| NANOMETRICS INC ITEM 1A RISK FACTORS Cyclicality in the semiconductor industry has led to substantial fluctuations in demand for our systems and may, from time to time, continue to do so |
| Our operating results have varied significantly from period to period due to the cyclical nature of the semiconductor industry |
| The majority of our business depends upon the capital expenditures of semiconductor device and 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 semiconductor manufacturing equipment, including metrology systems |
| We have found that the resulting decrease in capital expenditures has typically been more pronounced than the downturn in semiconductor device industry revenues |
| We expect the cyclical nature of the semiconductor industry, and therefore, our business, to continue in the foreseeable future |
| Recently, the semiconductor industry emerged from a sustained downturn |
| Should this trend reverse and the downturn resume, our business and results of operations would suffer |
| Because we derive a significant portion of our revenues from sales in Asia, our revenues and results of operations could be adversely affected by the instability of Asian economies |
| Revenues from customers in Asian markets represented approximately 65dtta5prca, 68dtta8prca and 72dtta7prca of our total net revenues in 2005, 2004 and 2003, respectively |
| Countries in the Asia Pacific region, including Japan, South Korea and Taiwan, each of which accounted for a significant portion of our business in that region, experienced general economic weaknesses in 2002 and 2003, which adversely affected our revenues at that time |
| We anticipate that we will continue to rely upon customers in Asia for a majority of our revenues and any future 19 ______________________________________________________________________ [45]Table of Contents weaknesses or instabilities in the economies of countries in Asia may continue to have a material adverse effect on our results of operations and financial condition |
| We depend on Applied Materials and other OEM suppliers for sales of our integrated metrology systems, and the loss of Applied Materials or any of our other OEM suppliers as a customer could harm our business |
| We believe that sales of integrated metrology systems will continue to be an important source of our revenues |
| Sales of our integrated metrology systems depend upon the ability of Applied Materials to sell 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 |
| If we were to 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 largest customers account for a substantial portion of our revenue, and our revenue would materially 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 each year has been derived from sales to a relatively few number of customers, and we expect this trend to continue |
| There are only a limited number of large companies operating in the semiconductor industry |
| Accordingly, we expect that we will continue to depend on a small number of large customers for a significant portion of our revenues for the foreseeable future |
| If any of our key customers were to purchase significantly fewer systems, or if a large order were delayed or cancelled, our revenues could significantly decline |
| In 2005, sales to Applied Materials accounted for 20dtta6prca and sales to Samsung accounted for 15dtta9prca of our total net revenues, respectively |
| In 2004, sales to Applied Materials accounted for 21dtta4prca and sales to Samsung accounted for 14dtta7prca of our total net revenues, respectively |
| In 2003, sales to Applied Materials accounted for 15dtta4prca and sales to Hynix accounted for 12dtta0prca of our total net revenues, respectively |
| 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 could be adversely affected |
| If we are unable to successfully address the material weakness in our internal controls, our ability to report our financial results on a timely and accurate basis may be adversely affected |
| Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of our internal controls over financial reporting as of the end of each year, and to include a management report assessing the effectiveness of our internal controls over financial reporting in all annual reports |
| Section 404 also requires our independent registered public accounting firm to attest to, and report on, management’s assessment of our internal controls over financial reporting |
| Management’s report and our auditors’ attestation report are included in this report on Form 10-K under Item 9A A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met |
| Further, the design of a control system must reflect the 20 ______________________________________________________________________ [46]Table of Contents fact that there are resource constraints, and the benefits of controls must be considered relative to their costs |
| Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, involving Nanometrics have been, or will be, detected |
| These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple error or mistake |
| Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls |
| The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and we cannot assure you that any design will succeed in achieving its stated goals under all potential future conditions |
| Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures |
| Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected |
| For the year ended December 31, 2005, our management concluded that there was a material weakness regarding the internal controls of our Japanese operations |
| A material weakness means that there is more than a remote likelihood that a material misstatement to our annual or interim financial statements would not be detected or prevented |
| For example, on October 26, 2005, our Audit Committee, acting on a recommendation from management, determined that our audited financial statements for the fiscal year ended January 1, 2005, and our unaudited quarterly financial statements for the periods ended April 2, 2005 and July 2, 2005, should no longer be relied upon and should be restated to revise the accounting for certain post-sale warranty services and other issues |
| Our management has identified certain steps designed to address our material weakness, and has begun to execute remediation plans, as described in Item 9A of this report on Form 10-K, “Report of Management on Internal Control Over Financial Reporting |
| ” Any failure to implement in a timely manner and maintain the improvements in the controls over our financial reporting that we are currently putting in place, or difficulties encountered in the implementation of these improvements in our controls, could cause us to fail to meet our reporting obligations, to fail to produce reliable financial reports or to prevent fraud |
| Any failure to improve our internal controls to address this identified weakness could also cause investors to lose confidence in our reported financial information, which could have a negative impact on our business, operating results and stock price |
| 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 industry 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 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 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 industry are large companies that require global support and service for their metrology systems |
| Some of our larger or more geographically diverse competitors might be better equipped to provide this global support |
| If any of our systems fail to meet or exceed our internal quality specifications, we cannot ship them until such time as they have met such specifications |
| If we experience significant delays or are unable to ship our products to our customers as a result of our internal processes, or for any other reason, our business and reputation may suffer |
| Our products are complex and require technical expertise to design and manufacture properly |
| Various problems occasionally arise during the manufacturing process that may cause delays and/or impair product quality |
| We must actively monitor our manufacturing processes to ensure that our products meet our internal 21 ______________________________________________________________________ [47]Table of Contents quality specifications |
| Any significant delays stemming from the failure of our products to meet or exceed our internal quality specifications, or for any other reasons, would delay our shipments |
| Shipment delays could harm our business and reputation in the industry |
| If we deliver systems with defects, our credibility will be harmed, revenue from, and market acceptance of, our systems will decrease and we could expend significant capital and resources as a result of such defects |
| Notwithstanding our internal quality specifications, our systems have sometimes 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 |
| 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 may receive communications from third parties asserting that our metrology systems may contain design features which are claimed to infringe on their proprietary rights |
| For example, we announced on March 14, 2005 that we had received notice of a patent infringement lawsuit brought by Nova Measuring Instruments, Ltd, alleging infringement of United States Patent Nodtta 6cmam752cmam689 |
| In August 2005, we were served with a complaint by KLA-Tencor Corporation alleging that certain of our products infringe two of KLA’s patents, Patent Nodtta 6cmam483cmam580 and Patent Nodtta 6cmam590cmam656 |
| In January 2006, KLA added Patent Nodtta 6cmam611cmam330 to their claim |
| There can be no assurance that Nanometrics’ new or current products do not infringe any valid intellectual property rights |
| Even if our products do not infringe, we may be required to expend significant sums of money to defend against infringement claims, as in the Nova Measuring Instruments, Ltd |
| lawsuit described above, or to actively protect our intellectual property rights through litigation |
| 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 significant 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 JA Woollam Company for the purchase of the spectroscopic ellipsometer component 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 |
| Some of our suppliers have relatively limited financial and other resources |
| 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 our suppliers |
| If we were forced to seek alternative sources of supply or to manufacture such components or subassemblies internally, we could be forced to redesign 22 ______________________________________________________________________ [48]Table of Contents our systems, which could cause production delays and prevent us from shipping our systems to customers on a timely basis |
| Any inability to obtain adequate deliveries from our suppliers, or any other circumstance that would restrict our ability to ship our products, could damage relationships with current and prospective customers, harm our business and result in significant loss of revenue |
| Variations in the amount of time it takes for us to sell our systems may cause fluctuations in our operating results, which could adversely affect our stock price |
| Variations in the length of our sales cycles could cause our revenues to fluctuate widely from period to period |
| Our customers generally take long periods of 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 that it takes for us to complete a sale depends upon many factors, including: • the efforts of our sales force and our independent sales representatives; • 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 at which we recognize revenue from that customer, if at all, 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 |
| Occasionally our sales cycles can be much longer, particularly with customers in Asia who may require longer evaluation periods |
| If we do complete a sale, 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 through purchase orders rather than through long-term contracts |
| The number of additional products that 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 is unpredictable and can vary from three months to a year or longer |
| Variations in the length of this period could cause fluctuations in our operating results, which could adversely affect our stock price |
| Relatively small fluctuations in our system sales volume 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 dlra200cmam000 to over dlra1cmam000cmam000 per system, our integrated metrology systems range in price from approximately dlra80cmam000 to dlra400cmam000 per system and our tabletop metrology systems range in price from approximately dlra50cmam000 to dlra200cmam000 per system |
| Accordingly, a small change in the number or mix of systems that we sell could cause significant changes in our operating results |
| We depend on orders that are received and shipped in the same quarter, and therefore our results of operations may be subject to significant variability from quarter to quarter |
| 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 include all 23 ______________________________________________________________________ [49]Table of Contents 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 into future product shipments, and our results of operations may be 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 attract customers from our competitors even if our metrology systems are superior to theirs |
| We believe that once a semiconductor 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 from that customer once it has selected another vendor’s system for an application |
| 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 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 |
| Lack of market acceptance for our new products may affect our ability to generate revenue and may harm our business |
| We have recently introduced several products to the market including the Atlas-M and Orion |
| We have invested substantial time and resources into the development of these products |
| However, we cannot accurately predict the future level of acceptance of our new products by our customers |
| While we anticipate that our new products will become an increasingly larger component of our business, their failure to gain acceptance with our customers could materially harm our business |
| Additionally, if our new products do gain market acceptance, our ability to sell our existing products may be impeded |
| As a result, there can be no assurance that the introduction of these products will be commercially successful or that these products will result in significant additional revenues or improved operating margins in future periods |
| Our intellectual property may be infringed upon by third parties despite our efforts to protect it, which could threaten our future success and competitive position and adversely affect our operating results |
| 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 may license 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 24 ______________________________________________________________________ [50]Table of Contents addition, the patents we own, have been issued, or may license 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 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, any of which would adversely affect our business and operating results |
| 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 achieve this, 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 |
| For example, we recently announced our intent to merge with Accent, a leading supplier of process control and metrology systems to the global semiconductor manufacturing industry |
| 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 them profitably or retain their key employees |
| Integrating any business, product or technology that 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 may be required 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 an 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 |
| We must attract and retain key personnel with relevant industry knowledge to help support our future growth |
| 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 generally do not enter into employment contracts with any of our key personnel |
| The loss of any of these key personnel, who would be 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 ongoing, 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 Milpitas, California and, to a lesser extent, through our subsidiaries in Japan and South 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, such as those resulting from a severe fire or earthquake, could seriously harm our ability to satisfy our customer order deadlines |
| A significant portion of our operations is located in Japan, Taiwan and South Korea, which may be subject to regional political and economic instability |
| 25 ______________________________________________________________________ [51]Table of Contents 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 2005, 2004 and 2003, 66dtta7prca, 71dtta8prca and 74dtta8prca, respectively, of our total net revenues were derived from sales to customers in foreign countries, including certain countries in Asia, such as Japan, South Korea and Taiwan 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 US companies have encountered substantial problems in protecting their proprietary rights against infringement in such countries |
| If we fail to adequately protect our intellectual property in these countries, it would be easier for our competitors to sell competing products |
| Continuing economic and political instability could affect our business and results of operations |
| The ongoing threat of terrorism targeted at the United States or other regions where we conduct business increases the uncertainty in our markets and the economy in general |
| This uncertainty is likely to result in economic stagnation, which would harm our business |
| In addition, increased international political instability may hinder our ability to do business by increasing our costs of operations |
| For example, our transportation costs, insurance costs and sales efforts may become more expensive as a result of geopolitical tension |
| These tensions may also negatively affect our suppliers and customers |
| If this international economic and political instability continues or increases, our business and results of operations could be harmed |
| We will incur increased costs as a result of recent changes in laws and regulations affecting public companies |
| Compliance with recent changes in laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act, has resulted in and, we expect, will continue to result in increased accounting, legal and administrative costs |
| In particular, Section 404 of the Sarbanes-Oxley Act of 2002 and the rules of the Securities and Exchange Commission and the Public Company Accounting Oversight Board impose new requirements with respect to the evaluation of the effectiveness of our internal controls |
| The cost of complying with these new requirements is substantial |
| Changes in financial accounting standards or practices may cause adverse unexpected fluctuations and affect our reported business and financial results |
| The Financial Accounting Standards Board, or FASB, recent change to mandate the expensing of stock options will require us to record charges to earnings for employee stock option grants and will adversely affect our financial results |
| In addition, the FASB requires certain valuation models to estimate the fair value of employee stock options |
| These models, including the Black-Scholes option-pricing model, use varying methods, inputs and assumptions selected across companies |
| If another party asserts that the fair value of our employee stock options are misstated, securities class action litigation could be brought against us or the market price of our common stock could decline or both could occur |
| As a result of these changes, we could incur losses and our operating results and gross margins may be below our expectations and those of investors and stock market analysts |
| 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 volatility 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 industries; 26 ______________________________________________________________________ [52]Table of Contents • 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 |
| 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 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 66dtta7prca, 71dtta8prca and 74dtta8prca of our total net revenues in 2005, 2004 and 2003, respectively |
| We maintain facilities in Japan, Taiwan and South Korea |
| We anticipate that international sales will continue to account for a significant portion of our revenues |
| International sales and operations carry inherent risks such as: regulatory limitations imposed by foreign governments, obstacles to the protection of our intellectual property, political, military and terrorism risks, disruptions or delays in shipments caused by customs brokers or other government agencies, unexpected changes in regulatory requirements, tariffs, customs, duties and other trade barriers, difficulties in staffing and managing foreign operations, and potentially adverse tax consequences resulting from changes in tax laws |
| If any of these risks materialize and we are unable to manage them, our international sales and operations would suffer |
| We are exposed to fluctuations in the exchange rates of foreign currency |
| With our ownership of subsidiaries in Japan and South Korea and a branch office in Taiwan, a significant percentage of our net sales are exposed to foreign currency risk |
| These exposures may change over time as business practices evolve and could have a material adverse impact on our financial results and cash flow |
| We are subject to various environmental laws and regulations that could impose substantial costs upon us and may adversely affect our business, operating results and financial condition |
| Some of our operations use substances regulated under various federal, state, local, and international laws governing the environment, including those relating to the storage, use, discharge, disposal, labeling, and human exposure to hazardous and toxic materials |
| We could incur costs, fines and civil or criminal sanctions, third-party property damage or personal injury claims, or could be required to incur substantial investigation or remediation costs, if we were to violate or become liable under environmental laws |
| Liability under environmental laws can be joint and several and without regard to comparative fault |
| Compliance with current or future environmental laws and regulations could restrict our ability to expand our facilities or require us to acquire additional expensive equipment, modify our manufacturing processes, or incur other significant expenses |
| There can be no assurance that violations of environmental laws or regulations will not occur in the future as a result of the inability to obtain permits, human error, equipment failure or other causes |
| 27 ______________________________________________________________________ [53]Table of Contents Risks Relating to the Merger with Accent Optical Technologies, Inc |
| Nanometrics and Accent Optical expect to incur significant costs in connection with the merger |
| Nanometrics estimates that it will incur direct transaction costs of dlra1dtta5 million in connection with the merger of which approximately dlra0dtta6 million had been paid as of March 21, 2006 |
| Certain of Nanometrics costs will be capitalized |
| Nanometrics and Accent Optical believe that the combined company will also incur charges to operations, but cannot reasonably estimate those costs at this time, in the quarter in which the merger is completed to reflect the costs of integrating the two companies |
| There can be no assurance that the combined company will not incur additional material charges in subsequent quarters to reflect additional costs associated with the merger |
| The stock price and business of Nanometrics may be adversely affected if the merger is not completed, and, under certain circumstances, Nanometrics may be required to pay a termination fee |
| If the merger is not completed, the trading price of Nanometrics common stock may decline to the extent that the current market prices reflect an assumption that the merger will be completed |
| In addition, Nanometrics business and operations may be harmed to the extent that customers, suppliers and others believe that the companies cannot effectively compete in the marketplace alone, or that uncertainty exists surrounding the future direction of the product and service offerings and strategy of the companies on a stand alone basis |
| Nanometrics and Accent Optical will be required to pay significant costs incurred in connection with the merger, including legal, accounting and a portion of the financial advisory fees, regardless of whether the merger is completed |
| In that regard, we have agreed to make a working capital loan to Accent Optical in two disbursements of dlra1dtta25 million each, the first on or after April 30, 2006 and the second on or after June 30, 2006 |
| However, we and Accent Optical agreed to accelerate the date of the first disbursement and on March 13, 2006, we advanced dlra750cmam000 to Accent Optical |
| In the event the merger is not completed, the working capital loans may continue as a debt obligation of Accent Optical or may be converted to Accent Optical common stock if certain events occur |
| In the event that the merger does not occur, Nanometrics may not receive repayment of the monies in a timely manner, if at all |
| If either Nanometrics or Accent Optical fails to obtain shareholder approval, it may be required to pay the other party a termination fee equal to dlra5 million, plus any applicable costs, expenses and interest pursuant to the merger agreement |
| Nanometrics and Accent Optical must continue to retain and motivate executives and key employees and recruit new employees, and failure to do so could seriously harm the combined company |
| In order to be successful, each of Nanometrics and Accent Optical must continue to retain and motivate executives and other key employees and recruit new employees before the merger is completed |
| Employees of Nanometrics or Accent Optical may experience uncertainty about their future roles until or after strategies with regard to Nanometrics after the merger are announced or executed |
| These potential distractions related to the merger may adversely affect each company’s ability to attract, motivate and retain executives and key employees and keep such executives and key employees focused on strategic corporate goals |
| Any failure by Nanometrics or Accent Optical to retain and motivate executives and key employees during the period prior to the completion of the merger could seriously harm their respective businesses or the business of the combined company after the closing of the merger |
| The combined company will need to retain and motivate key executives and employees after the merger in order to be successful |
| Uncertainty during the integration period after closing will pose retention challenges for the combined company after the closing |
| Failure to address these challenges could result in undesirable attrition, which would likely harm the combined company’s business |
| 28 ______________________________________________________________________ [54]Table of Contents The announcement of the merger may cause customers, distributors, resellers and others to delay or defer decisions concerning purchases from Nanometrics and Accent Optical, which may harm their or the combined company’s results of operations |
| Because the merger is subject to several closing conditions, uncertainty exists regarding whether and when the merger will be completed |
| In addition, customers, distributors, resellers and others may be uncertain about the combined company’s plans for each of Nanometrics’ and Accent Optical’s products |
| This uncertainty may cause customers, distributors, resellers and others to delay or defer purchasing decisions, or elect to switch to other suppliers, which could negatively affect the businesses and results of operations of Nanometrics, Accent Optical or the combined company |
| Prospective customers might also be reluctant to purchase the combined company’s products after the merger due to uncertainty about the direction of its products and its willingness to support and service existing products |
| Customers, distributors, resellers and others may also seek to change existing agreements with Nanometrics or Accent Optical as a result of the merger |
| These and other actions by customers, distributors, resellers and others could negatively affect the businesses and results of operations of Nanometrics and/or Accent Optical |
| The merger may be completed even though Nanometrics or Accent Optical suffers a material adverse change |
| In general, either party can refuse to complete the merger if the other party suffers from a material adverse change between January 25, 2006, the date of the signing of the merger agreement, and the closing of the merger |
| However, certain types of changes would not prevent the merger from going forward, even if the change would have a material adverse effect on Nanometrics or Accent Optical including: • changes in the market price or trading volume of Nanometrics common stock; • changes, circumstances or conditions affecting the economy as a whole or the industries in which Nanometrics and Accent Optical operate if those changes, circumstances or conditions do not disproportionately affect either or both parties; • changes in laws or GAAP; • any effects resulting primarily from the pendency of the merger; • any litigation by Accent Optical stockholders or Nanometrics shareholders relating to the merger; and • the impact of Nanometrics’ restatements of past financial statements as described in its Current Repot on Form 8-K dated October 25, 2005, as amended |
| Governmental authorities could seek to block or challenge the merger |
| The merger is exempt from the pre-merger notification filing requirements of the Hart-Scott-Rodino Act |
| However, even after completion of the merger, government authorities could seek to block or challenge the merger, impose conditions or require asset divestitures as they deem necessary or desirable in the public interest |
| In addition, in some jurisdictions, a competitor, customer or other third party could initiate a private action under the antitrust laws challenging or seeking to enjoin the merger, before or after it is completed |
| Nanometrics and Accent Optical may not prevail in such action, and significant legal fees and costs may be incurred even if they are ultimately successful |
| Challenges involved in integrating Accent Optical’s finance organization may negatively impact Nanometrics efforts to evolve its financial and managerial control and reporting systems and processes, including with respect to its internal control over financial reporting |
| The combined company’s ability to successfully offer its products and implement its business plan in a rapidly evolving market will require an effective planning and management process |
| The combined company will 29 ______________________________________________________________________ [55]Table of Contents need to continue to improve its financial and managerial control and its reporting systems and procedures in order to manage its business effectively in the future |
| Accent Optical has not been required to prepare a report on the effectiveness of its internal controls over financial reporting because it is not subject to the registration requirements of the Securities Exchange Act of 1934, as amended |
| The merger will require significant integration efforts by management |
| Additionally, unanticipated factors may hinder the effectiveness or delay the integration of Nanometrics’ and Accent Optical’s control systems and as such, there can be no assurances regarding the combined company’s ability to remediate deficiencies in its internal controls over financial reporting |
| Unless the combined company is able to evolve its current capabilities with respect to control systems and procedures, its ability to file reports with the SEC in a timely manner may be adversely affected |
| Accent Optical will need to obtain consents to the assignment of certain agreements it has with third parties as a result of the merger and if it cannot obtain these consents, Accent Optical and/or Nanometrics may lose the benefits of these relationships |
| Accent Optical is currently attempting to obtain third-party consents for some agreements requiring consent upon a change of control |
| If Accent Optical is unable to do so, it may be forced to renegotiate these agreements or enter into new agreements with these various third parties |
| The agreements requiring consent include certain sales representative and distributor agreements, customer agreements, real property leases and license agreements |
| There can be no assurance that Accent Optical will be able to renegotiate or to negotiate new agreements on favorable terms, or at all |