-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JtQ2ApXHjWLH0PAjGOt/TIf8xG07QL7Jw5IjLEYryMq7k0AeIFRjKN245DCHEO19 ckpV1Fx0mbhAbiGb/Hr21A== 0001012870-98-000866.txt : 19980402 0001012870-98-000866.hdr.sgml : 19980402 ACCESSION NUMBER: 0001012870-98-000866 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 17 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980401 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NANOMETRICS INC CENTRAL INDEX KEY: 0000704532 STANDARD INDUSTRIAL CLASSIFICATION: MEASURING & CONTROLLING DEVICES, NEC [3829] IRS NUMBER: 942276314 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-13470 FILM NUMBER: 98585720 BUSINESS ADDRESS: STREET 1: 310 DEGUIGNE DR CITY: SUNNYVALE STATE: CA ZIP: 94086 BUSINESS PHONE: 4087461600 MAIL ADDRESS: STREET 1: 310 DEGUIGNE DRIVE CITY: SUNNYVALE STATE: CA ZIP: 94086 10-K 1 FORM 10-K FOR PERIOD ENDING 12/31/97 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K (Mark One) [X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 1997 or [_] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 NANOMETRICS INCORPORATED (Exact name of registrant as specified in its charter) California 94-2276314 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 310 DeGuigne Drive, Sunnyvale, California 94086 (Address of principal executive offices and zip code) Registrant's telephone number, including area code: (408) 746-1600 _________________________ Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value _________________________ Title of Class 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. The aggregate market value of the voting stock held by non-affiliates of the Registrant as of March 10, 1998: $25,504,534 based upon the last sales price reported for such date. For purposes of this disclosure, shares of common stock held by officers, directors or persons who hold more than 5% of the outstanding shares of common stock of the Registrant have been excluded in that such persons may be deemed to be "affiliates" as that term is defined under the rules and regulations promulgated under the Securities Exchange Act of 1934, as amended. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of shares outstanding of the Registrant's common stock as of March 10, 1998 was 8,584,984. DOCUMENTS INCORPORATED BY REFERENCE The information called for by Part III is incorporated by reference to the definitive Proxy Statement for the Annual Meeting of Shareholders of the Company for the year ended December 31, 1997 which will be filed with the Securities and Exchange Commission no later than 120 days after December 31, 1997. NANOMETRICS INCORPORATED ANNUAL REPORT -- Form 10-K TABLE OF CONTENTS
PAGE ---- Part I Item 1. Business............................................ I-1 Item 2. Properties.......................................... I-15 Item 3. Legal Proceedings................................... I-15 Item 4. Submission of Matters to a Vote of Security Holders. I-17 Part II Item 5. Market for Registrant's Common Equity and Related Shareholder Matters................................. II-1 Item 6. Selected Consolidated Financial Data................ II-1 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................. II-3 Item 8. Financial Statements and Supplementary Data......... II-14 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................. II-32 Part III Item 10. Directors and Executive Officers of the Registrant.. III-1 Item 11. Executive Compensation.............................. III-1 Item 12. Security Ownership of Certain Beneficial Owners and Management...................................... III-1 Item 13. Certain Relationships and Related Transactions...... III-1 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................................... IV-1 Signatures........................................................ V-1
(ii) PART I BUSINESS -------- Nanometrics Incorporated ("Nanometrics" or the "Company") is a leading manufacturer of thin film measurement systems for the electronics industry. The Company's primary customers are manufacturers of semiconductors, magnetic recording heads and flat panel displays. Nanometrics' film measurement systems use wide wavelength range, high sensitivity optics, proprietary computer software and patented technology to measure thickness, uniformity and chemical properties of films deposited on silicon and other substrates. The primary application of these systems is to precisely monitor production processes employed in the fabrication of integrated circuits, magnetic recording heads used in disk drives and flat panel displays commonly used in laptop computers. The Company has been selling measurement systems since 1977 and has an extensive installed base of systems with customers worldwide, including Hitachi, IBM, Motorola, Quantum and Texas Instruments. The growth in the market for the Company's products is driven by the increased use of thin film technology by manufacturers of electronic products and by continued advances in thin film technology. Thin film technology is used in the manufacture of numerous products including integrated circuits, integrated fiber optics, conventional and advanced optics, magnetic recording heads, high density optical and magnetic disks, glass flat panel displays, sensors and lasers. These products benefit from the controlled electronic, optical, magnetic and surface finish properties enabled by thin film technology. The dramatic growth in the use of thin film technology has created significant demand for the thin film measurement systems provided by the Company. Companies that supply thin film deposition equipment to semiconductor manufacturers continue to enhance their products to enable the fabrication of more advanced semiconductors at reduced production costs per device. The next generation of equipment, which is currently being introduced, will process larger 300 mm (12 inch) wafers with geometries below 0.5 microns. In 1995, the Company was awarded a contract by SEMATECH, a consortium of large U.S. semiconductor manufacturers, to develop a 300 mm system for use by SEMATECH members in the early evaluation of 300 mm process equipment. The Company believes that it was the first to introduce a fully-automated product for thin film measurement on 300 mm wafers that also complies with sub 0.5 micron design rules. SELETE, a consortium of Japanese semiconductor manufacturers, purchased one of the first systems in 1996 to test and evaluate 300 mm process equipment and has recently ordered a second system. The Company has sold its advanced 300 mm measurement systems to several leading semiconductor equipment companies including Applied Materials, Novellus and Tokyo Electron, which are using such systems for the development and performance evaluation of advanced process equipment. The Company also sells fully automated systems for measuring films in magnetic recording heads. In 1995, the Company shipped its first automated film measurement system for use in flat panel display manufacturing. In 1997, the Company sold a more fully automated flat panel display film measurement system capable of measuring substrates up to 650 mm x 830 mm to Samsung in Korea. I-1 INDUSTRY BACKGROUND Manufacturers of semiconductors, magnetic recording heads and flat panel displays use a variety of measurement systems to monitor and control key dimensions and other physical properties during the manufacture of such products. Some physical properties measured include film thickness, film stress, line width, overlay, resistivity, step height, surface roughness and chemical properties Film thickness and chemical property control is a critical component of these manufacturing processes because deviations from thickness and chemical property specifications of film layers could result in impaired performance of the semiconductor, magnetic recording head or flat panel display. Manufacturers rely upon accurate measurement systems to promptly detect and minimize process deviations to increase production yields. With each new generation of product, tighter tolerances increase the need for accurate film thickness and chemical composition measurement. The two significant factors affecting demand for thin film measurement systems are: (i) new construction or refurbishment of manufacturing facilities, which, in turn, depends on the current and anticipated market demand for semiconductors, disk drives and flat panel displays and products that use such components and (ii) the increasing complexity of the manufacturing process as a result of the demand for higher performance semiconductors, magnetic recording heads and flat panel displays. Thin film measurement 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, magnetic recording heads and flat panel displays. Semiconductor Manufacturing Process. Semiconductors are fabricated by a complex series of process steps on a wafer substrate made of silicon or other semiconductor material. Each wafer typically goes through a series of 100 to 500 process steps in generally repetitive cycles. Three primary categories of wafer film processing steps are deposition, photolithography and etch. During deposition, layers of conductive or insulating films are deposited on each wafer. Control of the uniformity and the thickness during deposition of these films is important to the ultimate performance of the semiconductor circuit. During photolithography, the wafer is precoated with photoresist, a light sensitive film that must have an accurate thickness and uniformity. Individual integrated circuit patterns are then optically projected onto the photoresist after which it is developed, leaving open areas. During etch, certain areas of the film underlying the photeresist are removed to leave the desired circuit pattern. Most of these steps are typically repeated several times during the fabrication process, with alternating layers of conducting and insulating films being deposited each time to form a multitude of identical "dies" on each wafer. These are final tested, separated into individual die and assembled into an integrated circuit ready for use. Depending on the specific design of a given integrated circuit, a variety of film types, film thickness (which can range from less than 20 angstroms to greater than 25,000 angstroms) and a number of layers can be used to achieve desired electronic performance characteristics. Semiconductor circuits are becoming more complex, operating faster with smaller feature sizes, and employing larger dies that contain more transistors and that require increasing numbers of manufacturing process steps. Manufacturers are adopting new processes and technologies that increase the importance and utilization of thin film measurement systems. For example, to achieve greater semiconductor device speed, manufacturers are utilizing thinner films with different properties that require more frequent and accurate measurement during the manufacturing process. As the number of layers increases, manufacturers are also utilizing new manufacturing processes, such as I-2 chemical mechanical polishing ("CMP"). Accordingly, semiconductor manufacturers are seeking systems that can help the manufacturing process by measuring the thickness of the layer being polished to determine precisely when the appropriate film thickness has been achieved in the CMP process. Furthermore, as manufacturers migrate to new production standards such as the 300 mm wafer and higher levels of cleanliness and automation in the fabrication facility, they require film measurement systems that can accommodate these new standards. Semiconductor manufacturers demand film thickness measurement systems that meet specifications for accuracy at a low cost of ownership. Cost of ownership is estimated by cost per wafer inspected over a five-year period, which is dependent upon system price, mean time between failure, throughput, operating costs, footprint (space occupied in the fab), servicing and maintenance costs and other factors. Magnetic Recording Head Manufacturing Process. The magnetic recording head manufacturing process is similar to the semiconductor fabrication process. Magnetic recording heads are used to read and write data stored on hard disk drives. The head is a critical component in the drive structure and determines the data storage capacity. Multiple heads are manufactured on wafer-like pucks of various sizes that are round or square and typically made of an aluminum oxide-titanium carbide combination, 2 to 3 mm thick. The head structures are then built up in a series of thin film depositions and patterning steps involving mainly ultra-thin metals and dielectric films. The thickness of each film in the stack must be measured and controlled to very tight tolerances for optimum performance. Magnetic recording head manufacturers demand high throughput film measurement systems that meet specifications for accuracy at a low cost of ownership. Flat Panel Display Manufacturing Process. Flat panel displays are manufactured in clean rooms using processes that are similar to those used in semiconductor manufacturing. Flat panel displays use thin film technology and most displays are constructed on large glass substrates that range in size up to 650 mm x 830 mm. Future designs are expected to require panels as large as one meter square. These manufacturing processes are monitored in part by thin film measurement systems that measure the thickness and uniformity of various thin films specific to flat panel displays. Manufacturers of flat panel displays demand automated thin film measurement systems that handle large glass substrates and place them in position for measurement of various films during manufacturing. PRODUCTS - -------- Nanometrics has been a pioneer in the field of thin film measurement and has been instrumental in the development of many innovations over the past 20 years. The Company's film measurement systems use wide wavelength range, high sensitivity optics, proprietary computer software and patented technology to measure thickness, uniformity and the chemical properties of films deposited on silicon and other substrates. The primary technology used in the Company's measurement systems is non-contact spectroscopic reflectometry. In addition, some products offer simultaneous and complementary spectroscopic ellipsometry to measure the thickness, uniformity and chemical properties of films on a variety of substrates. The primary applications are in the semiconductor, magnetic recording head and flat panel displays industries. The Company's products can be divided into two groups: automated systems and table top systems. The automated systems are employed in high volume production environments. The table top systems are used mainly in low I-3 volume production environments where automated sample handling and high throughput are not required and where cost is a major consideration. Automated Systems for Semiconductor Equipment Manufacturers NANOSPEC 8300X SERIES
- ------------------------------------------------------------------------------------------------------- Model # Date of First Shipments List Price * Features - ----------------------------------------------------------------------------------------------------------- 8300X June 1996 $222K to $794K 200 mm and 300 mm wafers. Wide range of film thickness measurement. Computerized maps Full, automation, operator-free. Low cost of ownership - ----------------------------------------------------------------------------------------------------------- 8300XSE September 1996 $366K to $889K Same as 8300X. Spectoscopic ellipsometer. - ----------------------------------------------------------------------------------------------------------- 8300XSE-FOUP March 1998 $585K to $966K Same as 8300XSE. FOUP mini-environment. - -----------------------------------------------------------------------------------------------------------
* List prices vary from a base model with no options to a model with every option available. The 8300X Series of automated thin film measurement products are capable of handling both 200 mm and 300 mm diameter wafers. These systems have been developed over the last two years, funded in part by a contract from SEMATECH. The 8300X is the basic system configuration, while the 8300XSE includes a fully integrated spectroscopic ellipsometer which expands the measurement capabilities of the basic product, especially in ultrathin and multiple film stack measurement applications. The 8300XSE-FOUP (Front Opening Unified Pod) includes a mini-environment that maintains wafers in an ultra-clean environment during measurement and transfer between tools in the fabrication facilities and reduces the cleanliness requirements of the fabrication facility, resulting in substantial construction cost savings. In 1995, the Company was awarded a contract by SEMATECH to develop a 300 mm system for use by SEMATECH members in the early evaluation of 300 mm process equipment. With the introduction of the 8300X in 1996, the Company believes that it was the first to introduce a fully-automated product for thin film measurement on 300 mm wafers that also complies with sub 0.5 micron design rules. SELETE purchased one of the first systems in 1996 to test and evaluate 300 mm process equipment and has recently ordered a second system. In addition, the 8300XSE received a Photonics Spectra Magazine Circle of Excellence Award as one of the most technically innovative products in 1996. I-4 NANOSPEC 8000 SERIES
- ------------------------------------------------------------------------------------------------------- Model # Date of First Shipment List Price * Features - ------------------------------------------------------------------------------------------------------- 8000 June 1995 $273K to $679K 75 mm to 200 mm wafers Wide range of film thickness measurements Full automation, operator-free Low cost of ownership - ------------------------------------------------------------------------------------------------------- 8000X September 1996 $301K to $715K Same as 8000 Measurement and stage enclosure - ------------------------------------------------------------------------------------------------------- 8000XSE December 1996 $444K to $809K Same as 8000X Spectroscopic ellipsometer - ------------------------------------------------------------------------------------------------------- 8000XSE-SMIF April 1997 $499K to $875K Same as 8000XSE SMIF mini-environment - -------------------------------------------------------------------------------------------------------
* List prices vary from a base model with no options to a model with every option available. The 8000 Series consist of high throughput, high performance measurement systems capable of handling wafers ranging in size from 75 mm to 200 mm. The 8000XSE incorporates a spectroscopic ellipsometer which expands the measurement capabilities of this model over the basic 8000. The 8000XSE-SMIF includes a SMIF (Standard Mechanical interface) mini-environment that offers fab construction cost savings. Both the 8300X Series and 8000 Series are used in the CMP process. These systems are robust and offer computerized pattern recognition that accurately and consistently measures data at a desired location, despite surface roughness and scratches produced by the CMP process. In addition, the 8300X Series and 8000 Series are well suited for the precise measurements required by sub 0.5 micron geometries. Automated Systems for Magnetic Recording Head Manufacturers NANOSPEC 8000S
- ------------------------------------------------------------------------------------------------------- Model # Date of first Shipment List Price Features - ------------------------------------------------------------------------------------------------------- 8000S December 1996 $300K to $809K Round or square pucks Wide range of special film measurements Computerized maps Full automation, operator-free Low cost of ownership - -------------------------------------------------------------------------------------------------------
* List prices vary from a base model with no options to a model with every option available. I-5 The 8000S was designed to handle the round and square wafer-like pucks, typically 2 to 3 mm thick, which are used in the magnetic recording head industry. As in semiconductor manufacturing, magnetic recording head manufacturing involves a variety of deposition and patterning steps, some with requirements more stringent than those found in semiconductor manufacturing. In particular, magnetic recording head manufacturers are required to deposit more ultra-thin metal films than semiconductor manufacturers. Special proprietary measurement software programs have been developed for the 8000S to satisfy the production control requirements of the magnetic head industry. Automated Systems for Flat Panel Display Manufacturers NANOSPEC 5500/6500
- ------------------------------------------------------------------------------------------------------- Model # Date of First Shipment List Price * Features - ------------------------------------------------------------------------------------------------------- 5500 February 1995 $252K to $765K Up to 550 mm x 650 mm glass panel substrates Special measurement programs Computerized maps Full automation, operator-free - ------------------------------------------------------------------------------------------------------- 6500 September 1997 $420K to $980K Up to 650 mm x 830 mm glass panel substrates Special measurement programs Computerized maps Full automation, operator-free Precise stage matrix and substrate positioning - -------------------------------------------------------------------------------------------------------
* List prices vary from a base model with no options to a model with every option available. The 5500 and 6500 systems were engineered and are manufactured by the Company's subsidiary in Japan. The 5500 and 6500 are both fully automated and can measure most optically transparent films used in the manufacture of flat panel displays. The 5500 handles large glass substrates up to 550 mm x 650 mm. This model is also capable of precisely measuring the thickness of virtually all films used in the manufacture of flat panel displays at any site on the substrate in a 20 micron spot 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 improvements, and is capable of handling 650 mm x 830 mm substrates. I-6 Table Top Models for Semiconductor, Magnetic Recording Head, Flat Panel Display Manufacturers and Other Thin Film Applications NANOSPEC TABLE TOP MODELS
- ------------------------------------------------------------------------------------------------------- Model # Date of First List Price * Features Shipment - ------------------------------------------------------------------------------------------------------ 2100 December 1993 $54K to $134K 75 mm to 200 mm substrates Variety of measurement modes Manual stage - ------------------------------------------------------------------------------------------------------ 3000 November 1995 $52K to $72K 75 mm to 200 mm substrates Variety of measurement modes Manual stage - ------------------------------------------------------------------------------------------------------ 4000 November 1992 $80K to $208K 75 mm to 200 mm substrates Wide measurement range Manual stage Programmable software - ------------------------------------------------------------------------------------------------------ 4150 June 1994 $118K to $215K 75 mm to 200 mm substrates Wide measurement range Computerized maps Programmable, motorized stage Auto-focus Programmable software - ------------------------------------------------------------------------------------------------------ 5000 April 1994 $100K to $130K 75 mm to 200 mm substrates Wide measurement range Manual stage Programmable software - ------------------------------------------------------------------------------------------------------ 5100 May 1994 $130K to $252K 75 mm to 200 mm substrates Wide measurement range Computerized maps Programmable, motorized stage Auto-focus Programmable software - ------------------------------------------------------------------------------------------------------ 6100 July 1996 $142K to $213K 75 mm to 200 mm substrates Wide measurement range Computerized maps Programmable, motorized stage Auto-focus Programmable software Faster measurement - ------------------------------------------------------------------------------------------------------
* List prices vary from a base model with no options to a model with every option available The table top family of products provides a broad range of thin film measurement solutions at a low entry price point to manufacturers of semiconductors, magnetic recording heads, flat panel displays and other film applications. The principal market for the Company's table top products is the semiconductor industry, including device manufacturers and equipment materials suppliers to this I-7 industry. However, Nanometrics believes that a much broader market for these systems exists, and the Company expects to sell additional systems as thin film technology is used for new applications. With unique capabilities and several available configurations, each model allows manufacturers to create custom measurement programs used in developing new technology. CUSTOMERS Nanometrics sells its measurement systems worldwide to many of the major semiconductor, magnetic recording head and flat panel display manufacturers, as well as manufacturers of production equipment and materials for these industries. In 1997 and 1996, approximately 80% of the Company's total net revenues were derived from semiconductor applications, and approximately 20% of the Company's total net revenues were derived from magnetic recording head and flat panel display applications. Sales to one customer, Anam Electronics, represented 11% of the Company's total net revenues in 1997. No single customer represented 10% or more of the Company's total net revenues in 1996 and one customer, Intertrade Scientific Inc., a distributor, represented approximately 10% of total net revenues in 1995. The following is representative list of the Company's customers during 1996 and 1997.
Advanced Micro Devices, Inc. International Business Machines Corp. Samsung Group Analog Devices, Inc. Intel Corporation SGS-Thomson Microelectronics Anam Electronics IPEC Planar Seagate Technology Applied Magnetics Corporation LG. Group Inc. Symbios Logic, Inc. Applied Materials Inc. Lucent Technologies Texas Instrument Incorporated Dallas Semiconductor Corp. Matsushita Electric Industrial Co. Ltd. Tokyo Electron, Ltd. E.I. du Pont de Nemours & Co. Microchip Technology Inc. Toshiba Corporation Ericsson Mitsubishi Corporation TSMC Ltd. Telefonaktiebolaget LM Motorola, Inc. Vitesse Semiconductor Corp. The Fairchild Corporation National Semiconductor Corp. Winbond Electronics Corp. Fujitsu, Ltd. Nortel Communications Hewlett-Packard Co. Novellus Systems, Inc. Hitachi, Ltd. Quantum Corp. Hyundai Motor Company Read-Rite
I-8 SALES AND MARKETING The Company believes that a direct sales and support capability is essential for developing and maintaining close customer relationships and for rapidly responding to changing customer requirements. Nanometrics provides direct sales support from its corporate office in California. In addition, the Company has direct sales presence in Arizona, Oregon, Pennsylvania and Texas in the United States, as well as South Korea, Taiwan and the United Kingdom. The Company also uses sales representatives and distributors in Asia, Europe, and the United States. Nanometrics intends to continue to develop its distribution network by expanding its existing offices and opening new offices and forming additional distribution relationships. The Company believes that growing its international distribution network will enhance its competitive position. The Company maintains a direct sales force of highly trained, technically sophisticated sales engineers who are knowledgeable in the use of thin film measurement systems in general and the features and advantages of the Company's products in particular. In addition, the Company believes that its sales and application engineers are skilled in working with customers to solve complex measurement and process problems. International sales, which includes sales by the Company's foreign subsidiary in Japan, constituted approximately 60.3%, 52.5% and 64.1% of total net revenues for 1997, 1996 and 1995, respectively. Direct exports of the Company's film measurement systems to foreign customers and shipments to its subsidiaries require general export licenses. See Note 10 of Notes to Consolidated Financial Statements for information regarding total net revenues, operating income (loss) and identifiable assets of the Company's foreign operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operation-Factors That May Affect Future Operating Results." In order to raise market awareness of its products, the Company advertises in trade publications, distributes promotional materials, publishes technical articles, conducts marketing programs, issues press releases regarding new products and participates in industry trade shows and conferences. CUSTOMER SERVICE AND SUPPORT The Company believes that customer service and technical support are important competitive factors and are essential to building and maintaining close, long-term relationships with its customers. The Company provides support to its customers with site visits, telephonic technical support, direct training programs and operating manuals and other technical support information. The Company uses its demonstration equipment for training programs in addition to sales and marketing. Nanometrics provides warranty and post-warranty service from its corporate office in California. The Company also has service operations based in Arizona, Massachusetts, Pennsylvania and Texas. Local service and spare parts are provided in the United Kingdom by the Company's 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. The Company's distributors and representatives provide service in other countries in Asia. I-9 Nanometrics provides a one year service warranty on parts and labor for products. Revenues from post-warranty services (service revenue), including sales of replacement parts, represented approximately 10.6%, 18.9%, and 20.4% of total net revenues in 1997, 1996 and 1995, respectively. BACKLOG As of December 31, 1997, the Company's backlog was approximately $6.4 million. Backlog includes orders for products that the Company expects to ship within 12 months. Orders from the Company's customers are subject to cancellation or delay by the customer with minimal penalties. Historically, order cancellations and order rescheduling have not been significant. However, there can be no assurance that orders presently in backlog will not be canceled or rescheduled. Since only a portion of the Company's revenues for any quarter represent systems in backlog, the Company does not believe that backlog is a meaningful or accurate indication of its future revenues and performance. See "Risk factors-Dependence on Limited Systems Sales; Backlog." COMPETITION The market for film thickness measurement systems is subject to intense competitive pressure and characterized by rapidly evolving technology. The Company competes on a global basis with both larger and smaller companies in the United States, Japan and Europe. The Company competes primarily with thin film measurement products from KLA-Tencor Corporation, Therma-Wave Inc., Rudolph Technologies, Dai Nippon Screen and Toray Industries. Many of the Company's competitors have substantially greater financial, engineering, manufacturing and marketing resources than the Company. Significant competitive factors include technical capabilities, system performance (including automation and software capability), ease of use, reliability, established customer bases, cost of ownership, price and global customer service. The Company believes that it competes favorably with respect to these factors but must continue to develop and design new and improved products in order to maintain its competitive position. The Company expects its competitors to continue to improve the design and performance of their current products and to introduce new products with improved price and performance characteristics. For example, the Company expects to face intense competition in the emerging market for 300 mm thin film measurement systems. New product introductions and enhancements by the Company's competitors could cause a significant decline in sales or loss of market acceptance of the Company's systems or otherwise make the Company's systems or technology obsolete or noncompetitive. There can be no assurance that the Company will be able to compete successfully against current or future competitors. Increased competitive pressure could lead to reduced demand and lower prices for the Company's products, thereby materially adversely affecting the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operation-Factors That May Affect Future Operating Results-Highly Competitive Industry and Impact of Industry Consolidation." I-10 MANUFACTURING The Company manufactures its product in the United States and Japan by combining proprietary measurement components and software produced in its facility with components and subassemblies obtained from outside suppliers. The Company tests all systems prior to shipment. Certain of the Company's products includes system engineering and software development to meet specific customer requirements. The Company's manufacturing operations do not require a major investment in capital equipment. The Company is relying increasingly on outside vendors to manufacture many components and subassemblies. Certain components, subassemblies and services necessary for the manufacture of the Company's systems are obtained from a sole supplier or limited group of suppliers. For example, the Company relies on Kensington Laboratories for much of the robotics incorporated in the Company's automated systems. The Company does not maintain any long-term supply agreements with Kensington Laboratories or any of its other suppliers. The Company has entered into an agreement with J.A. Woollam Company for the purchase of the spectroscopic ellipsometer component incorporated in the Company's advanced measurement systems. The Company's reliance on a sole or limited group of suppliers involves several risks, including a potential inability to obtain an adequate supply of required components, reduced control of pricing and timely delivery of components and subassemblies and suppliers' potential inability to develop technologically advanced products to support the Company's growth and development of new systems. Because manufacturing of certain of these components and subassemblies involves extremely complex processes and requires long lead times, there can be no assurances that delays or shortages caused by suppliers will not occur in the future. The Company believes that alternative sources could be obtained and qualified, if necessary, for most sole and limited source parts. However, if the Company were forced to seek alternative sources of supply or to manufacture such components or subassemblies internally; it may be required to redesign its systems, which could prevent the Company from shipping its systems to its customers on a timely basis. Certain of the Company's suppliers have relatively limited financial resources. Any inability to obtain adequate deliveries or any other circumstance that would restrict the Company's ability to ship its products, could damage relationships with current and prospective customers and could have a material adverse impact on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operation-Factors That May Affect Future Operating Results-Sole or Limited Sources of Supply; Reliance on Subcontractors; Complexity in Manufacturing Process." RESEARCH AND DEVELOPMENT The Company's current research and development efforts are directed toward enhancing existing products and developing and introducing new products to maintain technological leadership and to meet current and evolving customer needs. The Company is working to develop potential applications of new and emerging technologies, including improved methods of thin film measurement. These efforts are conducted at its facilities in California and also at its Japanese subsidiary. The Company has an extensive base of proprietary technology and expertise in areas such as spectrophotometry using its patented absolute reflectivity, robust pattern recognition, and complex measurement software algorithms. The Company also has extensive experience in systems integration I-11 engineering required to design compact, highly automated systems for advanced clean room environments. The Company's process, engineering, marketing, operations and management personnel have developed close collaborative relationships with many of their customers' counterparts and have used these relationships to identify market demands and target the Company's research and development to meet those demands. Expenditures for research and development during 1997, 1996 and 1995 were $3.0 million, $2.8 million and $2.6 million, respectively, and represented 8.1%, 9.1% and 11.6% of total net revenues, respectively. The success of the Company in developing, introducing and selling new and enhanced systems depends upon a variety of factors, including product selections, timely and efficient completion of product design and development, timely and efficient implementation of manufacturing and assembly process, effective sales and marketing and product performance. Because new product development commitments must be made well in advance of sales, new product decisions must anticipate both the future demand for the products under development and the equipment required to produce such products. If new products have reliability or quality problems, reduced orders, higher manufacturing costs and additional service warranty expense may result. There can be no assurance that the Company will be successful in selecting, developing, manufacturing and marketing new products or in enhancing and marketing existing products. If the Company does not successfully introduce new products, the Company's business, financial condition and results of operations will be materially adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operation-Factors That May Affect Future Operating Results-Rapid Technological Change; Importance of Timely Product Introduction." INTELLECTUAL PROPERTY The Company's success depends in large part on the technical innovation of its products. Nanometrics actively pursues a program of filing patent applications to seek protection of technologically sensitive features of its product. The Company holds a number of United States patents and additional patents in Japan and Europe. The United States patents, issued during the period 1981 to 1997, will expire from 1998 to 2014. While the Company attempts to protect its intellectual property rights through patents, trademarks, copyrights and non-disclosure agreements, it believes that its success will depend to a greater degree upon innovation, technological expertise and its ability to adapt its products to new technology. There can be no assurance that the Company will be able to protect its technology or that competitors will not be able to develop similar technology independently. In addition, the laws of certain foreign countries may not protect the Company's intellectual property to the same extent as do the laws of United States. The validity of the Company's patents has not been adjudicated by any court. Competitors may bring legal challenges to the validity of one or more of these patents, or attempt to circumvent the patents. No assurance can be given that the Company's patents will be sufficiently broad to protect the Company's technology, nor that any existing or future patents will not be challenged, invalidated or circumvented, or that the rights granted thereunder will provide meaningful competitive advantages to the Company. Furthermore, there can be no assurance that others will not independently develop similar products, duplicate the Company's products, or if patents are issued to the Company, design around such patents. The Company does not believe there is any infringement by its products of any I-12 patents or proprietary rights of others. However, there can be no assurance that such infringements do not exist or will not occur in the future. As is typical in the semiconductor industry, the Company has from time to time received, and may in the future receive, communications alleging possible infringement of patents or other intellectual property rights of others. The Company investigates all such notices and responds as appropriate. In 1997 the Company received a claim from another company that alleged that the Company's sale of a measurement system with an ellipsometer violated such party's patent and requested the Company discontinue marketing such products. The Company reviewed the patent and advised such party that the Company believes that there is prior art that would invalidate such patent. The Company has not been contacted again by such party. In addition, some customers of the Company have received notices of infringement from Technivision Corporation/the estate of Jerome Lemelson alleging equipment used in the manufacture of semiconductor products infringes their patents. A number of these customers have notified the Company that they may seek indemnification from the Company for any damages and expenses resulting from this matter. Certain of the Company's customers had engaged in litigation with the late Mr. Lemelson involving a number of his patents, and some of these cases have settled. Although the ultimate outcome of these matters is not presently determinable, there can be no assurance that the resolution of all such pending matters will not have a material adverse effect on the Company's business, financial condition and result of operations. Based on industry practice, the Company believes that in most cases it could obtain any necessary licenses or other rights on commercially reasonable terms, but no assurance can be given that licenses would be available or would be on acceptable terms, that litigation would not ensue or that damages for any past infringement would not be assessed. Litigation may be necessary in the future to enforce patents issued to the Company, to protect trade secrets or know-how owned by the Company, to defend the Company against claimed infringement of the rights of others or to determine the scope and validity of the proprietary rights of others. Any such litigation could result in substantial cost and diversion of effort by the Company, which could have a material adverse effect on the Company's business, financial condition and results of operations. Moreover, adverse determinations in such litigation could result in the Company's loss of proprietary rights, subject the Company to significant liabilities to third parties, require the Company to seek licenses from third parties or prevent the Company from manufacturing or selling its products. The failure to obtain necessary licenses or other rights or litigation arising out of infringement claims could have material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operation-Factors That May Affect Future Operating Results-Uncertainty of Intellectual Property Rights." EMPLOYEES At December 31, 1997, the Company employed 153 persons worldwide on a full- time basis, including 28 in research and development, 30 in manufacturing and manufacturing support, 78 in marketing, sales and field service and 17 in general administration and finance. None of these employees is represented by a union and the Company has never experienced a stoppage as a result of union actions. Many of the Company's employees have specialized skills of value to the Company. Nanometrics' future success will depend in large part upon its ability to attract and retain highly I-13 skilled, scientific, technical, managerial, financial and marketing personnel, who are in great demand in the industry. Nanometrics considers its employee relations to be good. Executive Officers of the Registrant - ------------------------------------ The executive officers of the Company are as follows:
Name Age Position with the Company - ---- --- ------------------------- Vincent J. Coates 73 Chairman of the Board, Chief Executive Officer, Secretary John Heaton 38 Director, President and Chief Operating Officer Paul B. Nolan 43 Vice President and Chief Financial Officer William N. Fate 35 Vice President and Director of International Sales Roger Ingalls Jr. 35 Vice President and Director of North American Sales William A. McGahan 31 Vice President and Director of Applications Engineering
Mr. Vincent Coates has been Chairman of the Board since the Company was founded. He has also served as Chief Executive Officer and President from the founding through July 1988 except for the period January 1986 through February 1987 when he served exclusively as Chief Executive Officer. He is currently the Chief Executive Officer of the Company and was elected Secretary in February 1989. Mr. Heaton joined the Company in September 1990 and in April 1994 he was elected Vice President of Engineering and General Manager. In July 1995 he was appointed to the Board of Directors. In May 1996 he was elected President and Chief Operating Officer. Mr. Heaton served as Equipment Engineer at National Semiconductor from 1978 to 1990 prior to joining the Company. Mr. Nolan joined the Company in March 1989 and in March 1994 he was elected Vice President and Chief Financial Officer. Mr. Nolan served as Senior Financial Analyst at Harris Corporation prior to joining the Company. Mr. Fate has been employed by Nanometrics since July 1993 and was elected Vice President and Director of International Sales in October 1997. From July 1993 through July 1996, he served in various engineering and sales management positions at the Company. Since July 1996 he has held the title of Director of International Sales. Mr. Fate worked as an engineer at National Semiconductor between 1983 and 1992. Mr. Ingalls has been employed by Nanometrics since March 1995 and was elected Vice President and Director of North American Sales in October 1997. During his employment at Nanometrics, Mr. Ingalls has served as U.S. Sales and Product Manager, and most recently Director I-14 of North American Sales. Prior to joining Nanometrics he served as a sales engineer for Nikon Inc. from March 1993 to March 1995. Mr. McGahan, Ph.D. was elected Vice President and Director of Applications Engineering in October 1997. He served as Applications Engineering Manager from October 1996 to October 1997. Prior to that, Dr. McGahan served 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. Vincent Coates is the father of Mr. Norman Coates, a director of the Company. There are no other family relationships among any of the executive officers and directors of the Company. All directors hold office until the next annual meeting of shareholders of the Company and until their successors have been elected and qualified. Officers are elected by and serve at the discretion of the Board of Directors. ITEM 2. PROPERTIES ---------- The Company's 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 was scheduled to expire in April 1997, subject to a five-year renewal option. The Company exercised this option in April 1997 and extended the lease through April 2002. The Company also leases warehouse facilities in Sunnyvale. California and sales and service offices in Texas and Scotland. Rent expense for the Company's facilities was approximately $583,000 in 1997. The Company, through its Japanese subsidiary, owns a 15,000 square foot facility in Narita, Japan. This facility is utilized by the Company's Japanese subsidiary for sales, service, engineering and manufacturing. The Company's Japanese subsidiary also leases three sales offices. ITEM 3. LEGAL PROCEEDINGS ----------------- In 1997, the Company received a claim from another company that alleged the Company's sale of a measurement system with an ellipsometer violated such party's patent and requested the Company discontinue marketing such products. The Company reviewed the patent and advised such party that the Company believes that there is prior art that would invalidate such patent. The Company has not been contacted again by such party. In addition, some customers of the Company received notices of infringement from Technivision Corporation/the estate of Jerome Lemelson alleging that equipment used in the manufacture of semiconductor products infringes their patents. A number of these customers have notified the Company that they may seek indemnification from the Company for any damages and expenses resulting from this matter. Certain of the Company's 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, there can I-15 be no assurance that the resolution of all such pending matters will not have a material adverse effect on the Company's business, financial condition or results of operations. Based on industry practice, the Company believes that in most cases it could obtain any necessary licenses or other rights on commercially reasonable terms, but no assurance can be given that licenses would be available or would be on acceptable terms, that litigation would not ensue or that damages for any past infringement would not be assessed. Litigation may be necessary in the future to enforce patents issued to the Company, to protect trade secrets of know-how owned by the Company, to defend the Company against claimed infringement of the right of others or to determine the scope and validity of the proprietary rights of others. Any such litigation could result in substantial cost and diversion of effort by the Company, which could have a material adverse effect on the Company's business, financial condition and results of operations. Moreover, adverse determination in such litigation could result in the Company's loss of proprietary rights, subject the Company to significant liabilities to third parties, require the Company to seek licenses from third parties or prevent the Company from manufacturing or selling its products. The failure to obtain necessary licenses or other rights or litigation arising out of infringement claims could have adverse material effect on the Company's business, financial condition and results of operations. I-16 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- No matters were submitted to a vote of security holders during the quarter ended December 31, 1997. I-17 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER ----------------------------------------------------------------- MATTERS ------- The Company's Common Stock is traded on The Nasdaq National Market under the symbol "NANO". The following table sets forth, for the periods indicated, the range of high and low sale prices as reported on the Nasdaq National Market. January 2 and December 27 were the last trading days of the 1997 and 1996 fiscal years.
1997 1996 -------------- -------------- Year ended December 31, High Low High Low - ----------------------- ------ ------ ------ ------ First Quarter $ 7.75 $4.63 $8.63 $5.25 Second Quarter 7.38 4.63 7.19 4.88 Third Quarter 14.25 6.75 6.00 4.00 Fourth Quarter 13.38 7.69 6.13 4.19
As of March 10, 1998, there were approximately 136 shareholders of record and approximately 2,000 beneficial shareholders. The last sale price reported on the Nasdaq National Market on March 10, 1998 was $9.9375 per share. The Company has never paid cash dividends. It is the present policy of the Company's Board of Directors to retain earnings to finance expansion of the Company's operations, and the Company does not expect to pay dividends in the foreseeable future. ITEM 6. 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 Notes thereto included elsewhere in this Annual Report on Form 10-K. The balance sheet information as of December 31, 1997 and 1996 and the statement operations data set forth below for 1997, 1996, and 1995 are derived from the audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The balance sheet information as of December 31, 1995, 1994 and 1993 and the statement of operations data for 1994 and 1993 are derived from audited consolidated financial statements of the Company not included herein. II-1
YEARS ENDED DECEMBER 31, ------------------------------------------------------------------- (In thousands, except per share data) Statement of Operations Data 1997 1996 1995 1994 1993 - ---------------------------- ---------- ----------- ------------- ------------ -------------- Net revenues: Product sales............................ $32,767 $24,603 $18,117 $ 9,655 $13,126 Service.................................. 3,890 5,733 4,642 3,924 3,444 ------- ------- ------- ------- ------- Total net revenues.................... 36,657 30,336 22,759 13,579 16,570 ------- ------- ------- ------- ------- Cost and expenses: Cost of product sales.................... 12,092 10,109 8,189 5,128 6,365 Cost of service.......................... 3,632 4,088 3,406 2,862 2,437 Research and development................. 2,986 2,754 2,631 2,405 2,177 Selling.................................. 6,050 4,696 3,712 2,946 3,465 General and administrative............... 2,765 2,476 2,180 2,469 1,910 ------- ------- ------- ------- ------- Total costs and expenses.............. 27,525 24,123 20,118 15,810 16,354 ------- ------- ------- ------- ------- Income (loss) from operations............... 9,132 6,213 2,641 (2,231) 216 ------- ------- ------- ------- ------- Other income (expense): Interest income......................... 535 390 302 93 129 Interest expense......................... (110) (92) (152) (49) (76) Other, net............................... (175) 146 674 141 315 ------- ------- ------- ------- ------- Total other income, net............... 250 444 824 185 368 ------- ------- ------- ------- ------- Income (loss) before income taxes........... 9,382 6,657 3,465 (2,046) 584 Provision (benefit) for income taxes(1)..... 3,625 2,664 (812) 28 229 ------- ------- ------- ------- ------- Net income (loss)........................... $ 5,757 $ 3,993 $ 4,277 $(2,074) $ 355 ======= ======= ======= ======= ======= Net income per share: Basic.................................... $0.69 $0.50 $0.56 $(0.28) $0.05 ======= ======= ======= ======= ======= Diluted.................................. $0.65 $0.47 $0.52 $(0.28) $0.05 ======= ======= ======= ======= ======= Shares used in per share computation: Basic.................................... 8,325 8,047 7,604 7,304 7,016 ======= ======= ======= ======= ======= Diluted.................................. 8,820 8,524 8,280 7,304 7,610 ======= ======= ======= ======= =======
As of December 31 -------------------------------------------- (In thousands) BALANCE SHEET DATA 1997 1996 1995 1994 1993 - ------------------ -------- -------- -------- -------- -------- Cash and equivalents and short-term investments.............. $13,251 $ 8,382 $ 8,083 $ 2,628 $ 5,141 Working capital...................... 28,636 22,613 18,338 10,205 11,809 Total assets......................... 36,243 29,964 25,167 15,786 18,414 Debt Obligations, Net of current portion..................... 2,568 3,296 3,528 421 578 Shareholders' equity................. 28,528 22,060 17,574 12,995 14,427
(1) Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", and recognized the cumulative effect of the adoption which increased the 1993 provision for income taxes by $200,000. II-2 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS --------------------- OVERVIEW Nanometrics is a leading manufacturer of thin film measurement systems for the electronics industry. The Company's primary customers are manufacturers of semiconductors, magnetic recording heads and flat panel displays. Nanometrics' film measurement systems use wide wavelength range, high sensitivity optics, proprietary computer software and patented technology to measure thickness, uniformity and chemical properties of film deposited on silicon and other substrates. The primary applications of these systems is to precisely monitor production processes employed in the fabrication of integrated circuits, magnetic recording heads used in disk drives and flat panel displays commonly used in laptop computers. The Company has made several strategic changes in the business over the past several years which have contributed to revenue growth from $22.8 million in 1995 to $36.7 million in 1997 and positioned the Company to further participate in these markets. Such changes include: (i) a shift to direct sales from third-party representatives in Asia, the United Kingdom and the United States, (ii) an increased emphasis on product development, manufacturing and direct sales in Japan, (iii) a decision to outsource certain system components such as robotics, enabling the Company to leverage its technical resources, and (iv) the development of new products for the semiconductor, magnetic recording head and flat panel display markets. In addition, the Company has developed products that can be used for 300 mm wafers and chemical mechanical polishing. The Company's business is dependent upon the capital expenditures of manufacturers of: (i) semiconductors, (ii) magnetic recording heads for the read/write function on disk drives, and (iii) flat panel displays. The demand by such manufacturers is, in turn, dependent on the current and future market demand for (i) semiconductors and products utilizing semiconductors, (ii) disk drives and computers that utilize disk drives, and (iii) flat panel displays for use in laptop computers, pagers, cell phones, and a variety of other applications where portability and low power consumption are important. The increasing complexity of the manufacturing processes for semiconductors, magnetic recording heads, and flat panel displays is also an important factor in the demand for the Company's thin film measurement products. The Company believes that its diversification through multiple industry applications of its technology increases the total available market for its products and reduces, to an extent, its exposure to the cyclicality of any individual industry segment. For example, in fiscal 1996, a decline in sales to manufacturers of semiconductors was offset by increased sales to manufacturers of magnetic recording heads and flat panel displays. The Company derives its revenues from product sales and service, which includes sales of accessories and service of the installed base of products. In 1997, the Company derived 89.4% of its total net revenues from product sales and 10.6% of its 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 Notes to Consolidated Financial Statements. II-3 The Company derives a substantial portion of its revenues from the sale of a relatively small number of systems. As a result, a small change in the number of systems actually shipped may cause significant changes in revenues in any particular quarter. The Company's backlog at the beginning of a quarter typically does not include all sales required to achieve the Company's revenue objective for that quarter. Moreover, all customer purchase orders are subject to cancellation or rescheduling by the customer without penalties. Consequently, the Company depends on shipping products in the same quarter that the purchase order is received. The failure of the Company to receive anticipated orders or delays in shipments may cause quarterly net revenues to fall significantly short of the Company's objectives, which would adversely affect the Company's operating results. The Company believes that its 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. There can be no assurance that the Company will grow in future periods or that it will sustain its level of net revenues or its rate of revenue growth on a quarterly or annual basis. The Company 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 the Company's Common Stock would be materially adversely affected. See "Factors That May Affect Future Operating Results-Significant Fluctuations in Operating Results." RESULTS OF OPERATIONS Total Net Revenues. Total net revenues increased 20.8% from $30.3 million in 1996 to $36.7 million in 1997. Product sales increased by 33.2% from $24.6 million in 1996 to $32.8 million in 1997. The increase in product sales resulted from stronger worldwide demand for and increased shipments of the Company's products, especially its automated products. Service revenue decreased 32.1% from $5.7 million in 1996 to $3.9 million in 1997. The decrease in service revenue is primarily attributable to lower sales of parts, services and accessories in Asia and the U.S. in 1997 due in part to increased functionality and reliability of the Company's new products. Total net revenues increased 33.3% from $22.8 million in 1995 to $30.3 million in 1996. The increase in total net revenues resulted primarily from increased worldwide sales of the Company's automated NanoSpec 8000 product family for the semiconductor and magnetic recording head markets and of the automated Model 5500 flat panel display measurement system particularly in Asia. International revenues, which includes sales by the Company's foreign subsidiary in Japan, constituted approximately 60.3%, 52.5% and 64.1% of total net revenues for 1997, 1996 and 1995, respectively. The Company's 1997 domestic revenues of $14.5 million remained consistent with $14.4 million in 1996, while 1997 international revenues increased 39.0% from $15.9 million in 1996 to $22.1 million in 1997. In 1996, the Company experienced a 76.7% increase in domestic revenues from $8.2 million in 1995 to $14.4 million in 1996, while international revenues increased 9.0% from $14.6 million in 1995 to $15.9 million in 1996. The increases in international revenue were partially offset by the impact of the strengthening of the U.S. dollar against the Japanese yen on sales in Japan. Gross Profit. The product gross profit margin increased from 58.9% in 1996 to 63.1% in 1997. The increase was caused primarily by higher sales volumes in 1997 resulting in lower per unit manufacturing costs. The service gross profit margin decreased from 28.7% in 1996 to 6.6% in 1997. The decrease was primarily attributable to the decline in the sales of accessories and upgrades while fixed service costs increased to support the Company's growing installed base of systems at customer locations in 1997. Product gross profit increased from 54.8% in 1995 to 58.9% in 1996 II-4 primarily because of higher prices resulting from stronger demand for the Company's products and a continued decline in fixed operating costs as a percentage of revenues due to higher sales volume. Service gross profit increased to 28.7% in 1996 from 26.6% in 1995 primarily as a result of relatively higher margins on the increased sales of accessories in 1996. Research and Development. Research and development expenses increased 8.4% from $2.8 million in 1996 to $3.0 million in 1997 to support the continued development of new products and product enhancements. Research and development expenses increased by 4.7% from $2.6 million in 1995 to $2.8 million in 1996. The Company is committed to the development of new and enhanced products and believes that new product introductions are required for the Company to maintain its competitive position. During 1997, research and development expenses represented 8.1% of total net revenues, compared to 9.1% and 11.6% in 1996 and 1995, respectively. Selling. Selling expenses increased 28.8% from $4.7 million in 1996 to $6.1 million in 1997 primarily because of higher commission expenses resulting from higher sales levels, the addition of sales and marketing staff and the opening of an office in Scotland in 1997. Selling expenses increased by 26.5% from $3.7 million in 1995 to $4.7 million in 1996 as a result of both higher sales commission expenses from increased sales levels and the addition of sales personnel in the U.S. and Asia. During 1997 selling expenses represented 16.5% of total net revenues, compared to 15.5% and 16.3% in 1996 and 1995, respectively. General and Administrative. General and administrative expenses increased 11.7% from $2.5 million in 1996 to $2.8 million in 1997 as a result of higher spending associated with the increase in total net revenues. General and administrative expenses increased by 13.6% from $2.2 million in 1995 to $2.5 million in 1996 due primarily to the addition of a managing director and related expenses in Japan. During 1997 general and administrative expenses represented 7.5% of total net revenues, compared to 8.2% and 9.6% in 1996 and 1995, respectively. Total Other Income, Net. Total other income, net decreased 43.7% from $444,000 in 1996 to $250,000 in 1997 primarily due to higher royalty income and exchange rate gains in the prior year. Total other income, net decreased by 46.1% from $824,000 in 1995 to $444,000 in 1996 as a result of more favorable exchange rate results in 1995. Income Taxes. The Company's effective income tax rate decreased from 40.0% in 1996 to 38.6% in 1997 primarily due to an increased benefit from the Company's foreign sales corporation. The effective income tax rates in 1997 and 1996 exceed the U.S. statutory rate due primarily to state income taxes partially offset by realization of foreign sales corporation benefit. The effective income tax rate in 1995 differed from the U.S. statutory rate because the results for 1995 included a $2.3 million favorable income tax adjustment to reverse the valuation allowance for certain deferred tax assets in accordance with SFAS 109. Income. The Company's income from operations was $9.1 million and net income was $5.8 million or $0.65 per diluted share in 1997 compared to income from operations of $6.2 million and net income of $4.0 million or $0.47 per diluted share in 1996 and an income from operations of $2.6 million and net income of $4.3 million or $0.52 per diluted share in 1995. In 1997, the Company adopted Statement of Financial Accounting Standards ("SFAS") No.128, "Earnings Per Share", which requires a dual presentation of basic net income per share ("EPS") and diluted EPS. Basic EPS II-5 is computed by dividing net income by the weighted average common shares outstanding for the period. Diluted EPS reflects the potential dilution from outstanding dilutive stock options and shares issuable under the employee stock purchase plan and is unchanged from previously reported EPS. EPS for prior periods have been restated to conform to SFAS 128. The impact of inflation on the Company's results of operations has not been significant. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1997, the Company had working capital of $28.6 million compared to $22.6 million at December 31, 1996. The current ratio at December 31, 1997 was 6.6 to 1. The Company believes working capital including cash and equivalents and short-term investments of $13.3 million will be sufficient to meet its needs at least through the next twelve months. Operating activities during 1997 provided net cash of $4.2 million primarily from net income partially offset by working capital requirements. Financing activities provided cash of $590,000 from the sale of shares under the employee stock purchase and option plans. Investing activities used cash of $3.1 million, primarily from the purchase of short-term investments in the U.S. During 1996, operating activities provided cash of $356,000 primarily from net income partially offset by working capital requirements. Financing activities provided cash of $358,000 primarily from the sale of shares under the employee stock purchase and option plans. Investing activities used cash of $2.6 million, primarily from the purchase of short-term investments in the U.S. During 1995, operating activities provided cash of $2.3 million primarily from net income partially offset by working capital requirements. Financing activities provided cash of $4.2 million primarily from: (i) a loan to the Company's Japanese subsidiary of $4.7 million from a bank in Japan using the Company's building and land in Japan as collateral and (ii) cash of $351,000 from the sales of shares under the Company's employee stock purchase and option plans; partially offset by $822,000 of repayments of long-term debt. Investing activities used cash of $4.1 million in 1995, primarily from the investment of proceeds of the bank loan in short-term investments in the U.S. The Company has evaluated and will continue to evaluate the acquisition of products, technologies or businesses that are complementary to the Company's business. These activities may result in product and business investments. For example, as discussed in Note 12 of Notes to Consolidated Financial Statements, in January 1998, the Company acquired from Optical Specialties, Inc. a license to manufacture and sell, worldwide, a system used to measure the critical dimensions and overlay registration errors observed in submicron lithography. The Company may pay up to $2.85 million in royalties over 5 years if total product sales are $75 million or greater. On March 30, 1998, the Company entered into an agreement with Optical Specialties, Inc. to purchase the metrology system product line and certain related assets. Under the agreement, the Company is required to pay approximately $3.0 million in cash for all assets and technology and assumes warranty and service obligations of the existing installed base. The Company expects to fund these payments from its cash equivalents, short-term investments and cash flows from operations. RECENTLY ISSUED ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income," which requires that an enterprise report, by major components and as a single total, the change in net assets during the period from nonowner sources; and SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information," which establishes annual and interim reporting standards for an enterprise's business segments and related disclosures about its products, services, geographic areas and major customers. Adoption of these statements will not impact the Company's financial position, results of operations or cash flows. Both statements are effective for the Company in fiscal 1998. II-6 FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS This report contains statements that constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1993, as amended (the "Securities Act"), and Section 21E if the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The words "expect," "estimate," "anticipate," "predict," `believe," and similar expressions and variations thereof are intended to identify forward-looking statements. Such statements appear in a number of places in this report and include statements regarding the intent, belief or current expectations of the Company with respect to, among other things: (i) trends affecting the Company's financial condition or results of operation; (ii) the Company's financing plans; and (iii) the Company's business and growth strategies. Any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and actual results may differ materially from those projected in the forward-looking statements as a result of various factors. The accompanying information contained in this report including without limitation, the information set forth below under "Factors That May Affect Future Operating Results," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," identify important factors that could cause such differences. The Company undertakes no obligation to publicly update or revise forward looking statements made in this report to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events. The following risk factors should be considered by shareholders of and by potential investors in the Company in evaluating the Company, its business, financial condition and business prospects. SIGNIFICANT FLUCTUATIONS IN OPERATING RESULTS. The Company's operating results have fluctuated significantly in the past and may fluctuate significantly in the future. The Company anticipates that the factors that may affect its future operating results include the following: customer demand for the Company's products, which is affected by factors including the cyclicality of the semiconductor, magnetic recording head and flat panel display industries served by the Company, patterns of capital spending by customers, technological changes in the markets served by the Company and its customers, market acceptance of products of both the Company and its customers, the timing, cancellation or delay of customer orders and shipments, competition, including competitive pressures on product prices and changes in pricing by the Company's customers or suppliers, fluctuations in foreign currency exchange rates, particularly the Japanese yen, the proportion of direct sales versus sales through distributors and representatives, market acceptance of new and enhanced versions of the Company's products, the timing of new product announcements and releases of products by the Company or its competitors, including the Company's ability to design, introduce and manufacture new products on a timely and cost effective basis, the size and timing of acquisitions of businesses, products or technologies and fluctuations in the availability and cost of components and subassemblies. Gross margins may vary materially from quarter to quarter or year to year, based on a number of factors, including the mix and average selling prices of products sold and the absorption of fixed operating costs. In addition, the Company's operating results for the quarter ended March 31, 1998, will be affected by a one-time charge relating to the acquisition of in-process research and development from Optical Specialties, Inc. See "Liquidity and Capital Resources". The impact of the factors listed above and other factors on the Company's revenues, financial condition and operating results in any future period cannot be forecasted with any degree of certainty. Based upon these factors, the Company believes that its quarterly and annual revenues, expenses and II-7 operating results could vary significantly in the future and that period-to- period comparisons should not be relied upon as indications of future performance. There can be no assurance that the Company will grow in future periods or that it will sustain its level of revenues or its rate of revenue growth on a quarterly or annual basis. It is likely that, in some future quarter, the Company's operating results will be below the expectations of stock market analysts and investors. In such event, the price of the Company's Common Stock would be materially adversely affected. DEPENDENCE ON LIMITED NUMBER OF SYSTEMS SALES; BACKLOG. The Company derives a substantial portion of its revenues from the sale of a relatively small number of systems. As a result, a small change in the number of systems actually shipped may cause significant changes in revenues in any particular quarter. All customer purchase orders are subject to cancellation or delay by the customers with minimal penalties. Moreover, the Company's backlog at the beginning of a quarter typically does not include all sales required to achieve the Company's revenue objective for that quarter. Consequently, the Company depends to an extent on shipping products in the same quarter that the purchase order is received. The failure of the Company to receive anticipated orders or delays in shipments may cause quarterly net revenues to fall significantly short of the Company's objectives, which would adversely affect the Company's business, financial condition and results of operations. CYCLICALITY OF CUSTOMER INDUSTRIES. Sales to customers in the semiconductor industry represented approximately 80% of the Company's total net revenues in 1997, and sales to customers in the magnetic recording head and flat panel display industries represented approximately 20% of total net revenues in 1997. The Company's business will depend in large part upon the capital equipment expenditures of semiconductor manufacturers, which in turn depends on the current and anticipated market demand for integrated circuits and products utilizing integrated circuits. In addition, the Company's business depends upon the construction of new semiconductor fabrication facilities and improvements to existing fabrication facilities to reduce unit costs or to respond to technological innovation. The semiconductor industry has been cyclical in nature and historically has experienced periodic downturns, most recently during the second half of 1996. Such downturns are characterized by diminished product demand, erosion of average selling prices and production over-capacity. During downturns, manufacturers typically defer or cancel orders for equipment to conserve cash and reduce expenses. There can be no assurance that the Company's business, financial condition and results of operations will not be adversely affected by future downturns in the semiconductor industry. During the downturn in 1996, the Company offset declines in orders of its products from the semiconductor industry with increased sales to manufacturers of magnetic recording heads and flat panel displays; however, the Company may not be able to do so in future industry downturns. In addition, the magnetic recording head and flat panel display industries are subject to similar cyclical conditions that could materially affect the market for the Company's products and the Company's business, financial condition and results of operations. The Company may also experience substantial period-to-period fluctuations in future operating results due to such industry conditions or events occurring in the general economy. Even during periods of reduced revenues, in order to remain competitive the Company will be required to continue to invest in research and development and to maintain extensive ongoing worldwide customer service and support capability, which could have a material adverse impact on the Company's business financial condition and results of operations during industry downturns or other periods of reduced revenues. LENGTHY SALES CYCLE; DIFFICULTIES IN DISPLACING ENTRENCHED COMPETITORS. Sales of the Company's systems depend, in significant part, upon the decision of prospective customers to increase their existing production capacity by building and equipping new fabrication facilities or expanding existing facilities, either of which typically involves a significant capital commitment. In II-8 view of the significant investment involved in a system purchase, the Company may experience delays in obtaining purchase orders while the customer plans for such expansion, evaluates various thin film measurement systems of the Company and its competitors and receive purchase approvals. Due to these and other factors, the Company's systems typically have lengthy sales cycles during which the Company may expend substantial funds and management effort. In addition, lengthy sales cycles subject the Company to a number of significant risks, including inventory obsolescence and fluctuations in operating results over which the Company has little or no control. Customers often evaluate several suppliers' systems before deciding on the type of thin film measurement system to use. The Company believes that the customer generally relies upon that system for the specific production line application and frequently will attempt to consolidate its other thin film measurement system requirements with the same supplier. Accordingly, the Company expects to experience difficulty in selling to a particular customer for a significant period of time if that customer already uses a competitor's thin film measurement system. HIGHLY COMPETITIVE INDUSTRY. The market for thin film measurement systems is subject to intense competitive pressure and characterized by rapidly evolving technology. The Company competes on a global basis with both larger and smaller companies in the United States, Japan and Europe. The Company competes primarily with thin film measurement products from KLA-Tencor Corporation, Therma-Wave Inc., Rudolph Technologies, Dai Nippon Screen and Toray Industries. Many of the Company's competitors have substantially greater financial, engineering, manufacturing and marketing resources than the Company. The Company expects its competitors to continue to improve the design and performance of their current products and to introduce new products with improved price and performance characteristics. For example, the Company expects to face intense competition in the emerging market for 300 mm thin film measurement systems. New product introductions and enhancements by the Company's competitors could cause a significant decline in sales or loss of market acceptance of the Company's systems or otherwise make the Company's systems or technology obsolete or noncompetitive. There can be no assurance that Company will be able to compete successfully against current or future competitors. Increased competitive pressure could lead to reduced demand and lower prices for the Company's products, thereby materially adversely affecting the Company's business, financial condition and results of operations. RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS; RECENT ECONOMIC TRENDS IN ASIA. International revenues accounted for approximately 60.3% of the Company's total net revenues for 1997. The Company anticipates that international revenues will continue to account for a substantial portion of its total net revenues in the foreseeable future. The Company's international operations are subject to risks inherent in the conduct of international business, including unexpected changes in regulatory requirements, exchange rates, import or export requirements, tariffs and other barriers, political and economic instability, limited intellectual property protection, difficulties in collecting payments due from sales agents or customers, difficulties in managing distributors or representatives, difficulties in staffing and managing foreign subsidiary operations and potentially adverse tax consequences. Furthermore, downturns in foreign capital markets could affect the Company's international customers, which could have a material adverse effect on the Company's business, financial condition and results of operations. Recent economic trends, particularly in the Asia-Pacific marketplace, have caused a heightened awareness of the impact of this portion of the world's economy can have on the overall economy. As the Asia-Pacific market currently represents almost one-third of the world's buying power and approximately 51.7% of the Company's 1997 sales are to this region, changes in this area's economic growth rate may impact suppliers of product in that market. While the actual II-9 magnitude of the business at risk is unknown, it is likely that capital spending in this market will decrease which could have a material adverse impact on the Company's business, financial condition and results of operations. In addition, the future performance of the Company will be dependent, in part, upon its ability to continue to compete successfully in Asia, one of the largest markets for the Company's products. The Company's ability to compete in this area in the future is dependent upon the continuation of favorable trading relationships between the region (especially Japan, Korea and Taiwan) and the United States and the continuing ability of the Company to maintain satisfactory relationships with customers and potential customers in the region. In addition, the Japanese market, which is important to the Company's sales, has historically been difficult for non-Japanese companies to penetrate. Although the Company has had direct presence in Japan since 1985, there can be no assurance that the Company will be able to maintain or improve its competitive position in Japan. Approximately 27.5% of the Company's total net revenues for 1997, were generated by the Company's Japanese subsidiary and are denominated in Japanese yen. A significant fluctuation in the exchange rate between the yen and the U.S. dollar could result in a significant gain or loss being recorded in the Company's consolidated statement of income. A decline in the exchange rate of the yen against the U.S. dollar would result in a decrease in consolidated total net revenues and consolidated net income, whereas an increase in the exchange rate of the yen against the U. S. dollar would result in an increase in consolidated total net revenues and consolidated net income. Generally, a change in the exchange rate would have a similar impact on the consolidated net income associated with accounts due between the U.S. parent and the Japanese subsidiary. The Company's international revenues in countries except Japan are denominated in U.S. dollars and sales to customers may be affected by fluctuations in exchange rates which could increase the sales price in local currencies of the Company's products. Since the Company does not currently engage in currency exchange rate hedging transactions, there can be no assurance that fluctuations in currency exchange rates in the future will not have a material adverse effect on the Company's business, financial condition and results of operations. RAPID TECHNOLOGICAL CHANGE; IMPORTANCE OF TIMELY PRODUCT INTRODUCTION. The film measurement industry is subject to rapid technological change and new product introductions and enhancements. The Company believes that a key factor in its growth in the past three years has been the success of new product introductions, including the Model 8000 and Model 5500 introduced in 1995. A key factor in the Company's ability to achieve continued growth will be the market success of recent new product introductions, including products for 300 mm wafers, chemical mechanical polishing and large flat panel displays. The Company's ability to remain competitive will depend in part upon its ability to respond to technological change and develop new and enhanced systems and tointroduce these systems at competitive prices and in a timely and cost- effective manner. New product introductions may contribute to fluctuations in quarterly operating results, since customers may defer ordering product from the Company's existing product line in anticipation of the introduction of the new product or product enhancement. In addition, new product introductions or enhancements of existing products by the Company's competitors could cause a decline in sales or loss of market acceptance of the Company's existing products or render the Company's current product offerings obsolete. The success of the Company in developing, introducing and selling new and enhanced systems depends upon a variety of factors, including product selections, timely and efficient completion of product design and development, timely and efficient implementation of manufacturing and assembly processes, effective sales and marketing and product performance. Because new product development commitments must be made well in advance of sales, new product decisions must anticipate both the future demand for the products under development and the equipment required to produce such products. If new products have reliability or quality problems, II-10 reduced orders, higher manufacturing costs and additional service and warranty expenses may result. There can be no assurance that the Company will be successful in selecting, developing, manufacturing and marketing new products or in enhancing existing products. If the Company does not successfully introduce new products, the Company's business financial condition and results of operations will be materially adversely affected. UNCERTAINTY OF INTELLECTUAL PROPERTY RIGHTS. The Company's future success and competitive position depends in large part on the Company's ability to obtain and maintain certain proprietary technology used in its systems. The Company relies on a combination of patents, trademarks, copyrights, trade secret laws and confidentiality procedures to protect its proprietary rights. There can be no assurance that the Company will be able to protect its technology or that competitors will not be able to develop similar technology independently. In addition, the laws of certain foreign countries may not protect the Company's intellectual property rights to the extent as do the laws of the United States. The validity of the Company's patents has not been adjudicated by any court. Competitors may bring legal challenges to the validity of one or more of these patents, or attempt to circumvent the patents. There can be no assurance that Company's patents will be sufficiently broad to protect the Company's technology, or that any existing or future patents will not be challenged, invalidated or circumvented, or that the rights granted thereunder will provide meaningful competitive advantages to the Company. Furthermore, there can be no assurance that others will not independently develop similar products, duplicate the Company's products, or if patents are issued to the Company, design around such patents. The Company does not believe that its products infringe any patents or proprietary rights of others. However, there can be no assurance that such infringements do not exist or will not occur in the future. As is typical in the high technology industry, the Company has from time to time received, and may in the future receive, communications alleging possible infringement of patents or other intellectual property rights of others. The Company investigates all such notices and responds as appropriate In 1997, the Company received a claim from another company that alleged the Company's sale of a measurement system with an ellipsometer violated such party's patent and requested the Company discontinue marketing such products. The Company reviewed the patent and advised such party that the Company believes that there is prior art that would invalidate such patent. The Company has not been contacted again by such party. In addition, some customers of the Company received notices of infringement from Technivision Corporation/the estate of Jerome Lemelson alleging that equipment used in the manufacture of semiconductor products infringes their patents. A number of these customers have notified the Company that they may seek indemnification from the Company for any damages and expenses resulting from this matter. Certain of the Company's 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, there can be no assurance that the resolution of all such pending matters will not have a material adverse effect on the Company's business, financial condition or results of operations. Based on industry practice, the Company believes that in most cases it could obtain any necessary licenses or other rights on commercially reasonable terms, but no assurance can be given that licenses would be available or would be on acceptable terms, that litigation would not ensue or that damages for any past infringement would not be assessed. Litigation may be necessary in the future to enforce patents issued to the Company, to protect trade secrets of know-how owned by the Company, to defend the Company against claimed infringement of the right of others or to determine the scope and validity of the proprietary rights of others. Any such litigation could result in substantial cost and diversion of effort by the Company, which could have a material adverse effect II-11 on the Company's business, financial condition and results of operations. Moreover, adverse determination in such litigation could result in the Company's loss of proprietary rights, subject the Company to significant liabilities to third parties, require the Company to seek licenses from third parties or prevent the Company from manufacturing or selling its products. The failure to obtain necessary licenses or other rights or litigation arising out of infringement claims could have adverse material effect on the Company's business, financial condition and results of operations. SOLE OR LIMITED SOURCES OF SUPPLY; RELIANCE ON SUBCONTRACTORS; COMPLEXITY IN MANUFACTURING PROCESSES. The Company is relying increasingly on outside vendors to manufacture many components and subassemblies. Certain components, subassemblies and services necessary for the manufacture of the Company's systems are obtained from a sole supplier or limited group of suppliers. For example, the Company relies on Kensington Laboratories for the robotics incorporated in the Company's automated systems. The Company does not maintain any long-term supply agreements with Kensington Laboratories or any of its suppliers. The Company has entered into an agreement with J.A. Woollam Company for the spectroscopic ellipsometer component incorporated in the Company's advanced measurement systems. The Company's reliance on sole or a limited group of suppliers involves several risks, including a potential inability to obtain an adequate supply of required components, reduced control of pricing and timely delivery of components and subassemblies and suppliers' potential inability to develop technologically advanced products to support the Company's growth and development of new systems. Because the manufacturing of certain of these components and subassemblies involves extremely complex process and requires long lead times, there can be no assurance that delays or shortages caused by suppliers will not occur in the future. The Company believes that alternative sources could be obtained and qualified, if necessary, for most sole and limited source parts. However, if the Company were forced to seek alternative sources of supply or to manufacture such components or subassemblies internally, it may be required to redesign its systems, which could prevent the Company from shipping its systems to its customers on a timely basis. Certain of the Company's suppliers have relatively limited financial and other resources. Any inability to obtain adequate deliveries or any other circumstance that would restrict the Company's ability to ship its products, could damage relationships with current and prospective customers and could have a material adverse impact on the Company's business, financial condition and results of operations. MANAGEMENT OF GROWTH. The Company's business is currently experiencing a period of growth that has placed and is expected to continue to place a significant strain on the Company's personnel and resources. The Company's ability to manage future growth, if any, will depend on its ability to continue to implement and improve operational, financial and management information and controls systems on a timely basis, together with maintaining effective cost controls. To support any future growth, the Company will need to hire more engineering, manufacturing, sales, marketing, support and administrative personnel, and expand customer service capabilities. Competition worldwide for the necessary personnel in the Company's industry is intense. There can be no assurance that the Company will be able to attract and retain the necessary personnel or that it will be able to satisfy customer demand in a timely fashion and satisfactorily support its customers and operations. In addition, international growth will require the Company to expand its direct operations worldwide and enhance its communications infrastructure. Expansion of operations to various geographic areas with different business cultures could further strain the Company's management systems. The inability of the Company's management to manage growth effectively could have a material adverse effect on the Company's business, financial condition and results of operations. INFORMATION SYSTEMS AND THE YEAR 2000. The Company's information system uses a two digit date code and, as a result, will not recognize the difference between the years 2000 and 1900. II-12 The Company has been informed by the vendor of the software that an upgrade is available which will appropriately recognize Year 2000 date information. The Company plans to license this upgrade and implement it by 1999. Management believes that the cost for the license and the related internal and external costs to implement the upgrade will not have a material adverse affect on the Company's results of operations or cash flows. Many of the Company's products incorporate systems which utilize personal computers and related software to control certain functionality. The Company believes that its current products, which all use current versions of personal computer operating systems and software are compliant with the Year 2000. The Company is currently assessing the extent to which its older products may incorporate software which is not Year 2000 compliant and, based on the results of that assessment, will determine what action, if any, is necessary. Management believes that the cost of any such actions will not have a material adverse affect on the Company's results of operations or cash flows. DEPENDENCE UPON KEY EMPLOYEES. Because of the specialized nature of the Company's business, the Company's future performance depends upon the continued service of members of the Company's senior management and other key research and development and sales and marketing personnel. The loss of any of such persons could have a material adverse effect on the Company's business, financial condition and results of operations. The Company does not have employment contracts with any of its employees in the United States. The Company believes that its future success will depend upon it continuing ability to identify, attract, train and retain highly skilled managerial, technical, sales and marketing personnel in key areas worldwide. Hiring for such personnel is highly competitive. There can be no assurance that the Company will be able to continue to attract, assimilate and retain the qualified personnel necessary for the development of its business. The failure to recruit additional key personnel in a timely manner, or the failure to retain new or current personnel, would have a material adverse effect on the Company's business, financial condition and results of operations. IMPACT OF INDUSTRY CONSOLIDATION. The Company believes that the thin film measurement system market is undergoing a period of consolidation which could impact the Company's future success. A number of suppliers have been acquired by larger equipment manufacturers. For example, KLA Corporation recently acquired a competitor of the Company, Tencor Corporation, to form KLA-Tencor Corporation. The Company believes that similar acquisitions and business combinations involving competitors and potential competitors of the Company may occur in the future. Such acquisitions could adversely impact the Company's competitive position by enabling the Company's competitors and potential competitors to expand their product offerings and provide direct customer support worldwide, which could afford them an advantage in meeting customers' needs, particularly with those customers that seek to consolidate their capital equipment requirements with the same vendor. The greater resources, including financial, marketing and support resources, of competitors engaged in these acquisitions could permit them to accelerate the development and commercialization of new competitive products and the marketing of existing competitive products to their larger installed bases. Accordingly, such business combinations and acquisitions by competitors and potential competitors could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the Company has in the past considered consolidation with other companies and could consider such consolidations in the future in order to enhance the Company's competitive position or respond to competitive pressures. II-13 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ------------------------------------------- The financial statements filed herewith are listed in the index in Item 14. II-14 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, 1997 and 1996, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP San Jose, California February 13, 1998 (March 30, 1998 as to the last paragraph of Note 12) II-15
NANOMETRICS INCORPORATED CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 AND 1996 (IN THOUSANDS, EXCEPT SHARE AMOUNTS) - ---------------------------------------------------------------------------------------------------------------------- ASSETS 1997 1996 CURRENT ASSETS: Cash and equivalents......................................................................... $3,656 $1,725 Short-term investments....................................................................... 9,595 6,657 Accounts receivable, net of allowances of $413 and $419 in 1997 and 1996, respectively............................................................. 10,225 11,100 Inventories.................................................................................. 7,138 5,078 Prepaid expenses and other................................................................... 1,075 882 Deferred income taxes........................................................................ 2,094 1,648 ------- ------- Total current assets................................................................. 33,783 27,090 PROPERTY, PLANT AND EQUIPMENT, Net......................................................... 2,187 2,600 OTHER ASSETS.................................................................................. 273 274 ------- ------- TOTAL.......................................................................................... $36,243 $29,964 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable............................................................................. $ 1,889 $ 1,563 Accrued payroll and related expenses......................................................... 596 533 Other current liabilities.................................................................... 1,493 763 Income taxes payable......................................................................... 565 1,271 Current portion of debt obligations.......................................................... 604 347 ------- ------- Total current liabilities........................................................... 5,147 4,477 DEBT OBLIGATIONS, Net of current portion..................................................... 2,568 3,296 DEFERRED INCOME TAXES........................................................................ - 131 ------- ------- Total liabilities................................................................... 7,715 7,904 ------- ------- COMMITMENTS AND CONTINGENCIES (Note 7) SHAREHOLDERS' EQUITY: Common stock, no par value; 25,000,000 shares authorized; 8,521,484 and 8,258,061 outstanding in 1997 and 1996, respectively........................ 13,151 11,833 Retained earnings............................................................................ 16,144 10,387 Accumulated translation adjustment........................................................... (767) (160) ------- ------- Total shareholders' equity.......................................................... 28,528 22,060 ------- ------- TOTAL.......................................................................................... $36,243 $29,964 ======= =======
See notes to consolidated financial statements. II-16
NANOMETRICS INCORPORATED CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - -------------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 NET REVENUES: Product sales................................................................. $32,767 $24,603 $18,117 Service....................................................................... 3,890 5,733 4,642 ------- ------- ------- Total net revenues.................................................... 36,657 30,336 22,759 ------- ------- ------- COSTS AND EXPENSES: Cost of product sales......................................................... 12,092 10,109 8,189 Cost of service............................................................... 3,632 4,088 3,406 Research and development...................................................... 2,986 2,754 2,631 Selling....................................................................... 6,050 4,696 3,712 General and administrative.................................................... 2,765 2,476 2,180 ------- ------- ------- Total costs and expenses............................................... 27,525 24,123 20,118 ------- ------- ------- INCOME FROM OPERATIONS........................................................ 9,132 6,213 2,641 ------- ------- ------- OTHER INCOME (EXPENSE): Interest income............................................................... 535 390 302 Interest expense.............................................................. (110) (92) (152) Other, net.................................................................... (175) 146 674 ------- ------- ------- Total other income, net............................................... 250 444 824 ------- ------- ------- INCOME BEFORE INCOME TAXES................................................... 9,382 6,657 3,465 PROVISION (BENEFIT) FOR INCOME TAXES......................................... 3,625 2,664 (812) ------- ------- ------- NET INCOME..................................................................... $ 5,757 $ 3,993 $ 4,277 ======= ======= ======= NET INCOME PER SHARE: Basic......................................................................... $0.69 $0.50 $0.56 ======= ======= ======= Diluted....................................................................... $0.65 $0.47 $0.52 ======= ======= ======= SHARES USED IN PER SHARE COMPUTATION: Basic......................................................................... 8,325 8,047 7,604 ======= ======= ======= Diluted....................................................................... 8,820 8,524 8,280 ======= ======= =======
See notes to consolidated financial statements. II-17
NANOMETRICS INCORPORATED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN THOUSANDS, EXCEPT SHARE AMOUNTS) - ------------------------------------------------------------------------------------------------------------------------------ Common Stock Accumulated Total -------------------------------- Retained Translation Shareholders' Shares Amount Earnings Adjustment Equity BALANCES, January 1, 1995...................... 7,370,978 $10,018 $ 2,117 $ 860 $12,995 Issuance of common stock under employee stock purchase plan.................. 26,504 29 - - 29 Issuance of common stock under stock option plan............................. 486,428 322 - - 322 Tax benefit of employee stock transactions.................................. - 614 - - 614 Change in accumulated translation adjustment.................................... - - - (663) (663) Net income...................................... - - 4,277 - 4,277 --------- ------- -------- ------- ------- BALANCES, December 31, 1995.................... 7,883,910 10,983 6,394 197 17,574 Issuance of common stock under employee stock purchase plan.................. 25,627 115 - - 115 Issuance of common stock under stock option plan............................. 348,524 233 - - 233 Tax benefit of employee stock transactions.................................. - 502 - - 502 Change in accumulated translation adjustment.................................... - - - (357) (357) Net income...................................... - - 3,993 - 3,993 --------- ------- ------------- ----------- ------- BALANCES, December 31, 1996.................... 8,258,061 11,833 10,387 (160) 22,060 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 Change in accumulated translation adjustment.................................... - - - (607) (607) Net income...................................... - - 5,757 - 5,757 --------- ------- ------------- ----------- ------- BALANCES, December 31, 1997.................... 8,521,484 $13,151 $16,144 $(767) $28,528 ========= ======= ============= =========== =======
See notes to consolidated financial statements. II-18
NANOMETRICS INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (IN THOUSANDS) - -------------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 CASH FLOWS FROM OPERATING ACTIVITIES: Net income.................................................................... $ 5,757 $ 3,993 $ 4,277 Reconciliation of net income to net cash provided by operating activities: Depreciation and amortization............................................... 213 309 318 Deferred income taxes....................................................... (588) 263 (1,826) Changes in assets and liabilities: Accounts receivable....................................................... 93 (4,031) (2,886) Inventories............................................................... (2,322) (1,228) 766 Prepaid expenses and other................................................ (218) (458) (202) Accounts payable, accrueds and other current liabilities.................. 1,251 111 782 Income taxes payable...................................................... 26 1,397 1,050 -------- -------- ------- Net cash provided by operating activities............................ 4,212 356 2,279 -------- -------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of short-term investments........................................... (18,152) (12,522) (8,786) Sales/maturities of short-term investments.................................... 15,214 10,321 4,821 Purchases of property, plant and equipment.................................... (97) (270) (117) Other assets.................................................................. (17) (128) (60) -------- -------- ------- Net cash used in investing activities................................ (3,052) (2,599) (4,142) -------- -------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of debt obligations.................................... 329 762 4,700 Repayments of debt obligations................................................ (329) (752) (822) Sale of shares under employee stock purchase and option plans................. 590 348 351 -------- -------- ------- Net cash provided by financing activities............................ 590 358 4,229 -------- -------- ------- EFFECT OF EXCHANGE RATE CHANGES ON CASH................................... 181 (15) (876) -------- -------- ------- NET CHANGE IN CASH AND EQUIVALENTS......................................... 1,931 (1,900) 1,490 CASH AND EQUIVALENTS, Beginning of year....................................... 1,725 3,625 2,135 -------- -------- ------- CASH AND EQUIVALENTS, End of year............................................. $ 3,656 $ 1,725 $ 3,625 ======== ======== ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest........................................................ $ 117 $ 118 $ 135 ======== ======== ======= Cash paid for income taxes.................................................... $ 4,192 $ 715 $ 157 ======== ======== =======
See notes to consolidated financial statements. II-19 NANOMETRICS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS - Nanometrics Incorporated (the "Company") is a leading manufacturer of thin film measurement and analysis systems. The Company's primary customers are manufacturers of semiconductors, disk drives and flat panel displays. These film measurement systems combine proprietary computer software and patented optic technology to measure film thickness and uniformity as well as chemical composition. The primary application of these systems is to precisely monitor production processes employed in the fabrication of integrated circuits, magnetic recording heads used in disk drives and flat panel displays most commonly used in laptop computers. BASIS OF PRESENTATION - The consolidated financial statements include the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. FISCAL YEAR - The Company uses a 52/53 week fiscal year ending on the Saturday nearest to December 31. Accordingly, fiscal years 1997, 1996 and 1995 ended on January 3, 1998, December 28, 1996 and December 30, 1995, and consisted of 53, 52 and 52 weeks, respectively. For purposes of the consolidated financial statements, the year end is stated as December 31. All references to years relate to fiscal years rather than calendar years. 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. Significant estimates include provisions for doubtful accounts, warranty costs and net realizable value of inventory. Actual results could differ from those estimates. CONCENTRATION OF CREDIT RISK - Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of cash and equivalents, short-term investments and accounts receivable. The Company invests its cash and equivalents and short-term investments generally in United States Treasury bills that are primarily held by one broker. The Company performs ongoing credit evaluations of its customers and generally does not require collateral for sales on credit. The Company also maintains reserves for potential credit losses. CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES - 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 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 and services offered by the Company; changes in certain strategic partnerships or customer relationships; litigation or claims against the Company based on intellectual property, patent, product, regulatory or other factors (see Note 7); risks associated with changes in domestic and international economic and/or political II-20 conditions or regulations; availability of necessary product components; risks associated with year 2000 compliance; and the Company's ability to attract and retain employees necessary to support its growth. Certain components used in the Company's products are purchased only from one source. In particular, the Company currently purchases its robotics used in its automated systems and its spectroscopic ellipsometer used in its advanced measurement systems from separate single sources of supply. Any shortage or interruption in the supply of any of the components used in the Company's products, or the inability of the Company to procure these components from alternate sources on acceptable terms, could have a material adverse effect on the Company's business, financial condition and results of operations. CASH AND EQUIVALENTS - Cash and equivalents include cash and highly liquid debt instruments with original maturities of three months or less when purchased. SHORT-TERM INVESTMENTS - The Company's short-term investments consist of United States Treasury bills with maturities at the date of acquisition of more than three months. While the Company's intent is to hold such debt securities to maturity, they are classified as available-for-sale because the sale of such securities may be required prior to maturity. Available-for- sale securities at December 31, 1997 are stated at cost which approximates fair market value. INVENTORIES - Inventories are stated at the lower of cost (first-in, first- out) or market. PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are stated at cost. Depreciation is computed using straight line and accelerated methods over the estimated useful lives of the assets ranging from three to 45 years. Leasehold improvements are amortized over the shorter of the estimated useful lives of the improvements or the lease term. FAIR VALUE OF FINANCIAL INSTRUMENTS - Financial instruments include cash equivalents, short-term investments, and debt obligations. Cash equivalents are stated at fair market value based on quoted market prices. Short-term investments are stated at cost which approximates fair market value. The recorded carrying amount of the Company's debt obligations approximates fair market value. 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." REVENUE RECOGNITION - Revenues from product sales are recognized at the time of shipment. Revenues from service work is recognized when performed. Revenue from service contracts is recognized ratably over the period of the contract. The Company 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. 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 a loss of $217,000 for 1997 and gains of $39,000 and $623,000 for 1996 and 1995, respectively. INCOME TAXES -The Company accounts for income taxes under an asset and liability approach for financial accounting and reporting of 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 tax credit carryforwards. II-21 NET INCOME PER SHARE - In 1997, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share" and, retroactively, restated net income per share ("EPS") for 1996 and 1995. SFAS 128 requires a dual presentation of basic and diluted EPS. Basic EPS excludes dilution and is computed by dividing net income by the number of weighted average common shares outstanding for the period. Diluted EPS 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 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income," which requires that an enterprise report, by major components and as a single total, the change in net assets during the period from nonowner sources; and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which establishes annual and interim reporting standards for an enterprise's business segments and related disclosures about its products, services, geographic areas and major customers. Adoption of these statements will not impact the Company's financial position, results of operations or cash flows. Both statements are effective for the Company in fiscal 1998. 2. INVENTORIES Inventories at December 31 consist of the following (in thousands):
1997 1996 Finished goods........................................... $2,934 $1,809 Work in process.......................................... 1,528 1,414 Raw materials and subassemblies.......................... 2,676 1,855 ------ ------ $7,138 $5,078 ====== ======
3. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at December 31 consist of the following (in thousands):
1997 1996 Land.............................................................. $ 813 $ 908 Building.......................................................... 2,455 2,753 Machinery and equipment........................................... 1,243 1,510 Furniture and fixtures............................................ 404 281 Leasehold improvements............................................ 273 397 ------- ------- 5,188 5,849 Accumulated depreciation and amortization......................... (3,001) (3,249) ------- ------- $ 2,187 $ 2,600 ======= =======
II-22 4. OTHER CURRENT LIABILITIES Other current liabilities at December 31 consist of the following (in thousands):
1997 1996 Commissions payable................................ $ 564 $ 269 Accrued warranty................................... 479 303 Other.............................................. 450 191 ------ ----- $1,493 $ 763 ====== =====
5. INCOME TAXES Income (loss) before income taxes for the years ended December 31 consists of the following (in thousands):
1997 1996 1995 Domestic............................... $9,644 $6,305 $1,964 Foreign................................ (262) 352 1,501 ------ ------ ------ $9,382 $6,657 $3,465 ====== ====== ======
The provision (benefit) for income taxes for the years ended December 31 consists of the following (in thousands):
1997 1996 1995 Current: Federal................................................. $3,080 $1,583 $ 477 State................................................... 884 354 137 Foreign................................................. 181 304 461 ------ ------ ------- 4,145 2,241 1,075 ------ ------ ------- Deferred: Federal................................................. (574) 287 (1,302) State................................................... 9 186 (557) Foreign................................................. 45 (50) (28) ------ ------ ------- (520) 423 (1,887) ------ ------ ------- Provision (benefit) for income taxes...................... $3,625 $2,664 $ (812) ====== ====== =======
II-23 Significant components of the Company's net deferred tax asset (liability) at December 31 are as follows (in thousands):
1997 1996 Deferred tax assets: Reserves and accruals not currently deductible.................. $1,953 $1,466 Capitalized inventory costs..................................... 123 182 Tax credit carryforwards........................................ 31 - ------ ------ Total deferred tax assets......................................... 2,107 1,648 Deferred tax liabilities: Depreciation.................................................... - (56) Other........................................................... - (75) ------ ------ Total deferred tax liabilities.................................... - (131) ------ ------ Net deferred tax assets........................................... $2,107 $1,517 ====== ======
At December 31, 1997, $13,000 of the net deferred tax assets are classified as noncurrent (and included in other assets) and $2,094,000 is classified as current. Differences between income taxes computed by applying the statutory federal income tax rate to income before income taxes and the provision (benefit) for income taxes for the years ended December 31 consist of the following (in thousands):
1997 1996 1995 Income taxes computed at 35% U.S. statutory rate......................... $3,284 $2,330 $ 1,213 State income taxes....................................................... 589 356 - Foreign taxes higher than U.S. taxes..................................... - 60 225 Foreign sales corporation benefit........................................ (274) (205) (66) Nondeductible expenses................................................... 94 87 84 Change in valuation allowance............................................ - - (2,339) Other, net............................................................... (68) 36 71 ------ ------ ------- Provision (benefit) for income taxes..................................... $3,625 $2,664 $ (812) ====== ====== =======
The reduction in the Company's valuation allowance in 1995 reflected the Company's assessment that it was more likely than not that it would generate sufficient taxable income to realize the tax benefits associated with its deferred tax assets. 6. DEBT OBLIGATIONS Debt obligations at December 31 consist of the following (in thousands):
1997 1996 1995 working capital bank loan..................................... $2,266 $2,949 1996 working capital bank loan..................................... 604 694 Other.............................................................. 302 - ------ ------ Total.............................................................. 3,172 3,643 Current portion of debt obligations................................ (604) (347) ------ ------ Debt obligations, net of current portion........................... $2,568 $3,296 ====== ======
II-24 The 1995 working capital bank loan was obtained by the Company's Japanese subsidiary. The loan is secured by receivables of the Japanese subsidiary and is guaranteed by the parent, Nanometrics Incorporated. The loan is denominated in Japanese yen ((Yen)300,000,000 at December 31, 1997) and bears interest at 3.3% per annum. The loan is payable in quarterly installments with unpaid principal and interest due May 2005. The 1996 working capital bank loan was also obtained by the Company's Japanese subsidiary and is secured by land and building. The loan is denominated in Japanese yen ((Yen)80,000,000 at December 31, 1997) and bears interest at 3.4% per annum. The loan is payable in quarterly installments beginning May 1998 with unpaid principal and interest due May 2006. Other represents unsecured borrowings by the Company's Japanese subsidiary pursuant to an overdraft facility which bears interest at 1.925% per annum. At December 31, 1997, (Yen)40,000,000 is outstanding under the facility. At December 31, 1997, future annual maturities of debt obligations are as follows (in thousands): 1998............................ $ 604 1999............................ 302 2000............................ 302 2001............................ 302 2002............................ 302 Thereafter...................... 1,360 ------ $3,172 ======
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, 1996 and 1995, was approximately $583,000, $483,000 and $420,000, respectively. Future minimum lease payments under the Company's operating leases for each of the years ending December 31 are as follows (in thousands): 1998.............................. $ 653 1999.............................. 609 2000.............................. 617 2001.............................. 581 2002.............................. 191 ------ $2,651 ======
Pursuant to a 1985 agreement, as amended, if the Company's Chief Executive Officer is required to relinquish his position for any reason, the Company has agreed to continue his salary for a period of five years from such date. 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, II-25 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. 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 for the years ended December 31 are as follows (in thousands):
1997 1996 1995 Weighted average shares outstanding - shares used in basic net income per share computation...................................... 8,325 8,047 7,604 Dilutive effect of common stock equivalents, using the treasury stock method............................................. 495 477 676 ----- ----- ----- Shares used in diluted net income per share computation....................... 8,820 8,524 8,280 ===== ===== =====
During 1997, 1996 and 1995, 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, 5,000 such common stock options with a weighted average exercise price of $10.88 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 purchase 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 ratably generally over a period of three years 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 purchase 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 ratably over a period of three years and expire five years from the date of grant. The total shares authorized under the Directors' Plan are 300,000. II-26 Option activity under the plans is summarized as follows:
OUTSTANDING OPTIONS ---------------------------------------------------- WEIGHTED SHARES NUMBER OF AVERAGE AVAILABLE SHARES EXERCISE PRICE Balances, January 1, 1995....................................... 941,500 1,283,700 $0.66 Exercised....................................................... - (486,428) 0.66 Granted (weighted average fair value of $3.20).................. (636,700) 636,700 4.76 Canceled........................................................ 122,500 (204,400) 0.73 --------- --------- Balances, December 31, 1995 (372,312 exercisable at a weighted average price of $0.63)..................................................... 427,300 1,229,572 2.77 Exercised....................................................... - (348,524) 0.67 Granted (weighted average fair value of $3.61).................. (308,500) 308,500 5.36 Canceled........................................................ 91,607 (91,607) 3.69 --------- --------- Balances, December 31, 1996 (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..................................... 1,236,046 1,333,361 6.37 ========= =========
Additional information regarding options outstanding as of December 31, 1997 is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------------ ------------------------------ WEIGHTED AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE $ 0.56 - $ 0.75 92,507 2.1 $0.57 89,207 $0.57 $ 0.88 - $ 2.06 101,004 3.0 2.04 68,223 2.03 $ 4.31 - $10.88 1,139,850 4.1 7.23 345,837 5.74 --------- ------- $ 0.56 - $10.88 1,333,361 3.9 6.37 503,267 4.32 ========= =======
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, 25,627 and 26,504 in 1997, 1996 and 1995 at weighted average prices of $4.58, $4.49 and $1.10, respectively. II-27 The weighted average per share fair values of the 1997, 1996 and 1995 awards were $4.41, $5.16 and $5.19, respectively. At December 31, 1997, 72,837 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 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 significantly differ 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 1991 Option Plan and the 1991 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 and four years from the date of grant in 1996 and 1995; stock volatility, 80% in 1997 and 90% in 1996 and 1995; risk free interest rate, 6.1% in 1997 and 6.0% in 1996 and 1995; 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% per year. 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, 1996 and 1995; stock volatility, 80% in 1997 and 90% in 1996 and 1995; risk free interest rate, 5.5% in 1997, 5.6% in 1996 and 6.0% in 1995; and no dividends during the expected term. If the computed fair values of the 1997, 1996 and 1995 awards 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 the years ended December 31 (in thousands except per share amounts):
1997 1996 1995 Pro forma net income...................... $5,057 $3,576 $4,116 Pro forma net income per share: Basic................................... $ 0.61 $ 0.44 $ 0.54 Diluted................................. $ 0.60 $ 0.43 $ 0.51
The impact of outstanding stock options and shares issuable under the Purchase Plan granted prior to 1995 have been excluded from the pro forma calculations; accordingly, the 1997, 1996 and 1995 pro forma adjustments are not indicative of future period pro forma adjustments, when the calculation will apply to all applicable stock-based compensation arrangements. II-28 9. PROFIT-SHARING AND RETIREMENT AND BONUS PLANS No contributions were made by the Company in 1997, 1996 and 1995 to the Company's discretionary profit-sharing and retirement plan. The Company paid $678,000, $523,000 and $188,000 in 1997, 1996 and 1995, respectively, under formal discretionary cash bonus plans which cover all eligible employees. 10. MAJOR CUSTOMER AND GEOGRAPHIC INFORMATION In 1997, sales to one customer accounted for approximately 11% of total revenues. In 1996, no single customer accounted for 10% or more of total revenues. In 1995, sales to a different customer than in 1997 represented approximately 10% of total revenues. At December 31, 1997, one customer accounted for 10% of accounts receivable. At December 31, 1996, no single customer accounted for 10% or more of accounts receivable. Transfers between geographic areas are recorded at amounts above cost with profit intended to reflect the economic substance of the transaction. Identifiable assets of geographic areas represent those assets used in the Company's operations in each area. The following table summarizes selected geographic financial information of the Company as of and for the years ended December 31 (in thousands).
1997 1996 1995 Total net revenues: United States.......................................... $26,477 $20,781 $13,876 Japan.................................................. 10,086 9,454 8,883 Korea.................................................. 90 101 - Taiwan................................................. 4 - - ------- ------- ------- $36,657 $30,336 $22,759 ======= ======= ======= Export sales: Korea.................................................. $ 5,864 $ 4,062 $ 2,417 Europe................................................. 2,288 1,235 2,326 Other (primarily Asia)................................. 3,786 1,063 973 ------- ------- ------- $11,938 $ 6,360 $ 5,716 ======= ======= ======= Transfers between United States and Japan eliminated in consolidation............................ $ 6,137 $ 4,118 $ 2,564 ======= ======= ======= Operating income (loss): United States.......................................... $ 8,751 $ 5,280 $ 741 Japan.................................................. 967 1,324 1,900 Korea.................................................. (465) (391) - Taiwan................................................. (121) - - ------- ------- ------- $ 9,132 $ 6,213 $ 2,641 ======= ======= =======
II-29
Identifiable assets: United States.................................. $26,309 $20,805 $15,799 Japan.......................................... 9,726 9,040 9,368 Korea.......................................... 97 119 - Taiwan......................................... 111 - - ------- ------- ------- $36,243 $29,964 $25,167 ======= ======= =======
11. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The following tables set forth selected quarterly results of operations for the years ended December 31, 1997 and 1996 (in thousands, except per share amounts):
Quarters Ended ---------------------------------------------------------- March 31, June 30, Sept. 30, Dec. 31, 1997 1997 1997 1997 Total net revenues......................................... $8,259 $8,699 $9,416 $10,283 Gross profit............................................... 4,659 4,923 5,409 5,942 Income from operations..................................... 2,086 2,019 2,413 2,614 Net income................................................. 1,273 1,373 1,504 1,607 Net income per share:* Basic.................................................... $ 0.15 $ 0.17 $ 0.18 $ 0.19 Diluted.................................................. $ 0.15 $ 0.16 $ 0.17 $ 0.18 Shares used in per share computation: Basic.................................................... 8,260 8,282 8,327 8,431 Diluted.................................................. 8,673 8,665 9,002 8,940 Quarters Ended ---------------------------------------------------------- March 31, June 30, Sept. 30, Dec. 31, 1996 1996 1996 1996 Total net revenues......................................... $7,068 $7,557 $7,739 $ 7,972 Gross profit............................................... 3,696 3,979 4,152 4,312 Income from operations..................................... 1,445 1,477 1,642 1,649 Net income................................................. 834 961 1,027 1,171 Net income per share:* Basic.................................................... $ 0.11 $ 0.12 $ 0.13 $ 0.14 Diluted.................................................. $ 0.10 $ 0.11 $ 0.12 $ 0.14 Shares used in per share computation: Basic.................................................... 7,917 8,043 8,071 8,156 Diluted.................................................. 8,551 8,583 8,514 8,448
* The sum of the quarterly basic and diluted net income per share amounts will not necessarily equal the corresponding amounts for the entire fiscal year in the accompanying consolidated statements of income. II-30 12. SUBSEQUENT EVENTS In January 1998, the Company acquired from Optical Specialties, Inc. ("OSI") a license to manufacture and sell, worldwide, a metrology system used to measure the critical dimensions and overlay registration errors observed in submicron optical lithography. Under the agreement, the Company may pay up to $2.85 million in royalty payments over five years if total product sales are $75 million or greater. On March 30, 1998, the Company entered into an agreement with OSI to purchase the metrology system product line and certain related assets. Under the agreement, the Company is required to pay approximately $3.0 million in cash for all assets and technology and assume warranty and service obligations of the existing installed base. * * * * * II-31 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND --------------------------------------------------------------- FINANCIAL DISCLOSURE -------------------- None II-32 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT -------------------------------------------------- The section entitled "Election of Directors" appearing in the Registrant's proxy statement for the annual meeting of shareholders for the year ended December 31, 1997, sets forth certain information with respect to the directors of the Registrant and is incorporated herein by reference. Certain information with respect to persons who are or may be deemed to be executive officers of the Registrant is set forth under the caption "Business-Executive Officers of the Registrant" in Part I of this report. ITEM 11. EXECUTIVE COMPENSATION ---------------------- The section entitled "Executive Compensation" appearing in the Registrant's proxy statement for the annual meeting of shareholders for the year ended December 31, 1997, sets forth certain information with respect to the compensation of management of the Registrant and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT -------------------------------------------------------------- The section entitled "Election of Directors" appearing in the Registrant's proxy statement for the annual meeting of shareholders for the year ended December 31, 1997, sets forth certain information with respect to the ownership of the Registrant's Common Stock and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ---------------------------------------------- The section entitled "Transactions with Management" appearing in the Registrant's proxy statement for the annual meeting of shareholders for the year ended December 31, 1997, sets forth certain information with respect to certain business relationships and transactions between the Registrant and its directors and officers and is incorporated herein by reference. III-1 PART IV ITEM 14. EXHIBITS FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K -------------------------------------------------------------- (a) The following documents are filed as part of this Report: 1. Financial Statements. The following Consolidated Financial Statements -------------------- of Nanometrics Incorporated and Independent Auditors' Report are filed as part of this Annual Report. Independent Auditors' Report Consolidated Balance Sheets, as of December 31, 1997 and 1996 For the years ended December 31, 1997, 1996 and 1995: Consolidated Statements of Income Consolidated Statements of Shareholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements 2. Financial Statements Schedules. The following consolidated financial ------------------------------ statement schedules of Nanometrics Incorporated are filed as part of this Report and should be read in conjunction with the Consolidated Financial Statements of Nanometrics Incorporated. Financial Statement Schedules for the years ended December 31, 1997, 1996 and 1995. Schedule Page -------- ---- II - Valuation and Qualifying Accounts .............. S-1 Schedules not filed herein are omitted because of the absence of conditions under which they are required or because the information called for is shown in the consolidated financial statements or notes thereto. (b) Reports on Form 8-K: None IV-1 3. Exhibits.
3.1(1) Restated and Amended Articles of Incorporation of Registrant filed July 7, 1982. 3.2(1) Certificate of Amendment of Articles of Incorporation filed January 31, 1983. 3.3(1) Certificate of Amendment of Articles of Incorporation filed July 28, 1983. 3.4(1) Certificate of Amendment of Certificate of Determination of Preferences of Series B Common Stock filed September 13, 1983. 3.5(1) Certificate of Amendment of Articles of Incorporation filed September 13, 1983. 3.6 Certificate of Amendment of Articles of Incorporation filed December 3, 1984. 3.7 Certificate of Correction of Certificate of Amendment of Certificate of Determination of Preferences of Series B Common Stock filed March 19, 1985. 3.8 Certificate of Amendment of Articles of Incorporation filed June 27, 1988. 3.9 Bylaws 4.1(1) Form of Common Stock Certificate 10.1 Form of Indemnification Agreement for Directors & Officers 10.2 1986 Employee Stock Purchase Plan, as amended through April 1997 10.3(2) 1991 Stock Option Plan, as amended through May 15, 1997 10.4(3) 1991 Director Option Plan 10.5(4) Amendment to and Restatement of Redemption Agreement dated March 4, 1993 between Vincent J. Coates and Registrant 10.6 Consulting Agreement dated as of September 15, 1997 between the Registrant and Kanegi Nagai, as amended 10.7 Reverse Split Dollar Insurance Agreement and Collateral Assignment dated March 15, 1993 between the Registrant and Vincent J. Coates
IV-2
10.8 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 Loan Agreement between Japan Development Bank and Nanometrics Japan kk. 10.10 Loan Agreement and Guarantee dated June 5, 1995 between Mitsubishi Bank, Limited and Nanometrics Japan Ltd. 21 Subsidiaries of Registrant 23 Independent Auditors' Consent and Report on Schedule 24 Power of Attorney (see page V-1). 27.1 Financial Data Schedule for the Year Ended December 31, 1997 27.2 Financial Data Schedule for the Years Ended December 31, 1995 and 1996 and for the Quarters Ended March 31, June 30 and September 30, 1996 27.3 Financial Data Schedule for the Quarters Ended March 31, June 30 and September 30, 1997
1) Incorporated by reference to exhibits filed with Registrant's Registration Statement on Form S-1 (File No. 2-93949), which became effective November 28, 1984. 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 Exhibit 4.2 filed with Registrant's Registration Statement on Form S-8 (file number 33-43913) filed on November 14, 1991. 4) Incorporated by reference to exhibit 10.10 filed with Registrant's Form 10-K dated March 29, 1993 IV-3 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and 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 Date: April 1, 1998 By: /s/VINCENT J. COATES -------------------------- Vincent J. Coates, Chairman and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Vincent J. Coates, jointly and severally, his attorneys-in-fact, each with full power of substitution, for him in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant in the capacities and on the dates indicated:
Signature Title Date - ---------------------- ------------------------------ ------------- /s/VINCENT J. COATES Chairman of the Board and April 1, 1998 - ---------------------- (Vincent J. Coates) Chief Executive Officer (Principal Executive Officer) /s/PAUL B. NOLAN Chief Financial Officer April 1, 1998 - ---------------------- (Paul B. Nolan) (Principal Accounting and Financial Officer) /s/JOHN D. HEATON Director, President and April 1, 1998 - ---------------------- (John D. Heaton) Chief Operating Officer /s/NORMAN V. COATES Director April 1, 1998 - ---------------------- (Norman V. Coates) /s/NATHANIEL BRENNER Director April 1, 1998 - ---------------------- (Nathaniel Brenner) /s/KANEGI NAGAI Director April 1, 1998 - ---------------------- (Kanegi Nagai) /s/CLIFFORD F. SMEDLEY Director April 1, 1998 - ---------------------- (Clifford F. Smedley)
V-1 SCHEDULE II NANOMETRICS INCORPORATED VALUATION AND QUALIFYING ACCOUNTS Allowance for Doubtful Accounts
Balance at Charged to Deductions- Balance beginning costs and write-offs at end Year Ended of period expenses of accounts of period ---------- ---------- ------------ --------- December 31, 1997.. $419,000 $ 0 $(6,000) $413,000 ========== ========== =========== ========= December 31, 1996.. $380,000 $ 39,000 $ 0 $419,000 ========== ========== =========== ========= December 31, 1995.. $270,000 $110,000 $ 0 $380,000 ========== ========== =========== =========
S-1 EX-3.6 2 CERTIFICATE OF AMENDMENT EXHIBIT 3.6 CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION OF NANOMETRICS INCORPORATED Vincent J. Coates and Gary O. Rhea certify that: 1. They are the President and Secretary, respectively, of Nanometrics Incorporated, a California corporation. 2. Section (3)(iv) of the Certificate of Determination of Preferences of Series B Common Stock of this corporation, filed on January 31, 1983, is hereby amended in its entirety to read as follows: (iv) immediately prior to the closing of an underwritten public offering of the corporation's Common Stock which the price per share to the public is at least $46.75, as adjusted for splits and recombination of the Common Stock after January 31, 1983 and rounded to the nearest multiple of $.125 (being the lowest price differential at which common shares are normally offered in initial public offerings), and the net proceeds to the corporation are at least $5,000,000. 3. The foregoing Amendment of Articles of Incorporation has been duly approved by the Board of Directors of this corporation. 4. The foregoing Amendment of Articles of Incorporation has been duly approved by the required vote of shareholders in accordance with Section 903 of the California Corporations Code. The total number of outstanding shares of Common Stock entitled to vote with respect to the foregoing Amendment is 6,414,532. No vote of the outstanding Junior Common Stock was required. The number of shares voting in favor of the Amendment equaled or exceeded the vote required. The percentage vote required was more than 50%. IN WITNESS WHEREOF, the undersigned have executed this Certificate of Amendment on November 28, 1984. /s/ Vincent J. Coates --------------------------------- Vincent J. Coates, President /s/ Gary O. Rhea --------------------------------- Gary O. Rhea, Secretary The undersigned each declare under penalty of perjury that the matters set forth in the foregoing Certificate of Amendment are true of his own knowledge. Executed at Sunnyvale, California on November 28, 1984. /s/ Vincent J. Coates --------------------------------- Vincent J. Coates /s/ Gary O. Rhea --------------------------------- Gary O. Rhea -2- EX-3.7 3 CERTIFICATE OF CORRECTION Exhibit 3.7 CERTIFICATE OF CORRECTION OF CERTIFICATE OF AMENDMENT OF CERTIFICATE OF DETERMINATION OF PREFERENCES OF SERIES B COMMON STOCK NANOMETRICS INCORPORATED Vincent J. Coates and Gary O. Rhea certify that: 1. They are the President and Secretary, respectively, of Nanometrics Incorporated, a California corporation. 2. The instrument to be corrected is entitled "Certificate of Amendment of Certificate of Determination of Preferences of Series B Common Stock of Nanometrics Incorporated", and said instrument was filed with the Secretary of State of the State of California on September 13, 1983. 3. So much of the Certificate of Amendment of Certificate of Determination as previously read "The second series of Common Shares issued by this corporation shall be designated Series B Common Stock and shall consist of 200,000 shares" is hereby amended to read as follows: "The second series of Common Shares issued by this corporation shall be designated Series B Common Stock and shall consist of 600,000 shares." 4. That said phrase, as corrected, conforms the wording of the Certificate of Amendment of Certificate of Determination to the wording contained in resolutions adopted by the Board of Directors and shareholders of the corporation. We further declare under penalty of perjury under the laws of the State of California that the matters set forth in the certificate are true and correct of our own knowledge. Dated: March 8, 1985 ----- /s/ Vincent J. Coates -------------------------------- Vincent J. Coates, President /s/ Gary O. Rhea -------------------------------- Gary O. Rhea, Secretary EX-3.8 4 CERTIFICATE OF AMENDMENT EXHIBIT 3.8 CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION OF NANOMETRICS INCORPORATED Vincent J. Coates and Brian Flynn hereby certify that: 1. They are President and Secretary, respectively of Nanometrics Incorporated, a California corporation. 2. The Articles of Incorporation of this corporation are amended to add the following Article V: "V. Section 1. Limitation of Directors' Liability. The liability of the ---------------------------------- directors of this Corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. Section 2. Indemnification of Corporate Agents. This Corporations is ----------------------------------- authorized to provide for, through bylaw provisions or through agreements with the agents, or both, the indemnification of agents (as defined in Section 317 of the California General Corporation Law) of the corporation in excess of that expressly permitted by said Section 317 for said agents to the fullest extent permissible under California law, subject to the limitations set forth in Section 204 of the California General Corporation Law in actions brought by or on behalf of the corporation for breach of duty to this corporation or its shareholders. Section 3. Repeal or Modification. Any repeal or modification of the ---------------------- foregoing provisions of this Article V shall not adversely affect any right of indemnification or limitation of liability of an agent of this Corporation relating to acts or omissions occurring prior to such repeal or modification." 3. The foregoing Amendment of Articles of Incorporation has been duly approved by the Board of Directors. 4. The foregoing Amendment of Articles of Incorporation has been duly approved by the required vote of shareholders in accordance with Section 902 of the California General Corporation Law. The total number of outstanding shares of capital stock of the corporation is 7,649,660 shares of Common Stock. The --------- number of shares voting in favor of the Amendment of Articles of incorporation equaled or exceeded the vote required. The percentage vote required was more than 50% of the outstanding Common Stock. We further declare under penalty of Perjury under the laws of the State of California that the matters set forth in the Amendment of Articles of Incorporation are true of our own knowledge. Executed at Sunnyvale, California this 21st day of June, 1988. /s/ Vincent J. Coates ----------------------------------- Vincent J. Coates, President /s/ Brian Flynn ----------------------------------- Brian Flynn, Secretary -2- EX-3.9 5 BYLAWS EXHIBIT 3.9 RESTATED BYLAWS OF NANOMETRICS INCORPORATED RESTATED BYLAWS OF NANOMETRICS INCORPORATED TABLE OF CONTENTS
Page ---- ARTICLE I - CORPORATE OFFICES 1 1.1 PRINCIPAL OFFICE............................... 1 1.2 OTHER OFFICES.................................. 1 ARTICLE II - MEETINGS OF SHAREHOLDERS...................... 1 2.1 PLACE OF MEETINGS.............................. 1 2.2 ANNUAL MEETING................................. 1 2.3 SPECIAL MEETING................................ 2 2.4 NOTICE OF SHAREHOLDERS' MEETINGS............... 2 2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE... 3 2.6 QUORUM......................................... 3 2.7 ADJOURNED MEETING; NOTICE...................... 3 2.8 VOTING......................................... 4 2.9 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT........................................ 4 2.10 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING.............................. 5 2.11 RECORD DATE FOR SHAREHOLDER NOTICE; VOTING; GIVING CONSENTS................................ 6 2.12 PROXIES........................................ 6 2.13 INSPECTORS OF ELECTION......................... 7 ARTICLE III - DIRECTORS.................................... 7 3.1 POWERS......................................... 7 3.2 NUMBER AND QUALIFICATION OF DIRECTORS.......... 8 3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS....... 8 3.4 VACANCIES...................................... 8 3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE....... 9 3.6 REGULAR MEETINGS............................... 9 3.7 SPECIAL MEETINGS; NOTICE....................... 9 3.8 QUORUM......................................... 10 3.9 WAIVER OF NOTICE............................... 10 3.10 ADJOURNMENT.................................... 10
-i- 3.11 NOTICE OF ADJOURNMENT.......................... 10 3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING...................................... 10 3.13 FEES AND COMPENSATION OF DIRECTORS............. 11 ARTICLE IV - COMMITTEES.................................... 11 4.1 COMMITTEES OF DIRECTORS........................ 11 4.2 MEETINGS AND ACTION OF COMMITTEES.............. 12 ARTICLE V - OFFICERS....................................... 12 5.1 OFFICERS....................................... 12 5.2 ELECTION OF OFFICERS........................... 12 5.3 SUBORDINATE OFFICERS........................... 13 5.4 REMOVAL AND RESIGNATION OF OFFICERS............ 13 5.5 VACANCIES IN OFFICES........................... 13 5.6 CHAIRMAN OF THE BOARD.......................... 13 5.7 PRESIDENT...................................... 13 5.8 VICE PRESIDENTS................................ 14 5.9 SECRETARY...................................... 14 5.10 CHIEF FINANCIAL OFFICER........................ 14 ARTICLE VI - INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS.................... 15 ARTICLE VII - RECORDS AND REPORTS.......................... 17 7.1 MAINTENANCE AND INSPECTION OF SHARE REGISTER... 17 7.2 MAINTENANCE AND INSPECTION OF BYLAWS........... 17 7.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS.............................. 18 7.4 INSPECTION BY DIRECTORS........................ 18 7.5 ANNUAL REPORT TO SHAREHOLDERS; WAIVER.......... 18 7.6 FINANCIAL STATEMENTS........................... 18 ARTICLE VIII - GENERAL MATTERS............................. 19 8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING..................................... 19 8.2 CHECKS, DRAFTS, EVIDENCES OF INDEBTEDNESS...... 20 8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED................................... 20 8.4 CERTIFICATES FOR SHARES........................ 20
-ii- TABLE OF CONTENTS (continued)
Page ---- 8.5 LOST CERTIFICATES............................. 20 8.6 CONSTRUCTION; DEFINITIONS..................... 21 ARTICLE IX - AMENDMENTS.................................... 21 9.1 AMENDMENT BY SHAREHOLDERS..................... 21 9.2 AMENDMENT BY DIRECTORS........................ 21
-iii- RESTATED -------- BYLAWS ------ OF -- NANOMETRICS INCORPORATED ------------------------ ARTICLE 1 CORPORATE OFFICES ----------------- 1.1 PRINCIPAL OFFICE. ---------------- The board of directors shall fix the location of the principal executive office of the corporation at any place within or outside the State of California. If the principal executive office is located outside such state, and the corporation has one or more business offices in such state, the board of directors shall fix and designate a principal business office in the State of California. 1.2 OTHER OFFICES. ------------- The board of directors may at any time establish branch or subordinate offices at any place or places where the corporation is qualified to do business. ARTICLE II MEETINGS OF SHAREHOLDERS ------------------------ 2.1 PLACE OF MEETINGS. ----------------- Meetings of shareholders shall be held at any place within or outside the State of California designated by the board of directors. In the absence of any such designation, shareholders' meetings shall be held at the principal executive office of the corporation. 2.2 ANNUAL MEETING. -------------- The annual meeting of shareholders shall be held each year on a date and at a time designated by the board of directors. In the absence of such designation, the annual meeting of shareholders shall be held on the third Monday in April of each year at 10:00 a.m. However, if such day falls on a legal holiday, then the meeting shall be held at the same time and place on the next succeeding full business day. At the meeting, directors shall be elected, and any other proper business may be transacted. 2.3 SPECIAL MEETING. --------------- A special meeting of the shareholders may be called at any time by the board of directors, or by the chairman of the board, or by the president, or by one or more shareholders holding shares in the aggregate entitled to cast not less than ten percent (10%) of the votes at that meeting. If a special meeting is called by any person or persons other than the board of directors or the president or the chairman of the board, then the request shall be in writing, specifying the time of such meeting and the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail or by telegraphic or other facsimile transmission to the chairman of the board, the president, any vice president or the secretary of the corporation. The officer receiving the request shall cause notice to be promptly given to the shareholders entitled to vote, in accordance with the provisions of Sections 2.4 and 2.5 of these bylaws, that a meeting will be held at the time requested by the person or persons calling the meeting, so long as that time is not less than thirty-five (35) nor more than sixty (60) days after the receipt of the request. If the notice is not given within twenty (20) days after receipt of the request, then the person or persons requesting the meeting may give the notice. Nothing contained in this paragraph of this Section 2.3 shall be construed as limiting, fixing or affecting the time when a meeting of shareholders called by action of the board of directors may be held. 2.4 NOTICE OF SHAREHOLDERS' MEETINGS. -------------------------------- All notices of meetings of shareholders shall be sent or otherwise given in accordance with Section 2.5 of these bylaws not less than ten (10) nor more than sixty (60) days before the date of the meeting. The notice shall specify the place, date, and hour of the meeting and (i) in the case of a special meeting, the general nature of the business to be transacted (no business other than that specified in the notice may be transacted) or (ii) in the case of the annual meeting, those matters which the board of directors, at the time of giving the notice, intends to present for action by the shareholders The notice of any meeting at which directors are to be elected shall include the name of any nominee or nominees whom, at the time of the notice, management intends to present for election. If action is proposed to be taken at any meeting for approval of (i) a contract or transaction in which a director has a direct or indirect financial interest, pursuant to Section 310 of the Corporations Code of California (the "Code"), (ii) an amendment of the articles of incorporation, pursuant to Section 902 of the Code, (iii) a reorganization of the corporation, pursuant to Section 1201 of the Code, (iv) a voluntary dissolution of the corporation, pursuant to Section 1900 of the Code, or (v) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, pursuant to Section 2007 of the Code, then the notice shall also state the general nature of that proposal. -2- 2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE. -------------------------------------------- Notice of any meeting of shareholders shall be given either personally or by first-class mail or by telegraphic or other written communication, charges prepaid, addressed to the shareholder at the address of that shareholder appearing on the books of the corporation or given by the shareholder to the corporation for the purpose of notice. If no such address appears on the corporation's books or is given, notice shall be deemed to have been given if sent to that shareholder by first-class mail or telegraphic or other written communication to the corporation's principal executive office, or if published at least once in a newspaper of general circulation in the county where that office is located. Notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by telegram or other means of written communication. If any notice addressed to a shareholder at the address of that shareholder appearing on the books of the corporation is returned to the corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice to the shareholder at that address, then all future notices or reports shall be deemed to have been duly given without further mailing if the same shall be available to the shareholder on written demand of the shareholder at the principal executive office of the corporation for a period of one (1) year from the date of the giving of the notice. An affidavit of the mailing or other means of giving any notice of any shareholders' meeting, executed by the secretary, assistant secretary or any transfer agent of the corporation giving the notice, shall be prima facie ----- ----- evidence of the giving of such notice. 2.6 QUORUM. ------ The presence in person or by proxy of the holders of a majority of the shares entitled to vote thereat constitutes a quorum for the transaction of business at all meetings of shareholders. The shareholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. 2.7 ADJOURNED MEETING; NOTICE. ------------------------- Any shareholders' meeting, annual or special, whether or not a quorum is present, may be adjourned from time to time by the vote of the majority of the shares represented at that meeting, either in person or by proxy. In the absence of a quorum, no other business may be transacted at that meeting except as provided in Section 2.6 of these bylaws. When any meeting of shareholders, either annual or special, is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place are announced at the meeting at which the adjournment is taken. However, if a new record date for the adjourned meeting is fixed or if the adjournment is for more than forty-five (45) days from the date set for the original meeting, then notice of the adjourned meeting shall be given. Notice of any such adjourned meeting shall be given to -3- each shareholder of record entitled to vote at the adjourned meeting in accordance with the provisions of Sections 2.4 and 2.5 of these bylaws. At any adjourned meeting the corporation may transact any business which might have been transacted at the original meeting. 2.8 VOTING. ------ The shareholders entitled to vote at any meeting of shareholders shall be determined in accordance with the provisions of Section 2.11 of these bylaws, subject to the provisions of Sections 702 through 704 of the Code (relating to voting shares held by a fiduciary, in the name of a corporation or in joint ownership). The shareholders' vote may be by voice vote or by ballot; provided, however, that any election for directors must be by ballot if demanded by any shareholder at the meeting and before the voting has begun. On any matter other than the election of directors, any shareholder may vote part of the shares in favor of the proposal and refrain from voting the remaining shares or vote them against the proposal, but, if the shareholder fails to specify the number of shares which the shareholder is voting affirmatively, it will be conclusively presumed that the shareholder's approving vote is with respect to all shares which the shareholder is entitled to vote. If a quorum is present, the affirmative vote of the majority of the shares represented and voting at a duly held meeting (which shares voting affirmatively also constitute at least a majority of the required quorum) shall be the act of the shareholders, unless the vote of a greater number or a vote by classes is required by the Code or by the articles of incorporation. At a shareholders' meeting at which directors are to be elected, a shareholder shall be entitled to cumulate votes (i.e., cast for any candidate a number of votes greater than the number of votes which such shareholder normally is entitled to cast) if the candidates' names have been placed in nomination prior to commencement of the voting and a shareholder has given notice prior to commencement of the voting of the shareholder's intention to cumulate votes. If any shareholder has given such a notice, then every shareholder entitled to vote may cumulate votes for candidates in nomination and give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which that shareholder's shares are entitled, or distribute the shareholder's votes on the same principle among any or all of the candidates, as the shareholder thinks fit. The candidates receiving the highest number of votes, up to the number of directors to be elected, shall be elected. 2.9 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT. ------------------------------------------------- The transactions of any meeting of shareholders, either annual or special, however called and noticed, and wherever held, shall be as valid as though they had been taken at a meeting duly held after regular call and notice, if a quorum be present either in person or by proxy, and if, either before or after the meeting, each person entitled to vote, who was not present in person or by proxy, signs a written waiver of notice or a consent to the holding of the meeting or an approval of the minutes thereof. The -4- waiver of notice or consent or approval need not specify either the business to be transacted or the purpose of any annual or special meeting of shareholders, except that if action is taken or proposed to be taken for approval of any of those matters specified in the second paragraph of Section 2.4 of these bylaws, the waiver of notice or consent or approval shall state the general nature of the proposal. All such waivers, consents, and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Attendance by a person at a meeting shall also constitute a waiver of notice of and presence at that meeting, except when the person objects at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened. Attendance at a meeting is not a waiver of any right to object to the consideration of matters required by the Code to be included in the notice of the meeting but not so included, if that objection is expressly made at the meeting. 2.10 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING. ------------------------------------------------------- Any action which may be taken at any annual or special meeting of shareholders may be taken without a meeting and without prior notice, if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take that action at a meeting at which all shares entitled to vote on that action were present and voted. In the case of election of directors, such a consent shall be effective only if signed by the holders of all outstanding shares entitled to vote for the election of directors. All such consents shall be maintained in the corporate records. Any shareholder giving a written consent, or the shareholder's proxy holders, or a transferee of the shares, or a personal representative of the shareholder, or their respective proxy holders, may revoke the consent by a writing received by the secretary of the corporation before written consents of the number of shares required to authorize the proposed action have been filed with the secretary. If the consents of all shareholders entitled to vote have not been solicited in writing and if the unanimous written consent of all such shareholders has not been received, then the secretary shall give prompt notice of the corporate action approved by the shareholders without a meeting. Such notice shall be given to those shareholders entitled to vote who have not consented in writing and shall be given in the manner specified in Section 2.5 of these bylaws. In the case of approval of (i) a contract or transaction in which a director has a direct or indirect financial interest, pursuant to Section 310 of the Code, (ii) indemnification of a corporate "agent," pursuant to Section 317 of the Code, (iii) a reorganization of the corporation, pursuant to Section 1201 of the Code, and (iv) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, pursuant to Section 2007 of the Code, the notice shall be given at least ten (10) days before the consummation of any action authorized by that approval. -5- 2.11 RECORD DATE FOR SHAREHOLDER NOTICE; VOTING; GIVING -------------------------------------------------- CONSENTS. -------- For purposes of determining the shareholders entitled to notice of any meeting or to vote thereat or entitled to give consent to corporate action without a meeting, the board of directors may fix, in advance, a record date, which shall not be more than sixty (60) days nor less than ten (10) days before the date of any such meeting nor more than sixty (60) days before any such action without a meeting, and in such event only shareholders of record on the date so fixed are entitled to notice and to vote or to give consents, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date, except as otherwise provided in the Code. If the board of directors does not so fix a record date: (a) the record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held; and (b) the record date for determining shareholders entitled to give consent to corporate action in writing without a meeting, (i) when no prior action by the board has been taken, shall be the day on which the first written consent is given, or (ii) when prior action by the board has been taken, shall be at the close of business on the day on which the board adopts the resolution relating to that action, or the sixtieth (60th) day before the date of such other action, whichever is later. The record date for any other purpose shall be as provided in Article VIII of these bylaws. 2.12 PROXIES. ------- Every person entitled to vote for directors, or on any other matter, shall have the right to do so either in person or by one or more agents authorized by a written proxy signed by the person and filed with the secretary of the corporation. A proxy shall be deemed signed if the shareholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the shareholder or the shareholder's attorney-in-fact. A validly executed proxy which does not state that it is irrevocable shall continue in full force and effect unless (i) the person who executed the proxy revokes it prior to the time of voting by delivering a writing to the corporation stating that the proxy is revoked or by executing a subsequent proxy and presenting it to the meeting or by voting in person at the meeting, or (ii) written notice of the death or incapacity of the maker of that proxy is received by the corporation before the vote pursuant to that proxy is counted; provided, however, that no proxy shall be valid after the expiration of eleven (11) months from the date of the proxy, unless otherwise provided in the proxy. The dates contained on the forms of proxy presumptively determine the order of execution, regardless of the postmark dates on the envelopes in which they are mailed. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Sections 705(e) and 705(f) of the Code. -6- 2.13 INSPECTORS OF ELECTION. ---------------------- Before any meeting of shareholders, the board of directors may appoint an inspector or inspectors of election to act at the meeting or its adjournment. If no inspector of election is so appointed, then the chairman of the meeting may, and on the request of any shareholder or a shareholder's proxy shall, appoint an inspector or inspectors of election to act at the meeting. The number of inspectors shall be either one (1) or three (3). If inspectors are appointed at a meeting pursuant to the request of one (1) or more shareholders or proxies, then the holders of a majority of shares or their proxies present at the meeting shall determine whether one (1) or three (3) inspectors are to be appointed. If any person appointed as inspector fails to appear or fails or refuses to act, then the chairman of the meeting may, and upon the request of any shareholder or a shareholder's proxy shall, appoint a person to fill that vacancy. Such inspectors shall: (a) determine the number of shares outstanding and the voting power of each, the number of shares represented at the meeting, the existence of a quorum, and the authenticity, validity, and effect of proxies; (b) receive votes, ballots or consents; (c) hear and determine all challenges and questions in any way arising in connection with the right to vote; (d) count and tabulate all votes or consents; (e) determine when the polls shall close; (f) determine the result; and (g) do any other acts that may be proper to conduct the election or vote with fairness to all shareholders. ARTICLE III DIRECTORS --------- 3.1 POWERS. ------ Subject to the provisions of the Code and any limitations in the articles of incorporation and these bylaws relating to action required to be approved by the shareholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board of directors. -7- 3.2 NUMBER AND QUALIFICATION OF DIRECTORS. ------------------------------------- The number of directors of the corporation shall be not less than five (5) nor more than seven (7). The exact number of directors shall be six (6) until changed, within the limits specified above, by a bylaw amending this Section 3.2, duly adopted by the board of directors or by the shareholders. The indefinite number of directors may be changed, or a definite number fixed without provision for an indefinite number, by a duly adopted amendment to the articles of incorporation or by an amendment to this bylaw duly adopted by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that an amendment reducing the number or the minimum number of directors to a number less than five (5) cannot be adopted if the votes cast against its adoption at a meeting of the shareholders, or the shares not consenting in the case of action by written consent, are equal to more than sixteen and two-thirds percent (16-2/3%) of the outstanding shares entitled to vote thereon. No amendment may change the stated maximum number of authorized directors to a number greater than two (2) times the stated minimum number of directors minus one (1). 3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS. ---------------------------------------- Directors shall be elected at each annual meeting of shareholders to hold office until the next such annual meeting. Each director, including a director elected to fill a vacancy, shall hold office until the expiration of the term for which elected and until a successor has been elected and qualified. 3.4 VACANCIES. --------- Vacancies in the board of directors may be filled by a majority of the remaining directors, though less than a quorum, or by a sole remaining director, except that a vacancy created by the removal of a director by the vote or written consent of the shareholders or by court order may be filled only by the vote of a majority of the outstanding shares entitled to vote thereon represented at a duly held meeting at which a quorum is present, or by the unanimous written consent of all shares entitled to vote thereon. Each director so elected shall hold office until the next annual meeting of the shareholders and until a successor has been elected and qualified. A vacancy or vacancies in the board of directors shall be deemed to exist in the event of the death, resignation or removal of any director, or if the board of directors by resolution declares vacant the office of a director who has been declared of unsound mind by an order of court or convicted of a felony, or if the authorized number of directors is increased, or if the shareholders fail, at any meeting of shareholders at which any director or directors are elected, to elect the number of directors to be elected at that meeting. The shareholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors, but any such election other than to fill a vacancy created by removal, if by written consent, shall require the consent of the holders of a majority of the outstanding shares entitled to vote thereon. -8- Any director may resign effective on giving written notice to the chairman of the board, the president, the secretary or the board of directors, unless the notice specifies a later time for that resignation to become effective. If the resignation of a director is effective at a future time, the board of directors may elect a successor to take office when the resignation becomes effective. No reduction of the authorized number of directors shall have the effect of removing any director before that director's term of office expires. 3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE. ---------------------------------------- Regular meetings of the board of directors may be held at any place within or outside the State of California that has been designated from time to time by resolution of the board. In the absence of such a designation, regular meetings shall be held at the principal executive office of the corporation. Special meetings of the board may be held at any place within or outside the State of California that has been designated in the notice of the meeting or, if not stated in the notice or if there is no notice, at the principal executive office of the corporation. Any meeting, regular or special, may be held by conference telephone or similar communication equipment, so long as all directors participating in the meeting can hear one another; and all such directors shall be deemed to be present in person at the meeting. 3.6 REGULAR MEETINGS. ---------------- Regular meetings of the board of directors may be held without notice if the times of such meetings are fixed by the board of directors. 3.7 SPECIAL MEETINGS; NOTICE. ------------------------ Special meetings of the board of directors for any purpose or purposes may be called at any time by the chairman of the board, the president, any vice president, the secretary or any two directors. Notice of the time and place of special meetings shall be delivered personally or by telephone to each director or sent by first-class mail or telegram, charges prepaid, addressed to each director at that director's address as it is shown on the records of the corporation. If the notice is mailed, it shall be deposited in the United States mail at least four (4) days before the time of the holding of the meeting. If the notice is delivered personally or by telephone or telegram, it shall be delivered personally or by telephone or to the telegraph company at least forty-eight (48) hours before the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose or the place of the meeting, if the meeting is to be held at the principal executive office of the corporation. -9- 3.8 QUORUM. ------ A majority of the authorized number of directors shall constitute a quorum for the transaction of business, except to adjourn as provided in Section 3.10 of these bylaws. Every act or decision done or made by a majority of the directors present at a duly held meeting at which a quorum is present shall be regarded as the act of the board of directors, subject to the provisions of Section 310 of the Code (as to approval of contracts or transactions in which a director has a direct or indirect material financial interest), Section 311 of the Code (as to appointment of committees), Section 317(e) of the Code (as to indemnification of directors), the articles of incorporation, and other applicable law. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for that meeting. 3.9 WAIVER OF NOTICE. ---------------- The transactions of any meeting of the board of directors, however called and noticed or wherever held, shall be as valid as though had at a meeting duly held after regular call and notice if a quorum is present and if, either before or after the meeting, each of the directors not present signs a written waiver of notice, a consent to holding the meeting or an approval of the minutes thereof. The waiver of notice or consent need not specify the purpose of the meeting. All such waivers, consents, and approvals shall be filed with the corporate records or made part of the minutes of the meeting. Notice of a meeting shall also be deemed given to any director who attends the meeting without protesting, before or at its commencement, the lack of notice to that director. 3.10 ADJOURNMENT. ----------- A majority of the directors present, whether or not constituting a quorum, may adjourn any meeting to another time and place. 3.11 NOTICE OF ADJOURNMENT. --------------------- Notice of the time and place of holding an adjourned meeting need not be given unless the meeting is adjourned for more than twenty-four (24) hours. If the meeting is adjourned for more than twenty-four (24) hours, then notice of the time and place of the adjourned meeting shall be given before the adjourned meeting takes place, in the manner specified in Section 3.7 of these bylaws, to the directors who were not present at the time of the adjournment. 3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING. ------------------------------------------------- Any action required or permitted to be taken by the board of directors may be taken without a meeting, provided that all members of the board individually or collectively consent in writing to that action. Such action by written consent shall have the same force and effect as a unanimous vote of the -10- board of directors. Such written consent and any counterparts thereof shall be filed with the minutes of the proceedings of the board. 3.13 FEES AND COMPENSATION OF DIRECTORS. ---------------------------------- Directors and members of committees may receive such compensation, if any, for their services and such reimbursement of expenses as may be fixed or determined by resolution of the board of directors. This Section 3.13 shall not be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee or otherwise, and receiving compensation for those services. 3.14 APPROVAL OF LOANS TO OFFICERS. ----------------------------- The corporation may, upon the approval of the board of directors alone, make loans of money or property to, or guarantee the obligations of, any officer of the corporation or its parent or subsidiary, whether or not a director, or adopt an employee benefit plan or plans authorizing such loans or guaranties provided that (i) the board of directors determines that such a loan or guaranty or plan may reasonably be expected to benefit the corporation, (ii) the corporation has outstanding shares held of record by 100 or more persons (determined as provided in Section 605 of the Code) on the date of approval by the board of directors, and (iii) the approval of the board of directors is by a vote sufficient without counting the vote of any interested director or directors. ARTICLE IV COMMITTEES ---------- 4.1 COMMITTEES OF DIRECTORS. ----------------------- The board of directors may, by resolution adopted by a majority of the authorized number of directors, designate one (1) or more committees, each consisting of two or more directors, to serve at the pleasure of the board. The board may designate one (1) or more directors as alternate members of any committee, who may replace any absent member at any meeting of the committee. The appointment of members or alternate members of a committee requires the vote of a majority of the authorized number of directors. Any committee, to the extent provided in the resolution of the board, shall have all the authority of the board, except with respect to: (a) the approval of any action which, under the Code, also requires shareholders' approval or approval of the outstanding shares; (b) the filling of vacancies on the board of directors or in any committee; (c) the fixing of compensation of the directors for serving on the board or any committee; -11- (d) the amendment or repeal of these bylaws or the adoption of new bylaws; (e) the amendment or repeal of any resolution of the board of directors which by its express terms is not so amendable or repealable; (f) a distribution to the shareholders of the corporation, except at a rate or in a periodic amount or within a price range determined by the board of directors; or (g) the appointment of any other committees of the board of directors or the members of such committees. 4.2 MEETINGS AND ACTION OF COMMITTEES. --------------------------------- Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of Article III of these bylaws, Section 3.5 (place of meetings), Section 3.6 (regular meetings), Section 3.7 (special meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice), Section 3.10 (adjournment), Section 3.11 (notice of adjournment), and Section 3.12 (action without meeting), with such changes in the context of those bylaws as are necessary to substitute the committee and its members for the board of directors and its members; provided, however, that the time of regular meetings of committees may be determined either by resolution of the board of directors or by resolution of the committee, that special meetings of committees may also be called by resolution of the board of directors, and that notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The board of directors may adopt rules for the government of any committee not inconsistent with the provisions of these bylaws. ARTICLE V OFFICERS -------- 5.1 OFFICERS. -------- The officers of the corporation shall be a president, a secretary, and a chief financial officer. The corporation may also have, at the discretion of the board of directors, a chairman of the board, one or more vice presidents, one or more assistant secretaries, one or more assistant treasurers, and such other officers as may be appointed in accordance with the provisions of Section 5.3 of these bylaws. Any number of offices may be held by the same person. 5.2 ELECTION OF OFFICERS. -------------------- The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Section 5.3 or Section 5.5 of these bylaws, shall be chosen by the board, subject to the rights, if any, of an officer under any contract of employment. -12- 5.3 SUBORDINATE OFFICERS. -------------------- The board of directors may appoint, or may empower the president to appoint, such other officers as the business of the corporation may require, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these bylaws or as the board of directors may from time to time determine. 5.4 REMOVAL AND RESIGNATION OF OFFICERS. ----------------------------------- Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by the board of directors at any regular or special meeting of the board or, except in case of an officer chosen by the board of directors, by any officer upon whom such power of removal may be conferred by the board of directors. Any officer may resign at any time by giving written notice to the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. 5.5 VACANCIES IN OFFICES. -------------------- A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these bylaws for regular appointments to that office. 5.6 CHAIRMAN OF THE BOARD. --------------------- The chairman of the board, if such an officer be elected, shall, if present, preside at meetings of the board of directors and exercise and perform such other powers and duties as may from time to time be assigned to him by the board of directors or as may be prescribed by these bylaws. The chairman shall also be the chief executive officer of the corporation and shall, subject to the control of the board of directors have general supervision, direction and control of the business and the offices of the corporation. He shall preside at all meetings of the shareholders. He shall have the general powers and duties of management usually vested in the office of chief executive officer of a corporation, and shall have such other powers and duties as may be prescribed by the board of directors of these bylaws. 5.7 PRESIDENT. --------- Subject to such supervisory powers, if any, as may be given by the board of directors to the chairman of the board and chief executive officer, if there be such an officer, the president shall be the chief operating officer of the corporation and shall, subject to the control of the board of directors, have limited supervision, direction and control of the business and the officers of the corporation under his purview. In the absence of the chairman of the board and chief executive officer, or if there be none, he shall preside at all meetings of the shareholders and at all meetings of the board of directors. He shall -13- have the limited powers and duties of management usually vested in the office of chief operating officer of a corporation, and shall have such other powers and duties as may be prescribed by the board of directors or these bylaws. 5.8 VICE PRESIDENTS. --------------- In the absence or disability of the president, the vice presidents, if any, in order of their rank as fixed by the board of directors or, if not ranked, a vice president designated by the board of directors, shall perform all the duties of the president and when so acting shall have all the powers of, and be subject to all the restrictions upon, the president. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the board of directors, these bylaws, the president or the chairman of the board. 5.9 SECRETARY. --------- The secretary shall keep or cause to be kept, at the principal executive office of the corporation or such other place as the board of directors may direct, a book of minutes of all meetings and actions of directors, committees of directors and shareholders. The minutes shall show the time and place of each meeting, whether regular or special (and, if special, how authorized and the notice given), the names of those present at directors' meetings or committee meetings, the number of shares present or represented at shareholders' meetings, and the proceedings thereof. The secretary shall keep, or cause to be kept, at the principal executive office of the corporation or at the office of the corporation's transfer agent or registrar, as determined by resolution of the board of directors, a share register, or a duplicate share register, showing the names of all shareholders and their addresses, the number and classes of shares held by each, the number and date of certificates evidencing such shares, and the number and date of cancellation of every certificate surrendered for cancellation. The secretary shall give, or cause to be given, notice of all meetings of the shareholders and of the board of directors required to be given by law or by these bylaws. He shall keep the seal of the corporation, if one be adopted, in safe custody and shall have such other powers and perform such other duties as may be prescribed by the board of directors or by these bylaws. 5.10 CHIEF FINANCIAL OFFICER. ----------------------- The chief financial officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any director. -14- The chief financial officer shall deposit all money and other valuables in the name and to the credit of the corporation with such depositaries as may be designated by the board of directors. He shall disburse the funds of the corporation as may be ordered by the board of directors, shall render to the president and directors, whenever they request it, an account of all of his transactions as chief financial officer and of the financial condition of the corporation, and shall have such other powers and perform such other duties as may be prescribed by the board of directors or these bylaws. ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, -------------------------------------------------- AND OTHER AGENTS ---------------- 6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS. ----------------------------------------- The corporation shall, to the maximum extent and in the manner permitted by the Code, indemnify each of its directors and officers against expenses (as defined in Section 317(a) of the Code), judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding (as defined in Section 317(a) of the Code), arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Article VI, a "director" or "officer" of the corporation includes any person (i) who is or was a director or officer of the corporation, (ii) who is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was a director or officer of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 6.2 INDEMNIFICATION OF OTHERS. ------------------------- The corporation shall have the power, to the extent and in the manner permitted by the Code, to indemnify each of its employees and agents (other than directors and officers) against expenses (as defined in Section 317(a) of the Code), judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding (as defined in Section 317(a) of the Code), arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Article VI, an "employee" or "agent" of the corporation (other than a director or officer) includes any person (i) who is or was an employee or agent of the corporation, (ii) who is or was serving at the request of the corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was an employee or agent of a corporation which was a predecessor corpo ration of the corporation or of another enterprise at the request of such predecessor corporation. 6.3 PAYMENT OF EXPENSES IN ADVANCE. ------------------------------ Expenses incurred in defending any civil or criminal action or proceeding for which indemnification is required pursuant to Section 6.1 or for which indemnification is permitted pursuant to Section 6.2 following authorization thereof by the Board of Directors shall be -15- paid by the corporation in advance of the final disposition of such action or proceeding upon receipt of an undertaking by or on behalf of the indemnified party to repay such amount if it shall ultimately be determined that the indemnified party is not entitled to be indemnified as authorized in this Article VI. 6.4 INDEMNITY NOT EXCLUSIVE ----------------------- The indemnification provided by this Article VI shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any bylaw, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office, to the extent that such additional rights to indemnification are authorized in the Articles of Incorporation. 6.5 INSURANCE INDEMNIFICATION ------------------------- The corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation against any liability asserted against or incurred by such person in such capacity or arising out of such person's status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of this Article VI. 6.6 CONFLICTS --------- No indemnification or advance shall be made under this Article VI, except where such indemnification or advance is mandated by law or the order, judgment or decree of any court of competent jurisdiction, in any circumstance where it appears: (1) That it would be inconsistent with a provision of the Articles of Incorporation, these bylaws, a resolution of the shareholders or an agreement in effect at the time of the accrual of the alleged cause of the action asserted in the proceeding in which the expenses were incurred or other amounts were paid, which prohibits or otherwise limits indemnification; or (2) That it would be inconsistent with any condition expressly imposed by a court in approving a settlement. -16- ARTICLE VII RECORDS AND REPORTS ------------------- 7.1 MAINTENANCE AND INSPECTION OF SHARE REGISTER. -------------------------------------------- The corporation shall keep either at its principal executive office or at the office of its transfer agent or registrar (if either be appointed), as determined by resolution of the board of directors, a record of its shareholders listing the names and addresses of all shareholders and the number and class of shares held by each shareholder. A shareholder or shareholders of the corporation who holds at least five percent (5%) in the aggregate of the outstanding voting shares of the corporation or who holds at least one percent (l%) of such voting shares and has filed a Schedule 14B with the Securities and Exchange Commission relating to the election of directors, may (i) inspect and copy the records of shareholders' names, addresses, and shareholdings during usual business hours on five (5) days' prior written demand on the corporation, (ii) obtain from the transfer agent of the corporation, on written demand and on the tender of such transfer agent's usual charges for such list, a list of the names and addresses of the shareholders who are entitled to vote for the election of directors, and their shareholdings, as of the most recent record date for which that list has been compiled or as of a date specified by the shareholder after the date of demand. Such list shall be made available to any such shareholder by the transfer agent on or before the later of five (5) days after the demand is received or five (5) days after the date specified in the demand as the date as of which the list is to be compiled. The record of shareholders shall also be open to inspection on the written demand of any shareholder or holder of a voting trust certificate, at any time during usual business hours, for a purpose reasonably related to the holder's interests as a shareholder or as the holder of a voting trust certificate. Any inspection and copying under this Section 7.1 may be made in person or by an agent or attorney of the shareholder or holder of a voting trust certificate making the demand. 7.2 MAINTENANCE AND INSPECTION OF BYLAWS. ------------------------------------ The corporation shall keep at its principal executive office or, if its principal executive office is not in the State of California, at its principal business office in California the original or a copy of these bylaws as amended to date, which bylaws shall be open to inspection by the shareholders at all reasonable times during office hours. If the principal executive office of the corporation is outside the State of California and the corporation has no principal business office in such state, then the secretary shall, upon the written request of any shareholder, furnish to that shareholder a copy of these bylaws as amended to date. -17- 7.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS. ----------------------------------------------------- The accounting books and records and the minutes of proceedings of the shareholders, of the board of directors, and of any committee or committees of the board of directors shall be kept at such place or places as are designated by the board of directors or, in absence of such designation, at the principal executive office of the corporation. The minutes shall be kept in written form, and the accounting books and records shall be kept either in written form or in any other form capable of being converted into written form. The minutes and accounting books and records shall be open to inspection upon the written demand of any shareholder or holder of a voting trust certificate, at any reasonable time during usual business hours, for a purpose reasonably related to the holder's interests as a shareholder or as the holder of a voting trust certificate. The inspection may be made in person or by an agent or attorney and shall include the right to copy and make extracts. Such rights of inspection shall extend to the records of each subsidiary corporation of the corporation. 7.4 INSPECTION BY DIRECTORS. ----------------------- Every director shall have the absolute right at any reasonable time to inspect all books, records, and documents of every kind as well as the physical properties of the corporation and each of its subsidiary corporations. Such inspection by a director may be made in person or by an agent or attorney. The right of inspection includes the right to copy and make extracts of documents. 7.5 ANNUAL REPORT TO SHAREHOLDERS; WAIVER. ------------------------------------- The board of directors shall cause an annual report to be sent to the shareholders not later than one hundred twenty (120) days after the close of the fiscal year adopted by the corporation. Such report shall be sent at least fifteen (15) days before the annual meeting of shareholders to be held during the next fiscal year and in the manner specified in Section 2.5 of these bylaws for giving notice to shareholders of the corporation. The annual report shall contain a balance sheet as of the end of the fiscal year and an income statement and a statement of changes in financial position for the fiscal year accompanied by any report of independent accountants or, if there is no such report, the certificate of an authorized officer of the corporation that the statements were prepared without audit from the books and records of the corporation. The foregoing requirement of an annual report shall be waived so long as the shares of the corporation are held by fewer than one hundred (100) holders of record. 7.6 FINANCIAL STATEMENTS. -------------------- A copy of any annual financial statement and any income statement of the corporation for each quarterly period of each fiscal year, and any accompanying balance sheet of the corporation as of the end -18- of each such period, that has been prepared by the corporation shall be kept on file in the principal executive office of the corporation for twelve (12) months; and each such statement shall be exhibited at all reasonable times to any shareholder demanding an examination of any such statement or a copy shall be mailed to any such shareholder. If a shareholder or shareholders holding at least five percent (5%) of the outstanding shares of any class of stock of the corporation makes a written request to the corporation for an income statement of the corporation for the three-month, six-month or nine-month period of the then current fiscal year ended more than thirty (30) days before the date of the request, and for a balance sheet of the corporation as of the end of that period, then the chief financial officer shall cause that statement to be prepared, if not already prepared, and shall deliver personally or mail that statement or statements to the person making the request within thirty (30) days after the receipt of the request. If the corporation has not sent to the shareholders its annual report for the last fiscal year, such report shall likewise be delivered or mailed to the shareholder or shareholders within thirty (30) days after the request. The corporation shall also, on the written request of any shareholder, mail to the shareholder a copy of the last annual, semi-annual or quarterly income statement which it has prepared, and a balance sheet as of the end of that period. The quarterly income statements and balance sheets referred to in this section shall be accompanied by the report, if any, of any independent accountants engaged by the corporation or by the certificate of an authorized officer of the corporation that the financial statements were prepared without audit from the books and records of the corporation. ARTICLE VII GENERAL MATTERS --------------- 8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING. ----------------------------------------------------- For purposes of determining the shareholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the shareholders entitled to exercise any rights in respect of any other lawful action (other than action by shareholders by written consent without a meeting), the board of directors may fix, in advance, a record date, which shall not be more than sixty (60) days before any such action. In that case, only shareholders of record at the close of business on the date so fixed are entitled to receive the dividend, distribution or allotment of rights, or to exercise such rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date so fixed, except as otherwise provided in the Code. If the board of directors does not so fix a record date, then the record date for determining shareholders for any such purpose shall be at the close of business on the day on which the board adopts the applicable resolution or the sixtieth (60th) day before the date of that action, whichever is later. -19- 8.2 CHECKS, DRAFTS, EVIDENCES OF INDEBTEDNESS. ----------------------------------------- All checks, drafts, or other orders for payment of money, notes or other evidences of indebtedness, issued in the name of or payable to the shall be signed or endorsed by such person or persons and in such manner as, from time to time, shall be determined by resolution of the board of directors. 8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED. -------------------------------------------------- The board of directors, except as otherwise provided in these bylaws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation; such authority may be general or confined to specific instances. Unless so authorized or ratified by the board of directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. 8.4 CERTIFICATES FOR SHARES. ----------------------- A certificate or certificates for shares of the corporation shall be issued to each shareholder when any of such shares are fully paid. The board of directors may authorize the issuance of certificates for shares partly paid provided that these certificates shall state the total amount of the consideration to be paid for them and the amount actually paid. All certificates shall be signed in the name of the corporation by the chairman of the board or the vice chairman of the board or the president or a vice president and by the chief financial officer or an assistant treasurer or the secretary or an assistant secretary, certifying the number of shares and the class or series of shares owned by the shareholder. Any or all of the signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed on a certificate ceases to be that officer, transfer agent or registrar before that certificate is issued, it may be issued by the corporation with the same effect as if that person were an officer, transfer agent or registrar at the date of issue. 8.5 LOST CERTIFICATES. ----------------- Except as provided in this Section 8.5, no new certificates for shares shall be issued to replace a previously issued certificate unless the latter is surrendered to the corporation and cancelled at the same time. The board of directors may, in case any share certificate or certificate for any other security is lost, stolen or destroyed, authorize the issuance of replacement certificates on such terms and conditions as the board may require; the board may require indemnification of the corporation secured by a bond or other adequate security sufficient to protect the corporation against any claim that may be made against it, including any expense or liability, on account of the alleged loss, theft or destruction of the certificate or the issuance of the replacement certificate. -20- 8.6 CONSTRUCTION; DEFINITIONS. ------------------------- Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the Code shall govern the construction of these bylaws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both a corporation and a natural person. ARTICLE IX AMENDMENTS ---------- 9.1 AMENDMENT BY SHAREHOLDERS. ------------------------- New bylaws may be adopted or these bylaws may be amended or repealed by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that if the articles of incorporation of the corporation set forth the number of authorized directors of the corporation, then the authorized number of directors may be changed only by an amendment of the articles of incorporation. 9.2 AMENDMENT BY DIRECTORS. ---------------------- Subject to the rights of the shareholders as provided in Section 9.1 of these bylaws, bylaws, other than a bylaw or an amendment of a bylaw changing the authorized number of directors (except to fix the authorized number of directors pursuant to a bylaw providing for a variable number of directors), may be adopted, amended or repealed by the board of directors. -21- CERTIFICATE BY SECRETARY OF ADOPTION OF RESTATED BYLAWS ------------------------------------------------------- The undersigned hereby certifies that he is the duly elected, qualified and acting Secretary of Nanometrics Incorporated and that the foregoing Bylaws, comprising twenty-five (25) pages, constitute the restatement of the Bylaws of this corporation and include all amendments adopted by the Board of Directors and/or shareholders since the last restatement of the Bylaws on July 1, 1982. IN WITNESS WHEREOF, the undersigned has hereunto set his hand and affixed the corporate seal this 8th day of November, 1990. /s/ Vincent J. Coates ___________________________ Vincent J. Coates, Secretary -22- EX-10.1 6 FORM OF INDEMNIFICATION AGREEMENT EXHIBIT 10.1 INDEMNIFICATION AGREEMENT ------------------------- This indemnification Agreement ("Agreement") is made as of this ________ day of _____________, 19__ by and between Nanometrics Incorporated, a California corporation (the "Company"), and_____________________________("Indemnitee"). WHEREAS, the Company and Indemnitee recognize the increasing difficulty in obtaining directors' and officers' liability insurance, the significant increases in the cost of such insurance and the general reductions in the coverage of such insurance; WHEREAS, the Company and Indemnitee further recognize the substantial increase in corporate litigation in general, subjecting officers and directors to expensive litigation risks at the same time as the availability and coverage of liability insurance has been severely limited; WHEREAS, Indemnitee does not regard the current protection available as adequate under the present circumstances, and Indemnitee and other officers and directors of the Company may not be willing to continue to serve as officers and directors without additional protection; and WHEREAS, the Company desires to attract and retain the services of highly qualified individuals, such as Indemnitee, to serve as officers and directors of the Company and to indemnify its officers and directors so as to provide them with the maximum protection permitted by law. NOW, THEREFORE, the Company and Indemnitee hereby agree as follows: 1. Indemnification. --------------- (a) Third Party Proceedings. The Company shall indemnify Indemnitee ----------------------- if Indemnitee is or was a party or is threatened to be made a party to any threatened, pending or completed action or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Company) by reason of the fact that Indemnitee is or was a director, officer, employee or agent of the Company, or any subsidiary of the Company, by reason of any action or inaction on the part of Indemnitee while an officer or director or by reason of the fact that Indemnitee is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld) actually and reasonably incurred by Indemnitee in connection with such action or proceeding if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe Indemnitee's conduct was unlawful. The termination of any action or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a --------------- presumption that (i) Indemnitee did not act in good faith and in a manner which Indemnitee reasonably believed to be in the best interests of the Company, or (ii) with respect to any criminal action or proceeding, Indemnitee had reasonable cause to believe that Indemnitee's conduct was unlawful. (b) Proceedings By or in the Right of the Company. The Company shall --------------------------------------------- indemnify Indemnitee if Indemnitee was or is a party or is threatened to be made a party to any threatened, pending or completed action or proceeding by or in the right of the Company or any subsidiary of the Company to procure a judgment in its favor by reason of the fact that Indemnitee is or was a director, officer, employee or agent of the Company, or any subsidiary of the Company, by reason of any action or inaction on the part of Indemnitee while an officer or director or by reason of the fact that Indemnitee is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees) and, to the fullest extent permitted by law, amounts paid in settlement, in each case to the extent actually and reasonably incurred by Indemnitee in connection with the defense or settlement of such action or proceeding if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in the best interests of the Company and its shareholders, except that no indemnification shall be made in respect of any claim, issue or matter as to which Indemnitee shall have been adjudged to be liable to the Company in the performance of Indemnitee's duty to the Company and its shareholders unless and only to the extent that the court in which such action or proceeding is or was pending shall determine upon application that, in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for expenses and then only to the extent that the court shall determine. 2. Expenses; Indemnification Procedure. ----------------------------------- (a) Advancement of Expenses. The Company shall advance all expenses ----------------------- incurred by Indemnitee in connection with the investigation, defense, settlement or appeal of any civil or criminal action or proceeding referenced in Section 1(a) or (b) hereof (but not amounts actually paid in settlement of any such action or proceeding). Indemnitee hereby undertakes to repay such amounts advanced only if, and to the extent that, it shall ultimately be determined that Indemnitee is not entitled to be indemnified by the Company as authorized hereby. The advances to be made hereunder shall be paid by the Company to Indemnitee within twenty (20) days following delivery of a written request therefor by Indemnitee to the Company. (b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a -------------------------------- condition precedent to his right to be indemnified under this Agreement, give the Company notice in writing as soon as practicable of any claim made against Indemnitee for which indemnification will or could be sought under this Agreement. Notice to the Company shall be directed to the Chief Executive officer of the Company at the address shown on the signature page of this Agreement (or such other address as the Company shall designate in writing to Indemnitee). Notice shall be deemed received three business days after the date postmarked if sent by domestic certified or registered mail, properly addressed; otherwise notice shall be deemed received when such notice shall actually be received by the -2- Company. In addition, Indemnitee shall give the Company such information and cooperation as it may reasonably require and as shall be within Indemnitee's power. (c) Procedure. Any indemnification provided for in Section 1 shall be --------- made no later than forty-five (45) days after receipt of the written request of Indemnitee. If a claim under this Agreement, under any statute, or under any provision of the Company's Articles of Incorporation or By-laws providing for indemnification, is not paid in full by the Company within forty-five (45) days after a written request for payment thereof has first been received by the Company, Indemnitee may, but need not, at any time thereafter bring an action against the Company to recover the unpaid amount of the claim and, subject to Section 12 of this Agreement, Indemnitee shall also be entitled to be paid for the expenses (including attorneys' fees) of bringing such action. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in connection with any action or proceeding in advance of its final disposition) that Indemnitee has not met the standards of conduct which make it permissible under applicable law for the Company to indemnify Indemnitee for the amount claimed, but the burden of proving such defense shall be on the Company, and Indemnitee shall be entitled to receive interim payments of expenses pursuant to Subsection 2(a) unless and until such defense may be finally adjudicated by court order or judgment from which no further right of appeal exists. It is the parties' intention that if the Company contests Indemnitee's right to indemnification, the question of Indemnitee's right to indemnification shall be for the court to decide, and neither the failure of the Company (including its Board of Directors, any committee or subgroup of the Board of Directors, independent legal counsel, or its shareholders) to have made a determination that indemnification of Indemnitee is proper in the circumstances because Indemnitee has met the applicable standard of conduct required by applicable law, nor an actual determination by the Company (including its Board of Directors, any committee or subgroup of the Board of Directors, independent legal counsel, or its shareholders) that Indemnitee has not met such applicable standard of conduct, shall create a presumption that Indemnitee has or has not met the applicable standard of conduct. (d) Notice to Insurers. If, at the time of the receipt of a notice of ------------------ a claim pursuant to Section 2(b) hereof, the Company has director and officer liability insurance in effect, the Company shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policies. (e) Selection of Counsel. In the event the Company shall be obligated -------------------- under Section 2(a) hereof to pay the expenses of any proceeding against Indemnitee, the Company, if appropriate, shall be entitled to assume the defense of such proceeding, with counsel approved by Indemnitee, which approval shall not be unreasonably withheld, upon the delivery to Indemnitee of written notice of its election so to do. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel by the Company, the Company will not be liable to Indemnitee under this Agreement for any fees of counsel subsequently incurred by Indemnitee with respect to the same proceeding, provided that (i) Indemnitee shall have the right to employ his -3- counsel in any such proceeding at Indemnitee's expense; and (ii) if (A) the employment of counsel by Indemnitee has been previously authorized by the Company, (B) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and Indemnitee in the conduct of any such defense or (C) the Company shall not, in fact, have employed counsel to assume the defense of such proceeding, then the fees and expenses of Indemnitee's counsel shall be at the expense of the Company. 3. Additional Indemnification Rights; Nonexclusivity. ------------------------------------------------- (a) Scope. Notwithstanding any other provision of this Agreement, the ----- Company hereby agrees to indemnify the Indemnitee to the fullest extent permitted by law, notwithstanding that such indemnification is not specifically authorized by the other provisions of this Agreement, the Company's Articles of Incorporation, the Company's By-laws or by statute. In the event of any change, after the date of this Agreement, in any applicable law, statute or rule which expands the right of a California corporation to indemnify a member of its board of directors or an officer, such changes shall be, ipso facto, within the ---- ----- purview of Indemnitee's rights and Company's obligations, under this Agreement. In the event of any change in any applicable law, statute or rule which narrows the right of a California corporation to indemnify a member of its Board of Directors or an officer, such changes, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement shall have no effect on this Agreement or the parties' rights and obligations hereunder. (b) Nonexclusivity. The indemnification provided by this Agreement -------------- shall not be deemed exclusive of any rights to which Indemnitee may be entitled under the Company's Articles of Incorporation, its By-laws, any agreement, any vote of shareholders or disinterested directors, the California General Corporation Law, or otherwise, both as to action in Indemnitee's official capacity and as to action in another capacity while holding such office. The indemnification provided under this Agreement shall continue as to Indemnitee for any action taken or not taken while serving in an indemnified capacity even though he may have ceased to serve in such capacity at the time of any action or other covered proceeding. 4. Partial Indemnification. If Indemnitee is entitled under any ----------------------- provision of this Agreement to indemnification by the Company for some or a portion of the expenses, judgments, fines or penalties actually or reasonably incurred by him in the investigation, defense, appeal or settlement of any civil or criminal action or proceeding, but not, however, for the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion of such expenses, judgments, fines or penalties to which Indemnitee is entitled. 5. Mutual Acknowledgment. Both the Company and Indemnitee acknowledge --------------------- that in certain instances, Federal law or applicable public policy may prohibit the Company from indemnifying its directors and officers under this Agreement or otherwise. Indemnitee understands and acknowledges that the Company has undertaken or may be required in the future to undertake with the Securities and Exchange Commission to submit the question of indemnification to a court in -4- certain circumstances for a determination of the Company's right under public policy to indemnify Indemnitee. 6. Directors' and Officers' Liability Insurance. The Company shall, from -------------------------------------------- time to time, make the good faith determination whether or not it is practicable for the Company to obtain and maintain a policy or policies of insurance with reputable insurance companies providing the officers and directors of the Company with coverage for losses from wrongful acts, or to ensure the Company's performance of its indemnification obligations under this Agreement. Among other considerations, the Company will weigh the costs of obtaining such insurance coverage against the protection afforded by such coverage. In all policies of directors' and officers' liability insurance, Indemnitee shall be named as an insured in such a manner as to provide Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company's directors, if Indemnitee is a director; or of the Company's officers, if Indemnitee is not a director of the Company but is an officer; or of the Company's key employees, if Indemnitee is not an officer or director but is a key employee. Notwithstanding the foregoing, the Company shall have no obligation to obtain or maintain such insurance if the Company determines in good faith that such insurance is not reasonably available, if the premium costs for such insurance are disproportionate to the amount of coverage provided, if the coverage provided by such insurance is limited by exclusions so as to provide an insufficient benefit, or if Indemnitee is covered by similar insurance maintained by a subsidiary or parent of the Company. 7. Severability. Nothing in this Agreement is intended to require or ------------ shall be construed as requiring the Company to do or fail to do any act in violation of applicable law. The Company's inability, pursuant to court order, to perform its obligations under this Agreement shall not constitute a breach of this Agreement. The provisions of this Agreement shall be severable as provided in this Section 7. If this Agreement or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Company shall nevertheless indemnify Indemnitee to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated, and the balance of this Agreement not so invalidated shall be enforceable in accordance with its terms. 8. Exceptions. Any other provision herein to the contrary ---------- notwithstanding, the Company shall not be obligated pursuant to the terms of this Agreement: (a) Excluded Acts. To indemnify Indemnitee for any acts or omissions ------------- or transactions from which a director may not be relieved of liability under the California General Corporation Law. (b) Claims Initiated by Indemnitee. To indemnify or advance expenses ------------------------------ to Indemnitee with respect to proceedings or claims initiated or brought voluntarily by Indemnitee and not by way of defense, except with respect to proceedings brought to establish or enforce a right to indemnification under this Agreement or any other statute or law or otherwise as required under Section 317 of the California General Corporation Law, but such indemnification or advancement of -5- expenses may be provided by the Company in specific cases if the Board of Directors has approved the initiation or bringing of such suit; or (c) Lack of Good Faith. To indemnify Indemnitee for any expenses ------------------ incurred by the Indemnitee with respect to any proceeding instituted by Indemnitee to enforce or interpret this Agreement, if a court of competent jurisdiction determines that each of the material assertions made by the Indemnitee in such proceeding was not made in good faith or was frivolous; or (d) Insured Claims. To indemnify Indemnitee for expenses or -------------- liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes or penalties, and amounts paid in settlement) which have been paid directly to Indemnitee by an insurance carrier under a policy of directors' and officers' liability insurance maintained by the Company; or (e) Claims Under Section 16(b). To indemnify Indemnitee for expenses -------------------------- and the payment of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar successor statute. 9. Effectiveness of Agreement. To the extent that the indemnification -------------------------- permitted under the terms of certain provisions of this Agreement exceeds the scope of the indemnification provided for in the California General Corporation Law, such provisions shall not be effective unless and until the Company's Articles of Incorporation authorize such additional rights of indemnification. In all other respects, the balance of this Agreement shall be effective as of the date set forth on the first page and may apply to acts or omissions of Indemnitee which occurred prior to such date if Indemnitee was an officer, director, employee or other agent of the Company, or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, at the time such act or omission occurred. 10. Construction of Certain Phrases. ------------------------------- (a) For purposes of this Agreement, references to the "Company" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees or agents, so that if Indemnitee is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the resulting or surviving corporation as Indemnitee would have with respect to such constituent corporation if its separate existence had continued. (b) For purposes of this Agreement, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on Indemnitee with respect to an employee benefit plan; and references to "serving at the request of the Company" shall include any service as a director, officer, employee or agent of the Company which imposes -6- duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants, or beneficiaries. 11. Counterparts. This Agreement may be executed in one or more ------------ counterparts, each of which shall constitute an original. 12. Successors and Assigns. This Agreement shall be binding upon the ---------------------- Company and its successors and assigns, and shall inure to the benefit of Indemnitee and Indemnitee's estate, heirs, legal representatives and assigns. 13. Attorneys' Fees. In the event that any action is instituted by --------------- Indemnitee under this Agreement to enforce or interpret any of the terms hereof, Indemnitee shall be entitled to be paid all court costs and expenses, including reasonable attorneys' fees, incurred by Indemnitee with respect to such action, unless as a part of such action, the court of competent jurisdiction determines that each of the material assertions made by Indemnitee as a basis for such action were not made in good faith or were frivolous. In the event of an action instituted by or in the name of the Company under this Agreement or to enforce or interpret any of the terms of this Agreement, Indemnitee shall be entitled to be paid all court costs and expenses, including attorneys' fees, incurred by Indemnitee in defense of such action (including with respect to Indemnitee's counterclaims and cross-claims made in such action), unless as a part of such action the court determines that each of Indemnitee's material defenses to such action were made in bad faith or were frivolous. 14. Notice. All notices, requests, demands and other communications under ------ this Agreement shall be in writing and shall be deemed duly given (i) if delivered by hand and receipted for by the party addressee, on the date of such receipt, or (ii) if mailed by domestic certified or registered mail with postage prepaid, on the third business day after the date postmarked. Addresses for notice to either party are as shown on the signature page of this Agreement, or as subsequently modified by written notice. 15. Consent to Jurisdiction. The Company and Indemnitee each hereby ----------------------- irrevocably consent to the jurisdiction of the courts of the State of California for all purposes in connection with any action or proceeding which arises out of or relates to this Agreement and agree that any action instituted under this Agreement shall be brought only in the state courts of the State of California. 16. Choice of Law. This Agreement shall be governed by and its provisions ------------- construed in accordance with the laws of the State of California as applied to contracts between California residents entered into and to be performed entirely within California. -7- IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. NANOMETRICS INCORPORATED By: _______________________________ Title:_____________________________ Address: 310 De Guigne Drive Sunnyvale, CA 94086 AGREED TO AND ACCEPTED: INDEMNITEE: - --------------------------------- (type name) - --------------------------------- (signature) - --------------------------------- - --------------------------------- (address) -8- EX-10.2 7 1986 EMPLOYEE STOCK PURCHASE PLAN EXHIBIT 10.2 NANOMETRICS INCORPORATED EMPLOYEE STOCK PURCHASE PLAN (As amended through March 1998) The following constitute the provisions of the Employee Stock Purchase Plan of Nanometrics Incorporated. 1. Purpose. The purpose of the Plan is to provide employees of the ------- Company and its Designated Subsidiaries with an opportunity to purchase Common Stock of the Company through accumulated payroll deductions. It is the intention of the Company to have the Plan qualify as an "Employee Stock Purchase Plan" under Section 423 of the Internal Revenue Code of 1954, as amended. The provisions of the Plan shall, accordingly, be construed so as to extend and limit participation in a manner consistent with the requirements of that section of the Code. 2. Definitions. ----------- (a) "Board" shall mean the Board of Directors of the Company. ----- (b) "Code" shall mean the Internal Revenue Code of 1954, as amended. ---- (c) "Common Stock" shall mean the Common stock, no par value, of the ------------ Company. (d) "Company" shall mean Nanometrics Incorporated, a California ------- corporation. (e) "Compensation" shall mean all regular straight time gross ------------ earnings, exclusive of payments for overtime, shift premium, incentive compensation, incentive payments, bonuses, commissions or other compensation. (f) "Designated Subsidiaries" shall mean the Subsidiaries which have ----------------------- been designated by the Board from time to time in its sole discretion as eligible to participate in the Plan. (g) "Employee" shall mean any person, including an officer, who is -------- customarily employed for at least twenty (20) hours per week and more than five (5) months in a calendar year by the Company or one of its Designated Subsidiaries. For purposes of the Plan, the employment relationship shall be treated as continuing intact while the individual is on sick leave or other leave of absence approved by the Company. Where the period of leave exceeds 90 days and the individual's right to reemployment is not guaranteed either by statute or by contract, the employment relationship shall be deemed to have terminated on the 91st day of such leave. (h) "Exercise Date" shall mean the last day of each offering period of ------------- the Plan. (i) "Offering Date" shall mean the first day of each offering period ------------- of the Plan. (j) "Plan" shall mean this Employee Stock Purchase Plan. ---- (k) "Subsidiary" shall mean a corporation, domestic or foreign, of ---------- which not less than 50% of the voting shares are held by the Company or a Subsidiary, whether or not such corporation now exists or is hereafter organized or acquired by the Company or a Subsidiary. 3. Eligibility. ----------- (a) Any Employee as defined in paragraph 2 who shall be employed by the Company on the date his participation in the Plan is effective shall be eligible to participate in the Plan, subject to limitations imposed by Section 423(b) of the Code. (b) Any provisions of the Plan to the contrary notwithstanding, no Employee shall be granted an option under the Plan (i) if, immediately after the grant, such Employee (or any other person whose stock would be attributed to such Employee pursuant to Section 424(d) of the Code) would own stock and/or hold outstanding options to purchase stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or of any subsidiary of the Company, or (ii) which permits his rights to purchase stock under all employee stock purchase plans of the Company and its subsidiaries to accrue at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) of fair market value of such stock (determined at the time such option is granted) for each calendar year in which such option is outstanding at any time. 4. Offering Periods. The Plan shall be implemented by one offering ---------------- during each six month period of the Plan, commencing on or about September 28, 1986, and continuing thereafter until terminated in accordance with paragraph 19 hereof. The Board of Directors of the Company shall have the power to change the duration of offering periods with respect to future offerings without shareholder approval if such change is announced at least fifteen (15) days prior to the scheduled beginning of the first offering period to be affected. 5. Participation. ------------- (a) An eligible Employee may become a participant in the Plan by completing a subscription agreement authorizing payroll deduction on the form provided by the Company and filing it with the Company's payroll office prior to the applicable Offering Date, unless a later time for filing the subscription agreement is set by the Board for all eligible Employees with respect to a given offering. (b) Payroll deductions for a participant shall commence on the first payroll following the Offering Date and shall end on the Exercise Date of the offering to which such authorization is applicable, unless sooner terminated by the participant as provided in paragraph 10. -2- 6. Payroll Deductions. ------------------ (a) At the time a participant files his subscription agreement, he shall elect to have payroll deductions made on each payday during the offering period in an amount not exceeding ten percent (10%) of the Compensation which he received on the payday immediately preceding the Offering Date, and the aggregate of such payroll deductions during the offering period shall not exceed ten percent (10%) of his aggregate Compensation during said offering period. (b) All payroll deductions made by a participant shall be credited to his account under the Plan. A participant may not make any additional payments into such account. (c) A participant may discontinue his participation in the Plan as provided in paragraph 10, or may lower or increase, the rate of his payroll deductions during the offering period by completing or filing with the Company a new authorization for payroll deduction. The change in rate shall be effective fifteen (15) days following the Company's receipt of the new authorization. (d) Notwithstanding the foregoing, to the extent necessary to comply with Section 423(b)(8) of the Code and Section 3(b) hereof, a participant's payroll deductions may be decreased to zero percent (0%) at any time during an Offering Period. Payroll deductions shall recommence at the rate provided in such participant's subscription agreement at the beginning of the first Offering Period which is scheduled to end in the following calendar year, unless terminated by the participant as provided in Section 10 hereof. (e) At the time the option is exercised, in whole or in part, or at the time some or all of the Company's Common Stock issued under the Plan is disposed of, the participant must make adequate provision for the Company's federal, state, or other tax withholding obligations, if any, which arise upon the exercise of the option or the disposition of the Common Stock. At any time, the Company may, but shall not be obligated to, withhold from the participant's compensation the amount necessary for the Company to meet applicable withholding obligations, including any withholding required to make available to the Company any tax deductions or benefits attributable to sale or early disposition of Common Stock by the Employee. 7. Grant of Option. --------------- (a) On the Offering Date of each six month offering period, each eligible Employee participating in the Plan shall be granted an option to purchase (at the per share option price) up to a number of shares of the Company's Common Stock determined by dividing such Employee's payroll deductions to be accumulated during such offering period (not to exceed an amount equal to ten percent (10%) of his Compensation as of the date of the commencement of the applicable offering period) by eighty-five percent (85%) of the fair market value of a share of the Company's Common Stock on the Offering Date, subject to the limitations set forth in Section 3(b) and 12 hereof; provided that in no event shall an Employee be permitted to purchase during each Offering Period more than 5,000 shares (subject to any adjustment pursuant to Section 19), and provided further that such purchase shall be subject to the limitations set forth in Sections 3(b) and -3- 12 hereof. Exercise of the option shall occur as provided in Section 8 hereof, unless the participant has withdrawn pursuant to Section 10 hereof. The Option shall expire on the last day of the Offering Period. Fair market value of a share of the Company's Common Stock shall be determined as provided in Section 7(b) herein. (b) The option price per share of the shares offered in a given offering period shall be the lower of: (i) 85% of the fair market value of a share of the Common Stock of the Company on the Offering Date; or (ii) 85% of the fair market value of a share of the Common Stock of the Company on the Exercise Date. The fair market value of the Company's Common Stock on a given date shall be determined by the Board in its discretion; provided, however, that where there is a public market for the Common Stock, the fair market value per Share shall be the mean of the bid and asked prices of the Common Stock for such date, as reported in the Wall Street Journal (or, if not so reported, as otherwise reported by the National Association of Securities Dealers Automated Quotation (NASDAQ) System) or, in the event the Common Stock is listed on a stock exchange, the fair market value per Share shall be the closing price on such exchange on such date, as reported in the Wall Street Journal. 8. Exercise of Option. Unless a participant withdraws from the Plan as ------------------ provided in paragraph 10, his option for the purchase of shares will be exercised automatically on the Exercise Date of the offering period, and the maximum number of full shares subject to option will be purchased for him at the applicable option price with the accumulated payroll deductions in his account. No fractional shares shall be purchased; any payroll deductions accumulated in a participant's account which are not sufficient to purchase a full share shall be retained in the participant's account for the subsequent Offering Period, subject to earlier withdrawal by the participant as provided in Section 10 hereof. Any other monies left over in a participant's account after the Exercise Date shall be returned to the participant. The shares purchased upon exercise of an option hereunder shall be deemed to be transferred to the participant on the Exercise Date. During his lifetime, a participant's option to purchase shares hereunder is exercisable only by him. 9. Delivery. As promptly as practicable after the Exercise Date of each -------- offering, the Company shall arrange the delivery to each participant, as appropriate, of a certificate representing the shares purchased upon exercise of his option. Any cash remaining to the credit of a participant's account under the Plan after a purchase by him of shares at the termination of each offering period, or which is insufficient to purchase a full share of Common Stock of the Company, shall be returned to said participant. 10. Withdrawal; Termination of Employment. ------------------------------------- (a) A participant may withdraw all but not less than all the payroll deductions credited to his account under the Plan at any time prior to the Exercise Date of the offering period by giving written notice to the Company. All of the participant's payroll deductions credited to his account will be paid to him promptly after receipt of his notice of withdrawal and his option for the current period will be automatically terminated, and no further payroll deductions for the purchase of shares will be made during the offering period. -4- (b) Upon termination of the participant's employment prior to the Exercise Date of the offering period for any reason, including retirement or death, the payroll deductions credited to his account will be returned to him or, in the case of his death, to the person or persons entitled thereto under paragraph 14, and his option will be automatically terminated. (c) In the event an Employee fails to remain in the continuous employ of the Company for at least twenty (20) hours per week during the offering period in which the employee is a participant, he will be deemed to have elected to withdraw from the Plan and the payroll deductions credited to his account will be returned to him and his option terminated. (d) A participant's withdrawal from an offering will not have any effect upon his eligibility to participate in a succeeding offering or in any similar plan which may hereafter be adopted by the Company. 11. Interest. No interest shall accrue on the payroll deductions of a -------- participant in the Plan. 12. Stock. ----- (a) The maximum number of shares of the Company's Common Stock which shall be made available for sale under the Plan shall be 250,000 shares, subject to adjustment upon changes in capitalization of the Company as provided in paragraph 18. If the total number of shares which would otherwise be subject to options granted pursuant to Section 7(a) hereof on the Offering Date of an offering period exceeds the number of shares then available under the Plan (after deduction of all shares for which options have been exercised or are then outstanding), the Company shall make a pro rata allocation of the shares remaining available for option grant in as uniform a manner as shall be practicable and as it shall determine to be equitable. In such event, the Company shall give written notice of such reduction of the number of shares subject to the option to each Employee affected thereby and shall similarly reduce the rate of payroll deductions, if necessary. (b) The participant will have no interest or voting right in shares covered by his option until such option has been exercised. (c) Shares to be delivered to a participant under the Plan will be registered in the name of the participant or in the name of the participant and his spouse. 13. Administration. The Plan shall be administered by the Board of the -------------- Company or a committee of members of the Board appointed by the Board. The administration, interpretation or application of the Plan by the Board or its committee shall be final, conclusive and binding upon all participants. -5- 14. Designation of Beneficiary. -------------------------- (a) A participant may file a written designation of a beneficiary who is to receive any shares and cash, if any, from the participant's account under the Plan in the event of such participant's death subsequent to the end of the offering period but prior to delivery to him of such shares and cash. In addition, a participant may file a written designation of a beneficiary who is to receive any cash from the participant's account under the Plan in the event of such participant's death prior to the Exercise Date of the offering period. (b) Such designation of beneficiary may be changed by the participant at any time by written notice. In the event of the death of a participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such participant's death, the Company shall deliver such shares and/or cash to the executor or administrator of the estate of the participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such shares and/or cash to the spouse or to any one or more dependents or relatives of the participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate. 15. Transferability. Neither payroll deductions credited to a --------------- participant's account nor any rights with regard to the exercise of an option or to receive shares under the Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution or as provided in paragraph 14 hereof) by the participant. Any such attempt at assignment, transfer, pledge or other disposition shall be without effect, except that the Company may treat such act as an election to withdraw funds in accordance with paragraph 10. 16. Use of Funds. All payroll deductions received or held by the Company ------------ under the Plan may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such payroll deductions. 17. Reports. Individual accounts will be maintained for each participant ------- in the Plan. Statements of account will be given to participating Employees semi-annually promptly following the Exercise Date, which statements will set forth the amounts of payroll deductions, the per share purchase price, the number of shares purchased and the remaining cash balance, if any. 18. Adjustments Upon Changes in Capitalization. ------------------------------------------ (a) Changes in Capitalization. Subject to any required action by the ------------------------- shareholders of the Company, the number of shares of Common Stock covered by each option under the Plan which has not yet been exercised and the number of shares of Common Stock which have been authorized for issuance under the Plan but have not yet been placed under option (collectively, the "Reserves"), as well as the price per share of Common Stock covered by each option under the Plan which has not yet been exercised, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in -6- the number of shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration". Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an option. (b) Dissolution or Liquidation. In the event of the proposed -------------------------- dissolution or liquidation of the Company, the Offering Period then in progress shall be shortened by setting a new Exercise Date (the "New Exercise Date"), and shall terminate immediately prior to the consummation of such proposed dissolution or liquidation, unless provided otherwise by the Board. The New Exercise Date shall be before the date of the Company's proposed dissolution or liquidation. The Board shall notify each participant in writing, at least ten (10) business days prior to the New Exercise Date, that the Exercise Date for the participant's option has been changed to the New Exercise Date and that the participant's option shall be exercised automatically on the New Exercise Date, unless prior to such date the participant has withdrawn from the Offering Period as provided in Section 10 hereof. (c) Merger or Asset Sale. In the event of a proposed sale of all or -------------------- substantially all of the assets of the Company, or the merger of the Company with or into another corporation, each outstanding option shall be assumed or an equivalent option substituted by the successor corporation or a Parent or Subsidiary of the successor corporation. In the event that the successor corporation refuses to assume or substitute for the option, the Offering Period then in progress shall be shortened by setting a new Exercise Date (the "New Exercise Date"). The New Exercise Date shall be before the date of the Company's proposed sale or merger. The Board shall notify each participant in writing, at least ten (10) business days prior to the New Exercise Date, that the Exercise Date for the participant's option has been changed to the New Exercise Date and that the participant's option shall be exercised automatically on the New Exercise Date, unless prior to such date the participant has withdrawn from the Offering Period as provided in Section 10 hereof. The Board may, if it so determines in the exercise of its sole discretion, also make provision for adjusting the Reserves, as well as the price per share of Common Stock covered by each outstanding option, in the event that the Company effects one or more reorganizations, recapitalizations, rights offerings or other increases or reductions of shares of its outstanding Common Stock, and in the event of the Company being consolidated with or merged into any other corporation. 19. Amendment or Termination. ------------------------ (a) The Board of Directors of the Company may at any time and for any reason terminate or amend the Plan. Except as provided in Section 19 hereof, no such termination can affect options previously granted, provided that an Offering Period may be terminated by the Board of Directors on any Exercise Date if the Board determines that the termination of the Plan is in the -7- best interests of the Company and its stockholders. Except as provided in Section 19 hereof, no amendment may make any change in any option theretofore granted which adversely affects the rights of any participant. To the extent necessary to comply with Section 423 of the Code (or any other applicable law, regulation or stock exchange rule), the Company shall obtain shareholder approval in such a manner and to such a degree as required. (b) Without stockholder consent and without regard to whether any participant rights may be considered to have been "adversely affected," the Board (or its committee) shall be entitled to change the Offering Periods, limit the frequency and/or number of changes in the amount withheld during an Offering Period, establish the exchange ratio applicable to amounts withheld in a currency other than U.S. dollars, permit payroll withholding in excess of the amount designated by a participant in order to adjust for delays or mistakes in the Company's processing of properly completed withholding elections, establish reasonable waiting and adjustment periods and/or accounting and crediting procedures to ensure that amounts applied toward the purchase of Common Stock for each participant properly correspond with amounts withheld from the participant's Compensation, and establish such other limitations or procedures as the Board (or its committee) determines in its sole discretion advisable which are consistent with the Plan. 20. Notices. All notices or other communications by a participant to the ------- Company under or in connection with the Plan shall be deemed to have been duly given when received in the form specified by the Company at the location, or by the person, designated by the Company for the receipt thereof. 21. Shareholder Approval. Continuance of the Plan shall be subject to -------------------- approval by the shareholders of the Company within twelve months before or after the date the Plan is adopted. If such shareholder approval is obtained at a duly held shareholders' meeting, it may be obtained by the affirmative vote of the holders of a majority of the outstanding shares of the Company present or represented and entitled to vote thereon, which approval shall be: (a) (1) solicited substantially in accordance with Section 14(a) of the Securities Act of 1934, as amended (the "Act") and the rules and regulations promulgated thereunder, or (2) solicited after the Company has furnished in writing to the holders entitled to vote substantially the same information concerning the Plan as that which would be required by the rules and regulations in effect under Section 14(a) of the Act at the time such information is furnished; and (b) obtained at or prior to the first annual meeting of shareholders held subsequent to the first registration of Common Stock under Section 12 of the Act. In the case of approval by written consent, it must be obtained by the unanimous written consent of all shareholders of the Company, or by written consent of a smaller percentage of shareholders but only if the Board determines, on the basis of an opinion rendered by the Company's legal counsel, that the written consent of such a smaller percentage of shareholders will comply with all applicable laws and will not adversely affect the qualifications of the Plan under Section 423 of the Code. -8- 22. Conditions Upon Issuance of Shares. Shares shall not be issued with ---------------------------------- respect to an option unless the exercise of such option and the issuance and delivery of such shares pursuant thereto shall comply with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an option, the Company may require the person exercising such option to represent and warrant at the time of any such exercise that the shares are being purchased only for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned applicable provisions of law. 23. Term of Plan. The Plan shall become effective upon the earlier to ------------ occur of its adoption by the Board of Directors or its approval by the shareholders of the Company as described in paragraph 21. It shall continue in effect for a term of twenty (20) years unless sooner terminated under paragraph 19. -9- EMPLOYEE STOCK PURCHASE PLAN ---------------------------- SUBSCRIPTION AGREEMENT ---------------------- ______ Original Application Offering Date: _______ ______ Change in Payroll Deduction Rate ______ Change of Beneficiary(ies) 1. ____________________________________ hereby elects to participate in the __________________ Employee Stock Purchase Plan (the "Stock Purchase Plan") and subscribes to purchase shares of the Company's Common Stock, without par value, in accordance with this Subscription Agreement and the Stock Purchase Plan. 2. I hereby authorize payroll deductions from each paycheck in the amount of $__________ (which equals _____% of by Base compensation as of the payday immediately preceding the Offering Date) in accordance with the Stock Purchase Plan. 3. I understand that said payroll deductions shall be accumulated for the purchase of shares of Common Stock, without par value, at the applicable purchase price determined in accordance with the Stock Purchase Plan. I further understand that, except as otherwise set forth in the Stock Purchase Plan, shares will be purchased for me automatically on the Exercise Date of the offering period unless I otherwise withdraw form the Stock Purchase Plan by giving written notice to the Company for such purpose. 4. I have received a copy of the Company's most recent prospectus which describes the Stock Purchase Plan and a copy of the complete "__________________ Employee Stock Purchase Plan." I understand that my participation in the Stock Purchase Plan is in all respects subject to the terms of the Plan. 5. Shares purchased for me under the Stock Purchase Plan should be issued in the name(s) of: ____________________________________________________________. 6. I understand that if I dispose of any shares received by me pursuant to the Plan within 2 years after the Offering Date (the first day of the offering period during which I purchased such shares) or within 1 year after the date on which such shares were transferred to me, I may be treated for federal income tax purposes as having received ordinary income at the time of such disposition in an amount equal to the excess of the fair market value of the shares at the time such shares were transferred to me over the price which I paid for the shares. I hereby agree to notify the Company in writing within 30 --------------------------------------------------------- days after the date of any such disposition. However, if I dispose of such - ------------------------------------------- shares at any time after the expiration of the 2-year and 1-year holding period, I understand that I will be treated for federal income tax purposes as having received income only at the time of such disposition, and that such income will be taxed as ordinary income only to the extent of an amount equal to the lesser of (1) the excess of the fair market value of the shares at the time of such disposition over the purchase price which I paid for the shares under the option, or (2) the excess of the fair market value of the shares over the option price, measured as if the option had been exercised on the Offering Date. The remainder of the gain, if any, recognized on such disposition will be taxed as capital gains. 7. I hereby agree to be bound by the terms of the Stock Purchase Plan. The effectiveness of this Subscription Agreement is dependent upon my eligibility to participate in the Stock Purchase Plan. 8. In the event of my death, I hereby designate the following as my beneficiary(ies) to receive all payments and shares due me under the Stock Purchase Plan: NAME: (Please print)____________________________________________________________ (First) (Middle) (Last) ____________________________________ _______________________________________ Relationship _______________________________________ (Address) NAME: (Please print)___________________________________________________________ (First) (Middle) (Last) ____________________________________ _______________________________________ Relationship _______________________________________ (Address) Dated:______________________________ _______________________________________ Signature of Employee -2- PROSPECTUS - ---------- NANOMETRICS INCORPORATED _____________________ EMPLOYEE STOCK PURCHASE PLAN _____________________ The shares offered by this Prospectus are speculative and subject to a high degree of risk. Prospective purchasers of the shares offered hereby should carefully consider the information set forth in "Risk Factors." _____________________ This Prospectus relates to 250,000 shares of Common Stock, no par value, of Nanometrics Incorporated (the "Company") which are offered for sale to those employees of the Company and its designated subsidiaries who are eligible to participate in the Company's Employee Stock Purchase Plan. The terms and conditions of the Employee Stock Purchase Plan, including the price of the shares of Common Stock, are governed by its provisions and the agreements thereunder between the Company and the participants. _____________________ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. _____________________ The Company's executive offices are located at 310 DeGuigne Drive, Sunnyvale, California 94086, and its telephone number at that location is (408) 746-1600. The date of this Prospectus is March 31, 1998 This Prospectus contains information concerning Nanometrics Incorporated and its Employee Stock Purchase Plan, but does not contain all the information set forth in the Registration Statement which the Company has filed with the Securities and Exchange Commission under the Securities Act of 1933. The Registration Statement, including various exhibits, may be inspected at the Commission's office in Washington, D.C. In addition, the Commission maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The address of the Commission's Web site is http:\\www.sec.gov. _____________________ TABLE OF CONTENTS
Page The Employee Stock Purchase Plan............... 3 Description of Capital Stock................... 8 Indemnification of Directors and Officers...... 8 Information Incorporated by Reference.......... 9
_____________________ The Company hereby undertakes to provide without charge to each person to whom a copy of this Prospectus is delivered, upon written or oral request of any such person, a copy of any and all of the information that has been or may be incorporated by reference in this Prospectus, other than exhibits to such documents, together with copies of the Company's annual report delivered or to be delivered to its shareholders. Requests for such copies should be directed to Paul Nolan, Chief Financial Officer, Nanometrics Incorporated, 310 DeGuigne Drive, Sunnyvale, California 94086. The Company's telephone number at that location is (408) 746-1600. The Company is subject to the informational requirements of the Exchange Act, and, in accordance therewith, files reports and other information with the Commission. Reports, proxy and information statements filed by the Company with the Commission pursuant to the informational requirements of the Exchange Act may be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following Regional Offices of the Commission: New York Regional Office, 7 World Trade Center, Suite 1300, New York, New York 10048; and Chicago Regional Office, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material may be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W. Washington D.C., 20549, at prescribed rates. Such materials may also be obtained from the Commission's web site at http://www.sec.gov. In addition, reports, proxy statements and other information concerning the Company can be inspected and copied at the offices of the Nasdaq National Market, Nasdaq Operations, 1735 K Street, N.W., Washington, D.C. 20006, on which the Common Stock of the Company is quoted. No person has been authorized to give any information or make any representations, other than those contained in this Prospectus, in connection with the Employee Stock Purchase Plan described in this Prospectus, and, if given or made, such information or representations must not be relied upon as -2- having been authorized by the Company. This Prospectus does not constitute an offering in any state in which such offering may not lawfully be made. THE EMPLOYEE STOCK PURCHASE PLAN General - ------- The Employee Stock Purchase Plan ("Purchase Plan") was adopted by the Board of Directors in February 1986. The Purchase Plan was approved by the shareholders of the Company in May 1986. The Purchase Plan was amended by the Board of Directors March 1998. A total of 250,000 shares of Common Stock have been reserved for issuance under the Purchase Plan. As of September 30, 1986, no shares have been issued under the Purchase Plan. The Purchase Plan, and the right of participants to make purchases thereunder, is intended to qualify under the provisions of Sections 421 and 423 of the Internal Revenue Code of 1954, as amended (the "Code"). See "Tax Information." The Purchase Plan is not a qualified deferred compensation plan under Section 401(a) of the Code, and is not subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Purpose - ------- The purpose of the Purchase Plan is to provide employees of the Company and its designated subsidiaries with an opportunity to purchase Common Stock of the Company through accumulated payroll deductions. Administration - -------------- The Purchase Plan is administered by the Board of Directors or a committee appointed by the Board. At the present time, no committee has been appointed by the Board of Directors. All questions of interpretation or application of the Purchase Plan are determined in the sole discretion of the Board of Directors or its committee, and its decisions are final and binding upon all participants. Members of the Board of Directors receive no additional compensation for their services in connection with the administration of the Purchase Plan. Eligibility - ----------- Any person, including an officer, who is customarily employed by the Company or one of its designated subsidiaries for at least twenty hours per week and more than five months per calendar year is eligible to participate in the Purchase Plan. As of December 31, 1997 approximately _________ employees would have been eligible to participate in the Purchase Plan. -3- Offering Dates - -------------- The Purchase Plan is implemented by six-month offering periods, the first of which commenced on September 28, 1986. The Board of Directors has the power to alter the duration of the offering periods without shareholder approval. In the event of dissolution or liquidation, the offering period will terminate immediately prior to the consummation of such action, unless otherwise provided by the Board. Participation in the Plan - ------------------------- An eligible employee becomes a participant in the Purchase Plan by delivering to the Company's payroll office a subscription agreement authorizing payroll deductions prior to the applicable offering date, unless a later time for filing the subscription agreement has been set by the Board of Directors for all eligible employees with respect to a given offering. An employee who becomes eligible to participate in the plan after the commencement of an offering period may not participate in the plan until the commencement of the next offering period. Purchase Price - -------------- The purchase price per share at which shares are sold in an offering under the Purchase Plan is the lower of 85% of the fair market value of a share of Common Stock on the date of commencement of the offering period or 85% of the fair market value of a share of Common Stock on the last day of the six-month offering period. The fair market value of the Common Stock on a given date shall be determined by the Board of Directors, and, where there is a public market for the Common Stock, shall be the closing price of the Common Stock for such date, as reported in the Wall Street Journal (or, if not so reported, as otherwise reported by the Nasdaq National Market on such date) or, if the Common Stock is listed on a stock exchange, the closing price on such exchange as of such date. Payment of Purchase Price; Payroll Deductions - --------------------------------------------- The purchase price of the shares is accumulated by payroll deductions over the offering period. The deductions may not exceed 10% of a participant's compensation. "Compensation" for purposes of the Purchase Plan means all regular straight time gross earnings, exclusive of payments for overtime, shift premium, incentive compensation, incentive payments, bonuses, commissions, or other compensation. A participant may discontinue his participation in the plan, and may decrease or increase the rate of payroll deductions at any time during the offering period by completing and filing with the Company a new authorization for payroll deductions, which change shall be effective fifteen (15) days following the Company's receipt of the new authorization. A participant may not make additional contributions to his account. Payroll deductions shall commence on the first payday following the offering date and shall continue at the same rate until the end of the offering period unless sooner terminated or decreased as provided in the plan. All payroll deductions are credited to the participant's account under the plan, deposited with the general funds of the Company and may be used by the Company for any corporate purpose. Any cash -4- remaining to the credit of a participant's account under the plan after a purchase of shares at the termination of an offering period, to the extent that such cash is less than the amount necessary to purchase a full share of the Common Stock of the Company, shall be returned to the participant. Purchase of Stock; Grant and Exercise of Option - ------------------------------------------------ By executing a subscription agreement to participate in the Purchase Plan, the employee is entitled to have shares placed under option to him. The number of shares placed under option to a participant in an offering is that number determined by dividing the amount accumulated in such participant's account at the end of the offering period by the lower of (i) 85% of the fair market value of the Common Stock at the beginning of the offering period and (ii) 85% of the fair market value of the Common Stock on the last day of the six-month offering period; provided, however, that a participant may not purchase more than 5,000 shares per offering period. See "Payment of Purchase Price; Payroll Deductions" for limitations on payroll deductions. Unless the employee's participation is discontinued, his option for the purchase of shares will be exercised automatically at the end of the offering period at the applicable price. See "Withdrawal." Notwithstanding the foregoing, no employee shall be permitted to subscribe for shares under the plan if, immediately after the grant of the option, the employee would own 5% or more of the total combined voting power or value of all classes of stock of the Company or its majority-owned subsidiaries (including stock which may be purchased through subscriptions under the plan or pursuant to any other options), nor shall any employee be granted an option which would permit the employee to buy pursuant to the Purchase Plan more than $25,000 worth of stock (determined at the fair market value of the shares at the time the option is granted) in any calendar year. Furthermore, if the number of shares which would otherwise be placed under option at the beginning of an offering period exceeds the number of shares then available under the Purchase Plan, a pro rata allocation of the shares remaining shall be made in as equitable a manner as is practicable. Withdrawal - ---------- A participant's interest in a given offering may be terminated in whole, but not in part, by signing and delivering to the Company a notice of withdrawal from the plan. Such withdrawal may be elected at any time prior to the end of the applicable six-month offering period. Any withdrawal by the employee of accumulated payroll deductions for a given offering automatically terminates the employee's interest in that offering. A participant's withdrawal from an offering does not have any effect upon such participant's eligibility to participate in subsequent offerings under the Purchase Plan. Termination of Employment - ------------------------- Termination of a participant's employment for any reason, including retirement or death, cancels his or her participation in the Purchase Plan immediately. In such event, the payroll deductions credited to the participant's account will be returned to such participant or, in the case of death, to the person or persons entitled thereto as specified by the employee in the subscription agreement. In the event a participant fails to remain in the continuous employ of the Company for at least 20 hours per week -5- during the offering period in which he is participating, he will be deemed to have elected to withdraw from the plan and the payroll deductions credited to the participant's account will be returned to the participant and the participant's option terminated. For this purpose, a participant will not be deemed to have terminated employment or failed to remain in the continuous employ of the Company in the case of sick leave, military leave or any other leave of absence approved by the Board; provided that such leave is for a period of not more than 90 days or reemployment upon the expiration of such leave is guaranteed by contract or statute. Capital Changes - --------------- In the event any change, such as a stock split or payment of a stock dividend, is made in the Company's capitalization which results in an exchange of Common Stock for a greater or lesser number of shares without receipt of consideration by the Company, appropriate adjustment shall be made in the exercise price and in the number of shares subject to options outstanding under the Purchase Plan, as well as in the number of shares reserved for issuance under the Purchase Plan. In the event of the proposed dissolution or liquidation of the Company, the option will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Board. In the event of a proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, each option under the plan shall be assumed or an equivalent option shall be substituted by such successor corporation or a parent or subsidiary of such successor corporation, if the successor corporation refuses to assume or substitute for the outstanding options, the current offering period will be shortened and a new exercise date will be set. Nonassignability - ---------------- No rights or accumulated payroll deductions of an employee under the Purchase Plan may be pledged, assigned or transferred for any reason, and any such attempt may be treated by the Company as an election to withdraw from the plan. Reports - ------- Individual accounts will be maintained for each participant in the Purchase Plan. Each participant shall receive as promptly as practicable after the end of the six-month offering period a report of his or her account setting forth the total amount of payroll deductions accumulated, the per share purchase price, the number of shares purchased, and the remaining cash balance, if any. Amendment and Termination of the Plan - ------------------------------------- The Board of Directors may at any time amend or terminate the Purchase Plan, except that certain amendments require stockholder approval. -6- Tax Information - --------------- The discussion below summarizes the federal income tax consequences of the grant and exercise of a stock option under an Employee Stock Purchase Plan, as defined in Section 423 of the Code. It also summarizes the tax consequences of the subsequent sale or other disposition of shares acquired under such options. This summary is not intended to be exhaustive and may not cover all tax aspects of every situation. First Day of the Offering Period - -------------------------------- You are not taxed at the beginning of the offering period. Date of Purchase of Stock - ------------------------- You are not taxed when shares are purchased for you at the end of the offering period, even though your purchase price will be the lower of 85% of the fair market value on the first or last day of the offering period. Date of Sale of Shares - ----------------------- If you sell your shares two years or more after the beginning of the ---- offering period (the "Statutory Holding Period"): 1. At the time you sell the shares, any gain up to 15% of the market value of the shares at the beginning of the offering period is taxable as ordinary income, and any further gain is taxable as long-term capital gain. 2. Any loss is treated as long-term capital loss. If you sell your shares before the end of the Statutory Holding Period: 1. At the time you sell the shares, the difference between your purchase price and the fair market value of the shares on the date of purchase is taxable as ordinary income. 2. The difference between the amount you receive on the sale of the shares and the fair market value of the shares on the date of purchase is taxable as capital gain or loss. Tax Deduction by Company - ------------------------ If you sell your shares before the end of the Statutory Holding Period, the Company is entitled to a tax deduction corresponding to the ordinary income you recognize under the rules discussed above. -7- For this reason, when you sell any shares you purchase under the Employee Stock Purchase Plan, you must notify the Company in writing within 30 days of the sale. At any time, the Company may, but will not be obligated to, withhold from your compensation the amount necessary for the Company to meet applicable withholding obligations. Disposition Other than Sale - --------------------------- If you give away or otherwise dispose of your shares before the end of the Statutory Holding Period, the difference between your purchase price for the shares and their fair market value on the date of purchase is taxable to you as --- ordinary income. If you give away or otherwise dispose of the shares after the Statutory Holding Period has elapsed, an amount up to 15% of the market value of the shares at the beginning of the offering period is taxable to you as ordinary income. Tax Consultation - ---------------- SINCE TAX IMPLICATIONS OF THE EMPLOYEE STOCK PURCHASE PLAN CAN BE COMPLEX, WE SUGGEST THAT YOU CONTACT YOUR TAX ADVISOR WITH QUESTIONS SPECIFIC TO YOUR SITUATION. DESCRIPTION OF CAPITAL STOCK The Company's authorized capital stock consists of 25,000,000 shares of Common Stock. As of March 10, 1998 there were 8,584,984 shares of Common Stock outstanding, held of record by 136 shareholders. The holders of Common Stock are entitled to one vote for each share held of record on each matter submitted to a vote of shareholders, and upon giving notice required by law, may cumulate their votes in elections of directors. Holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared by the Board of Directors out of funds legally available therefor and, in the event of the liquidation, dissolution or winding up of the Company, are entitled to share ratably in all assets remaining after payment of liabilities. Holders of Common Stock have no preemptive rights and have no rights to convert their Common Stock into any other securities. The outstanding Common Stock is fully paid and nonassessable. Transfer Agent and Registrar - ---------------------------- Bank of America NT & SA is the Transfer Agent and Registrar of the Company's Common Stock. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 317 of the California Corporations Code authorizes a court to award, or a corporation's Board of Directors to grant, indemnity to directors and officers in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act. Article VI of the By-Laws of the Company provides for -8- indemnification of certain agents to the maximum extent permitted by the California Corporations Code. Persons covered by this indemnification provision include current and former directors, officers, employees and other agents of the Company, as well as persons who serve at the request of the Company as directors, officers, employees or agents of another enterprise. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Company pursuant to the California Corporations Code and the foregoing By-Law provision, the Company has been informed 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 such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in a successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, the Company will, unless in the opinion of its counsel the question has already been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of 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. INFORMATION INCORPORATED BY REFERENCE There are hereby incorporated by reference in this Prospectus the following documents and information heretofore filed with the Securities and Exchange Commission: 1. The Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 filed pursuant to Section 13 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). 2. The Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 filed pursuant to Section 13 of the Exchange Act. 3. The Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 filed pursuant to Section 13 of the Exchange Act. 4. The Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997 filed pursuant to Section 13 of the Exchange Act. All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act after the date of this Prospectus and prior to the filing of a post-effective amendment which indicates that all securities offered have been sold or which deregisters all securities then remaining unsold, shall be deemed to be incorporated by reference in this Prospectus and to be part hereof from the date of filing such documents. -9- Information as to the numbers of eligible and of participating employees and certain other information as to stock options will be included in the future in either the Company's proxy statements, annual reports to shareholders or appendices or amendments to this Prospectus. -10- EX-10.6 8 CONSULTING AGREEMENT EXHIBIT 10.6 NANOMETRICS INCORPORATED CONSULTING AGREEMENT This Consulting Agreement (the "Agreement") is made and entered into as of the 24th day of August, 1995 by and between Nanometrics Incorporated, a California corporation ("Nanometrics"), and Kanegi Nagai ("Consultant"). Nanometrics desires to retain Consultant as an independent contractor to perform consulting services for Nanometrics and Consultant is willing to perform such services, on terms set forth more fully below. In consideration of the mutual promises contained herein, the parties agree as follows: 1. SERVICES AND COMPENSATION -------- --- ------------ (a) Consultant agrees to perform for Nanometrics the services described in Exhibit A ("Services"). (b) Nanometrics agrees to pay Consultant the compensation set forth in Exhibit A for the performance of the Services. 2. CONFIDENTIALITY --------------- (a) "Confidential Information" means any Nanometrics proprietary information, technical data, trade secrets or know-how, including, but not limited to, research, product plans, products, services, customers, customer lists, markets, software, developments, inventions, processes, formulas, technology, designs, drawings, engineering, hardware configuration information, marketing, finances or other business information disclosed by Nanometrics either directly or indirectly in writing, orally or by drawings or inspection of parts or equipment. (b) Consultant will not, during or subsequent to the term of this Agreement, use Nanometrics' Confidential Information for any purpose whatsoever other than the performance of the Services on behalf of Nanometrics or disclose Nanometrics' Confidential Information to any third party, and it is understood that said Confidential Information shall remain the sole property of Nanometrics. Consultant further agrees to take all reasonable precautions to prevent any unauthorized disclosure of such Confidential Information including, but not limited to, having each employee of Consultant, if any, with access to any Confidential Information, execute a nondisclosure agreement containing provisions in Nanometrics' favor substantially similar to Sections 2, 3 and 5 of this Agreement. Confidential Information does not include information which (1) is known to Consultant at the time of disclosure to Consultant by Nanometrics as evidenced by written records of Consultant, (2) has become publicly known and made generally available through no wrongful act of Consultant, or (3) has been rightfully received by Consultant from a third party who is authorized to make such disclosure. Without Nanometrics' prior written approval, Consultant will not directly or indirectly disclose to anyone the existence of this Agreement or the fact that Consultant has this arrangement with Nanometrics. (c) Consultant agrees that Consultant will not, during the term of this Agreement, improperly use or disclose any proprietary information or trade secrets of any former or current employer or other person or entity with which Consultant has an agreement or duty to keep in confidence information acquired by Consultant in confidence, if any, and that Consultant will not bring onto the premises of Nanometrics any unpublished document or proprietary information belonging to such employer, person or entity unless consented to in writing by such employer, person or entity. Consultant will indemnify Nanometrics and hold it harmless from and against all claims, liabilities, damages and expenses, including reasonable attorneys' fees and costs of suit, arising out of or in connection with any violation or claimed violation of a third party's rights resulting in whole or in part from Nanometrics' use of the work product of Consultant under this Agreement. (d) Consultant recognizes that Nanometrics has received and in the future will receive from third parties their confidential or proprietary information subject to a duty on Nanometrics' part to maintain the confidentiality of such information and to use it only for certain limited purposes. Consultant agrees that Consultant owes Nanometrics and such third parties, during the term of this Agreement and thereafter, a duty to hold all such confidential or proprietary information in the strictest confidence and not to disclose it to any person, firm or corporation or to use it except as necessary in carrying out the Services for Nanometrics consistent with the Nanometrics' agreement with such third party. (e) Upon the termination of this Agreement, or upon Nanometrics' earlier request, Consultant will deliver to Nanometrics all of Nanometrics' property and Confidential Information in tangible form that Consultant may have in Consultant's possession or control. 3. OWNERSHIP --------- (a) Consultant agrees that all copyrightable material, notes, records, drawings, designs, inventions, improvements, developments, discoveries and trade secrets (collectively, "Inventions") conceived, made or discovered by Consultant, solely or in collaboration with others, during the period of this Agreement which relate in any manner to the business of Nanometrics that Consultant may be directed to undertake, investigate or experiment with, or which Consultant may become associated with in work, investigation or experimentation in the line of business of Nanometrics in performing the Services hereunder, are the sole property of Nanometrics. In addition, any inventions which constitute copyrightable subject matter shall be considered "works made for hire" as that term is defined in the United States Copyright Act. Consultant further agrees to assign (or cause to be assigned) and does hereby assign fully to Nanometrics all such Inventions and any copyrights, patents, mask work rights or other intellectual property rights relating thereto. (b) Consultant agrees to assist Nanometrics, or its designee, at Nanometrics' expense, in every proper way to secure Nanometrics' rights in the Inventions and any copyrights, patents, mask work rights or other intellectual property rights relating thereto in any and all countries, including the disclosure to Nanometrics of all pertinent information and data with respect thereto, the execution of all applications, specifications, oaths, assignments and all other instruments which Nanometrics shall deem necessary in order to apply for and obtain such rights and in order to assign and convey to Nanometrics, its successors, assigns and nominees the sole and exclusive rights, title and interest in and to such Inventions, and any copyrights, patents, mask work rights or other intellectual property rights relating thereto. Consultant further agrees that Consultant's obligation to execute or cause to be executed, when it is in Consultant's power to do so, any such instrument or papers shall continue after the termination of this Agreement. (c) Consultant agrees that if in the course of performing the Services, Consultant incorporates into any Invention developed hereunder any invention, improvement, development, concept, discovery or other proprietary information owned by Consultant or in which Consultant has an interest, Nanometrics is hereby granted and shall have a nonexclusive, royalty-free, perpetual, irrevocable, worldwide license to make, have made, modify, use and sell such item as part of or in connection with such Invention. (d) Consultant agrees that if Nanometrics is unable because of Consultant's unavailability, dissolution, mental or physical incapacity, or for any other reason, to secure Consultant's signature to apply for or to pursue any application for any United States or foreign patents or mask work or copyright registrations covering the Inventions assigned to Nanometrics above, then Consultant hereby irrevocably designates and appoints Nanometrics and its duly authorized officers and agents as Consultant's agent and attorney in fact, to act for and in Consultant's behalf and stead to execute and file any such applications and to do all other lawfully permitted acts to further the prosecution and issuance of patents, copyright and mask work registrations thereon with the same legal force and effect as if executed by Consultant. 4. REPORTS ------- Consultant agrees that it will from time to time during the term of this Agreement or any extension thereof keep Nanometrics advised as to Consultant's progress in performing the Services hereunder and that Consultant will, as requested by Nanometrics, prepare written reports with respect thereto. It is understood that the time required in the preparation of such written reports shall be considered time devoted to the performance of Consultant's Services. 5. CONFLICTING OBLIGATIONS ----------------------- (a) Consultant certifies that Consultant has no outstanding agreement or obligation that is in conflict with any of the provisions of this Agreement, or that would preclude Consultant from complying with the provisions hereof, and further certifies that Consultant will not enter into any such conflicting Agreement during the term of this Agreement. (b) In view of Consultant's access to Nanometrics' trade secrets and proprietary know-how, Consultant further agrees that Consultant will not, without Nanometrics' prior written consent, design identical or substantially similar designs as those developed under this Agreement for any third party during the term of this Agreement and for a period of twelve (12) months after the termination of this Agreement. (c) Consultant agrees not to recruit any Nanometrics employee(s) for Consultant or for any other employer(s) and not to provide information concerning any Nanometrics employee(s) to any other employer or recruiter. This provision shall remain in full force and effect during the term of this Agreement and for a period of twenty-four (24) months after the term of this Agreement. 6. TERM AND TERMINATION -------------------- (a) This Agreement will commence on the date first written above and will continue until final completion of the Services or termination as provided below. (b) Nanometrics may terminate this Agreement upon giving two (2) weeks prior written notice thereof to Consultant. Any such notice shall be addressed to Consultant at the address shown below or such other address as either party may notify the other of and shall be deemed given upon delivery if personally delivered, or forty-eight (48) hours after deposited in the United States mail, postage prepaid, registered or certified mail, return receipt requested. Nanometrics may terminate this Agreement immediately and without prior notice if Consultant refuses to or is unable to perform the Services or is in breach of any material provision of this Agreement. (c) Upon such termination all rights and duties of the parties toward each other shall cease except: (i) that Nanometrics shall be obliged to pay, within thirty (30) days of the effective date of termination, all amounts owing to Consultant for unpaid Services and related expenses, if any, in accordance with the provisions of Section 1 (Services and Compensation) hereof; and (ii) Sections 2 (Confidentiality), 3 (Ownership), 5 (Conflicting Obligations), and 8 (Independent Contractors) shall survive termination of this Agreement. 7. ASSIGNMENT ---------- Neither this Agreement nor any right hereunder or interest herein may be assigned or transferred by Consultant without the express written consent of Nanometrics. 8. INDEPENDENT CONTRACTOR ---------------------- Nothing in this Agreement shall in any way be construed to constitute Consultant as an agent, employee or representative of Nanometrics, but Consultant shall perform the Services hereunder as an independent contractor. Consultant agrees to furnish (or reimburse Nanometrics for: all tools and materials necessary to accomplish this contract, and shall incur all expenses associated with performance, except as expressly provided on Exhibit A of this Agreement. Consultant acknowledges and agrees that Consultant is obligated to report as income all compensation received by Consultant pursuant to this Agreement, and Consultant agrees to and acknowledges the obligation to pay all self-employment and other taxes thereon. Consultant further agrees to indemnify Nanometrics and hold it harmless to the extent of any obligation imposed on Nanometrics (i) to pay in withholding taxes or similar items or (ii) resulting from Consultant's being determined not to be an independent contractor. 9. INDEMNITY. --------- Consultant hereby waives all claims against Nanometrics for damages to goods, equipment, and all other personal property occurring in the course of performance of consulting activities and for injury to persons in connection with performing consulting activities, from any cause arising at any time, and Consultant will hold Nanometrics exempt and harmless from any damage or injury to any person, or to the goods, equipment, and all other personal property of any person, arising from the performance of consulting activities. 10. ARBITRATION AND EQUITABLE RELIEF -------------------------------- (a) Except as provided in Section 10(b) below, Nanometrics and Consultant agree that any dispute or controversy arising out of or relating to any interpretation, construction, performance or breach of this Agreement, shall be settled by arbitration to be held in Santa Clara County, California, in accordance with the rules then in effect of the American Arbitration Association. The arbitrator may grant injunctions or other relief in such dispute or controversy. The decision of the arbitrator shall be final, conclusive and binding on the parties to the arbitration. Judgment may be entered on the arbitrator's decision in any court of competent jurisdiction. Nanometrics and Consultant shall each pay one-half of the costs and expenses of such arbitration, and each shall separately pay its respective counsel fees and expenses. (b) Consultant agrees that it would be impossible or inadequate to measure and calculate Nanometrics' damages from any breach of the covenants set forth in Sections 2 or 3 herein. Accordingly, Consultant agrees that if Consultant breaches Sections 2 or 3, Nanometrics will have available, in addition to any other right or remedy available, the right to obtain from any court of competent jurisdiction an injunction restraining such breach or threatened breach and specific performance of any such provision. Consultant further agrees that no bond or other security shall be required in obtaining such equitable relief and Consultant hereby consents to the issuances of such injunction and to the ordering of such specific performance. 11. GOVERNING LAW ------------- This Agreement shall be governed by the laws of the State of California. 12. ENTIRE AGREEMENT ---------------- This Agreement is the entire agreement of the parties and supercedes any prior agreements between them with respect to the subject matter hereof. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. CONSULTANT NANOMETRICS INCORPORATED /s/ K. Nagai /s/ Vincent J. Coates By: ________________________ By: _________________________ (Signature) (Signature) Kanegi Nagai Chairman & CEO Title:_____________________ Title: ______________________ Address: 761 Los Altos Ave. Address: 310 Deguigne Drive Los Altos, CA 94022 Sunnyvale, CA 94086 Date: 8/24/95 Date: 8/24/95 EXHIBIT A SERVICES AND COMPENSATION ------------------------- 1. Contact. Consultant's principal Nanometrics contact: ------- Name: Vincent J. Coates ------------------------------------------------------------ Title: Chairman and CEO ------------------------------------------------------------ 2. Services. Consultant will render to Nanometrics the following -------- services: See attached job description. -------------------------------------------------------------------- This Agreement shall commence on August 24, 1995 and shall remain in force --------------------------------------------------------------------------- through December 15, 1995 unless terminated earlier in accordance with the --------------------------------------------------------------------------- provisions of Paragraph 6 of this Agreement. --------------------------------------------------------------------------- 3. Compensation. ------------ (a) Nanometrics shall pay Consultant on the following basis: ----------- Four Hundred Dollars ($400.00) per day or portion thereof, plus reasonable -------------------------------------------------------------------------- expenses. -------------------------------------------------------------------------- Consultant's schedule shall be established by Nanometrics' Chairman & CEO ------------------------------------------------------------------------- and generally is expected to average two (2) days per week. ------------------------------------------------------------------------- (b) Consultant shall submit invoices in a form prescribed by Nanometrics and such statement shall be approved by the contact person listed above or by his or her supervisor. 1 Attachment: Job Description. JOB DESCRIPTIONS (PROPOSAL) --------------------------- 1. Job Title Executive Adviser to Chairman and Chief Executive Officer (CEO). 2. Reporting line Report directly to Chairman and CEO, Mr. Vincent J. Coates. 3. Job descriptions (1) Identify problems currently facing NanoJapan, propose appropriate action plans and implement the plans in accordance with CEO's decision. (2) Based on the above decision, search for a qualified Resident Managing Director (RMD). Make interviews with candidates and recommend CEO the most qualified person(s). (3) Assist CEO in supervising RMD to ensure that RMD can run NanoJapan successfully in line with the policies set by CEO. (4) Review the business and budget plans that NanoJapan submits to CEO and give comments and advices to him. Also, follow closely actual performance in comparison to the approved budget and give recommendation on what kind of actions, if any, should be taken to stay on the budget. (5) Negotiate and conclude with Japanese semiconductor equipment manufacturer(s), including Holon Co. Ltd. exclusive distribution and technical service agreements in USA under the terms and conditions most favorable to Nanometrics. (6) Give advices and assistances to CEO and other executive officers of the Company with regard to its business operations in South Korea, Taiwan and ASEAN countries. (7) Under the direction of CEO, participate in and give advices on important business decision that Nanometrics makes in such areas as marketing, sales, finance, accounting and human resources. (8) Take on any other responsibilities according to CEO's instructions to make Nanometrics a better and more profitable company. (9) In course of fulfilling the above responsibilities make business trips from time to time to Asia, particularly to Japan to meet key employees of NanoJapan, candidates of its RMD and its customers, suppliers, bankers, CPA and other business partners. K. Nagai [LETTERHEAD OF NANOMETRICS] AMENDMENT NUMBER 1 TO CONSULTING AGREEMENT BETWEEN NANOMETRICS INCORPORATED AND MR. KANEGI NAGAI NANOMETRICS INCORPORATED ("NANOMETRICS") and Mr. Kanegi Nagai ("Consultant") hereby agree to extend the term of the Consulting Agreement (the "Agreement") between the parties entered into as of August 24, 1995 such that the Agreement shall remain in full force and effect throughout April 15, 1996 by amending Exhibit A to the Agreement as follows: In Exhibit A of the Agreement, Section 2, replace "December 15, 1995" with "April 15, 1996." This Amendment Number 1 is effective December 15, 1995. IN WITNESS WHEREOF, the parties hereunto have affixed their signatures below. CONSULTANT NANOMETRICS INCORPORATED KANEGI NAGAI By: /s/ K. Nagai By: /s/ Vincent J. Coates --------------------------- -------------------------- (Signature) (Signature) Address: 761 Los Altos Avenue Address: 310 De Guigne Drive Los Altos, CA 94022 Sunnyvale, CA 94086 Date: Dec 15, 1995 Date: Dec 15, 1995 ------------------------- ------------------------- [LETTERHEAD OF NANOMETRICS] AMENDMENT NUMBER 2 TO CONSULTING AGREEMENT BETWEEN NANOMETRICS INCORPORATED AND MR. KANEGI NAGAI NANOMETRICS INCORPORATED ("NANOMETRICS") and Mr. Kanegi Nagai ("Consultant") hereby agree to extend the term of the Consulting Agreement (the "Agreement") between the parties entered into as of August 24, 1995 such that the Agreement shall remain in full force and effect throughout August 23, 1996 by amending Exhibit A to the Agreement as follows: In Exhibit A of the Agreement, Section 2, replace "December 15, 1995" with "August 23, 1996." This Amendment Number 2 is effective April 16, 1996. IN WITNESS WHEREOF, the parties hereunto have affixed their signatures below. CONSULTANT NANOMETRICS INCORPORATED KANEGI NAGAI By: /s/ Kanegi Nagai By: /s/ Vincent J. Coates ------------------- ---------------------- (Signature) (Signature) Vincent J. Coates Chairman and CEO Address: 761 Los Altos Avenue Address: 310 De Guigne Drive Los Altos, CA 94022 Sunnyvale, CA 94086 Date: April 11, 1996 Date: April 9, 1996 ----------------------- ---------------------- [LETTERHEAD OF NANOMETRICS] AMENDMENT NUMBER 3 TO CONSULTING AGREEMENT BETWEEN NANOMETRICS INCORPORATED AND MR. KANEGI NAGAI NANOMETRICS INCORPORATED ("NANOMETRICS") and Mr. Kanegi Nagai ("Consultant") hereby agree to extend the term of the Consulting Agreement (the "Agreement") between the parties entered into as of August 24, 1995 such that the agreement shall remain in full force and effect through November 23, 1996 by amending Exhibit A to the Agreement as follows: In Exhibit A of the Agreement, Section 2, replace "December 15, 1995" with "November 31, 1996". This Amendment Number 3 is effective August 24, 1996. IN WITNESS WHEREOF, the parties hereunto have affixed their signatures below. CONSULTANT NANOMETRICS INCORPORATED KANEGI NAGAI By: /s/ Kanegi Nagai By: /s/ Vincent J. Coates ------------------- ---------------------- (Signature) (Signature) Vincent J. Coates Chairman and CEO Address: 761 Los Altos Avenue Address: 310 De Guigne Drive Los Altos, CA 94022 Sunnyvale, CA 94086 Date: August 26, 1996 Date: August 26, 1996 ----------------------- ----------------------- [LETTERHEAD OF NANOMETRICS] AMENDMENT NUMBER 4 TO CONSULTING AGREEMENT BETWEEN NANOMETRICS INCORPORATED AND MR. KANEGI NAGAI NANOMETRICS INCORPORATED ("NANOMETRICS") and Mr. Kanegi Nagai ("Consultant") hereby agree to extend the term of the Consulting Agreement (the "Agreement") between the parties entered into as of August 24, 1995 such that the agreement shall remain in full force and effect through March 31, 1997 by amending Exhibit A to the Agreement as follows: In Exhibit A of the Agreement, Section 2, replace "December 15, 1995" with "March 31, 1997." This Amendment Number 4 is effective November 24, 1996. IN WITNESS WHEREOF, the parties hereunto have affixed their signatures below. CONSULTANT NANOMETRICS INCORPORATED KANEGI NAGAI By: /s/ Kanegi Nagai By: /s/ Vincent J. Coates ------------------- ---------------------- (Signature) (Signature) Vincent J. Coates Chairman and CEO Address: 761 Los Altos Avenue Address: 310 De Guigne Drive Los Altos, CA 94022 Sunnyvale, CA 94086 Date: Nov. 25, 1996 Date: Nov. 15, 1996 ----------------------- ----------------------- [LETTERHEAD OF NANOMETRICS] AMENDMENT NUMBER 5 TO CONSULTING AGREEMENT BETWEEN NANOMETRICS INCORPORATED AND MR. KANEGI NAGAI NANOMETRICS INCORPORATED ("NANOMETRICS") and Mr. Kanegi Nagai ("Consultant") hereby agree to reduce the Consultant's regular weekly schedule and to extend the term of the Consulting Agreement (the "Agreement") between the parties entered into as of August 24, 1995 such that the Agreement shall remain in full force and effect through August 24, 1997 by amending Exhibit A to the Agreement as follows: Section 2: Replace "December 15, 1995" with "August 24, 1997." Section 3: Replace "two (2) days" with "one (1) day." Section 3: Add the following sentence; However, Nanometrics' Chairman and CEO, may increase the number of consulting days in the event of such occurrences as special projects and travel to Japan. This Amendment Number 5 is effective April 1, 1997. IN WITNESS WHEREOF, the parties hereunto have affixed their signatures below. CONSULTANT NANOMETRICS INCORPORATED KANEGI NAGAI By: /s/ Kanegi Nagai By: /s/ Vincent J. Coates ------------------- ---------------------- (Signature) (Signature) Vincent J. Coates Chairman and CEO Address: 761 Los Altos Avenue Address: 310 De Guigne Drive Los Altos, CA 94022 Sunnyvale, CA 94086 Date: April 7, 1997 Date: April 7, 1997 ----------------------- ----------------------- AMENDMENT NUMBER 6 TO CONSULTING AGREEMENT BETWEEN NANOMETRICS INCORPORATED AND MR. KANEGI NAGAI NANOMETRICS INCORPORATED ("NANOMETRICS") and Mr. Kanegi Nagai ("Consultant") hereby agree to extend the term of the Consulting Agreement (the "Agreement") between the parties entered into as of August 24, 1995 such that the Amendment shall remain in full force and effect through December 31, 1997 by amending Exhibit A to the Agreement as follows: Section 2: Replace "December 15, 1995) with "December 31, 1997." Section 3: The modification to Section 3 contained in Amendment Number 5 shall remain in full force and effect. This Amendment Number 6 is effective August 25, 1997. IN WITNESS WHEREOF, the parties hereunto have affixed their signatures below CONSULTANT NANOMETRICS INCORPORATED KANEGI NAGAI /s/ Kanegi Nagai /s/ Vincent J. Coates By:_______________________ By: ________________________ Signature Signature Vincent J. Coates Chairman and CEO Address: 761 Los Altos Avenue Address: 310 De Guigne Drive Los Altos, CA 94022 Sunnyvale, CA 94086 Date: September 15, 1997 Date: September 15, 1997 EX-10.7 9 REVERSE SPLIT DOLLAR INSURANCE AGREEMENT EXHIBIT 10.7 REVERSE SPLIT DOLLAR INSURANCE AGREEMENT ---------------------------------------- This AGREEMENT is made and entered into this 15th day of March, 1993, by and between NANOMETRICS INCORPORATED (hereafter, "Corporation") and VINCENT J. COATES (hereafter, "Employee"). RECITALS -------- WHEREAS, Employee is a valuable and efficient employee of Corporation and has been since incorporation; and WHEREAS, Employee has agreed to continue to provide such services to Corporation, and Corporation desires that Employee do so; and WHEREAS, in the continuation of such relationship the parties desire to establish a reverse split dollar arrangement in order to provide insurance protection for the benefit of both Employer and Corporation; and WHEREAS, Employee has applied for a Universal Life Plan of Insurance (hereafter, including any and all supplemental riders or endorsements thereto, "the Policy") issued by Chubb Life Insurance Company, Concord, New Hampshire (hereafter, "Chubb") in the face amount of Eight Million Dollars ($8,000,000); and WHEREAS, Employee and Corporation agree to make the Policy subject to this split-dollar agreement (hereafter, "Agreement"); NOW THEREFORE, in consideration of the foregoing and the mutual covenants hereinafter set forth, the parties hereto agree as follows: ARTICLE I OWNERSHIP OF POLICY ------------------- 1.1 Employee as Owner. Employee shall be the owner of the Policy and may ----------------- exercise all ownership rights granted to the owner thereof by the terms of the Policy, except as may otherwise be provided herein. Employee and Corporation agree that the Policy shall be subject to the terms and conditions of this Agreement. 1.2 Collateral Assignment. Employee agrees to execute a collateral --------------------- assignment of the Policy (hereafter, "the Assignment") to Corporation, in substantially the form of Exhibit A attached hereto, to secure Corporation's --------- rights under this Agreement. a. Corporation's rights. Corporation's interest in and to the Policy -------------------- shall be specifically limited to (i) the right to realize against the proceeds of the Policy, in the event of Employee's death, an amount (hereafter, "Corporation's Portion") equal to its Policy interest as provided in paragraph 3.2 of Article III below; (ii) the right to realize against the cash value of the Policy, in the event of a termination of this Agreement as provided in paragraph 4.1 of Article IV below, an amount equal to the unearned portion of the premium paid by Corporation for the policy year in which the termination occurs; and (iii) the right to execute a written release of the Assignment upon receipt by Corporation of its Policy interest. b. Employee's Rights. Employee shall retain all rights as owner of ----------------- the Policy, including, but not limited to, (i) the right to assign Employee's interest in and to the Policy; (ii) the right to designate and to change the beneficiary(ies) of that portion of the proceeds of the Policy to which Employee is entitled under paragraph 3.1 of Article III below (hereafter, "Employee's Portion") upon the death of Employee; (iii) the right to elect any settlement option available with respect to Employee's Portion; (iv) the right -2- to exercise all nonforfeiture or lapse option rights permitted by the terms of the Policy; (v) the right to cause the surrender of the Policy, provided that Employee shall give Corporation at least thirty (30) days' advance written notice of such exercise; and (vi) the right to obtain, directly or indirectly, one or more loans or advances against the cash surrender value of the Policy and the right to pledge or assign the Policy as security for such loans or advances, provided that any such action by Employee shall in no way diminish Corporation's rights pursuant to subparagraph a above. The Assignment shall set forth the rights of Corporation in and to the Policy as herein set forth. Employee and Corporation agree to be bound by the terms of the Assignment. 1.3 Division of Benefits. It is agreed that benefits under the Policy may -------------------- be paid by Chubb either by separate checks to the parties entitled thereto, or by a joint check. In the latter instance, Employee and Corporation agree that the benefits shall be divided as provided herein. ARTICLE II PAYMENT OF PREMIUMS ------------------- 2.1 "Premium" Defined. As used herein, the term "premium" shall include ----------------- all costs associated with any and all supplemental riders and endorsements to the Policy. 2.2 Premium Shares. Corporation's annual share of the premium shall be -------------- Two Hundred Thousand Dollars ($200,000). Employee's annual share of the premium shall equal the premium required to maintain the Policy in force less the share of the premium allocated to Corporation above. 2.3 Time for Payment. Corporation (i) shall pay to Chubb the full premium ---------------- due on the Policy on or before the due date of each premium payment, and in any event, not later than the expiration of the grace period under the Policy for such premium payment; and (ii) shall furnish Employee with -3- written notice of such timely payment. Within ten (10) days of Employee's receipt of such notice, Employee shall reimburse Corporation for that portion of the premium payment equal to Employee's share of the premium as provided in paragraph 2.2 above. Notwithstanding the foregoing, if Corporation shall fail to pay any premium payment within twenty (20) days after its due date, Employee may pay the premium due; and within ten (10) days of Employee's payment of such premium, Corporation shall reimburse Employee for the portion of the premium payment not payable by Employee pursuant to the terms hereof. 2.4 Excess Premiums. Notwithstanding any other provision in this --------------- agreement, Employee may deposit premiums with Chubb in excess of the premium required to maintain the Policy in force. ARTICLE III RIGHTS UPON DEATH OF INSURED ---------------------------- 3.1 Corporation's Portion of Death Benefit. Upon the death of Employee, -------------------------------------- Corporation shall be entitled to receive, from the proceeds of the Policy, an amount equal to Eight Million Dollars ($8,000,000). 3.2 Employee's Portion of Death Benefit. Upon the death of Employee, the ----------------------------------- beneficiary designated by the Employee shall be entitled to receive the balance of the proceeds of the Policy remaining after deducting Corporation's Portion. 3.3 Beneficiary Designation. Employee and Corporation agree to conform ----------------------- the beneficiary designation for the Policy to the provisions hereof. ARTICLE IV RIGHTS UPON TERMINATION OF AGREEMENT ------------------------------------ -4- 4.1 Events of Termination. This Agreement shall automatically terminate --------------------- upon the occurrence of any of the following events: (a) the bankruptcy, receivership or dissolution of Corporation; (b) the termination of Employee's employment with Corporation, other than by reason of Employee's death; (c) Employee's notice, pursuant to clause (v) of paragraph 1.2b of Article I above, of its intent to exercise its right to surrender the Policy; (d) Corporation's written notice of its intent to terminate the Agreement; or (e) the mutual written agreement of Corporation and Employee. 4.2 Rights Upon Termination. In the event of termination of this ----------------------- Agreement as specified above, Employee shall pay to Corporation the amount determined in accordance with paragraph 4.3 below. Upon receipt of such amount, Corporation's interest in the Policy will be extinguished, and Corporation shall execute an appropriate instrument of release of the Assignment, taking all other steps necessary to effect said release. 4.3 Amount Payable. If this Agreement is terminated as hereinabove -------------- provided, Corporation shall be entitled to receive from Employee an amount equal to the unearned portion of the premium paid by Corporation for the policy year in which the termination occurs. ARTICLE V ADMINISTRATIVE PROVISIONS ------------------------- 5.1 Insurer's Responsibility. Insurer shall not be considered a party to ------------------------ this Agreement and shall not be bound hereby. No provision of this Agreement, or any amendment hereof, shall in any way -5- enlarge, change, vary or affect Insurer's obligations as expressly provided in the Policy, except as the same may become a part of the Policy by Insurer's acceptance of the Assignment. 5.2 Amendment. This Agreement may not be cancelled, amended, altered or --------- modified except by a written instrument signed by Employee and a duly authorized representative of Corporation. 5.3 Notice. Any and all notices required or permitted under the terms of ------ this Agreement to be given by one party to another shall be in writing, signed by the party giving such notice, and may be given either (i) by delivering the same to such other party personally or (ii) by mailing the same by United States certified mail, postage prepaid, to the other party's appropriate address, in which case the date of mailing shall be deemed the date of such notice. 5.4 Binding Effect. This Agreement shall be binding upon and shall inure -------------- to the benefit of Corporation and its successors, Employee and all Policy beneficiaries. Employee and Corporation agree that either party may assign its interest under this Agreement upon the written consent of the other party, and any assignee shall be bound by the terms and conditions of this Agreement as if made an original party hereto. 5.5 Governing Law. This Agreement and the interests and rights of the ------------- parties hereunder shall be governed by and construed in accordance with the laws of the State of California. 5.6 Headings. All headings or captions in this Agreement are for -------- reference purposes only and shall not expand, limit, change or affect the meaning of any provision of this Agreement. 5.7 Counterparts. This Agreement may be executed in any number of ------------ counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument. -6- 5.8 Term. This Agreement shall be effective as of the date the Policy is ---- issued by Chubb, and shall continue until terminated as herein provided or until all covenants herein activated by the death of Employee are fully carried out. Corporation ----------- NANOMETRICS INCORPORATED By /s/ Bill Turnquist ---------------------------- Its Senior Vice President ---------------------------- Employee -------- /s/ Vincent J. Coates ---------------------------- Vincent J. Coates, Employee -7- COLLATERAL ASSIGNMENT --------------------- This ASSIGNMENT is made and entered into effective as of the _____ day of _______________, 19___, by VINCENT J. COATES (hereafter, "Assignor"), as owner of that certain insurance policy issued by Chubb Life Insurance Company (hereafter, "Insurer") on his life, as more fully described in Exhibit A --------- attached hereto and made a part hereof (hereafter, including with any and all supplemental riders or endorsements thereto, "the Policy"), to NANOMETRICS INCORPORATED (hereafter, "Assignee"). WITNESSETH: ---------- WHEREAS, Assignor and Assignee entered into that certain Reverse Split- Dollar Insurance Agreement dated _________________, (hereafter, "the Agreement"); and WHEREAS, in consideration of Assignee's agreeing to pay a portion of the Policy premiums, Assignor agrees to grant to Assignee a security interest in and to the Policy to secure Assignee's rights to certain benefits from the Policy; NOW, THEREFORE, for value received, Assignor hereby assigns, transfers and sets over to Assignee, and its successors and assigns, the following specific rights in and to the Policy, subject to the terms and conditions hereof: 1. This Assignment is made, and the Policy is to be held, as collateral security for Assignee's interest in the Policy pursuant to the terms of the Agreement. 2. Assignee's interest in and to the Policy shall be specifically limited to: (a) the right to realize against the proceeds of the Policy, in the event of Assignor's death, an amount equal to its Policy interest as provided in paragraph 3.1 of the Agreement; (b) the right to realize against the cash value of the Policy, in the event of a termination of the Agreement pursuant to paragraph 4.1 of said Agreement, an amount equal to the unearned portion of the premium paid by Assignee for the policy year in which the termination occurs; and (c) the right to release this Assignment upon receipt of the amount specified in paragraph 4.3 of the Agreement. 3. Assignor shall retain all incidents of ownership in the Policy, including, but not limited to: (a) the right to assign Assignor's interest in and to the Policy; (b) the right to designate and to change the beneficiary(ies) of the Policy; (c) the right to elect any settlement option available with respect to the Policy; (d) the right to exercise all nonforfeiture or lapse option rights permitted by the terms of the Policy; (e) the right to cause the surrender of the Policy; and (f) the right to obtain, directly or indirectly, one or more loans or advances against the cash surrender value of the Policy and the right to pledge or assign the Policy as security for such loans or advances, provided that any such action by Assignor shall in no way diminish Assignee's right to receive the Corporation's Portion (as defined in para graph 1.2.a of the Agreement); provided, however, all rights retained by Assignor shall be subject to the terms and conditions of the Agreement. -2- 4. Assignee shall forward the Policy to Insurer, without unreasonable delay, for endorsement of any designation or change of beneficiary, any election of an optional mode of settlement or the exercise of any other right required by this collateral assignment agreement. 5. Insurer is hereby authorized to recognize Assignee's claims to rights hereunder without investigating the reason for any action taken by Assignee, the amount of Assignee's premium outlay or the existence of any default therein, the giving of any notice required herein or under the Agreement or the application to be made by Assignee of any amounts to be paid to Assignee. The signature of Assignee shall be sufficient for the exercise of any rights under the Policy assigned hereby to Assignee and the receipt of Assignee for any sums received by Assignee shall be a full discharge and release therefor to Insurer. 6. Insurer shall be fully protected in recognizing the requests made by Assignor for surrender of the Policy, with or without the consent of Assignee, and upon such surrender, the Policy shall be terminated and shall be of no further force or effect. 7. Upon full payment to Assignee of the Corporation's Portion (as defined in paragraph 1.2.a of the Agreement), Assignee shall reassign to Assignor the Policy and all specific rights included in this Assignment. -3- IN WITNESS WHEREOF, the undersigned has executed this Assignment as of the date first above written. - --------------------------------- ----------------------------------- Witness VINCENT J. COATES, Assignor -4- EXHIBIT A Description of Insurance Policy(ies) ------------------------------------ Insurance Type of Policy Policy # Company Insurance Insured Amount - -------- ------------ ---------- ------------------- ---------- EX-10.8 10 LEASE AGREEMENT EXHIBIT 10.8 LEASE AGREEMENT --------------- 1. Parties. This lease is made by and between PM-DE ------- ----- _______________________ , a California General Partnership , ("Landlord") , and ------------------- Nanometrics Incorporated , a California corporation ("Tenant") . - ------------------------- ------------ 2. Premises. Landlord hereby leases to Tenant and Tenant hereby leases -------- from Landlord, upon the terms and conditions herein after set forth, those certain premises (the "Premises") situated in the City of Sunnyvale , County of --------- Santa Clara, State of California, described as follows: approximately Thirty - ----------- ------ Four Thousand Six Hundred Ninety Seven (34,697 )square feet of floor space - -------------------------------------- ------- commonly known as 310 DeGuigne Avenue, Sunnyvale, CA, located in the building ---------------------------------- (the "Building"), as shown cross-hatched on the site plan (the "Site Plan") attached hereto as Exhibit "A". The Building is located on a larger parcel (the "Parcel" containing other buildings (the "Buildings") as shown on the Site Plan, which Parcel is described in Exhibit "B" attached hereto. In the event Landlord subdivides the Parcel in the future into two (2) or more legal parcels, the term "Parcel" shall thereafter refer to the legal parcel on which the Premises are located. Landlord shall not be required to make any alterations, additions or improvements to the Premises and the Premises shall be leased to Tenant in an "as-is" condition. 3. Term. The term of this Lease ("Lease Term") shall be for Five (5) ---- ---- years, commencing on May 1, , 1992 (the "Commencement Date") and ending on ------ -- April 30, , 1997 unless sooner terminated pursuant to any provision hereof. - ---------- -- Notwithstanding said scheduled Commencement Date, if for any reason Landlord cannot deliver possession of the Premises to Tenant on said date, Landlord shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease or the obligations of Tenant hereunder, but in such case Tenant shall not be obligated to pay rent until possession of the Premises is tendered to Tenant and the commencement and termination dates of this lease shall be revised to conform to the date of landlord's delivery of possession. In the event Landlord shall permit Tenant to occupy the Premises prior to the Commencement Date, such occupancy shall be subject to all the provisions of this Lease, including the obligation to pay the Monthly Installment of rent, and Common Area Charges. 4. Rent. ---- A. Time of Payment. Tenant shall pay to Landlord as rent for the --------------- Premises the sum specified in Paragraph 4.B below (the "Monthly Installment") each month in advance on the first day of each calendar month, without deduction or offset, prior notice or demand, commencing on the Commencement Date and continuing through the term of this Lease, together with such additional rents as are payable by Tenant to Landlord under the terms of this Lease. The 1 Monthly Installment for any period during the Lease Term which period is less than one (1) full month shall be a prorata portion of the Monthly Installment based upon a thirty (30) day month. B. Monthly Installment. The Monthly Installment of rent payable ------------------- each month during the period from May 1 , 19 92 through and including April ----- --- ----- 30 , 1997, shall be the sum of Twenty Nine Thousand Four Hundred Ninety Two & - -- -- ----------- ---------------------------------- 45/100 Dollars $29,492.45 ) per month. - ------ ---------- C. Late Charge. Tenant acknowledges that late payment by Tenant to ----------- Landlord of rent and other sums due hereunder will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed on Landlord by the terms of any mortgage or deed of trust covering the Premises. Accordingly, if any installment of rent or any other sum due from Tenant shall not be received by Landlord within ten (10) days after such amount shall be due, Tenant to Landlord as additional rent, a late charge equal to Three percent (3%) of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Landlord will incur by reason of late payment by Tenant. D. Additional Rent. All taxes, insurance premiums, Common Area --------------- Charges, late charges, costs and expenses which Tenant is required to pay hereunder, together with all interest and penalties that may accrue thereon in the event of Tenant's failure to pay such amounts, shall be deemed to be additional rent ("Additional Rent") and shall be paid in addition to the Monthly Installment of rent, and, in the event of nonpayment by Tenant, Landlord shall have all of the rights and remedies with respect thereto as Landlord has for the nonpayment of the Monthly Installment of rent. E. Place of Payment Rent shall be payable in lawful money of the ---------------- United States of America to Landlord at 511 Division Street, Campbell CA 99008 -------------------------------------- - ------------ or to such other person(s) or at such other place(s) as Landlord may designate in writing. F. Advance Payment. Concurrently with the execution of this Lease, --------------- Tenant shall pay to Landlord the sum of Twenty Nine Thousand Four Hundred Ninety ---------------------------------------- Two & 45/100 Dollars ($29,492.45 ) to be applied to the Monthly Installment of - ------------ ----------- rent first accruing under this Lease. 2 5. Security Deposit. Tenant shall deposit the sum of Twenty Nine ---------------- ----------- Thousand Four Hundred Ninety-Two & 45/100 Dollars ($29,492.45 ) (the - ----------------------------------------- ---------- "Security Deposit") upon execution of this Lease, to secure the faithful performance by Tenant of each term, covenant and condition of this Lease. If Tenant shall at any time fail to make any payment or fail to keep or perform any term, covenant or condition on its part to be made or performed or kept under this, Lease, Landlord may, but shall not be obligated to and without waiving or releasing Tenant from any obligation under this Lease, use, apply or retain the whole or any part of the Security Deposit (A) to the extent of any sum due to Landlord; (B) to make any required payment on Tenant's behalf; In such event, Tenant shall, within five (5) days of written demand by Landlord, remit to Landlord sufficient funds to restore the Security Deposit to its original sum. No interest shall accrue on the Security Deposit. Landlord shall not be required to keep the Security Deposit separate from its general funds. Should Tenant comply with all the terms, covenants, and conditions of this Lease and at the end of the term of this Lease leave the Premises in the condition required by this Lease, then said Security Deposit, less any sums owing to Landlord, shall be returned to Tenant within thirty (30) days after the termination of this Lease and vacancy of the Premises by Tenant. 6. Use of Premises. Tenant shall use the Premises only in conformance --------------- with applicable governmental laws, regulations, rules and ordinances for the purpose of Office, R&D, Mfg and warehousing -------------------------------- and for no other purpose. Tenant shall indemnify, protect, defend , and hold Landlord harmless against any loss, expense, damage, attorneys' fees or liability arising out of the failure of Tenant to comply with any applicable law. Tenant shall not commit or suffer to be committed, any waste upon the Premises, or any nuisance, or other acts or things which may disturb the quiet enjoyment of any other tenant in the buildings adjacent to the Premises, or allow any sale by auction upon the Premises, or allow the Premises to be used for any unlawful purpose, or place any loads upon the floor, walls or ceiling which endanger the structure, or place any harmful liquids in the drainage system of the Building. No waste materials or refuse shall be dumped upon or permitted to remain upon any part of the Premises outside of the Building proper, except in trash containers placed inside exterior enclosures designated for that purpose by Landlord. No materials, supplies, equipment, finished products or semifinished products, raw materials or articles of any nature shall be stored upon or permitted to remain on any portion of the Premises outside of the Building proper. Tenant shall strictly comply with the provisions of Paragraph 39 below. 3 7. Taxes and Assessments. --------------------- A. Tenant's Property. Tenant shall pay before delinquency any and ----------------- all taxes and assessments, license fees and public charges levied, assessed or imposed upon or against Tenant's fixtures, equipment, furnishings, furniture, appliances and personal property installed or located on or within the Premises. Tenant shall cause said fixtures, equipment, furnishings, furniture, appliances and personal property to be assessed and billed separately from the real property of Landlord. If any of Tenant's said personal property shall be assessed with Landlord's real property, Tenant shall pay Landlord the taxes attributable to Tenant within ten (10) days after receipt of a written statement from Landlord setting forth the taxes applicable to Tenant's property. B. Property Taxes. Tenant shall pay, as additional rent, its Pro -------------- Rata Share (as defined below) of all Property Taxes levied or assessed with respect to the land comprising the Parcel and with respect to all buildings and improvements located on the Parcel which become due or accrue during the term of this Lease. Tenant shall pay such Property Taxes to Landlord within twenty (20) days after receipt of billing. Provided that Landlord bills Tenant at least thirty (30) days prior to the delinquency date of such Property Taxes, Tenant shall pay such Property Taxes to Landlord at least ten (10) days prior to the delinquency date, and if Tenant fails to do so, Tenant shall reimburse Landlord, on demand, for all interest, late fees and penalties that the taxing authority charges Landlord. In the event Landlord's mortgagee requires an impound for Property Taxes, then on the first day of each month during the Lease Term, Tenant shall pay Landlord one twelfth (1/12) of its annual share of such Property Taxes. Tenant's liability hereunder shall be prorated to reflect the Commencement and termination dates of this Lease. As used in this Lease, the term "Tenant's Pro Rata Share" shall mean a fraction, expressed as a percentage, the numerator of which is the number of square feet of floor space contained in the Premises and the denominator of which is the number of square feet of floor space contained in all of the Buildings located on the Parcel (which square footage Landlord warrants is equal to 93,385). As of the Commencement Date, Tenant's Pro Rata Share is Thirty Seven ------------ point one five percent (37.15 %). - -------------- ------ For the purpose of this Lease, "Property Taxes" means and includes all taxes, assessments (including, but not limited to, assessments for public improvements or benefits), taxes based on vehicles utilizing parking areas, taxes based or measured by the rent paid, payable or received under this Lease, taxes on the value, use, or occupancy of the Premises, the Buildings and/or the Parcel, Environmental Surcharges, and all other governmental 4 impositions and charges of every kind and nature whatsoever, whether or not customary or within the contemplation of the parties hereto and regardless of whether the same shall be extraordinary or ordinary, general or special, unforeseen or foreseen, or similar or dissimilar to any of the foregoing which, at any time during the Lease Term, shall be applicable to the Premises, the Buildings and/or the Parcel or assessed, levied or imposed upon the Premises, the Buildings and/or the Parcel, or become due and payable and a lien or charge upon the Premises, the Buildings and/or the Parcel, or any part thereof, under or by virtue of any present or future laws, statutes, ordinances, regulations or other requirements of any governmental authority whatsoever. The term "Environmental Surcharges" shall mean and include any and all expenses, taxes, charges or penalties imposed by the Federal Department of Energy, the Federal Environmental Protection Agency, the Federal Clean Air Act, or any regulations promulgated thereunder or any other local, state or federal governmental agency or entity now or hereafter vested with the power to impose taxes, assessments, or other types of surcharges as a means of controlling or abating environmental pollution or the use of energy provided, however, that Environmental Surcharges shall include only those assessments that are applicable to property generally and not those related to the cleanup or remediation of Hazardous Materials on the Parcel which were not introduced onto the Parcel by Tenant. The term "Property Taxes" shall not include any federal, state or local net income, estate, or inheritance tax imposed on Landlord. C. Other Taxes: Tenant shall, as additional rent, pay or reimburse ----------- Landlord for any tax based upon, allocable to, or measured by the area of the Premises or the Buildings or the Parcel; or by the rent paid, payable or received under this Lease; any tax upon or with respect to the possession, leasing, operation, management, maintenance, alteration, repair, use or occupancy of the Premises or any portion thereof; any privilege tax, excise tax, business and occupation tax, gross receipts tax, sales and/or use tax, water tax, sewer tax, employee tax, occupational license tax imposed upon Landlord or Tenant with respect to the Premises; any tax upon this transaction or any document to which Tenant is a party creating or transferring an interest or an estate in the Premises. 8. Insurance. --------- A. Indemnity. Tenant agrees to indemnify, protect and defend --------- Landlord against and hold Landlord harmless from any and all claims, causes of action, judgments, obligations or liabilities, and all reasonable expenses incurred in investigating or resisting the same (including reasonable attorneys' fees), on account of, or arising out of, the operation, maintenance, use or occupancy of the Premises and all areas appurtenant thereto by Tenant, except that this indemnity shall not apply to any such claims, etc. arising out of the negligence or willful misconduct of Landlord. This Lease is made on the express understanding that Landlord shall not be liable for, or suffer loss by reason of, injury to person or property, from what ever cause (except for active negligence or willful misconduct of Landlord), which in any way may be connected with the operation, use or occupancy of the Premises specifically including, without limitation, any liability for injury to the person or property of Tenant, its agents, officers, employees, licensees and invitees. 5 B. Liability Insurance. Tenant shall, at Tenant's expense, obtain ------------------- and keep in force during the term of this Lease a policy of comprehensive public liability insurance insuring Landlord and Tenant against claims and liabilities arising out of the operation, use, or occupancy of the Premises and all areas appurtenant thereto, including parking areas. Such insurance shall be in an amount of not less than Three Million Dollars ($3,000,000.00) for bodily injury or death as a result of any one occurrence and Five Hundred Thousand Dollars ($500,000.00) for damage to property as a result of any one occurrence. The insurance shall be with companies approved by Landlord, which approval Landlord agrees not to withhold unreasonably. Tenant shall deliver to Landlord, prior to possession, and at least thirty (30) days prior to the expiration thereof, a certificate of insurance evidencing the existence of the policy required hereunder and such certificate shall certify that the policy (1) names Land lord as an additional insured, (2) shall not be canceled or altered without thirty (30) days prior written notice to Landlord, (3) insures performance of the indemnity set forth in Paragraph 8.A above, (4) the coverage is primary and any coverage by Landlord is in excess thereto and (5) contains a cross-liability endorsement. Landlord may maintain a policy or policies of comprehensive general liability insurance insuring Landlord (and such others as are reasonably designated by Landlord), against liability for personal injury, bodily injury, death and damage to property occurring or resulting from an occurrence in, on or about the Premises or the Common Area, with such limits of coverage as Landlord may from time to time determine are reasonably necessary for its protection that is usual and customary. The cost of any such liability insurance maintained by Landlord shall be a Common Area Charge and Tenant shall pay, as additional rent, Pro Rata Share of such cost to Landlord as provided in Paragraph 12 below. C. Property Insurance. Landlord shall obtain and keep in force ------------------ during the term of this Lease a policy or policies of insurance covering loss or damage to the Premises and the Buildings, in the amount of the full replacement value thereof, providing protection against those perils included within the classification of "all risk" insurance, plus a policy of rental income insurance in the amount of one hundred percent (100%) of twelve (12) months rent (including, without limitation, sums payable as Additional Rent), plus, at Landlord's option, flood insurance and earthquake insurance, and any other coverages which may be required from time to time by Landlord's mortgagee. Tenant shall have no interest in nor any right to the proceeds of any insurance procured by Landlord on the Premises. Tenant shall, within thirty (30) days after receipt of billing, pay to Landlord as additional rent Tenant's Pro Rata Share of the full cost of such insurance procured and maintained by Landlord. Tenant acknowledges that such insurance procured by Landlord shall contain a deductible which reduces Tenant's cost for such insurance and, in the event of loss or damage, Tenant shall be required to pay to Landlord the amount of such deductible. D. Tenant's Insurance; Release of Landlord. Tenant --------------------------------------- 6 acknowledges that the insurance to be maintained by Landlord on the Premises pursuant to Subparagraph C above will not insure any of Tenant's property. Accordingly, Tenant, at Tenant's own expense, shall maintain in full force and effect on all of its fixtures, equipment, leasehold improvements and personal property in the Premises, a policy of "All Risk" coverage insurance to the extent of at least ninety percent (90%) of their insurable value. Tenant hereby releases Landlord, and its partners, officers, agents, employees, and servants, from any and all claims, demands, losses, expenses or injuries to the Premises or to the furnishings, in, about, or upon the Premises, which are caused by perils, events or happenings where the same are covered by the insurance required by this Lease or which are the subject of insurance carried by Tenant and in force at the time of such loss. 9. Utilities. Tenant shall pay for all water, gas, light, heat, power, --------- electricity, telephone, trash pick-up, sewer charges and all other services supplied to or consumed on the Premises, and all taxes and surcharges thereon. In addition, the cost of any utility service supplied to the Common Area or not separately metered to the Premises shall be a Common Area Charge and Tenant shall pay its Pro Rata share of such costs to Landlord as provided in Paragraph 12 below. 10. Repairs and Maintenance ----------------------- A. Landlord's Repairs. Subject to provisions of Paragraph 16, ------------------ Landlord shall keep the structural elements and exterior walls of the Building in good order, condition and repair. Landlord shall not, however, be required to maintain, repair or replace the interior surface of exterior walls, nor shall Landlord be required to maintain, repair or replace windows, door, skylights or plate glass. Landlord shall have no obligation to make repairs under this subparagraph until a reasonable time after receipt of written notice from Tenant of the need for such repairs. Tenant shall reimburse Landlord, as additional rent, within Thirty (30) days after receipt of billing, for the cost of such repairs and maintenance which are the obligation of Landlord hereunder, provided however, that Tenant shall not be required to reimburse Landlord for the cost of maintenance and repairs of the structural elements of the Building unless such maintenance or repair is required because of the negligence or willful misconduct of Tenant or its employees, The term "Structural Elements" of the Building" shall mean and be limited to the foundation, footings, floor slab (but not flooring) , structural walls, and roof structure (but not roofing or roof membrane). b. Tenant's Repairs. Except as expressly provided in Subparagraph A above, Tenant shall, at its sole cost, keep and maintain the entire Premises and every part thereof, including without limitation, the windows, window frames, plate glass, glazing, skylights, roofing and roof membrane truck doors, doors and all door hardware, the 7 walls and partitions, and the electrical, plumbing, lighting, heating, ventilating and air conditioning systems and equipment in good order, condition and repair. The term "repair" shall include replacements, restorations and/or renewals when necessary as well as painting. Tenant's obligation shall extend to all alterations, additions and improvements to the Premises, and all fixtures and appurtenances therein and thereto. Tenant shall, at all times during the Lease Term, have in effect a service contract for the maintenance of the heating, ventilating and air conditioning ("HVAC") equipment with an HVAC repair and maintenance contractor approved by Landlord. The HVAC service contract shall provide for periodic inspection and servicing at least once every three (3) months during the term hereof, and Tenant shall provide Landlord with a copy of such contract and all periodic service reports. Should Tenant fail to commence to make repairs required of Tenant hereunder forthwith upon thirty (30) days notice from Landlord or should Tenant fail thereafter to diligently complete the repairs, Landlord, addition to all other remedies available hereunder or by law and without waiving any alternative remedies, may make the same, and that event, Tenant shall reimburse Landlord as additional rent the cost of such maintenance or repairs within Thirty (30) days written demand by Landlord. Landlord shall have no maintenance or repair obligations whatsoever with respect to the Premises except as expressly provided in Paragraphs 10.A and 11. Tenant hereby expressly waives the provisions of Subsection 1 of Section 1932 and Sections 1941 and 1942 of the Civil Code of California and all rights to make repairs at the expense of Landlord as provided in Section 1942 of said Civil Code. There shall be no allowance to Tenant for diminution of rental value, and no liability on the part of Landlord by reason of inconvenience, annoyance or injury to business arising from the making of, or the failure to make, any repairs, alterations, decorations, additions or improvements in or to any portion of the Premises or the Building or Common Area (or any of the areas used in connection with the operation thereof, or in or to any fixtures, appurtenances or equipment), or by reason of the negligence of Tenant or any other tenant or occupant of the Parcel. In no event shall Landlord be responsible for any consequential damages arising or alleged to have arisen from any of the foregoing matters. Tenant hereby agrees that Landlord shall not be liable for injury to Tenant's business or any loss of income therefrom or for damage to the goods, wares, merchandise or other property of Tenant, Tenant's employees, invitees, customers, or any other person in or about the Premises, the Building, or the Common Area, nor shall Landlord be liable for injury to the person of Tenant, Tenant's employees, agents or contractors whether such damage or injury is caused by or results from fire, steam , electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires., appliances, plumbing, air conditioning or lighting fixtures, or from any other cause other than the negligence or willful misconduct of Landlord or a breach of Landlord's obligations hereunder, whether the said damage or injury results from conditions arising upon the Premises or upon other portions of 8 the Building, or from other sources or places and regardless of whether the cause of such damage or injury or the means of repairing the same is inaccessible to Tenant. Landlord shall not be liable for any damages arising from any act or neglect of any other tenant, if any, of the Building or the Parcel. 11. Common Area. Subject to the terms and conditions of this Lease and ----------- such rules and regulations as Landlord may from time to time prescribe, Tenant and Tenant's employees, invitees and customers shall, in common with other occupants of the Parcel, and their respective employees, invitees and customers, and others entitled to the use thereof, have the non-exclusive right to use the access roads, parking areas and facilities provided and designated by Landlord for the general use and convenience of the occupants of the Parcel, which areas and facilities are referred to herein as "Common Area." This right shall terminate upon the termination of this Lease. Landlord reserves the right from time to time to make changes in the shape, size, location, amount and extent of the Common Area. Landlord further reserves the right to promulgate such reasonable rules and regulations relating to the use of the Common Area, and any part or parts thereof, as Landlord may deem appropriate for the best interest of the occupants of the Parcel. The rules and regulations shall be binding upon Tenant upon delivery of a copy of them to Tenant, and Tenant shall abide by them and cooperate in their observance. Such rules and regulations may be amended by Landlord from time to time, with or without advance notice, and all amendments shall be effective upon delivery of a copy of them to Tenant. Tenant shall have the non-exclusive use of no more than One Hundred Eighteen (118) of the parking spaces in the Common Area as designated from time to time by Landlord. Tenant shall not at any time park or permit the parking of Tenant's trucks or other vehicles, or the trucks or other vehicles of others, adjacent to loading areas so as to interfere in any way with the use of such areas, nor shall Tenant at any time park or permit the parking of Tenant's vehicles or trucks, or the vehicles or trucks of Tenant's suppliers or others, in any portion of the Common Area not designated by Landlord for such use by Tenant. Tenant shall not abandon any inoperative vehicles or equipment on any portion of the Common Area. Tenant shall make no alterations, improvements or additions to the Common Area notwithstanding the above, Landlord understands and agrees to work with Tenant to enable Tenant to provide an outside covered area for a smoking area for its employees. Landlord shall operate, manage, insure, maintain and repair the Common Area in good order, condition and repair. The manner in which the Common Area shall be maintained and the expenditures for such maintenance shall be at the reasonable discretion of Landlord. The cost of such repair, maintenance, operation, insurance and management, including without limitation, maintenance and repair of landscaping, irrigation systems, paving, sidewalks, fences, and lighting, shall be a Common Area Charge and Tenant shall pay to Landlord its pro rata share of such costs as provided in Paragraph 12 below. 12. Common Area Charges. Tenant shall pay to Landlord, as additional ------------------- rent, upon demand but not more often than once each calendar month, an amount equal to its Pro Rata Share of the Common 9 Area Charges as defined in Paragraphs 8.B, 9, 11 and 13 of this Lease. Tenant acknowledges and agrees that the Common Area Charges shall include an additional Three percent (3%) of the actual expenditures in order to compensate Landlord for accounting management and processing services. 13. Alterations. Tenant shall not make, or suffer to be made, any ----------- alterations, improvements or additions over $10,000 in, on, about Premises or any part thereof, without the prior written consent of Landlord and without a valid building permit issued by the appropriate governmental authority. As a condition to giving such consent, Landlord may require at the time consent is given that Tenant agree to remove any such alterations, improvements or additions at the termination of this Lease, and to restore the Premises to their prior condition. Unless Landlord requires that Tenant remove any such alteration, improvement or addition, any alteration, addition or improvement to the Premises, except movable furniture and trade fixtures not affixed to the Premises, shall become the property of Landlord upon termination of the Lease and shall remain upon and be surrendered with the Premises at the termination of this Lease. Without limiting the generality of the foregoing, all heating, lighting, electrical (including all wiring, conduit, outlets, drops, buss ducts, main and subpanels, air conditioning, partitioning, drapery, and carpet installations made by Tenant regardless of how affixed to the Premises, together with all other additions, alterations and improvements that have become an integral part of the Building, shall be and become the property of the Landlord upon termination of the Lease, and shall not be deemed trade fixtures, and shall remain upon and be surrendered with the Premises at the termination of this Lease. If, during the term hereof, any alteration, addition or change of any sort to all or any portion of the Premises is required by law, regulation, ordinance or order of any public agency, Tenant shall promptly make the same at its sole cost and expense. If during the term hereof, any alteration, addition, or change to the Common Area is required by law, regulation, ordinance or order of any public agency, Landlord shall make the same and the cost of such alteration, addition or change shall be a Common Area Charge and Tenant shall pay its share of said cost to Landlord as provided in Paragraph 12 above. 14. Acceptance of the Premises. By entry and taking possession of the -------------------------- Premises pursuant to this Lease, Tenant accepts the Premises as being in good and sanitary order, condition and repair and accepts the Premises in their condition existing as of the date of such entry, and Tenant further accepts the tenant improvements to be constructed by Landlord, if any, as being completed in accordance with the plans and specifications for such improvements. except for punch list items list to be provided within two weeks after early occupancy and work to be completed prior to lease commencement or as soon thereafter that is reasonably possible. Tenant acknowledges that neither the Landlord nor Landlord's agents has made any representation or warranty as to the suitability of the Premises to the conduct of Tenant's business. Any agreements, warranties or representations not expressly contained herein shall in no way bind 10 either Landlord or Tenant, and Landlord and Tenant expressly waive all claims for damages by reason of any statement, representation, warranty, promise or agreement, if any, not contained in this Lease. This Lease constitutes the entire understanding between the parties hereto and no addition to, or modification of, any term or provision of this Lease shall be effective until set forth in a writing signed by both Landlord and Tenant. 15. Default. ------- A. Events of Default. A breach of this Lease shall exist if any of ----------------- the following events (hereinafter referred to as "Event of Default") shall occur: (1) Default in the payment when due of any installment of rent or other payment required to be made by Tenant hereunder, where such default shall not have been cured within five (5) days after written notice of such default is given to Tenant; (2) Tenant's failure to perform any other term, covenant or condition contained in this Lease where such failure shall have continued for twenty (20) days after written notice of such failure is given to Tenant; (3) Tenant's vacating or abandonment of the Premises; (4) Tenant's assignment of its assets for the benefit of its creditors; except for financing personal property or equipment. (5) The sequestration of, attachment of, or execution on, any substantial part of the property of Tenant or on any property essential to the conduct of Tenant's business, shall have occurred and Tenant shall have failed to obtain a return or release of such property within thirty (30) days thereafter, or prior to sale pursuant to such sequestration, attachment or levy, whichever is earlier; (6) Tenant or any guarantor of Tenant's obligations hereunder shall commence any case, proceeding or other action seeking reorganization, arrangement, adjustment, liquidation, dissolution or composition of it or its debts under any law relating to bankruptcy, insolvency, reorganization or relief of debtors, or seek appointment of a receiver, trustee, custodian, or other similar official for it or for all or any substantial part of its property; (7) Tenant or any such guarantor shall take any corporate action to authorize any of the actions set forth in Clause 6 above; or (8) Any case, proceeding or other action against Tenant or any guarantor of Tenant's obligations hereunder shall be 11 commenced seeking to have an order for relief entered against it as debtor, or seeking reorganization, arrangement, adjustment, liquidation, dissolution or composition of it or its debts under any law relating to bankruptcy, insolvency, reorganization or relief of debtors, or seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its property, and such case, proceeding or other action (add) results in the entry of an order for relief against it which is not fully stayed within seven (7) business days after the entry thereof or (ii) remains undismissed for a period of forty-five (45) days. B. Remedies. Upon any Event of Default, Landlord shall have the -------- following remedies, in addition to all other rights and remedies provided by law, to which Landlord may resort cumulatively, or in the alternative: (1) Recovery of Rent. Landlord shall be entitled to keep this ---------------- Lease in full force and effect (whether or not Tenant shall have abandoned the Premises) and to enforce all of its rights and remedies under this Lease, including the right to recover rent and other sums as they become due , plus interest at the Permitted Rate (as defined in Paragraph 33 below) from the due date of each installment of rent or other sum until paid. (2) Termination. Landlord may terminate this Lease by giving ----------- Tenant written notice of termination. On the giving of the notice all of Tenant's rights in the Premises and the Building and Parcel shall terminate. Upon the giving of the notice of termination, Tenant shall surrender and vacate the Premises in the condition required by Paragraph 34, and Landlord may re- enter and take possession of the Premises and all the remaining improvements or property and eject Tenant or any of Tenant's subtenants, assignees or other person or persons claiming any right under or through Tenant or eject some and not others or eject none. This Lease may also be terminated by a judgment specifically providing for termination. Any termination under this paragraph shall not release Tenant from the payment of any sum then due Landlord or from any claim for damages or rent previously accrued or then accruing against Tenant. In no event shall any one or more of the following actions by Landlord constitute a termination of this Lease: (a) maintenance and preservation of the Premises; (b) efforts to relet the Premises; (c) appointment of a receiver in order to protect Landlord's interest hereunder; (d) consent to any subletting of the Premises or assignment of this Lease by Tenant, whether pursuant to provisions hereof concerning subletting and assignment or 12 otherwise; or (e) any other action by Landlord or Landlord's agents intended to mitigate the adverse effects from any breach of this Lease by Tenant. (3) Damages. In the event this Lease is terminated pursuant to ------- subparagraph 15.B.2 above, or otherwise, Landlord shall be entitled to damages in the following sums: (a) the worth at the time of award of the unpaid rent which has been earned at the time of termination; plus (b) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; plus (c) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided; and (d) any other amount necessary to compensate Landlord for all detriment proximately caused by Tenant's failure to perform Tenant's obligations under this Lease, or which in the ordinary course of things would be likely to result therefrom including, without limitation, the following: (i) expenses for cleaning, repairing or restoring the premises; (iii) real estate broker's fees, advertising costs; (iv) costs of carrying the premises such as taxes and insurance premiums thereon, utilities and security precautions; (v) expenses in retaking possession of the premises; (vi) attorneys' fees and court costs; and (vii) any unamortized real estate brokerage commission paid in connection with this Lease. (e) The "worth at the time of award" of the amounts referred to in subparagraphs (a) and (b) of this paragraph, is computed by allowing interest at the permitted Rate. The "worth at the time of award of the amounts referred to in subparagraph (c) of this Paragraph is computed by discounting such amount at the discount rate of the Federal Reserve Board of San Francisco at the time of award plus one percent (1%). The term "rent" as used in this paragraph shall include all sums required to be paid by Tenant to Landlord pursuant to the terms of this Lease. 16. Destruction. In the event that any portion of the premises are ----------- destroyed or damaged by an uninsured peril, Landlord 13 or Tenant may, upon written notice to the other, given within thirty (30) days after the occurrence of such damage or destruction, elect to terminate this Lease; provided, however, that either party may, within thirty (30) days after receipt of such notice, elect to make any required repairs and/or restoration at such party's sole cost and expense, in which event this lease shall remain in full force and effect, and the party having made such election to restore or repair shall thereafter diligently proceed with such repairs and/or restoration. In the event the Premises are damaged or destroyed from any insured peril to the extent of fifty percent (50%) or more of the then replacement cost of the Premises, Landlord may, upon written notice to Tenant, given within Twenty (20) days after the occurrence of such damage or destruction, elect to terminate this lease. If Landlord does not give such notice in writing within such period, Landlord shall be deemed to have elected to rebuild or restore the Premises, in which event Landlord shall, at its expense, promptly rebuild or restore the Premises to their condition prior to the damage or destruction and Tenant shall pay to Landlord upon commencement of reconstruction the amount of any deductible from the insurance policy applicable to the Premises. In the event the Premises are damaged or destroyed from any insured peril to the extent of less than fifty percent (50%) of the then replacement cost of the Premises, Landlord shall, at Landlord's expense, promptly rebuild or restore the Premises to their condition prior to the damage or destruction and Tenant shall pay to Landlord upon commencement of reconstruction the amount of any deductible from the insurance policy. In the event that, pursuant to the foregoing provisions, Landlord is to rebuild or restore the Premises, Landlord shall, within Twenty (20) days after the occurrence of such damage or destruction, provide Tenant with written notice of the time required for such repair or restoration. If such period is longer than One Hundred Twenty (120) days from the issuance of a building permit, Tenant may, within thirty (30) days after receipt of Landlord's notice, elect to terminate the lease by giving written notice to Landlord of such election, whereupon the lease shall immediately terminate. The period of time for Landlord to complete the repair or restoration shall be extended for delays caused by the fault or neglect of Tenant or because of acts of God, labor disputes, strikes, fires, freight embargoes rainy or stormy weather, inability to obtain materials, supplies or fuels. Landlord's obligation to repair or restore the Premises shall not include restoration of Tenant's trade fixtures, equipment, merchandise, or any improvements, alterations or additions made by Tenant to the Premises. Unless this Lease is terminated pursuant to the foregoing 14 provisions, this Lease shall remain in full force and effect; provided, however, that during any period of repairs or restoration, rent and all other amounts to be paid by Tenant on account of the Premises and this Lease shall be abated in proportion to the area of the Premises rendered not reasonably suitable for the conduct of Tenant's business thereon. Tenant hereby expressly waives the provisions of Section 1932, Subdivision 2 and Section 1933, Subdivision 4 of the California Civil Code. 17. Condemnation. ------------ A. Definition of Terms. For the purposes of this Lease, the term (1) ------------------- "Taking" means a taking of the Premises or damage to the Premises related to the exercise of the power of eminent domain and includes a voluntary conveyance, in lieu of court proceedings, to any agency, authority, public utility, person or corporate entity empowered to condemn property; (2) "Total Taking" means the taking of the entire Premises or so much of the Premises as to prevent or substantially impair the use thereof by Tenant for the uses herein specified; provided, however, in no event shall a Taking of less than ten percent (10%) of the Premises be deemed a Total Taking unless such 10% Taking is such that it is not reasonably possible for Tenant to access and use the remainder of the Premises for its intended purpose. (3) "Partial Taking" means the taking of only a portion of the Premises which does not constitute a Total Taking; (4) "Date of Taking" means the date upon which the title to the Premises, or a portion thereof, passes to and vests in the condemnor or the effective date of any order for possession if issued prior to the date title vests in the condemnor; and (5) "Award" means the amount of any award made, consideration paid, or damages ordered as a result of a Taking. B. Rights. The parties agree that in the event of a Taking all ------ rights between them or in and to an Award shall be as set forth herein and Tenant shall have no right to any Award except as set forth herein. C. Total Taking. In the event of a Total Taking during the term ------------ hereof (1) the rights of Tenant under the Lease and the leasehold estate of Tenant in and to the Premises shall cease and terminate as of the Date of Taking; (2) Landlord shall refund to Tenant any prepaid rent; (3) Tenant shall pay Landlord any rent or charges due Landlord under the lease, each prorated as of the Date of Taking; (4) Tenant shall receive from Landlord those portions of the Award attributable to trade fixtures of Tenant and for moving expenses of Tenant; and (5) the remainder of the Award shall be paid to and be the property of Landlord. D. Partial Taking. In the event of a Partial Taking during the term -------------- hereof (1) the rights of Tenant under the lease and the leasehold estate of Tenant in and to the portion of the Premises taken shall cease and terminate as of the Date of Taking; (2) from and after the Date of Taking the Monthly Installment of rent shall be an amount equal to the product obtained by multiplying the Monthly Installment of rent immediately prior to the Taking by a fraction, the numerator of which is the number of 15 square feet contained in the Premises after the Taking and the denominator of which is the number of square feet contained in the Premises prior to the Taking; (3) Tenant shall receive from the Award the portions of the Award attributable to trade fixtures of Tenant; and (4) the remainder of the Award shall be paid to and be the property of Landlord. 18. Mechanics' Lien. Tenant shall (A) pay for all labor and services --------------- performed for, materials used by or furnished to, Tenant or any contractor employed by Tenant with respect to the Premises; (B) indemnify, defend, protect and hold Landlord and the Premises harmless and free from any liens, claims, liabilities, demands, encumbrances, or judgments created or suffered by reason of any labor or services performed for, materials used by or furnished to, Tenant or any contractor employed by Tenant with respect to the Premises; (C) give notice to Landlord in writing five (5) days prior to employing any laborer or contractor to perform services related to, or receiving materials for use upon the Premises; and (D) permit Landlord to post a notice of nonresponsibility in accordance with the statutory requirements of California Civil Code Section 3094 or any amendment thereof. In the event Tenant is required to post an improvement bond with a public agency in connection with the above, Tenant agrees to include Landlord as an additional obligee. 19. Inspection of the Premises. Tenant shall permit Landlord and its -------------------------- agents to enter the Premises at any reasonable time with 24 hours notice and to occur during normal business hours for the purpose of inspecting the same, performing Landlord's maintenance and repair responsibilities, posting a notice of non-responsibility for alterations, additions or repairs and at any time within Thirty (30) days prior to expiration of this lease, to place upon the Premises, ordinary "For lease" or "For Sale" signs. 20. Compliance with Laws. Tenant shall, at its own cost, comply with all -------------------- of the requirements of all municipal, county, state and federal authorities now in force, or which nay hereafter be in force, pertaining to Tenant's use and occupancy of the Premises, and shall faithfully observe all municipal, county, state and federal law, statutes or ordinances now in force or which may hereafter be in force. The judgment of any court of competent jurisdiction or the admission of Tenant in any action or proceeding against Tenant, whether Landlord be a party thereto or not, that Tenant has violated any such ordinance or statute in the use and occupancy of the Premises shall be conclusive of the fact that such violation by Tenant has occurred. 21. Subordination. The following provisions shall govern the relationship ------------- of this Lease to any underlying lease, mortgage or deed of trust which now or hereafter affects the Premises, the Building and/or the Parcel, or Landlord's interest or estate therein (the "Project") and any renewal, modification, consolidation, replacement, or extension thereof (a "Security Instrument"). 16 A. Priority. This Lease is subject and subordinate to all Security -------- Instruments existing as of the Commencement Date. However, if any lender so requires, this Lease shall become prior and superior to any such Security Instrument. B. Subsequent Security Instruments. At Landlord's election, this ------------------------------- lease shall become subject and subordinate to any Security Instrument created after the Commencement Date. Notwithstanding such subordination, Tenant's right to quiet possession of the Premises shall not be disturbed so long as Tenant is not in default and performs all of its obligations under this lease, unless this Lease is otherwise terminated pursuant to its terms. C. Documents. Tenant shall execute any document or instrument --------- required by Landlord or any Lender to make this Lease either prior or subordinate to a Security Instrument, which may include such other matters as the Lender customarily requires in connection with such agreements, including provisions that the lender not be liable for (1) the return of the Security Deposit unless the lender receives it from Landlord, and (2) any defaults on the part of Landlord occurring prior to the time that the Lender takes possession of the Project in connection with the enforcement of its Security Instrument. Tenant's failure to execute any such document or instrument as is usual and customary within ten (10) days after written demand therefor shall constitute a default by Tenant. D. Tenant's Attornment. Tenant shall attorn (1) to any purchaser ------------------- of the Premises at any foreclosure sale or private sale conducted pursuant to any Security Instrument encumbering the Project; (2) to any grantee or transferee designated in any deed given in lieu of foreclosure; or (3) to the lessor under any underlying ground lease should such ground lease be terminated. E. lender. The term "Lender" shall mean (1) any beneficiary, ------ mortgagee, secured party, or other holder of any deed of trust, mortgage, or other written security device or agreement affecting the Project; and (2) any lessor under any underlying lease under which Landlord holds its interest in the Project. 22. Holding Over. This Lease shall terminate without further notice at ------------ the expiration of the Lease Term. Any holding over by Tenant after expiration shall not constitute a renewal or extension or give Tenant any rights in or to the Premises except as expressly provided in this Lease. Any holding over after the expiration with the consent of Landlord shall be construed to be a tenancy from month to month, at one hundred twenty five (125%) percent of the monthly rent for the last month of the Lease Term, and shall otherwise be on the terms and conditions herein specified insofar as applicable. 17 23. Notices. Any notice required or desired to be given under this lease ------- shall be in writing with copies directed as indicated below and shall be personally served or given by mail. Any notice given by mail shall be deemed to have been given when five (5) business days have elapsed from the time such notice was deposited in the United States mails, certified and postage prepaid, addressed to the party to be served with a copy as indicated herein at the last address given by that party to the other party under the provisions of this Paragraph. At the date of execution of this Lease, the address of Landlord is: South Bay Construction & Development Co. ----------------------------------- 511 Division Street ------------------- Campbell CA 95008 ----------------- and the address of Tenant is: Nanometrics ----------- 310 DeGuigne Avenue ------------------- Sunnyvale CA 94089 ------------------ 24. Attorneys' Fees. In the event either party shall bring any action or --------------- legal proceeding for damages for any alleged breach of any provision of this Lease, to recover rent or possession of the Premises, to terminate this lease, or to enforce, protect or establish any term or covenant of this lease or right or remedy of either party, the prevailing party shall be entitled to recover as a part of such action or proceeding, reasonable attorneys' fees and court costs, including attorneys' fees and costs for appeal, as nay be fixed by the court or jury. The term "prevailing party" shall mean the party who received substantially the relief requested, whether by settlement, dismissal, summary judgment, judgment, or otherwise. 25. Nonassignment. ------------- A. Landlord's Consent Required. Tenant's interest in this lease --------------------------- is not assignable, by operation of law or otherwise, nor shall Tenant have the right to sublet the Premises, transfer any interest of Tenant therein or permit any use of the Premises by another party, without the prior written consent of Landlord to such assignment, subletting, transfer or use, which consent Land lord agrees not to withhold unreasonably subject to the provisions of Subparagraph B below. A consent to one assignment, subletting, occupancy or use by another party shall not be deemed to be a consent to any subsequent assignment, subletting, occupancy or use by another party. Any assignment or subletting without such consent shall be void and shall, at the option of Landlord, terminate this lease. Landlord's waiver or consent to any assignment or subletting 18 hereunder shall not relieve Tenant from any obligation under this Lease unless the consent shall so provide. B. Transferee Information Required. If Tenant desires to assign its ------------------------------- interest in this Lease or sublet the Premises, or transfer any interest of Tenant therein, or permit the use of the Premises by another party (hereinafter collectively referred to as a "Transfer"), Tenant shall give Landlord at least thirty (30) days prior written notice of the proposed Transfer and of the terms of such proposed Transfer, including, but not limited to, the name and legal composition of the proposed transferee, a financial statement of the proposed transferee, the nature of the proposed transferee's business to be carried on in the Premises, the payment to be made or other consideration to be given to Tenant on account of the Transfer, and such other pertinent information as may be requested by Landlord, all in sufficient detail to enable Landlord to evaluate the proposed Transfer and the prospective transferee. It is the intent of the parties hereto that this Lease shall confer upon Tenant only the right to use and occupy the Premises, and to exercise such other rights as are conferred upon Tenant by this Lease. The parties agree that this Lease is not intended to have a bonus value nor to serve as a vehicle whereby Tenant may profit by a future Transfer of this Lease or the right to use or occupy the Premises as a result of any favorable terms contained herein, or future changes in the market for leased space. It is the intent of the parties that any such bonus value that may attach to this Lease shall be and remain the exclusive property of Landlord. Accordingly, in the event Tenant seeks to Transfer its interest in this Lease or the Premises, Landlord shall have the following options, which may be exercised at its sole choice without limiting Landlord in the exercise of any other right or remedy which Landlord may have by reason of such proposed Transfer: (1) Landlord may elect to terminate this Lease effective as of the proposed effective date of the proposed Transfer and release Tenant from any further liability hereunder accruing after such termination date by giving Tenant written notice of such termination within twenty (20) days after receipt by Landlord of Tenant's notice of intent to transfer as provided above. If Landlord makes such election to terminate this Lease, Tenant may withdraw its request to Transfer, in which case this Lease shall continue in full force and effect, or Tenant shall surrender the Premises, in accordance with Paragraph 34, on or before the effective termination date; or (2) Landlord may consent to the proposed Transfer on the condition that Tenant agrees to pay to Landlord, as additional rent, any and all rents or other consideration (including key money) received by Tenant from the transferee by reason of such Transfer in excess of the rent payable by Tenant to Landlord under this Lease (less any brokerage commissions or advertising expenses incurred by Tenant in connection with the Transfer). Tenant expressly agrees that the foregoing is a reasonable condition for obtaining Landlord's consent to any Transfer; or (3) Landlord may reasonably withhold its consent to 19 the proposed transfer. 26. Successors. The covenants and agreements contained in this Lease ---------- shall be binding on the parties hereto and on their respective heirs, successors and assigns (to the extent the Lease is assignable). 27. Mortgagee Protection. In the event of any default on the part of -------------------- Landlord, Tenant will give notice by registered or certified mail to any beneficiary of a deed of trust or mortgagee of a mortgage encumbering the Premises, whose address shall have been furnished to Tenant, and shall offer such beneficiary or mortgagee a reasonable opportunity to cure the default, including time to obtain possession of the Premises by power of sale or judicial foreclosure, if such should prove necessary to effect a cure. 28. Landlord Loan or Sale. Tenant agrees within ten (10) days --------------------- following request by Landlord to (A) execute and deliver to Landlord any documents, including estoppel certificates presented to Tenant by Landlord, (i) certifying that this Lease is unmodified and in full force and effect and the date to which the rent and other charges are paid in advance, if any, and (ii) acknowledging that there are not, to Tenant's knowledge, any uncured defaults on the part of Landlord hereunder, and (iii) evidencing the status of the Lease as may be required either by a lender making a loan to Landlord to be secured by a deed of trust or mortgage covering the Premises or a purchaser of the Premises from Landlord and (B) to deliver to Landlord the financial statement of Tenant with an opinion of a certified public accountant, including a balance sheet and profit and loss statement, for the last completed fiscal year all prepared in accordance with generally accepted accounting principles consistently applied. Tenant's failure to deliver an estoppel certificate within the time period described above shall be an Event of Default under this Lease. 29. Surrender of Lease Not Merger. The voluntary or other ----------------------------- surrender of this Lease by Tenant, or a mutual cancellation thereof, shall not work a merger and shall, at the option of Landlord, terminate all or any existing subleases or subtenants, or operate as an assignment to Landlord of any or all such subleases or subtenants. 30. Waiver. The waiver by Landlord or Tenant of any breach of any ------ term, covenant or condition herein contained shall not be deemed to be a waiver of such term, covenant or condition or any subsequent breach of the same or any other term, covenant or condition herein contained. 31. General. ------- A. Captions. The captions and paragraph headings used in this -------- Lease are for the purposes of convenience only. They shall not be construed to limit or extend the meaning of any part of this 20 Lease, or be used to interpret specific sections. The word(s) enclosed in quotation marks shall be construed as defined terms for purposes of this Lease. As used in this Lease, the masculine, feminine and neuter and the singular or plural number shall each be deemed to include the other whenever the context so requires. B. Definition of Landlord. The term LANDLORD as used in this ---------------------- Lease, so far as the covenants or obligations on the part of Landlord are concerned, shall be limited to mean and include only the owner at the time in question of the fee title of the Premises, and in the event of any transfer or transfers of the title of such fee, the Landlord herein named (and in case of any subsequent transfers or conveyances, the then grantor) shall after the date of such transfer or conveyance be automatically freed and relieved of all liability with respect to performance of any covenants or obligations on the part of Landlord contained in this Lease, thereafter to be performed; provided that any funds in the hands of Landlord or the then grantor at the tine of such transfer, in which Tenant has an interest, shall be turned over to the grantee and provided further that the grantee agrees in writing to perform the obligations of Landlord hereunder. It is intended that the covenants and obligations contained in this Lease on the part of Landlord shall, subject as aforesaid, be binding upon each Landlord, its heirs, personal representatives, successors and assigns only during its respective period of ownership. C. Time of Essence. Time is of the essence for the --------------- performance of each tern, covenant and condition of this Lease. D. Severability. In case any one or more of the provisions ------------ contained herein, except for the payment of rent, shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Lease, but this ease shall be construed as if such invalid, illegal or unenforceable provision had not been contained herein. This Lease shall be construed and enforced in accordance with the laws of the State of California. E. Joint and Several Liability. If Tenant is more than one --------------------------- person or entity, each such person or entity shall be jointly and severally liable for the obligations of Tenant hereunder. F. Law. The term "law" shall mean any judicial decision, --- statute, constitution, ordinance, resolution, regulation, rule, administrative order, or other requirement of any government agency or authority having jurisdiction over the parties to this Lease or the Premises or both, in effect at the Commencement Date of this Lease or any time during the Lease Term, including, without limitation, any regulation, order, or policy of any quasi- official entity or body (e.g., board of fire examiners, public utility or special district). 32. Sign. Tenant shall not place or permit to be placed any sign or ---- decoration on the land or the exterior of the Building without the prior written consent of Landlord. Tenant, upon written notice by Landlord, shall immediately remove any sign or 21 decoration that Tenant has placed or permitted to be placed on the land or the exterior of the Building without the prior written consent of Landlord, and if Tenant fails to so remove such sign or decoration within five (5) days after Landlord's written notice, Landlord may enter upon the Premises and remove said sign or decoration and Tenant agrees to pay Landlord, as additional rent upon demand, the cost of such removal. At the termination of this Lease, Tenant shall remove any sign which it has placed on the Parcel or Building and shall repair any damage caused by the installation or removal of such sign. 33. Interest on Past Due Obligations. Any Monthly Installment of -------------------------------- rent or any other sum due from Tenant under this Lease which is receive Landlord after the date the same is due shall bear interest from Thirty days after said due date until paid, at an annual rate equal to the lesser of (the "Permitted Rate"): (1) twelve percent (12%); or (2) five percent (5%) plus the rate established by the Federal Reserve Bank of San Francisco, as of the twenty-fifth (25th) day of the month immediately preceding the due date, on advances to member banks under Sections 13 and 13(a) of the Federal Reserve Act, as now in effect or hereafter from time to time amended. Payment of such interest shall not excuse or cure any default by Tenant. In addition, Tenant shall pay all costs and attorneys' fees incurred by Landlord in collection of such amounts. 34. Surrender of the Premises. On the last day of the term hereof, ------------------------- or on the sooner termination of this Lease, Tenant shall surrender the Premises to Landlord in their condition existing as of the Commencement Date of this Lease, ordinary wear and tear excepted, with all originally painted interior walls washed, and other interior walls cleaned, and repaired or replaced, all carpets shampooed and cleaned, the air conditioning and heating equipment serviced and repaired by a reputable and licensed service firm, all floors cleaned and waxed, all to the reasonable satisfaction of Landlord. Tenant shall remove all of Tenant's personal property and trade fixtures from the Premises, and all property not so removed shall be deemed abandoned by Tenant. Tenant, at its sole cost, shall repair any damage to the Premises caused by the removal of Tenant's personal property, machinery and equipment, which repair shall include, without limitation, the patching and filling of holes and repair of structural damage. If the Premises are not so surrendered at the termination of this Lease, Tenant shall indemnify, defend, protect and hold Landlord harmless from and against loss or liability resulting from delay by Tenant in so surrendering the Premises including without limitation, any claims made by any succeeding tenant or losses to Landlord due to lost opportunities to lease to succeeding tenants. 35. Authority. The undersigned parties hereby warrant that they have --------- proper authority and are empowered to execute this Lease on behalf of Landlord and Tenant, respectively. 36. C. C. & R.'s. This Lease is made subject to all matters of ------------ public record affecting title to the property of which the 22 Premises are a part. Tenant shall abide by and comply with all private conditions, covenants and restrictions of public record now or hereafter affecting the Premises and any amendment thereof, including, but not limited to, the following: None ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ______________________________________________________________________________. All assessments and charges which are imposed, levied or assessed against the Parcel and Buildings pursuant to the above-described covenants, conditions and restrictions shall be a Common Area Charge and Tenant shall pay its share of such assessments and charges to Landlord as provided in Paragraph 12 above. 37. Brokers. Tenant represents and warrants to Landlord that it has ------- not dealt with any broker respecting this transaction and hereby agrees to indemnify and hold Landlord harmless from and against any brokerage commission or fee, obligation, claim or damage (including attorneys' fees) paid or incurred respecting any broker claiming through Tenant or with which/whom Tenant has dealt except Dave Marley of Wayne Mascia. 38. Limitation on Landlord's Liability. Tenant, for itself and its ---------------------------------- successors and assigns (to the extent this Lease is assignable), hereby agrees that in the event of any actual, or alleged, breach or default by Landlord under this Lease that: (A) Tenant's sole and exclusive remedy against Landlord shall be as against Landlord's interest in the Building and the parcel; (B) No partner of Landlord shall be sued or named in a party in a suit or action (except as may be necessary to secure jurisdiction of the partnership); (C) No service of process shall be made against any partner of Landlord (except as may be necessary to secure jurisdiction of the partnership); (D) No partner of Landlord shall be required to answer or otherwise plead to any service of process; (E) No judgment will be taken against any partner of Landlord; (F) Any judgment taken against any partner of Landlord may be vacated and set aside at any time nunc pro tunc; (G) No writ of execution will ever be levied against the assets of any partner of Landlord; (H) The covenants and agreements of Tenant set forth in this Section 38 shall be enforceable by Landlord and any partner of 23 Landlord. 39. Hazardous Material. ------------------ A. Definitions. As used herein, the term "Hazardous Material" ----------- shall mean any substance or material which has been determined by any state, federal or local governmental authority to be capable of posing a risk of injury to health, safety or property including all of those materials and substances designated as hazardous or toxic by the Environmental Protection Agency, the California Water Quality Control Board, the Department of Labor, the California Department of Industrial Relations, the Department of Transportation, the Department of Agriculture, the Consumer Product Safety Commission, the Department of Health and Human Services, the Food and Drug Agency or any other governmental agency now or hereafter authorized to regulate materials and substances in the environment. Without limiting the generality of the foregoing, the term "Hazardous Material" shall include all of those materials and substances defined as "Toxic Materials" in Sections 66680 through 66685 of Title 22 of the California Code of Regulations, Division 4, Chapter 30, as the same shall be amended from time to time. B. Use Restriction. Subject to the terms and conditions set --------------- forth herein, Landlord acknowledges that so long as Nanometrics, Inc. is the ---------------- tenant under this Lease, Tenant shall be permitted to use and store in the Premises those materials described in Paragraph G below, in the quantities set forth in said Paragraph. Except as specifically allowed in this Lease, Tenant shall not cause or permit any Hazardous Material to be used, stored, generated, discharged, transported to or from, or disposed of in or about the Premises, or any other land or improvements in the vicinity of the Premises. The appearance of any Hazardous Material that is not permitted by this Lease in or about the Premises shall be deemed an Event of Default under Paragraph 15 above. Without limiting the generality of the foregoing, Tenant, at its sole cost, shall comply with all laws relating to the storage, use, generation, transport, discharge and disposal of Hazardous Materials. If the presence of Hazardous Materials on the Premises caused or permitted by Tenant results in contamination of the Premises or any soil, air, ground or surface waters under, through, over, on, in or about the Premises, Tenant, at its expense, shall promptly take all actions necessary to return the Premises and/or the surrounding real and personal property to the condition existing prior to the appearance of such Hazardous Material. Tenant shall defend, protect, hold harmless and indemnify Landlord and its agents and employees with respect to all actions, claims, losses, fines, penalties, fees, costs, damages and liabilities (including but not limited to attorneys' and consultants' fees) arising out of or in connection with any Hazardous Material used, generated, discharged, transported to or from, stored, or disposed of in, on, under, over, through or about 24 the Premises and/or the surrounding real and personal property Tenant shall not suffer any lien to be recorded against the Premises as a consequence of a Hazardous Material, including any so called state, federal or local "super fund" lien related to the "clean up" of a Hazardous Material in, over, on, under, through, or about the Premises. C. Compliance. Tenant shall immediately notify Landlord of any ---------- inquiry, test, investigation, enforcement proceeding by or against Tenant or the Premises concerning a Hazardous Material. Tenant acknowledges that Landlord, as the owner of the Property, at its election, shall have the sole right, at Tenant's expense, to negotiate, defend, approve and appeal any action taken or order issued with regard to any Hazardous Material(s) by any applicable governmental authority. Landlord shall have the right to appoint a consultant, at Tenant's expense, to conduct an investigation to determine whether Hazardous Materials are being used, generated, discharged, transported to or from, stored or disposed of in, on, over, through, or about the Premises, in an appropriate and lawful manner. Tenant, at its expense, shall comply with all recommendations of the consultant. D. Assignment and Subletting. It shall not be unreason able ------------------------- for Landlord to withhold its consent to any proposed assignment or subletting if (1) the proposed assignee's or subtenant's anticipated use of the Premises involves the storage, generation, discharge, transport, use or disposal of any Hazardous Material; (2) if the proposed assignee or subtenant has been required by any prior landlord, lender or governmental authority to "clean up" or remediate any Hazardous Material; (3) if the proposed assignee or subtenant is subject to investigation or enforcement order or proceeding by any governmental authority in connection with the use, generation, discharge, transport, disposal or storage of any Hazardous Material. E. Surrender. Upon the expiration or earlier termination of --------- the Lease, Tenant, at its sole cost, shall remove all Hazardous Materials from the Premises and the surrounding real and personal property which were brought on the Premises or the property by Tenant. If Tenant fails to so surrender the Premises, Tenant shall indemnify, protect, defend and hold Landlord harmless from and against all damages resulting from Tenant's failure to surrender the Premises as required by this Paragraph, including, without limitation, any actions, claims, losses, liabilities, fees (including but not limited to attorneys' and consultants' fees), fines, costs, penalties, or damages in connection with the condition of the Premises including, without limitation, damages occasioned by the inability to relet the Premises or a reduction in the fair market and/or rental value of the Premises by reason of the existence of introduction by Tenant of Hazardous Materials in, on, over, under, through or around the 25 Premises. F. Holding Over. If any action off any kind is required to be ------------ taken by any governmental authority to clean-up, remove, remediate or monitor Hazardous Materials from the Premises which were introduced onto the Premises by Tenant and such action is not completed prior to the expiration or earlier termination of the Lease, Tenant shall be deemed to have impermissibly held over until such time as such required action is completed, and Landlord shall be entitled to all damages directly or indirectly incurred in connection with such holding over, including without limitation, damages occasioned by the inability to re-let the Premises or a reduction of the fair market and/or rental value of the Premises. G. Materials. Check none if applicable: ___________ --------- Materials Quantity --------- -------- LIST TO BE PROVIDED PRIOR TO OCCUPANCY. ------------------------------------------ ____________________ _________________ ____________________ _________________ H. Provision Survive Termination. The provisions off this ----------------------------- Paragraph 39 shall survive the expiration or termination of this Lease. I. The provisions of this Paragraph 39 are intended to govern the rights and liabilities of the Landlord and Tenant hereunder respecting Hazardous Materials to the exclusion of any other provisions in this Lease that right otherwise be deemed applicable. The provisions of this Paragraph 39 shall be controlling with respect to any provisions in this Lease that are inconsistent with this Paragraph 39. 40. Landlord at its sole cost and expense shall perform additional hazardous materials testing on the Parcel to establish a "Hazardous Materials Baseline" prior to Tenant Occupancy. Tenant shall receive a copy of such report and an opportunity to review it prior to Tenant's occupancy. 41. Landlord warrants that as of the Commencement Date of this Lease all mechanical, plumbing and electrical units will be in proper working order and that the roof shall be water tight. 26 42. Option to Extend ---------------- a. Provided that Lessee has not committed an uncured Event of Default under this Lease at the time of exercise of this Option, Lessee shall have one (1) option to extend the term of this Lease (the "Option") for a period of five (5) years. Said Option shall be exercised only by written notice delivered to Lessor no later than one hundred eighty (180) days prior to the expiration date of the then existing term of this Lease. In all respects, the terms, covenants and conditions of this Lease shall remain unchanged during the Option Term, except that the Monthly Installment of rent payable during the Option Term, shall be increased in accordance with the provisions of subparagraph 42b below, and except that there shall be no further Option to extend the term of this Lease at the end of the Option term. b. The Monthly Installment of rent payable during each Option Term shall be ninety five percent (95%) of the Fair Market Rental for the Premises as of the first day of the Option Term. In no event shall the rental paid during the Option Term be less than the preio months rent. c. Determination of Fair Market Rental. Promptly following the exercise of the Option, the parties shall meet and endeavor to agree upon the Fair Market Rental of the Premises as of the first day of the Option Term. In determining the Fair Market Rental for the Premises, the Premises shall be compared only to buildings of a similar quality and size and with similar improvements and amenities in the Sunnyvale area shall be considered. Any alterations made at the expense of Tenant shall not be considered in determining the Fair Market Rental for the Premises. If, within fifteen (15) days after exercise of the Option, the parties cannot agree upon the Fair Market Rental for the Premises as of the first day of the Option Term, the parties shall submit the matter to binding appraisal in accordance with the following procedures. d. Appraisal. Within thirty (30) days after exercise of the Option, the parties shall either (a) jointly appoint an appraiser for this purpose or (b) failing this joint action, separately designate a disinterested appraiser. No person shall be appointed or designated an appraiser unless they have at least five (5) years experience in appraising major commercial properties in the Sunnyvale area and is a member of a recognized society of real estate appraisers. If, within thirty (30) days after their appointment, the two appraisers reach agreement on the Fair Market Rental for the Premises as of the first day of the Option Term in question, that value shall be binding and conclusive upon the parties. If the two appraisers thus appointed cannot reach agreement on the question presented thirty (30) days after their appointment, then the appraisers thus appointed shall appoint a third disinterested appraiser having like qualifications. If within thirty (30) days after the appointment of the third appraiser, a majority of the appraisers agree on the Fair Market Rental of the Premises as of the first day of the Option Term, that value shall be binding and conclusive upon the parties. If within thirty (30) days after the appointment of the third appraiser a majority of the appraisers cannot reach agreement on the question presented, then the three appraisers shall submit their independent appraisal to the parties, and the appraisal farthest from the median of the three appraisals shall be disregarded and the mean average of the remaining two appraisals shall be deemed to be the Fair Market Rental of the Premises as of the first day of the Option Term and shall be binding and conclusive upon the parties. Each party shall pay the fees and expenses of the appraiser appointed by it and shall share equally the fees and expenses of the third appraiser. If the two appraisers appointed by the parties cannot agree on tile appointment of the third appraiser, they or either of them shall give notice of such failure to agree to the parties and if the parties fail to agree upon the selection of such third appraiser within ten (10) days after the appraisers appointed by the parties give such notice, then either of the parties, upon notice to the other party, may request such appointment by the American Arbitration Association , or on its failure, refusal or inability to act, may apply for such appointment to the presiding judge of the Superior Court of the Santa Clara County, State of California. IN WITNESS WHEREOF, the parties have executed this Agreement on the dates set forth below. TENANT: Nanometrics, Incorporated _______________________________________, a California corporation -------------------------- Dated: 2/25/92 By: /s/ Vincent J. Coates ---------- ------------------------------------ Name: Vincent J. Coates ---------------------------------- Title: Chairman & CEO --------------------------------- LANDLORD: PM-DE _______________________________________, a California general partnership -------------------------- Dated: 3/5/92 By: /s/ W. Leslie Pelio ---------- ------------------------------------ Name: W. Leslie Pelio ---------------------------------- Title: General Partner ------------------------------- Dated: 3/5/92 By: /s/ James D. Mair ---------- ------------------------------------ Name: James D. Mair ---------------------------------- Title: General Partner ------------------------------- 27 EXHIBIT "A" [MAP APPEARS HERE] EXHIBIT "A" W.LESLIE PELIO & ASSOCIATES SOUTH BAY ================================================================================ SOUTH BAY CONSTRUCTION & DEVELOPMENT COMPANY For Information Contact: Jim Mair (408) 379-0400 Les Pelio (408) 379-4000 Exhibit B Improvements Landlord shall construct certain interior improvements (the "Improvements") in the Premises prior to the commencement of the term of this Lease in accordance with the Approved Plans to be developed as provided in Paragraph 1 below, subject to the following terms and conditions: 1. Tenant shall take delivery of Premises in an "as-is" condition excepting for any and all touch-up and clean-up of Premises. Landlord at its sole cost and expense and prior to the Commencement Date shall remove all chemical-related items from the premises and restore the premises to the level of cleanliness (the base line) that existed prior to installation of those items. Landlord shall remove any inconvenient or obstructive pipes, fittings, values or other items related to the chemical delivery systems, and Landlord will retain responsibility for maintenance and repair and hold Tenant harmless as to any hazardous material liability in connection with these chemical systems that remain. At Landlord's sole cost and expense, Nanometrics will be provided with a clean room of class 1000 or better included in the facility at time of occupancy and if the clean room is not class 1000 or better, then any modifications required to make a class 1000 clean room shall be immediately performed by Landlord at Landlord's sole cost and expense. Nanometrics shall have the right to verify class 1000 or better compliance prior to occupancy. TENANT LANDLORD: Nanometrics, Incorporated PM-DE, a California a California corporation General Partnership By: /s/ Vincent J. Coates By:__________________________ --------------------------- Name: Vincent J. Coates Name:________________________ -------------------------- Title: CHAIRMAN & CEO Title: ______________________ ------------------------- FIRST ADDENDUM TO LEASE THIS FIRST ADDENDUM TO LEASE (Addendum") is dated as of FEB 25, 1992, ------------ 1992, and is made between PM-DE, a California general partnership ("Landlord") and Nanometrics incorporated, a California corporation ("Tenant") to be a part of that certain Lease, of even date herewith between Landlord and Tenant (herein the "Lease Form"). Landlord and Tenant agree that the Lease Form is modified and supplemented by this Addendum. 1. Acceptance of Premises: Notwithstanding anything to the contrary in the ---------------------- Lease Form, Tenant's acceptance of the Premises shall not be deemed a waiver of Tenant's right to have defects in the Premises repaired at Landlord's sole expense. Tenant shall give notice to Landlord whenever any such defect becomes reasonably apparent, and Landlord shall repair such defect as soon as practicable. 2. Compliance with Laws: Notwithstanding anything to the contrary in the ---------- ---- ---- Lease Form, Tenant shall not be required to construct or pay the cost of complying with any laws requiring construction of improvements in the premises which are properly capitalized under generally accepted accounting principles, unless such compliance is necessitated solely because of Tenant's particular use of the Premises or Tenant's construction of new improvements. Landlord shall be responsible for the repair not regular maintenance, however, for a period of one (1) year after commencement for all H.V.A.C. equipment, electrical equipment and roofing and roof membrane, provided said repair is not necessarily due to neglect or damage by Tenant. 3. Property Taxes: Notwithstanding anything to the contrary in the Lease -------- ----- Form, in no event shall Tenant have any obligation to pay any portion of any increases in Property Taxes resulting from a voluntary or involuntary change of ownership of the Building or the Parcel of which the Premises are a part during the original lease term only 4. Alterations: Notwithstanding anything to the contrary in the Lease ----------- Form, Tenant may construct nonstructural alterations, additions and improvements ("Alterations") in the Premises without Landlord's prior approval, if the cost of such work does not exceed Ten Thousand Dollars ($10,000). If Landlord's consent is required for an Alteration and Landlord does not notify Tenant in writing of its approval or disapproval within thirty (30) days following Tenant's request for approval, then Landlord shall be deemed to have approved the proposed Alteration. Except for Alterations which cannot be removed without structural injury to the Premises, at any 1 time Tenant may remove the Alterations from the Premises, provided Tenant repairs all damage caused by such removal. 5. Hazardous Materials/Landlord Indemnity: Landlord shall indemnify, --------- ------------------ --------- protect and hold harmless Tenant, its employees, agents and contractors, from and against all third party claims, suits, judgments, costs, damages, liabilities, investigations, detoxifications, removals and expenses of every type and nature, directly or indirectly arising out of or in connection with any Hazardous Material existing on or under the Premises as of the Commencement Date. 6. Waiver of subrogation: Notwithstanding anything to the contrary in the ------ -- ----------- Lease Form, the parties hereto release each other and their respective agents, employees, successors, assignees and subtenants from all liability for injury to any person or damage to any property that is caused by or results from a risk which is actually insured against, or which is required to be insured against under this Lease, without regard to the negligence or willful misconduct of the entity so released. Each party shall use its best efforts to cause each insurance policy it obtains to provide that the insurer thereunder waives all right of recovery by way of subrogation as required herein in connection with any injury or damage covered by the policy. If such insurance policy cannot be obtained with such waiver of subrogation, or if such waiver of subrogation is only available at additional cost and the party for whose benefit the waiver is not obtained does not pay such additional cost, the party obtaining such insurance shall immediately notify the other party of that fact. 7. Assignment And Subletting: Notwithstanding anything to the contrary in ------------------------- the Lease Form, Tenant may, without Landlord's prior written consent and without any participation by Landlord in assignment and subletting proceeds, sublet the Premises or assign the Lease to: (i) a subsidiary, affiliate, or corporation controlled or under common control with Tenant; (ii) a successor corporation related to Tenant by merger; or (iii) a purchaser of substantially all of Tenant's assets. For the purpose of this Lease, sale of Tenant's capital stock through any public ex change shall not be deemed an assignment, subletting, or any other transfer of the Lease or the Premises. If Landlord's consent to any proposed assignment or subletting is required and not given or withheld within fourteen (14) days following Tenant's request for consent, such consent shall be deemed given. 8. Subordination: Notwithstanding anything to the contrary in the Lease ------------- Form, this Lease shall not be subject to or subordinate to any ground lease or to any lien, mortgage, deed of trust, or security interest hereafter affecting the Premises, nor shall Tenant be required to execute any documents subordinating this Lease, unless the ground lessor, lender or other holder of the interest to which 2 this Lease shall be subordinated contemporaneously executes a recognition and nondisturbance agreement which (i) provides that this lease shall not be terminated so long as Tenant is not in default under this Lease. 9. Effect of Addendum: Each term used herein with initial capital letters ------ -------- shall have the meaning ascribed to such term in the Lease Form unless specifically otherwise defined herein. In the event of any inconsistency between this First Addendum and the Lease Form, the terms of this First Addendum shall prevail. LANDLORD: TENANT: PM-DE, a California NANOMETRICS CORPORATION, general partnership a California corporation By: /s/ JAMES D. MAIR By: /s/ VINCENT J. COATES ---------------------------- ------------------------- Title: GEN PARTNER Title: CHAIRMAN & CEO ------------------------- ---------------------- Date: 3-5-92 Date: FEB 25 1992 -------------------------- ----------------------- EX-10.9 11 LOAN AGREEMENT EXHIBIT 10.9 Loan Agreement Secured by Mortgage (Teito-ken) Teitoken on Real Estate The Japan Development Bank (hereinafter referred to as "A") has made the loan to Nanometrics Japan k.k. (hereinafter referred to as "B") upon the following terms and conditions (hereinafter referred to as the "Conditions") and those in the ANNEX (hereinafter referred to as the "Terms and Conditions") and B accepts the Conditions and the Terms and Conditions. The execution, validity, interpretation and performance of this Agreement shall be governed by Japanese law. In Witness Whereof, the parties hereto have executed two originals of this Agreement in Japanese, and A shall keep the original called "Seihon" and B shall keep the original called "Fukuhon" respectively. Date: -------------------------------------- A: The Japan Development Bank 9-1, 1-chome, Otemachi, Chiyoda-ku, Tokyo By: Yoshihiko Yoshino, Governor B: Nanometrics Japan k.k. 84, Shin-izumi, Narita-si, China By: Hiroshi Adachi, President Conditions Principal: Yen 80,000,000- ----------- Name of and expenses for the project for which the loan is required (hereinafter referred to as the "Project"); R&D of Measuring Equipments of Semiconductor -------------------------------------------- Yen 205,000,000- ------------ Repayment schedule of the principal: The first repayment shall be made on the 20th of May, 1998, and thereafter repayment shall be made until the 20th day of February, 2006, on the 20th day of February, May, August and November of every year in installments, each amount of which shall be yen 2,400,000-, and the balance shall be paid in full on the 20th day of May, 2006. Interest rate: 3.40% per annum (subject to per diem calculation on the basis of 365 days ----- per year). -2- Method of payment of interest: The first payment shall be made on the 20th day of August, 1996 and thereafter payment shall be made on the 20th day of February, May, August and November of every year. Interest accrued between each payment day shall be paid at the end of the accrual period. -3- ANNEX Terms and Conditions (Purpose for use of money) Article 1. B shall perform the Project in accordance with the project plan at the date of this Agreement and shall use the borrowed money under this Agreement only for the Project. (Delivery of loaned money in installments) Article 2. B shall keep once the borrowed money under this Agreement on deposit with A and A may deliver the loaned money on deposit (hereinafter referred to as the "Money Deposited") in installments depending on the progress of the Project and the payment of expenses therefor and other matters. 2. When B requests A to deliver the Money Deposited, B shall, in advance, report the payment of expenses for the Project and other matters in a form designated by A, and obtain A's consent to such delivery. 3. A will pay no interest to B on the Money Deposited and B will pay no interest to A on the borrowed money equivalent in amount to the Money Deposited. 4. B shall not assign or create a pledge on the right of claim for delivery of the Money Deposited. -4- (Delivery of Money Deposited by bank transfer) Article 3. In cases where A delivers the Money Deposited under this Agreement by transfer to B's bank deposit account, such delivery shall be deemed made when A completed the necessary procedures for the bank transfer. Even if B has sustained a loss due to accidents, delays of procedure or other events in the subsequent process, B shall not ask for compensation or other claims against A. (Repayment of the obligations by bank transfer) Article 4. When B makes repayments to A by transfer to A's account with checks, notes or other securities (hereinafter collectively referred to as the "Securities") to A, B shall ensure that the Securities will be paid in full by the relevant repayment dates. (Repayment of the B's obligations by delivering Securities) Article 5. When B makes repayments to A by personally delivering Securities to A, any Securities personally delivered to A for the payment shall be negotiable for settlement through the clearing house approved by A and B shall ensure that the Securities will be paid in full by the relevant repayment dates. -5- 2. In case any of the Securities in the preceding paragraph are dishonored and returned from A to B, B agrees that no procedure will be taken by A for the preservation of rights on such Securities. (Prepayment) Article 6. If the expenses for the Project decrease to less than those for the Project mentioned in the Conditions (hereinafter referred to as the "Amount mentioned in the Conditions") due to a change of the project plan or for other reasons, B shall, upon A's request, despite the maturities of the loan mentioned in the Conditions, prepay the borrowed money under this Agreement in accordance with the proportion of the amount of decrease to the Amount mentioned in the Conditions. 2. When such decrease of the expenses for the Project under the preceding paragraph is a substantial portion of the Amount mentioned in the Conditions and A recognizes that as a result the completion of the purpose of the Project will become difficult, B shall, upon A's request, prepay the borrowed money in full under this Agreement. 3. When B does not perform the Project without justifiable reason, despite A's instructions to perform, for a reasonable period of time which A judges to be necessary for performance of the Project, when B does not apply the money delivered under paragraph 1 of Article 2 to the payments for the expenses of the Project, or when A recognizes that the purpose of the Project will not be completed because B assigns, leases or otherwise disposes to any third party the assets or properties which B acquires as a result of the Project immediately after its acquisition or for other reasons, and A requests to prepay the borrowed money, B shall, despite the maturities of the loans -6- mentioned in the Conditions, prepay the borrowed money under this Agreement to A in whole or in part. 4. B may prepay the borrowed money under this Agreement in whole or in part when B obtains A's consent in advance. 5. In addition to the preceding paragraph, B may prepay the borrowed money under this agreement in whole or in part when B gives A a written notice of prepayment no less than ninety (90) days before the date of prepayment. 6. In case of prepayment under the preceding paragraph, notice of prepayment once received by A shall be irrevocable unless A consents to such revocation of such notice. Article 7. When B prepays the borrowed money, B shall pay at the same time the amounts set forth in each following item: 1. Interest on the prepaid amount accrued to the date of such prepayment. 2. In case of prepayment under paragraph 5 of the preceding Article, if the interest rate under this Agreement (hereinafter referred to as the "agreed interest rate") exceeds A's standard interest rate as of the date of such prepayment (hereinafter referred to as the "standard interest rate"), in addition to the amount in the preceding paragraph, the difference between (i) the amount equal to interest which would be accrued on the basis of the agreed interest rate on the prepaid amount for the period during the date of such prepayment and the date of repayment set forth in the Conditions and (ii) the amount equal to interest which would be accrued on the basis of the standard interest rate for the same period (the method of calculation of such interests to be determined by A). -7- Article 8. A may first set off the Deposited Money against the money which B should prepay (including interest and any other obligation thereon). (Application of repayment) Article 9. When B prepays the borrowed money under this Agreement to A in part, when A first sets off the Deposited Money against the money which B should prepay under this Agreement, or when the amount which B has repaid under this Agreement or other loan agreements between A and B is less than the amount which B should repay under these agreements, A shall apply repaid money in accordance with order and methods decided by A. (Inspection of books, etc.) Article 10. A may at any time inspect the status of progress of the Project and B's assets, documents, books and other materials, when A reasonably deems it necessary, such as for confirmation of the use of loaned money under this Agreement or preservation of A's rights. 2. B shall provide necessary assistance to A for the inspection in the preceding paragraph. (Matters to be filed) Article 11. -8- When B changes corporate name, tradename, address, representative, seal- impression that B has filed with A or other matters that B has filed with A, B shall file such change with A thereof in writing forthwith. (Matters to be reported) Article 12. B shall report to A, in accordance with the method as instructed by A, the matters mentioned in (1) and (2) upon A's request and the one mentioned in (3) without delay after the occurrence of such event. (1) Progress status of the Project and payment status of the expenses of the Project. (2) Settlement of accounts (including mid-year settlement if the company(s) which chooses yearly settlement makes up it) and decisions as to dividends (including interms dividends) and B and Nanometrics Incorporated at the time of each settlement of accounts. (3) Other important events concerning management, financial condition or operation. (Acceleration of payment) Article 13. If any one of the following events should occur and be continuing, B's obligations to A shall, upon A's request, immediately become due and payable and B shall forthwith pay the entire amount of such obligations under this Agreement. (1) When B does not perform the Project and use the borrowed money under this Agreement for the purpose other than that of the Project; -9- (2) When B fails to perform any of its obligations under Article 11 or Article 12 and does not perform such obligations despite A's request or when B makes untrue filing or report; (3) When B fails to pay any part of the principal or interest thereon; (4) When B fails to perform any of its obligations under this Agreement other than those set forth in each of the preceding items, or fails to perform any of its obligations to A under any other agreements; (5) When B dishonors any note or check; (6) When an order or notice of provisional attachment, preservative attachment or attachment with respect to the Money Deposited is issued or given to B; (7) When attachment with respect to assets which B furnishes or agrees to furnish to A as security is made; (8) When B has become unable to pay its debts, or an application is filed by or against B for bankruptcy, composition of creditors, corporate reorganization or company arrangement; (9) When B is dissolved or its business is closed down; or (10) When any event necessary for preservation of A's rights other than those set forth in each of the preceding items occurs under or in connection with B. (To furnish security) Article 14. B has created a Mortgage ("Teitoken") of the second ranking upon the real estate owned by B described in the ATTACHMENT, as security for the obligations under this Agreement. -10- 2. When B creates the Teitoken in the preceding paragraph, B shall promptly complete procedures for the registration thereof and shall submit a certified copy of the registration record thereof to A. (Additional security) Article 15. B shall, upon A's reasonable request, in accordance with the method as instructed by A, furnish A as additional security for the obligations under this Agreement any real property, machine, equipment or other properties which B will obtain for use at Narita Technology Center until B has paid the entire amount of the obligations under this Agreement. (Procedure taken for any change in secured property) Article 16. If any loss of, injury to or substantial decrease of value in, any important portion appertaining to the properties which B has furnished, or has agreed to furnish A as security under this Agreement (hereinafter referred to as the "Securing Property") should occur, B shall inform A thereof forthwith. 2. In case of the preceding paragraph, B shall, upon A's request, in accordance with the method as instructed by A, furnish A additional security or substitute security, or shall prepay the borrowed money under this Agreement in whole or in part. (Registration of change) -11- Article 17. In case of Article 15 or if any change in the Securing Property should occur, or if B furnishes A additional security or substitute security under paragraph 2 of the preceding Article, B shall, upon A's request, promptly complete registration or other necessary procedures and shall submit to A a document certifying thereof. (Preservation of security) Article 18. When B assigns, leases, creates mortgage or other security on, or changes the present status of, the Securing Property, B must, in advance, obtain A's consent in writing. (Insurance) Article 19. Upon A's request, B shall purchase and maintain a damage insurance policy to cover not less than the amount designated by A on the insurable assets appertaining to the Securing Property and other assets designated by A, and shall create for A a pledge on the claim for insurance proceeds or shall assign the claim for insurance money to A and submit the insurance policy to A. 2. When B carries any insurance policy other than the insurance policy in the preceding paragraph on the same assets, B shall inform A thereof forthwith and shall take such procedures as in the preceding paragraph. -12- 3. B shall follow A's instruction concerning the continuation, novation and change of the insurance contracts set forth in the preceding two paragraphs, and the handling of insurance proceeds or other matters after the occurrence of any accident on the insured assets. 4. If B fails to take procedures in paragraph 1 and A has paid the premium of the insurance contract necessary for the preservation of A's rights, which A purchased or maintained, or of the insurance contract A purchased or maintained on behalf of B, B shall reimburse such premium to A together with interest ("Songaikin") equivalent to 14.5% per annum (subject to per diem calculation on the basis of 365 days per year) of the amount of the premium or other expenses from the day when A paid such premium or other expenses. 5. When A applies the insurance proceeds A received under the insurance contract in each preceding paragraph to payment of the obligations under this Agreement, B shall raise no objection, despite the maturities of the loans provided under this Agreement. (Execution of notarial deed) Article 20. B shall, at any time upon A's request by using a notary public in Japan, take necessary procedures to execute a notarial deed containing the acknowledgment of the obligations under this Agreement and the statement of acceptance of enforcement thereof. (Burden of expenses) Article 21. -13- The expenses for preparation of this Agreement and registration, and all other expenses (including cost of litigation and legal counsel's fees) incurred in connection with this Agreement shall be borne by B. (Default interest) Article 22. B shall pay default interest equivalent to 14.5% per annum (subject to per diem calculation on the basis of 365 days per year) of the principal, interest and any other amounts payable in the event of default of any payment obligation, or of advance money A paid for the expenses under the preceding Article. (Jurisdiction of court) Article 23. In the event that any litigation is needed pertaining to this Agreement, the court which has jurisdiction over the A's head office shall have exclusive jurisdiction over such litigation. -14- ATTACHMENT Description of Real Estate (Land) 1 34 Ban Shin-izumi, Narita Land for residence 4075 m/2/80 (Building) 1. Location 34 Bauchi Shin-izumi, Narita Number of building No. 34 Kind Factory, Office Structure Steel frames, galvanized steel plates, two-story Floor space 1st floor 750m/2/87 2nd floor 708m/2/75 -15- FIRST AMENDMENT TO LEASE ------------------------ (Extended Term) I. PARTIES AND DATE. ---------------- THIS FIRST AMENDMENT TO LEASE (this "Amendment") is made and entered into as of April 24, 1997, by and between MP ARQUES, INC., a Delaware corporation --------- ("Landlord"), and NANOMETRICS INCORPORATED, a California corporation ("Tenant"). II. RECITALS. -------- A. PM-DE and Tenant entered into that certain Lease Agreement dated as of March 3, 1992, as supplemented by that certain First Addendum to Lease dated as of February 25, 1992 (the "Lease"), for the premises known as 310 DeGuigne Avenue, Sunnyvale, California and consisting of approximately 34,697 of space ("Premises"). B. Landlord is the owner of the Premises and the current landlord under the Lease. C. Landlord and Tenant desire to modify the Lease as set forth in this Amendment, which modifications shall be deemed effective as of May 1, 1997. III. MODIFICATIONS. ------------- Landlord and Tenant hereby agree to extend the term of the Lease upon the terms and conditions hereinafter set forth. A. Term. The Lease Term is hereby extended for a period of five (5) years ---- commencing as of May 1,1997 and terminating on April 30, 2002 (the "Extended Term"). B. Monthly Rent. In addition to Tenant's obligation to pay Additional ------------ Rent under the Lease, Tenant shall pay to Landlord, for each calendar month of the Extended Term, Monthly Installments of rent commencing on May 1, 1997 as follows:
Month of Extended Term Monthly Rent Installments ---------------------- ------------------------- 1-30 $43,372.00 31-60 $47,709.00
-1- C. Tenant Representations and Warranties. Tenant hereby represents and ------------------------------------- warrants that there exists no breach, default or event of default under the Lease, as amended by this Amendment. D. Landlord Representations and Warranties. Landlord hereby represents --------------------------------------- and warrants that there exists no breach, default or event of default under the Lease, as amended by this Amendment. F. Roofing Repairs. Landlord, at Tenant's expense, hereby agrees to --------------- perform or cause to be performed all necessary repairs and maintenance but not replacement of the roof and roof membrane of the Premises which is otherwise the obligation of Tenant under Section 10(b) of the Lease. Tenant shall reimburse Landlord, as Additional Rent, for any and all costs associated with repairing and maintaining but not replacing the roof and roofing membrane within ten (10) days after receipt by Tenant of a bill from Landlord for such costs. IV. GENERAL. ------- A. Effect of Amendment: Definitions. Except to the extent the Lease is -------------------------------- expressly modified by this Amendment, the terms and provisions of the Lease shall remain unmodified and in full force and effect. In the event of conflict between the terms of the Lease and the terms of this Amendment the terms of this Amendment shall prevail. The capitalized terms used and not otherwise defined herein shall have the same definitions as set forth in the Lease. B. Counterparts. If this Amendment is executed in counterparts, each ------------ counterpart shall be deemed an original. C. Authority to Execute Amendment. Each individual executing this ------------------------------ Amendment on behalf of a partnership or corporation as Tenant represents that he or she is duly authorized to execute and deliver this Amendment on behalf of the partnership and/or corporation and agrees to deliver evidence of his or her authority to Landlord upon request by Landlord. D. Governing Law. This Amendment and any enforcement of the agreements ------------- and modifications set forth above shall be governed by and construed in accordance with the laws of the State of California. -2- E. Headings. Paragraph headings contained in this Amendment are for -------- reference purposes only, and shall not affect in any way the meaning or interpretation of this Amendment. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date and year first above written. "Landlord" -------- MP ARGUES, INC., a Delaware corporation By: GE CAPITAL INVESTMENT ADVISORS, INC., Its Duly Authorized Investment Advisor By: /s/ JERRY D. BUCKLEY ------------------------------ Its: JERRY D. BUCKLEY ---------------------------- "Tenant" ------ NANOMETRICS INCORPORATED, a California corporation By: /s/ VINCENT J. COATES ------------------------------- Its: CEO ------------------------------ -3- EX-10.10 12 LOAN AGREEMENT AND GUARANTEE EXHIBIT 10.10 LOAN AGREEMENT -------------- Date: _______________, 199___ To: The Mitsubishi Bank, Limited Address: 34 Shin-Izumi, Narita-City Chiba-Pref. ________________________________________ Obligor: NANOMETRICS JAPAN LTD. Fumio Kuruta Representative Director ________________________________________ (Seal) Address: ________________________________________ Joint Guarantor: ________________________________________ (Seal) Address: ________________________________________ Joint Guarantor: ________________________________________ (Seal) The Obligor hereby executes this Loan Agreement with your bank as follows upon approval of each provision set forth in the Agreement on Bank Transactions as executed separately: Article 1 Loan ---- The Obligor has hereby borrowed monies from your bank pursuant to terms and conditions set forth hereinbelow: (1) Amount borrowed: (Yen) 400,000,000 ----------- (2) Purpose for borrowing: Fund for Working Capital --------------- (3) Interest rate: 3.675% per annum (Prime Rate + 0.8%) ----- Rate for delay charge: 14% per annum (these rates are computed on the basis of a year of 365 days) (4) Guarantee by Credit Guarantee Association N/A (5) Schedule of repayment: i) The schedule for the initial and last repayment shall be as follows: Date of initial repayment: -2- August 31, 1995 --------------- Amount of initial repayment: (Yen) 10,000,000 ---------- Date of last repayment: May 31, 2005 ------------ Amount of last repayment: (Yen) 10,000,000 ---------- ii) The schedule of the second repayment and thereafter (except for the last repayment) shall be as follows: Month of second repayment: November 1995 ------------- Amount of second repayment: (Yen) 10,000,000 ---------- (3) Term of repayment: Until February 2005 ------------- Interval: Every 3 months --- Amount of each repayment: (Yen) 10,000,000 ------------ (4) Term of repayment: Until ________________ Interval: -3- Every ______ months Amount of each repayment: (Yen)________________ (5) Term of repayment: Until________________ Interval: Every ______ months Amount of each repayment: (Yen)________________ (6) Term of repayment: Until________________ Interval: Every ______ months Amount of each repayment: (Yen)______________ (7) Term of repayment: Until______________ Interval: Every ______ months Amount of each repayment: (Yen)______________ -4- (8) Term of repayment: Until______________ Interval: Every ______ months Amount of each repayment: (Yen)______________ (9) Term of repayment: Until______________ Interval: Every ______ months Amount of each repayment: (Yen)______________ (10) Term of repayment: Until______________ Interval: Every ______ months Amount of each repayment: (Yen)______________ (11) Term of repayment: Until______________ Interval: Every ______ months -5- Amount of each repayment: (Yen)______________ iii) The repayment date contemplated in ii) above shall be the last day of the month. iv) In the event that the repayment date in i) or ii) above falls under holiday, the date below shall be the repayment date (cross out the date not applicable). (1) Banking day immediately following holiday. (6) Method of Interest Payment i) The interest payment date shall be the date of borrowing and the date in every 3 months numerically corresponding to the date --- set forth in Paragraph 5, Item iii), and the interest accruable from the date of borrowing (the date immediately following each interest payment date for the second interest payment and thereafter) up to the following interest payment date (the last interest payment date being the date of last repayment) shall be paid on each such interest payment date in advance. ii) If any of the interest payment dates falls under holiday, the provisions of Paragraph 5, Item iv) above shall be applicable mutatis mutandis. (7) Bank account for repayment: -6- The Mitsubishi Bank, Limited, Chiba Branch ------- [_] Current Account [X] Ordinary deposit account Account number: 4722167 ------- Account holder: Obligor: Nanometrics Japan Ltd. Article 2 Partial Early Repayment ----------------------- If the Obligor makes partial early prepayment, the Obligor shall thereafter make repayment in accordance with the provisions of the foregoing Article, and the last repayment date shall be accelerated accordingly. Article 3 Issuance of Note or No Issuance ------------------------------- (1) The Obligor shall issue and deliver the promissory note with the amount and maturity date designated by your bank to cover the borrowed monies under Article 1 hereof, and keep renewing such note until the last repayment date. (2) The Obligor may, upon approval of your bank, omit the issuance and delivery to your bank of the promissory note provided for in Paragraph 1 above; provided, however, that the Obligor shall issue and deliver such promissory note to your bank in accordance with the provisions of the foregoing Paragraph immediately when your bank requests such issuance later. Article 4 Debiting of Principal and Interest Against Deposit Account ---------------------------------------------------------- -7- (1) With respect to the principal to be repaid by the Obligor, your bank shall debit the amount of the relevant repayment against the bank account for repayment set forth in Article 1, Paragraph 7 hereof, and shall apply such amount to the relevant repayment. i) As regards the repayment as set forth above, the delivery to your bank of a check, the ordinary deposit account passbook or the integrated bank account passbook and the voucher for withdrawal from such account shall be omitted irrespective of any provisions to the contrary in the Current Account Regulations, the Ordinary Deposit Account Regulations or the Integrated Account Regulations. ii) If the balance in the bank account for repayment is less than the amount to be repaid on any repayment date, your bank may make the settlement in accordance with the foregoing provisions on such repayment date or thereafter if the balance shall have become equal to or more than the amount to be repaid. (2) Your bank may debit interest, delay charge and/or other charges arising from the loan hereunder against the balance in the bank account for repayment by applying the provisions of foregoing Paragraph 1 mutatis mutandis. (3) If the settlement of the repayment is not made in accordance with the provisions of foregoing Paragraphs 1 and 2 for any reason, the Obligor shall follow the instruction of your bank. Article 5 Expenses -------- -8- The Obligor shall bear any and all the expenses necessary for the preparation of this Agreement and the notarial deed set forth in Article 7 hereof, disposition of any collateral and/or other expenses relating to this Agreement. Article 6 Guarantee --------- (1) The Guarantor shall guarantee jointly and severally with the Obligor any and all indebtedness of the Obligor arising from this Agreement, and its obligations shall be performed in accordance with the provisions of this Agreement in addition to each provision in the Agreement on Bank Transactions separately delivered by the Obligor. (2) The Guarantor shall not claim any release from the guarantee if your bank at its discretion should change or waive any collateral or other guarantee. (3) The Guarantor shall not set off its obligation against the deposit of the Obligor at your bank or other credit of the Obligor as against your bank. (4) In the event that the Guarantor performed its obligation under the guarantee under this Agreement, the Guarantor shall not exercise its right acquired from your bank by subrogation without the approval of your bank so long as the transactions between the Obligor and your bank continue. If your bank so requests, the Guarantor shall assign to your bank such right or priority in rank without compensation. (5) In the event that the Guarantor has granted any guarantee other than this, or will grant any guarantee in the future, for any indebtedness owed by the Obligor to your bank, the aggregate amount guaranteed shall, unless otherwise agreed, be the total of such guarantees, and other guarantee(s) shall not be affected by the guarantee under this Agreement. -9- Article 7 Preparation of Notarial Deed ---------------------------- The Obligor and the Guarantor shall, upon request of your bank, immediately take any proceedings required to execute the notarial deed with the statement to accept compulsory enforcement of their obligations under this Agreement. (Additional Agreement) N/A (Remark) Interest shall be calculated in accordance with the following formula, irrespective that the year is common or intercalary: Principal (interest being accrued in each (Yen)100) x number of dates x annual interest rate -------------------------------------- 365 = Interest (amount less than (Yen)1 being cut) -10- Date: June 5, 1995 To: The Mitsubishi Bank, Limited GUARANTEE - -------------------------------------------------------------------------------- The maximum amount guaranteed Japanese Yen 400,000,000.- - -------------------------------------------------------------------------------- The term of this guarantee Ten years from the date of first drawdown - -------------------------------------------------------------------------------- In regard to any and all obligations the Principal presently owes and/or may owe your Bank as a result of transactions at any time until the date set forth above provided for in Article 1 of the Agreement on Bank Transactions which the Principal separately executed and delivered to your Bank, the Guarantor shall be jointly and severally liable with the Principal for the performance of all such obligations to the extent of the maximum amount set forth above, and the Guarantor hereby agrees to abide by the terms and conditions of the said Agreement on Bank Transactions as well as the terms set forth below with regard to the performance of any such obligations: 1. Even if your Bank changes or releases the security or other guarantees at your Bank's convenience, the Guarantor shall not claim exemption from the obligations. 2. The Guarantor shall not effect a setoff by any of the Principal's deposits or credits with your Bank. 3. If and when the Guarantor performs any obligations of this guarantee, the Guarantor shall not exercise any rights obtained from your Bank by subrogation without the prior approval of your Bank so long as transactions between the Principal and your Bank continue. Upon your Bank's demand, the Guarantor shall assign such rights and priority to your Bank without compensation. 4. In cases in which the Guarantor has given or gives in the future any other guarantee in regard to any of the Principal's obligations to your Bank, the total amount of the obligations guaranteed shall, unless otherwise agreed, be the aggregate of such guarantees, and this guarantee shall not affect any such other guarantees. The Principal: Signature: Nanometrics Japan Kabushiki Kaisha Full Name: Representative Director Fumio Kuruta Address: 34 Banchi Shinsen, Narita, Chiba The Guarantor: Signature: /s/ Vincent J. Coates Full Name: Nanometrics Inc. Address: 310 DeGuigne Drive Sunnyvale, CA 94086 USA (All questions that may arise within or without courts of law in regard to the meaning of the words, provisions and stipulations of this Agreement shall be decided in accordance with the Japanese text.) Cover Page To: Nanometrics Japan Co. Registration of Building Indication Certificate of Registration Yoshimoto Survey Office Land House survey administrator: Toshio Yoshimoto Address: 4-12-9 Chuo, Chiba-city Tel: ###-##-#### FAX: ###-##-#### Page 1 Registration Request Purpose of Registration: Building Indication registration Attachment Registration sub book: Building drawing Plane drawing of each floor: certificate of owner right Certificate of owner right: certificate of address Survey Documents June 25, Showa 61 (1986) Registrar: Nanometrics Japan Co. Address: 4-8-1 Chuo, Chiba city Fukoku Seimei Building Agent: Toshio Yoshimoto Address: 12-9 Chuo, Chiba city Page 2 Location: 34 Shin-Izumi, Narita city Number of the house: 34 Category of building: Factory and Office Structure: Steel Frame, roof of zinc coated steel plates, two floors Size of floors: The first Floor: 750.87 Square meters The second floor: 708.75 square meters Newly Built on May 7, Showa 61 (1986) Two pages drawings (not translated because of self explanatory) Date: _______________, 19_____ TO: THE MITSUBISHI BANK, LIMITED AGREEMENT ON BANK TRANSACTIONS I/We do hereby agree to the terms and conditions set forth in the following Articles in regard to my/our transactions with your Bank: Article 1 (Scope of Application) (1) I/We shall abide by this Agreement pertaining to the performance of my/our obligations arising from loss against Bills of Exchange (hereinafter referred to as "Bills") and Promissory Notes (hereinafter referred to as "Notes"), discounts of Bills and Notes, loans by deed, overdrafts, acceptances and guarantees, foreign exchanges, and any and all other transactions. (2) Even in cases in which your Bank has, through your Bank's transactions with any third party, acquired Bills and Notes drawn, endorsed, accepted, accepted by intervention, or guaranteed by me/us, I/we shall also abide by this Agreement pertaining to the performance of my/our obligations evidenced by such Bills and Notes. Article 2 (Obligations in Bills and Notes and Money Borrowed) In cases in which your Bank has granted me/us loans accompanied by Bills and Notes, your Bank may demand from me/us the payment of my/our obligations arising from the loans by exercising your Bank's rights either on the Bills and Notes or on the loans. Article 3 (Interest, Damages, etc.) (1) In regard to the stipulations concerning the rates of interest, discount charges, guarantee fees, handling commissions and rebates of any thereof, and also concerning the time and method of payment thereof, I/we shall agree, in the event of changes in the financial situation or any other reasonable and probable causes arising, to the revision of the stipulations to those in the range prevailing generally. (2) In case I/we fail to perform any obligations which I/we owe your Bank, I/we shall pay your Bank damages at the rate of 14% per annum for the amount payable. In this case, the calculation will be made on the actual number of days on a 365-day year basis. Article 4 (Security) (1) In cases in which a reasonable and probable cause necessitates the preservation of your Bank's rights, I/we shall upon demand forthwith furnish to your Bank such security or additional security, or such guarantors or additional guarantors as may be approved by your Bank. (2) Any and all security which has been furnished and that to be furnished in the future to your Bank for specific obligations shall constitute security that covers and secures not only such obligations, but also any and all other obligations which I/we at present or in the future may owe your Bank. (3) Your Bank may collect or dispose of security in the manner, at the time, and for the price, etc. generally deemed proper, not necessarily following the procedures prescribed by law, and deduct expenses from the proceeds and appropriate the remainder to the payment of my/our obligations regardless of the priority prescribed by law; and in the event any obligations still remain, I/we shall pay them forthwith. (4) In cases in which I/we fail to perform any obligations which I/we owe your Bank, your Bank may collect or dispose of my/our movables, Bills and Notes, and other instruments and securities in your Bank's possession; and in such cases, I/we shall agree to your Bank's handling the matter mutatis mutandis in the manner set forth in the preceding Paragraph. Article 5 (Acceleration of Payment) (1) In case any one of the following events occurs to me/us, any and all obligations I/we owe your Bank shall immediately become due and payable without any notice or demand, etc. from your Bank and I/we shall pay such obligations forthwith: 1. When I/we have become unable to pay debts or application or petition is submitted for bankruptcy, commencement of composition of creditors, commencement of corporate reorganization proceedings, commencement of company arrangement, or commencement of special liquidation. 2. When the Clearing House in observance of its rules takes procedures for suspension of my/our transactions with banks and similar institutions. 3. When order or notice of provisional attachment, preservative attachment or attachment is dispatched in respect of my/our or the guarantor's deposits and/or any other credits with your Bank. -2- 4. When my/our whereabouts become unknown to your Bank due to my/our failure to notify your Bank of change of my/our address or any other causes attributable to me/us. (2) In any of the following cases, upon your Bank's demand, any and all obligations I/we owe your Bank shall immediately become due and payable; and I/we shall pay them forthwith: 1. When I/we fail to pay any of my/our obligations to your Bank when it is due. 2. When property offered to your Bank as security is attached or public auction procedure is commenced in respect of such property. 3. When I/we violate the stipulations of any transactions with your Bank. 4. When the guarantor fails under any one of the items of the preceding Paragraph of this Paragraph. 5. In addition to each of the preceding items, when a reasonable and probable cause necessitates the preservation of your Bank's rights. Article 6 (Repurchase of Discounted Bills and Notes) (1) In cases in which I/we have had Bills and Notes discounted by your Bank and any one of the items in Paragraph (1) of the preceding Article occurs to me/us, then pertaining to all such Bills and Notes, or in cases in which the principal obligors of my/our discounted Bills and Notes fail to pay them on due dates or any one of the items in Paragraph (1) of the preceding Article occurs to the principal obligors, then pertaining to the Bills and Notes wherein such persons are the principal obligors, I/we shall assume as a matter of course the repurchasing obligations for the face value of my/our discounted Bills and Notes without any notice or demand, etc. from your Bank; and I/we shall pay them forthwith. (2) In cases other than those provided for in the preceding Paragraph, in which a reasonable and probable cause necessitates the preservation of your Bank's rights pertaining to the Bills and Notes which your Bank has discounted, I/we shall assume, upon your Bank's demand, the repurchasing obligations for the face value of my/our discounted Bills and Notes; and I/we shall pay them forthwith. (3) As long as I/we do not perform the obligations set forth in the preceding two Paragraphs, your Bank may exercise any and all rights as holder of the Bills and Notes. -3- Article 7 (Deductions in Accounts) (1) In cases in which I/we must perform any obligations owed to your Bank because they become due or because of acceleration of payment or because I/we have assumed the repurchasing obligations or because your Bank has acquired the right of claiming compensation from me/us or for any other causes, your Bank may set off against any such obligations at any time any of my/our deposits and/or any other credits with your Bank irrespective of the due dates of such deposits and/or other credits. (2) In cases in which your Bank is able to effect a setoff as mentioned in the preceding Paragraph, your Bank may also obtain withdrawals from my/our deposits in lieu of my/our doing so, and may appropriate any such withdrawals to payments or my/our obligations, omitting any advance notice and also not adhering to established procedures. (3) In cases in which your Bank makes any deductions in accounts according to the provisions of the preceding two Paragraphs, interest on my/our credits and obligations, discount charges and damages, etc. shall be calculated up to the date on which the actual calculation is made by your Bank for the purpose of deductions and the rate of interest and tariffs shall be in accordance with those fixed by your Bank; and with regard to the foreign exchange rate, the rate quoted at your Bank at the time when the actual calculation is made by your Bank shall apply. Article 7-2 (Ditto) (1) I/We may set off any obligations I/we owe your Bank against my/our deposits and/or any other credits with your Bank which have become due, even when such obligations have not yet become due. (2) When I/we effect a setoff under the provision of the preceding Paragraph with regard to the Bills and Notes which your Bank has discounted and which have not yet become due, I/we may do so upon assuming the repurchasing obligations for the face value of the discounted Bills and Notes; provided, however, that I/we may not effect a setoff with regard to Bills and Notes which your Bank has discounted and assigned to a third party. (3) With regard to my/our credits or obligations in foreign currency or in free yen, I/we may not, notwithstanding the provisions of the preceding two Paragraphs, effect a setoff until and unless they have become due and procedures required under foreign exchange laws and regulations have been completed for them. -4- (4) In cases in which I/we effect a setoff under the provisions of the preceding three Paragraphs, a notice of the setoff shall be made in writing and I/we shall affix my/our seal impression (or signature) which has previously been filed with your Bank to the certificate or passbook representing my/our deposits and/or other credits with your Bank which I/we have set off against my/our obligations and submit the same to your Bank forthwith. (5) In cases in which I/we affect a setoff, interest on my/our credits and obligations, discount charges and damages, etc. shall be calculated up to the date on which my/our notice of the setoff arrives at your Bank, and the rate of interest and tariffs shall be in accordance with those fixed by your Bank; and with regard to the foreign exchange rate, the rate quoted at your Bank at the time when the accrual calculation is made by your Bank for the purpose of setoffs shall apply. If there is an agreement providing for special charges payable when obligations are paid prior to their due dates, I/we shall abide by such agreement. Article 8 (Presentment and Delivery of Bills and Notes) (1) In cases in which there exists Bills and Notes pertaining to my/our obligations, and your Bank makes deductions in accounts as set forth in Article 7 without exercising your Bank's rights on the Bills and Notes, your Bank need not simultaneously return to me/us any such Bills and Notes. (2) In cases in which there exist Bills and Notes which your Bank returns to me/us as a result of deductions in accounts made by your Bank or me/us under the preceding two Articles, I/we shall appear at your Bank to receive such Bills and Notes without delay; provided, however, that if such Bills and Notes have not yet become due, your Bank may collect them without returning them to me/us. (3) In cases in which your Bank makes deductions in accounts as set forth in Article 7 by exercising your Bank's rights on the Bills and Notes, your Bank need not present nor deliver any such Bills and Notes to me/us in the cases enumerated below; and as for my/our receiving such Bills and Notes, the provisions of the preceding Paragraph shall apply mutatis mutandis: 1. When your Bank does not know my/our whereabouts, 2. When I/we have designated your Bank as the place at which Bills and Notes are made payable, 3. When it is deemed difficult to dispatch the Bills and Notes, 4. When it is deemed that presentment or delivery of the Bills and Notes cannot be made for unavoidable reasons as use for collection, etc. -5- (4) In cases in which any of my/our obligations which require immediate performance still exist after a deduction in accounts has been effected as provided for in the preceding two Articles, and there also exist obligors on the Bills and Notes besides me/us, your Bank may retain such Bills and Notes, and after collecting or disposing of them, your Bank may appropriate the proceeds to the payment of my/our obligations. Article 9 (Designation of Appropriation) In the event I/we made payments or your Bank made deductions in accounts as provided for in Article 7, and if in such cases the amount of such payments made by me/us or my/our deposits and any other creditors with your Bank are insufficient to liquidate all of my/our obligations, your Bank may appropriate the amount of such payments or such deposits and other credits to satisfy my/our obligations in such order and in such manner as your Bank deems proper and I/we shall raise no objection to such appropriation. Article 9-2 (Ditto) (1) In the event I/we effect a setoff in accordance with Article 7-2, and if in such case my/our deposits and any other credits with your Bank are insufficient to liquidate all of my/our obligations, I/we may appropriate such deposits and other credits to satisfy my/our obligations in such order and in such manner as I/we designate. (2) In the event I/we fail to designate the order and manner of appropriation under the preceding Paragraph, your Bank may appropriate my/our deposits and other credits with your Bank to satisfy my/our obligations in such order and in such manner as your Bank deems proper and I/we shall raise no objection to such appropriation. (3) In the event my/our designation under Paragraph (1) is likely to interfere with the preservation of your Bank's rights, your Bank may, upon lodging an objection thereto without delay, appropriate my/our deposits and other credits with your Bank to satisfy my/our obligations in such order and in such manner as your Bank designates taking into consideration whether or not the obligations are secured or guaranteed and if secured or guaranteed, the extent of coverage of such security or guarantee, the degree of difficulty of disposition of such security, their due dates, prospects for settlement of discounted Bills and Notes, etc. (4) In case of appropriation by your Bank under the preceding two Paragraphs, your Bank may designate the order and manner of appropriation on the assumption that my/our obligations which are in fact not due have become due or that I/we have assumed the repurchasing obligations with regard to the Bills and Notes which your Bank has discounted and which have not yet become due or that I/we have assumed in advance the obligations to compensate your Bank with regard to the acceptances and guarantees. -6- Article 10 (Assumption of Risks, Hold Harmless Clause, etc.) (1) In cases in which Bills and Notes which I/we have drawn, endorsed, accepted, accepted by intervention or guaranteed, or instruments which I have furnished to your Bank are lost, destroyed, damaged or delayed in arrival due to unavoidable circumstances such as incidents, calamities, accidents during transit, etc. I/we shall pay my/our obligations as recorded on your Bank's books, vouchers, etc.; and further, upon your Bank's demand, I/we shall forthwith furnish your Bank with substitute Bills and Notes or instruments. I/We shall make no claim whatsoever against your Bank with regard to losses and damages arising in such cases. (2) In cases in which security which I/we have furnished to your Bank is lost or damaged due to unavoidable circumstances as set forth in the preceding Paragraph, I/we shall make no claim whatsoever against your Bank. (3) Even if your Bank's rights on Bills and Notes are ineffective due to lack of legal requirements in the Bills and Notes, or due to invalidating entries thereon, or if your Bank's rights on the Bills and Notes lapse due to inadequacy in the procedures for preservation of your Bank's rights, I/we shall be liable for the face value of such Bills and Notes. (4) In transactions in which your Bank has deemed my/our seal impression (or signature) genuine after checking with reasonable care the seal impression (or signature) on Bills and Notes or instruments against my/our seal impression (or specimen signature) filed with your Bank, I/we shall bear any losses and damages arising from forgery, alteration, wrongful use of Bills and Notes, instruments or seals (or signatures), and shall be liable in accordance with the terms of any such Bills and Notes or instruments. (5) I/We shall bear the expenses incurred in exercising or preserving your Bank's rights against me/us, or in collecting or disposing of any security; and I/we shall also bear any expenses required in the event I/we request your Bank to cooperate with me/us for the preservation of my/our rights. Article 11 (Changes in Matters Filed) (1) In cases of a change in the matters filed with your Bank such as my/our seal (or signature), name, trade name, representative, address, etc., I/we shall forthwith notify your Bank thereof in writing. (2) In case any notice given by your Bank or any documents, etc. dispatched by your Bank are delayed or fail to reach me/us because of my/our failure to notify your Bank in accordance with the preceding Paragraph, the notices or documents, etc. shall be deemed to have arrived at the time they normally should have arrived. -7- Article 12 (Report and Investigation) (1) Upon your Bank's demand, I/we shall forthwith submit to your Bank reports pertaining to my/our assets and liabilities, management or the state of business; and I/we shall also furnish assistance necessary for the investigation thereof. (2) In cases in which material change has occurred or is likely to occur pertaining to my/our assets and liabilities, management or the state of business, I/we shall forthwith submit to your Bank reports thereof even in the absence of your Bank's demand. Article 13 (Applicable Offices) I/We agree that all of the terms and conditions of this Agreement shall apply equally to all of my/our transactions with your Bank's head office and branch offices. Article 14 (Jurisdiction by Agreement) In the event the institution of a lawsuit in connection with a transaction covered by this Agreement becomes necessary, I/we shall agree that the Court having the jurisdiction in the locale in which the head office or __________________ branch office of your Bank is situated shall be the competent Court. Signature: Full Name: Address: (All questions that may arise within or without courts of law in regard to the meaning of the words, provisions and stipulations of this Agreement shall be decided in accordance with the Japanese text.) -8- EX-21 13 SUBSIDIARIES OF REGISTRANT Exhibit 21 SUBSIDIARIES OF REGISTRANT Nanometrics Japan Ltd. Nanometrics Korea Ltd. Nanometrics Taiwan Branch Office EX-23 14 INDEPENDENT AUDITORS' CONSENT EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE We consent to the incorporation by reference in Registration Statement Nos. 33- 8518, 33-8519, 33-43913 and 333-33583 of Nanometrics Incorporated on Form S-8 of our report dated February 13, 1998 (March 30, 1998 as to the last paragraph of Note 12), appearing in this Annual Report on Form 10-K of Nanometrics Incorporated for the year ended December 31, 1997. Our audits of the consolidated financial statements referred to in our aforementioned report also included the consolidated financial statement schedule of Nanometrics Incorporated, listed in Item 14(a)(2). This consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. DELOITTE & TOUCHE LLP San Jose, California March 30, 1998 EX-27.1 15 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 3,656 9,595 10,638 413 7,138 33,783 5,188 3,001 36,243 5,147 2,568 0 0 13,151 15,377 36,243 32,767 36,657 12,092 15,724 11,801 0 110 9,382 3,625 5,757 0 0 0 5,757 0.69 0.65
EX-27.2 16 RESTATED FINANCIAL DATA SCHEDULE
5 1,000 12-MOS 12-MOS 3-MOS 6-MOS 9-MOS DEC-31-1995 DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996 JAN-01-1995 JAN-01-1996 JAN-01-1995 JAN-01-1996 JAN-01-1996 DEC-31-1995 DEC-31-1996 MAR-31-1996 JUN-30-1996 SEP-30-1996 3,625 1,725 2,943 1,680 957 4,458 6,657 4,753 6,072 8,127 7,947 11,519 7,877 10,976 9,889 380 419 380 378 404 3,955 5,078 4,308 4,976 4,998 22,102 27,090 22,181 25,476 25,898 6,324 5,849 6,176 6,096 6,276 3,249 3,249 3,420 3,451 3,520 25,167 29,964 25,097 28,308 28,936 3,764 4,477 3,432 5,111 4,872 3,528 3,296 3,076 3,646 3,519 0 0 0 0 0 0 0 0 0 0 10,983 11,833 11,053 11,156 11,168 6,591 10,227 7,295 8,199 9,192 25,167 29,964 25,097 28,308 28,936 18,117 24,603 5,554 11,545 18,026 22,759 30,336 7,068 14,625 22,364 8,189 10,109 2,369 4,902 7,491 11,595 14,197 3,372 6,950 10,537 8,523 9,926 2,251 4,753 7,263 0 0 0 0 0 152 92 0 0 0 3,465 6,657 1,517 3,111 4,866 (812) 2,664 683 1,316 2,044 4,277 3,993 834 1,795 2,822 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 4,277 3,993 834 1,795 2,822 0.56 0.50 0.11 0.22 0.35 0.52 0.47 0.10 0.21 0.33
EX-27.3 17 RESTATED FINANCIAL DATA SCHEDULE
5 1,000 3-MOS 6-MOS 9-MOS DEC-31-1997 DEC-31-1997 DEC-31-1997 JAN-01-1997 JAN-01-1997 JAN-01-1997 MAR-31-1997 JUN-30-1997 SEP-30-1997 1,969 2,764 1,798 7,639 8,639 9,622 10,334 8,811 10,838 415 419 416 5,556 6,316 6,250 27,428 30,329 30,427 5,607 5,956 5,717 3,201 3,410 3,324 30,099 33,159 33,094 3,926 5,016 3,826 2,978 3,143 2,888 0 0 0 0 0 0 11,844 11,990 12,132 11,321 12,904 14,211 30,099 33,159 33,094 7,301 15,042 23,475 8,259 16,958 26,374 2,737 5,639 8,658 3,600 7,376 11,383 2,573 5,477 8,473 0 0 0 0 0 85 2,165 4,291 6,768 892 1,645 2,618 1,274 2,646 4,150 0 0 0 0 0 0 0 0 0 1,274 2,646 4,150 0.15 0.32 0.50 0.15 0.31 0.47
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