive from the sale of 1,750,000 shares of our
common stock in this offering are estimated to be $59.2 million, or $68.2
million if the underwriters' over-allotment option is exercised in full, based
on an assumed public offering price of $36.50 per share and after deducting the
estimated underwriting discount and offering expenses we will pay.
We expect to use the net proceeds from this offering for working capital and
other general corporate purposes. In addition, we may use a portion of the net
proceeds to acquire complementary products, technologies or businesses or make
strategic investments. However, we have no commitments or agreements for any
acquisitions or investments. Pending the uses described above, we intend to
invest the net proceeds in interest-bearing, investment-grade securities. We
will not receive any proceeds from the sale of the shares being sold by the
selling shareholders.
PRICE RANGE OF COMMON STOCK
Our common stock is quoted on the Nasdaq National Market under the symbol
"NANO". The following table sets forth, for the periods indicated, the high and
low sale prices per share of our common stock as reported on the Nasdaq
National Market. These quotations represent prices between dealers and do not
include retail markups, markdowns or commissions and may not necessarily
represent actual transactions.
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
1998
First Quarter.................................................. $10.75 $ 7.81
Second Quarter................................................. $10.13 $ 7.85
Third Quarter.................................................. $ 9.25 $ 3.78
Fourth Quarter................................................. $ 8.88 $ 4.31
1999
First Quarter.................................................. $ 9.88 $ 5.38
Second Quarter................................................. $ 9.63 $ 5.50
Third Quarter.................................................. $10.75 $ 6.50
Fourth Quarter................................................. $24.38 $ 8.88
2000
First Quarter (through February 28, 2000)...................... $52.13 $18.13
</TABLE>
On February 28, 2000, the last reported sale price of our common stock on
the Nasdaq National Market was $36.50 per share. As of December 31, 1999, there
were approximately 120 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 the use in the
operation and expansion of our business and do not anticipate paying any cash
dividends in the foreseeable future.
15
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999
(1) on an actual basis and (2) on an as adjusted basis to give effect to our
sale and issuance of 1,750,000 shares of common stock in this offering at an
assumed public offering price of $36.50 per share having estimated net proceeds
of $59.2 million.
The following information is based upon shares outstanding as of December
31, 1999. It excludes, as of December 31, 1999, 1,494,664 shares of common
stock subject to outstanding options at a weighted average exercise price of
$7.49 per share and 479,172 shares of common stock available for future grant
under our stock option and stock purchase plans.
<TABLE>
<CAPTION>
December 31,
1999
----------------
As
Actual Adjusted
------- --------
(In thousands)
<S> <C> <C>
Debt obligations, less current portion........................ $ 2,288 $ 2,288
------- -------
Shareholders' equity:
Common stock; no par value; 25,000,000 shares authorized;
shares issued and outstanding: 9,163,998 actual and
10,913,998 as adjusted..................................... 17,277 76,520
Retained earnings............................................. 20,608 20,608
Accumulated other comprehensive income........................ 270 270
------- -------
Total shareholders' equity................................ 38,155 97,398
------- -------
Total capitalization...................................... $40,443 $99,686
======= =======
</TABLE>
16
<PAGE>
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 prospectus or incorporated herein by
reference. The consolidated statement of operations data set forth below for
the fiscal years ended December 31, 1997, 1998 and 1999, and the consolidated
balance sheet data as of December 31, 1998 and 1999, have been derived from our
consolidated financial statements included elsewhere in this prospectus, 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, 1995 and 1996, and the consolidated balance sheet data as of
December 31, 1995, 1996 and 1997, have been derived from our consolidated
financial statements not included in this prospectus, and have been audited by
Deloitte & Touche LLP, independent auditors. The historical results are not
necessarily indicative of results to be expected for any future period.
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- ------- -------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Net revenues:
Product sales.................... $18,117 $24,603 $32,767 $29,718 $32,162
Service.......................... 4,642 5,733 3,890 3,546 4,246
------- ------- ------- ------- -------
Total net revenues............. 22,759 30,336 36,657 33,264 36,408
------- ------- ------- ------- -------
Costs and expenses:
Cost of product sales............ 8,189 10,109 12,092 13,002 14,606
Cost of service.................. 3,406 4,088 3,632 3,669 4,560
Research and development......... 2,631 2,754 2,986 4,206 4,658
Acquired in-process research and
development..................... -- -- -- 1,421 --
Selling.......................... 3,712 4,696 6,050 5,728 5,871
General and administrative....... 2,180 2,476 2,765 2,828 2,973
------- ------- ------- ------- -------
Total costs and expenses....... 20,118 24,123 27,525 30,854 32,668
------- ------- ------- ------- -------
Income from operations............ 2,641 6,213 9,132 2,410 3,740
------- ------- ------- ------- -------
Other income (expense):
Interest income.................. 302 390 535 572 662
Interest expense................. (152) (92) (110) (108) (180)
Other, net....................... 674 146 (175) 64 94
------- ------- ------- ------- -------
Total other income, net........ 824 444 250 528 576
------- ------- ------- ------- -------
Income before income taxes........ 3,465 6,657 9,382 2,938 4,316
Provision (benefit) for income
taxes............................ (812) 2,664 3,625 1,108 1,682
------- ------- ------- ------- -------
Net income........................ $ 4,277 $ 3,993 $ 5,757 $ 1,830 $ 2,634
======= ======= ======= ======= =======
Net income per share:
Basic............................ $ 0.56 $ 0.50 $ 0.69 $ 0.21 $ 0.30
======= ======= ======= ======= =======
Diluted.......................... $ 0.52 $ 0.47 $ 0.65 $ 0.20 $ 0.28
======= ======= ======= ======= =======
Shares used in per share
computation:
Basic............................ 7,604 8,047 8,325 8,635 8,829
======= ======= ======= ======= =======
Diluted.......................... 8,280 8,524 8,820 9,041 9,393
======= ======= ======= ======= =======
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term
investments.......................... $ 8,083 $ 8,382 $13,251 $11,431 $18,140
Working capital....................... 18,338 22,613 28,653 30,621 36,021
Total assets.......................... 25,167 29,964 36,243 39,305 46,410
Debt obligations, less current
portion.............................. 3,528 3,296 2,568 2,496 2,288
Total shareholders' equity............ 17,574 22,060 28,528 32,010 38,155
</TABLE>
18
<PAGE>
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
prospectus. Our discussion contains forward-looking statements based upon
current expectations that involve risks and uncertainties, such as our plans,
objectives and intentions. Our actual results may differ materially from those
predicted in such forward-looking statements. See "Special Note Regarding
Forward-Looking Statements."
Overview
We are a leader in the design, manufacture, marketing and support of thin
film metrology systems for the semiconductor, flat panel display and magnetic
recording head industries. We have made several strategic changes in our
business over the past two years that have positioned us to further
participate in these markets. These changes include:
. becoming an original equipment manufacturer, or OEM, of metrology systems
that are integrated into various types of semiconductor processing
equipment;
. the development of new products that can be used for 300 millimeter wafers
and chemical mechanical planarization;
. an increased emphasis on product development, manufacturing and direct
sales in Japan and Korea;
. a shift to direct sales from third-party representatives in Asia and the
United States;
. a decision to outsource certain system components such as robotics,
enabling us to leverage our technical resources;
. the acquisition of an overlay registration product line from Optical
Specialties, Inc. in March 1998 (see "Acquisition" for more information on
the product line acquisition); and
. the acquisition of inspection and metrology technology from Phase Metrics
in December 1999.
Our business is dependent upon the capital expenditures of manufacturers of
semiconductors, flat panel displays and magnetic recording heads and their
suppliers. The demand by these manufacturers and suppliers for our products
is, in turn, dependent on the current and future market demand for
semiconductors and products utilizing semiconductors, disk drives and
computers that utilize disk drives and flat panel displays for use in laptop
computers, pagers, cell phones and a variety of other applications. The
increasing complexity of the manufacturing processes for semiconductors, flat
panel displays and magnetic recording heads is also an important factor in the
demand for our metrology systems.
We derive our revenues from product sales and services, which include sales
of accessories and service to the installed base of products. For the year
ended December 31, 1999, we derived 88.3% of our total net revenues from
product sales and 11.7% of our total net revenues from services. Revenues from
product sales and replacement and spare parts are recognized at the time of
shipment. Revenues from service work are recognized when performed. See note 1
of the notes to consolidated financial statements for more information on our
revenue recognition policy.
19
<PAGE>
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, 1997,
1998 and 1999:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net revenues:
Product sales................................... 89.4% 89.3% 88.3%
Service......................................... 10.6 10.7 11.7
-------- -------- --------
Total net revenues............................ 100.0 100.0 100.0
-------- -------- --------
Cost and expenses:
Cost of product sales........................... 33.0 39.1 40.1
Cost of service................................. 9.9 11.0 12.5
Research and development........................ 8.1 12.7 12.8
Acquired in-process research and development.... -- 4.3 --
Selling......................................... 16.5 17.2 16.1
General and administrative...................... 7.6 8.5 8.2
-------- -------- --------
Total cost and expenses....................... 75.1 92.8 89.7
-------- -------- --------
Income from operations............................ 24.9 7.2 10.3
-------- -------- --------
Other income (expense):
Interest income................................. 1.5 1.7 1.8
Interest expense................................ (0.3) (0.3) (0.5)
Other, net...................................... (0.5) 0.2 0.3
-------- -------- --------
Total other income, net....................... 0.7 1.6 1.6
-------- -------- --------
Income before income taxes........................ 25.6 8.8 11.9
Provision for income taxes........................ 9.9 3.3 4.7
-------- -------- --------
Net income........................................ 15.7% 5.5% 7.2%
======== ======== ========
</TABLE>
Years ended December 31, 1997, 1998 and 1999
Total net revenues. Total net revenues increased 9.5% from $33.3 million in
1998 to $36.4 million in 1999. Product sales increased 8.2% from $29.7 million
in 1998 to $32.2 million in 1999. The increase in product sales resulted from
stronger demand for and increased shipments of our products, especially in the
U.S. and Asia. Service revenue increased 19.7% from $3.5 million in 1998 to
$4.2 million in 1999. The increase in service revenue is primarily attributable
to higher sales of parts, services and accessories in Asia and the U.S. in 1999
due in part to the recovery in the semiconductor market. Total net revenues
decreased 9.3% from $36.7 million in 1997 to $33.3 million in 1998. Product
sales decreased 9.3% from $32.8 million in 1997 to $29.7 million in 1998. The
decrease in product sales resulted from slower worldwide demand for and
decreased shipments of our products, especially in the U.S. and in Asia.
Service revenue decreased 8.8% from $3.9 million in 1997 to $3.5 million in
1998. The decrease in service revenue is primarily attributable to lower sales
of parts, services and accessories in Asia and the U.S. in 1998 due in part to
increased functionality and reliability of our newer products. International
revenues, which includes sales by our foreign subsidiaries, constituted
approximately 60.9%, 61.8% and 60.3% of total net revenues for 1999, 1998 and
1997, respectively. In 1998, we experienced a 12.7% decrease in domestic
revenues from $14.5 million in 1997 to $12.7 million in 1998, while
international revenues decreased 7.1% from $22.1 million in 1997 to $20.6
million in 1998.
20
<PAGE>
Cost of product sales. Cost of product sales as a percentage of product
sales increased from 43.8% in 1998 to 45.4% in 1999 primarily as a result of
lower volume purchasing resulting in fewer purchasing discounts for materials
early in 1999. Cost of product sales as a percentage of product sales increased
from 36.9% in 1997 to 43.8% in 1998 primarily because of lower sales volumes in
1998 resulting in higher per unit manufacturing costs.
Cost of service. Cost of service as a percentage of service revenue
increased from 103.5% in 1998 to 107.4% in 1999 primarily as a result of
increased fixed service costs to support our growing installed based of systems
at customer locations in 1999. Cost of service as a percentage of service
revenue increased from 93.4% in 1997 to 103.5% in 1998. This increase was
primarily attributable to the decline in the sales of accessories and parts
while fixed service costs increased slightly to support our growing installed
base of systems at customer locations in 1998.
Research and development. Research and development expenses increased 10.7%
from $4.2 million in 1998 to $4.7 million in 1999 as a result of additional
headcount and a purchase of technology from Phase Metrics in the fourth quarter
of 1999. Research and development expenses increased 40.9% from $3.0 million in
1997 to $4.2 million in 1998 due to the development of our new Metra overlay
registration product line and our new NanoSpec 9000 integrated film thickness
metrology product line. 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 1999, research and development
expenses represented 12.8% of total net revenues, compared to 12.7% in 1998 and
8.1% in 1997.
Acquired in-process research and development. In the first quarter of 1998,
we paid approximately $3.2 million for the assets and technology related to the
Metra product line from Optical Specialties. Of this purchase price, $1.4
million related to the value of in-process research and development that had no
alternative future use and was charged to expense during the year ended
December 31, 1998. Our increase in research and development expenses discussed
above is primarily attributable to efforts to bring the acquired in-process
technology to completion. See "Acquisition" for further discussion.
Selling. Selling expenses increased 2.5% from $5.7 million in 1998 to $5.9
million in 1999 primarily because of higher sales in 1999. Selling expenses
decreased 5.3% from $6.1 million in 1997 to $5.7 million in 1998 primarily due
to lower commission expenses and other expenses associated with lower sales
levels in 1998. In 1999 selling expenses represented 16.1% of total net
revenues, compared to 17.2% in 1998 and 16.5% in 1997.
General and administrative. General and administrative expenses increased
5.1% from $2.8 million in 1998 to $3.0 million in 1999 as a result of higher
spending associated with the increase in total net revenues. General and
administrative expenses in 1997 remained essentially unchanged from 1998 at
$2.8 million. During 1999, general and administrative expenses represented 8.2%
of total net revenues, compared to 8.5% in 1998 and 7.6% in 1997.
Total other income, net. Total other income, net increased 9.1% from
$528,000 in 1998 to $576,000 in 1999 primarily due to higher interest income in
1999. Total other income, net increased 111.2% from $250,000 in 1997 to
$528,000 in 1998 primarily due to lower exchange rate losses in 1998.
Income taxes. Our effective income tax rate increased from 37.7% in 1998 to
39.0% in 1999 primarily due to a valuation allowance established in 1999
against the net defferred tax assets of our Japanese subsidiary. Our effective
income tax rate decreased from 38.6% in 1997 to 37.7% in 1998 primarily as a
result of income tax benefits realized from net operating losses in foreign tax
jurisdictions. The effective income tax rates in 1999, 1998 and 1997 exceed the
U.S. statutory rate due primarily to state income taxes partially offset by the
realization of foreign sales corporation benefit.
21
<PAGE>
Quarterly Results of Operations
The following tables present unaudited quarterly results of operations in
dollars and as a percentage of total net revenues for the eight quarters ended
December 31, 1999. We believe that all necessary adjustments, consisting only
of normal recurring adjustments, have been included in the amounts stated below
to present fairly such quarterly information. The operating results for any
quarter are not necessarily indicative of results for any subsequent period.
<TABLE>
<CAPTION>
Quarters Ended,
--------------------------------------------------------------------------------
Mar. 31, June 30, Sep. 30, Dec. 31, Mar. 31, June 30, Sep. 30, Dec. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- -------- -------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues:
Product sales.......... $ 9,618 $ 9,705 $ 6,249 $ 4,146 $ 5,265 $ 6,468 $ 8,717 $11,712
Service................ 920 1,023 756 847 924 1,055 1,104 1,163
------- ------- ------- ------- ------- ------- ------- -------
Total net revenues... 10,538 10,728 7,005 4,993 6,189 7,523 9,821 12,875
------- ------- ------- ------- ------- ------- ------- -------
Costs and expenses:
Cost of product
sales................. 3,629 4,029 2,813 2,531 2,552 2,984 3,976 5,094
Cost of service........ 985 967 835 882 1,104 1,017 1,176 1,263
Research and
development........... 1,231 1,063 886 1,026 1,016 1,094 1,099 1,449
Acquired in process
research and
development........... 1,421 -- -- -- -- -- -- --
Selling................ 1,572 1,529 1,366 1,261 1,277 1,309 1,519 1,766
General and
administrative........ 785 694 614 735 641 724 730 878
------- ------- ------- ------- ------- ------- ------- -------
Total costs and
expenses............ 9,623 8,282 6,514 6,435 6,590 7,128 8,500 10,450
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations............. 915 2,446 491 (1,442) (401) 395 1,321 2,425
Total other income
(expense), net......... 126 (3) 165 240 66 112 216 182
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before
income taxes........... 1,041 2,443 656 (1,202) (335) 507 1,537 2,607
Provision (benefit) for
income taxes........... 417 948 262 (519) (134) 203 637 976
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)....... 624 $ 1,495 $ 394 $ (683) $ (201) $ 304 $ 900 $ 1,631
======= ======= ======= ======= ======= ======= ======= =======
Net income (loss) per
share
Basic.................. $ 0.07 $ 0.17 $ 0.05 $ (0.08) $ (0.02) $ 0.03 $ 0.10 $ 0.18
Diluted................ $ 0.07 $ 0.17 $ 0.04 $ (0.08) $ (0.02) $ 0.03 $ 0.10 $ 0.17
Shares used in per share
computation
Basic.................. 8,545 8,641 8,669 8,686 8,701 8,757 8,823 9,033
Diluted................ 8,978 9,003 9,074 8,686 8,701 9,177 9,347 9,842
<CAPTION>
Quarters Ended,
--------------------------------------------------------------------------------
Mar. 31, June 30, Sep. 30, Dec. 31, Mar. 31, June 30, Sep. 30, Dec. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues:
Product sales.......... 91.3% 90.5% 89.2% 83.0% 85.1% 86.0% 88.8% 91.0%
Service................ 8.7 9.5 10.8 17.0 14.9 14.0 11.2 9.0
------- ------- ------- ------- ------- ------- ------- -------
Total net revenues... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
------- ------- ------- ------- ------- ------- ------- -------
Costs and expenses:
Cost of product
sales................. 34.4 37.6 40.2 50.7 41.2 39.7 40.5 39.6
Cost of service........ 9.3 9.0 11.9 17.7 17.8 13.5 12.0 9.8
Research and
development........... 11.7 9.9 12.6 20.5 16.4 14.5 11.2 11.3
Acquired in process
research and
development........... 13.5 -- -- -- -- -- -- --
Selling................ 14.9 14.3 19.5 25.3 20.6 17.4 15.5 13.7
General and
administrative........ 7.5 6.4 8.8 14.7 10.5 9.6 7.3 6.8
------- ------- ------- ------- ------- ------- ------- -------
Total costs and
expenses............ 91.3 77.2 93.0 128.9 106.5 94.7 86.5 81.2
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations............. 8.7 22.8 7.0 (28.9) (6.5) 5.3 13.5 18.8
Total other income
(expense), net......... 1.2 0.0 2.4 4.8 1.1 1.4 2.2 1.4
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before
income taxes........... 9.9 22.8 9.4 (24.1) (5.4) 6.7 15.7 20.2
Provision (benefit) for
income taxes........... 4.0 8.9 3.8 (10.4) (2.2) 2.7 6.5 7.5
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)....... 5.9% 13.9% 5.6% (13.7)% (3.2)% 4.0% 9.2% 12.7%
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
22
<PAGE>
Total net revenues for the quarters ended September 30, 1998, December 31,
1998 and March 31, 1999 were adversely affected as a result of decreased
shipments of our products in the U.S. and Asia due primarily to slower
worldwide demand in the semiconductor industry. In the first quarter of 1998,
we paid approximately $3.2 million for the assets and technology related to the
Metra product line from Optical Specialties. Of this purchase price, $1.4
million related to the value of in-process research and development that had no
alternative future use and was charged to expense during the quarter ended
March 31, 1998. See "Acquisition" for further discussion. During the quarter
ended December 31, 1999, we benefited from a generalized recovery in the
semiconductor industry.
During each quarter we sell a relatively small number of systems, and
therefore a slight change in the timing of shipments can have a significant
impact on our quarterly results of operations. Our backlog at the beginning of
each quarter does not include all systems sales needed to achieve expected
revenues for that quarter. Consequently, we are dependent on obtaining orders
for systems to be shipped in the same quarter that the order is received.
Moreover, customers may reschedule shipments, and production difficulties could
delay shipments. Accordingly, our results of operations are subject to
significant variability from quarter to quarter and could be adversely affected
in a particular quarter if shipments for that quarter were lower than
anticipated. Because a relatively small group of customers may account for a
significant percentage of our sales in any given period, the loss of any single
customer could have a material, adverse effect on our results of operations.
We believe that our quarterly and annual revenues, expenses and operating
results could vary significantly in the future and that period-to-period
comparisons should not be relied upon as indications of future performance. We
may not sustain or increase our level of net revenues or our rate of revenue
growth on a quarterly or annual basis. We may, in some future quarter, have
operating results that will be below the expectations of stock market analysts
and investors. In such event, the price of our common stock could decline.
Acquisition
On March 30, 1998, we purchased from Optical Specialties a metrology system
product line and related assets used to measure the critical dimensions and
overlay registration errors observed in sub-micron photolithography. Under the
agreement, we paid approximately $3.2 million in cash for the assets and in-
process research and development. The total purchase price and allocation among
the tangible and intangible assets and liabilities acquired (including acquired
in-process research and development) is summarized as follows (in thousands):
<TABLE>
<S> <C>
Total purchase price--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
Liabilities........................................................... (734)
------
Total purchase price allocation......................................... $3,225
======
</TABLE>
- --------
* Intangible assets are being amortized using the straight-line method over a
five-year useful life.
The purchase price allocation and intangible valuation was based on our
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:
. the employment of a fair market value premise excludes any Nanometrics-
specific considerations, which could result in estimates of investment
value for the subject assets; and
23
<PAGE>
. comprehensive due diligence concerning all potential intangible assets
including trademarks/tradenames, patents, copyrights, noncompete
agreements, assembled workforce and customer relationships and sales
channel.
The value of core technology was specifically 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 these completed
efforts for the products currently in process.
As indicated above, we recorded a one-time charge of $1.4 million in the
first quarter of 1998 for acquired in-process research and development related
to the Metra 7000 development project that had not reached technological
feasibility, had no alternative future use and for which successful
development was uncertain. Our conclusion that the in-process development
effort, or any material sub-component, had no alternative future use was
reached in consultation with our engineering personnel and engineering
personnel from Optical Specialties.
The project to complete the Metra 7000 product included the completion of a
software platform design started by Optical Specialties 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 design.
At the time of acquisition, the estimated cost to complete this software and
related development was approximately $300,000. We began shipments of the
Metra 7000 product to a customer in June 1998 and it was at that time that we
began to benefit from the acquired research and development related to the
product.
Significant assumptions used to determine the value of in-process research
and development included several factors, including the following:
. forecast of net cash flows that were expected to result from the
development effort using projections prepared by us; and
. percentage complete of 77.0% for the Metra 7000 project estimated by
considering a number of factors, including the costs invested to date
relative to 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 functionality of the eventual product.
The technological issues were addressed by engineering representatives from
both us and Optical Specialties, 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 was embodied in the in-process Metra 7000 product line
and enabled a quicker and more cost effective development of the Metra 7000.
When estimating the value of the developed, core and in-process technologies,
discount rates of 25.0%, 30.0% and 35.0%, respectively, were used. These
discount rates considered both the status and risk associated with the
respective cash flows as of the acquisition date.
Liquidity and Capital Resources
At December 31, 1999, our cash, cash equivalents and short-term investments
totaled $18.1 million as compared to $11.4 million at December 31, 1998.
Additionally, our working capital of $36.0 million at December 31, 1999
increased from $30.6 million at December 31, 1998. We believe our working
capital, together with the proceeds of this offering, will be sufficient to
meet our needs at least through the next twelve months.
24
<PAGE>
Operating activities during 1999 provided cash of $7.1 million primarily
from net income and changes in income taxes of $2.8 million. Investing
activities used $5.9 million due to net purchases of short-term investments of
$4.8 million and $1.0 million in capital expenditures and prepaid licenses
fees. Financing activities provided cash of $816,000 primarily due to the sale
of shares under the employee stock purchase and option plans offset by the net
repayment of debt obligations in Japan of $1.3 million.
Operating activities during 1998 provided net cash of $885,000 primarily
from net income partially offset by working capital requirements. Investing
activities used cash of $3.8 million, primarily to purchase the Metra product
line, as previously discussed above, and to fund net purchases of short-term
investments. Financing activities provided cash of $801,000 resulting primarily
from the sale of shares under the employee stock purchase and option plans.
Operating activities during 1997 provided net cash of $4.2 million primarily
from net income partially offset by working capital requirements. Investing
activities used cash of $3.1 million, primarily to purchase short-term
investments in the U.S. Financing activities provided cash of $590,000
resulting from the sale of shares under the employee stock purchase and option
plans.
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. For example, as
previously discussed above, in March 1998, we purchased from Optical
Specialties a metrology system product line and related assets. Under the
agreement, we paid approximately $3.2 million in cash for the assets and
technology. We funded this acquisition from our cash equivalents, short-term
investments and cash flows from operations.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires companies to
record derivatives on the balance sheet as assets or liabilities, measured at
fair value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. SFAS No. 133 will be effective for
us beginning in the first quarter of fiscal year 2001. Although we have not
fully assessed the implications of SFAS No. 133, our management does not
believe adoption of this statement will have a significant impact on our
consolidated financial position, results of operations or cash flows.
In December 1999, the Securities and Exchange Commission (SEC) released
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." This bulletin summarizes certain interpretations and practices
followed by the Division of Corporation Finance and the Office of the Chief
Accountant of the SEC in administering the disclosure requirements of the
Federal securities laws in applying generally accepted accounting principles to
revenue recognition in financial statements. Application of the accounting and
disclosures desired in the bulletin is required by the first fiscal quarter of
2000. Although we have not fully assessed the implications of SAB No. 101, our
management does not believe adoption of this bulletin will have a significant
impact on our consolidated financial position, results of operations or cash
flows.
Quantitative and Qualitative Disclosures About Market Risks
We are exposed to financial market risks, which include changes in foreign
currency exchange rates and interest rates. We do not use derivative financial
instruments. Instead, we actively manage the balances of current assets and
liabilities denominated in foreign currencies to minimize currency fluctuation
risk. As a result, a hypothetical 10% change in the foreign currency exchange
rates at December 31, 1998 and 1999 would not have a material impact on our
results of operations. Our 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 at
December 31, 1998 and 1999. We also have fixed rate yen
25
<PAGE>
denominated debt obligations in Japan that have no interest rate risk. At
December 31, 1998 and 1999, our total debt obligation was $3.8 million and $2.9
million with a long-term portion of $2.5 million and $2.3 million,
respectively. The fixed rates on such obligations in 1998 and 1999 ranged from
1.9% to 3.4% and 1.5% to 3.4%, respectively, and mature on various dates
through May 2006. A hypothetical 10% change in interest rates at December 31,
1998 and 1999 would not have a material impact on our results of operation.
Year 2000 Issues
Many computer systems had been expected to experience problems handling
dates for the Year 2000. The Year 2000 issue arose as a result of certain
computer programs being written using two digits rather than four to define the
applicable year. Consequently, these computer programs were unable to
distinguish between 21st century dates and 20th century dates and could have
caused computer system failures or miscalculations that could result in
significant business disruptions.
Over the past year we have been testing our systems to evaluate Year 2000
problems, executing remediation activities to fix non-compliant systems and
monitoring and testing products and systems. To date, we have not experienced
any problems complying with the Year 2000 issue and have not been informed of
any failures of our products from customers.
26
<PAGE>
BUSINESS
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 non-contact, non-
destructive thin film measurement systems use a broad spectrum of wavelengths,
high-sensitivity optics, proprietary software and patented technology to
measure the thickness and uniformity of films deposited on silicon and other
substrates as well as their chemical composition.
Growth in the market for our products is driven by the increasing use of
thin film technology by manufacturers of electronic products. Many types of
thin films are used in the manufacture of numerous products, including
semiconductors, flat panel displays and magnetic recording heads as well as
integrated fiber optics, conventional and advanced optics, high density
optical and magnetic disks and lasers. These products require the precise
electronic, optical, magnetic and surface finish properties enabled by thin
film technology. The rapid growth in the sale and use of these products has
created significant demand for our metrology systems.
We offer a complete line of systems to address the thin film metrology
requirements of our customers. Each of our systems are equipped with
computerized mapping capability for measurement, visualization and control of
film uniformity. Our metrology systems can be categorized as follows:
. stand-alone, fully automated systems for measurements of thin films in
high-volume manufacturing operations;
. integrated systems for integration into semiconductor processing
equipment that provide virtually immediate measurements and feedback to
improve process control and increase throughput; and
. tabletop systems used to manually or semiautomatically measure thin films
in engineering and low-volume production environments.
In addition, we provide systems that are used to measure the overlay
accuracy of successive layers of semiconductor patterns on wafers in the
photolithography process. The accurate alignment of successive film layers,
relative to each other, across the wafer is critical for device performance
and favorable production yields.
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,
Hyundai, IBM, LG International, TSMC and WaferTech.
Industry Background
Growth
The semiconductor, flat panel display and magnetic recording head
industries have experienced significant growth over the past decade. This
trend is expected to continue due to rapid growth in Internet usage and
continuing demand for applications in data processing, wireless
communications, personal computers, handheld electronic devices, computer
games and other consumer electronics. Dataquest, an independent industry
research company, estimates that worldwide semiconductor sales will increase
to approximately $251 billion in 2002 from $136 billion in 1998, representing
a compound annual growth rate of 16.6%. To keep pace with the demand, capital
equipment spending by semiconductor manufacturers is estimated to reach
$75 billion in 2002 from $30 billion in 1998, representing a compound annual
growth rate of 25.7%. Similarly, according to Stanford Resources Inc., a
display market research firm, the flat panel display market is expected to
grow to $26 billion in 2004 from $14 billion in 1998, representing a compound
annual growth rate of 10.9%.
27
<PAGE>
Semiconductor Manufacturing Process
Semiconductors are fabricated by a complex series of process steps on a
wafer substrate made of silicon or other material. Thin film metrology systems
are used at many points during the fabrication process to monitor and
precisely measure film thickness and uniformity as well as chemical properties
in order to maximize the yield of acceptable semiconductors. Each wafer
typically goes through a series of 100 to 500 process and metrology steps in
generally repetitive cycles.
[CHART APPEARS HERE]
[Graphical chart depicting the interaction of metrology systems with the four
primary wafer film processing steps used in semiconductor manufacturing:
deposition, CMP, photolithography and etch. A circular diagram is used to show
the movement of a bare wafer through each of the four areas, beginning with
deposition and proceeding through CMP, photolithography and etch,
respectively. Metrology systems are shown to be used both before and after
each step in this process.]
The four primary wafer film processing steps are:
. deposition;
. chemical mechanical planarization, known in our industry as CMP;
. photolithography; and
. etch.
Deposition. Deposition refers to placing layers of insulating or conductive
materials on a wafer surface in thin films that make up the circuit elements
of semiconductor devices. The four most common methods of deposition are
chemical vapor deposition, or CVD, physical vapor deposition, or PVD,
diffusion and oxidation. The control of uniformity and thickness during
deposition of these films is critical to the performance of the semiconductor
circuit.
Chemical Mechanical Planarization. CMP flattens, or planarizes, the
topography of the film surface to permit the patterning of small features on
the resulting smooth surface by the photolithography process. The CMP process
is a combination of chemical etching and mechanical polishing and commonly
uses an abrasive liquid and polishing pad. Semiconductor manufacturers need
metrology systems to control the CMP process by measuring the thin film layer
to determine precisely when the appropriate thickness has been reached.
Photolithography. Photolithography is the process step that defines the
patterns of the circuits to be built on the chip. Before photolithography, a
wafer is pre-coated with photoresist, a light sensitive film, that must have
an accurate thickness and uniformity. Photolithography involves the projection
of integrated circuit patterns onto the photoresist after which it is
developed, leaving unexposed areas available for etching. In order to
precisely control the photolithography process, it is necessary to measure
reflectivity, film thickness and overlay registration.
28
<PAGE>
Etch. Etch is the process of selectively removing precise areas of thin
films that have been deposited on the surface of a wafer. The hardened
photoresist protects material that needs to be left to make up the circuits.
During etch, certain areas of the film not covered by photoresist are removed
to leave a desired circuit pattern. Thin film metrology systems are required to
verify material removal and critical dimension conformity.
Before and after deposition, CMP, photolithography and etch, the wafer
surface is measured to determine the quality of the film or pattern and find
defects. Measurements are taken to ensure process uniformity and include
thickness, width, height, roughness and other characteristics. Process control
helps avoid costly rework or misprocessing and results in higher yields for
semiconductor manufacturers.
These processing steps are typically repeated multiple times during the
fabrication process, with alternating layers of insulating and conductive
films. Depending on the specific design of a given integrated circuit, a
variety of film types and thicknesses and a number of layers can be used to
achieve desired electronic performance characteristics. The semiconductors are
then tested, separated into individual circuits, assembled and packaged into an
integrated circuit.
Flat Panel Display and Magnetic Recording Head Manufacturing Processes
Flat panel displays and magnetic recording heads are manufactured in clean
rooms using thin film processes that are similar to those used in semiconductor
manufacturing. Most flat panel displays are constructed on large glass
substrates that range in size up to 650 by 830 millimeters. Multiple magnetic
recording heads are manufactured on substrates that are typically made of an
aluminum oxide-titanium carbide alloy, two to three millimeters thick and
approximately 150 millimeters across.
Increased Use of Thin Film Metrology Systems
Manufacturers of semiconductors, flat panel displays and magnetic recording
heads are experiencing several trends that are increasing the need for thin
film metrology systems including the following:
. Growing Use of Chemical Mechanical Planarization. Manufacturers are
adopting CMP to flatten, or planarize, thin films to obtain the ultra-
flat surfaces required for advanced photolithography. In addition, the
introduction of new interconnect techniques has increased the need for
CMP. Accordingly, semiconductor manufacturers are seeking metrology
systems that can help control the CMP process by measuring the thin film
layer to determine precisely when the appropriate thickness has been
achieved.
. Adoption of New Types of Thin Films. Manufacturers are adopting new
processes and technologies that increase the importance and utilization
of thin film metrology systems. To achieve greater semiconductor device
speed, manufacturers are utilizing copper and new insulating materials
that require enhanced metrology solutions for the manufacturing process.
. Increasing Complexity of Semiconductors. Semiconductors are becoming more
complex as they operate at faster speeds with smaller feature sizes,
employ larger dies that contain more transistors and utilize increasing
numbers of manufacturing process steps. The value of process wafers and
the cost of rework is significantly higher for these complex
semiconductors and therefore, manufacturers are seeking to use metrology
systems to increase production yields and limit the amount of rework.
. Need for Rapid Ramp of Production Efficiencies. Competitive forces on
semiconductor device manufacturers, such as price cutting and shorter
product life cycles, place pressure on the manufacturers to rapidly
achieve production efficiency. Semiconductor device manufacturers are
using metrology systems throughout the fab to ensure that manufacturing
processes scale rapidly, are accurate and can be repeated on a consistent
basis.
29
<PAGE>
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 and CVD. Until recently,
semiconductor manufacturers had to physically transport wafers from a process
tool to a separate metrology system in order to make critical measurements such
as film thickness and uniformity. Manufacturers of process equipment are
increasingly seeking to offer their customers integrated metrology in their
tools to lower costs and improve overall fab efficiency. Such tools can have
one or two metrology chambers that are integrated onto a process system, which
utilize the common automation platform so that measurements can be taken
without removing the wafers from the tool. Integrated metrology provides
semiconductor manufacturers with several benefits, including a reduction in the
number of test wafers, increased overall process throughput, faster detection
of process excursions and faults, reduced wafer handling, faster process
development and ultimately an improvement in overall equipment effectiveness.
Nanometrics Solution
We are a leader in the design, manufacture, marketing and support of thin
film metrology systems for the semiconductor, flat panel display and magnetic
recording head industries. We offer a complete line of systems to address the
thin film metrology requirements of our customers. Our metrology systems can be
categorized as follows:
. Stand-alone, fully automated systems used for measurements of thin films
in high-volume manufacturing operations. We offer a broad line of fully
automated thin film thickness 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. We believe we offer the only fully automated
thin film thickness measurement systems that synergistically combine
spectroscopic ellipsometry, spectroscopic reflectometry and Fourier
transform infrared reflectometry, known in the industry as FTIR. Each of
these measurement systems are non-contact and use non-destructive
techniques to analyze and measure films. This combination of technologies
enables our systems to determine the concentration of elements, or
dopants, within a film. This is of significant importance, as many new
films used today require continuous monitoring of dopant levels and
chemical composition. Our fully automated metrology product line also
includes systems that are used to measure the overlay registration
accuracy of successive layers of semiconductor patterns on wafers in the
photolithography process.
. 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, 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. Similar to
our automated metrology systems, our integrated systems can be configured
to determine the concentration of dopants within a film. We believe we
are the only supplier of integrated metrology systems with this
capability. We are currently shipping integrated systems to Applied
Materials for installation on their CMP and CVD tools.
30
<PAGE>
. Tabletop systems used to manually or semiautomatically measure thin films
in engineering and low-volume production environments. We pioneered and
believe we are the leading supplier of tabletop thin film thickness
measurement systems, which are mainly used in low-volume production
environments and failure analysis and engineering labs. Our three
tabletop models have unique capabilities and several available
configurations, depending on wafer handling, range of films to be
measured, uniformity mapping and other customer needs.
Each of our thin film thickness measurement systems are equipped with
computerized readout capability for measurement, visualization and control of
film uniformity. In addition, we have developed new automated systems and
tabletop products for emerging technologies using larger substrates such as 300
millimeter wafers and larger flat panel displays. We believe that we are the
first company to ship fully automated thin film thickness measurement systems
for 300 millimeter wafers. We have also introduced new technology for the
precise thin film measurements that are dictated by sub 0.25 micron design
rules and have developed products with mini-environments that meet the latest
standards for clean, particle-free manufacturing.
Strategy
Our strategy is to offer and support, on a worldwide basis, technologically
advanced metrology systems that meet the changing manufacturing requirements of
the semiconductor, flat panel display and magnetic recording head industries as
well as other industries that use metrology systems. Key elements of our
strategy include:
Continuing to Offer Advanced Integrated Metrology Systems. We were one
of the first suppliers to offer products that integrate process metrology
systems into wafer processing equipment. We are currently the only supplier
of integrated systems that combine spectroscopic reflectometry with FTIR,
thereby providing comprehensive analysis for thin film measurement. We
intend to continue our efforts to develop the integrated metrology market
to achieve and maintain competitive advantages. In September 1998, we
entered into an OEM agreement to supply metrology systems for Applied
Materials' Mirra Mesa(TM) CMP system. In addition, in July 1999, we
introduced a metrology system that is incorporated into Applied Materials'
Producer QA(TM) CVD system. We are pursuing other OEM arrangements and will
continue to investigate other integrated metrology technologies.
Maintaining Technology Leadership. We are committed to developing
advanced metrology systems that meet the requirements of advances in thin
film manufacturing technology. We have an extensive base of proprietary
technology and expertise in optics, software and systems integration. We
have supplemented our capabilities by establishing strategic relationships
to leverage our technical resources and strengthen our product offerings.
These include relationships with Kensington Laboratories, a manufacturer of
precision robotic systems, J.A. Woollam Company, a leading designer of
spectroscopic ellipsometer systems and Midac, a provider of FTIR
technology. In December 1999, we acquired inspection and metrology
technology from Phase Metrics, a data storage equipment company, to augment
our technology portfolio.
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 facilitated our ability to introduce new
products and applications that met customer needs. We believe that our
large customer base will continue to be an important source of new product
development ideas. Our large customer base also provides us with the
opportunity for increased sales of additional metrology systems to our
customers without the extensive effort that might otherwise be required.
Providing Worldwide Distribution and Support. We believe that a direct
sales and support capability is essential for developing and maintaining
close customer relationships and for rapidly responding to changing
customer requirements. Because a majority of our sales come from outside
the United States, we
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<PAGE>
are expanding our direct sales force in South Korea and Taiwan and will
continue to expand into additional territories as customer requirements
dictate. We use selected sales representatives and distributors in other
countries in Asia, Europe and the Middle East. We intend to continue
developing our distribution network by expanding our existing offices,
opening new offices and forming additional distribution relationships. We
believe that growing our international distribution network will enhance
our competitive position.
Providing a Broad Portfolio of Metrology Systems and Technology. We
offer a comprehensive family of metrology systems that accurately measure
thin films and overlay registration used in the manufacturing process. We
offer automated and integrated systems for high-volume manufacturing
applications and tabletop systems for engineering and small fab
applications. Our products can include a wide range of accessories as well
as special hardware and software configurations to meet customer needs. We
plan to continue enhancing our products and integrating additional features
and measurement modules that will strengthen and broaden our product line.
Addressing Multiple Markets. There are broad applications of our
technology beyond the semiconductor industry. We intend to continue
developing and marketing products to address metrology requirements in the
manufacture of flat panel displays, magnetic recording heads and any other
industries that might apply our technology in the future. We believe our
diversification through multiple industry applications of our technology
increases the total available market for our products and reduces, to an
extent, our exposure to the cyclicality of any particular market.
Products
We have been a pioneer in the field of thin film metrology and have been
instrumental in the development of many innovations over the past 25 years. Our
thin film thickness measurement systems use microscope-based, non-contact
spectroscopic reflectometry. Some of our systems provide complementary
spectroscopic ellipsometry to measure the thickness and optical characteristics
of films on a variety of substrates. In addition, we offer an optional FTIR
feature on some of our products to determine other film parameters, such as the
concentration of dopants within a film. 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.
<TABLE>
<CAPTION>
Technology
-----------------------------------------------------
Fourier
Maximum Transform Advanced
Substrate Spectroscopic Spectroscopic Infrared Dimensional
System Market Size (mm) Reflectometry Ellipsometry Reflectometry Metrology
--------- ---------------------------- --------- ------------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Automated
8000X Semiconductor, Magnetic Head 200 X X X
8300X Semiconductor 300 X X X
9200 Semiconductor 200 X X
5500/6500 Flat Panel Display 960 by 1100 X
7000/7200 Semiconductor 200 X
- ------------------------------------------------------------------------------------------------------------
<CAPTION>
Integrated
<S> <C> <C> <C> <C> <C> <C>
9000i Semiconductor 200 X X
9000b Semiconductor 300 X X
- ------------------------------------------------------------------------------------------------------------
<CAPTION>
Tabletop
<S> <C> <C> <C> <C> <C> <C>
3000 Semiconductor, Magnetic Head 200 X
6100/6150 Semiconductor 200 X
50-2c Semiconductor, Magnetic Head 200 X
</TABLE>
32
<PAGE>
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 integration into a variety of fab automation
environments, and implement multiple measurement technologies for a broad range
of substrate sizes. Our automated systems range in price from approximately
$200,000 to $700,000 depending on substrate sizes, measurement technologies,
material handling interfaces and software options.
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 fully integrated spectroscopic ellipsometer for ultrathin and
multiple film stack measurement applications. In addition, an FTIR option can
be added to determine dielectric dopant concentrations. 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 and FTIR options for expanded measurement applications. This
system can also include a mini-environment enclosure and wafer load ports
compatible with industry standards. These systems conform to the new industry
standards for 300 millimeter wafer handling automation. The 8300X received a
Photonics Circle of Excellence Award for innovation and achievement in photonic
technology.
NanoSpec 9200
The NanoSpec 9200 stand-alone, automated thin film measurement system is
capable of handling wafers of 150 and 200 millimeters in diameter. We developed
this system using technologies from the NanoSpec 9000 integrated film thickness
system to be compact and to provide high wafer throughput.
NanoSpec 5500 and 6500
The NanoSpec 5500 and 6500 measure most optically transparent films used in
the manufacture of flat panel displays. The Model 5500 is fully automated and
handles large glass substrates up to 550 by 650 millimeters. This model is also
capable of precisely measuring at any site on the substrate and generating film
thickness maps, which show uniformity across the panel. The 6500 is an advanced
version of the 5500 with many proprietary software and hardware enhancements
and is capable of handling substrates up to 960 by 1100 millimeters.
Metra 7000 and 7200
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 Metra 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
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<PAGE>
DUV, FTIR measurement technologies, in addition to spectroscopic reflectometry.
Depending on features and technologies, our integrated metrology systems range
in price from approximately $90,000 to $295,000.
NanoSpec 9000i
The NanoSpec 9000i 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 9000i is equipped
with visible wavelength spectroscopic reflectometry. In 1999, the 9000i
received a Photonics Circle of Excellence Award for innovation and achievement
in photonic technology.
NanoSpec 9000b
The NanoSpec 9000b is a 300 millimeter-based system that incorporates all
the features of the 9000i. This system is interchangeable with industry
conforming load ports for simplified mechanical integration.
Tabletop Systems
Our tabletop systems are used mainly in low-volume production environments
and in engineering labs where automated handling and high throughput are not
required. Our tabletop product line encompasses both manual and 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.
NanoSpec 3000 and 6100/6150
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 6100/6150 models feature semiautomatic wafer handling or
staging.
NanoLine 50-2C
The NanoLine 50-2C is a tabletop critical dimension, or linewidth,
measurement system primarily used in low-volume production environments and
photolithography mask making shops. The system uses a high- magnification
optical system and scanning technology combined with proprietary software to
provide accurate, repeatable dimensions.
Customers
We sell our thin film metrology systems worldwide to many of the major
semiconductor, flat panel display and magnetic recording head manufacturers and
equipment suppliers, as well as producers of silicon wafers and photomasks. The
majority of our systems are sold to customers located in the United States,
Asia and Europe. One customer, IBM, represented 11.2% of our total net revenues
in 1998 and Applied Materials and TSMC represented 12.8% and 10.5% of our total
net revenues in 1999, respectively.
The following is a list of our top customers, based on revenues, during
1999:
<TABLE>
<S> <C>
Applied Materials Intertrade Scientific
CHI-MEI Sony
Hyundai Taiwan Semiconductor Manufacturing
IBM Co. (TSMC)
Innotech Texas Instruments
WaferTech
</TABLE>
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<PAGE>
Sales and Marketing
We believe that a direct sales and support capability is essential for
developing and maintaining close customer relationships and for rapidly
responding to changing customer requirements. We provide direct sales support
from our corporate office in California. In addition, we have a direct sales
presence in Oregon and Texas in the United States as well as Scotland, South
Korea, Taiwan and Japan. We use selected sales representatives and distributors
in other countries in Asia, Europe and the Middle East. We intend to continue
to develop our distribution network by expanding our existing offices and
opening new offices and forming additional distribution relationships. We
believe that growing our international distribution network will enhance our
competitive position. We maintain a direct sales force of highly trained,
technically sophisticated sales engineers who are knowledgeable in the use of
metrology systems in general and the features and advantages of our products in
particular. We believe that our sales and application engineers are skilled in
working with customers to solve complex measurement and process problems.
Sales to customers in foreign countries constituted approximately 61.8% and
60.9% of total net revenues for 1998 and 1999, respectively. Direct exports of
our metrology systems to 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.
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 specify high performance systems not offered by other
suppliers or, as a cost saving measure, they can narrowly configure a system
for a specific application.
Spectroscopic Reflectometry. We pioneered the use of micro-spot
spectroscopic reflectometry for semiconductor film metrology in the late 1970s.
Spectroscopic reflectometry uses multiple wavelengths (colors) of light to
obtain an array of data for analysis of film thickness and other film
parameters. Today's semiconductor manufacturers still depend on spectroscopic
reflectometry for most film metrology applications. Reflectometry is the
measurement of reflected light. For film metrology, a wavelength spectrum in
the visible region is commonly used. Light reflected from the surfaces of the
film and the substrate is analyzed using computers and measurement algorithms.
The analysis yields thickness information and other parameters without
contacting or destroying the film.
In the mid-1980s, we introduced a DUV reflectometer for material analysis.
In 1991, we were awarded a patent for the determination of absolute reflectance
in the ultraviolet region. This technology provides enhanced measurement
performance for thinner films and films stacked on top of one another.
Spectroscopic Ellipsometry. Like reflectometry, ellipsometry is a non-
contact and non-destructive technique used to analyze and measure films. An
ellipsometer analyzes the change in a polarized beam of light after reflection
from a film's surface and interface. Our systems are spectroscopic providing
ellipsometric data at many different wavelengths. Spectroscopic ellipsometry
provides a wealth of information about a film, yielding very accurate and
reliable measurements. In general, ellipsometers are used for thin films and
complex film stacks, whereas reflectometers are used for thicker films and
stacks.
FTIR Reflectometry. FTIR is another non-contact analytical technique used to
collect information about a film. FTIR operates in the infrared region of the
electromagnetic spectrum, which is invisible to the human eye.
35
<PAGE>
Our proprietary, compact FTIR design collects a wide spectrum of infrared
radiation reflected from the film and then separates this radiation into
wavelength data using mathematical algorithms, referred to as Fourier
transforms. The infrared spectrum is useful for determining the dopants in a
film. FTIR is of significant importance to the semiconductor industry, as many
new films used today require careful monitoring of dopant levels. In addition,
FTIR can be used to measure very thick films and films that cannot be analyzed
within the range of visible or DUV reflectometry and ellipsometry.
Combined Film Analysis. By combining all three film analysis techniques
(reflectometry, ellipsometry and FTIR) onto one platform, our film metrology
systems offer a comprehensive analysis for film metrology applications.
Competitive systems generally measure only thickness and optical characteristic
of a film. Our systems measure thickness, optical characteristics and the
concentration of dopants. Beyond the performance advantage, our combined
systems require less cleanroom space and provide lower cost of ownership.
Surface Analysis. We have a variety of proprietary, non-contact and non-
destructive technologies that are used to inspect the surfaces of films and
substrates. These technologies locate and analyze abnormalities found on the
surfaces and can be adapted to metrology platforms.
Overlay Registration. Overlay registration refers to the relative alignment
of two layers in the thin film photolithographic process. Our microscope-based,
measurement technology utilizes a high magnification, low distortion imaging
system combined with proprietary software algorithms to numerically quantify
the alignment.
Customer Service and Support
We believe that customer service and technical support are important
competitive factors and are essential to building and maintaining close, long-
term relationships with our customers. We provide support to our customers with
telephonic technical support access, direct training programs and operating
manuals and other technical support information. We use our demonstration
equipment for training programs in addition to sales and marketing. We provide
warranty and post-warranty service from our corporate office in California. We
also have service operations based in Arizona, Massachusetts, Oregon,
Pennsylvania, Idaho and Texas. Local service and spare parts are provided in
the United Kingdom by our sales office in Scotland and in the rest of Europe by
distributors and sales representatives. In Asia, service is provided by direct
offices in Japan, Korea and Taiwan. Our distributors and representatives
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 10.7% and 11.7% of total net
revenues in 1998 and 1999, respectively.
Backlog
As of December 31, 1999, our backlog was approximately $13.4 million,
compared with approximately $1.0 million at December 31, 1998. 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. Since 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 on a global basis with
both larger and smaller companies in the United States, Japan, Israel and
Europe. We compete primarily with: stand-alone thin film measurement products
from KLA-Tencor
36
<PAGE>
Corporation, Therma-Wave, Inc., Rudolph Technologies and Dai Nippon Screen;
integrated thin film measurement products from Nova Measuring Instruments Ltd.
and Online Technologies; and overlay measurement products from KLA-Tencor
Corporation, 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 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 are relying increasingly on outside vendors to manufacture many components
and subassemblies. We have entered into agreements with J.A. Woollam Company
for the purchase of the spectroscopic ellipsometer components and Midac
Corporation for the purchase of FTIR spectrometer components. Additionally, we
use Kensington Laboratories 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 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 1998
and 1999 were $4.2 million and $4.7 million, and represented 12.7% and 12.8% 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. We
hold a number of United States patents with several pending patents. The United
States patents, issued during the period 1983 to 1999, will expire from 2000 to
2018. 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 have received communications from third parties
asserting that our metrology systems infringe, or may infringe, the proprietary
rights of these third parties. We are presently discussing
37
<PAGE>
patent issues with Therma-Wave, Inc. We believe that Therma-Wave's Opti-Probe
product line may infringe on a patent issued to us relating to absolute
reflectance measurement. Therma-Wave alleges that some of our thin film
thickness measurement products may infringe on a Therma-Wave patent relating to
the combination of a spectroscopic reflectometer with a spectroscopic
ellipsometer. Although we believe that none of our products infringe on a valid
Therma-Wave patent, if this matter is resolved against us, our business could
be harmed. Additionally, some customers of ours have received notices from The
Lemelson Medical, Education & Research Foundation alleging that equipment used
in the manufacture of semiconductor products infringes their patents. A number
of these customers have notified us that they are seeking indemnification from
us for any damages and expenses resulting from this matter. Certain of our
customers have engaged in litigation with the late Mr. Lemelson involving a
number of his patents and some of these cases have been settled. Although the
ultimate outcome of these matters is not presently determinable, the resolution
of all such pending matters could harm our business. These claims of
infringement may lead to protracted and costly litigation that could require us
to pay substantial damages or have the sale of our products or systems stopped
by an injunction. Infringement claims could also cause product or system delays
or require us to redesign our products or systems, and these delays could
result in the loss of substantial revenues. We may also be required to obtain a
license from the third party or cease activities utilizing the third party's
proprietary rights. We may not be able to enter into such a license or such
license may not be available on commercially reasonable terms. The loss of an
infringement action or the inability to license a third party's intellectual
property could therefore prevent our ability to sell our systems, or require us
to redesign our products, making the sale of such systems more expensive for
us. We may be required to initiate litigation in order to enforce any patents
issued to or licensed by us, or to determine the scope or validity of a third
party's patent or other proprietary rights. Any such litigation, regardless of
outcome, could be expensive and time consuming, and could subject us to
significant liabilities or require us to re-engineer our product or obtain
expensive licenses from third parties.
Employees
At December 31, 1999, we employed approximately 191 persons worldwide,
including 52 in research and development, 38 in manufacturing and manufacturing
support, 77 in marketing, sales and field service and 24 in general
administration and finance. None of these employees is represented by a union
and we have never experienced a work stoppage as a result of union actions.
Many of our employees have specialized skills of value to us. Our future
success will depend in large part upon our ability to attract and retain highly
skilled scientific, technical, managerial, financial and marketing personnel,
who are in great demand in the industry. We consider our employee relations to
be good.
Facilities
Our principal manufacturing and administrative facility is located in
Sunnyvale, California in a leased building with approximately 35,000 square
feet. The lease on this building began in May 1992 and is scheduled to expire
in April 2002. We also have sales and service offices in Texas, Korea and
Taiwan. Rent expense for our facilities was approximately $867,000 for 1999.
Through our Japanese subsidiary, we own a 15,000 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.
In September 1998, our Korean subsidiary entered into a two-year agreement
for manufacturing facilities that provides for payments based on a percentage
of net product sales.
Legal Proceedings
There are no material legal proceedings pending against us. We could become
involved in litigation from time to time relating to claims arising out of our
ordinary course of business.
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<PAGE>
MANAGEMENT
The following are our current executive officers and directors and their
ages as of December 31, 1999:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Vincent J. Coates........... 74 Chairman of the Board, Secretary
John D. Heaton.............. 39 President, Chief Executive Officer and Director
Paul B. Nolan............... 44 Vice President and Chief Financial Officer
Roger Ingalls Jr............ 38 Vice President and Director of Marketing
William A. McGahan.......... 33 Vice President and Chief Scientist
Nathaniel Brenner........... 73 Director
Norman V. Coates............ 50 Director
Kanegi Nagai................ 68 Director
Edmond R. Ward.............. 60 Director
</TABLE>
Mr. Vincent Coates has been our Chairman of the Board since our founding in
1975. He has also served as our Chief Executive Officer and President from our
founding through July 1988, except for the period January 1986 through
February 1987 when he served exclusively as Chief Executive Officer. He was
elected Secretary in February 1989. He resigned the position of Chief
Executive Officer in April 1998.
Mr. Heaton joined us in September 1990 and in April 1994 was elected Vice
President of Engineering and General Manager. In July 1995, he was appointed
to the Board of Directors and became General Manager. He has been President
since May 1996 and was elected Chief Executive Officer in April 1998. Mr.
Heaton served in various technical roles at National Semiconductor from 1978
to 1990 prior to joining us.
Mr. Nolan joined us in March 1989 and in March 1994 was elected Vice
President and Chief Financial Officer. Mr. Nolan served as Senior Financial
Analyst at Harris Corporation prior to joining us.
Mr. Ingalls has been employed by Nanometrics since March 1995 and was
elected Vice President in October 1997. He was appointed Director of Marketing
in February 1998. During his employment at Nanometrics, Mr. Ingalls has served
as U.S. Sales and Product Manager, and most recently Director of North
American Sales. Prior to joining Nanometrics, he served as a sales engineer
for Nikon Inc. from March 1993 to March 1995.
Dr. McGahan joined us in October 1995 and was elected Vice President in
October 1997 and Chief Scientist in December 1999. He served as Director of
Research and Development from January 1999 to December 1999. From January 1998
to January 1999, Dr. McGahan served as Director of Engineering. Prior to that,
he served as Applications Engineering Manager from October 1996 to October
1997 and as Advanced Metrology Development Manager from October 1995 to
October 1996. From September 1987 to October 1995, Dr. McGahan served as an
engineer for the J.A. Woollam Co., Inc., a manufacturer of spectroscopic
ellipsometers. Dr. McGahan has published 46 papers relating to ellipsometry
magneto-optics and thermal characterization of materials.
Mr. Brenner has served as one of our directors since June 1986. He joined
Beckman Instruments, Inc. in 1976 where he held the positions of Program
Manager, Marketing Manager (Instruments) and General Manager (Spectroscopy).
In 1992, Mr. Brenner retired from Beckman Instruments, Inc.
Mr. Norman V. Coates has served as one of our directors since May 1988. He
has operated Gem of the River Produce, a farming and produce packing operation
in Orleans, California, as a sole proprietor since 1978. He has also been
manager of the Boise Creek Farm operation since 1985 and a manager of Coates
Vineyards since 1997.
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<PAGE>
Mr. Nagai has served as one of our directors since May 1996. Mr. Nagai also
served us as a consultant from August 1995 until June 1998. From January 1990
to April 1995, Mr. Nagai was the President and Chief Executive Officer of Cybeq
Systems, a semiconductor equipment supplier. From 1983 to 1989, Mr. Nagai held
a number of management positions with the Mitsubishi Bank (currently the Bank
of Tokyo-Mitsubishi) and the Mitsubishi Materials Corporation.
Mr. Ward has served as one of our directors since August 1999. Since August
1999, Mr. Ward has been a General Partner of Virtual Founders. From April 1992
to June 1997, Mr. Ward was the Vice President of Technology at Silicon Valley
Group Inc.
Mr. Vincent Coates is the father of Mr. Norman Coates, one of our directors.
There are no other family relationships among any of our executive officers and
directors. All directors hold office until the next annual meeting of
shareholders and until their successors have been elected and qualified.
Officers are elected by and serve at the discretion of the Board of Directors.
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PRINCIPAL AND SELLING SHAREHOLDERS
The following table presents information with respect to beneficial
ownership of our common stock as of December 31, 1999 and as adjusted to
reflect the sale of the shares offered by this prospectus by:
. each person who beneficially owns more than 5% of the common stock;
. each of our executive officers;
. each of our directors;
. all executive officers and directors as a group; and
. the selling shareholders.
The applicable percentage of ownership for each shareholder is based on
9,163,998 shares of common stock outstanding as of December 31, 1999.
<TABLE>
<CAPTION>
Ownership Prior to Ownership After
Offering (1) Offering
-------------------- --------------------
Number of Shares Being Number of
Beneficial Owner Shares Percentage Offered Shares Percentage
- ------------------------ --------- ---------- ------------ --------- ----------
<S> <C> <C> <C> <C> <C>
Vincent J. Coates(2).... 5,388,774 58.8% 1,750,000 3,638,774 33.3%
c/o Nanometrics
Incorporated
310 DeGuigne Drive
Sunnyvale, CA 94086
Putnam Investments,
Inc.(3)................ 833,840 9.1% 0 833,840 7.6%
One Post Office Square
Boston, MA 02109
FMR Corp.(4)............ 700,000 7.6% 0 700,000 6.4%
82 Devonshire Street
Boston, MA 02109
Nathaniel Brenner(5).... 55,999 * 0 55,999 *
Norman V. Coates(6)..... 38,049 * 0 38,049 *
John D. Heaton(7)....... 126,668 1.4% 0 126,668 1.1%
Paul B. Nolan(8) ....... 61,666 * 0 61,666 *
Kanegi Nagai(9) ........ 13,999 * 0 13,999 *
Roger Ingalls Jr.(10)... 32,999 * 0 32,999 *
William A. McGahan(11).. 29,332 * 0 29,332 *
Edmond R. Ward.......... 0 * 0 0 *
All officers and
directors as a group
(9 persons)(12)........ 5,747,486 60.6% 1,750,000 3,997,486 35.6%
</TABLE>
- --------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
SEC. The number of shares beneficially owned by a person includes shares
of common stock subject to options held by that person that are currently
exercisable or exercisable within 60 days of December 31, 1999. Such
shares issuable pursuant to such options are deemed outstanding for
computing the percentage ownership of the person holding such options but
are not deemed outstanding for the purposes of computing the percentage
ownership of each other person.
(2) Includes 3,376,154 shares of common stock held of record by the Vincent J.
Coates Separate Property Trust, U/D/T dated August 7, 1981, for which Mr.
Coates acts as trustee; 1,000,000 shares of common stock held of record by
the Vincent J. Coates 1999 Charitable Trust UTA dated December 17, 1999,
for which Mr. Coates acts as trustee; and 1,012,500 shares of common stock
held of record by the Vincent J.
41
<PAGE>
Coates Foundation, for which Mr. Coates acts as president. The Vincent J.
Coates 1999 Charitable Trust and the Vincent J. Coates Foundation will sell
1,000,000 and 750,000 shares of common stock, respectively, in the
offering. If the underwriters exercise their over-allotment option in full,
the Vincent J. Coates Foundation will sell an additional 262,500 shares,
bringing Mr. Coates's percentage of our common stock beneficially owned
after this offering to 30.2%.At December 31, 1999, our total debt
obligation was $2.9 million while the long-term portion was $2.3 million.
The fixed rates on such obligations range from 1.5% to 3.4% per annum and
mature on various dates through May 2006.
(3) According to a Schedule 13G filed with the Securities Exchange Commission
on or about February 17, 2000, Putnam Investments, Inc. ("PI") may be
deemed to be the beneficial owner of 833,840 shares of common stock. PI
is identified as a Parent Holding Company on its Schedule 13G.
(4) According to a Schedule 13G filed with the Securities Exchange Commission
on or about February 12, 1999 FMR Corp. ("FMR") may be deemed to be the
beneficial owner of 858,500 shares of common stock. FMR is identified as a
Parent Holding Company on its Schedule 13G.
(5) Includes 26,000 shares of common stock held of record by the N&J Brenner
Living Trust, for which Mr. Brenner and his spouse act as trustees, for
the benefit of members of Mr. Brenner's immediate family, and 29,999
shares of common stock issuable upon exercise of outstanding options
exercisable within 60 days of December 31, 1999.
(6) Includes an aggregate of 8,050 shares held as trustee on the behalf of
other family members and 29,999 shares of common stock issuable upon
exercise of outstanding options exercisable within 60 days of December 31,
1999.
(7) Includes 126,668 shares of common stock issuable upon exercise of
outstanding options exercisable within 60 days of December 31, 1999.
(8) Includes 61,666 shares of common stock issuable upon exercise of
outstanding options exercisable within 60 days of December 31, 1999.
(9) Includes 13,999 shares of common stock issuable upon exercise of
outstanding options exercisable within 60 days of December 31, 1999.
(10) Includes 32,999 shares of common stock issuable upon exercise of
outstanding options exercisable within 60 days of December 31, 1999.
(11) Includes 29,332 shares of common stock issuable upon exercise of
outstanding options exercisable within 60 days of December 31, 1999.
(12) Includes 324,662 shares of common stock issuable upon exercise of
outstanding options exercisable within 60 days of December 31, 1999.
42
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, we are authorized to issue 25,000,000
shares of common stock, no par value of which there were 9,163,998 shares of
common stock outstanding as of December 31, 1999.
The following description of our common stock is not complete and is subject
to and qualified in its entirety by our amended and restated articles of
incorporation and bylaws and by the provisions of applicable California Law.
Holders of common stock are entitled to one vote per share on all matters to
be voted upon by the shareholders. Holders of common stock have cumulative
voting rights in the election of directors. Accordingly, provided notice of the
intention to use cumulative voting has been given at the meeting prior to
voting, a shareholder may give one candidate a number of votes equal to the
number of directors to be elected multiplied by the number of votes to which
the shareholder's shares are entitled, or distribute the shareholder's votes on
the same principle among as many candidates as the shareholder may select.
Holders of the common stock are entitled to receive such dividends as may be
declared from time to time by the board of directors out of funds legally
available therefor. In the event of the liquidation, dissolution or winding up
of Nanometrics, the holders of common stock are entitled to share ratably in
all assets legally available for distribution.
Our transfer agent and register is U.S. Stock Transfer Corporation.
43
<PAGE>
UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement
dated the date hereof, each underwriter named below has severally agreed to
purchase, and Nanometrics and the selling shareholders have agreed to sell to
such underwriter, the number of shares set forth opposite the name of such
underwriter.
<TABLE>
<CAPTION>
Number of
Name Shares
- ---- ---------
<S> <C>
Salomon Smith Barney Inc..............................................
SoundView Technology Group, Inc.......................................
Tucker Anthony Inc....................................................
Needham & Company, Inc................................................
---------
Total............................................................... 3,500,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares included in this offering are subject to
approval of certain legal matters by counsel and to certain other conditions.
The underwriters are obligated to purchase all the shares (other than those
covered by the over-allotment option described below) if they purchase any of
the shares.
The underwriters, for whom Salomon Smith Barney Inc., SoundView Technology
Group, Inc., Tucker Anthony Inc. and Needham & Company, Inc. are acting as
representatives, propose to offer some of the shares directly to the public at
the public offering price set forth on the cover page of this prospectus and
some of the shares to certain dealers at the public offering price less a
concession not in excess of $ per share. The underwriters may allow, and
such dealers may reallow, a concession not in excess of $ per share on
sales to certain other dealers. If all of the shares are not sold at the
initial offering price, the representatives may change the public offering
price and the other selling terms.
Nanometrics and a selling shareholder have granted to the underwriters an
option, exercisable for 30 days from the date of this prospectus, to purchase
up to 525,000 additional shares of common stock at the public offering price
less the underwriting discount. The underwriters may exercise such option
solely for the purpose of covering over-allotments, if any, in connection with
this offering. To the extent such option is exercised, each underwriter will be
obligated, subject to certain conditions, to purchase a number of additional
shares approximately proportionate to such underwriter's initial purchase
commitment.
Nanometrics, its officers and directors and the selling shareholders have
agreed that, for a period of 90 days from the date of this prospectus, they
will not, without the prior written consent of Salomon Smith Barney Inc.,
dispose of or hedge any shares of common stock of Nanometrics or any securities
convertible into or exchangeable for common stock. Salomon Smith Barney Inc. in
its sole discretion may release any of the securities subject to these lock-up
agreements at any time without notice. The common stock is quoted on the Nasdaq
National Market under the symbol "NANO".
The following table shows the underwriting discounts and commissions to be
paid to the underwriters by Nanometrics and the selling shareholders in
connection with this offering. These amounts are shown assuming both no
exercise and full exercise of the underwriters' option to purchase additional
shares of common stock.
<TABLE>
<CAPTION>
Paid by Paid by Selling
Nanometrics Shareholder
----------------- -----------------
No Full No Full
Exercise Exercise Exercise Exercise
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Per share................................ $ $ $ $
Total.................................... $ $ $ $
</TABLE>
In connection with the offering, Salomon Smith Barney Inc., on behalf of the
underwriters, may purchase and sell shares of common stock in the open market.
These transactions may include over-allotment, syndicate
44
<PAGE>
covering transactions and stabilizing transactions. Over-allotment involves
syndicate sales of common stock in excess of the number of shares to be
purchased by the underwriters in the offering, which creates a syndicate short
position. Syndicate covering transactions involve purchases of the common stock
in the open market after the distribution has been completed in order to cover
syndicate short positions. Stabilizing transactions consist of certain bids or
purchases of common stock made for the purpose of preventing or retarding a
decline in the market price of the common stock while the offering is in
progress.
The underwriters also may impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when
Salomon Smith Barney Inc., in covering syndicate short positions or making
stabilizing purchases, repurchases shares originally sold by that syndicate
member.
Any of these activities may cause the price of the common stock to be higher
than the price that otherwise would exist in the open market in the absence of
such transactions. These transactions may be effected on the Nasdaq National
Market or in the over-the-counter market, or otherwise and, if commenced, may
be discontinued at any time.
In addition, in connection with this offering, certain of the underwriters
(and selling group members) may engage in passive market making transactions in
the common stock on the Nasdaq National Market, prior to the pricing and
completion of the offering. Passive market making consists of displaying bids
on the Nasdaq National Market no higher than the bid prices of independent
market makers and making purchases at prices no higher than those independent
bids and effected in response to order flow. Net purchases by a passive market
maker on each day are limited to a specified percentage of the passive market
maker's average daily trading volume in the common stock during a specified
period and must be discontinued when such limit is reached. Passive market
making may cause the price of the common stock to be higher than the price that
otherwise would exist in the open market in the absence of such transactions.
If passive market making is commenced, it may be discontinued at any time.
A prospectus in electronic format is being made available on an Internet web
site maintained by Wit Capital Corporation, an affiliate of SoundView
Technology Group, Inc. Other than the prospectus in electronic format, the
information on this web site and any other web site maintained by Wit Capital
Corporation is not part of the prospectus or registration statement, has not
been approved or endorsed by Nanometrics or any underwriter in its capacity as
underwriter and should not be relied upon by investors.
Nanometrics will pay the expenses of this offering, estimated to be
$800,000.
Nanometrics and the selling shareholders have agreed to indemnify the
underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, or to contribute to payments the underwriters may be
required to make in respect of any of those liabilities.
45
<PAGE>
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for
Nanometrics by Wilson Sonsini Goodrich & Rosati, Professional Corporation,
Palo Alto, California. Certain legal matters will be passed upon for the
underwriters by Brobeck, Phleger & Harrison LLP, San Francisco, California.
EXPERTS
The consolidated financial statements of Nanometrics Incorporated and
subsidiaries as of December 31, 1998 and 1999 and for each of the three years
in the period ended December 31, 1999 included in this prospectus and
incorporated by reference from the Company's Annual Report on Form 10-K and
the related consolidated financial statement schedule incorporated by
reference in the Registration Statement from the Company's Annual Report on
Form 10-K have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their reports appearing herein and incorporated by reference in the
Registration Statement, and have been so included and incorporated in reliance
upon the reports of such firm given upon their authority as experts in
accounting and auditing.
AVAILABLE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC.
Our SEC filings are available to the public over the Internet at the SEC's
website at http://www.sec.gov. You may also read and copy any document we file
with the SEC at its Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. You can also obtain copies of the documents at
prescribed rates by writing to the Public Reference Section of the SEC at 450
Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-
0330 for further information on the operation of its Public Reference Room.
INCORPORATION OF INFORMATION BY REFERENCE
The SEC allows us to "incorporate by reference" into this prospectus the
information we have filed with it. The information incorporated by reference
is an important part of this prospectus and the information that we file
subsequently with the SEC will automatically update this prospectus. The
information incorporated by reference is considered to be part of this
prospectus. We incorporate by reference the documents listed below and any
filings we make with the SEC under Section 13(a), 13(c), 14, or 15(d) of the
Securities Exchange Act of 1934, after the initial filing of this registration
statement that contains this prospectus and prior to the time that all the
securities offered by this prospectus are sold:
. Our Annual Report on Form 10-K for the fiscal year ended December 31,
1999; and
. Our Report on Form 8-K filed on February 15, 2000.
You may request a copy of these filings, at no cost, by writing or
telephoning us at the following address:
Nanometrics Incorporated
Paul Nolan
Chief Financial Officer
310 DeGuigne Drive
Sunnyvale, California 94086
(408) 746-1600
The information in the documents incorporated by reference shall be deemed
superseded to the extent that more current information is included in this
prospectus or any future document incorporated herein.
46
<PAGE>
NANOMETRICS INCORPORATED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors'
Report................. F-2
Consolidated Balance
Sheets................. F-3
Consolidated Statements
of Income.............. F-4
Consolidated Statements
of Shareholders' Equity
and Comprehensive
Income................. F-5
Consolidated Statements
of Cash Flows.......... F-6
Notes to Consolidated
Financial Statements... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Nanometrics Incorporated
We have audited the accompanying consolidated balance sheets of Nanometrics
Incorporated and subsidiaries as of December 31, 1998 and 1999, and the related
consolidated statements of income, shareholders' equity and comprehensive
income, and of cash flows for each of the three years in the period ended
December 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Nanometrics Incorporated and
subsidiaries at December 31, 1998 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1999 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Jose, California
February 15, 2000
F-2
<PAGE>
NANOMETRICS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
December 31,
----------------
1998 1999
------- -------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................... $ 1,518 $ 3,442
Short-term investments...................................... 9,913 14,698
Accounts receivable, net of allowances of $420 and $425 in
1998 and 1999, respectively................................ 8,458 11,435
Inventories................................................. 11,719 9,460
Deferred income taxes....................................... 1,441 1,722
Prepaid expenses and other.................................. 2,328 1,196
------- -------
Total current assets...................................... 35,377 41,953
PROPERTY, PLANT AND EQUIPMENT, Net............................ 2,481 2,998
DEFERRED INCOME TAXES......................................... 560 135
OTHER ASSETS.................................................. 887 1,324
------- -------
TOTAL ASSETS.............................................. $39,305 $46,410
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................ $ 1,395 $ 2,412
Accrued payroll and related expenses........................ 317 751
Other current liabilities................................... 1,720 1,721
Income taxes payable........................................ -- 464
Current portion of debt obligations......................... 1,324 584
------- -------
Total current liabilities................................. 4,756 5,932
DEFERRED RENT................................................. 43 35
DEBT OBLIGATIONS.............................................. 2,496 2,288
------- -------
Total liabilities......................................... 7,295 8,255
------- -------
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY:
Common stock, no par value; 25,000,000 shares authorized;
8,690,643 and 9,163,998 outstanding in 1998 and 1999,
respectively............................................... 14,170 17,277
Retained earnings........................................... 17,974 20,608
Accumulated other comprehensive income (loss)............... (134) 270
------- -------
Total shareholders' equity................................ 32,010 38,155
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................ $39,305 $46,410
======= =======
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
NANOMETRICS INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended December
31,
-------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
NET REVENUES:
Product sales...................................... $32,767 $29,718 $32,162
Service............................................ 3,890 3,546 4,246
------- ------- -------
Total net revenues............................... 36,657 33,264 36,408
------- ------- -------
COSTS AND EXPENSES:
Cost of product sales.............................. 12,092 13,002 14,606
Cost of service.................................... 3,632 3,669 4,560
Research and development........................... 2,986 4,206 4,658
Acquired in-process research and development....... -- 1,421 --
Selling............................................ 6,050 5,728 5,871
General and administrative......................... 2,765 2,828 2,973
------- ------- -------
Total costs and expenses......................... 27,525 30,854 32,668
------- ------- -------
INCOME FROM OPERATIONS............................... 9,132 2,410 3,740
------- ------- -------
OTHER INCOME (EXPENSE):
Interest income.................................... 535 572 662
Interest expense................................... (110) (108) (180)
Other, net......................................... (175) 64 94
------- ------- -------
Total other income, net.......................... 250 528 576
------- ------- -------
INCOME BEFORE INCOME TAXES........................... 9,382 2,938 4,316
PROVISION FOR INCOME TAXES........................... 3,625 1,108 1,682
------- ------- -------
NET INCOME........................................... $ 5,757 $ 1,830 $ 2,634
======= ======= =======
NET INCOME PER SHARE:
Basic.............................................. $ 0.69 $ 0.21 $ 0.30
======= ======= =======
Diluted............................................ $ 0.65 $ 0.20 $ 0.28
======= ======= =======
SHARES USED IN PER SHARE COMPUTATION:
Basic.............................................. 8,325 8,635 8,829
======= ======= =======
Diluted............................................ 8,820 9,041 9,393
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
NANOMETRICS INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Accumulated
Common Stock Other Total
----------------- Retained Comprehensive Shareholders' Comprehensive
Shares Amount Earnings Income(Loss) Equity Income
--------- ------- -------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, January 1,
1997................... 8,258,061 $11,833 $10,387 $(160) $22,060
Comprehensive income:
Net income............. -- -- 5,757 -- 5,757 $5,757
Other comprehensive
loss, net of tax:
Foreign currency
translation
adjustments........... -- -- -- (607) (607) (607)
------
Comprehensive
income.............. -- -- -- -- -- $5,150
======
Issuance of common stock
under employee stock
purchase plan.......... 24,482 112 -- -- 112
Issuance of common stock
under stock option
plan................... 238,941 478 -- -- 478
Tax benefit of employee
stock transactions..... -- 728 -- -- 728
--------- ------- ------- ----- -------
BALANCES, December 31,
1997................... 8,521,484 13,151 16,144 (767) 28,528
Comprehensive income:
Net income............. -- -- 1,830 -- 1,830 $1,830
Other comprehensive
income, net of tax:
Foreign currency
translation
adjustments........... -- -- -- 633 633 633
------
Comprehensive
income.............. -- -- -- -- -- $2,463
======
Issuance of common stock
under employee stock
purchase plan.......... 18,006 124 -- -- 124
Issuance of common stock
under stock option
plan................... 151,153 576 -- -- 576
Tax benefit of employee
stock transactions..... -- 319 -- -- 319
--------- ------- ------- ----- -------
BALANCES, December 31,
1998................... 8,690,643 14,170 17,974 (134) 32,010
Comprehensive income:
Net income............. -- -- 2,634 -- 2,634 $2,634
Other comprehensive
income (loss), net of
tax:
Foreign currency
translation
adjustments........... -- -- -- 422 422 422
Unrealized loss on
investments........... -- -- -- (18) (18) (18)
------
Comprehensive
income.............. -- -- -- -- -- $3,038
======
Issuance of common stock
under employee stock
purchase plan.......... 28,937 148 -- -- 148
Issuance of common stock
under stock option
plan................... 444,418 1,936 -- -- 1,936
Tax benefit of employee
stock transactions..... -- 1,023 -- -- 1,023
--------- ------- ------- ----- -------
BALANCES, December 31,
1999................... 9,163,998 $17,277 $20,608 $ 270 $38,155
========= ======= ======= ===== =======
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
NANOMETRICS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................... $ 5,757 $ 1,830 $ 2,634
Reconciliation of net income to net cash
provided by operating activities:
Depreciation and amortization................ 213 298 359
Deferred rent................................ 13 26 (8)
Acquired in-process research and
development................................. -- 1,421 --
Deferred income taxes........................ (588) (573) 174
Changes in assets and liabilities, net of
effects of product line acquisition:
Accounts receivable........................ 93 2,805 (2,496)
Inventories................................ (2,322) (2,751) 2,449
Prepaid income taxes....................... -- (1,325) 1,325
Prepaid expenses and other................. (218) 93 (178)
Accounts payable, accrueds and other
current liabilities....................... 1,238 (1,355) 1,341
Income taxes payable....................... 26 416 1,462
-------- -------- --------
Net cash provided by operating
activities.............................. 4,212 885 7,062
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments............ (18,152) (17,790) (22,575)
Sales/maturities of short-term investments..... 15,214 17,472 17,760
Purchases of property, plant and equipment..... (97) (167) (511)
Other assets................................... (17) (50) (536)
Product line acquisition....................... -- (3,225) --
-------- -------- --------
Net cash used in investing activities.... (3,052) (3,760) (5,862)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt obligations..... 329 761 90
Repayments of debt obligations................. (329) (660) (1,358)
Sale of shares under employee stock purchase
and stock option plans........................ 590 700 2,084
-------- -------- --------
Net cash provided by financing
activities.............................. 590 801 816
-------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH.......... 181 (64) (92)
-------- -------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS.......... 1,931 (2,138) 1,924
CASH AND CASH EQUIVALENTS, Beginning of year..... 1,725 3,656 1,518
-------- -------- --------
CASH AND CASH EQUIVALENTS, End of year........... $ 3,656 $ 1,518 $ 3,442
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest......................... $ 117 $ 92 $ 72
======== ======== ========
Cash paid for income taxes..................... $ 4,192 $ 2,558 $ 82
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
1. Significant Accounting Policies
Description of Business--Nanometrics Incorporated and its wholly-owned
subsidiaries sell, design, manufacture, market and support thin film and
overlay dimension metrology systems for customers in the semiconductor, flat
panel display and magnetic recording head industries. These metrology systems
precisely measure a wide range of film types deposited on substrates during
manufacturing in order to control manufacturing processes and increase
production yields in the fabrication of integrated circuits, flat panel
displays and magnetic recording heads. The thin film metrology systems use a
broad spectrum of wavelengths, high-sensitivity optics, proprietary software
and patented technology to measure the thickness and uniformity of films
deposited on silicon and other substrates as well as their chemical
composition. The overlay metrology systems are used to measure the overlay
accuracy of successive layers of semiconductor patterns on wafers in the
photolithography process.
Basis of Presentation--The consolidated financial statements include
Nanometrics Incorporated and its wholly-owned subsidiaries (the Company). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fiscal Year--The Company uses a 52/53 week fiscal year ending on the
Saturday nearest to December 31. Accordingly, fiscal years 1997, 1998 and 1999
ended on January 3, 1998, January 2, 1999, and January 1, 2000, and consisted
of 53, 52 and 52 weeks, respectively. For purposes of the consolidated
financial statements, the year end is denoted as December 31. All references to
years relate to fiscal years rather than calendar years.
Cash and Cash Equivalents--Cash and cash equivalents include cash and highly
liquid debt instruments with original maturities of three months or less when
purchased.
Short-Term Investments--Short-term investments consist of United States
Treasury bills and are stated at fair value based on quoted market prices.
Short-term investments are classified as available-for-sale based on the
Company's intended use. The difference between amortized cost and fair value
representing unrealized holding gains or losses are recorded as a component of
shareholders' equity as accumulated other comprehensive income (loss). Gains
and losses on sales of investments are determined on a specific identification
basis.
Fair Value of Financial Instruments--Financial instruments include cash
equivalents, short-term investments and debt obligations. Cash equivalents and
short-term investments are stated at fair market value based on quoted market
prices. The recorded carrying amount of the Company's debt obligations
approximates fair market value.
Inventories--Inventories are stated at the lower of cost (first-in, first-
out) or market.
F-7
<PAGE>
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
Property, Plant and Equipment--Property, plant and equipment are stated at
cost. Depreciation is computed using straight line and accelerated methods over
the following estimated useful lives of the assets:
<TABLE>
<S> <C>
Building........................................................ 15--45 years
Machinery and equipment......................................... 3-- 7 years
Furniture and fixtures.......................................... 5--15 years
</TABLE>
Leasehold improvements are amortized over the shorter of the estimated useful
lives of the improvements or the lease term.
Goodwill and Intangible Assets--The Company amortizes goodwill and acquired
intangible assets (included in other assets) using the straight-line method
over an estimated useful life of five years.
Long-Lived Assets--The Company evaluates long-lived assets for impairment
using an undiscounted cash flow method whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.
Income Taxes--Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes and
operating loss and tax credit carryforwards measured by applying currently
enacted tax laws. A valuation allowance is provided when necessary to reduce
deferred tax assets to an amount that is more likely than not to be realized.
Revenue Recognition--Revenues are recognized when persuasive evidence of an
arrangement exists, delivery has occurred or services have been rendered, the
price is fixed and determinable and collectibility is reasonably assured. For
product sales, this generally occurs at the time of shipment, and for revenues
from service work, this generally occurs when the work is performed. Revenues
from service contracts are recognized ratably over the period under contract.
The Company sells the majority of its product with a one-year repair or
replacement warranty and records a provision for estimated claims at the time
of sale.
Stock-Based Compensation--The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to
Employees.
Foreign Currency--The functional currencies of the Company's foreign
subsidiaries are the local currencies. Accordingly, translation adjustments for
the subsidiaries have been included in shareholders' equity. Gains and losses
from transactions denominated in currencies other than the functional
currencies of the Company or its subsidiaries are included in other income and
expense and consist of losses of $217,000 for 1997 and $13,000 for 1998 and a
gain of $91,000 for 1999.
Net Income Per Share--Basic net income per share excludes dilution and is
computed by dividing net income by the number of weighted average common shares
outstanding for the period. Diluted net income per share reflects the potential
dilution from outstanding dilutive stock options (using the treasury stock
method) and shares issuable under the employee stock purchase plan.
Recently Issued Accounting Standards--In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. This statement requires companies to record derivatives on
the balance sheet as assets or liabilities, measured at fair value. Gains or
losses resulting from changes in the values of those derivatives would be
accounted for depending on the use of
F-8
<PAGE>
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
the derivative and whether it qualifies for hedge accounting. SFAS No. 133 will
be effective for the Company beginning in the first quarter of fiscal year
2001. Although the Company has not fully assessed the implications of SFAS No.
133, management does not believe the adoption of this statement will have a
significant impact on the Company's consolidated financial position, results of
operations or cash flows.
In December 1999, the Securities and Exchange Commission (SEC) released
Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial
Statements. This bulletin summarizes certain interpretations and practices
followed by the Division of Corporation Finance and the Office of the Chief
Accountant of the SEC in administering the disclosure requirements of the
Federal securities laws in applying generally accepted accounting principles to
revenue recognition in financial statements. Application of the accounting and
disclosures desired in the bulletin is required by the first quarter of fiscal
2000. Although the Company has not fully assessed the implications of SAB No.
101, management does not believe adoption of this bulletin will have a
significant impact on the Company's consolidated financial position, results of
operations or cash flows.
Certain Significant Risks and Uncertainties--Financial instruments which
potentially subject the Company to concentration of credit risk consist of cash
and cash equivalents, short-term investments and accounts receivable. Cash and
cash equivalents and short-term investments are held primarily with two
financial institutions and consist primarily of cash in bank accounts and
United States Treasury bills. The Company sells its products primarily to end
users in the United States and Asia, and generally does not require its
customers to provide collateral or other security to support accounts
receivable. Management performs ongoing credit evaluations of its customers'
financial condition. The Company maintains allowances for estimated potential
bad debt losses.
The Company participates in a dynamic high technology industry and believes
that changes in any of the following areas could have a material adverse effect
on the Company's future financial position, results of operations or cash
flows; advances and trends in new technologies and industry standards;
competitive pressures in the form of new products or price reductions on
current products; changes in product mix; changes in the overall demand for
products offered by the Company; changes in third-party manufacturers; changes
in key suppliers; changes in certain strategic relationships or customer
relationships; litigation or claims against the Company based on intellectual
property, patent, product, regulatory or other factors; fluctuations in foreign
currency exchange rates; risk associated with changes in domestic and
international economic and/or political regulations; availability of necessary
components or subassemblies; disruption of manufacturing facilities; and the
Company's ability to attract and retain employees necessary to support its
growth.
The Company's customer base is highly concentrated. A relatively small
number of customers have accounted for a significant portion of the Company's
revenues. In 1999, aggregate revenue from the Company's top ten largest
customers comprised approximately 59.5% of the Company's total net revenues.
Certain components and subassemblies used in the Company's products are
purchased from a sole supplier or a limited group of suppliers. In particular,
the Company currently purchases its spectroscopic ellipsometer, Fourier
transform infrared reflectometry spectrometer and robotics used in its advanced
measurement systems from a sole supplier or a limited group of suppliers. Any
shortage or interruption in the supply of any of the components or
subassemblies used in the Company's products or the inability of the Company to
procure these components or subassemblies from alternate sources on acceptable
terms, could have a material adverse effect on the Company's business,
financial condition and results of operations.
F-9
<PAGE>
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
2. Product Line Acquisition
On March 30, 1998, the Company purchased from Optical Specialties, Inc.
(OSI) a metrology system product line and related assets used to measure
the critical dimensions and overlay registration errors observed in
submicron photolithography. Under the agreement, the Company paid
approximately $3,225,000 in cash for the assets and in-process research and
development. The total purchase price and allocation among the tangible and
intangible assets and liabilities acquired (including acquired in-process
research and development) is summarized as follows (in thousands):
<TABLE>
<S> <C>
Total purchase price--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
Liabilities....................................................... (734)
------
Total purchase price allocation............................... $3,225
======
</TABLE>
Net intangible assets as of December 31, 1998 and 1999 of $523,000 and
$400,000, respectively (net of accumulated amortization of $92,000 and
$215,000, respectively), are recorded within other assets in the accompanying
consolidated balance sheet and are being amortized using the straight-line
method over a five-year useful life.
The purchase price allocation and intangible 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 could 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, noncompete agreements, assembled
workforce and customer relationships and sales channel. The value of core
technology was specifically 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 indicated 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 the Metra 7000 development project that had not reached
technological feasibility, had no alternative future use and for which
successful development was uncertain. Management's conclusion 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 the
Company and OSI.
The project to complete the Metra 7000 product included 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 design. At the time of
acquisition, the
F-10
<PAGE>
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
estimated cost to complete this software and related development was
approximately $300,000. The Company began shipments of the Metra 7000 product
to a customer in June 1998 and it was at that time that the Company began to
benefit from the acquired research and development related to the product.
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 the Company's management; (ii) percentage
complete of 77% for the Metra 7000 project estimated by considering a number of
factors, including the costs invested to date relative to 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 inacquisition functionality of the
eventual product. The technological issues were addressed by engineering
representatives from both the Company 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 was embodied in the in-process Metra 7000 product line and
enabled a quicker and more cost effective development of the Metra 7000. 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 considered both the status and risk associated with the respective cash
flows as of the acquisition date.
In the first quarter of 1998, the Company also hired certain former
employees of OSI and incurred approximately $350,000 in related nonrecurring
hiring expenses. Such expenses are classified in the accompanying 1998
consolidated statement of income according to the employees' functions.
3. Inventories
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------
1998 1999
------- ------
<S> <C> <C>
Finished goods............................................... $ 5,607 $4,593
Work in process.............................................. 2,253 1,092
Raw materials and subassemblies.............................. 3,859 3,775
------- ------
Total inventories.......................................... $11,719 $9,460
======= ======
</TABLE>
F-11
<PAGE>
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
4. Property, Plant and Equipment
Property, plant and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------
1998 1999
------ ------
<S> <C> <C>
Land......................................................... $ 949 $1,054
Building..................................................... 2,863 3,183
Machinery and equipment...................................... 1,096 1,462
Furniture and fixtures....................................... 380 446
Leasehold improvements....................................... 453 466
------ ------
5,741 6,611
Accumulated depreciation and amortization.................... (3,260) (3,613)
------ ------
Total property, plant and equipment, net..................... $2,481 $2,998
====== ======
</TABLE>
5. Other Current Liabilities
Other current liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------
1998 1999
------ ------
<S> <C> <C>
Commissions payable.......................................... $ 366 $ 247
Accrued warranty............................................. 581 482
Trade-in allowances.......................................... 262 --
Unearned revenue............................................. 65 384
Other........................................................ 446 608
------ ------
Total other current liabilities.............................. $1,720 $1,721
====== ======
</TABLE>
6. Debt Obligations
Debt obligations consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------
1998 1999
------ ------
<S> <C> <C>
1995 working capital bank loan............................... $2,292 $2,154
1996 working capital bank loan............................... 642 620
Other debt obligations....................................... 886 98
------ ------
Total...................................................... 3,820 2,872
Current portion of debt obligations.......................... (1,324) (584)
------ ------
Debt obligations............................................. $2,496 $2,288
====== ======
</TABLE>
The 1995 working capital bank loan was obtained by the Company's Japanese
subsidiary. The loan is collateralized by receivables of the Japanese
subsidiary and is guaranteed by the parent, Nanometrics Incorporated. The loan
is denominated in Japanese yen ((Yen)220,000,000 at December 31, 1999) and
bears interest at 3.3% per annum. The loan is payable in quarterly installments
with unpaid principal and interest due in May 2005.
F-12
<PAGE>
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
The 1996 working capital bank loan was also obtained by the Company's
Japanese subsidiary and is collateralized by land and building. The loan is
denominated in Japanese yen ((Yen)63,200,000 at December 31, 1999) and bears
interest at 3.4% per annum. The loan is payable in quarterly installments with
unpaid principal and interest due in May 2006.
Other debt obligations represent short-term borrowings by the Company's
Japanese subsidiary which are collateralized by the subsidiary's accounts
receivable. The borrowings are denominated in Japanese yen ((Yen)10,000,000 at
December 31, 1999) and bear interest at rates ranging from 1.5% to 1.625% per
annum. The outstanding borrowings and unpaid interest at December 31, 1999 were
due and paid in January 2000.
At December 31, 1999, future annual maturities of debt obligations are as
follows (in thousands):
<TABLE>
<S> <C>
2000................................................................. $ 584
2001................................................................. 486
2002................................................................. 486
2003................................................................. 486
2004................................................................. 486
Thereafter........................................................... 344
------
Total.............................................................. $2,872
======
</TABLE>
7. Commitments and Contingencies
The Company leases manufacturing and administrative facilities and certain
equipment under noncancellable operating leases. The Company's current primary
facility lease expires in April 2002. Rent expense for 1997, 1998 and 1999 was
approximately $583,000, $693,000 and $867,000, respectively. Future minimum
lease payments under the Company's operating leases for each of the years
ending December 31 are as follows (in thousands):
<TABLE>
<S> <C>
2000................................................................. $ 720
2001................................................................. 627
2002................................ ................................ 197
Thereafter........................................................... 15
------
Total.............................................................. $1,559
======
</TABLE>
In September 1998, the Company's Korean subsidiary entered into a two-year
lease agreement for manufacturing facilities. The lease payments are based on a
percentage of net product sales, as defined.
Pursuant to a 1985 agreement, as amended, if the Company's Chairman of the
Board is involuntarily removed from his position, the Company is required to
continue his salary and related benefits for a period of five years from such
date, at his option.
The high technology industry is characterized by frequent claims and related
litigation regarding patent and other intellectual property rights. The Company
is a party to various claims, legal actions and complaints of this nature.
Although the ultimate outcome of these matters is not presently determinable,
management believes that the resolution of all such pending matters will not
have a material adverse effect on the Company's financial position, results of
operations or cash flows.
F-13
<PAGE>
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
8. Shareholders' Equity
Common Stock
The authorized capital stock of the Company consists of 25,000,000 common
shares, of which 22,500,000 shares have been designated "Common Stock" and
2,500,000 shares have been allocated to all other series of common shares,
collectively designated "Junior Common."
Net Income per Share
The reconciliation of the share denominator used in the basic and diluted
net income per share computations is as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended
December 31,
-----------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Weighted average shares outstanding--shares used in ba-
sic net income per share computation................... 8,325 8,635 8,829
Dilutive effect of common stock equivalents, using the
treasury stock method.................................. 495 406 564
----- ----- -----
Shares used in diluted net income per share
computation............................................ 8,820 9,041 9,393
===== ===== =====
</TABLE>
During 1997, 1998 and 1999, 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 December 31, 1997, 1998 and 1999,
5,000, 248,000 and 51,000, respectively, of the Company's outstanding common
stock options with a weighted average exercise price of $10.88, $7.88 and
$19.59, respectively, per share were excluded from the diluted net income per
share computation.
Stock Option Plans
Under the 1991 Stock Option Plan (the Option Plan), as amended, the Company
may grant options to acquire up to 3,000,000 shares of common stock to
employees and consultants at prices not less than the fair market value at date
of grant for incentive stock options and not less than 50% of fair market value
for nonstatutory stock options. These options generally expire five years from
the date of grant and become exercisable as they vest, generally 33.3% upon
each anniversary of the grant, as set forth in the stock option agreements.
Under the 1991 Directors' Stock Option Plan (the Directors' Plan),
nonemployee directors of the Company are automatically granted options to
acquire 10,000 shares of common stock, at the fair market value at the date of
grant, each year that such person remains a director of the Company. Options
granted under the Directors' Plan become exercisable as they vest 33.3% upon
each anniversary of the grant and expire five years from the date of grant. The
total shares authorized under the Directors' Plan are 300,000.
F-14
<PAGE>
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
Option activity under the plans is summarized as follows:
<TABLE>
<CAPTION>
Outstanding Options
-------------------------------------
Weighted
Shares Number of Average
Available Shares Exercise Price
---------- --------- --------------
<S> <C> <C> <C>
Balances, January 1, 1997 (348,514
exercisable at a weighted average price
of $2.91).............................. 210,407 1,097,941 $4.08
Additional shares reserved.............. 1,500,000 -- --
Exercised............................... -- (238,941) 2.00
Granted (weighted average fair value of
$5.17)................................. (488,500) 488,500 9.33
Canceled................................ 14,139 (14,139) 4.46
---------- ---------
Balances, December 31, 1997 (503,267
exercisable at a weighted average price
of $4.32).............................. 1,236,046 1,333,361 6.37
Exercised............................... -- (151,153) 3.81
Granted (weighted average fair value of
$1.88)................................. (1,395,174) 1,395,174 6.14
Canceled................................ 986,949 (986,949) 8.24
---------- ---------
Balances, December 31, 1998 (745,171
exercisable at a weighted average price
of $4.57).............................. 827,821 1,590,433 5.25
Exercised............................... -- (444,418) 4.36
Granted (weighted average fair value of
$6.67)................................. (455,000) 455,000 12.06
Canceled................................ 106,351 (106,351) 6.65
---------- ---------
Balances, December 31, 1999............. 479,172 1,494,664 $7.49
========== =========
</TABLE>
During the third quarter of fiscal 1998, the Company approved the
cancellation and reissuance of outstanding options under the Company's stock
options plans. Under the program, holders of outstanding options with exercise
prices in excess of $5.13 per share were given the choice of retaining these
options or of obtaining, in substitution, new options for the same number of
shares. The new options were exercisable at a price of $5.13 per share, the
fair market value of the common stock on the reissue date. The new options
maintained the vesting schedule and expiration dates established by the
canceled option.
Additional information regarding options outstanding as of December 31, 1999
is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------- --------------------
Weighted
Average
Remaining Weighted Average
Contractual Average Weighted
Number Life Exercise Number Exercise
Range of Exercise Prices Outstanding (Years) Price Exercisable Price
- ------------------------ ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 2.06--$ 5.13 822,662 2.67 $4.95 582,322 $4.88
5.63-- 9.00 449,502 4.44 7.58 83,366 7.49
15.88-- 20.13 222,500 5.00 16.73 -- --
--------- -------
$ 2.06--$20.13 1,494,664 3.55 $7.49 665,688 $5.21
========= =======
</TABLE>
F-15
<PAGE>
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
Employee Stock Purchase Plan
Under the 1986 Employee Stock Purchase Plan (the Purchase Plan), eligible
employees are allowed to have salary withholdings of up to 10% of their base
compensation to purchase shares of common stock at a price equal to 85% of the
lower of the market value of the stock at the beginning or end of each six-
month offering period, subject to an annual limitation. Shares issued under the
plan were 24,482, 18,006 and 28,937 in 1997, 1998 and 1999 at weighted average
prices of $4.58, $6.87 and $5.10, respectively. The weighted average per share
fair values of the 1997, 1998 and 1999 awards were $4.41, $2.42 and $2.89,
respectively. At December 31, 1999, 25,894 shares were reserved for future
issuances under the Purchase Plan.
Additional Stock Plan Information
As discussed in Note 1, the Company continues to account for its stock-based
awards using the intrinsic value method in accordance with APB No. 25,
Accounting for Stock Issued to Employees, and its related interpretations.
Accordingly, no compensation expense has been recognized in the accompanying
consolidated financial statements for employee stock arrangements.
SFAS No. 123, Accounting for Stock-Based Compensation requires the
disclosure of pro forma net income and net income per share had the Company
adopted the fair value method as of the beginning of fiscal 1995. Under SFAS
No. 123, the fair value of stock-based awards to employees is calculated
through the use of option pricing models, even though such models were
developed to estimate the fair value of freely tradable, fully transferable
options without vesting restrictions, which differ significantly from the
Company's stock option awards. These models also require subjective
assumptions, including future stock price volatility and expected time to
exercise, which greatly affect the calculated values. The Company's fair value
calculations on stock-based awards under the Option Plan and the Directors'
Plan were made using the Black-Scholes option pricing model with the following
weighted average assumptions: expected life, three years from the date of grant
in 1997, 1998 and 1999; stock volatility, 80% in 1997, 1998 and 1999; risk free
interest rate, 6.1% in 1997, 5.0% in 1998 and 5.9% in 1999; and no dividends
during the expected term. The Company's calculations are based on a single
option valuation approach and forfeitures are recognized at a historical rate
of 29% for 1997 and 1998, and 24% for 1999. The Company's fair value
calculations on stock-based awards under the Purchase Plan were also made using
the Black-Scholes option pricing model with the following weighted average
assumptions: expected life, six months in 1997, 1998 and 1999; stock
volatility, 80% in 1997, 1998 and 1999; risk free interest rate, 5.5% in 1997,
5.0% in 1998 and 5.3% in 1999; and no dividends during the expected term.
If the computed fair values of the stock-based awards after 1995 had been
amortized to expense over the vesting period of the awards, pro forma net
income and net income per share, basic and diluted, would have been as follows
(in thousands except per share amounts):
<TABLE>
<CAPTION>
Years Ended
December 31,
-------------------
1997 1998 1999
------ ----- ------
<S> <C> <C> <C>
Pro forma net income.................................... $5,057 $ 807 $1,729
Pro forma net income per share:
Basic................................................. $ 0.61 $0.09 $ 0.20
Diluted............................................... $ 0.60 $0.09 $ 0.18
</TABLE>
F-16
<PAGE>
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
9. Income Taxes
Income before income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
Years Ended December
31,
----------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Domestic............................................. $9,644 $3,471 $3,928
Foreign.............................................. (262) (533) 388
------ ------ ------
Income before income taxes........................... $9,382 $2,938 $4,316
====== ====== ======
</TABLE>
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
Years Ended December
31,
----------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Current:
Federal............................................ $3,080 $ 840 $1,127
State.............................................. 884 148 186
Foreign............................................ 181 16 195
------ ------ ------
4,145 1,004 1,508
====== ====== ======
Deferred:
Federal............................................ (574) 161 71
State.............................................. 9 166 (128)
Foreign............................................ 45 (223) 231
------ ------ ------
(520) 104 174
------ ------ ------
Provision for income taxes........................... $3,625 $1,108 $1,682
====== ====== ======
</TABLE>
Significant components of the Company's deferred tax assets are as follows
(in thousands):
<TABLE>
<CAPTION>
December 31,
--------------
1998 1999
------ ------
<S> <C> <C>
Deferred tax assets--current:
Reserves and accruals not currently deductible............ $ 978 $1,307
Capitalized inventory costs............................... 201 161
Net operating loss carryforwards.......................... 246 338
Tax credit carryforwards.................................. 16 147
------ ------
Total gross deferred tax assets--current.................... 1,441 1,953
Valuation allowance......................................... -- (231)
------ ------
Total net deferred tax assets--current...................... $1,441 $1,722
------ ------
Deferred tax assets--noncurrent:
Depreciation.............................................. $ (25) $ (69)
Goodwill and capitalized acquired technology.............. 553 391
Translation adjustments................................... -- (225)
Other..................................................... 32 38
------ ------
Total net deferred tax assets--noncurrent................... $ 560 $ 135
====== ======
</TABLE>
F-17
<PAGE>
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
Due to continuing losses in its Japanese subsidiary during the year ended
December 31, 1999, the Company determined that it was more likely than not that
future tax benefits from the deferred tax assets of the Japanese subsidiary
would not be realized. Accordingly, as of December 31, 1999, the Company has
provided a full valuation allowance of $231,000 against the net deferred tax
assets of its Japanese subsidiary.
As of December 31, 1999, the Company has available for carryforward net
operating losses of approximately $800,000 generated by the Company's Japanese
subsidiary. The net operating loss carryforwards will expire if not utilized
beginning in the years 2002 through 2004.
Differences between income taxes computed by applying the statutory federal
income tax rate to income before income taxes and the provision for income
taxes consist of the following (in thousands):
<TABLE>
<CAPTION>
Years Ended December
31,
----------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Income taxes computed at 35% U.S. statutory rate... $3,284 $1,028 $1,511
State income taxes................................. 589 207 58
Foreign tax provision (benefit) higher than U.S.
rates............................................. -- (74) 59
Foreign sales corporation benefit.................. (274) (99) (228)
Change in valuation allowance...................... -- -- 231
Other, net......................................... 26 46 51
------ ------ ------
Provision for income taxes......................... $3,625 $1,108 $1,682
====== ====== ======
</TABLE>
10. Profit-Sharing and Retirement and Bonus Plans
No contributions were made by the Company in 1997, 1998 and 1999 to the
Company's discretionary profit-sharing and retirement plan. The Company paid
$678,000, $688,000 and $92,000 in 1997, 1998 and 1999, respectively, under
formal discretionary cash bonus plans which cover all eligible employees.
11. Major Customers
In 1997, sales to one customer accounted for approximately 11.4% of total
revenues. In 1998, sales to another customer accounted for approximately 11.2%
of total revenues. In 1999, sales to two other customers accounted for
approximately 12.8% and 10.5% of total revenues, respectively.
At December 31, 1998, no single customer accounted for 10.0% or more of
accounts receivable. The customer accounting for 12.8% of total revenues in
1999 also accounted for 11.8% of accounts receivable, at December 31, 1999.
12. Product, Segment and Geographic Information
The Company's operating divisions consist of its geographically based
entities in the United States, Japan, South Korea and Taiwan. All such
operating divisions have similar economic characteristics, as defined in SFAS
No. 131, "Disclosures About Segments of an Enterprise and Related Information",
and accordingly, the Company operates in one reportable segment: the sale,
design, manufacture, marketing and support of thin film and overlay dimension
metrology systems. For the years ended December 31, 1997, 1998 and 1999, the
Company recorded revenue from customers throughout the United States, Canada,
Germany, the United Kingdom, Ireland, France, Italy, Sweden,
F-18
<PAGE>
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
Israel, Japan, South Korea, China, Singapore, Hong Kong, Taiwan, Indonesia
and Malaysia. The following table summarizes total net revenues and long-lived
assets attributed to significant countries (in thousands):
<TABLE>
<CAPTION>
Years Ended December
31,
-----------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Total net revenues:
United States...................................... $14,539 $12,698 $14,225
Japan.............................................. 10,086 9,167 11,594
Korea.............................................. 5,954 2,596 2,991
Taiwan............................................. 2,583 3,404 4,967
Germany............................................ 1,763 4,784 2,340
All other.......................................... 1,732 615 291
------- ------- -------
Total net revenues*.............................. $36,657 $33,264 $36,408
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31,
-------------
1998 1999
------ ------
<S> <C> <C>
Long-lived assets:
United States............................................... $1,439 $1,716
Japan....................................................... 2,419 2,569
Korea....................................................... 59 81
Taiwan...................................................... 11 91
------ ------
Total long-lived assets................................... $3,928 $4,457
====== ======
</TABLE>
- --------
* Net revenues are attributed to countries based on the deployment and service
locations of systems.
The Company's product lines differ primarily based on the environment the
systems will be used in. Automated systems are used primarily in high-volume
production environments. Integrated systems are installed inside wafer
processing equipment to provide near real-time measurements for improving
process control and increasing throughput. Tabletop systems are used primarily
in low-volume production environments and in engineering labs where automated
handling and high throughput are not required. Sales by product type were as
follows (in thousands):
<TABLE>
<CAPTION>
Years Ended December
31,
-----------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Automated systems.................................... $21,982 $21,694 $20,885
Integrated systems................................... -- 120 3,953
Tabletop systems..................................... 10,785 7,904 7,324
------- ------- -------
Total product sales................................ $32,767 $29,718 $32,162
======= ======= =======
</TABLE>
F-19
<PAGE>
NANOMETRICS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
13. Selected Quarterly Financial Results (Unaudited)
The following tables set forth selected quarterly results of operations for
the years ended December 31, 1998 and 1999 (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
Quarters Ended
-----------------------------------
Mar. 31, Jun. 30, Sep. 30, Dec. 31,
1998 1998 1998 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Total net revenues......................... $10,538 $10,728 $7,005 $4,993
Gross profit............................... 5,924 5,732 3,357 1,580
Income (loss) from operations.............. 915 2,446 491 (1,442)
Net income (loss).......................... 624 1,495 394 (683)
Net income (loss) per share:
Basic.................................... $ 0.07 $ 0.17 $ 0.05 $(0.08)
Diluted.................................. $ 0.07 $ 0.17 $ 0.04 $(0.08)
Shares used in per share computation:
Basic.................................... 8,545 8,641 8,669 8,686
Diluted.................................. 8,978 9,003 9,074 8,686
</TABLE>
<TABLE>
<CAPTION>
Quarters Ended
------------------------------
Jun. Sep. Dec.
Mar. 31, 30, 30, 31,
1999 1999 1999 1999
-------- ------ ------ -------
<S> <C> <C> <C> <C>
Total net revenues.............................. $6,189 $7,523 $9,821 $12,875
Gross profit.................................... 2,533 3,522 4,669 6,518
Income (loss) from operations................... (401) 395 1,321 2,425
Net income (loss)............................... (201) 304 900 1,631
Net income (loss) per share:
Basic......................................... $(0.02) $ 0.03 $ 0.10 $ 0.18
Diluted....................................... $(0.02) $ 0.03 $ 0.10 $ 0.17
Shares used in per share computation:
Basic......................................... 8,701 8,757 8,823 9,033
Diluted....................................... 8,701 9,177 9,347 9,842
</TABLE>
F-20
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,500,000 Shares
Nanometrics Incorporated
Common Stock
[LOGO OF NANOMETRICS]
--------
PROSPECTUS
, 2000
--------
Salomon Smith Barney
Wit SoundView
Tucker Anthony Cleary Gull
Needham & Company, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The fees and expenses incurred by the registrant in connection with the
offering are payable by the registrant and, other than registration, filing and
listing fees, are estimated as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee................... $ 22,880
NASD Filing Fee....................................................... 9,167
Nasdaq Fee for Listing of Additional Shares........................... 40,250
Legal Fees and Expenses............................................... 250,000
Blue Sky Fees and Expenses............................................ 3,000
Accounting Fees....................................................... 150,000
Transfer Agent and Custodian Fees..................................... 136,250
Miscellaneous......................................................... 191,453
--------
Total............................................................... $800,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Nanometrics' Articles of Incorporation and Bylaws provide for
indemnification of the officers and directors of the Company to the full extent
permitted by law. The General Corporation law of the State of California
permits a corporation to limit, under certain circumstances, a director's
liability for monetary damages in actions brought by or in the right of the
corporation. Nanometrics' Articles of Incorporation also provide for the
elimination of the liability of directors for monetary damages to the full
extent permitted by law.
Nanometrics has entered into agreements to indemnify its directors and
officers in addition to the indemnification provided for in the Articles of
Incorporation and Bylaws. These agreements will, among other things, indemnify
Nanometrics' directors and officers for certain expenses (including attorneys'
fees), judgments, fines and settlement amounts incurred in any action or
proceeding, including any action by or in the right of Nanometrics, on account
of services as a director or officer of any other enterprise to which the
person provides services at Nanometrics' request. Nanometrics believes that
these provisions and agreements are necessary to attract and retain qualified
persons as directors and officers. At present, there is no pending litigation
or proceeding involving a director, officer or employee of Nanometrics as to
which indemnification is sought, nor is Nanometrics aware of any threatened
litigation or proceeding that may result in claims for indemnification.
See also the undertakings set out in response to Item 17 herein.
ITEM 16. EXHIBITS.
The following exhibits are filed with this Registration Statement:
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation
10.1(1) Form of Indemnification Agreement for Directors & Officers
10.2(3) Employee Stock Purchase Plan, as amended through March 1998
10.3(2) 1991 Stock Option Plan, as amended through May 15, 1997
10.4(3) 1991 Director Option Plan as amended April 1994
10.5(4) Amendment to and Restatement of Redemption Agreement dated March 4,
1993 between Vincent J. Coates and Registrant
10.6(1) Consulting Agreement dated as of September 15, 1997 between the
Registrant and Kanegi Nagai, as amended
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.7(1) Reverse Split Dollar Insurance Agreement and Collateral Assignment
dated March 15, 1993 between the Registrant and Vincent J. Coates
10.8(1) Lease Agreement dated February 25, 1992 between PM-DE and the
Registrant, first Addendum to Lease dated February 22, 1992 and
First Amendment to Lease dated April 24, 1997
10.9(1) Loan Agreement between Japan Development Bank and Nanometrics Japan
k.k.
10.10(1) Loan Agreement and Guarantee dated June 5, 1995 between Mitsubishi
Bank, Limited and Nanometrics Japan Ltd.
23.1 Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (included in Exhibit 5.1)
23.2 Independent Auditors' Consent
24.1+ Power of Attorney
</TABLE>
- --------
+ Previously filed.
(1) Incorporated by reference to the Registrant's Registration Statement on
Form 10-K filed on April 1, 1998.
(2) Incorporated by reference to Exhibit 4.1 filed with Registrant's
Registration Statement on Form S-8 (File No. 333-33583) filed on August
14, 1997.
(3) Incorporated by reference to the Registrant's Registration Statement on
Form 10-K filed on March 2, 2000.
(4) Incorporated by reference to Exhibit 10.10 filed with Registrant's Form
10-K dated March 29, 1993.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) For purposes of determining any liability under the Securities Act,
each filing of the registrant's annual report pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934 (and, where applicable, each
filing of an employee benefit plan's annual report pursuant to Section 15(d)
of the Securities Exchange Act of 1934) that is incorporated by reference in
the registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(2) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 15 above, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against liabilities (other than the
payment of the registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(3) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(4) For the purpose of determining liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this 2nd amendment to the registration statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Sunnyvale, State of California on this 2nd day of March, 2000.
NANOMETRICS INCORPORATED
/s/ Paul B. Nolan
By: _________________________________
Paul B. Nolan
Chief Financial Officer and Vice
President
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities indicated on March 2, 2000.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<C> <S>
* President, Chief Executive
____________________________________ Officer and Director (Principal
John D. Heaton Executive Officer)
/s/ Paul B. Nolan Chief Financial Officer and Vice
____________________________________ President (Principal Financial
Paul B. Nolan and Accounting Officer)
* Chairman of the Board
____________________________________
Vincent J. Coates
* Director
____________________________________
Nathaniel Brenner
* Director
____________________________________
Norman V. Coates
* Director
____________________________________
Kanegi Nagai
* Director
____________________________________
</TABLE> Edmond R. Ward
Paul B. Nolan, by signing his name hereto, does sign and execute this
Amendment No. 2 to the registration statement on behalf of each of the above-
named officers and directors of the registrant on this 2nd day of March 2000,
pursuant to powers of attorneys executed on behalf of each of such officers and
directors and previously filed with the Securities and Exchange Commission.
/s/ Paul B. Nolan
* By: _________________________
Paul B. Nolan
Attorney-in-Fact
II-3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- ---------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation
10.1(1) Form of Indemnification Agreement for Directors & Officers
10.2(3) Employee Stock Purchase Plan, as amended through March 1998
10.3(2) 1991 Stock Option Plan, as amended through May 15, 1997
10.4(3) 1991 Director Option Plan as amended April 1994
10.5(4) Amendment to and Restatement of Redemption Agreement dated March 4,
1993 between Vincent J. Coates and Registrant
10.6(1) Consulting Agreement dated as of September 15, 1997 between the
Registrant and Kanegi Nagai, as amended
10.7(1) Reverse Split Dollar Insurance Agreement and Collateral Assignment
dated March 15, 1993 between the Registrant and Vincent J. Coates
10.8(1) Lease Agreement dated February 25, 1992 between PM-DE and the
Registrant, first Addendum to Lease dated February 22, 1992 and First
Amendment to Lease dated April 24, 1997
10.9(1) Loan Agreement between Japan Development Bank and Nanometrics Japan
k.k.
10.10(1) Loan Agreement and Guarantee dated June 5, 1995 between Mitsubishi
Bank, Limited and Nanometrics Japan Ltd.
Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation
23.1 (included in Exhibit 5.1)
23.2 Independent Auditors' Consent
24.1+ Power of Attorney
</TABLE>
- --------
+ Previously filed.
(1) Incorporated by reference to the Registrant's Registration Statement on
Form 10-K filed on April 1, 1998.
(2) Incorporated by reference to Exhibit 4.1 filed with Registrant's
Registration Statement on Form S-8 (File No. 333-33583) filed on August
14, 1997.
(3) Incorporated by reference to the Registrant's Registration Statement on
Form 10-K filed on March 2, 2000.
(4) Incorporated by reference to Exhibit 10.10 filed with Registrant's Form
10-K dated March 29, 1993.
<PAGE>
Nanometrics Incorporated
3,500,000 Shares /
Common Stock
(no par value)
Underwriting Agreement
New York, New York
____________, 2000
Salomon Smith Barney Inc.
Soundview Technology Group, Inc.
Tucker Anthony Inc.
Needham & Company
As Representatives of the several Underwriters,
c/o Salomon Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
Nanometrics Incorporated, a corporation organized under the laws of
California (the "Company"), proposes to sell to the several underwriters named
in Schedule I hereto (the "Underwriters"), for whom you (the "Representatives")
are acting as representatives, 1,750,000 shares of Common Stock, no par value
("Common Stock") of the Company and the shareholders of the Company named in
Schedule II hereto (the "Selling Shareholders") propose to sell to the
Underwriters an aggregate of 1,750,000 shares of Common Stock (said shares to be
issued and sold by the Company and the Selling Shareholder being hereinafter
called the "Underwritten Securities"). The Company also proposes to grant to
the Underwriters an option to purchase up to 262,500 additional shares of Common
Stock and the Selling Shareholders propose to grant to the Underwriters an
option to purchase up to 262,500 shares of Common Stock to cover over-allotments
(the aggregate of 525,000 shares referred to as the "Option Securities"; the
Option Securities, together with the Underwritten Securities, being hereinafter
called the "Securities"). To the extent there are no additional Underwriters
listed on Schedule I other than you, the term Representatives as used herein
shall mean you, as Underwriters, and the terms Representatives and Underwriters
shall mean either the singular or plural as the context requires. Any reference
herein to the Registration Statement, a Preliminary Prospectus or the
Prospectus, as the case may be; and any reference therein pursuant to Item 12 of
Form S-2 which were filed under the Exchange Act on or before the Effective Date
of the Registration Statement or the issue date of such Preliminary Prospectus
or the Prospectus, as the case may be; and any reference herein to the terms
"amend", "amendment" or "supplement" with respect to the Registration Statement,
any Preliminary Prospectus or the Prospectus shall be deemed to refer to and
include the filing of any document under the Exchange Act after the Effective
Date of Registration Statement or the issue date of any Preliminary Prospectus
or the Prospectus, as the case may be, deemed to be
____________________
/ Plus an option to purchase from the Company and a Selling Shareholder,
up to 525,000 additional Securities to cover over-allotments.
<PAGE>
incorporated therein by reference. Certain terms used herein are defined in
Section 17 hereof.
1. Representations and Warranties.
(a) The Company and each of the Selling Shareholders severally
represent and warrant to, and agree with, each Underwriter as set forth
below in this section 1
(i) The Company meets the requirements for use of Form S-2 under
the Act and has prepared and filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-2
(File No. 333-95115) which contains a form of prospectus to be used in
connection with the public offering and sale of the Securities. Such
registration statement, as amended, including the financial
statements, exhibits and schedules thereto, in the form in which it
was declared effective by the Commission under the Act of 1933 and the
rules and regulations promulgated thereunder (collectively, the
"Act"), including all documents incorporated or deemed to be
incorporated by reference therein and any information deemed to be a
part thereof at the time of effectiveness pursuant to Rule 430A or
Rule 434 under the Act or the Securities Exchange Act of 1934 and the
rules and regulations promulgated thereunder (collectively the
"Exchange Act"), is called the "Registration Statement." Any
registration statement filed by the Company pursuant to Rule 462(b)
under the Act is called the "Rule 462(b) Registration Statement," and
from and after the date and time of filing of the Rule 462(b)
Registration Statement the term "Registration Statement" shall include
the Rule 462(b) Registration Statement. Such prospectus, in the form
first used by the Underwriters to confirm sales of the Securities, is
called the "Prospectus." All references in this Agreement to the
Registration Statement, the Rule 462(b) Registration Statement, a
preliminary prospectus, the Prospectus, or any amendments or
supplements to any of the foregoing, shall include any copy thereof
filed with the Commission pursuant to its Electronic Data Gathering,
Analysis and Retrieval System ("EDGAR"). All references in this
Agreement to financial statements and schedules and other information
which is "contained," "included" or "stated" in the Registration
Statement or the Prospectus (and all other references of like import)
shall be deemed to mean and include all such financial statements and
schedules and other information which is or is deemed to be
incorporated by reference in the Registration Statement or the
Prospectus, as the case may be; and all references in this Agreement
to amendments or supplements to the Registration Statement or the
Prospectus shall be deemed to mean and include the filing of any
document under the Exchange Act which is or is deemed to be
incorporated by reference in the Registration Statement or the
Prospectus, as the case may be.
(ii) On the Effective Date, the Registration Statement did or
will, and when the Prospectus is first filed (if required) in
accordance with Rule 424(b) and on the Closing Date (as defined
herein) and on any date on which Option
A-2
<PAGE>
Securities are purchased, if such date is not the Closing Date (a
"settlement date"), the Prospectus (and any supplements thereto) will,
comply in all material respects with the applicable requirements of
the Act and the rules thereunder; on the Effective Date and at the
Execution Time, the Registration Statement did not or will not contain
any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the
statements therein not misleading; and, on the Effective Date, the
Prospectus, if not filed pursuant to Rule 424(b), will not, and on the
date of any filing pursuant to Rule 424(b) and on the Closing Date and
any settlement date, the Prospectus (together with any supplement
thereto) will not, include any untrue statement of a material fact or
omit to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading; provided, however, that the Company and
-------- -------
and each of the Selling Shareholders make no representations or
warranties as to the information contained in or omitted from the
Registration Statement, or the Prospectus (or any supplement thereto)
in reliance upon and in conformity with information furnished in
writing to the Company by or on behalf of any Underwriter through the
Representatives specifically for inclusion in the Registration
Statement or the Prospectus (or any supplement thereto).
(iii) Each of the Company and the Subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction in which it is chartered or
organized with full corporate power and authority to own or lease, as
the case may be, and to operate its properties and conduct its
business as described in the Prospectus, and is duly qualified to do
business as a foreign corporation except where failure to be so
qualified in any such jurisdiction would not have a material adverse
effect on the condition (financial or otherwise), prospects, earnings,
business or properties of the Company or its subsidiaries, taken as a
whole (a "Material Adverse Effect") and is in good standing under the
laws of each jurisdiction which requires such qualification.
(iv) All the outstanding shares of capital stock of each
Subsidiary have been duly and validly authorized and issued and are
fully paid and nonassessable, and, except as otherwise set forth in
the Prospectus, all outstanding shares of capital stock of the
Subsidiaries are owned by the Company either directly or through
wholly owned subsidiaries free and clear of any perfected security
interest or any other security interests, claims, liens or
encumbrances.
(v) The Company's authorized equity capitalization is as set
forth in the Prospectus; the capital stock of the Company conforms in
all material respects to the description thereof contained in the
Prospectus; the outstanding shares of Common Stock have been duly and
validly authorized and issued and are fully paid and nonassessable;
the Securities have been duly and validly authorized, and,
A-3
<PAGE>
when issued and delivered to and paid for by the Underwriters pursuant
to this Agreement, will be fully paid and nonassessable; the
Securities are duly listed, and admitted and authorized for trading on
the Nasdaq National Market, subject to official notice of issuance,
the certificates for the Securities are in valid and sufficient form;
the holders of outstanding shares of capital stock of the Company are
not entitled to preemptive or other rights to subscribe for the
Securities; and, except as set forth in the Prospectus, no options,
warrants or other rights to purchase, agreements or other obligations
to issue, or rights to convert any obligations into or exchange any
securities for, shares of capital stock of or ownership interests in
the Company are outstanding.
(vi) There is no franchise, contract or other document of a
character required to be described in the Registration Statement or
Prospectus, or to be filed as an exhibit thereto, which is not
described or filed as required; and the statements in the Prospectus
insofar as such statements summarize legal matters, agreements or
documents or proceedings discussed in the Registration Statement or
Prospectus are accurate and fair summaries of such franchise, contract
or other document.
(vii) This Agreement has been duly authorized, executed and
delivered by the Company and constitutes a valid and binding
obligation of the Company enforceable in accordance with its terms.
(viii) The Company is not and, after giving effect to the
offering and sale of the Securities and the application of the
proceeds thereof as described in the Prospectus, will not be an
"investment company" as defined in the Investment Company Act of 1940,
as amended.
(ix) No consent, approval, authorization, filing with or order
of any court or governmental agency or body is required in connection
with the transactions contemplated herein, except (i) such as have
been obtained under the Act and such as may be required under the blue
sky laws of any jurisdiction in connection with the purchase and
distribution of the Securities by the Underwriters in the manner
contemplated herein and in the Prospectus or (ii) where a failure to
obtain such consent, approval, authorization, filing or order would
individually or in the aggregate result in a Material Adverse Effect.
(x) Neither the issue and sale of the Securities nor the
consummation of any other of the transactions herein contemplated nor
the fulfillment of the terms hereof will conflict with, result in a
breach or violation or imposition of any lien, charge or encumbrance
upon any property or assets of the Company or any of its subsidiaries
pursuant to, (i) the charter or by-laws of the Company or any of its
subsidiaries, (ii) the terms of any indenture, contract, lease,
mortgage, deed of trust, note agreement, loan agreement or other
agreement, obligation, condition, covenant or instrument to which the
Company or any of its subsidiaries is a party
A-4
<PAGE>
or bound or to which its or their property is subject, or (iii) any
statute, law, rule, regulation, judgment, order or decree applicable
to the Company or any of its subsidiaries of any court, regulatory
body, administrative agency, governmental body, arbitrator or other
authority having jurisdiction over the Company or any of its
subsidiaries or any of its or their properties; except in the case of
(ii) and (iii), where such conflict, breach, violation or imposition
of any lien, charge or encumbrance upon any property or assets of the
Company would not result, individually or in the aggregate, in a
Material Adverse Effect.
(xi) No holders of securities of the Company have rights to the
registration of such securities under the Registration Statement.
(xii) The consolidated historical financial statements and
schedules of the Company and its consolidated subsidiaries included in
the Prospectus and the Registration Statement present fairly in all
material respects the financial condition, results of operations and
cash flows of the Company as of the dates and for the periods
indicated, comply as to form with the applicable accounting
requirements of the Act and have been prepared in conformity with
generally accepted accounting principles applied on a consistent basis
throughout the periods involved (except as otherwise noted therein).
The selected financial data set forth under the caption "Selected
Financial Information" in the Prospectus and Registration Statement
fairly present, on the basis stated in the Prospectus and the
Registration Statement, the information included therein.
(xiii) No action, suit or proceeding by or before any court or
governmental agency, authority or body or any arbitrator involving the
Company or the Subsidiaries or its or their property is pending or, to
the best knowledge of the Company, threatened that (i) could
reasonably be expected to have a material adverse effect on the
performance of this Agreement or the consummation of any of the
transactions contemplated hereby or (ii) could reasonably be expected
to have a Material Adverse Effect, except as set forth in or
contemplated in the Prospectus (exclusive of any supplement thereto).
(xiv) Each of the Company and the Subsidiaries owns or leases
all such properties as are necessary to the conduct of its operations
as presently conducted.
(xv) Neither the Company nor any Subsidiary is in violation or
default of (i) any provision of its charter or bylaws, (ii) the terms
of any indenture, contract, lease, mortgage, deed of trust, note
agreement, loan agreement or other agreement, obligation, condition,
covenant or instrument to which it is a party or bound or to which its
property is subject, or (iii) any statute, law, rule, regulation,
judgment, order or decree of any court, regulatory body,
administrative agency, governmental body, arbitrator or other
authority having jurisdiction over the Company or such subsidiary or
any of its properties, as applicable; except in the
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case of (ii) and (iii), where such violation or default would not
result, individually or in the aggregate, in a Material Adverse
Effect.
(xvi) Deloitte & Touche LLP, who have certified certain
financial statements of the Company and its consolidated subsidiaries
and delivered their report with respect to the audited consolidated
financial statements and schedules included in the Prospectus, are
independent public accountants with respect to the Company within the
meaning of the Act and the applicable published rules and regulations
thereunder.
(xvii) There are no transfer taxes or other similar fees or
charges under Federal law or the laws of any state, or any political
subdivision thereof, required to be paid in connection with the
execution and delivery of this Agreement or the issuance by the
Company or sale by the Company of the Securities.
(xviii) The Company has filed all foreign, federal, state and
local tax returns that are required to be filed or has requested
extensions thereof (except in any case in which the failure so to file
would not have a Material Adverse Effect, except as set forth in or
contemplated in the Prospectus (exclusive of any supplement thereto))
and has paid all taxes required to be paid by it and any other
assessment, fine or penalty levied against it, to the extent that any
of the foregoing is due and payable, except for any such assessment,
fine or penalty that is currently being contested in good faith or as
would not have a Material Adverse Effect, except as set forth in or
contemplated in the Prospectus (exclusive of any supplement thereto).
(xix) No labor problem or dispute with the employees of the
Company or any of the Subsidiaries exists or is threatened or
imminent, and the Company is not aware of any existing or imminent
labor disturbance by the employees of any of its or the Subsidiaries'
principal suppliers, contractors or customers, that could have a
Material Adverse Effect, except as set forth in or contemplated in the
Prospectus (exclusive of any supplement thereto).
(xx) The Company and each of the Subsidiaries are insured by
insurers of recognized financial responsibility against such losses
and risks and in such amounts as are prudent and customary in the
businesses in which they are engaged; all policies of insurance
insuring the Company or any of its subsidiaries or their respective
businesses, assets, employees, officers and directors are in full
force and effect; the Company and its subsidiaries are in material
compliance with the terms of such policies and instruments in all
material respects; and there are no claims by the Company or any of
its subsidiaries under any such policy or instrument as to which any
insurance company is denying liability or defending under a
reservation of rights clause; and neither the Company nor any such
subsidiary has any reason to believe that it will not be able to renew
its existing insurance coverage as and when such coverage expires or
to obtain similar
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coverage from similar insurers as may be necessary to continue its
business at a cost that would not have a Material Adverse Effect,
except as set forth in or contemplated in the Prospectus (exclusive of
any supplement thereto).
(xxi) No subsidiary of the Company is currently prohibited,
directly or indirectly, from paying any dividends to the Company, from
making any other distribution on such subsidiary's capital stock, from
repaying to the Company any loans or advances to such subsidiary from
the Company or from transferring any of such subsidiary's property or
assets to the Company or any other subsidiary of the Company, except
as described in or contemplated by the Prospectus.
(xxii) The Company and its subsidiaries possess all licenses,
certificates, permits and other authorizations issued by the
appropriate federal, state or foreign regulatory authorities necessary
to conduct their respective businesses, and neither the Company nor
any such subsidiary has received any notice of proceedings relating to
the revocation or modification of any such certificate, authorization
or permit which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would have a Material Adverse
Effect, except as set forth in or contemplated in the Prospectus
(exclusive of any supplement thereto).
(xxiii) The Company and each of its subsidiaries maintain a
system of internal accounting controls sufficient to provide
reasonable assurance that (i) transactions are executed in accordance
with management's general or specific authorizations; (ii)
transactions are recorded as necessary to permit preparation of
financial statements in conformity with generally accepted accounting
principles and to maintain asset accountability; (iii) access to
assets is permitted only in accordance with management's general or
specific authorization; and (iv) the recorded accountability for
assets is compared with the existing assets at reasonable intervals
and appropriate action is taken with respect to any differences.
(xxiv) The Company has not taken, directly or indirectly, any
action designed to or which has constituted or which might reasonably
be expected to cause or result, under the Exchange Act or otherwise,
in stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Securities.
(xxv) The Company and its subsidiaries are (i) in compliance
with any and all applicable foreign, federal, state and local laws and
regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("Environmental Laws"), (ii) have received and are in
compliance with all permits, licenses or other approvals required of
them under applicable Environmental Laws to conduct their respective
businesses and (iii) have not received notice of any actual or
potential liability for the investigation or remediation of any
disposal or release of hazardous or toxic
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substances or wastes, pollutants or contaminants, except where such
non-compliance with Environmental Laws, failure to receive required
permits, licenses or other approvals, or liability would not,
individually or in the aggregate, have a Material Adverse Effect,
except as set forth in or contemplated in the Prospectus (exclusive of
any supplement thereto). Except as set forth in the Prospectus,
neither the Company nor any of the subsidiaries has been named as a
"potentially responsible party" under the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended.
(xxvi) In the ordinary course of its business, the Company
periodically reviews the effect of Environmental Laws on the business,
operations and properties of the Company and its subsidiaries, in the
course of which it identifies and evaluates associated costs and
liabilities (including, without limitation, any capital or operating
expenditures required for clean-up, closure of properties or
compliance with Environmental Laws, or any permit, license or
approval, any related constraints on operating activities and any
potential liabilities to third parties). On the basis of such review,
the Company has reasonably concluded that such associated costs and
liabilities would not, singly or in the aggregate, have a Material
Adverse Effect, except as set forth in or contemplated in the
Prospectus (exclusive of any supplement thereto).
(xxvii) Each of the Company and its subsidiaries has fulfilled
its obligations, if any, under the minimum funding standards of
Section 302 of the United States Employee Retirement Income Security
Act of 1974 ("ERISA") and the regulations and published
interpretations thereunder with respect to each "plan" (as defined in
Section 3(3) of ERISA and such regulations and published
interpretations) in which employees of the Company and its
subsidiaries are eligible to participate and each such plan is in
compliance in all material respects with the presently applicable
provisions of ERISA and such regulations and published
interpretations. The Company and its subsidiaries have not incurred
any unpaid liability to the Pension Benefit Guaranty Corporation
(other than for the payment of premiums in the ordinary course) or to
any such plan under Title IV of ERISA.
(xxviii) The subsidiaries listed on Annex A attached hereto are
-------
the only significant subsidiaries of the Company as defined by Rule 1-
02 of Regulation S-X (the "Subsidiaries").
(xxix) Except as set forth in the Prospectus, the Company and
the Subsidiaries own, possess, license or have other rights to use, on
reasonable terms, all patents, patent applications, trade and service
marks, trade and service mark registrations, trade names, copyrights,
licenses, inventions, trade secrets, technology, know-how and other
intellectual property (collectively, the "Intellectual Property")
reasonably necessary for the conduct of the Company's
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business as now conducted or as proposed in the Prospectus to be
conducted. Except as set forth in the Prospectus under the caption
"Business--Intellectual Property," (a) to the Company's knowledge,
there are no rights of third parties to any such Intellectual
Property; (b) to the Company's knowledge, there is no material
infringement by third parties of any such Intellectual Property; (c)
there is no pending or, to the Company's knowledge, threatened action,
suit, proceeding or claim by others challenging the Company's rights
in or to any such Intellectual Property, and the Company is unaware of
any facts which would form a reasonable basis for any such claim; (d)
to the Company's knowledge, there is no pending or threatened action,
suit, proceeding or claim by others challenging the validity or scope
of any such Intellectual Property, and the Company is unaware of any
facts which would form a reasonable basis for any such claim; (e)
there is no pending or, to the Company's knowledge, threatened action,
suit, proceeding or claim by others that the Company infringes or
otherwise violates any patent, trademark, copyright, trade secret or
other proprietary rights of others, and the Company is unaware of any
other fact which would form a reasonable basis for any such claim; (f)
to the Company's knowledge, there is no U.S. patent or published U.S.
patent application which contains claims that dominate or may dominate
any Intellectual Property described in the Prospectus as being owned
by or licensed to the Company or that interferes with the issued or
pending claims of any such Intellectual Property; and (g) there is no
prior art of which the Company is aware that may render any U.S.
patent held by the Company invalid or any U.S. patent application held
by the Company unpatentable which has not been disclosed to the U.S.
Patent and Trademark Office.
(xxx) The statements contained in the Prospectus under the
captions "Risk Factors - Successful infringement claims by third
parties could result in substantial damages, lost product sales and
the loss of intellectual property rights by us", "Business -
Intellectual Property," "Business - Legal Proceedings" and
"Description of Capital Stock" insofar as such statements summarize
legal matters, agreements, documents, or proceedings discussed
therein, are accurate and fair summaries of such legal matters,
agreements, documents or proceedings.
(xxxi) Except as disclosed in the Registration Statement and the
Prospectus, the Company (i) does not have any material lending or
other relationship with any bank or lending affiliate of Salomon Smith
Barney Holdings Inc. and (ii) does not intend to use any of the
proceeds from the sale of the Securities hereunder to repay any
outstanding debt owed to any affiliate of Salomon Smith Barney Holding
Inc.
(xxxii) The Company has tested its systems to evaluate whether its
computer hardware and software will be able to recognize and properly
execute date-sensitive functions involving certain dates prior to and
any dates after December 31, 1999, executing remediation activities to
fix non-compliant systems and
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monitoring and testing products and systems. To date the Company has
not experienced any problems complying with the Year 2000 issue and
have not been informed of any failures of its products from customers.
(xxxiii) Neither the Company nor any of its subsidiaries nor any
of its or their properties or assets has any immunity from the
jurisdiction of any court or from any legal process (whether through
service or notice, attachment prior to judgment, attachment in aid of
execution or otherwise).
(xxxiv) The documents incorporated or deemed to be incorporated
by reference in the Prospectus, at the time they were or hereafter are
filed with the Commission, complied and will comply in all material
respects with the requirements of the Exchange Act, and, when read
together with the other information in the Prospectus, at the time of
the Registration Statement and any amendments thereto become effective
and at the Closing Date, will not contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the fact required to be stated therein or
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(xxxv) The Company has filed all reports required to be filed
pursuant to the Act and the Exchange Act.
(xxxvi) The Company has satisfied the conditions for the use of
Form S-2, as set forth in the general instructions thereto, with
respect to the Registration Statement.
Any certificate signed by any officer of the Company and delivered to
the Representatives or counsel for the Underwriters in connection with the
offering of the Securities shall be deemed a representation and warranty by the
Company, as the case may be, as to matters covered thereby, to each Underwriter.
(b) Each Selling Shareholder represents and warrants with respect to
himself or itself, as the case may, severally or not jointly, to, and
agrees with, each of the Underwriters that:
(i) Such Selling Shareholder is the record and beneficial owner
of the Securities to be sold by it hereunder free and clear of all
liens, encumbrances, equities and claims and has duly endorsed such
Securities in blank, and, assuming that each Underwriter acquires its
interest in the Securities it has purchased from such Selling
Shareholder without notice of any adverse claim (within the meaning of
Section 8-105 of the New York Uniform Commercial Code ("UCC")), each
Underwriter that has purchased such Securities delivered on the
Closing Date to The Depository Trust Company or other securities
intermediary by making payment therefor as provided herein, and that
has had such Securities credited to
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the securities account or accounts of such Underwriters maintained
with The Depository Trust Company or such other securities
intermediary will have acquired a security entitlement (within the
meaning of Section 8-102(a)(17) of the UCC) to such Securities
purchased by such Underwriter, and no action based on an adverse claim
(within the meaning of Section 8-105 of the UCC) may be asserted
against such Underwriter with respect to such Securities.
(ii) Such Selling Shareholder has not taken, directly or
indirectly, any action designed to or which has constituted or which
might reasonably be expected to cause or result, under the Exchange
Act or otherwise, in stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the
Securities.
(iii) Certificates in negotiable form for such Selling
Shareholder's Securities have been placed in custody, for delivery
pursuant to the terms of this Agreement, under a Custody Agreement and
Power of Attorney duly authorized (if applicable) executed and
delivered by such Selling Shareholder, in the form heretofore
furnished to you (the "Custody Agreement") with ____________, as
Custodian (the "Custodian"); the Securities represented by the
certificates so held in custody for such Selling Shareholder are
subject to the interests hereunder of the Underwriters; the
arrangements for custody and delivery of such certificates, made by
such Selling Shareholder hereunder and under the Custody Agreement,
are not subject to termination by any acts of such Selling
Shareholder, or by operation of law, whether by the death or
incapacity of such Selling Shareholder or the occurrence of any other
event; and if any such death, incapacity or any other such event shall
occur before the delivery of such Securities hereunder, certificates
for the Securities will be delivered by the Custodian in accordance
with the terms and conditions of this Agreement and the Custody
Agreement as if such death, incapacity or other event had not
occurred, regardless of whether or not the Custodian shall have
received notice of such death, incapacity or other event.
(iv) No consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation by the
Selling Shareholder of the transactions contemplated herein, except
such as may have been obtained under the Act and such as may be
required under the blue sky laws of any jurisdiction in connection
with the purchase and distribution of the Securities by the
Underwriters and such other approvals as have been obtained.
(v) Neither the sale of the Securities being sold by such
Selling Shareholder nor the consummation of any other of the
transactions herein contemplated by such Selling Shareholder or the
fulfillment of the terms hereof by the Selling Shareholder will
conflict with, result in a breach or violation of, or constitute a
default under any law or other agreement or instrument to which such
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<PAGE>
Selling Shareholder is a party or bound, or any judgment, order or
decree applicable to such Selling Shareholder of any court, regulatory
body, administrative agency, governmental body or arbitrator having
jurisdiction over the Selling Shareholder.
(vi) Such Selling Shareholder has no reason to believe that the
representations and warranties of the Company contained in this
Section 1 are not true and correct, is familiar with the Registration
Statement and has no knowledge of any material fact, condition or
information not disclosed in the Prospectus or any supplement thereto
which has adversely affected or may adversely affect the business of
the Company or any of its subsidiaries; and the sale of Securities by
such Selling Shareholder pursuant hereto is not prompted by any
information concerning the Company or any of its subsidiaries which is
not set forth in the Prospectus or any supplement thereto.
(vii) In respect of any statements in or omissions from the
Registration Statement or the Prospectus or any supplements thereto
made in reliance upon and in conformity with information furnished in
writing to the Company by the Selling Shareholder specifically for use
in connection with the preparation thereof, such Selling Shareholder
hereby makes the same representations and warranties to each
Underwriter as the Company makes to such Underwriter under paragraph
(a)(2)of this Section.
Any certificate signed by such Selling Shareholder and delivered to
the Representatives or counsel for the Underwriters in connection with the
offering of the Securities shall be deemed a representation and warranty by such
Selling Shareholder, as to matters covered thereby, to each Underwriter.
2. Purchase and Sale. (a) Subject to the terms and conditions and in
reliance upon the representations and warranties herein set forth, the Company
and each Selling Shareholder agree, severally and not jointly, to sell to each
Underwriter, and each Underwriter agrees, severally and not jointly, to purchase
from the Company and each Selling Shareholder, at a purchase price of $
per share, the amount of the Underwritten Securities set forth opposite such
Underwriter's name in Schedule I hereto.
(b) Subject to the terms and conditions and in reliance upon the
representations and warranties herein set forth, the Company and the
Vincent J. Coates Foundation hereby grant, severally and not jointly an
option to the several Underwriters to purchase the 525,000 shares of Option
Securities (262,500 shares of which shall be sold by the Company and
262,500 shares of which shall be sold by the Vincent J. Coates Foundation)
at the same purchase price per share as the Underwriters shall pay for the
Underwritten Securities. Said option may be exercised only to cover over-
allotments in the sale of the Underwritten Securities by the Underwriters.
Said option may be exercised in whole or
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in part at any time (but not more than once) on or before the 30th day
after the date of the Prospectus upon written or telegraphic notice by the
Representatives to the Company and the Vincent J. Coates Foundation setting
forth the number of shares of the Option Securities as to which the several
Underwriters are exercising the option and the settlement date. In the
event that the Underwriters exercise less than their full over-allotment
option, the number of Option Securities purchased by each Underwriter shall
be the same percentage of the total number of shares of the Option
Securities to be purchased by the several Underwriters as such Underwriter
is purchasing of the Underwritten Securities, subject to such adjustments
as you in your absolute discretion shall make to eliminate any fractional
shares.
3. Delivery and Payment. Delivery of and payment for the
Underwritten Securities and the Option Securities (if the option provided for in
Section 2(b) hereof shall have been exercised on or before the third Business
Day prior to the Closing Date) shall be made at 10:00 AM, New York City time, on
, 2000, or at such time on such later date not more than three Business Days
after the foregoing date as the Representatives shall designate, which date and
time may be postponed by agreement between the Representatives and the Company
or as provided in Section 9 hereof (such date and time of delivery and payment
for the Securities being herein called the "Closing Date"). Delivery of the
Securities shall be made to the Representatives for the respective accounts of
the several Underwriters against payment by the several Underwriters through the
Representatives of the purchase price thereof to or upon the order of the
Company and each Selling Shareholder by wire transfer payable in same-day funds
to accounts specified by the Company and the Selling Shareholders. Delivery of
the Underwritten Securities and the Option Securities shall be made through the
facilities of The Depository Trust Company unless the Representatives shall
otherwise instruct.
If the option provided for in Section 2(b) hereof is exercised
after the third Business Day prior to the Closing Date, the Company and each
Selling Shareholders will deliver the Option Securities (at the expense of the
Company) to the Representatives, at 388 Greenwich Street, New York, New York, on
the date specified by the Representatives (which shall be within three Business
Days after exercise of said option) for the respective accounts of the several
Underwriters, against payment by the several Underwriters through the
Representatives of the purchase price thereof to or upon the order of the
Company and Selling Shareholders by wire transfer payable in same-day funds to
an account specified by the Company and the Selling Shareholders. If settlement
for the Option Securities occurs after the Closing Date, the Company and the
Selling Shareholders will deliver to the Representatives on the settlement date
for the Option Securities, and the obligation of the Underwriters to purchase
the Option Securities shall be conditioned upon receipt of, supplemental
opinions, certificates and letters confirming as of such date the opinions,
certificates and letters delivered on the Closing Date pursuant to Section 6
hereof.
4. Offering by Underwriters. It is understood that the several
Underwriters propose to offer the Securities for sale to the public as set forth
in the Prospectus.
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5. Agreements.
(a) The Company agrees with the several Underwriters that:
(i) The Company will use its best efforts to cause the
Registration Statement, if not effective at the Execution Time, and
any amendment thereof, to become effective. Prior to the termination
of the offering of the Securities, the Company will not file any
amendment of the Registration Statement or supplement to the
Prospectus or any Rule 462(b) Registration Statement unless the
Company has furnished you a copy for your review prior to filing and
will not file any such proposed amendment or supplement to which you
reasonably object. Subject to the foregoing sentence, if the
Registration Statement has become or becomes effective pursuant to
Rule 430A, or filing of the Prospectus is otherwise required under
Rule 424(b), the Company will cause the Prospectus, properly
completed, and any supplement thereto to be filed with the Commission
pursuant to the applicable paragraph of Rule 424(b) within the time
period prescribed and will provide evidence satisfactory to the
Representatives of such timely filing. The Company will promptly
advise the Representatives (1) when the Registration Statement, if not
effective at the Execution Time, shall have become effective, (2) when
the Prospectus, and any supplement thereto, shall have been filed (if
required) with the Commission pursuant to Rule 424(b) or when any Rule
462(b) Registration Statement shall have been filed with the
Commission, (3) when, prior to termination of the offering of the
Securities, any amendment to the Registration Statement shall have
been filed or become effective, (4) of any request by the Commission
or its staff for any amendment of the Registration Statement, or any
Rule 462(b) Registration Statement, or for any supplement to the
Prospectus or for any additional information, (5) of the issuance by
the Commission of any stop order suspending the effectiveness of the
Registration Statement or the institution or threatening of any
proceeding for that purpose and (6) of the receipt by the Company of
any notification with respect to the suspension of the qualification
of the Securities for sale in any jurisdiction or the institution or
threatening of any proceeding for such purpose. The Company will use
its best efforts to prevent the issuance of any such stop order or the
suspension of any such qualification and, if issued, to obtain as soon
as possible the withdrawal thereof.
(ii) If, at any time when a prospectus relating to the Securities
is required to be delivered under the Act, any event occurs as a
result of which the Prospectus as then supplemented would include any
untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein in the light of the
circumstances under which they were made not misleading, or if it
shall be necessary to amend the Registration Statement or supplement
the Prospectus to comply with the Act or the Exchange Act or the
respective rules thereunder, the Company promptly will (1) notify the
Representatives of any such event, (2) prepare and file with the
Commission, subject to the second sentence of
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paragraph (a)(i) of this Section 5, an amendment or supplement which
will correct such statement or omission or effect such compliance; and
(3) supply any supplemented Prospectus to you in such quantities as
you may reasonably request.
(iii) As soon as practicable, the Company will make generally
available to its security holders and to the Representatives an
earnings statement or statements of the Company and its subsidiaries
which will satisfy the provisions of Section 11(a) of the Act and Rule
158 under the Act.
(iv) The Company will furnish to the Representatives and counsel
for the Underwriters, without charge, signed copies of the
Registration Statement (including exhibits thereto) and to each other
Underwriter a copy of the Registration Statement (without exhibits
thereto) and, so long as delivery of a prospectus by an Underwriter or
dealer may be required by the Act, as many copies of each Preliminary
Prospectus and the Prospectus and any supplement thereto as the
Representatives may reasonably request.
(v) The Company will arrange, if necessary, for the
qualification of the Securities for sale under the laws of such
jurisdictions as the Representatives may designate and will maintain
such qualifications in effect so long as required for the distribution
of the Securities and will pay any fee of the National Association of
Securities Dealers, Inc. in connection with its review of the
offering; provided that in no event shall the Company be obligated to
qualify to do business in any jurisdiction where it is not now so
qualified or to take any action that would subject it to service of
process in suits, other than those arising out of the offering or sale
of the Securities, in any jurisdiction where it is not now so subject.
(vi) The Company will not, without the prior written consent of
Salomon Smith Barney Inc., offer, sell, contract to sell, pledge, or
otherwise dispose of, (or enter into any transaction which is designed
to, or might reasonably be expected to, result in the disposition
(whether by actual disposition or effective economic disposition due
to cash settlement or otherwise) by the Company or any affiliate of
the Company or any person in privity with the Company or any affiliate
of the Company) directly or indirectly, including the filing (or
participation in the filing) of a registration statement with the
Commission in respect of, or establish or increase a put equivalent
position or liquidate or decrease a call equivalent position within
the meaning of Section 16 of the Exchange Act, any other shares of
Common Stock or any securities convertible into, or exercisable, or
exchangeable for, shares of Common Stock; or publicly announce an
intention to effect any such transaction, for a period of 90 days
after the date of the Underwriting Agreement, provided, however, that
-------- -------
(i) the Company may issue and sell Common Stock pursuant to any
employee stock option plan, stock ownership plan or dividend
reinvestment plan of the Company in effect at the Execution Time and,
(ii) the Company may issue Common Stock issuable upon the
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conversion of securities or the exercise of warrants outstanding at
the Execution Time.
(vii) The Company will not take, directly or indirectly, any
action designed to or which has constituted or which might reasonably
be expected to cause or result, under the Exchange Act or otherwise,
in stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Securities.
(viii) The Company agrees to pay the costs and expenses relating
to the following matters: (i) the preparation, printing or
reproduction and filing with the Commission of the Registration
Statement (including financial statements and exhibits thereto), each
Preliminary Prospectus, the Prospectus, and each amendment or
supplement to any of them; (ii) the printing (or reproduction) and
delivery (including postage, air freight charges and charges for
counting and packaging) of such copies of the Registration Statement,
each Preliminary Prospectus, the Prospectus, and all amendments or
supplements to any of them, as may, in each case, be reasonably
requested for use in connection with the offering and sale of the
Securities; (iii) the preparation, printing, authentication, issuance
and delivery of certificates for the Securities, including any stamp
or transfer taxes in connection with the original issuance and sale of
the Securities; (iv) the printing (or reproduction) and delivery of
this Agreement, any blue sky memorandum and all other agreements or
documents printed (or reproduced) and delivered in connection with the
offering of the Securities; (v) the registration of the Securities
under the Exchange Act and the listing of the Securities on the Nasdaq
National Market; (vi) any registration or qualification of the
Securities for offer and sale under the securities or blue sky laws of
the several states (including filing fees and the reasonable fees and
expenses of counsel for the Underwriters relating to such registration
and qualification); (vii) any filings required to be made with the
National Association of Securities Dealers, Inc. (including filing
fees and the reasonable fees and expenses of counsel for the
Underwriters relating to such filings); (viii) the transportation and
other expenses incurred by or on behalf of Company representatives in
connection with presentations to prospective purchasers of the
Securities; (ix) the fees and expenses of the Company's accountants
and the fees and expenses of counsel (including local and special
counsel) for the Company; and (x) all other costs and expenses
incident to the performance by the Company of its obligations
hereunder.
(b) Each Selling Shareholder agrees with the several Underwriters
that:
(i) Such Selling Shareholder will not, without the prior written
consent of Salomon Smith Barney, offer, sell, contract to sell, pledge
or otherwise dispose of, (or enter into any transaction which is
designed to, or might reasonably be expected to, result in the
disposition (whether by actual disposition or effective
A-16
<PAGE>
economic disposition due to cash settlement or otherwise) by the
Company or any affiliate of the Company or any person in privity with
the Company or any affiliate of the Company) directly or indirectly,
or file (or participate in the filing of) a registration statement
with the Commission in respect of, or establish or increase a put
equivalent position or liquidate or decrease a call equivalent
position within the meaning of Section 16 of the Exchange Act with
respect to, any shares of capital stock of the Company or any
securities convertible into or exercisable or exchangeable for such
capital stock, or publicly announce an intention to effect any such
transaction, for a period of 90 days after the date of this Agreement,
other than shares of Common Stock disposed of as bona fide gifts
approved by Salomon Smith Barney Inc. or as otherwise provided by the
Lock-Up Agreement between the Representatives and such Selling
Shareholder relating to the sale of the Securities.
(ii) Such Selling Shareholder will not take any action designed to
or which has constituted or which might reasonably be expected to
cause or result, under the Exchange Act or otherwise, in stabilization
or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Securities.
(iii) Such Selling Shareholder will advise you promptly, and if
requested by you, will confirm such advice in writing, so long as
delivery of a prospectus relating to the Securities by an underwriter
or dealer may be required under the Act, of (i) any material change in
the Company's condition (financial or otherwise), prospects, earnings,
business or properties, (ii) any change in information in the
Registration Statement or the Prospectus relating to the Selling
Shareholder or (iii) any new material information relating to the
Company or relating to any matter stated in the Prospectus which comes
to the attention of the Selling Shareholder.
6. Conditions to the Obligations of the Underwriters. The obligations
of the Underwriters to purchase the Underwritten Securities and the Option
Securities, as the case may be, shall be subject to the accuracy of the
representations and warranties on the part of the Company and each of the
Selling Shareholders contained herein as of the Execution Time, the Closing Date
and any settlement date pursuant to Section 3 hereof, to the accuracy of the
statements of the Company and each of the Selling Shareholders made in any
certificates pursuant to the provisions hereof, to the performance by the
Company and each Selling Shareholder of their respective obligations hereunder
and to the following additional conditions:
(a) If the Registration Statement has not become effective prior to
the Execution Time, unless the Representatives agree in writing to a later
time, the Registration Statement will become effective not later than (i)
6:00 PM New York City time on the date of determination of the public
offering price, if such determination occurred at or prior to 3:00 PM New
York City time on such date or (ii) 9:30 AM on the Business Day following
the day on which the public offering price was determined, if
A-17
<PAGE>
such determination occurred after 3:00 PM New York City time on such date;
if filing of the Prospectus, or any supplement thereto, is required
pursuant to Rule 424(b), the Prospectus, and any such supplement, will be
filed in the manner and within the time period required by Rule 424(b); and
no stop order suspending the effectiveness of the Registration Statement
shall have been issued and no proceedings for that purpose shall have been
instituted or threatened.
(b) The Company shall have requested and caused Wilson Sonsini
Goodrich & Rosati, Professional Corporation, counsel for the Company, to
have furnished to the Representatives their opinion, dated the Closing Date
and addressed to the Representatives, to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
jurisdiction in which it is chartered or organized, with full
corporate power and authority to own or lease, as the case may be, and
to operate its properties and conduct its business as described in the
Prospectus, and is duly qualified to do business as a foreign
corporation in which it owns or leases property and is in good
standing under the laws of each jurisdiction which requires such
qualification except where failure to be so qualified does not have a
Material Adverse Effect;
(ii) to the knowledge of such counsel the Company's authorized
equity capitalization is as set forth in the Prospectus; the capital
stock of the Company conforms in all material respects to the
description thereof contained in the Prospectus; the outstanding
shares of Common Stock (including the Securities being sold hereunder
by each of the Selling Shareholders) have been duly and validly
authorized and issued and are fully paid and nonassessable; the
Securities being sold hereunder by each of the Company have been duly
and validly authorized, and, when issued and delivered to and paid for
by the Underwriters pursuant to this Agreement, will be fully paid and
nonassessable; the Securities being sold by the Selling Shareholders
and the Company are duly listed, and admitted and authorized for
trading, subject to official notice of issuance, the certificates for
the Securities are in valid and sufficient form; the holders of
outstanding shares of capital stock of the Company are not entitled to
preemptive rights under the Articles of Incorporation of the Company,
California law, or to our knowledge other preemptive or other rights
to subscribe for the Securities; and, except as set forth in the
Prospectus, to such counsel's knowledge no options, warrants or other
rights to purchase, agreements or other obligations to issue, or
rights to convert any obligations into or exchange any securities for,
shares of capital stock of or ownership interests in the Company are
outstanding;
(iii) to the knowledge of such counsel, there is no pending or
threatened action, suit or proceeding by or before any court or
governmental agency, authority or body or any arbitrator involving the
Company or any of the
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<PAGE>
Subsidiaries or its or their property of a character required to be
disclosed in the Registration Statement which is not adequately
disclosed in the Prospectus, and to the knowledge of such counsel
there is no contract or other document of a character required to be
described in the Registration Statement or Prospectus or to be filed
as an exhibit thereto, which is not described or filed as required;
(iv) the conditions of the use of Form S-2 set forth in the
General Instructions thereto have been satisfied;
(v) this Agreement has been duly authorized, executed and
delivered by the Company;
(vi) the Company is not and, after giving effect to the offering
and sale of the Securities and the application of the proceeds thereof
as described in the Prospectus, will not be, an "investment company"
as defined in the Investment Company Act of 1940, as amended;
(vii) no consent, approval, authorization, filing with or order of
any court or governmental agency or body having jurisdiction over the
Company is required in connection with the transactions contemplated
herein, except such as have been obtained under the Act and such as
may be required under the blue sky laws of any jurisdiction in
connection with the purchase and distribution of the Securities by the
Underwriters in the manner contemplated in this Agreement and in the
Prospectus and such other approvals (specified in such opinion) as
have been obtained or waived, or if not obtained or waived, would not
have a Material Adverse Effect;
(viii) neither the issue and sale of the Securities, nor the
consummation of any other of the transactions herein contemplated nor
the fulfillment of the terms hereof will conflict with, result in a
breach, violation or constitute a default of (i) the charter or by-
laws of the Company or its subsidiaries, or (ii) the terms of any
material indenture, contract, lease, mortgage, deed of trust, note
agreement, loan agreement or other agreement, obligation, condition,
covenant or instrument to which the Company or its subsidiaries is a
party or bound or to which its or their property is subject, or (iii)
statute, law, rule, regulation, judgment, order or decree known to
such counsel applicable to the Company or its subsidiaries of any
court, regulatory body, administrative agency, governmental body,
arbitrator or other authority having jurisdiction over the Company or
its subsidiaries or any of its or their properties; and
(ix) no holders of securities of the Company have rights to the
registration of such securities under the Registration Statement; and
(x) each document filed pursuant to the Exchange Act (other than
the financial statements and supporting schedules included therein, as
to which no
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<PAGE>
opinion need be rendered) and incorporated or deemed to be
incorporated by reference in the Prospectus complied when so filed as
to form in all material respects with the Exchange Act.
In addition such counsel shall state that in addition to rendering
legal advice and assistance to the Company in the course of the preparation
of the Registration Statement and Prospectus, involving, among other
things, discussions and inquiries concerning various legal matters and the
review of certain corporate records, documents and proceedings (in addition
to those described in paragraph (i) through (x) above), such counsel also
participated in conferences with certain officers and other representatives
of the Company, including its independent certified public accountants and
with the Underwriters and their counsel, at which the contents of the
Registration Statement and the Prospectus and related matters were
discussed; provided, however, that such counsel may state that they have
not independently verified the accuracy, completeness or fairness of the
information contained in the Registration Statement and Prospectus.
Such counsel shall also state that based upon its participation as
described in the preceding paragraph, they confirm that they have no reason
to believe that (except for financial statements and schedules and other
financial and statistical data as to which such counsel need not express
any belief) (A) the Registration Statement and the prospectus included
therein at the time the Registration Statement became effective contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading and (B) the Prospectus when issued contained, or as of the
date such opinion is delivered, contains any untrue statement of a material
fact or omits to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were
made, not misleading.
In rendering such opinion, such counsel may state that their opinion is
limited to the federal laws of the United States and the laws of the State
of California.
(c) Each of the Selling Shareholders shall have requested and caused
Wilson Sonsini Goodrich & Rosati, Professional Corporation, counsel for
each of the Selling Shareholders, to have furnished to the Representatives
their opinion, dated the Closing Date and addressed to the Representatives
to the effect that:
(i) this Agreement and the Custody Agreement and Power of Attorney
have been duly executed and delivered by each Selling Shareholder, the
Custody Agreement is valid and binding on each Selling Shareholder and
each Selling Shareholder has full legal right and authority to sell,
transfer and deliver in the manner provided in this Agreement and the
Custody Agreement the Securities being sold by each Selling
Shareholder hereunder;
(ii) the delivery by each Selling Shareholder to the several
Underwriters of certificates for the Securities being sold hereunder
by each Selling Shareholder
A-20
<PAGE>
against payment therefor as provided herein, will pass valid and
marketable title to such Securities to the several Underwriters, free
and clear of any adverse claim, assuming the Underwriter purchase such
Securities for value, in good faith and without notice of adverse
claim, as such terms are defined in the Uniform Commercial Code in
effect in California;
(iii) to the knowledge of such counsel, no consent, approval,
authorization or order of any court or governmental agency or body is
required for the consummation by each Selling Shareholder of the
transactions contemplated herein, except such as may have been
obtained under the Act and such as may be required under the blue sky
laws of any jurisdiction in connection with the purchase and
distribution of the Securities by the Underwriters and such other
approvals (specified in such opinion) as have been obtained; and
(iv) neither the sale of the Securities being sold by each Selling
Shareholder nor the consummation of any other of the transactions
herein contemplated by each Selling Shareholder or the fulfillment of
the terms hereof by each Selling Stockholder will conflict with,
result in a breach or violation of, or constitute a default under any
law the terms of any agreement or instrument known to such counsel and
to which either Selling Shareholder is party to or bound, or any
judgment, order or decree known to such counsel to be applicable to
the Selling Shareholders of any court, regulatory body, administrative
agency, governmental body or arbitrator having jurisdiction over each
of the Selling Shareholders.
(v) Each Selling Shareholder is the record and beneficial owner
of the Securities to be sold by it hereunder free and clear of all
adverse claims.
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction other than the State
of California or the Federal laws of the United States, to the extent they
deem proper and specified in such opinion,
A-21
<PAGE>
upon the opinion of other counsel of good standing whom they believe to be
reliable and who are satisfactory to counsel for the Underwriters, and (B)
as to matters of fact, to the extent they deem proper, on certificates of
the Selling Shareholders and public officials.
(d) The Company shall have requested and caused counsel for each of
the Company's Subsidiaries, to have furnished to the Representatives their
opinion, dated the Closing Date and addressed to the Representatives to the
effect that:
(i) the Subsidiary has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
jurisdiction in which it is chartered or organized, with full
corporate power and authority to own or lease, as the case may be, and
to operate its properties and conduct its business as described in the
Prospectus, and is duly qualified to do business as a foreign
corporation and is in good standing under the laws of each
jurisdiction which requires such qualification;
(ii) all the outstanding shares of capital stock of the Subsidiary
have been duly and validly authorized and issued and are fully paid
and nonassessable, and, except as otherwise set forth in the
Prospectus, all outstanding shares of capital stock of the Subsidiary
are owned by the Company either directly or through wholly owned
subsidiaries free and clear of any perfected security interest and, to
the knowledge of such counsel, after due inquiry, any other security
interest, claim, lien or encumbrance;
(e) The Company shall have requested and caused Fenwick and West LLP,
special litigation counsel for the Company, to have furnished to the
Representatives their opinion, dated the Closing Date and addressed to the
Representatives, substantially in the form attached hereto as Exhibit B.
---------
(f) The Company shall have requested and caused Skjerven, Morrill,
Macpherson, Franklin & Friel LLP, patent counsel for the Company, to have
furnished to the Representatives their opinion, dated the Closing Date and
addressed to the Representatives, substantially in the form attached hereto
as Exhibit C.
---------
(g) The Representatives shall have received from Brobeck, Phleger &
Harrison LLP, counsel for the Underwriters, such opinion or opinions, dated
the Closing Date and addressed to the Representatives, with respect to the
issuance and sale of the Securities, the Registration Statement, the
Prospectus (together with any supplement thereto) and other related matters
as the Representatives may reasonably require, and the Company shall have
furnished to such counsel such documents as they request for the purpose of
enabling them to pass upon such matters.
(h) The Company shall have furnished to the Representatives a
certificate of the Company, signed by the Chairman of the Board or the
President and the principal
A-22
<PAGE>
financial or accounting officer of the Company, dated the Closing Date, to
the effect that the signers of such certificate have carefully examined the
Registration Statement, the Prospectus, any supplements to the Prospectus
and this Agreement and that:
(i) the representations and warranties of the Company in this
Agreement are true and correct in all material respects on and as of
the Closing Date with the same effect as if made on the Closing Date
and the Company has complied with all the agreements and satisfied all
the conditions on its part to be performed or satisfied at or prior to
the Closing Date;
(ii) no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that
purpose have been instituted or, to the Company's knowledge,
threatened; and
(iii) since the date of the most recent financial statements
included, or incorporated by references in the Prospectus (exclusive
of any supplement thereto), there has been no material adverse effect
on the condition (financial or otherwise), prospects, earnings,
business or properties of the Company and its subsidiaries, taken as a
whole, whether or not arising from transactions in the ordinary course
of business, except as set forth in or contemplated in the Prospectus
(exclusive of any supplement thereto).
(i) On the Closing Date, the Representatives shall have received a
written certificate executed by the Selling Shareholders or the Attorney-
in-Fact of the Selling Shareholders, dated as of such Closing Date, to the
effect that the signer of such certificate has carefully examined the
Registration Statement, the Prospectus, any supplement to the Prospectus
and this Agreement and that the representations and warranties of the
Selling Shareholders in this Agreement are true and correct in all material
respects on and as of the Closing Date to the same effect as if made on the
Closing Date.
(j) At least three business days prior to the date hereof, the
Company and the Selling Shareholders shall have furnished for review by the
Representatives copies of the Power of Attorney and Custody Agreement
executed by each Selling Shareholder and such further information,
certificates and documents as the Representatives may reasonably request.
(k) The Company shall have requested and caused Deloitte & Touche
LLP to have furnished to the Representatives, at the Execution Time and at
the Closing Date, letters, dated respectively as of the Execution Time and
as of the Closing Date, in form and substance satisfactory to the
Representatives, confirming that they are independent accountants within
the meaning of the Act and the Exchange Act and respective applicable rules
adopted by the Commission thereunder and that they have performed a review
of the unaudited interim financial information of the Company for the nine-
month
A-23
<PAGE>
period ended December 31, 1999, and as at December 31, 1999, in accordance
with Statement on Auditing Standards No. 71 and stating in effect that:
(i) in their opinion the audited financial statements and
financial statement schedules included in the Registration Statement
and the Prospectus and reported on by them comply as to form in all
material respects with the applicable accounting requirements of the
Act and the Exchange Act and the related rules and regulations adopted
by the Commission;
(ii) they have performed certain other specified procedures as a
result of which they determined that certain information of an
accounting, financial or statistical nature (which is limited to
accounting, financial or statistical information derived from the
general accounting records of the Company and its subsidiaries) set
forth in the Registration Statement and the Prospectus, including the
information set forth under the captions "Prospectus Summary - Summary
Consolidated Financial Data", "Selected Consolidated Financial Data"
and "Management's Discussions and Analysis of Financial Condition and
Results of Operations" in the Prospectus, agrees with the accounting
records of the Company and its subsidiaries, excluding any questions
of legal interpretation;
References to the Prospectus in this paragraph (e) include any
supplement thereto at the date of the letter.
(l) Subsequent to the Execution Time or, if earlier, the dates as of
which information is given in the Registration Statement (exclusive of any
amendment thereof) and the Prospectus (exclusive of any supplement
thereto), there shall not have been (i) any change or decrease specified in
the letter or letters referred to in paragraph (j) of this Section 6 or
(ii) any change, or any development involving a prospective change, in or
affecting the condition (financial or otherwise), earnings, business or
properties of the Company and its subsidiaries taken as a whole, whether or
not arising from transactions in the ordinary course of business, except as
set forth in or contemplated in the Prospectus (exclusive of any supplement
thereto) the effect of which, in any case referred to in clause (i) or (ii)
above, is, in the sole judgment of the Representatives, so material and
adverse as to make it impractical or inadvisable to proceed with the
offering or delivery of the Securities as contemplated by the Registration
Statement (exclusive of any amendment thereof) and the Prospectus
(exclusive of any supplement thereto).
(m) Prior to the Closing Date, the Company shall have furnished to
the Representatives such further information, certificates and documents as
the Representatives may reasonably request.
(n) The securities shall have been quoted, admitted and authorized
for trading on the Nasdaq National Market, and satisfactory evidence of
such actions shall have been provided to the Representatives.
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<PAGE>
(o) Prior to the Execution Time, the Company shall have furnished to
the Representatives a letter substantially in the form of Exhibit A hereto
---------
from each officer and director of the Company and shareholders of the
Company holding more than 5% of the Company's outstanding capital stock
addressed to the Representatives.
If any of the conditions specified in this Section 6 shall not have been
fulfilled in all material respects when and as provided in this Agreement, or if
any of the opinions and certificates mentioned above or elsewhere in this
Agreement shall not be in all material respects reasonably satisfactory in form
and substance to the Representatives and counsel for the Underwriters, this
Agreement and all obligations of the Underwriters hereunder may be canceled at,
or at any time prior to, the Closing Date by the Representatives. Notice of such
cancellation shall be given to the Company in writing or by telephone or
facsimile confirmed in writing.
The documents required to be delivered by this Section 6 shall be delivered
at the office of Wilson Sonsini Goodrich & Rosati, P.C., counsel for the
Company, at 650 Page Mill Road, Palo Alto, CA 94304 on the Closing Date.
7. Reimbursement of Underwriters' Expenses. If the sale of the
Securities provided for herein is not consummated because any condition to the
obligations of the Underwriters set forth in Section 6 hereof is not satisfied,
because of any termination pursuant to Section 10 hereof or because of any
refusal, inability or failure on the part of the Company or the Selling
Shareholders to perform any agreement herein or comply with any provision hereof
other than by reason of a default by any of the Underwriters, the Company will
reimburse the Underwriters severally through Salomon Smith Barney Inc. on demand
for all out-of-pocket expenses (including reasonable fees and disbursements of
counsel) that shall have been incurred by them in connection with the proposed
purchase and sale of the Securities.
8. Indemnification and Contribution.
(a) The Company and each of the Selling Shareholders, severally and
not jointly, agree to indemnify and hold harmless each Underwriter, the
directors, officers, employees and agents of each Underwriter and each
person who controls any Underwriter within the meaning of either the Act or
the Exchange Act against any and all losses, claims, damages or
liabilities, joint or several, to which they or any of them may become
subject under the Act, the Exchange Act or other Federal or state statutory
law or regulation, at common law or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of
or are based upon any untrue statement or alleged untrue statement of a
material fact contained in the registration statement for the registration
of the Securities as originally filed or in any amendment thereof, or in
any Preliminary Prospectus or the Prospectus, or in any amendment thereof
or supplement thereto, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, and
agrees to reimburse each such indemnified party, as incurred, for any legal
or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or
action;
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<PAGE>
provided, however, that the Company and each of the Selling Shareholders
-------- -------
will not be liable in any such case to the extent that any such loss,
claim, damage or liability arises out of or is based upon any such untrue
statement or alleged untrue statement or omission or alleged omission made
therein in reliance upon and in conformity with written information
furnished to the Company by or on behalf of any Underwriter through the
Representatives specifically for inclusion therein; provided further, the
----------------
Company and each of the Underwriters agrees with each of the Selling
Shareholders that any claim of such Underwriter against such Selling
Shareholder for indemnification, reimbursement or advancement of expenses
pursuant to this Section 8(a) or for breach of any representation or
warranty in Section 1 hereof shall first be sought by such Underwriter to
be satisfied in full by the Company and, subject to the limitation on the
aggregate liability of each Selling Shareholder set forth below, shall be
satisfied by the Selling Shareholders only to the extent that such claim
has not been satisfied in full by the Company within the 60-day period
following the date requested for payment in accordance with the terms of
this Agreement. The liability of each Selling Shareholder under this
Agreement shall be limited to an amount as set forth in Section 8(e) below.
This indemnity agreement will be in addition to any liability which the
Company or each Selling Shareholder may otherwise have.
(b) Each Underwriter severally and not jointly agrees to indemnify
and hold harmless the Company, each of its directors, each of its officers
who signs the Registration Statement, and each person who controls the
Company within the meaning of either the Act or the Exchange Act and each
Selling Shareholder, to the same extent as the foregoing indemnity to each
Underwriter, but only with reference to written information relating to
such Underwriter furnished to the Company by or on behalf of such
Underwriter through the Representatives specifically for inclusion in the
documents referred to in the foregoing indemnity. This indemnity agreement
will be in addition to any liability which any Underwriter may otherwise
have. The Company and the Selling Shareholder acknowledge that the
statements set forth in the last paragraph of the cover page regarding
delivery of the Securities, under the heading "Underwriting", the sentences
related to concessions and reallowances and the paragraph related to
stabilization, syndicate covering transactions and penalty bids and passive
market making in any Preliminary Prospectus and the Prospectus constitute
the only information furnished in writing by or on behalf of the several
Underwriters for inclusion in any Preliminary Prospectus or the Prospectus.
(c) Promptly after receipt by an indemnified party under this Section
8 of notice of the commencement of any action, such indemnified party will,
if a claim in respect thereof is to be made against the indemnifying party
under this Section 8, notify the indemnifying party in writing of the
commencement thereof; but the failure so to notify the indemnifying party
(i) will not relieve it from liability under paragraph (a) or (b) above
unless and to the extent it did not otherwise learn of such action and only
to the extent such failure results in the forfeiture by the indemnifying
party of substantial rights and defenses and (ii) will not, in any event,
relieve the indemnifying party from any
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<PAGE>
obligations to any indemnified party other than the indemnification
obligation provided in paragraph (a) or (b) above. The indemnifying party
shall be entitled to appoint counsel of the indemnifying party's choice at
the indemnifying party's expense to represent the indemnified party in any
action for which indemnification is sought (in which case the indemnifying
party shall not thereafter be responsible for the fees and expenses of any
separate counsel retained by the indemnified party or parties except as set
forth below); provided, however, that such counsel shall be satisfactory to
-------- -------
the indemnified party. Notwithstanding the indemnifying party's election to
appoint counsel to represent the indemnified party in an action, the
indemnified party shall have the right to employ separate counsel
(including local counsel), and the indemnifying party shall bear the
reasonable fees, costs and expenses of such separate counsel if (i) the use
of counsel chosen by the indemnifying party to represent the indemnified
party would present such counsel with a conflict of interest, (ii) the
actual or potential defendants in, or targets of, any such action include
both the indemnified party and the indemnifying party and the indemnified
party shall have reasonably concluded that there may be legal defenses
available to it and/or other indemnified parties which are different from
or additional to those available to the indemnifying party, (iii) the
indemnifying party shall not have employed counsel satisfactory to the
indemnified party to represent the indemnified party within a reasonable
time after notice of the institution of such action or (iv) the
indemnifying party shall authorize the indemnified party to employ separate
counsel at the expense of the indemnifying party. An indemnifying party
will not, without the prior written consent of the indemnified parties,
settle or compromise or consent to the entry of any judgment with respect
to any pending or threatened claim, action, suit or proceeding in respect
of which indemnification or contribution may be sought hereunder (whether
or not the indemnified parties are actual or potential parties to such
claim or action) unless such settlement, compromise or consent includes an
unconditional release of each indemnified party from all liability arising
out of such claim, action, suit or proceeding.
(d) In the event that the indemnity provided in paragraph (a) or (b)
of this Section 8 is unavailable to or insufficient to hold harmless an
indemnified party for any reason, the Company and the Selling Shareholders,
severally and not jointly, and the Underwriters severally agree to
contribute to the aggregate losses, claims, damages and liabilities
(including legal or other expenses reasonably incurred in connection with
investigating or defending same) (collectively "Losses") to which the
Company, the Selling Shareholder and one or more of the Underwriters may be
subject in such proportion as is appropriate to reflect the relative
benefits received by the Company and each Selling Shareholder on the one
hand and by the Underwriters on the other hand from the offering of the
Securities; provided, however, that in no case shall any Underwriter
-------- -------
(except as may be provided in any agreement among underwriters relating to
the offering of the Securities) be responsible for any amount in excess of
the underwriting discount or commission applicable to the Securities
purchased by such Underwriter hereunder. If the allocation provided by the
immediately preceding sentence is unavailable for any reason, the Company
and each Selling Shareholder, severally and not jointly, and the
Underwriters severally shall contribute in such proportion as is
appropriate to reflect not
A-27
<PAGE>
only such relative benefits but also the relative fault of the Company and
each Selling Shareholder on the one hand and of the Underwriters on the
other hand in connection with the statements or omissions which resulted in
such Losses as well as any other relevant equitable considerations.
Benefits received by the Company and each Selling Shareholder shall be
deemed to be equal to the total net proceeds from the offering (before
deducting expenses) received by it, and benefits received by the
Underwriters shall be deemed to be equal to the total underwriting
discounts and commissions, in each case as set forth on the cover page of
the Prospectus. Relative fault shall be determined by reference to, among
other things, whether any untrue or any alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information provided by the Company or either of the Selling
Shareholders on the one hand or the Underwriters on the other, the intent
of the parties and their relative knowledge, access to information and
opportunity to correct or prevent such untrue statement or omission. The
Company, each of the Selling Shareholders and the Underwriters agree that
it would not be just and equitable if contribution were determined by pro
rata allocation or any other method of allocation which does not take
account of the equitable considerations referred to above. Notwithstanding
the provisions of this paragraph (d), no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. For purposes of this Section 8, each person
who controls an Underwriter within the meaning of either the Act or the
Exchange Act and each director, officer, employee and agent of an
Underwriter shall have the same rights to contribution as such Underwriter,
and each person who controls the Company within the meaning of either the
Act or the Exchange Act, each officer of the Company who shall have signed
the Registration Statement and each director of the Company shall have the
same rights to contribution as the Company, subject in each case to the
applicable terms and conditions of this paragraph (d).
(e) Notwithstanding the foregoing, the liability of each Selling
Shareholder under such Selling Shareholder's representations and warranties
contained in Section 1 hereof and under the indemnity and contribution
agreements contained in this Section 8 shall be limited to an amount equal
to the initial public offering price of the Securities sold by each Selling
Shareholder to the Underwriters. The Company and each Selling Shareholder
may agree, as among themselves and without limiting the rights of the
Underwriters under this Agreement, as to the respective amounts of such
liability for which they each shall be responsible.
9. Default by an Underwriter. If any one or more Underwriters shall
fail to purchase and pay for any of the Securities agreed to be purchased by
such Underwriter or Underwriters hereunder and such failure to purchase shall
constitute a default in the performance of its or their obligations under this
Agreement, the remaining Underwriters shall be obligated severally to take up
and pay for (in the respective proportions which the amount of Securities set
forth opposite their names in Schedule I hereto bears to the aggregate amount of
Securities set forth opposite the names of all the remaining Underwriters) the
Securities which the defaulting
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<PAGE>
Underwriter or Underwriters agreed but failed to purchase; provided, however,
-------- -------
that in the event that the aggregate amount of Securities which the defaulting
Underwriter or Underwriters agreed but failed to purchase shall exceed 10% of
the aggregate amount of Securities set forth in Schedule I hereto, the remaining
Underwriters shall have the right to purchase all, but shall not be under any
obligation to purchase any, of the Securities, and if such nondefaulting
Underwriters do not purchase all the Securities, this Agreement will terminate
without liability to any nondefaulting Underwriter, the Company or Selling
Shareholder. In the event of a default by any Underwriter as set forth in this
Section 9, the Closing Date shall be postponed for such period, not exceeding
five Business Days, as the Representatives shall determine in order that the
required changes in the Registration Statement and the Prospectus or in any
other documents or arrangements may be effected. Nothing contained in this
Agreement shall relieve any defaulting Underwriter of its liability, if any, to
the Company, a Selling Shareholder and any nondefaulting Underwriter for damages
occasioned by its default hereunder.
10. Termination. This Agreement shall be subject to termination in
the absolute discretion of the Representatives, by notice given to the Company
and the Selling Shareholder prior to delivery of and payment for the Securities,
if at any time prior to such time (i) trading in the Company's Common Stock
shall have been suspended by the Commission or the Nasdaq National Market or
trading in securities generally on the New York Stock Exchange or the Nasdaq
National Market shall have been suspended or limited or minimum prices shall
have been established on such Exchange or the Nasdaq National Market, (ii) a
banking moratorium shall have been declared either by Federal or New York State
authorities or (iii) there shall have occurred any outbreak or escalation of
hostilities, declaration by the United States of a national emergency or war, or
other calamity or crisis the effect of which on financial markets is such as to
make it, in the sole judgment of the Representatives, impractical or inadvisable
to proceed with the offering or delivery of the Securities as contemplated by
the Prospectus (exclusive of any supplement thereto).
11. Representations and Indemnities to Survive. The respective
agreements, representations, warranties, indemnities and other statements of the
Selling Shareholder, the Company or its officers and of the Underwriters set
forth in or made pursuant to this Agreement will remain in full force and
effect, regardless of any investigation made by or on behalf of the Selling
Shareholder, any Underwriter or the Company or any of the officers, directors,
employees, agents or controlling persons referred to in Section 8 hereof, and
will survive delivery of and payment for the Securities. The provisions of
Sections 7 and 8 hereof shall survive the termination or cancellation of this
Agreement.
12. Notices. All communications hereunder will be in writing and
effective only on receipt, and, if sent to the Representatives, will be mailed,
delivered or telefaxed to the Salomon Smith Barney Inc. General Counsel (fax
no.: (212) 816-7912) and confirmed to the General Counsel, Salomon Smith Barney
Inc., at 388 Greenwich Street, New York, New York, 10013, Attention: General
Counsel; or, if sent to the Company, will be mailed, delivered or telefaxed to
Chief Financial Officer at 310 De Guigne Drive, Sunnyvale, CA 94086, facsimile:
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<PAGE>
(408) 720-0196, or if sent to either of the Selling Shareholders, will be mailed
or delivered to c/o Vincent Coates at 1080 Leonello Avenue, Los Altos, CA 94024.
13. Successors. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective successors and the
officers, directors, employees, agents and controlling persons referred to in
Section 8 hereof, and no other person will have any right or obligation
hereunder.
14. Applicable Law. This Agreement will be governed by and construed
in accordance with the laws of the State of New York applicable to contracts
made and to be performed within the State of New York.
15. Counterparts. This Agreement may be signed in one or more
counterparts, each of which shall constitute an original and all of which
together shall constitute one and the same agreement.
16. Headings. The section headings used herein are for convenience
only and shall not affect the construction hereof.
17. Definitions. The terms which follow, when used in this Agreement,
shall have the meanings indicated.
"Act" shall mean the Securities Act of 1933, as amended, and the
rules and regulations of the Commission promulgated thereunder.
"Business Day" shall mean any day other than a Saturday, a Sunday
or a legal holiday or a day on which banking institutions or trust
companies are authorized or obligated by law to close in New York City.
"Effective Date" shall mean each date and time that the
Registration Statement, any post-effective amendment or amendments thereto
and any Rule 462(b) Registration Statement became or become effective.
"Execution Time" shall mean the date and time that this Agreement
is executed and delivered by the parties hereto.
"Rule 424", "Rule 430A" and "Rule 462" refer to such rules under
the Act.
"Rule 430A Information" shall mean information with respect to
the Securities and the offering thereof permitted to be omitted from the
Registration Statement when it becomes effective pursuant to Rule 430A.
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicate hereof, whereupon
this letter and your acceptance shall represent a binding agreement among the
Company, each of the Selling
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<PAGE>
Shareholders and the several Underwriters.
Very truly yours,
Nanometrics Incorporated
By: _____________________
Name: Paul Nolan
Title: Chief Financial Officer
Selling Shareholders
Vincent J. Coates 1999 Charitable Trust UTA
dated December 17, 1999
By: _____________________
Name:
Title:
Vincent J. Coates Foundation
By: _____________________
Name:
Title:
A-31
<PAGE>
The foregoing Agreement is hereby
confirmed and accepted as of the date first
above written.
Salomon Smith Barney Inc.
Needham & Company, Inc.
Soundview Technology Group
Tucker Anthony Cleary Gull
By: Salomon Smith Barney Inc.
By:
________________________
Name:
Title:
For themselves and the other several
Underwriters named in Schedule I to the
foregoing Agreement.
A-32
<PAGE>
SCHEDULE I
----------
Number of Underwritten
Securities to be
Underwriters Purchased
----------------------
Salomon Smith Barney Inc...................
Soundview Technology Group, Inc............
Tucker Anthony Inc.........................
Needham & Company..........................
-----------
Total............................ 3,500,000
===========
<PAGE>
SCHEDULE II
-----------
Number of Underwritten
Securities to be
Selling Shareholders Sold
----------------------
Vincent J. Coates 1999 Charitable Trust
UTA dated December 17, 1999............ 1,000,000
Vincent J. Coates Foundation.............. 750,000
<PAGE>
EXHIBIT A
---------
LOCK-UP AGREEMENT
-----------------
Nanometrics Incorporated
Public Offering of Common Stock
January ___, 2000
Salomon Smith Barney Inc.
Needham & Company, Inc.
SoundView Technology Group, Inc.
Tucker Anthony Cleary Gull
as representatives of the several Underwriters,
c/o Salomon Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
This letter is being delivered to you in connection with the proposed
Underwriting Agreement (the "Underwriting Agreement"), between Nanometrics
Incorporated, a California corporation (the "Company"), and each of you as
representatives of a group of Underwriters named therein, relating to an
underwritten public offering of Common Stock, no par value (the "Common Stock"),
of the Company.
In order to induce you and the other Underwriters to enter into the
Underwriting Agreement, the undersigned will not, without the prior written
consent of Salomon Smith Barney Inc., offer, sell, contract to sell, pledge or
otherwise dispose of, (or enter into any transaction which is designed to, or
might reasonably be expected to, result in the disposition (whether by actual
disposition or effective economic disposition due to cash settlement or
otherwise) by the Company or any affiliate of the Company or any person in
privity with the Company or any affiliate of the Company) directly or
indirectly, including the filing (or participation in the filing) of a
registration statement with the Securities and Exchange Commission in respect
of, or establish or increase a put equivalent position or liquidate or decrease
a call equivalent position within the meaning of Section 16 of the Securities
Exchange Act of 1934, as amended, and the rules and regulations of the
Securities and Exchange Commission promulgated thereunder with respect to, any
shares of capital stock of the Company or any securities convertible into, or
exercisable or exchangeable for such capital stock, or publicly announce an
intention to effect any such transaction, for a period of 90 days after the date
of the final Prospectus.
Notwithstanding the foregoing, if the undersigned is an individual, he
or she may transfer any or all of the Shares either during his or her lifetime
or on death by gift, will or intestacy to his or her immediate family or to a
trust, partnership or other entity, the beneficiaries, partners or equity
holders of which are exclusively the undersigned and/or a member or members of
his or her immediate family; provided, however, that in any such case, it
A-1
<PAGE>
shall be a condition to such transfer that the transferee execute an agreement
stating that the transferee is receiving and holding the Shares subject to the
provisions of this Agreement, and there shall be no further transfer of such
Shares except in accordance with this Agreement. For purposes of this paragraph,
"immediate family" shall mean lineal descendant, spouse, adopted child, father,
mother, brother or sister of the transferor and the spouses, adopted children
and lineal descendants of any of the foregoing.
If for any reason the Underwriting Agreement shall be terminated prior
to the Closing Date (as defined in the Underwriting Agreement), the agreement
set forth above shall likewise be terminated. In any event, the agreement set
forth above shall terminate if the pricing of the public offering shall not have
occurred prior to or on May 31, 2000.
Yours very truly,
_______________________________
Signature
_______________________________
Print Name
A-2
<PAGE>
EXHIBIT B
---------
OPINION OF FENWICK & WEST
-------------------------
B-1
<PAGE>
EXHIBIT C
---------
FORM OF PATENT OPINION
Such counsel are familiar with the technology used by the Company in
its business and the manner of its use thereof and have read the Registration
Statement and the Prospectus, including particularly the portions of the
Registration Statement and the Prospectus referring to patents, trade secrets,
trademarks, service marks or other proprietary information or materials and:
(a) The Company is listed in the records of the United States Patent and
Trademark Office as the holder of record of the patents listed on a
schedule to such opinion (the "Patents") and each of the applications
listed on a schedule to such opinion (the "Applications").
(b) The Company is listed in the records of the appropriate foreign
offices as the holder of record of the foreign patents listed on a
schedule to such opinion (the "Foreign Patents") and each of the
applications listed on a schedule to such opinion (the "Foreign
Applications").
(c) As to the statements under the captions "Risk Factors -- 'Successful
infringement claims by third parties could result in substantial
damages, lost product sales and the loss of important intellectual
property rights by us' and 'Successful infringement claims by third
parties could result in substantial damages, lost product sales and
the loss of important intellectual property rights by us'" and
"Business -- Intellectual Property" and "Business-Legal Proceedings"
nothing has come to the attention of such counsel which caused them to
believe that the above-mentioned sections of the Registration
Statement and any amendment or supplement thereto made available and
reviewed by such counsel, at the time the Registration Statement
became effective and at all times subsequent thereto up to and on the
Closing Date and on any later date on which Option Securities are to
be purchased, contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
C-1
<PAGE>
ANNEX A
-------
List of Subsidiaries Pursuant to 1(a)(xxix)
<PAGE>
EXHIBIT 5.1
[WILSON SONSINI GOODRICH & ROSATI LETTERHEAD]
March 1, 2000
Nanometrics Incorporated
310 DeGuigne Drive
Sunnyvale, California 94086
RE: Registration Statement on Form S-2
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-2 filed by you with
the Securities and Exchange Commission on January 21, 2000 (the "Registration
Statement") in connection with the registration under the Securities Act of
1933, as amended, of 3,500,000 shares of Common Stock (the "Shares"), 1,750,000
of which are presently issued and outstanding and will be sold by certain
selling shareholders (the "Selling Shareholders").
We assume that the Shares are to be sold as described in the Registration
Statement. As your counsel in connection with this transaction, we have examined
the proceedings taken and proposed to the taken in connection with said sale of
the Shares.
It is our opinion that the 2,275,000 Shares (including 525,000 Shares
subject to the underwriters' over-allotment option) to be sold by the Selling
Shareholders pursuant to the Registration Statement are validly issued, fully
paid and nonassessable and that the 1,750,000 Shares that may be issued and sold
by you, when issued and sold in accordance in the manner referred to in the
Registration Statement, will be validly issued, fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to the use of our name wherever appearing in the
Registration Statement, including the Prospectuses constituting a part thereof,
and any amendment thereto.
Very truly yours,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
/s/ Wilson Sonsini Goodrich & Rosati, P.C.
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Amendment No. 2 to
Registration Statement No. 333-95115 of Nanometrics Incorporated on Form S-2 of
our report dated February 15, 2000, included in the Annual Report on Form 10-K
of Nanometrics Incorporated for the year ended December 31, 1999, and to the
use of our report dated February 15, 2000, appearing in the Prospectus, which
is part of this Registration Statement.
We also consent to the reference to us under the headings "Selected
Consolidated Financial Data" and "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
San Jose, California
March 1, 2000
