UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 ----------- FORM 10-Q ----------- (Mark One) [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2003 OR [_] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to -------------- --------------- Commission file number 0-13470 ------------- NANOMETRICS INCORPORATED ------------------------------------------------------ (Exact name of registrant as specified in its charter) California 94-2276314 - ------------------------------- ------------------ (State or other jurisdiction of (I. R. S. Employer incorporation or organization) Identification No.) 1550 Buckeye Drive, Milpitas, CA 95035 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (408) 435-9600 --------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES NO X --- --- At November 4, 2003 there were 12,103,415 shares of common stock, no par value, issued and outstanding. 1
NANOMETRICS INCORPORATED INDEX Part I. Financial Information Page Item 1. Financial Statements Condensed Consolidated Balance Sheets - September 30, 2003 and December 31, 2002 ................ 3 Condensed Consolidated Statements of Operations - Three months and nine months ended September 30, 2003 and 2002 ............................. 4 Condensed Consolidated Statements of Cash Flows - Nine months ended September 30, 2003 and 2002 ........... 5 Notes to Condensed Consolidated Financial Statements .... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ........... 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk ....................................... 12 Item 4. Controls and Procedures ................................. 12 Part II. Other Information Item 1. Legal Proceedings ....................................... 14 Item 2. Changes in Securities and Use of Proceeds ............... 14 Item 3. Defaults Upon Senior Securities ......................... 14 Item 4. Submission of Matters to a Vote of Security Holders ..... 14 Item 5. Other Information ....................................... 14 Item 6. Exhibits and Reports on Form 8-K ........................ 14 Signatures ................................................................ 15 Certifications ............................................................ 16 Exhibit Index ............................................................. 18 2
PART I: FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS NANOMETRICS INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except share amounts) (Unaudited) <TABLE> <CAPTION> September 30, December 31, 2003 2002 --------- --------- <S> <C> <C> ASSETS CURRENT ASSETS: Cash and cash equivalents $ 7,062 $ 7,967 Short-term investments 22,938 28,899 Accounts receivable, net of allowances of $569 and $566 10,797 9,021 Inventories 23,113 25,847 Deferred income taxes 862 6,840 Prepaid expenses and other 3,100 2,803 --------- --------- Total current assets 67,872 81,377 PROPERTY, PLANT AND EQUIPMENT, Net 49,830 50,050 INTANGIBLE ASSETS 1,423 1,748 OTHER ASSETS 1,378 1,513 --------- --------- TOTAL ASSETS $ 120,503 $ 134,688 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 2,276 $ 1,708 Accrued payroll and related expenses 1,624 1,004 Deferred revenue 1,509 1,396 Other current liabilities 1,077 1,574 Income taxes payable 14 139 Current portion of debt obligations 1,487 780 --------- --------- Total current liabilities 7,987 6,601 DEFERRED INCOME TAXES 1,081 858 DEBT OBLIGATIONS 2,737 3,123 --------- --------- Total liabilities 11,805 10,582 --------- --------- SHAREHOLDERS' EQUITY: Common stock, no par value; 50,000,000 shares authorized; 12,092,415 and 12,006,641 outstanding 100,516 99,911 Retained earnings 7,813 24,475 Accumulated other comprehensive loss 369 (280) --------- --------- Total shareholders' equity 108,698 124,106 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 120,503 $ 134,688 ========= ========= </TABLE> See Notes to Condensed Consolidated Financial Statements 3
NANOMETRICS INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands, except per share amounts) (Unaudited) <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, 2003 2002 2003 2002 -------- -------- -------- -------- <S> <C> <C> <C> <C> NET REVENUES: Product sales $ 8,514 $ 6,637 $ 23,814 $ 20,634 Service 1,617 1,932 5,401 4,352 -------- -------- -------- -------- Total net revenues 10,131 8,569 29,215 24,986 -------- -------- -------- -------- COSTS AND EXPENSES: Cost of product sales 4,539 3,063 13,026 8,884 Cost of service 1,425 1,666 4,918 4,377 Research and development 3,357 3,688 10,199 10,127 Selling 2,867 2,718 8,465 7,636 General and administrative 1,130 1,349 3,464 3,512 -------- -------- -------- -------- Total costs and expenses 13,318 12,484 40,072 34,536 -------- -------- -------- -------- LOSS FROM OPERATIONS (3,187) (3,915) (10,857) (9,550) -------- -------- -------- -------- OTHER INCOME (EXPENSE): Interest income 60 125 230 433 Interest expense (24) (25) (71) (72) Other, net 208 (61) 176 57 -------- -------- -------- -------- Total other income, net 244 39 335 418 -------- -------- -------- -------- LOSS BEFORE INCOME TAXES (2,943) (3,876) (10,522) (9,132) PROVISION (BENEFIT) FOR INCOME TAXES 53 (2,060) 6,141 (4,067) -------- -------- -------- -------- NET LOSS $ (2,996) $ (1,816) $(16,663) $ (5,065) ======== ======== ======== ======== NET LOSS PER SHARE: Basic and diluted $ (0.25) $ (0.15) $ (1.39) $ (0.43) ======== ======== ======== ======== SHARES USED IN PER SHARE COMPUTATION: Basic and diluted 12,033 11,886 12,016 11,838 ======== ======== ======== ======== </TABLE> See Notes to Condensed Consolidated Financial Statements 4
NANOMETRICS INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) (Unaudited) <TABLE> <CAPTION> Nine Months Ended September 30, 2003 2002 -------- -------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(16,663) $ (5,065) Reconciliation of net loss to net cash used in operating activities: Depreciation and amortization 1,859 1,725 Deferred income taxes 5,982 (2,841) Changes in assets and liabilities Accounts receivable (1,355) 504 Inventories 3,118 (487) Prepaid expenses and other current assets (86) (6) Accounts payable accrued and other current liabilities 655 (1,175) Income taxes payable (126) 126 -------- -------- Net cash used in operating activities (6,616) (7,219) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of short-term investments (49,039) (36,989) Sales/maturities of short-term investments 55,000 35,000 Purchases of property, plant and equipment (748) (2,710) -------- -------- Net cash provided by (used in) investing activities 5,213 (4,699) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayments of long-term debt (361) (611) Issuance of common stock 605 894 -------- -------- Net cash provided by financing activities 244 283 -------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH 254 (164) -------- -------- NET CHANGE IN CASH AND CASH EQUIVALENTS (905) (11,799) CASH AND CASH EQUIVALENTS, beginning of period 7,967 47,227 -------- -------- CASH AND CASH EQUIVALENTS, end of period $ 7,062 $ 35,428 ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest $ 72 $ 76 ======== ======== Cash paid for income taxes $ 146 $ 6 ======== ======== </TABLE> See Notes to Condensed Consolidated Financial Statements 5
NANOMETRICS INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1. Condensed Consolidated Financial Statements The condensed consolidated financial statements include the accounts of Nanometrics Incorporated and its wholly owned subsidiaries. All significant inter-company accounts and transactions have been eliminated. While the quarterly condensed financial statements are unaudited, the financial statements included in this report reflect all adjustments (consisting only of normal recurring adjustments), which Nanometrics considers necessary for a fair presentation of the results of operations for the interim periods covered and of our financial condition at the date of the interim balance sheet. The operating results for interim periods are not necessarily indicative of the operating results that may be expected for the entire year. The information included in this report should be read in conjunction with the information included in Nanometrics' 2002 Annual Report on Form 10-K filed with the Securities and Exchange Commission. Note 2. Significant Accounting Policies 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. During the quarter ended March 31, 2003, Nanometrics recorded a valuation allowance of $6,020,000 and will continue to provide a full valuation allowance against deferred tax assets for the foreseeable future. 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 Nanometrics' 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 loss and was not significant as of September 30, 2003. Gains and losses on sales of short-term investments are determined on a specific identification basis. Note 3. Inventories Inventories are stated at the lower of cost (first-in, first-out) or market and consist of the following (in thousands): September 30, December 31, 2003 2002 ------- ------- Raw materials and subassemblies $12,989 $18,353 Work in process 4,702 4,733 Finished goods 5,422 2,761 ------- ------- Total inventories $23,113 $25,847 ======= ======= 6
Note 4. Other Current Liabilities Other current liabilities consist of the following (in thousands): September 30, December 31, 2003 2002 ------ ------ Commissions payable $ 129 $ 291 Accrued warranty 332 261 Accrued professional services 111 169 Other 505 853 ------ ------ Total other current liabilities $1,077 $1,574 ====== ====== Note 5. Shareholders' Equity Net Loss Per Share - The reconciliation of the share denominator used in the basic and diluted net loss per share computations are as follows (in thousands): <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, 2003 2002 2003 2002 ------ ------ ------ ------ <S> <C> <C> <C> <C> Weighted average common shares outstanding-shares used in basic net loss per share computation 12,033 11,886 12,016 11,838 Dilutive effect of common stock equivalents, using the treasury stock method -- -- -- -- ------ ------ ------ ------ Shares used in dilutive net loss per share computation 12,033 11,886 12,016 11,838 ====== ====== ====== ====== </TABLE> During the three- and nine-month periods ended September 30, 2003 and September 30, 2002, respectively, diluted net loss per share excludes common equivalent shares outstanding of 2,851,000 and 2,936,000, as their effect is anti-dilutive. Note 6. Comprehensive Loss Comprehensive loss, which consisted of net loss for the periods and changes in accumulated other comprehensive loss, was a loss of $2,378,000 and $2,182,000 for the three months ended September 30, 2003 and 2002, respectively. For the nine months ended September 30, 2003 and 2002, the comprehensive loss was $16,014,000 and $4,215,000, respectively. Substantially all of the accumulated other comprehensive loss consists of accumulated translation adjustments for all periods presented. 7
Note 7. Warranties Nanometrics sells the majority of its products with a one-year repair or replacement warranty and records a provision for estimated claims at the time of sale. Components of the warranty accrual, which was included in the accompanying consolidated balance sheets as other current liabilities, was as follows (in thousands): Balance as of December 31, 2002 $ 261 Actual warranty costs (132) Revision to existing warranty (195) Provision for warranty (nine months ended September 30, 2003) 398 ----- Balance as of September 30, 2003 $ 332 ===== Note 8. Stock-Based Compensation Nanometrics accounts for stock-based compensation using the intrinsic value method in accordance with the provision of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, as allowed by Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock Based Compensation as amended by SFAS No. 148, Accounting for Stock Based Compensation-Transition and Disclosures, an Amendment of SFAS No. 123. Under the intrinsic value method, Nanometrics does not recognize any compensation expense, as the exercise price of all stock options is equal to the fair market value at the time the options are granted. Had compensation expense been recognized using the fair value-based methods under SFAS No. 123, Nanometrics' pro forma consolidated loss and loss per share would have been as follows (in thousands, except per share amounts): <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, 2003 2002 2003 2002 -------- -------- -------- -------- <S> <C> <C> <C> <C> Net Loss As reported $ (2,996) $ (1,816) $(16,663) $ (5,065) Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related income tax effects (1,362) (1,171) (7,086) (3,375) -------- -------- -------- -------- Pro forma $ (4,358) $ (2,987) $(23,749) $ (8,440) ======== ======== ======== ======== Basic and diluted net loss per share: As reported $ (0.25) $ (0.15) $ (1.39) $ (0.43) Pro forma $ (0.36) $ (0.25) $ (1.98) $ (0.71) </TABLE> During June 2003, Nanometrics issued 1,399,000 options to purchase shares of common stock at a weighted average exercise price of $5.70. The options were issued more than six months and one day after the cancellation of options in connection with an offer to exchange in December 2002. In May 2003, Nanometrics' shareholders approved the adoption of the Company's 2003 Employee Stock Purchase Plan and the reservation of 750,000 shares of common stock for issuance under this plan. Under the 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. The first offering period began October 2003. 8
Note 9. Intangible Assets Intangible assets are recorded at cost, less accumulated amortization. Intangible assets as of September 30, 2003 consist of (in thousands): Gross Net Carrying Accumulated Intangible Amount Amortization Assets ------ ------------ ------ Technology $2,709 $1,378 $1,331 Other 250 158 92 ------ ------ ------ Total $2,959 $1,536 $1,423 ====== ====== ====== Amortization expense for the three-month and nine-month periods ended September 30, 2003 was $101,000 and $325,000, respectively. The estimated future amortization expense as of September 30, 2003 is as follows (in thousands): Fiscal Years 2003 (remaining three months) $ 101 2004 397 2005 285 2006 256 2007 256 Thereafter 128 ------- Total amortization $ 1,423 ======= Note 10. New Accounting Pronouncements In January 2003, the Emerging Issues Task Force ("EITF"), published EITF Issue 00-21 ("EITF 00-21"), "Revenue Arrangements with Multiple Deliverables", which requires companies to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting. In applying EITF 00-21, revenue arrangements with multiple deliverables should be divided into separate units of accounting if the deliverables in the arrangement meet certain criteria. Arrangement consideration should be allocated among the separate units of accounting based on their relative fair values. This issue is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. There was no impact on our results of operations or financial position as a result of adopting EITF 00-21. 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This report including the following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements are based upon current expectations and beliefs that involve risks and uncertainties, such as our plans, objectives and intentions, regarding, among other things: (i) customer demand for Nanometrics' products, which may be affected by several factors including the cyclicality of the semiconductor, magnetic recording head and flat panel display industries served by Nanometrics, patterns of capital spending by its customers, technological changes in the markets served by Nanometrics and its customers, and market acceptance of products of both Nanometrics and its customers; (ii) the timing, cancellation or delay of Nanometrics' customer orders and shipments; (iii) competition, including competitive pressures on product prices and changes in pricing by Nanometrics' customers or suppliers; (iv) fluctuations in foreign currency exchange rates, particularly the Japanese yen; (v) the proportion of sales Nanometrics makes directly to its customers versus sales through distributors and representatives; (vi) market acceptance of new and enhanced versions of Nanometrics' products; (vii) the timing of new product announcements and releases of products by Nanometrics or its competitors, including our ability to design, introduce and manufacture new products on a timely and cost effective basis; (viii) the size and timing of acquisitions of businesses, products or technologies and fluctuations in the availability and cost of components and subassemblies of Nanometrics' products. In some cases, forward-looking statements can be identified by words such as "believe," "expect," "anticipate," "plan," "potential," "continue" or similar expressions. Forward-looking statements also include the assumptions underlying or relating to any of the foregoing statements. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain risk factors, including those set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Factors That May Affect Future Operating Results" in Nanometrics' 2002 Annual Report on Form 10-K. We believe that it is important to communicate our expectations to our investors. However, there may be events in the future that we are not able to predict accurately or over which we have no control. You should be aware that the occurrence of the events described in such risk factors and elsewhere in this report could materially and adversely affect our business, operating results and financial condition. All forward-looking statements included in this report are based on information available to us on the date hereof. We undertake no obligation to update forward-looking statements made in this report to reflect events or circumstances after the date of this report or to update reasons why actual results could differ from those anticipated in such forward-looking statements. Overview We are a leader in the design, manufacture, marketing and support of thin film metrology systems for the semiconductor, flat panel display and magnetic recording head industries. Our systems precisely measure a wide range of film types deposited on substrates during manufacturing in order to control manufacturing processes and increase production yields. Critical Accounting Policies Our critical accounting policies include those set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies" in Nanometrics' 2002 Annual Report on Form 10-K. 10
New Accounting Pronouncements In January 2003, the Emerging Issues Task Force ("EITF"), published EITF Issue 00-21 ("EITF 00-21"), "Revenue Arrangements with Multiple Deliverables", which requires companies to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting. In applying EITF 00-21, revenue arrangements with multiple deliverables should be divided into separate units of accounting, if the deliverables in the arrangement meet criteria. Arrangement consideration should be allocated among the separate units of accounting based on their relative fair values. This issue is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. There was no impact on our results of operations or financial position as a result of adopting EITF 00-21. Results of Operations Total net revenues for the three months ended September 30, 2003 were $10,131,000, an increase of $1,562,000 or 18% from the comparable period in 2002. For the nine months ended September 30, 2003, total net revenues of $29,215,000 increased by $4,229,000 or 17% from the comparable period in 2002. Product sales of $8,514,000 for the three months ended September 30, 2003, increased $1,877,000 or 28% as compared with the same period in 2002. Product sales of $23,814,000 for the nine months ended September 30, 2003, increased $3,180,000 or 15% as compared with the same period in 2002. Unit sales of automated and integrated systems increased in the third quarter of 2003 from their third quarter 2002 levels. The increase in product sales resulted from demand for semiconductor process control equipment and flat panel display equipment, primarily in the U.S. and Far East. Service revenue of $1,617,000 for the three months ended September 30, 2003 decreased $315,000 or 16% from the same period in 2002 as customers began to spend more of their budgets on the purchase of new systems and less on the maintenance of older systems. Service revenue of $5,401,000 for the nine months ended September 30, 2003 increased $1,049,000 or 24% compared to the same period in 2002 primarily due to higher sales of parts and services, particularly in the U.S. and the Far East during the first half of 2003. Cost of product sales as a percentage of product sales increased to 53% in the third quarter of 2003 from 46% in the third quarter of 2002 and increased to 55% in the nine months ended September 30, 2003 from 43% for the same period in 2002 due in part to lower sales prices on older products and costs associated with an increase in manufacturing capacity added to our U.S. facility. The increased manufacturing capacity is part of a strategic plan to internalize the production of key parts and components, allowing us to have greater control over their development, delivery, quality and cost. Cost of service as a percentage of service revenue increased slightly to 88% in the third quarter of 2003 from 86% in the third quarter of 2002. Cost of service as a percentage of service revenue decreased to 91% in the nine months ended September 30, 2003 from 101% for the same period in 2002 due primarily to higher service revenues, which exceeded our cost of service. Research and development expenses for the three months ended September 30, 2003 decreased $331,000 or 9% primarily as a result of lower materials expenses incurred during the current phase in the development of new and enhanced products. Research and development expenses for the nine months ended September 30, 2003 increased $72,000 or 1% compared to the same period in 2002. Selling expenses for the three-month and nine-month periods ended September 30, 2003 increased by $149,000 or 5% and $829,000 or 11%, respectively, compared to the same periods in 2002 primarily because of higher headcount levels and other expenses incurred promoting our products. General and administrative expenses for the three-month and nine-month periods ended September 30, 2003 decreased $219,000 or 16% and $48,000 or 1%, respectively, compared to the same periods in 2002. The higher expenses in 2002 were due in part to information technology implementation expenses. Total other income, net for the three months ended September 30, 2003 increased $205,000 or 526% due primarily to foreign currency transaction gain. Total other income, net for the nine months ended September 30, 2003 decreased $83,000 or 20%, from the comparable period in 2002 due primarily to lower interest income, resulting from lower investment balances and lower interest rates. A provision for income taxes of $6,020,000 was recorded in the first quarter of 2003, which primarily represents a charge to record a valuation allowance against deferred income tax assets. This charge was taken primarily as a result of pretax losses incurred over the past several quarters coupled with uncertainty about future 11
expected income in the current market environment, making it more likely than not that the deferred tax asset will not be realized. As a result of the factors discussed above, Nanometrics' loss from operations was $3,187,000 and net loss was $2,996,000 for the third quarter of 2003 compared to a loss from operations of $3,915,000 and a net loss of $1,816,000 for the same period in 2002. For the first nine months of 2003, Nanometrics' loss from operations was $10,857,000 and the net loss was $16,663,000 which compared to a loss from operations of $9,550,000 and a net loss of $5,065,000 for the same period in 2002. Liquidity and Capital Resources At September 30, 2003, our cash, cash equivalents and short-term investments totaled $30,000,000. These funds are invested primarily in U.S. Treasury Bills. At September 30, 2003, Nanometrics had working capital of $59,885,000 compared to $74,776,000 at December 31, 2002. The current ratio at September 30, 2003 was 8.5 to 1. We believe working capital including cash and short-term investments will be sufficient to meet our needs through at least the next twelve months. Operating activities for the first nine months of 2003 used cash of $6,616,000 primarily from the net loss and higher accounts receivable resulting from increased sales and the timing of shipments and receipts. These uses of cash were offset to some extent by lower inventory levels as we continued to limit our purchases of inventory in an effort to reduce our use of cash. Investing activities provided $5,213,000 primarily due to sales of short-term investments of $55,000,000 offset to some extent by purchases of short-term investments in the amount of $49,039,000 and capital expenditures of $748,000 used to continue the process of internalizing our manufacturing capacity in the United States. Financing activities provided $244,000 generated primarily by stock issuances from the exercise of stock options by employees. We have evaluated and will continue to evaluate the acquisition of products, technologies or businesses that are complementary to our business. These activities may result in product and business investments, which may affect our cash position and working capital balances. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 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 September 30, 2003 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 September 30, 2003. We also have fixed rate yen denominated debt obligations in Japan that have no interest rate risk. At September 30, 2003, our total debt obligation was $4,224,000 with a long-term portion of $2,737,000. A hypothetical 10% change in interest rates at September 30, 2003 would not have a material impact on our results of operations. ITEM 4. CONTROLS AND PROCEDURES We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the periodic reports filed by us with the Securities and Exchange Commission (the "Commission") is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Commission and that such information is accumulated and communicated to our management. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. 12
Based on their most recent evaluation, which was completed within 90 days of the filing of this Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934, as amended) are effective. There were not any significant changes in internal controls or in other factors that could significantly affect these internal controls subsequent to the date of their most recent evaluation. 13
NANOMETRICS INCORPORATED PART II: OTHER INFORMATION ITEM 1. Legal Proceedings Not applicable. ITEM 2. Changes in Securities and Use of Proceeds Not applicable. ITEM 3. Defaults Upon Senior Securities Not applicable. ITEM 4. Submission of Matters to a Vote of Security Holders Not applicable. ITEM 5. Other Information In compliance with Section 202 of the Sarbanes-Oxley Act of 2002, the Audit Committee of the Board of Directors of Nanometrics, has preapproved the continuing provision of certain non-audit services to Nanometrics by Deloitte & Touche LLP, Nanometrics' independent auditor. Such services include tax and tax-related services. ITEM 6. Exhibits and Reports on Form 8-K A. Exhibits. See Exhibit Index attached hereto. B. Reports on Form 8-K. A current report on Form 8-K was furnished on October 23, 2003 with an attached press release. 14
NANOMETRICS INCORPORATED SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NANOMETRICS INCORPORATED (Registrant) /s/ Vincent J. Coates - ------------------------------ Vincent J. Coates Chairman of the Board /s/ John Heaton - ------------------------------ John Heaton Chief Executive Officer /s/ Paul B. Nolan - ------------------------------ Paul B. Nolan Chief Financial Officer Dated: November 11, 2003 15
I, John D. Heaton, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Nanometrics Incorporated; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within these entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 11, 2003 By: /s/ John D. Heaton ------------------------------ Name: John D. Heaton Title: Chief Executive Officer 16
I, Paul B. Nolan, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Nanometrics Incorporated; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within these entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 11, 2003 By: /s/ Paul B. Nolan ------------------------------ Name: Paul B. Nolan Title: Chief Financial Officer 17
Exhibit Index Exhibit No. Exhibit Title - ----------- ------------- 3.1* Amended and restated Articles of Incorporation of the Registrant 3.2** Bylaws 99.1 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 * Incorporated by reference to Registrant's Annual Report on Form 10-K for the year ended December 31, 2002 (File No. 000-13470) filed with the Securities and Exchange Commission on March 28, 2003. ** Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997 (File No. 000-13470) filed with the Securities and Exchange Commission on April 1, 1998. 18