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UNITED STATES
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 [NO FEE REQUIRED]
For the fiscal year ended October 31, 1996
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
COMMISSION FILE NUMBER 0-22366
CREDENCE SYSTEMS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-2878499
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
215 FOURIER AVENUE, FREMONT, CALIFORNIA 94539
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (510) 657-7400
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS: NAME OF EACH EXCHANGE ON WHICH REGISTERED
- -------------------- -----------------------------------------
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, $0.001
par value
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 a 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 the 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. [X]
The aggregate market value of voting stock held by non-affiliates of the
Registrant, as of January 10, 1997 was approximately $452,159,000 (based upon
the closing price for shares of the Registrant's common stock as reported by the
Nasdaq National Market for the last trading date prior to that date). Shares of
common stock held by each officer, director and holder of 5% or more of the
outstanding common stock have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
On January 10, 1997, approximately 21,790,778 shares of the Registrant's
common stock, $0.001 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 1997 Annual Meeting of
Stockholders to be held on March 26, 1997 are incorporated by reference into
Part III.
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PART I
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ITEM 1. BUSINESS
Credence Systems Corporation (the "Company" or "Credence") designs,
manufactures, sells and services automatic test equipment ("ATE") used in the
production of semiconductors. The Company serves a broad spectrum of the
semiconductor industry's testing needs through a wide range of products that
test digital logic, mixed-signal and non-volatile memory semiconductors.
Credence utilizes its proprietary technologies to design products that provide a
lower total cost of ownership than many competing products while meeting the
increasingly demanding performance requirements of today's ATE market. The
Company's products are primarily designed to test semiconductors that are
produced in high volume. The Company's customers include major semiconductor
manufacturers as well as assembly and test services companies. In March 1995,
through the acquisition of EPRO, the Company expanded its product offerings to
include systems that test a broad range of non-volatile memory semiconductors.
Credence was incorporated in California in March 1982 to succeed to the
business of a sole proprietorship and was reincorporated in Delaware in October
1993. The term "Credence" or the "Company" includes, when the context so
requires, Credence Systems Corporation, its subsidiaries and its California
predecessor corporation, the Semiconductor Test Systems Division (the "STS
Division") of Tektronix, Inc., which the Company acquired in December 1990, and
Axiom Technology Corporation ("Axiom"), ASIX Systems Corporation ("ASIX") and
EPRO and EPRO's subsidiary, which the Company acquired through mergers in March
1988, October 1989 and March 1995, respectively./1/
BACKGROUND
The price of semiconductors once limited their use to high cost military
and industrial computing applications. Dramatic advances in semiconductor
process technology have improved the performance and lowered the average selling
prices ("ASPs") of semiconductors to levels that now support their use in a wide
range of office, consumer, automotive, communications, industrial and other
products. In order to maintain or improve gross margins as semiconductor ASPs
decline, semiconductor manufacturers are constantly seeking ways to reduce
manufacturing costs.
Testing is a principal element in the cost structure of high volume
production of semiconductors. As a result of improved efficiencies in wafer
fabrication, test costs have become a higher percentage of the total cost of
manufacturing. This shift in cost structure has changed the traditional criteria
for selection of ATE. Although performance was the dominant factor in the
selection of ATE in the past, the Company believes that economic considerations
have assumed much greater importance to semiconductor manufacturers. Purchasers
of ATE now examine more carefully the total cost of ownership of ATE. Total cost
of ownership includes the initial purchase price of the tester, as well as the
tester's reliability, flexibility, size, power and air conditioning
requirements, upgradeability and maintenance costs, including spare parts.
Traditionally, semiconductor die were minimally tested at wafer probe and
incurred rigorous performance testing to full specification only at the
completion of final packaging. Today, assembly and packaging has become
increasingly expensive compared with the cost of the die, such that their costs
may exceed the cost of the die itself. This trend has influenced semiconductor
manufacturers to shift performance testing increasingly toward wafer probe. By
subjecting devices to performance testing earlier in the manufacturing process,
defective die are detected and eliminated before assembly and packaging costs
are incurred.
Increased facility costs and the trend toward performance testing at wafer
probe have led to the increased importance of smaller testers in the
semiconductor manufacturing process. Performance testing at wafer probe requires
that the device under test be located in close physical proximity to the
measuring circuits of the tester in order to minimize potential signal
distortions that can negatively impact testing yields. Smaller testers can more
easily be placed in close physical proximity to such circuits. In addition,
wafer probe test typically occurs in a clean room where potential contaminants
must be continually removed and temperatures kept constant. These special
maintenance requirements make clean rooms expensive to operate. Smaller testers
occupy less floor space and therefore assist in reducing clean room costs. In
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/1/ "Credence Systems Corporation," "SC212," "STS," "Vista LT," "VistaLOGIC,"
"VistaVISION," "Logic100," and "Duo" are the trademarks of the Company. This
Annual Report on Form 10-K also includes trademarks of other companies.
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addition, smaller testers that consume less power generally have reduced air
conditioning requirements and produce fewer contaminants.
For over 20 years, emitter-coupled logic ("ECL") has been the conventional
process technology used by the Company and others for the integrated circuits
used in ATE due to its speed, repeatability and precision. ECL technology,
however, results in low functionality per chip and requires continuous power. As
a result, conventional ATE systems generally are large, expensive and require
significant electrical power to operate.
Another process technology commonly used in the manufacture of
semiconductors is complementary metal oxide semiconductor ("CMOS"). As compared
to ECL, CMOS technology allows higher functionality for a given chip size and
requires less power to operate. Some ATE manufacturers have used a combination
of ECL and CMOS ("BiCMOS") to lower the cost of ATE by reducing the use of ECL.
The production of ATE based exclusively on CMOS technology, however, had
been limited by the inability of CMOS to meet the timing and measurement demands
of semiconductor testing. Although the speed of CMOS was acceptable, its timing
repeatability was not. This problem results from the tendency of CMOS circuits
to experience timing drift as a function of temperature variation. To fully
benefit from the economic and other advantages of CMOS technology, the challenge
has been to minimize this drift characteristic in order to produce
semiconductors for ATE that meet the performance requirements of semiconductor
testing.
THE CREDENCE SOLUTION AND STRATEGY
Credence has developed proprietary CMOS stabilization methods that minimize
the drift characteristic of CMOS and enable the Company to produce testers that
are smaller than those based upon ECL or BiCMOS technology and that provide a
lower total cost of ownership than many competing products currently available
while meeting the performance demands of today's ATE market. CMOS technology
allows the circuits used in Credence's testers to be reduced, or "scaled" down
in size as IC process technology improves, resulting in higher performance and
freeing space on the die for additional functionality. This scalability feature
enables the Company to develop and manufacture smaller, higher performance
integrated circuits for use in its testers at what Credence believes to be a
lower cost, and with a shorter development cycle, than traditional process
technologies.
Credence's objective is to become the leading supplier of cost-effective
ATE for production testing of integrated circuits used in high volume
applications. The Company's business strategy incorporates the following key
elements:
. Technology Leadership. The Company believes that its proprietary CMOS
stabilization technology enables the development of ATE that is
designed to meet the performance and cost of ownership requirements of
semiconductor manufacturers and assembly and test services companies.
In addition, the Company believes the scalability of this technology
will allow it to offer new products and enhancements in a shorter time
and at a lower cost than many of its competitors that base their
products on traditional non-scaleable architecture.
Lower Total Cost of Ownership. The Company seeks to provide ATE to
its customers at a lower total cost of ownership than many competing
products currently available while meeting the performance
requirements of its customers. The Company believes that the system
price, reliability, flexibility, size, power and air conditioning
requirements, upgradeability and maintenance costs, including spare
parts, of its testers enable its customers to more cost effectively
test integrated circuits. Credence's proprietary CMOS stabilization
technology is integral to the successful implementation of this
strategy.
. Diverse, High-Volume Markets. Credence's products target the testing
of digital logic, mixed-signal and non-volatile memory devices that
are used in a broad range of growing end-user market segments. The
Company's products are designed to test semiconductors that are
manufactured in high volume and are used in a variety of applications
such as automobiles, appliances, personal computers, personal
communications products, networking products, digital televisions and
multimedia hardware.
. Worldwide Technical Support and Customer Service. As semiconductor
manufacturers expand their operations worldwide, they require that
their ATE suppliers have the capability to provide global support and
service. To
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meet this requirement, Credence utilizes a combination of direct
sales, service and support personnel and a broad network of
independent distributors located in close proximity to major customer
sites. Credence and its distributors currently maintain locations
throughout the world to service and support Credence's customers.
PRODUCTS
Credence currently offers a wide variety of products that test digital
logic, mixed-signal and non-volatile memory integrated circuits. Digital logic
semiconductors produce discrete "on" and "off" logical sequences that control
functions, store data, retrieve data and move and manipulate data at high rates
of speed. Examples of digital logic semiconductors include logic devices such as
microcontrollers. Certain digital devices which store and retrieve data are
memory semiconductors. Non-volatile memory semiconductors retain their data when
the power is turned off. Mixed-signal semiconductors combine both digital and
analog functions. Analog semiconductors control external functions such as
motors by producing continuous varying voltage or current. When these analog
functions are integrated onto a digital integrated circuit, the resulting device
is considered a mixed-signal device.
The Company's CMOS-based products, the SC series and the Vista series
testers, are designed to test high speed devices used in applications such as
networking and portable computing as well as multimedia, digital television,
high-definition television and personal communications. The Company's STS mixed-
signal products test certain semiconductors used principally in automotive and
telecommunications applications. The Company's memory products test non-volatile
memory devices, including ROM, EPROM, EEPROM and FLASH memories used in high
volume applications in the consumer, automotive and telecommunications markets.
The following table sets forth the Company's current product offerings,
their features and examples of typical devices tested by each product. Included
in certain of the basic features are the anticipated cycle speed in megahertz
("MHz"), timing accuracy in either picoseconds ("ps") or nanoseconds ("ns"), the
number and characteristics of the pins and the density in megabits ("mb") of the
device that can be tested:
<TABLE>
<CAPTION>
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PRODUCT SERIES MODELS BASIC FEATURES TYPICAL DEVICES
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<S> <C> <C> <C> <C>
SC SC 212 50 - 100 MHz Microcontrollers, ASSPs, DSPs
SC Micro 64 - 304 Pins and FPGAs
DIGITAL + 350 ps accuracy
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Vista LOGIC 50 - 100 MHz Microprocessors, RISC circuits,
Logic100 32 - 512 Pins PLDs, FPGAs, ASICs and ASSPs
+ 290ps-200ps accuracy
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Vista VISION Same as Vista digital RAMDACs, graphic palettes and
DUO series, but configured with other multimedia devices, mass
DUO-SE 64 analog pins in place of storage, DSPs, ASICs, Datacom,
MIXED- 64 digital pins and specialty devices
SIGNAL DUO-SE - 50 MHz
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STS 3500 10 - 30MHz Codecs, converters, power
5000 24 - 48 Pins devices, automotive modules and
+ 1ns accuracy telecom devices
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NON- EPRO 142/AX 10 MHz full function ROM, EEPROM, EPROM, and
VOLATILE 128mb FLASH
MEMORY + 2ns
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WORKCELL Centaur Centaur Uses an SC Micro Microcontrollers, ASSPs, DSPs
Zero footprint tester and FPGAs
Zero changeover time
Multiple package types
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</TABLE>
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Digital Products
SC The model SC 212 was first shipped in 1992 and incorporates one of the
Company's two proprietary CMOS stabilization methods. This product requires
approximately 30 square feet of floor space and 4 kilowatts of power. The SC
Micro is a cost reduced, higher reliability version of the SC 212. This new
system offers our customers a full capability test system at a price as low as
$2K per digital pin channel. This per channel price has previously been
available only in test systems with reduced functionality - requiring users to
compromise the quality of their device testing. The SC Micro retains the
customer's test quality while continuing to lower their test costs. The
purchase price of these testers typically range from $350,000 to $850,000
depending upon configuration.
Vista The VistaLOGIC was introduced by the Company in 1993 and evolved
from its predecessor, the Vista LT. The Vista LT was first shipped by Tektronix
in 1987 and was acquired by the Company in 1990. The Logic100 was introduced by
the Company in 1994 and is the 100 Mhz version of the VistaLOGIC. The VistaLOGIC
and Logic100 incorporate one of the Company's proprietary CMOS stabilization
methods. The purchase prices of the Vista digital testers typically range from
$600,000 to $1.5 million, depending upon configuration.
Mixed-Signal Products
Vista The VistaVISION, an adaptation of the VistaLOGIC, was first shipped
by the Company in 1992, and has been enhanced to test both digital and mixed-
signal devices. The Duo is the 100 MHz version of the VistaVISION and was
introduced by the Company in 1994. The VistaVISION and the DUO incorporate one
of the Company's proprietary CMOS stabilization methods. The Duo SE is a new low
end addition to the Duo product line. It provides a lower cost, 50 MHz version
of the industry's leading Digital Mixed Signal test system family. The Duo SE
is fully compatible with other members of the Duo family and supports the same
set of mixed signal instrumentation. The purchase price of these testers
typically range from $700,000 to $2.5 million, depending upon configuration.
STS The STS 3500 mixed-signal tester currently offered by the Company
evolved from predecessor mixed-signal testers that were introduced by Axiom, a
mixed-signal tester manufacturer acquired by the Company in 1988. The STS 5000
is the higher pin count version of the STS 3500. The purchase prices of these
mixed-signal testers typically range from $350,000 to $750,000, depending upon
configuration.
Non-Volatile Memory Products
EPRO The Company's EPRO product line includes the model 142/AX and EDGE
testers. The model 142/AX was first shipped by EPRO in 1982. The EDGE is the
follow-on version of the model 142/AX with additional testing sites. The EDGE
was first shipped by EPRO in 1991. The purchase price of these non-volatile
memory testers typically ranges from $30,000 to $80,000, depending upon
configuration.
Workcell Products
Centaur In 1996, the Company established the Workcell product group. This
group's charter is to provide complete test solutions that meet the value
expectations of our customers, enabling Credence to compete effectively in the
IC manufacturing production environment. The first embodiment of this new
process is Centaur. The combination of our SC Micro product and a new handling
system developed by the MCT Corporation, Centaur offers our customers an
unprecedented level of integration between a test system and the device handling
equipment required for volume production. Centaur provides our customers a
unique set of advantages including: a true zero footprint test system, high
reliability, high fidelity electrical interface, multiple package types with
zero changeover time, and single point control of both handler and test system.
Centaur sets the standard in the industry for factory integration which will
become an important criteria by which our customers select their test system
suppliers.
CUSTOMERS, MARKETS AND APPLICATIONS
Credence targets digital logic, mixed-signal and non-volatile memory device
manufacturers that serve a broad range of growing end-user market segments.
These customers manufacture semiconductors in high volume for use in
applications
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such as automobiles, appliances, personal computers, personal communications
products, networking products, digital televisions and multimedia hardware.
In addition to marketing its products to major semiconductor manufacturers,
the Company has developed relationships with numerous assembly and test services
companies. Semiconductor manufacturers increasingly utilize these subcontractors
as a means of lowering their fixed production costs, thus minimizing the effects
of cyclicality inherent in the semiconductor industry. As a result, these
assembly and test services companies have become an increasingly important
segment of the ATE market.
The Company believes that the Company's success depends in large part upon
the success of its major customers. The loss of or any reduction in orders by a
significant customer (including the potential for reductions in orders by
assembly and test services companies which that customer may utilize), including
reductions due to market, economic or competitive conditions in the
semiconductor industry or in other industries that manufacture products
utilizing semiconductors may adversely affect the Company's business, financial
condition or results of operations as it has recently and is expected to do. The
Company's ability to increase its sales in the future will depend in part upon
its ability to obtain orders from new customers as well as the financial
condition and success of its customers and the general economy. There can be no
assurance that the Company's sales will not decrease in the future or that the
Company will be able to retain existing customers or to attract new ones.
For information on the Company's geographic data and major customers, see
Note 3 to the Consolidated Financial Statements included elsewhere herein. The
Company's international sales are primarily denominated in United States
dollars. The Company anticipates that its international business will continue
to account for a significant portion of net sales in the foreseeable future.
The Company schedules production of its systems based upon order backlog
and order forecast. The Company includes in its backlog only those customer
orders for systems (including upgrades) for which it has accepted purchase
orders and assigned shipment dates within the following twelve months. The
majority of the Company's orders are subject to cancellation or rescheduling by
the customer with limited or no penalties. The Company's backlog at any
particular date may not necessarily be representative of actual sales for any
succeeding period due to orders received for systems to be shipped in the same
quarter, possible changes in system delivery schedules, cancellation of orders
and potential delays in system shipments. As of October 31, 1996, the Company's
order backlog for systems (exclusive of orders for spare parts and service and
support) was approximately $ 49.4 million, as compared with $70.6 million as of
October 31, 1995.
SALES, SERVICE AND SUPPORT
The Company currently markets and sells its products in the United States
principally through its direct sales organization, with direct sales employees
in 12 locations. Outside the United States, the Company utilizes both direct
sales employees and a broad network of distributors, with direct sales employees
and distributors in over 15 countries. The Company sold its sales and service
subsidiaries in the United Kingdom and Germany in February 1994 and the Company
utilizes the purchaser of such operations as its primary distributor in Europe.
The Company and its distributors have sales and support centers located in
the United States, Europe, Israel, Taiwan, Korea, China, Japan, Singapore and
Hong Kong from which both direct Credence personnel and independent sales and
service representatives sell and support the equipment. The Company believes
that field support is critical to its customers. Support encompasses many of the
components of the total cost of ownership for ATE. Credence seeks to develop
long-term relationships with major ATE customers through extensive support
consisting of teams of professional sales, applications, training and service
personnel. These personnel are located in close physical proximity to key
customer sites in order to provide the required support in a timely fashion. The
sales process includes consultations with customers to help them purchase the
most cost-effective equipment for their needs, to help develop custom test
programs to optimize production throughput, to assist in long-term self-
sufficiency through training of customer test engineering personnel and to
provide the service capacity and preventive maintenance to reduce downtime for
customers' systems. Customer support includes field personnel and in-house
applications personnel who work closely with design engineering groups to modify
existing equipment to meet the latest performance requirements.
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In Japan, the Company has a wholly-owned subsidiary that provides sales and
service to its customers. In addition, the Company has a relationship with
Innotech, Inc., the distributor of the Company's products in Japan. In March
1996, the Company established a service and support subsidiary in Korea. The
Company also has a relationship with Itek, Inc., the distributor of the
Company's products in Korea.
The Company's standard policy is to warrant its new systems against defects
in design, materials and workmanship for one year for parts and labor. The
Company offers its customers additional support after the warranty period in the
form of maintenance contracts for specified time periods. Such contracts include
various options such as board replacement, priority response, planned preventive
maintenance, scheduled one-on-one training, daily on-site support and monthly
system and performance analysis.
RESEARCH AND DEVELOPMENT
The ATE market is subject to rapid technological change and new product
introductions. The Company's ability to be competitive in this market will
depend in significant part upon its ability to successfully develop and
introduce new products, enhancements and related software tools on a timely and
cost-effective basis. This will enable customers to integrate such products into
their operations as they begin volume manufacturing of the next generation of
semiconductors.
Credence has pursued a technology acquisition strategy to complement its
internal research and development efforts. In 1988, the Company completed its
acquisition of Axiom, which added mixed-signal testing capability. In 1989, the
Company completed its acquisition of ASIX, which added one of the two
proprietary CMOS stabilization methods. In 1990, the Company acquired the STS
Division of Tektronix, which added the second proprietary CMOS stabilization
method. In 1993, the Company acquired various patents from Tektronix. In March
1995, the Company acquired EPRO, which added non-volatile memory testing
capability.
Each of the stabilization methods acquired by Credence provides a different
solution to the tendency of CMOS to experience timing drift as a function of
temperature variation. The first proprietary solution uses a timing phase
detection circuit combined with a voltage control mechanism to compensate for
thermal, voltage and process instability. The second uses a unique combination
of counters and heating circuits to provide thermal stability. These methods
allow the Company's CMOS-based integrated circuits to achieve the timing
repeatability necessary to meet the performance requirements of ATE and to
realize the economic and other advantages of CMOS technology over ECL
technology. CMOS circuits use less die space than those based on ECL as the
circuits require less power and can be more closely packed together.
Credence believes that the non-volatile memory technology acquired from
EPRO may facilitate the development of products and enhancements for testing
devices that combine digital, mixed-signal and memory circuits on a single chip.
System-on-a-chip testing with a single insertion is designed to reduce the
number of systems and process steps required to test specifications while
increasing throughput.
Credence's ongoing research and development efforts also include focusing
on increased cycle speed and pin counts of its testers. In addition, the Company
is working on a software development program that is intended to provide for
upward compatibility through the Company's products. The Company currently
intends to continue to invest significant resources in the development of new
products and enhancements for the foreseeable future.
Research and development expenses were $ 35.4 million, $24.9 million and
$17.3 million in fiscal 1996, 1995 and 1994, respectively.
PROPRIETARY RIGHTS
The Company currently holds 19 United States patents, which expire
beginning in June 1997 through April 2014, and currently has 11 additional
patent applications in the United States. In addition, the Company currently has
28 foreign patents, which expire beginning in August 1999 through September 2011
and currently has 12 additional foreign patent applications. The two United
States patents acquired from ASIX and Tektronix underlying the Company's
proprietary CMOS stabilization methods expire in February 2007 and December
2007, respectively. There can be no assurance that pending patent applications
will be approved or that any patents will provide competitive advantages for the
Company's products or will not be challenged or circumvented by competitors.
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The Company has granted a license to Tektronix with respect to 16 United
States patents, 29 foreign patents and 10 foreign patent applications and
certain other intellectual property rights (collectively, the "Tektronix
Rights"), including a patent covering one of the Company's proprietary CMOS
stabilization technologies, that were assigned to the Company by Tektronix in
1993. Tektronix has a worldwide, perpetual, irrevocable, non-exclusive, royalty
free, fully-paid, sublicensable and transferable license to the Tektronix
Rights. Tektronix may grant rights under the Tektronix Rights to make, use, sell
or otherwise distribute automatic test equipment for testing integrated circuits
only to Sony-Tektronix, a Tektronix joint venture affiliate that does not
currently offer production ATE, and to a successor-in-interest to Tektronix.
Tektronix may not grant or assign such rights to any other party. In addition,
Tektronix may not knowingly sell components incorporating the Tektronix Rights
to any other party. The Company and Tektronix have granted to each other a
worldwide, perpetual, irrevocable, non-exclusive, royalty free, fully-paid,
sublicensable and transferable license to all improvements, enhancements,
modifications or derivative works created before August 1996 ("Improvements") of
intellectual property that was licensed or assigned pursuant to a Technology
Agreement dated December 31, 1990, as amended on August 12, 1993, including the
Tektronix Rights, to make, use and sell ATE for testing integrated circuits.
Tektronix's license to the Improvements is subject to the same restrictions as
its license to the Tektronix Rights.
In 1994, the Company granted a royalty bearing license to Micro Component
Technology, Inc. ("MCT") with respect to 3 United States patents unrelated to
the Company's ATE products in exchange for a worldwide, irrevocable, non-
exclusive, royalty-free license on United States Patent No. 4,517,512 issued to
MCT for an "Integrated Circuit Test Apparatus Test Head." These three United
States patents and their corresponding foreign patents and foreign patent
applications were subsequently abandoned in August 1994.
The Company attempts to protect its intellectual property rights through
patents, trade secrets and other measures. There can be no assurance that others
will not independently develop substantially equivalent proprietary information
and techniques or otherwise gain access to the Company's trade secrets and other
intellectual property rights or disclose such technology or that the Company can
meaningfully protect its trade secrets or other intellectual property rights.
There can be no assurance that any patent owned by the Company will not be
invalidated, circumvented or challenged, that the rights granted thereunder will
provide competitive advantages to the Company or that any of the Company's
pending patent applications will be issued. Furthermore, there can be no
assurance that others will not develop similar products, duplicate the Company's
products or design around the patents owned by the Company. In addition,
litigation may be necessary to enforce the Company's patents and other
intellectual property rights, to protect the Company's trade secrets, to
determine the validity and scope of the proprietary rights of others, or to
defend against claims of infringement or invalidity.
The Company and, to the Company's knowledge, one of its customers, was
notified of a claim that certain products, which may include products supplied
by the Company, may infringe intellectual property rights of a third party.
There are no pending lawsuits against the Company regarding any possible
infringement claims arising from such notification.
The European patent application for the proprietary CMOS stabilization
method that was previously owned by Tektronix and subsequently assigned to the
Company was abandoned by Tektronix after the patent examiner cited certain prior
art. This prior art was not referenced in the corresponding United States patent
application. Based upon its review to date of the cited prior art and the
European patent examiner's objections, the Company believes that such prior art
is unlikely to affect the validity or scope of the claims of the United States
patent that was previously owned by Tektronix.
The prior art may, however, render invalid or significantly narrow the
scope of certain claims set forth in the United States patent covering the
Company's second proprietary CMOS stabilization method. The European patent
examiner referred to this prior art in the European patent application covering
this CMOS stabilization method. The European patent application has been
approved, but with significantly narrower claims than the United States patent.
This prior art was not referenced in the corresponding United States patent.
Based on its review of its current products, the Company believes that this
patent will continue to be valuable to the Company in preventing imitation of
the Company's products covered by this patent. Additionally, in mid-1992, a
third party suggested that certain claims set forth in this patent might be
invalid over other alleged prior art. The Company believes that the prior art
alleged by the third party is less relevant than the prior art referenced by the
European patent examiner. However, there can be no assurance that any of the
aforementioned prior art or other prior art will not be successfully asserted
and used to invalidate or narrow the scope of any claim of the United States
patents or the corresponding Japanese patent applications for the Company's CMOS
stabilization methods or any other patents or patent applications of the
Company.
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The Company filed suit against Micro Component Technology, Inc. ("MCT") in
the United States District Court for the Northern District of California on July
6, 1994. The complaint alleged that MCT was infringing United States Letters
Patent No. 4,724,378 owned by the Company for a "Calibrated Automatic Test
System" (the "'378 Patent"). The Company sought both injunctive relief and
monetary damages. On January 4, 1995, MCT answered the complaint, denying
infringement and alleging as a defense that the '378 Patent is invalid and
unenforceable. MCT further alleged that it had sold all of its rights to the
allegedly infringing product to Megatest Corporation ("Megatest"). Accordingly,
on January 30, 1995, the Company filed a motion to amend its complaint to add
Megatest as a defendant, seeking injunctive relief and monetary damages. On
March 22, 1995, the Court granted the Company's motion to amend its complaint.
Megatest answered the amended complaint on April 24, 1995, denying the claim of
infringement and asserting a counterclaim for declaratory judgment, declaring
that it has not infringed the '378 Patent and that the '378 Patent is invalid
and unenforceable. On May 25, 1995, Credence and MCT executed a settlement
agreement pursuant to which MCT paid a royalty for past sales and agreed to the
entry of an injunction against it regarding the '378 Patent. Credence and
Megatest subsequently negotiated a settlement, and settlement documents were
transmitted for execution in November 1995. In December 1995, Megatest rejected
the settlement and refused to execute the settlement documents. On February 21,
1996, the Company filed a motion to enforce the terms of a negotiated settlement
between the Company and Megatest, which motion was denied by the Court after a
hearing on April 12, 1996. The Company thereafter amended its complaint with
leave of Court to assert a claim against Megatest for breach of the settlement
agreement to which the Company contends the parties agreed. Accordingly,
Credence is now pursuing its breach of settlement agreement claim and its patent
infringement claim against Megatest. Trial on Credence's settlement agreement
claims and patent related claims has been bifurcated, such that the former will
be tried first. Trial is currently scheduled to commence in June 1997.
On June 11, 1996, a lawsuit was commenced against the Company by Megatest
in the United States District Court for the Northern District of California, in
an action styled Megatest Corporation v. Credence Systems Corporation, Civil
Action No. C-96-20472. The complaint alleges that the Company has, in
connection with its sales of the Vista and Duo Series Testers, infringed United
States Letters Patent Number 4,806,852 (the "'852 Patent"), issued on February
21, 1989, which patent is directed to an "Automatic Test System With Enhanced
Performance Of Timing Generators." The complaint includes a claim for injunctive
relief, as well as claims for an accounting, lost profits and damages, an
assessment of interest and costs, and an award of attorneys' fees pursuant to 35
U.S.C. (S)285. The Company answered the complaint on July 3, 1996, denying the
claim of infringement, and asserting a counterclaim for a declaratory judgment
that it has not infringed the '852 Patent and that the '852 Patent is invalid
and unenforceable. The parties have recently commenced fact discovery, which is
not expected to end until January 5, 1998. Trial is scheduled for June 1, 1998.
Based upon information known at this time, the Company believes that it has
meritorious defenses to Megatest's claims.
On June 11, 1996, a lawsuit was commenced against the Company by Teradyne,
Inc. ("Teradyne") in the United States District Court for the Central District
of California, in an action styled Teradyne, Inc. v. Credence Systems
Corporation, Civil Action No. C-96-4121(Ex). The complaint alleges that the
Company has, in connection with its sales of the Vista and Duo Series Testers,
infringed United States Letters Patent Number 4,231,104 (the "'104 Patent"),
issued on October 28, 1980, which patent is directed to "Generating Timing
Signals." The complaint includes a claim for injunctive relief, as well as
claims for an accounting, lost profits and damages, an assessment of interest
and costs, and an award of attorneys' fees pursuant to 35 U.S.C. (S)285. The
Company answered the complaint on July 9, 1996, denying the claim of
infringement, and asserting a counterclaim for a declaratory judgment that it
has not infringed the '104 Patent and that the '104 Patent is invalid and
unenforceable. The parties have exchanged discovery requests including requests
for documents and interrogatories. Document production is currently on hold
pending Court resolution regarding the scope of a protective order. The
discovery deadline is June 9, 1997. A pre-trial conference is set for June 30,
1997, and a trial date has been set for July 15, 1997. Based on information
known at this time, the Company believes that it has meritorious defenses to
Teradyne's claims.
On November 8, 1996, Credence filed a complaint against Teradyne in the
United States District Court for the Northern District of California, in an
action styled Credence Systems Corporation v. Teradyne, Inc., Civil Action No.
C96-4061 (SBA). The complaint alleges that Teradyne is infringing United States
Letters Patent No. 4,902,986 owned by the Company and directed toward a "Phased
Locked Loop to Provide Precise Frequency and Phase Tracking of Two Signals." The
Company's complaint seeks injunctive relief, as well as an accounting, lost
profits and damages, an assessment of interest and costs, and an award of
attorneys' fees pursuant to 35 U.S.C. (S)285. Teradyne has not yet served its
answer to the complaint, which answer is due by February 7, 1997.
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The Company is involved in various claims arising in the ordinary course of
business, none of which, including the above Megatest and Teradyne litigation
matters, in the opinion of management, if determined adversely against the
Company, will have a material adverse effect on the Company's business,
financial condition or results of operations.
There can be no assurance, however, that infringement or invalidity claims
by third parties or claims for indemnification resulting from infringement
claims will not be asserted in the future or that such assertions, if proven to
be true, will not materially adversely affect the Company's business, financial
condition or results of operations. If any claims or actions are asserted
against the Company, the Company may seek to obtain a license under a third
party's intellectual property rights. There can be no assurance, however, that a
license will be available under reasonable terms or at all. In addition, the
Company could decide to resort to litigation to challenge such claims. Such
challenges could be extremely expensive and time consuming and could materially
adversely affect the Company's business, financial condition or results of
operations.
MANUFACTURING AND SUPPLIERS
The Company's manufacturing objective is to produce ATE that conforms to
Credence's specification at the lowest possible manufacturing cost. Credence
relies on outside vendors to manufacture certain components and subassemblies.
The Company seeks to manage its inventory levels through agreements with both
suppliers and subcontractors that provide just-in-time delivery of these
components and subassemblies. The Company assembles these components and
subassemblies to create finished testers in the configuration specified by its
customers. In general, Credence uses standard components and prefabricated parts
available from numerous suppliers. However, certain components and subassemblies
necessary for the manufacture of the Company's testers are obtained from a sole
supplier or a limited group of suppliers. In particular, the Company's Vista
testers have two critical components that are currently available from a sole
supplier. In addition, although the Company is qualifying a second source for
one critical component used in the SC 212 tester, this critical component is
currently being supplied by the same sole supplier of these Vista components. In
addition, the Company purchases certain components that are available solely
from Tektronix for use in certain of its testers. The Company is in the process
of qualifying a second source for the components obtained from Tektronix. There
can be no assurance that such alternative sources will be qualified or available
to the Company. The Company's reliance on a sole or a limited group of suppliers
and on outside subcontractors involves certain risks, including a potential
inability to obtain an adequate supply of required components, and reduced
control over pricing and timely delivery of components. The yield and quality of
components and the timeliness of deliveries from the Company's outside
subcontractors have generally been acceptable to date, although there can be no
assurance that they will be acceptable in the future.
TOTAL QUALITY MANAGEMENT
Credence believes that total quality management ("TQM") is a vital
component of customer satisfaction and internal productivity. The Company
believes it is a leader in the ATE industry in terms of productivity, as
measured by revenue per employee, and that its productivity achievements result
in significant part from its focus on TQM. The Company believes that its
position with respect to productivity per employee provides it with operational
and financial advantages, as it is able to generate revenues without incurring
many of the expenses and overhead associated with a greater number of employees.
The Company has targeted ISO 9001 registration in 1997, and is using this
international standard as a baseline for developing an effective quality system.
As a result of efforts towards ISO registration, Credence is developing
documentation, allowing for comprehensive auditing of its processes. A key
component of the quality system is an internal audit process which will result
in corrective and preventive actions which are reviewed by senior management on
a periodic basis. The Company's participation in these programs is required by
several of the Company's major customers.
COMPETITION
The ATE industry is intensely competitive. Credence faces substantial
competition throughout the world, primarily from ATE manufacturers located in
the United States, Europe and Japan, as well as from certain of its customers.
The Company's competitors in the digital semiconductor testing market include
Advantest Corporation ("Advantest"), Ando Electric Co., Ltd., LTX Corporation
("LTX"), Schlumberger Ltd., Hewlett-Packard Company ("HP") and Teradyne, Inc.
("Teradyne"). In the mixed-signal semiconductor testing market, the Company's
competitors include Teradyne, LTX, HP,
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Schlumberger Ltd., and Advantest. In the non-volatile memory testing market the
Company's competitors include Teradyne, HP and Advantest.
The principal elements of competition in the Company's markets and the
basis upon which ATE customers select testers include throughput and product
performance and total cost of ownership. The Company believes that it competes
favorably with respect to these factors.
EMPLOYEES
As of October 31, 1996, the Company had a total of 575 employees, including
138 engaged in manufacturing, 153 in research and development, 50 in
applications, 168 in sales, marketing and service, and 66 in administration.
Many of the Company's employees are highly skilled, and the Company believes its
future results of operations will depend in large part on its ability to attract
and retain such employees. None of the Company's employees are represented by a
labor union, and the Company has not experienced any work stoppages. The Company
considers its employee relations to be good.
ADDITIONAL RISK FACTORS
Limited System Sales; Backlog
The Company derives a substantial portion of its net sales from the sale of
a relatively small number of systems that typically range in price from $350,000
to $2.0 million, excluding the EPRO products which price range is typically
below $100,000. As a result, the timing of recognition of revenue from a single
transaction could have a significant impact on the Company's net sales and
operating results for a particular period. The Company's net sales and operating
results for a particular period could be materially adversely affected if an
anticipated order for even one system is not received in time to permit shipment
during that period. The Company's backlog at the beginning of a quarter
typically does not include all tester orders needed to achieve the Company's
sales objectives for that quarter. In addition, orders in backlog are subject to
cancellation, delay, deferral or rescheduling by a customer with limited or no
penalties. Consequently, the Company's net sales and operating results for a
quarter have in the past and will in the future depend upon the Company
obtaining orders for systems to be shipped in the same quarter that the order is
received. Furthermore, products generating most of the Company's net sales
continue to be shipped near the end of each quarter. Accordingly, the failure to
receive an anticipated order or a delay or rescheduling in a shipment near the
end of a particular period due, for example, to an order cancellation, a delay
by a customer, manufacturing, technical, reliability or other difficulties,
including difficulties relating to customization and reconfiguration of systems,
a delay in the supply of components, subassemblies or services or a delay due to
competitive or economic factors, may cause net sales in a particular period to
fall significantly below the Company's expectations, which would have a material
adverse effect upon the Company's business, financial condition or results of
operations. The relatively long manufacturing cycle of many of its testers has
caused and could cause shipments of such products to be delayed from one quarter
to the next, which could materially adversely affect the Company's business,
financial condition or results of operations. Furthermore, announcements by the
Company or its competitors of new products and technologies could cause
customers to defer or cancel purchases of the Company's existing systems, which
could also have a material adverse effect on the Company's business, financial
condition or results of operations. The impact of these and other factors on the
Company's sales and operating results in any future period cannot be forecasted
with certainty. In addition, the need for continued significant expenditures for
research and development, capital equipment purchases and worldwide training and
customer service and support, among other factors, will make it difficult for
the Company to reduce significantly its fixed expenses in a particular period if
the Company's net sales goals for such period are not met. The Company has
significantly increased its expense levels to support its recent growth, and the
Company does not currently believe it will maintain or exceed its current level
of net sales or rate of growth for any period in the future. Accordingly, there
can be no assurance that the Company will be able to remain profitable or that
it will not sustain losses in future periods. Due to all of the foregoing
factors, it is likely that in some future quarter the Company's operating
results will be below the expectations of public market analysts and investors.
In such event, the price of the Company's common stock would be materially
adversely affected.
Cyclicality of Semiconductor Industry
The Company's business and results of operations depend in significant part
upon the capital expenditures of manufacturers of semiconductors, including
manufacturers that are opening new or expanding existing fabrication facilities,
which in turn depend upon the current and anticipated market demand for
semiconductors and products incorporating
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semiconductors. Historically, the semiconductor industry has been highly
cyclical with recurring periods of oversupply, which often have had a severe
effect on the semiconductor industry's demand for test equipment, including the
systems manufactured and marketed by the Company. The Company believes that the
markets for newer generations of semiconductors will also be subject to similar
fluctuations. Prior to the recent downturn, the semiconductor industry had
experienced significant growth which, in turn, has caused significant growth in
the capital equipment industry in the past three years. There can be no
assurance that such growth will resume. The Company anticipates that a
significant portion of new orders may depend upon demand from semiconductor
device manufacturers building or expanding large fabrication facilities and
there can be no assurance that such demand will exist. In addition, any factor
adversely affecting the semiconductor industry or particular segments within the
semiconductor industry may adversely affect the Company's business, financial
condition or results of operations. Therefore, there can be no assurance that
the Company's operating results will not be materially adversely affected if
downturns or slowdowns in the semiconductor industry occur again in the future.
Expansion of Operations; Management of Growth
The Company has over the last three years experienced a period of annual
growth. Since 1993, the Company has significantly increased the scale of its
operations to support increased sales levels and has expanded its operations to
address critical infrastructure and other requirements, including the hiring of
additional personnel, significant investments in research and development to
support product development, the March 1995 acquisition of EPRO and the
Company's establishment of relationships in Asia. In this regard, the Company
relocated its principal office in Fremont, California and EPRO's operations in
Santa Clara, California to a larger facility in Fremont, California in July
1996. The Company's expansion has resulted in significantly higher operating
expenses, and the Company expects that its operating expenses, including
research and development expenses with respect to new products and enhancements
and expenses relating to facilities expansion, may continue to increase
significantly. If the Company is unable to achieve significantly increased sales
or its sales fall below expectations, the Company's business, financial
condition or results of operations may be materially adversely affected.
Moreover, there can be no assurance that the Company's net sales or rate of
growth will increase or remain at or above recent levels.
The recent growth during the last several years in the Company's sales and
the expansion in the scope of its operations has placed a considerable strain on
its management, financial, manufacturing and other resources and has required
the Company to implement and improve a variety of operating, financial and other
systems, procedures and controls. There can be no assurance that any existing or
new systems, procedures or controls will be adequate to support the Company's
operations or that its systems, procedures and controls will be designed,
implemented or improved in a cost effective and timely manner. Any failure to
implement, improve and expand such systems, procedures and controls in an
efficient manner at a pace consistent with the Company's business could have a
material adverse effect on the Company's business, financial condition or
results of operations.
Sole or Limited Sources of Supply; Reliance on Subcontractors
Certain components, subassemblies and services necessary for the
manufacture of the Company's testers are obtained from a sole supplier or a
limited group of suppliers. In particular, the Company's Vista series testers
have two critical components that are currently available from a sole supplier.
In addition, one critical component in the Company's SC series testers is
currently supplied by the same sole supplier. In addition, the Company purchases
certain components that are available solely from Tektronix for use in the Vista
series testers. The Company does not maintain any long-term supply agreements
with any of its vendors and purchases its components and subassemblies through
individual purchase orders. The manufacture of certain of the Company's
components and subassemblies is an extremely complex process. The Company also
relies increasingly on outside vendors to manufacture certain components and
subassemblies and to provide certain services. The Company has recently
experienced and continues to experience significant reliability, quality and
timeliness problems with several critical components supplied by one of its
vendors. In addition, the Company and certain of its subcontractors are
currently experiencing significant shortages and delays in delivery of various
components and subassemblies. There can be no assurance that these or other
problems will not continue to occur in the future with these or the Company's
other suppliers or outside subcontractors. The Company's reliance on sole or a
limited group of suppliers, and the Company's increasing reliance on outside
subcontractors involves several risks, including an inability to obtain an
adequate supply of required components, subassemblies and services and reduced
control over the price, timely delivery, reliability and quality of components,
subassemblies and services. Shortages, delays, disruptions or terminations of
the sources for these components and subassemblies has delayed and could
continue to delay shipments of the Company's systems and could have a material
adverse effect on the Company's business, financial condition or results of
operations. Any continuing inability to obtain
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adequate yields or timely deliveries or any other circumstance that would
require the Company to seek alternative sources of supply or to manufacture such
components internally, could have a material adverse effect on the Company's
business, financial condition or results of operations. Such delays, shortages
and disruptions would also damage relationships with current and prospective
customers and could allow competitors to penetrate such customer accounts. There
can be no assurance that the Company's internal manufacturing capacity and that
of its suppliers and subcontractors will be sufficient to meet customer
requirements.
Highly Competitive Industry
The ATE industry is intensely competitive. Because of the substantial
investment required to develop test application software and interfaces, the
Company believes that once a semiconductor manufacturer has selected a
particular ATE vendor's tester, the semiconductor manufacturer is likely to use
that tester for a majority of its testing requirements for the market life of
that semiconductor and, to the extent possible, subsequent generations of
similar products. As a result, once an ATE customer chooses a system for the
testing of a particular device, it is difficult for competing vendors to achieve
significant ATE sales to such customer for similar use. The inability of the
Company to achieve significant sales to each ATE customer could
have a material adverse effect on the Company's business, financial condition or
results of operations.
The Company faces substantial competition throughout the world, primarily
from ATE manufacturers located in the United States, Europe and Japan, as well
as several of the Company's customers. Many of the Company's competitors have
substantially greater financial and other resources with which to pursue
engineering, manufacturing, marketing and distribution of their products.
Certain of the Company's competitors have introduced or announced new products
with certain performance or price characteristics equal or superior to certain
products currently offered by the Company. The Company believes that if the ATE
industry continues to consolidate through strategic alliances or acquisitions,
as evidenced by acquisitions of Versatest Corporation by Hewlett-Packard
Company, of a tester product line of Micro Component Technology, Inc. by
Megatest Corporation ("Megatest") and of Megatest by Teradyne, the Company will
face significant additional competition from larger competitors that may offer
more complete product lines and services than the Company. The Company also
expects its competitors to continue to improve the performance of their current
products and to introduce new products, enhancements and new technologies that
provide improved cost of ownership and performance characteristics. New product
introductions by the Company's competitors could cause a decline in sales or
loss of market acceptance of the Company's existing products. Moreover,
increased competitive pressure could lead to intensified price-based
competition, which could materially adversely affect the Company's business,
financial condition or results of operations. The Company has experienced and
continues to experience significant price competition in the sale of all of its
testers. In addition, at the end of a product life cycle and as competitors
introduce more technologically advanced products, pricing pressures typically
become more intense. The Company believes that to be competitive, it will
continue to require significant financial resources in order to, among other
items, invest in new product development and enhancements and to maintain
customer service and support centers worldwide. There can be no assurance that
the Company will be able to compete successfully in the future.
Rapid Technological Change; Importance of Timely Product Introduction
The ATE market is subject to rapid technological change and new product
introductions and enhancements and related software tools. The Company's ability
to be competitive in this market will depend in significant part upon its
ability to successfully develop and introduce new products and enhancements and
related software tools on a timely and cost-effective basis, including the
products and products under development acquired in the EPRO merger. The
Company's customers require testers with additional features and higher
performance and other capabilities. The Company is therefore required to enhance
the performance and other capabilities of its existing systems and related
software tools. Any success by the Company in developing new and enhanced
systems and related software tools and new features to its existing systems
depends upon a variety of factors, including product selection, timely and
efficient completion of product design, timely and efficient implementation of
manufacturing and assembly processes, product performance in the field and
effective sales and marketing. Because new product development commitments must
be made well in advance of sales, new product decisions must anticipate both
future demand and the availability of technology to satisfy that demand. There
can be no assurance that the Company will be successful in selecting,
developing, manufacturing and marketing new products or enhancements and related
software tools. The inability of the Company to introduce new products and
related software tools that contribute significantly to net sales, gross margins
and net income would have a material adverse effect on the Company's business,
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financial condition or results of operations. In addition, new product or
technology introductions by the Company's competitors could cause a decline in
sales or loss of market acceptance of the Company's existing products.
Significant delays can occur between a system's introduction and the
commencement by the Company of volume production of such system. The Company has
been and is experiencing significant delays in the introduction, volume
production and sales of its systems and related enhancements, including new
models within the digital, mixed-signal and non-volatile memory product lines,
due to technical, manufacturing, parts shortages, component reliability and
other difficulties and may continue to experience similar delays in the future.
As a result, certain of the Company's significant customers have been and are
experiencing significant delays in receiving and using certain of the Company's
testers in production. There can be no assurance that these or additional
difficulties will not continue to arise in the future with respect to the
Company's systems and that such delays will not materially adversely affect
customer relationships and future sales. Moreover, there can be no assurance
that the Company will not encounter these or other difficulties that could delay
future introductions or volume production or sales of its systems or
enhancements and related software tools. The Company has incurred and may
continue to incur substantial unanticipated costs to ensure the functionality
and reliability of its testers. If the Company's systems continue to have
reliability, quality or other problems, reduced orders, higher manufacturing
costs, delays in collecting accounts receivable and higher service, support and
warranty expenses, among other items, could result. The Company's failure to
have a competitive tester and related software tools available when required by
a semiconductor manufacturer could make it substantially more difficult for the
Company to sell testers to that manufacturer for a number of years. The Company
believes that the continued acceptance, volume production, timely delivery and
customer satisfaction of its newer digital, mixed signal and non-volatile
memory testers are of critical importance to its future financial results. As a
result, an inability to correct any technical, reliability, parts shortages or
other difficulties associated with the Company's systems or to manufacture and
ship the Company's systems on a timely basis to meet customer requirements could
damage relationships with current and prospective customers and would materially
adversely affect the Company's business, financial condition or results of
operations.
Customer Concentration; Lengthy Sales Cycle
One customer (a distributor) accounted for 25%, 17% and 13% of the
company's net sales in fiscal 1996, 1995 and 1994, respectively. Another
customer accounted for 11% of net sales in fiscal 1995. The loss of or any
reduction in orders by a significant customer, including losses or reductions
due to continuing or other technical, manufacturing, reliability or other
difficulties associated with the Company's products or market, economic or
competitive conditions in the semiconductor industry or in other industries that
manufacture products utilizing semiconductors could materially adversely affect
the Company's business, financial condition or results of operations. The
Company's ability to maintain or increase its sales levels in the future will
depend in significant part upon its ability to obtain orders from existing and
new customers and to manufacture systems on a timely and cost-effective basis,
the financial condition and success of its customers, general economic
conditions, and the Company's ability to meet increasingly stringent customer
performance and other requirements and shipment delivery dates. There can be no
assurance that the Company will be able to maintain or increase the level of its
net sales in the future or that the Company will be able to retain existing
customers or attract new ones.
Sales of the Company's systems depend in significant part upon the decision
of a semiconductor manufacturer to develop and manufacture new semiconductor
devices or to increase manufacturing capacity. As a result, sales of the
Company's testers are subject to a variety of factors outside of the Company's
control. In addition, the decision to purchase a tester generally involves a
significant commitment of capital, with the attendant delays frequently
associated with significant capital expenditures. For these and other reasons,
the Company's systems have lengthy sales cycles during which the Company may
expend substantial funds and management effort to secure a sale and subject the
Company to a number of significant risks.
Dependence on Key Personnel; Management Changes
The Company's future operating results depend in significant part upon the
continued service of its key personnel, none of whom are bound by an employment
or non-competition agreement. The Company's future operating results also depend
in significant part upon its ability to attract and retain qualified management,
manufacturing, technical, engineering
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and marketing and sales and support personnel. Competition for such personnel is
intense, and there can be no assurance that the Company will be successful in
attracting or retaining such personnel. There may be only a limited number of
persons with the requisite skills to serve in these positions and it may be
increasingly difficult for the Company to hire such personnel over time. The
loss of any key employee, the failure of any key employee to perform in his or
her current position, or the Company's inability to attract and retain skilled
employees, as needed, could materially adversely affect the Company's business,
financial condition or results of operations.
On June 26, 1996, Dr. Wilmer R. Bottoms, Chairman of the Board of Directors
since 1991 and a member of the Board of Directors since 1985, was appointed
Chief Executive Officer of the Company, succeeding Mr. James T. Healy. Dr.
Bottoms remains Chairman of the Company's Board of Directors. Mr. Healy
resigned from his positions as President and a director of the Company,
effective September 30, 1996, to pursue his career elsewhere.
International Sales
International sales accounted for approximately 67%, 55% and 52% of total
net sales in fiscal years 1996, 1995 and 1994, respectively. The Company
anticipates that international sales will continue to account for a significant
portion of total net sales in the foreseeable future. As a result, these sales
will continue to be subject to certain risks, including changes in regulatory
requirements, tariffs and other barriers, political and economic instability, an
outbreak of hostilities, integration of foreign operations of acquired
businesses, foreign currency exchange rate fluctuations, difficulties with
distributors, original equipment manufacturers, foreign subsidiaries
and branch operations, potentially adverse tax consequences and the possibility
of difficulty in accounts receivable collection. The Company is also subject to
the risks associated with the imposition of legislation and regulations relating
to the import or export of semiconductor equipment. The Company cannot predict
whether quotas, duties, taxes or other charges or restrictions will be
implemented by the United States or any other country upon the importation or
exportation of the Company's products in the future. Any of these factors or the
adoption of restrictive policies could have a material adverse effect on the
Company's business, financial condition or results of operations.
Proprietary Rights
The Company attempts to protect its intellectual property rights through
patents, trade secrets and other measures, including confidentiality agreements.
There can be no assurance that others will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to the Company's trade secrets and other intellectual property
rights or disclose such technology or that the Company can meaningfully protect
its trade secrets or other intellectual property rights. In connection with the
Company's patent infringement litigation against Megatest, Megatest has
challenged the validity and enforceability of one of the Company's patents not
relating to its CMOS stabilization methods. There can be no assurance that this
or any other patent owned by the Company will not be invalidated, deemed
unenforceable, circumvented or challenged, that the rights granted thereunder
will provide competitive advantages to the Company or that any of the Company's
pending or future patent applications will be issued with claims of the scope
sought by the Company, if at all. Furthermore, there can be no assurance that
others will not develop similar products, duplicate the Company's products or
design around the patents owned by the Company. In addition, there can be no
assurance that foreign intellectual property laws or the Company's agreements
will protect the Company's intellectual property rights. Failure to protect the
Company's intellectual property rights could have a material adverse effect upon
the Company's business, financial condition or results of operations. In
addition to those patent infringement suits discussed in Item 3 hereof, the
Company has been involved in extensive, expensive, and time consuming review of
patent infringement claims. In addition, the Company has at times been notified
of other claims that it may be infringing intellectual property rights possessed
by third parties. For a discussion of current proceedings, please see Item 3.
Legal Proceedings, below.
The European patent application relating to one of the proprietary CMOS
stabilization methods owned by the Company was abandoned by the prior owner
after the European patent examiner cited prior art. This prior art was not
referenced in the corresponding United States patent application. Based upon its
review to date of the cited prior art and the European examiner's objections,
and in part upon the advice of Smith-Hill and Bedell, P.C., general patent
counsel to the Company ("SHB"), the Company believes that such prior art is
unlikely to affect the validity or scope of the claims of the United States
issued patent.
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This prior art may, however, render invalid or significantly narrow the
scope of certain claims set forth in the United States patent covering the
Company's other proprietary CMOS stabilization method. The European examiner
referred to this prior art in the corresponding European patent application. The
European application was approved, but with significantly narrower claims than
the United States patent. This prior art was not referenced in the corresponding
United States patent. Based in part upon the advice of SHB, and on the Company's
review of its current products, the Company believes that this patent will
continue to be valuable to the Company in preventing imitation of the Company's
products covered by this patent. Additionally, in mid-1992, a third party
suggested that certain claims set forth in this patent might be invalid as a
result of other alleged prior art. The Company believes, based in part upon the
advice of SHB, that the prior art alleged by the third party is less relevant
than the prior art referenced by the European examiner. The corresponding
Japanese application has been rejected by the examiner and the Company has
appealed to reverse the examiner's rejection. However, there can be no assurance
that any of the aforementioned prior art or other prior art will not be
successfully asserted and used to invalidate or narrow the scope of any claim of
the United States patents or the corresponding Japanese patent applications or
any other patents or other patent applications of the Company.
Certain of the Company's customers have received notices of infringement
from Jerome Lemelson alleging that the manufacture of semiconductor products
and/or the equipment used to manufacture semiconductor products infringes
certain patents issued to such person. The Company was notified by a customer in
1990 and a different customer in late 1994 that the Company may be obligated to
defend or settle claims that the Company's products infringe such person's
patents, and, in the event it is subsequently determined that the customer
infringes such person's patents, such customer intends to seek reimbursement
from the Company for damages and other related expenses. There can
be no assurance the Company will be successful in defending current or future
patent infringement claims or claims for indemnification resulting from
infringement claims. An award of damages, injunctive relief or expenditures by
the Company of significant amounts in defending any such action could materially
adversely affect the Company's business, financial condition or results of
operations, regardless of the outcome of any litigation. With respect to any
claims, the Company may seek to obtain a license under the third party's
intellectual property rights. There can be no assurance, however, that a license
will be available on reasonable terms or at all. The Company could decide, in
the alternative, to continue to resort to litigation to challenge such claims.
Such challenges have been and could continue to be extremely expensive and time
consuming, and could materially adversely affect the Company's business,
financial condition or results of operations, regardless of the outcome of any
litigation.
Acquisitions
The Company has developed in significant part through mergers and
acquisitions. The Company may in the future pursue acquisitions of complementary
product lines, technologies or businesses. Any future acquisitions by the
Company, if any, could result in potentially dilutive issuances of equity
securities, the incurrence of debt and contingent liabilities, expenditures and
reserves, and amortization expenses related to goodwill and other intangible
assets, which could materially adversely affect the Company's business,
financial condition or results of operations. In addition, acquisitions involve
numerous risks, including difficulties in the assimilation of the operations,
technologies and products of the acquired companies, the diversion of
management's attention from other business concerns, risks of entering markets
in which the Company has no or limited direct prior experience, and the
potential loss of key employees of the acquired company. From time to time, the
Company has engaged in and may continue to engage in discussions with third
parties concerning potential acquisitions of product lines, technologies and
businesses; however, there are currently no commitments or agreements with
respect to any such acquisition. In the event that such an acquisition does
occur, however, there can be no assurance as to the effect thereof on the
Company's business, financial condition or results of operations.
Future Capital Needs
The development and manufacture of new ATE systems and enhancements are
highly capital intensive. In order to be competitive, the Company must make
significant investments in capital equipment, expansion of operations, systems,
procedures and controls, research and development and worldwide training,
customer service and support, among many items. The Company expects that cash on
hand, short-term investments, its bank line of credit, anticipated cash flow
from operations and equipment lease arrangements will satisfy its financing
requirements for at least the next 12 months.
16
<PAGE>
Volatility of Stock Price
The Company believes that factors such as announcements of developments
related to the Company's business, fluctuations in the Company's financial
results, general conditions or developments in the semiconductor and capital
equipment industry and the general economy, sales of the Company's common stock
into the marketplace, an outbreak of hostilities, natural disasters,
announcements of technological innovations or new products or enhancements by
the Company or its competitors, developments in patents or other intellectual
property rights, developments in the Company's relationships with its customers
and suppliers, or a shortfall or changes in revenue, gross margins or earnings
or other financial results from analysts' expectations could cause the price of
the Company's common stock to fluctuate, perhaps substantially. In recent years
the stock market in general, and the market for shares of small capitalization
stocks in particular, including the Company, have experienced extreme price
fluctuations, which have often been unrelated to the operating performance of
affected companies. There can be no assurance that the market price of the
Company's common stock will not continue to experience significant fluctuations
in the future, including fluctuations that are unrelated to the Company's
performance.
ITEM 2. PROPERTIES
The Company maintains its corporate headquarters in Fremont, California.
This leased facility, totaling 104,400 square feet, contains corporate
administration, sales, engineering, local customer support and memory products
manufacturing. The lease on this facility expires in June 2004. The Company's
digital and mixed signal manufacturing facilities, as well as additional sales,
engineering and customer support functions, are located in Beaverton, Oregon.
The lease covering this 90,000 square foot facility expires in November 2002. An
additional 42,000 square foot building houses Beaverton sales and service groups
under a lease expiring in February 2001. The Company maintains 12 sales and
service offices in the United States. The Company believes that its existing
facilities are adequate to meet its current and foreseeable requirements and
that suitable additional or substitute space will be available as needed.
ITEM 3. LEGAL PROCEEDINGS
The Company filed suit against Micro Component Technology, Inc. ("MCT") in
the United States District Court for the Northern District of California on July
6, 1994. The complaint alleged that MCT was infringing United States Letters
Patent No. 4,724,378 owned by the Company for a "Calibrated Automatic Test
System" (the "'378 Patent"). The Company sought both injunctive relief and
monetary damages. On January 4, 1995, MCT answered the complaint, denying
infringement and alleging as a defense that the '378 Patent is invalid and
unenforceable. MCT further alleged that it had sold all of its rights to the
allegedly infringing product to Megatest Corporation ("Megatest"). Accordingly,
on January 30, 1995, the Company filed a motion to amend its complaint to add
Megatest as a defendant, seeking injunctive relief and monetary damages. On
March 22, 1995, the Court granted the Company's motion to amend its complaint.
Megatest answered the amended complaint on April 24, 1995, denying the claim of
infringement and asserting a counterclaim for declaratory judgment, declaring
that it has not infringed the '378 Patent and that the '378 Patent is invalid
and unenforceable. On May 25, 1995, Credence and MCT executed a settlement
agreement pursuant to which MCT paid a royalty for past sales and agreed to the
entry of an injunction against it regarding the '378 Patent. Credence and
Megatest subsequently negotiated a settlement, and settlement documents were
transmitted for execution in November 1995. In December 1995, Megatest rejected
the settlement and refused to execute the settlement documents. On February 21,
1996, the Company filed a motion to enforce the terms of a negotiated settlement
between the Company and Megatest, which motion was denied by the Court after a
hearing on April 12, 1996. The Company thereafter amended its complaint with
leave of Court to assert a claim against Megatest for breach of the settlement
agreement to which the Company contends the parties agreed. Accordingly,
Credence is now pursuing its breach of settlement agreement claim and its patent
infringement claim against Megatest. Trial on Credence's settlement agreement
claims and patent related claims has been bifurcated, such that the former will
be tried first. Trial is currently scheduled to commence in June 1997.
On June 11, 1996, a lawsuit was commenced against the Company by Megatest
in the United States District Court for the Northern District of California, in
an action styled Megatest Corporation v. Credence Systems Corporation, Civil
Action No. C-96-20472. The complaint alleges that the Company has, in
connection with its sales of the Vista and Duo Series Testers, infringed United
States Letters Patent Number 4,806,852 (the "'852 Patent"), issued on February
21, 1989, which patent is directed to an "Automatic Test System With Enhanced
Performance Of Timing Generators." The complaint
17
<PAGE>
includes a claim for injunctive relief, as well as claims for an accounting,
lost profits and damages, an assessment of interest and costs, and an award of
attorneys' fees pursuant to 35 U.S.C. (S)285. The Company answered the complaint
on July 3, 1996, denying the claim of infringement, and asserting a counterclaim
for a declaratory judgment that it has not infringed the '852 Patent and that
the '852 Patent is invalid and unenforceable. The parties have recently
commenced fact discovery, which is not expected to end until January 5, 1998.
Trial is scheduled for June 1, 1998. Based upon information known at this time,
the Company believes that it has meritorious defenses to Megatest's claims.
On June 11, 1996, a lawsuit was commenced against the Company by Teradyne,
Inc. ("Teradyne") in the United States District Court for the Central District
of California, in an action styled Teradyne, Inc. v. Credence Systems
Corporation, Civil Action No. C-96-4121(Ex). The complaint alleges that the
Company has, in connection with its sales of the Vista and Duo Series Testers,
infringed United States Letters Patent Number 4,231,104 (the "'104 Patent"),
issued on October 28, 1980, which patent is directed to "Generating Timing
Signals." The complaint includes a claim for injunctive relief, as well as
claims for an accounting, lost profits and damages, an assessment of interest
and costs, and an award of attorneys' fees pursuant to 35 U.S.C. (S)285. The
Company answered the complaint on July 9, 1996, denying the claim of
infringement, and asserting a counterclaim for a declaratory judgment that it
has not infringed the '104 Patent and that the '104 Patent is invalid and
unenforceable. The parties have exchanged discovery requests including requests
for documents and interrogatories. Document production is currently on hold
pending Court resolution regarding the scope of a protective order. The
discovery deadline is June 9, 1997. A pre-trial conference is set for June 30,
1997, and a trial date has been set for July 15, 1997. Based on information
known at this time, the Company believes that it has meritorious defenses to
Teradyne's claims.
On November 8, 1996, Credence filed a complaint against Teradyne in the
United States District Court for the Northern District of California, in an
action styled Credence Systems Corporation v. Teradyne, Inc., Civil Action No.
C96-4061 (SBA). The complaint alleges that Teradyne is infringing United States
Letters Patent No. 4,902,986 owned by the Company and directed toward a "Phased
Locked Loop to Provide Precise Frequency and Phase Tracking of Two Signals." The
Company's complaint seeks injunctive relief, as well as an accounting, lost
profits and damages, an assessment of interest and costs, and an award of
attorneys' fees pursuant to 35 U.S.C. (S)285. Teradyne has not yet served its
answer to the complaint, which answer is due by February 7, 1997.
The Company is involved in various claims arising in the ordinary course of
business, none of which, including the above Megatest and Teradyne litigation
matters, in the opinion of management, if determined adversely against the
Company, will have a material adverse effect on the Company's business,
financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None
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EXECUTIVE OFFICERS AND KEY EMPLOYEES
The executive officers and key employees of the Company, and their ages and
positions as of January 10, 1997, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Executive Officers:
Dr. Wilmer R. Bottoms 53 Chairman and Chief Executive Officer
Richard Y. Okumoto 44 Senior Vice President, Chief Financial Officer and Secretary
David A. Ranhoff 41 Senior Vice President, Sales and Marketing
Key Employees:
Rick Carmichael 48 Senior Vice President, Corporate Marketing
David K. Cheung 43 Senior Vice President, Engineering
George W. DeGeer 50 Senior Vice President, Operations
Robert E. Huston 55 Vice President, Test Technology
Gary J. Lesmeister 56 Chief Scientist
</TABLE>
Dr. Wilmer R. Bottoms has served as Chairman of the Board of Directors and
Chief Executive Officer since June 1996 and as Chairman of the Board of
Directors since July, 1991 and a member of the Board of Directors of the Company
since 1985. Dr. Bottoms served as Senior Vice President of Patricof & Co.
Ventures, Inc., from 1984 to June 1996 and prior to his tenure at Patricof & Co.
Ventures, Inc., Dr. Bottoms served as President of the Semiconductor Equipment
Group at Varian Associates.
Richard Y. Okumoto has served as Senior Vice President since August 1993,
as Vice President, Finance and Treasurer of the Company from March 1993 to
August 1993 and as Chief Financial Officer and Secretary since March 1993. Prior
to joining the Company, Mr. Okumoto served as Corporate Controller of Novellus
Systems, Inc., a semiconductor equipment manufacturer, from March 1990 to March
1993. Mr. Okumoto was corporate controller for Digital Research Corporation, a
software developer, from March 1989 to March 1990. From August 1987 to March
1989, Mr. Okumoto served as Vice President and General Manager of Basys, Inc., a
software publisher. From 1976 to August 1987, Mr. Okumoto also held various
management positions with Media Test Specialists, Inc., Measurex Corporation and
Fairchild.
David A. Ranhoff has served as Senior Vice President, Sales and Marketing
since July 1996 and as Senior Vice President, Sales, Marketing and Service from
July 1995 to June 1996. Mr. Ranhoff served as Senior Vice President, Sales and
Service from August 1993 to July 1995 and as Vice President, Sales from January
1993 to August 1993. He served as Vice President, European Operations from July
1990 to December 1992. From March 1988 to June 1990, Mr. Ranhoff served as
Managing Director of European Operations of the Company and as National Sales
Manager from July 1985 to March 1988. Prior to joining the Company, Mr. Ranhoff
served for eight years in various sales and management positions for GenRad.
Richard C. Carmichael rejoined the Company in September 1996 and has served
as Senior Vice President, Corporate Marketing since that time. From September
1995 to December 1995 Mr. Carmichael served as Vice President of Marketing at
Megatest Corporation and then, after the acquisition of Megatest Corporation by
Teradyne, Inc., Mr. Carmichael held the position of Marketing Manager, Megatest
Division for Teradyne, Inc. Mr. Carmichael served as Senior Vice President,
Marketing for the Company from August 1993 until August 1995 and Vice President,
Marketing from July 1992 to August 1993. Mr. Carmichael first joined the
Company in January 1991 and served as Western Area Sales Manager from January
1991 to July 1992. From January 1989 to December 1990, Mr. Carmichael was the
Regional Sales Manager for the STS Division of Tektronix. Prior to joining the
Company, Mr. Carmichael served for nine years in various sales and marketing
positions, most recently as Vice President of Sales for Megatest Corporation, a
semiconductor test manufacturer. Mr. Carmichael was also a product specialist
at Fairchild.
David K. Cheung has served as Senior Vice President, Engineering since
January 1995, as Vice President, Engineering from May 1994 to January 1995 and
as Director of Engineering from October 1993 to May 1994. From
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<PAGE>
September 1992 to October 1993, Mr. Cheung served as Director of Engineering at
Schlumberger Technologies, Inc. where he led the development of advanced digital
IC testers. Mr. Cheung held various management positions at Schlumberger from
1982 to September 1992.
George W. DeGeer has served as Senior Vice President, Operations since
August, 1996, as Senior Vice President, Manufacturing from January 1995 to
August, 1996, as Vice President, Manufacturing from October 1993 to January
1995, as Director of Manufacturing from July 1992 to October 1993, and as Vista
Manufacturing Manager from January 1991 to July 1992. Prior to joining the
Company, Mr. DeGeer held various manufacturing management positions at
Tektronix, Inc. for more than twenty years.
Robert E. Huston has served as Vice President, Test Technology since August
1992. From February 1983 to August 1992, Mr. Huston was a co-founder and fellow
of Trilium Corporation and was the architect of the Micromaster series of test
systems. Mr. Huston was a fellow at LTX from August 1988 to August 1992
developing high frequency test strategies. He served in various senior
engineering positions beginning in 1967 at Fairchild working with a team to
develop the LSI test system.
Gary J. Lesmeister has served as Chief Scientist of the Company since 1991.
Mr. Lesmeister is the inventor of the Company's proprietary V-Chip technology
and has created other patent pending designs for products. Prior to joining the
Company, Mr. Lesmeister served as a consultant for TimeMaster from January 1990
to December 1990, as a Senior Staff Engineer with ASIX from March 1987 to
December 1989 and as technical staff member of research laboratories of
Rosemount Inc., and Control Data for more than ten years where he worked on
ultrasonics, supercomputers, voice recognition, bubble memory and custom VLSI
projects.
Officers serve at the discretion of the Board of Directors, until their
successors are appointed. There are no family relationships among executive
officers or directors of the Company.
20
<PAGE>
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on the Nasdaq National Market under
the symbol CMOS. High and low stock prices for the last two fiscal years were:
<TABLE>
<CAPTION>
1996 1995
----------------------------------------
Quarter Ended High Low High Low
- -------------- ---------- ---------- --------- --------
<S> <C> <C> <C> <C>
January 31 $41.50 $17.75 $18.00 $13.00
April 30 27.50 15.75 24.50 15.17
July 31 24.50 10.62 38.25 22.50
October 31 18.25 12.50 40.25 28.00
</TABLE>
There were approximately 450 stockholders of record at January 10, 1997. To
date, the Company has not declared or paid any cash dividends on its common
stock. The Company does not anticipate paying any dividends on its common stock
in the foreseeable future and, under the current bank agreements, such payment
would require prior bank approval.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data is qualified by reference to and
should be read in conjunction with the consolidated financial statements and
notes thereto elsewhere in this Annual Report on Form 10-K and the Management's
Discussion and Analysis of Financial Condition and Results of Operations.
<TABLE>
<CAPTION>
Year Ended October 31,
----------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ---------- ----------- -----------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations
Data:
Net sales $238,788 $176,805 $118,211 $83,058 $58,017
Operating income (loss) 54,334 43,817 24,208 9,496 (6,194)
Income (loss) before taxes 58,267 46,649 24,939 8,574 (8,206)
Net income (loss) 37,703 30,354 19,193 6,000 (8,639)
Net income (loss) per share $ 1.72 $ 1.45 $ 0.97 $ 0.39 $ (0.60)
Number of shares used in computing
per share amounts 21,930 20,984 19,749 15,251 14,310
Consolidated Balance Sheet Data:
Working capital $144,623 $126,395 $ 64,101 $30,542 $ 7,449
Total assets 223,042 186,593 103,668 73,355 40,694
Long-term debt, less current maturities -- -- 655 1,843 1,244
Retained earnings (accumulated deficit) 84,029 46,326 16,604 (2,589) (8,589)
Stockholders' equity 189,782 150,286 78,213 41,633 15,615
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Credence was incorporated in California in March, 1982 and shipped its
first automatic test equipment ("ATE") product in June 1985. The Company
reincorporated in Delaware in October 1993. The Company experienced sequential
growth in annual net sales from fiscal 1985 through fiscal 1991, followed by a
downturn in fiscal 1992 caused by weaknesses
21
<PAGE>
in certain sectors of the ATE market and delayed new product introductions. From
fiscal 1993 through fiscal 1996, the Company's annual net sales grew
sequentially due principally to growth in the semiconductor industry and related
capacity expansion by the Company's customers.
The Company received approximately $78.0 million in net proceeds from its
initial, second and third public offerings of its common stock in the first
quarter of fiscal 1994, the second quarter of fiscal 1994 and the third quarter
of fiscal 1995. In March 1995, EPRO, a California-based manufacturer of memory
testers, merged with the Company in a stock-for-stock exchange. The Company
accounted for the merger as a pooling of interests, and, accordingly, historical
financial information of the Company includes the results of operations of EPRO
for all periods presented.
The Company's operating performance from the first quarter of fiscal 1993
through the third quarter of fiscal 1996 produced sequential quarter-to-quarter
growth in both net sales and net income. In the fourth quarter of fiscal 1996,
net sales decreased 34% from the third quarter of fiscal 1996 and 17% from the
fourth quarter of fiscal 1995. The decrease was due primarily to a significant
weakness in the ATE market which materially adversely affected the Company and
several other companies in the semiconductor equipment industry. Net income for
the fourth quarter of fiscal 1996 decreased 63% from the third quarter of fiscal
1996 and 55% from the fourth quarter of fiscal 1995.
The following discussions should be read in conjunction with the
consolidated financial statements, and notes thereto, included elsewhere herein.
For a further discussion of the Company's business, and risk factors affecting
its results of operations, readers are strongly encouraged to review the
additional risk factors included elsewhere in this Annual Report on Form 10-K.
Certain of the statements contained in this Annual Report on Form 10-K are
forward-looking statements and involve a number of risks and uncertainties. In
addition to the factors discussed herein, among other factors that could cause
actual results to differ materially include the following: limited system
sales; backlog; expansion of operations; management of growth; sole or limited
sources of supply; reliance on subcontractors; an intensely competitive
industry; rapid technological change; dependence on key customers; dependence on
key personnel; management changes; international sales; proprietary rights;
acquisitions; and need for future capital.
RESULTS OF OPERATIONS
Net Sales. Net sales consist of revenues from systems sales, upgrades,
spare parts sales and maintenance contracts. Net sales increased to $238.8
million in fiscal 1996 from $176.8 million in fiscal 1995 and $118.2 million in
fiscal 1994, increases of 35.1% and 49.6%, respectively. These increases were
due primarily to increases in system unit sales and, to a lesser extent, higher
average selling prices ("ASPs") for certain systems sold. The growth rate in
fiscal 1996 was adversely impacted by a significant decrease in revenue
shipments in the fourth quarter due to declines in orders booked in the second
half of fiscal 1996. The Company anticipates that its quarterly net sales may
continue at the same or lower levels into the first half of fiscal 1997 or until
market conditions improve. International net sales accounted for approximately
67%, 55% and 52% of total net sales in fiscal 1996, 1995 and 1994, respectively.
The Company anticipates that its international business will continue to account
for a significant portion of net sales for the foreseeable future. As a result,
the Company's international business will continue to be subject to certain
risks, including changes in regulatory requirements, tariffs and other barriers,
political and economic instability, integration of foreign operations of
acquired businesses, difficulties in managing distributors, original equipment
manufacturers, foreign subsidiaries and branch operations, potentially adverse
tax consequences and the possibility of difficulty in accounts receivable
collection.
Gross Margin. The Company's gross margin has been and will continue to be
affected by a variety of factors, including manufacturing efficiencies, new
product introductions, pricing by competitors or suppliers, product sales mix,
production volume, customization and reconfiguration of systems, international
and domestic sales mix and field service margins. The Company's gross margin as
a percentage of net sales decreased to 59.4% in fiscal 1996 from 60.3% in fiscal
1995 and 59.5% in fiscal 1994. The decrease in fiscal 1996 was due primarily to
a significant decrease in revenue shipments in the fourth quarter which resulted
in an underutilization of factory capacity, offset partially by the benefit from
resizing of certain areas in operations. There can be no assurance that the
Company's gross margin will remain at or above the recent levels.
22
<PAGE>
Research and Development. Research and development expenses as a
percentage of net sales were 14.8%, 14.1% and 14.6%, in fiscal 1996, 1995 and
1994, respectively. In absolute dollars, research and development expenses
increased to $35.4 million in fiscal 1996 from $24.9 million in fiscal 1995 and
$17.3 million in fiscal 1994, reflecting continued investments in the
development of new products, as well as enhancements of existing product lines.
The Company currently intends to continue to invest significant resources in the
development of new products and enhancements for the foreseeable future.
Accordingly, the Company expects these expenses may increase in absolute dollars
in fiscal 1997 as compared to fiscal 1996.
Selling, General and Administrative. Selling, general and administrative
expenses increased in absolute dollars to $52.0 million in fiscal 1996 from
$38.0 million in fiscal 1995 and $28.9 million in 1994, increases of 36.8% and
31.7%, respectively. These increases were due primarily to increased sales
commissions related to increased product sales and increased employee
compensation and expenses related to additional personnel. In fiscal 1996,
selling, general and administrative expenses as a percentage of net sales
remained flat from fiscal 1995. As a percentage of net sales, selling, general
and administrative expenses declined to 21.5% in fiscal 1995 from 24.4% in
fiscal 1994, due primarily to the increase in net sales amounts in fiscal 1995.
The Company expects selling, general and administrative expenses may increase in
absolute dollars in fiscal 1997 as compared to fiscal 1996.
Interest Income and Interest and Other Expenses. The Company generated
interest income of $4.2 million, $3.0 million and $1.1 million in fiscal 1996,
1995 and 1994, respectively, due to interest earned on significantly higher cash
and short-term investments balances provided by operations and the receipt of
proceeds from public offerings.
Income Tax. The effective tax rates of 35% for fiscal 1996 and 1995, and
23% for fiscal 1994 were lower than the combined federal and state statutory
rates in effect for those years, due primarily to the foreign sales corporation
benefits, utilization of tax loss carryforwards and the recognition of certain
other deferred tax assets. The Company expects that its effective tax rate will
be comparable to its 1996 rate in future years.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities provided net cash of $31.0 million, $14.7 million and
$13.6 million in fiscal 1996, 1995 and 1994, respectively. The net cash provided
by operating activities reflected higher profitability and adjustments for
increasing levels of depreciation and amortization, offset primarily by
significant increases in inventories and accounts receivable. Investing
activities used net cash of $37.7 million, $38.0 million, and $10.7 million in
fiscal 1996, 1995 and 1994, respectively. In the last three fiscal years, the
Company invested primarily in short-term investments, capital equipment and
technologies. Financing activities provided net cash of $0.8 million, $38.3
million and $33.6 million for fiscal 1996, 1995 and 1994, respectively, due
primarily to the issuance of the Company's common stock, offset in part by
payments on debt and capital lease obligations. As of October 31, 1996, the
Company had working capital of approximately $144.6 million, including cash,
cash equivalents and short-term investments of $86.3 million, $49.0 million of
accounts receivable and $35.7 million of inventories. The growth in accounts
receivable is due primarily to slower collections and extended payment terms
given to certain customers during the fourth quarter of fiscal 1996. The Company
expects accounts receivable to continue to represent a significant portion of
working capital. The growth in inventories in fiscal 1996 is due primarily to
increased purchases to meet increasing shipments during the first three quarters
of the year, followed by decreased shipments in the fourth quarter of fiscal
1996. The Company believes that because of the relatively long manufacturing
cycles of many of its testers as well as the necessary stocking of materials for
new products that are expected to be introduced in fiscal 1997, investments in
inventories will also continue to represent a significant portion of working
capital. Significant investments in accounts receivable and inventories may
subject the Company to increased risks that could materially adversely affect
the Company's business, financial condition or results of operations.
The Company's principal sources of liquidity as of October 31, 1996
consisted of approximately $86.3 million of cash, cash equivalents and short-
term investments and $20.0 million available under the Company's unsecured
working capital line of credit due to expire on July 25, 1997. As of October 31,
1996, no amounts were outstanding under the line of credit and the Company was
in compliance with all financial covenants under the agreement. The development
and manufacture of new ATE systems and enhancements are highly capital
intensive. In order to be competitive, the Company must make significant
investments in capital equipment, operations expansion and research and
development. The Company expects that its existing cash balances and short-term
investments, together with its current or successor line of credit and
anticipated cash flow from operations will satisfy its financing requirements
for at least the next 12 months.
23
<PAGE>
FUTURE OPERATING RESULTS
The Company's short-term outlook weakened significantly in the latter half
of fiscal 1996, as it did in general for the other companies in the
semiconductor equipment industry. Delays, deferrals and cancellations in orders
for the Company's products in the second half of fiscal 1996 resulted in a 30%
decrease in backlog at October 31, 1996, as compared to backlog at October 31,
1995. Consequently, the Company anticipates it will experience reduced shipment
levels until market conditions improve. The Company is continuing to monitor
and control expenses in order to minimize the impact lower revenues would have
on the results of operations; however, there can be no assurance that the
Company will be able to maintain profitability during this period of lower
revenues.
The Company's sales, gross margin and operating results have in the past
fluctuated significantly, as experienced in fiscal 1992 due to a downturn caused
by weakness in the ATE market and a similar experience in the latter part of
fiscal 1996, and may in the future fluctuate significantly depending upon a
variety of factors, including cyclicality or downturns in the semiconductor
market and the markets served by the Company's customers; the timing of new
product announcements and releases by the Company or its competitors; market
acceptance of new products and enhanced versions of the Company's products;
manufacturing inefficiencies associated with the startup of new product
introductions; changes in pricing by the Company, its competitors, customers, or
suppliers; manufacturing capacity; the ability to volume produce systems and
meet customer requirements; inventory obsolescence; patterns of capital spending
by customers; delays, cancellations, or rescheduling of orders due to customer
financial difficulties or otherwise; changes in overhead absorption levels due
to changes in the number of systems manufactured; the timing and shipment of
orders; availability of components, subassemblies, and services; expenses
associated with acquisitions and alliances; product discounts; customization and
reconfiguration of systems; the proportion of direct sales and sales through
third parties, including distributors and original equipment manufacturers; the
mix of products sold; the length of manufacturing and sales cycles; natural
disasters; regulatory changes; and political and economic instability. In
addition, new and enhanced products typically have lower gross margins in the
early stages of commercial introduction and production. While the Company has
recorded and continues to record allowances for estimated sales returns and
uncollectible accounts, there can be no assurance that such estimates regarding
allowances will be adequate.
The impact of these and other factors on the Company's sales and operating
results in any future period cannot be forecast with certainty. In addition,
the need for continued expenditures for research and development, capital
equipment purchases, and ongoing training and customer service and support
worldwide, among other factors, will make it difficult for the Company to reduce
its operating expenses in a particular period if the Company's net sales goals
for the period are not met. The Company has significantly increased its expense
levels to support its recent annual growth, and there can be no assurance that
the Company will maintain or exceed its current level of net sales or rate of
growth for any period in the future. Accordingly, there can be no assurance
that the Company will be able to be profitable or that it will not sustain
losses in future periods. Due to these additional factors, historical results
and percentage relationships discussed in this Annual Report on Form 10-K will
not necessarily be indicative of the results of operations for any future
period.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
For the years ended October 31, 1996, 1995, and 1994
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors 25
Consolidated Balance Sheets -- October 31, 1996 and 1995 26
Consolidated Statements of Operations -- Years Ended October 31, 1996, 1995 and
1994 27
Consolidated Statements of Stockholders' Equity -- Years Ended October 31, 1996,
1995 and 1994 28
Consolidated Statements of Cash Flows -- Years Ended October 31, 1996, 1995 and
1994 29
Notes to Consolidated Financial Statements 31
</TABLE>
24
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND STOCKHOLDERS
CREDENCE SYSTEMS CORPORATION
We have audited the accompanying consolidated balance sheets of Credence
Systems Corporation as of October 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended October 31, 1996. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and this schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and this schedule 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, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Credence Systems Corporation at October 31, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended October 31, 1996 in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
/s/ Ernst & Young LLP
San Jose, California
December 2, 1996
25
<PAGE>
CREDENCE SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
OCTOBER 31,
-----------------------
1996 1995
-----------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 48,649 $ 54,534
Short-term investments 37,643 29,045
Accounts receivable, net of allowance
for doubtful accounts
of $1,781 and $1,692 in 1996 and
1995, respectively 49,025 44,049
Inventories 35,721 25,887
Deferred income taxes 3,939 4,978
Prepaid expenses and other current
assets 2,906 4,209
-------- --------
Total current assets 177,883 162,702
Long-term investments 4,284 --
Property and equipment, net 32,764 17,770
Other assets, net of accumulated
amortization of $4,594 and $3,136 in
1996 and 1995, respectively 8,111 6,121
-------- --------
$223,042 $186,593
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 13,842 $ 11,271
Accrued payroll and related
liabilities 7,064 7,390
Accrued warranty 2,358 5,068
Accrued distributor commissions 3,054 2,140
Other accrued liabilities 5,353 5,738
Income taxes payable 1,589 4,700
-------- --------
Total current liabilities 33,260 36,307
Commitments and contingencies
Stockholders' equity:
Preferred stock:
Authorized shares -- 1,000,000
($0.001 par value); no shares
issued -- --
Common stock:
Authorized shares -- 40,000,000
($0.001 par value)
Issued and outstanding shares --
21,642,936 in 1996 and 21,420,634
in 1995 22 21
Additional paid-in capital 105,731 103,939
Retained earnings 84,029 46,326
-------- --------
Total stockholders' equity 189,782 150,286
-------- --------
$223,042 $186,593
======== ========
</TABLE>
See accompanying notes.
26
<PAGE>
CREDENCE SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
---------------------------------
1996 1995 1994
------------ ---------- ---------
<S> <C> <C> <C>
Net sales:
Systems and upgrades $221,096 $160,030 $102,536
Service and spare parts 17,692 16,775 15,675
-------- -------- --------
Total net sales 238,788 176,805 118,211
Cost of goods sold 97,010 70,121 47,873
-------- -------- --------
Gross margin 141,778 106,684 70,338
Operating expenses:
Research and development 35,442 24,859 17,273
Selling, general and administrative 52,002 38,008 28,857
-------- -------- --------
Total operating expenses 87,444 62,867 46,130
-------- -------- --------
Operating income 54,334 43,817 24,208
Interest income 4,155 2,979 1,094
Interest and other expenses, net 222 147 363
-------- -------- --------
Income before income taxes 58,267 46,649 24,939
Income taxes 20,564 16,295 5,746
-------- -------- --------
Net income $ 37,703 $ 30,354 $ 19,193
======== ======== ========
Net income per share $ 1.72 $ 1.45 $ 0.97
======== ======== ========
Number of shares used in computing per
share amount 21,930 20,984 19,749
======== ======== ========
</TABLE>
See accompanying notes.
27
<PAGE>
CREDENCE SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL STOCKHOLDERS' EARNINGS TOTAL
---------------------- PAID-IN NOTES (ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT) EQUITY
---------- ---------- ---------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at October 31, 1993 17,376 $11 $ 44,244 $(33) $(2,589) $ 41,633
Issuance of common stock on
exercise of options
under incentive stock
option plans and warrants 821 1 576 -- -- 577
Issuance of common stock in
second public
offering, net of issuance
costs 1,125 1 13,739 -- -- 13,740
Issuance of common stock under
employee stock
purchase plan 16 -- 152 -- -- 152
Income tax benefit from stock
option exercises -- -- 2,885 -- -- 2,885
Payments on stockholders'
notes receivable -- -- -- 33 -- 33
Net income -- -- -- -- 19,193 19,193
------ --- -------- ---- ------- --------
Balance at October 31, 1994 19,338 13 61,596 -- 16,604 78,213
Adjustment for three-for-two
stock split -- 6 (6) -- -- --
Issuance of common stock on
exercise of options
under incentive stock
option plans 591 1 788 -- -- 789
Issuance of common stock in
third public offering, net of issuance
costs 1,425 1 37,945 -- -- 37,946
Issuance of common stock under
employee stock
purchase plan 67 -- 734 -- -- 734
Income tax benefit from stock
option exercises -- -- 2,882 -- -- 2,882
EPRO fiscal year conversion -- -- -- -- (632) (632)
Net income -- -- -- -- 30,354 30,354
------ --- -------- ---- ------- --------
Balance at October 31, 1995 21,421 21 103,939 -- 46,326 150,286
Issuance of common stock on
exercise of options
under incentive stock
option plans 133 1 243 -- -- 244
Issuance of common stock under
employee stock
purchase plan 89 -- 1,232 -- -- 1,232
Income tax benefit from stock
option exercises -- -- 317 -- -- 317
Net income -- -- -- -- 37,703 37,703
------ --- -------- ---- ------- --------
Balance at October 31, 1996 21,643 $22 $105,731 $ -- $84,029 $189,782
====== === ======== ==== ======= ========
</TABLE>
See accompanying notes.
28
<PAGE>
CREDENCE SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------------------
INCREASE IN CASH AND CASH EQUIVALENTS 1996 1995 1994
----------- ----------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 37,703 $ 30,354 $ 19,193
Adjustments to reconcile net income to
net cash provided
by operating activities:
Depreciation and amortization 11,485 6,326 5,228
EPRO fiscal year conversion -- (632) --
Deferred taxes 1,039 (1,744) (2,605)
(Gain) loss on disposal of property
and equipment (123) (253) 49
Changes in operating assets and
liabilities:
Accounts receivable (4,976) (17,537) (10,380)
Inventories (13,339) (13,654) (2,764)
Prepaid expenses and other current
assets 1,303 (3,018) (402)
Accounts payable 2,571 6,193 (508)
Accrued liabilities (1,852) 5,222 1,469
Income taxes payable (2,794) 3,490 4,344
-------- -------- --------
Net cash provided by operating
activities 31,017 14,747 13,624
INVESTING ACTIVITIES:
Purchases of available-for-sale
securities (80,028) (17,524) --
Purchases of held-to-maturity
securities -- (32,570) (4,642)
Maturation of available-for-sale
securities 55,625 -- --
Maturation of held-to-maturity
securities 11,521 25,691 --
Acquisition of property and equipment (24,689) (11,280) (4,308)
Other assets (4,209) (2,925) (1,963)
Proceeds from sale of assets 4,057 600 189
-------- -------- --------
Net cash used in investing activities (37,723) (38,008) (10,724)
FINANCING ACTIVITIES:
Payments on notes payable -- -- (5,845)
Principal payments under capital
lease obligations (655) (1,172) (1,842)
Issuance of common stock, net of
repurchases 1,476 40,398 43,374
Payment of expenses related to
Company's public offerings -- (928) (2,005)
Borrowings under notes receivable -- -- (163)
Payments received on stockholders'
notes receivable and notes
receivable -- -- 87
-------- -------- --------
Net cash provided by financing
activities 821 38,298 33,606
-------- -------- --------
Net increase (decrease) in cash and
cash equivalents (5,885) 15,037 36,506
Cash and cash equivalents at beginning
of the period 54,534 39,497 2,991
-------- -------- --------
Cash and cash equivalents at end of the
period $ 48,649 $ 54,534 $ 39,497
======== ======== ========
</TABLE>
29
<PAGE>
CREDENCE SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-------------------------------
1996 1995 1994
--------- ----------- ---------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid $ 48 $ 124 $ 378
Income taxes paid $22,319 $14,017 $4,319
NONCASH ACTIVITIES:
Net transfers of inventory to
property and equipment $ 3,505 $ 712 $ 973
</TABLE>
See accompanying notes.
30
<PAGE>
CREDENCE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Credence Systems Corporation ("Credence" or the "Company") was incorporated
under the laws of the State of California in March 1982 and was reincorporated
in Delaware in October 1993. The principal business activity of the Company is
the design, development, manufacture, sale and service of automated test
equipment used in the production of semiconductors. The Company has a subsidiary
in Japan engaged in sales, marketing and service of the Company's products.
Also, the Company has a subsidiary in Korea engaged in service of the Company's
products. The operations of and net investment in foreign subsidiaries is not
material.
BASIS OF PRESENTATION
The consolidated financial statements give retroactive effect to the merger
with EPRO (see Note 2), which was accounted for as a pooling of interests. The
accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany
transactions and balances have been eliminated. Certain amounts in the prior
year's consolidated financial statements have been reclassified to conform to
the current year's presentation.
REVENUE RECOGNITION
Revenue and related warranty expenses are recognized upon product shipment.
Net sales consist of product sales less discounts and estimated allowances. A
provision for the estimated costs to enhance the functionality and reliability
of the installed base is recorded when such requirements become known. Revenues
from service contracts are recognized ratably over the contract period.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
For purposes of cash flow reporting, the Company considers all highly
liquid investments with minimum yield risks and original maturity dates of three
months or less to be cash equivalents. Short-term investments consist primarily
of commercial paper and U.S. government agency obligations, carried at cost that
approximates market.
Management classifies investments as trading, available-for-sale or held-
to-maturity at the time of purchase and periodically reevaluates such
classification. There were no securities classified as trading as of October 31,
1996. Securities are classified as held-to-maturity when the Company has the
positive intent and ability to hold the securities to maturity. Held-to-maturity
securities are stated at cost with corresponding premiums or discounts amortized
over the life of the investment to interest income. Securities not classified as
held-to-maturity are classified as available-for-sale and reported at fair
market value. Unrealized gains or losses on available-for-sale securities, if
material, are included, net of tax, in equity until disposition. Realized gains
and losses and declines in value judged to be other-than-temporary on available-
for-sale securities are included in interest income. The cost of securities sold
is based on the specific identification method.
The fair market value of cash equivalents and short-term and long-term
investments is substantially equal to the carrying value and represents the
quoted market prices at the balance sheet dates. Cash and cash equivalents are
categorized as follows (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 31
1996 1995
------------ -----------
<S> <C> <C>
Money market $17,284 $14,522
Commercial paper 16,404 32,042
Certificate of deposit 8,452 --
------------ -----------
Cash equivalents 42,140 46,564
Cash 6,509 7,970
Cash and cash equivalents $48,649 $54,534
============ ===========
</TABLE>
31
<PAGE>
The short-term investments mature in less than one year. All long-term
investments have maturities of one to two years. At October 31, 1996 these
investments are classified as available-for-sale and are categorized as follows
(in thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
1996
------------
<S> <C>
Commercial paper $15,067
Treasury notes 11,847
Certificates of deposit 9,744
Banker's acceptances 985
------------
Short-term investments 37,643
Long-term investments, all treasury notes 4,284
------------
$41,927
============
</TABLE>
The following is a summary of available-for-sale and held-to-maturity
securities as of October 31, 1995 (in thousands):
<TABLE>
<CAPTION>
AVAILABLE-FOR- HELD-TO-MATURITY
SALE SECURITIES SECURITIES
--------------- ----------------
<S> <C> <C>
Commercial paper $ 9,331 $ 4,476
Treasury notes 494 3,007
Certificates of deposit --- 3,006
Banker's acceptances 589 1,032
Other debt securities 7,110 --
--------------- ----------------
Short-term investments $17,524 $11,521
=============== ================
</TABLE>
INVENTORIES
Inventories are stated at the lower of standard cost (which approximates
first-in, first-out cost) or market. Inventories consist of the following (in
thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
-----------------------------
1996 1995
----------- -----------
<S> <C> <C>
Raw materials $20,482 $11,855
Work-in-process 10,222 10,392
Finished goods 5,017 3,640
$35,721 $25,887
=========== ===========
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of three to five years.
Assets under capitalized leases are amortized using the straight-line method
over the shorter of the estimated useful life of the asset or the lease term.
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
-----------------------------
1996 1995
----------- -----------
<S> <C> <C>
Machinery and equipment $29,845 $23,713
Leasehold improvements 7,780 1,403
Furniture and fixtures 4,699 2,993
Spare parts 20,169 12,417
----------- -----------
62,493 40,526
Less accumulated depreciation and 29,729 22,756
amortization ----------- -----------
Net property and equipment $32,764 $17,770
=========== ===========
</TABLE>
32
<PAGE>
OTHER ASSETS
Other assets consist primarily of purchased technologies and related rights
which are amortized using the straight-line method over the assets estimated
useful lives of three to five years. Accumulated amortization associated with
intangible assets is approximately $4,594,000 and $3,136,000 at October 31, 1996
and 1995, respectively.
NET INCOME PER SHARE
Net income per share is based upon the weighted average number of common
and common equivalent shares (stock options) outstanding during the period.
UPCOMING PRONOUNCEMENTS
Required adoption of Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets to be Disposed Of,"
effective for the Company during the first fiscal quarter of 1997 is not
expected to have a material impact on the consolidated financial statements of
the Company.
The Company intends to adopt Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation," effective for the Company
during the first fiscal quarter of 1997. The Company will disclose the impact of
stock-based compensation in its footnotes and will not include such impact on
its recorded earnings.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles ("GAAP") requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results inevitably will differ from those estimates and
such differences may be material to the financial statements.
CONCENTRATIONS OF OTHER RISKS
The semiconductor industry has historically been cyclical and has
experienced periodic downturns, which have had a material adverse effect on the
semiconductor industry's demand for automatic test equipment, including
equipment manufactured and marketed by the Company. Differences between the
Company's forecast of market demand for its products and actual demand could
have a material effect on the financial statements. In addition, the automatic
test equipment industry is highly competitive, and subject to rapid
technological change. As defined by GAAP, it is reasonably possible that events
related to the above factors may occur in the near term which would cause a
change to the Company's estimate of the net realizable value of receivables,
inventories or other assets, and the adequacy of costs accrued for warranty and
other liabilities. Such changes could materially adversely affect the
Company's business, financial condition and results of operations.
In addition, the Company relies on several suppliers and manufacturing
subcontractors to provide many of the key components and subassemblies used in
the Company's products. Some of these items are available from only one or a
limited group of suppliers. Any disruption in the delivery of these items could
materially adversely affect the Company's business, financial condition and
results of operations.
2. MERGER WITH EPRO
In March 1995, the Company completed a merger with EPRO whereby EPRO was
merged with a wholly-owned subsidiary of Credence. The Company issued
approximately 2.1 million shares of common stock in exchange for all of the
outstanding common stock of EPRO. In addition, outstanding options to purchase
EPRO common stock were converted into options to purchase approximately 81,000
shares of Credence common stock. The transaction was accounted for as a pooling
of interests and, therefore, all prior period consolidated financial statements
presented, and the consolidated financial statements as of October 31, 1995 and
for the year then ended, were restated as if the merger took place at the
beginning of the earliest period presented.
33
<PAGE>
EPRO had a calendar year and, accordingly, the EPRO statement of operations
for the year ended December 31, 1994 has been combined with the Credence
statement of operations for the fiscal year ended October 31, 1994. In order to
conform EPRO's year end to Credence's fiscal year end, the consolidated
statement of operations for fiscal 1995 includes two months (November and
December 1994) for EPRO that are also included in the consolidated statement of
income for the fiscal year ended October 31, 1994. Accordingly, an adjustment
has been made in fiscal 1995 to retained earnings for the duplication of net
income of $632,000 for such two-month period. Other results of operations for
such two-month period of EPRO include net sales of $2,896,000, income before
taxes of $1,100,000, and income tax expense of $468,000.
3. CONCENTRATION OF CREDIT RISK AND GEOGRAPHIC DATA
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of investments in cash
equivalents, short-term investments and trade receivables. The Company is
exposed to credit risks in the event of default by the financial institutions
or customers to the extent of the amount recorded on the balance sheet.
The Company sells its products primarily to semiconductor manufacturers
located in the United States, Asia Pacific and Europe. The Company performs
ongoing credit evaluations of its customers and generally does not require
collateral. The Company maintains reserves for potential credit losses and such
losses historically have been both immaterial and within management's
expectations.
Export sales, which are denominated in U.S. dollars, represent sales to the
Company's customers primarily throughout Asia Pacific and Europe. Sales by the
Company to customers in different geographic areas, expressed as a percentage of
revenue, for the periods ended were:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------------
1996 1995 1994
-------- ------ ------
<S> <C> <C> <C>
Domestic 33% 45% 48%
Asia Pacific 58 45 45
Europe 9 10 7
----- ----- -----
Total sales 100% 100% 100%
===== ===== =====
</TABLE>
One customer (a distributor) accounted for 25%, 17% and 13% of the
Company's net sales in fiscal 1996, 1995 and 1994, respectively. Another
customer accounted for 11% of net sales in fiscal 1995. The Company's major
distributor sells product into one country in Asia. This subjects a significant
portion of the Company's receivables and future revenues to the risks associated
with doing business in a foreign country, including political and economic
instability, currency exchange rate fluctuations and regulatory changes. No
estimate could be made of the impact that disruption of business with that
country would have on the Company's business, financial condition or results of
operations.
4. BANK CREDIT LINE
The Company has a $20,000,000 unsecured bank line of credit, with interest
at the bank's prime rate (8.25% at October 31, 1996), which expires July 25,
1997. This line supports the issuance of letters of credit and foreign exchange
contracts. At October 31, 1996, the Company had no borrowings outstanding under
this line of credit. Borrowings under the line of credit are subject to the
Company's ability to meet certain financial covenants and require the Company to
obtain certain bank approvals for the payment of dividends. The Company was in
compliance with all financial covenants at October 31, 1996.
5. LEASE OBLIGATIONS AND OTHER COMMITMENTS
The Company entered into operating leases for test and other equipment
totalling approximately $3.3 million and $1.1 million, in fiscal 1996 and 1995,
respectively. Test equipment included in these leases was sold to and leased
back from the lessors at the Company's cost. These leases call for monthly
rental payments for three years from the inception of each lease and contain
multiple end-of-lease options including: 1) renewal of the lease; 2) purchase
of the equipment at predetermined or fair market values; or 3) return of the
equipment to the lessor.
34
<PAGE>
The Company leases its facilities under operating leases that expire
periodically through 2004. In addition, the Company has subleased a vacated
facility under a non-cancelable lease agreement.
The approximate future minimum lease payments and sublease proceeds under
these operating leases at October 31, 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
LEASE SUBLEASE
PAYMENTS PROCEEDS
------------ -----------
<S> <C> <C>
1997 $ 4,090 $307
1998 3,511 26
1999 2,964 --
2000 2,321 --
2001 2,003 --
Thereafter 3,328 --
------------ -----------
$18,217 $333
============ ===========
</TABLE>
Rent expense was approximately $4,132,000, $1,936,000 and $1,475,000 for
the years ended October 31, 1996, 1995 and 1994, respectively.
The Company has an agreement with a distributor whereby the Company issued
a guaranty in favor of a bank with respect to certain obligations of the
distributor to the bank. Under this agreement, the distributor agreed to grant
to the Company a security interest to secure the obligations of the distributor
as a result of any payments by the Company pursuant to the guaranty. At October
31, 1996, the maximum allowable debt of the distributor subject to this
guarantee was $1,000,000 and the amount outstanding was $1,000,000. At October
31, 1996, no demand had been made on the Company in regards to this guaranty.
6. STOCKHOLDERS' EQUITY
COMMON STOCK
In March 1996, the stockholders approved an amendment to the Company's
certificate of incorporation to increase the number of shares of common stock
authorized for issuance thereunder by an additional 10,000,000 shares to a total
of 40,000,000 shares of common stock. This amendment has not yet been filed in
Delaware.
The Company sold 3,750,000 shares of common stock at $8.00 per share in its
initial public offering on October 28, 1993. On April 7, 1994, the Company sold
1,125,000 shares of common stock at $13.83 per share in its second public
offering. On June 14, 1995, the Company sold 1,425,000 shares of common stock at
$28.75 per share in its third public offering.
On May 17, 1995, the Company declared a three-for-two stock split paid in
the form of a 50% stock dividend to holders of record of the Company's common
stock on May 26, 1995 (the "Stock Split"). The dividend shares were distributed
to stockholders on June 5, 1995. All share and per share amounts herein reflect
the Stock Split. Additionally, an amount equal to the par value of the
additional common shares has been transferred from additional paid-in capital to
common stock as of October 31, 1995.
STOCK OPTION PLANS
In 1984, the Company adopted the 1984 Stock Option Plan (the "Option
Plan"). The Option Plan allowed for the granting of incentive as well as
nonqualified stock options. The Company's 1993 Stock Option Plan (the "1993
Plan") serves as the successor equity incentive program to the Option Plan and
the ASIX 1989 Stock Option Plan, which the Company assumed in connection with
its merger with ASIX Systems Corporation effective in October 1989. The 1993
Plan was adopted by the Board of Directors in August 1993 and approved by the
stockholders in October 1993. All outstanding stock options under the
predecessor plans were incorporated into the new 1993 Plan at the effective date
of the Company's initial public offering, but continue to be governed by the
terms and conditions of the specific instruments evidencing those options.
The 1993 Plan is divided into two separate components: (i) the
Discretionary Option Grant Program and (ii) the Automatic Option Grant Program.
Options granted under the Discretionary Option Grant Program will have an
exercise price equal to 100% of the fair market value of such shares on the date
of grant, a maximum term of ten years and are
35
<PAGE>
exercisable, over a vesting period, generally four to five years. Under the
Automatic Option Grant Program, options are granted automatically at periodic
intervals to non-employee members of the Board at an exercise price equal to
100% of the fair market value of the option shares on the date of grant and a
maximum term of ten years.
Activity under both plans (in thousands, except per share amounts) is as
follows:
<TABLE>
<CAPTION>
OPTIONS OPTIONS OUTSTANDING
AVAILABLE -----------------------------------------------
FOR GRANT NUMBER OF AGGREGATE
SHARES PRICE PER SHARE PRICE
------------- ----------- ---------------- ------------
<S> <C> <C> <C> <C>
BALANCE AT OCTOBER 31, 1993 404 1,952 $ 0.08 - $ 9.00 $ 2,439
Options granted (222) 222 $ 1.61 - $ 17.08 2,138
Options canceled 122 (122) $ 0.08 - $ 17.08 (267)
Options exercised -- (821) $ 0.08 - $ 9.00 (577)
------------- ----------- ---------------- ------------
BALANCE AT OCTOBER 31, 1994 304 1,231 $ 0.08 - $ 17.08 3,733
Increase in authorized shares 749 -- -- --
Options granted (442) 442 $ 1.61 - $ 33.00 11,536
Options canceled 41 (41) $ 0.54 - $ 33.00 (460)
Options exercised -- (591) $ 0.08 - $ 17.08 (789)
------------- ----------- ---------------- ------------
BALANCE AT OCTOBER 31, 1995 652 1,041 $ 0.44 - $ 33.00 14,020
Increase in authorized shares 500 -- -- --
Options granted (1,107) 1,107 $12.75 - $ 29.00 17,129
Options canceled 227 (227) $ 0.54 - $ 33.00 (5,344)
Options exercised -- (133) $ 0.52 - $ 16.50 (242)
Options expired (8) -- -- --
------------- ----------- ---------------- ------------
BALANCE AT OCTOBER 31, 1996 264 1,788 $ 0.44 - $ 33.00 $ 25,563
============= =========== ================ ============
</TABLE>
The Company has reserved for issuance approximately 2,052,000 shares of
common stock in connection with the stock option plans. At October 31, 1996,
approximately 463,000 shares were exercisable at an aggregate exercise price of
$4,916,000.
EMPLOYEE STOCK PURCHASE PLAN
In 1994, the Company adopted the 1994 Employee Stock Purchase Plan, which
provides eligible employees with the opportunity to acquire shares of the
Company's common stock. The purchase price is 85% of the fair market value per
share of common stock on the date on which the purchase period begins or on the
date on which the purchase period ends, whichever is lower. Approximately 89,000
and 67,000 shares were acquired pursuant to the plan in 1996 and 1995,
respectively. At October 31, 1996, approximately 126,000 shares were reserved
for issuance under the plan.
7. EMPLOYEE BENEFIT PLANS
The Company maintains a 401(k) retirement savings plan for its full-time
domestic employees, which allows them to contribute up to 20 percent of their
pre-tax wages subject to IRS limits. The Company has never made a matching
contribution to this plan as of October 31, 1996.
The Company maintains a profit sharing plan for those domestic employees
that are not otherwise eligible for incentive based compensation. Contributions
to this plan are subject to the discretion of the Board of Directors. The
Company made $3,721,000 in quarterly contributions in fiscal 1996 and $3,467,000
and $1,545,000 in annual contributions in fiscal 1995 and 1994, respectively.
8. INCOME TAXES
The tax provision (benefit) for continuing operations consists of the
following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------------------
1996 1995 1994
----------- ----------- ----------
<S> <C> <C> <C>
FEDERAL:
Current $16,317 $15,310 $ 6,446
Deferred 1,647 (1,140) (2,345)
---------- ----------- ----------
17,964 14,170 4,101
STATE:
Current 2,358 2,928 1,645
Deferred 220 (803) --
---------- ----------- ----------
2,578 2,125 1,645
FOREIGN:
Current 22 -- --
$20,564 $16,295 $ 5,746
========== =========== ==========
</TABLE>
36
<PAGE>
Pre-tax income (loss) from foreign operations was approximately $56,000 in
1996, $0 in 1995 and $(318,000) in 1994.
A reconciliation between the Company's effective tax rate (35% in 1996 and
1995, and 23% in 1994) and the U.S. statutory rate is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ---------
<S> <C> <C> <C>
Tax computed at statutory rate $20,394 $16,327 $ 8,728
State income tax (net of federal 1,687 1,381 1,073
benefit)
Foreign sales corporation benefit (1,626) (1,388) (202)
Net operating loss carryforward benefit (141) (141) (141)
Change in valuation allowance -- (141) (4,684)
Other items 250 257 972
---------- ---------- ---------
$20,564 $16,295 $ 5,746
---------- ---------- ---------
</TABLE>
At October 31, 1996 the Company has unused net operating loss and research
tax credit carryforwards for federal income tax purposes of approximately
$2,400,000 and $194,000, respectively, which expire in 2003 through 2005.
Utilization of the net operating loss carryforwards at October 31, 1996 is
limited to approximately $401,000 annually under the provisions of Section 382
of the Internal Revenue Code of 1986, as amended. Utilization of the credit
carryforwards is similarly limited.
Significant components of the Company's deferred tax assets are as follows
(in thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
---------------------
1996 1995
---------- ---------
<S> <C> <C>
Deferred tax assets:
Accounting for inventories $ 3,173 $ 2,774
Allowance for doubtful accounts 748 634
Accruals not currently deductible 1,621 2,728
Net operating loss carryforwards 843 984
Research credit carryforwards 194 194
---------- ---------
Total deferred tax assets 6,579 7,314
Valuation allowance for deferred tax assets (897) (1,037)
---------- ---------
5,682 6,277
Deferred tax liability:
Tax over book depreciation (1,742) (439)
Other -- (34)
---------- ---------
Total deferred tax liability (1,742) (473)
---------- ---------
Net deferred tax assets $ 3,940 $ 5,804
========== =========
</TABLE>
The change in the valuation allowance was a net decrease of $140,000 and
$984,000 in 1996 and 1995, respectively.
9. CONTINGENCIES
The Company filed suit against Micro Component Technology, Inc. ("MCT") in
the United States District Court for the Northern District of California on July
6, 1994. The complaint alleged that MCT was infringing United States Letters
Patent No. 4,724,378 owned by the Company for a "Calibrated Automatic Test
System" (the "'378 Patent"). The Company sought both injunctive relief and
monetary damages. On January 4, 1995, MCT answered the complaint, denying
infringement and alleging as a defense that the '378 Patent is invalid and
unenforceable. MCT further alleged that it had sold all of its rights to the
allegedly infringing product to Megatest Corporation ("Megatest"). Accordingly,
on January 30, 1995, the Company filed a motion to amend its complaint to add
Megatest as a defendant, seeking injunctive relief and monetary damages. On
March 22, 1995, the Court granted the Company's motion to amend its complaint.
Megatest
37
<PAGE>
answered the amended complaint on April 24, 1995, denying the claim of
infringement and asserting a counterclaim for declaratory judgment, declaring
that it has not infringed the '378 Patent and that the '378 Patent is invalid
and unenforceable. On May 25, 1995, Credence and MCT executed a settlement
agreement pursuant to which MCT paid a royalty for past sales and agreed to the
entry of an injunction against it regarding the '378 Patent. Credence and
Megatest subsequently negotiated a settlement, and settlement documents were
transmitted for execution in November 1995. In December 1995, Megatest rejected
the settlement and refused to execute the settlement documents. On February 21,
1996, the Company filed a motion to enforce the terms of a negotiated settlement
between the Company and Megatest, which motion was denied by the Court after a
hearing on April 12, 1996. The Company thereafter amended its complaint with
leave of Court to assert a claim against Megatest for breach of the settlement
agreement to which the Company contends the parties agreed. Accordingly,
Credence is now pursuing its breach of settlement agreement claim and its patent
infringement claim against Megatest. Trial on Credence's settlement agreement
claims and patent related claims has been bifurcated, such that the former will
be tried first. Trial is currently scheduled to commence in June 1997.
On June 11, 1996, a lawsuit was commenced against the Company by Megatest
in the United States District Court for the Northern District of California, in
an action styled Megatest Corporation v. Credence Systems Corporation, Civil
Action No. C-96-20472. The complaint alleges that the Company has, in
connection with its sales of the Vista and Duo Series Testers, infringed United
States Letters Patent Number 4,806,852 (the "'852 Patent"), issued on February
21, 1989, which patent is directed to an "Automatic Test System With Enhanced
Performance Of Timing Generators." The complaint includes a claim for injunctive
relief, as well as claims for an accounting, lost profits and damages, an
assessment of interest and costs, and an award of attorneys' fees pursuant to 35
U.S.C. (S)285. The Company answered the complaint on July 3, 1996, denying the
claim of infringement, and asserting a counterclaim for a declaratory judgment
that it has not infringed the '852 Patent and that the '852 Patent is invalid
and unenforceable. The parties have recently commenced fact discovery, which is
not expected to end until January 5, 1998. Trial is scheduled for June 1, 1998.
Based upon information known at this time, the Company believes that it has
meritorious defenses to Megatest's claims.
On June 11, 1996, a lawsuit was commenced against the Company by Teradyne,
Inc. ("Teradyne") in the United States District Court for the Central District
of California, in an action styled Teradyne, Inc. v. Credence Systems
Corporation, Civil Action No. C-96-4121(Ex). The complaint alleges that the
Company has, in connection with its sales of the Vista and Duo Series Testers,
infringed United States Letters Patent Number 4,231,104 (the "'104 Patent"),
issued on October 28, 1980, which patent is directed to "Generating Timing
Signals." The complaint includes a claim for injunctive relief, as well as
claims for an accounting, lost profits and damages, an assessment of interest
and costs, and an award of attorneys' fees pursuant to 35 U.S.C. (S)285. The
Company answered the complaint on July 9, 1996, denying the claim of
infringement, and asserting a counterclaim for a declaratory judgment that it
has not infringed the '104 Patent and that the '104 Patent is invalid and
unenforceable. The parties have exchanged discovery requests including requests
for documents and interrogatories. Document production is currently on hold
pending Court resolution regarding the scope of a protective order. The
discovery deadline is June 9, 1997. A pre-trial conference is set for June 30,
1997, and a trial date has been set for July 15, 1997. Based on information
known at this time, the Company believes that it has meritorious defenses to
Teradyne's claims.
On November 8, 1996, Credence filed a complaint against Teradyne in the
United States District Court for the Northern District of California, in an
action styled Credence Systems Corporation v. Teradyne, Inc., Civil Action No.
C96-4061 (SBA). The complaint alleges that Teradyne is infringing United States
Letters Patent No. 4,902,986 owned by the Company and directed toward a "Phased
Locked Loop to Provide Precise Frequency and Phase Tracking of Two Signals." The
Company's complaint seeks injunctive relief, as well as an accounting, lost
profits and damages, an assessment of interest and costs, and an award of
attorneys' fees pursuant to 35 U.S.C. (S)285. Teradyne has not yet served its
answer to the complaint, which answer is due by February 7, 1997.
The Company is involved in various claims arising in the ordinary course of
business, none of which, including the above Megatest and Teradyne litigation
matters, in the opinion of management, if determined adversely against the
Company, will have a material adverse effect on the Company's business,
financial condition or results of operations.
10. RELATED PARTY TRANSACTIONS
Mr. Vonderschmitt, a director of the Company, is the founder and chairman
of Xilinx, Inc. For the years ended October 31, 1996, 1995 and 1994, the
Company sold approximately $7,887,000, $3,135,000 and $3,018,000, respectively,
of
38
<PAGE>
products and services to Xilinx. The amounts receivable from Xilinx were
approximately $126,000 and $799,000 at October 31, 1996 and 1995, respectively.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
PART III
--------
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT.
The information required by this item relating to the Company's directors
and nominees and disclosure relating to compliance with Section 16(a) of the
Securities Exchange Act of 1934 is included under the captions "Election of
Directors" and "Compliance with Section 16(a) of the Securities Exchange Act of
1934" in the Company's Proxy Statement for the 1997 Annual Meeting of
Stockholders and is incorporated herein by reference. The information required
by this item relating to the Company's executive officers and key employees is
included under the caption "Executive Officers and Key Employees" in Part I of
this Form 10-K Annual Report.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is included under the caption
"Executive Compensation and Related Information" in the Company's Proxy
Statement for the 1997 Annual Meeting of Stockholders and is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is included under the caption
"Ownership of Securities" in the Company's Proxy Statement for the 1997 Annual
Meeting of Stockholders and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is included under the caption
"Certain Relationships and Related Transactions" in the Company's Proxy
Statement for the 1997 Annual Meeting of Stockholders and is incorporated herein
by reference.
39
<PAGE>
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of the Annual Report on Form 10-
K:
1. Financial Statements. The following Consolidated Financial Statements of
Credence Systems Corporation are included in Item 8 of this Annual Report
on Form 10-K:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors 25
Consolidated Balance Sheets --
October 31, 1996 and 1995 26
Consolidated Statements of Operations --
Years Ended October 31, 1996, 1995 and 1994 27
Consolidated Statements of Stockholders' Equity --
Years Ended October 31,1996, 1995 and 1994 28
Consolidated Statements of Cash Flows --
Years Ended October 31,1996, 1995 and 1994 29
Notes to Consolidated Financial Statements 31
</TABLE>
2. Financial Statement Schedule. The following financial statement schedule
of Credence Systems Corporation, for the years ended October 31, 1996,
1995 and 1994, is filed as part of this Annual Report on Form 10-K and
should be read in conjunction with the Consolidated Financial Statements
of Credence Systems Corporation:
Page
----
Schedule II -- Valuation and Qualifying Accounts 43
Schedules other than the one listed above have been omitted since they are
either not required, are not applicable or the required information is
shown in the consolidated financial statements or related notes.
3. Exhibits. See Exhibit Index on page 44.
(b) No reports on Form 8-K were filed during the last quarter of the fiscal
year covered by this Annual Report on Form 10-K.
(c) See Exhibit Index on page 44.
(d) The following financial statement schedule of Credence Systems Corporation,
for the years ended October 31, 1996, 1995 and 1994, is filed as part of this
Annual Report on Form 10-K and should be read in conjunction with the
Consolidated Financial Statements of Credence Systems Corporation:
Page
----
Schedule II -- Valuation and Qualifying Accounts 43
Schedules other than the one listed above have been omitted since they are
either not required, are not applicable or the required information is shown in
the consolidated financial statements or related notes.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on
January 28, 1997.
CREDENCE SYSTEMS CORPORATION
-------------------------------
(Registrant)
By: /s/ WILMER R. BOTTOMS
--------------------------------------
Wilmer R. Bottoms
Chairman of the Board of Directors and
Chief Executive Officer
/s/ RICHARD Y. OKUMOTO
--------------------------------------
Richard Y. Okumoto
Senior Vice President, Chief Financial
Officer and Secretary (Principal
Financial and Accounting Officer)
41
<PAGE>
POWER OF ATTORNEY
-----------------
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Wilmer R. Bottoms and Richard Y. Okumoto,
and each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Report on Form 10-K, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, or their or his substitute or substitutes, may lawfully 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 below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ WILMER R. BOTTOMS Chairman of the Board of Directors and January 28, 1997
- ----------------------------- Chief Executive Officer
Wilmer R. Bottoms
/s/ RICHARD Y. OKUMOTO Senior Vice President, Chief Financial Officer and January 28, 1997
- ----------------------------- Secretary (Principal Financial and Accounting Officer)
Richard Y. Okumoto
/s/ HENK J. EVENHUIS Director January 28, 1997
- -----------------------------
Henk J. Evenhuis
/s/ WILLIAM G. HOWARD, JR. Director January 28, 1997
- -----------------------------
William G. Howard, Jr.
/s/ JOS C. HENKENS Director January 28, 1997
- -----------------------------
Jos C. Henkens
/s/ BERNARD V. VONDERSCHMITT Director January 28, 1997
- -----------------------------
Bernard V. Vonderschmitt
</TABLE>
42
<PAGE>
SCHEDULE II
CREDENCE SYSTEMS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Additions
Balance at Charged to Balance at
Beginning Costs and End
Description of Year Expenses Write-offs of Year
- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year ended October 31, 1996
Allowance for doubtful accounts $1,692 $270 $181 $1,781
Year ended October 31, 1995
Allowance for doubtful accounts $1,472 $360 $140 $1,692
Year ended October 31, 1994
Allowance for doubtful accounts $1,449 $127 $104 $1,472
</TABLE>
43
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER PAGE
- --------- ----
<C> <S> <C>
2.1(1) Agreement and Plan of Merger dated October 5, 1993 between Credence
Systems Corporation, a California Corporation, and the Company.
2.2(1) Asset Purchase Agreement dated December 31, 1990 between Tektronix,
Inc. and the Company, including Amendment No. 1 to the Asset
Purchase Agreement dated December 31, 1990.
2.3(1) Technology Agreement between Tektronix, Inc. and the Company dated
December 31, 1990.
2.4(1) Letter Agreement between Tektronix, Inc. and the Company dated
September 30, 1992.
2.5(1) Amendment Agreement dated as of August 12, 1993 between Tektronix,
Inc. and the Company.
2.6(1) 1990 Plan of Purchase Price Adjustment Recapitalization.
2.7(1) Letter Agreement between Tektronix, Inc. and the Company dated
August 11, 1993.
2.8(11) Agreement and Plan of Reorganization dated as of February 6, 1994
among the Registrant, Semiconductor Test Solutions, Inc., EPRO and
the shareholders of EPRO listed therein.
3.1(14) Amended and Restated Certificate of Incorporation of the Company.
3.2(1) Bylaws of the Company.
4.1(1) Investor Rights Agreement dated October 15, 1989 by and among the
Company and the investors listed therein, including Amendment
Agreement to the Investor Rights Agreement dated June 15, 1990,
Second Amendment Agreement to the Investor Rights Agreement dated
September 30, 1992, the Third Amendment Agreement to Investor Rights
Agreement dated August 8, 1993 and the Fourth Amendment Agreement to
Investor Rights Agreement dated March 10, 1994.
4.2(10) Fifth Amendment Agreement to the Investor Rights Agreement dated May
26, 1995.
10.1(1) Form of Indemnification Agreement between the Company and each of
its officers and directors.
10.2(1) Underwriting Agreement dated October 28, 1993 by and among the
Company and the underwriters named therein.
10.3(4) Underwriting Agreement dated March 31, 1994 by and among the Company
and the underwriters named therein.
10.4(10) Underwriting Agreement dated June 14, 1995 by and among the Company
and the underwriters named therein.
10.5(1) Industrial Space Lease between Renco Investment Company and the
Company dated August 12, 1992 including the First Addendum dated
August 14, 1992, Option to renew Lease dated August 14, 1992, First
Amendment to Lease dated October 22, 1992 and Acceptance Agreement
dated November 25, 1992.
10.6(1) Indenture (lease agreement) between Pen Nom I Corporation and the
Company dated April 3, 1991, including the First Amendment to Lease
dated August 16, 1991, the Second Amendment to Lease dated December
10, 1991, the Third Amendment to Lease dated August 7, 1992, the
Fourth Amendment to Lease dated October 13, 1992 and the Fifth
Amendment to Lease dated November 15, 1993.
10.7(1) Master Equipment Lease Agreement between the Company and Financing
for Science and Industry, Inc. dated February 26, 1993.
10.8(6) Settlement Agreement between MCT and the Company dated May 9, 1994.
10.9(7) Leaseline Agreement between Comdisco and the Company dated July 29,
1994.
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER PAGE
- --------- ----
<C> <S> <C>
10.10(2) Indemnification and Security Agreement between Credence Capital
Corporation and the Company dated October 28, 1994.
10.11(4) Stock Transfer Agreement by and among the Company, Richard Cann,
Rene Verhaegen and Credence Europa Limited dated as of February 28,
1994.
10.12(4) Secured Line of Credit Agreement between Credence Europa Limited and
the Company dated as of February 28, 1994.
10.13(9) Lease by and between the Company and The Mutual Life Insurance
Company of New York dated June 16, 1995.
10.14(13) First Amendment to Lease by and between the Company and The Mutual
Life Insurance Company of New York dated December 29, 1995.
10.15(14) Loan and Security Agreement between the Company and Silicon Valley
Bank and Comerica Bank-California dated April 28, 1995, as amended.
10.16(12) Domestic and International Master Agreement for Purchase of Equipment
and Product Support between the Company and Comdisco, Inc., dated
January 31, 1995.
10.17(13) Employment Agreement by and between the Company and Elwood H.
Spedden dated October 31, 1995.
10.18(14) Master Lease Purchase Agreement, Lease Purchase Closing Schedule and
Lease Purchase Addendum No. One between Metlife Capital Corporation
and the Company dated April 30, 1996.
10.19(15) Loan Agreement among Silicon Valley Bank, Bank of Hawaii and the
Company, dated July 26, 1996.
10.20 License Agreement between the Company and Kinetix Test Systems, LLC,
dated July 31, 1996.
10.21 Lease Agreement between Petula Associates, Ltd. and Koll Portland
Associates, dba KBC-Tigard II and the Company dated September 12,
1995.
10.22 Sixth Amendment to Lease by and between the Company and Pen Nom I
Corporation dated March 10, 1995.
11.1 Statement of Computation of Net Income per Share.
21.1 Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney (reference is made to page 42 of this report).
27.1 EDGAR Financial Data Schedule.
99.1(14) 1993 Stock Option Plan, as amended.
99.2(5) 1994 Employee Stock Purchase Plan.
99.3(3) Form of Notice of Grant to be generally used in connection with the
1993 Stock Option Plan.
99.4(3) Form of Stock Option Agreement to be generally used in connection
with the 1993 Stock Option Plan.
99.5(3) Addendum to the Stock Option Agreement (Special Tax Elections).
99.6(3) Addendum to the Stock Option Agreement (Change in Control).
99.7(3) Addendum to the Stock Option Agreement (Financial Assistance).
99.8(3) Addendum to the Stock Option Agreement (Limited Stock Appreciation
Rights).
99.9(14) Form of Notice of Grant of Stock Option (Non-Employee Director) to
be generally used in connection with the automatic option grant
program of the 1993 Stock Option Plan.
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER PAGE
- --------- ----
<C> <S> <C>
99.10(14) Form of Stock Option Agreement (Non-Employee Director) to be
generally used in connection with the automatic option grant program
of the 1993 Stock Option Plan.
99.11(8) Compensation Agreement between the Company and Jos C. Henkens, dated
November 5, 1993.
99.12(8) Compensation Agreement between the Company and Wilmer R. Bottoms,
dated November 5, 1993.
99.13(8) Compensation Agreement between the Company and Robert F. Kibble,
dated November 5, 1993.
99.14(8) Compensation Agreement between the Company and Bernard V.
Vonderschmitt, dated November 5, 1993.
99.15(8) Compensation Agreement between the Company and Henk J. Evenhuis,
dated November 4, 1993.
99.16(14) Form of Notice of Grant of Initial Stock Option (Non-Employee
Director) to be generally used in connection with the automatic
option grant program of the 1993 Stock Option Plan, as amended.
- ---------------------
(1) Incorporated by reference to an exhibit to the Company's
Registration Statement on Form S-1 (Registration No. 33-68438) as
amended.
(2) Incorporated by reference to an exhibit to the Company's 1994 Annual
Report on Form 10-K (Commission File No. 0-22366).
(3) Incorporated by reference to an exhibit to the Company's
Registration Statement on Form S-8 (Registration No. 33-71856).
(4) Incorporated by reference to an exhibit to the Company's
Registration Statement on Form S-1 (Registration No. 33-76264) as
amended.
(5) Incorporated by reference to an exhibit to the Company's
Registration Statement on Form S-8 (Registration No. 33-76542).
(6) Incorporated by reference to an exhibit to the Company's Quarterly
Report on Form 10-Q (Commission File No. 0-22366) for the quarterly
period ended April 30, 1994.
(7) Incorporated by reference to an exhibit to the Company's Quarterly
Report on Form 10-Q (Commission File No. 0-22366) for the quarterly
period ended July 31, 1994.
(8) Management contract or compensatory plan filed pursuant to Item
14(c).
(9) Incorporated by reference to an exhibit to the Company's Quarterly
Report on Form 10-Q (Commission File No. 0-22366) for the quarterly
period ended July 31, 1995.
(10) Incorporated by reference to an exhibit to the Company's
Registration statement on Form S-3 (Registration No. 33-92802), as
amended.
(11) Incorporated by reference to an exhibit to the Company's Current
Report on Form 8-K as filed with the Commission on March 29, 1995,
as amended on May 26, 1995.
(12) Incorporated by reference to an exhibit to the Company's Quarterly
Report on Form 10-Q (Commission File No. 0-22366) for the quarterly
period ended April 30, 1995.
(13) Incorporated by reference to an exhibit to the Company's 1995 Annual
Report on Form 10-K (Commission File No. 0-22366).
(14) Incorporated by reference to an exhibit to the Company's Quarterly
Report on Form 10-Q (Commission File No. 0-22366) for the quarterly
period ended April 30, 1996.
(15) Incorporated by reference to an exhibit to the Company's Quarterly
Report on Form 10-Q (Commission File No. 0-22366) for the quarterly
period ended July 31, 1996.
</TABLE>
46
<PAGE>
EXHIBIT 10.20
LICENSE AGREEMENT
This Agreement is entered into as of July 31, 1996 (the "Effective
Date") by and between Credence Systems Corporation, a Delaware corporation, with
its principal place of business located at 215 Fourier Avenue, Fremont,
California 94539 ("Licensor"), and Kinetix Test Systems, LLC, a California
limited liability company, with its principal place of business located at 660
East Calaveras Blvd., Milpitas, California 95035 ("Licensee").
WHEREAS, Licensor desires to license to Licensee the Technology (as
defined below) on the terms and conditions contained herein; and
WHEREAS, Licensee desires to obtain from Licensor a license to the
Technology (as defined below) on the terms and conditions contained herein;
NOW, THEREFORE, in consideration of the mutual promises and covenants
set forth herein, the parties hereby agree as follows:
1. Certain Definitions.
-------------------
1.1 An "Affiliate" of a party means an entity directly or indirectly
controlling, controlled by or under common control with that party.
1.2 "Gross Revenue" means the gross revenue received by Licensee with
respect to the sale, transfer or disposition of any Product (including without
limitation, all service and upgrade revenue) to a person or entity that is not
an Affiliate. Where a Product is sold, transferred or disposed of to an
Affiliate or for consideration other than cash or other than in an arms-length
transaction, the Gross Revenue applicable to such transaction shall be the Gross
Revenue attributable to like transactions of the same quantity of such Product
to third parties for cash on an arms-length basis.
1.3 "Products" means Licensor's 6K/8K test systems, namely, the
STS/6060, STS/6120, STS/6560, STS/6520, STS/7720, and STS/8256 test systems as
well as all optional hardware and software products which relate to the use of
these machines. The optional hardware and software products include but are not
limited to system configuration options, TesterTools software, off-line
programming workstations, and off-line compilers.
1.4 "Proprietary Information" of a disclosing party means the
following, to the extent previously, currently or subsequently disclosed to the
other party hereunder or otherwise: information relating to Products, the
properties, composition or structure thereof or the manufacture or processing
thereof or machines therefor or to the disclosing party's business (including,
without limitation, reagents, computer programs, algorithms, names and expertise
of employees and consultants, know-how, formulas, processes, ideas, inventions
<PAGE>
(whether patentable or not), schematics and other technical, business,
financial, customer and product development plans, forecasts, strategies and
information).
1.5 "Proprietary Rights" means patent rights, copyrights, trademark
rights, mask work rights, trade secret rights, including without limitation,
manufacturing rights, engineering rights, upgrade rights, and any and all other
statutory and legal rights and protections available under applicable laws for
the protection of intellectual property.
1.6 "Technology" shall mean all technology comprising of Licensor's
"6K/8K" test system family, as set forth and described in Attachment A hereto,
including, without limitation, all patents and patent applications, related
inventions (whether or not patentable), ideas, processes, formulas, designs,
works of authorship, technology, computer programs, source and object code,
firmware, software, microcode, mask works, processes, techniques, information
and know-how, owned or controlled by Licensor as of the date of this Agreement,
together with reasonable documentation provided therewith to Licensee by
Licensor.
2. License Grant.
-------------
2.1 Subject to all of the terms and conditions of this Agreement,
Licensor hereby grants Licensee an exclusive, worldwide, perpetual (subject to
Section 12), transferable (but only after July 31, 2001) license under
Licensor's Proprietary Rights in the Technology to make, use, sell, offer for
sale and distribute Products. Licensee shall have the right to modify or create
derivatives of the Products or Technology; provided, however, that Licensee
shall not change or modify the current maximum pin count or maximum test
frequency of the Products during the first two (2) years after the Effective
Date of this Agreement.
2.2 Notwithstanding anything else, Licensor and its licensors retain
(i) all title to, and, except as expressly and unambiguously licensed herein,
all rights to the Technology and all related documentation and materials, (ii)
all of their respective service marks, trademarks, trade names or any other
designations (and notwithstanding anything else herein, Licensee may not use any
name, mark or designation used by Licensor or its licensors, and (iii) all
Proprietary Rights in the Technology.
3. Fees; Payment.
-------------
3.1 As full consideration for this Agreement and the license granted
in Section 2 above, Licensee will pay Licensor fees ("Management Fees") equal to
a percentage of the Gross Revenue received by Licensee on Products sold by or
under the authority of Licensee according the following schedule:
3.1.1 five percent (5%) of Gross Revenue received for the period
commencing on the Effective Date and continuing for three (3) years thereafter;
2
<PAGE>
3.1.2 four percent (4%) of Gross Revenue received during the
fourth (4th) year of this Agreement;
3.1.3 three percent (3%) of Gross Revenue received during the
fifth (5th) year of this Agreement;
3.1.4 after the end of the fifth (5th) year Licensee shall cease
royalty payments and the license granted in Section 2 above shall become royalty
free.
3.2 Management Fees shall be due within thirty (30) days after the
end of each calendar quarter with respect to the Gross Revenue received by
Licensee in that quarter. All payments shall be made in U.S. dollars in the
United States. All late payments shall be assessed a service charge of 1.5% per
month, to the extent allowed by law.
4. Maintenance, Service and Support.
--------------------------------
4.1 Licensee acknowledges and agrees that maintaining good customer
relations, including providing proper service and support to customers is
critical to Licensor's business. Licensee shall be responsible for providing
certain customer support for Products. Licensee agrees to continue to support
Licensor's ongoing service activities relating to Products, including, but not
limited to, hardware and software engineering necessary for bug fixes, execution
of product change requests ("PCRs") from Licensor's warranty and service
contract customers, periodic software releases, and technical support services.
4.2 Payment for these support activities will occur in the form of an
exchange of services. When it is appropriate and mutually agreed that Licensor
will provide the field service and/or logistics support for a product
manufactured and shipped by Licensee under the terms of this agreement, Licensee
will reserve a portion of the Gross Revenue from such a sale at the following
percentages in order to compensate Licensor: (i) 3.75% of Gross Revenue for
products shipped to locations in Northern California, (ii) 5.625% of Gross
Revenue for products shipped to locations throughout the rest of the United
States, and (iii) 7.5% of Gross Revenue for products shipped to locations
outside the United States. Licensor may then draw from the reserve account to
compensate Licensee at the rate of Seventy-Five Dollars ($75.00) per hour for
time actually spent by Licensee performing the services and support described in
Section 4.1 above.
4.3 During the term of this Agreement, Licensor will provide second
level telephone support or, at Licensor's option, electronic support to Licensee
during Licensor's normal business hours for answering questions regarding the
Technology. Licensee must designate one (1) individual for handling all
maintenance and support contact and communications with Licensor and shall,
within thirty (30) days after the Effective Date,
3
<PAGE>
provide Licensor with the name of such individual. Thereafter, Licensee may
designate successor individuals upon ten (10) days prior written notice.
5. Transfer of Technology; Existing Orders. To carry on the
---------------------------------------
physical transfer of Technology from Licensor to Licensee, Licensor shall
disclose to Licensee (to the extent not already disclosed), on the Effective
Date of this Agreement, Technology in tangible form sufficient to enable
Licensee to exercise the license granted in Section 2 above. The physical
transfer of Technology shall take place according to the transition plan
described in Attachment B hereto. Upon termination of this Agreement for any
reason, Licensee will immediately return to Licensor any and all copies (in
whatever media) of the Technology or portions thereof that it has in its
possession or control. As part of the transfer of Technology, Licensor shall
provide Licensee with information relating to orders of Products placed with
Licensor before, and existing as of, the Effective Date. Licensee shall have
the right to fill such orders as part of its distribution of Products under this
Agreement.
6. Licensee Covenants and Representations.
--------------------------------------
Except as expressly and unambiguously provided herein and as
conditions of Licensee's license hereunder, Licensee represents, warrants and
agrees:
6.1 not to delete, alter, add to or fail to reproduce in and on any
Licensee Products any copyright, trademark (if such trademark is used by
Licensee) or other notices appearing in or on any copy, media, master disk or
package materials containing or relating to the Technology and provided by
Licensor or which may be required by Licensor at any time;
6.2 to keep Licensor informed as to any problems encountered with the
Technology and any resolutions arrived at for those problems. If Licensor makes
any modifications, design changes or improvements of the Technology based on
suggestions by Licensee or any of its customers, distributors, employees or
agents, Licensor shall have any and all right, title and interest in and to any
such suggested modifications, design changes or improvements;
6.3 to provide Licensor with quarterly written reports of the total
number of Products sold within thirty (30) days after the end of each quarter.
Such reports shall accompany the payments specified in Section 3 above.
6.4 to keep complete and accurate books and records of its sales,
customers and end users of Products and all other transactions relating to the
Technology. Licensor shall have the right (upon reasonable notice and during
Licensee's normal business hours) to have an independent certified public
accountant inspect and audit the books and records of Licensee for the purpose
of verifying Licensee's compliance with the terms and conditions of this
Agreement and any reports, information or payments provided or due hereunder.
All
4
<PAGE>
underpayments revealed by such audit shall be paid to Licensor within thirty
(30) days of the audit results. The cost of such audit shall be borne by the
Licensor, except that if such audit reveals an underpayment to Licensor in
excess of five percent (5%), Licensee shall bear the expense of the audit.
Licensor may exercise its right to audit no more than once each year unless an
audit reveals Licensee's non-compliance with the terms and conditions of this
Agreement or an underpayment hereunder of over five percent (5%), in which event
Licensor shall have the right to audit more frequently (but no more than once
every three (3) months) until the results of the last audit reveal Licensee's
compliance with the terms and conditions of this Agreement and less than a five
(5%) underpayment hereunder.
6.5 to comply with all export laws and restrictions and regulations
of the Department of Commerce or other United States or foreign agency or
authority, and not to export, or allow the export or reexport of any Proprietary
Information, Technology or Products or any direct product thereof in violation
of any such restrictions, laws or regulations, or to Afghanistan, the People's
Republic of China or any Group Q, S, W, Y or Z country specified in the then
current Supplement No. 1 to Section 770 of the U.S. Export Administration
Regulations (or any successor supplement or regulations); Licensee shall obtain
and bear all expenses relating to any necessary licenses and/or exemptions with
respect to the export from the U.S. of all material or items deliverable by
Licensee to any location and shall demonstrate to Licensor compliance with all
applicable laws and regulations prior to delivery thereof by Licensee;
6.6 that all advertising and marketing materials relating to the
Technology shall be accurate in all respects. Licensee agrees to provide
Licensor with copies of all brochures, advertisements, direct mail materials and
all other marketing materials regarding the Technology for Licensor's prior
review and approval which shall not be unreasonably withheld or delayed. The
purpose of such review shall be to verify the accuracy of such materials with
respect to the Technology and the appropriate usage of proprietary notices
(including, without limitation, copyright notices). Licensor shall approve or
disapprove such materials within ten (10) business days of receipt from
Licensee. Licensee agrees to correct all errors and omissions as required by
Licensor prior to the distribution of such materials. Licensee shall provide
Licensor with copies of such materials sufficiently in advance to allow adequate
time for Licensor to correct any errors or omissions and for Licensee to correct
such errors or omissions.
7. Confidentiality. Each party recognizes the importance to the
---------------
other of the other's Proprietary Information. Accordingly, the receiving party
agrees (i) to hold the disclosing party's Proprietary Information in confidence
and to take reasonable precautions to protect such Proprietary Information
(including, without limitation, all precautions the receiving party employs with
respect to its confidential materials), (ii) not to divulge any such Proprietary
Information or any information derived therefrom to any third person, (iii) not
to make any use whatsoever at any time of such Proprietary Information except as
expressly
5
<PAGE>
authorized in this Agreement. Without granting any right or license, the
disclosing party agrees that the foregoing clauses (i), (ii) and (iii) shall not
apply with respect to information the receiving party can document (a) is in or
(through no improper action or inaction by the receiving party or any Affiliate,
agent or employee) enters the public domain (and is readily available without
substantial effort), or (b) was rightfully in its possession or known by it
prior to receipt from the disclosing party, or (c) was rightfully disclosed to
it by another person without restriction, or (d) was independently developed by
it by persons without access to such information. The receiving party must
promptly notify the disclosing party of any information it believes comes within
any circumstance listed in the immediately preceding sentence and will bear the
burden of proving the existence of any such circumstance by clear and convincing
evidence.
8. Warranty and Disclaimers.
------------------------
8.1 Licensor warrants (i) that this Agreement and the obligations of
Licensor hereunder do not contravene, interfere with, or result in the breach of
any rights of any third parties or breach any agreement to keep in confidence
proprietary information acquired by Licensor in confidence or in trust prior to
the execution of this Agreement, (ii) that it has full right, power and
authority to enter into this Agreement and grant Licensee the rights and license
contained herein.
8.2 THE TECHNOLOGY IS PROVIDED TO LICENSEE "AS IS." EXCEPT FOR THE
REPRESENTATIONS MADE IN SECTION 8.1 ABOVE, LICENSOR MAKES NO WARRANTIES TO ANY
PERSON OR ENTITY WITH RESPECT TO THE TECHNOLOGY OR ANY PRODUCTS, SERVICES OR
LICENSES AND DISCLAIMS ALL IMPLIED WARRANTIES, INCLUDING WITHOUT LIMITATION,
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
9. Patent Indemnity.
----------------
9.1 Licensor shall defend, at its sole expense, any suit or
proceeding against Licensee for the direct infringement of any U.S. patent of
any third party by Technology licensed from Licensor hereunder. Licensor shall
pay all costs and damages finally awarded against Licensee because of direct
infringement.
9.2 The foregoing obligation of Licensor does not apply with respect
to Technology or Products or portions or components thereof (i) not supplied by
Licensor, (ii) made in whole or in part in accordance to Licensee
specifications, (iii) which are modified by Licensee, if the alleged
infringement relates to such modification, (iv) combined with other products,
processes or materials where the alleged infringement relates to such
combination, (v) where Licensee continues allegedly infringing activity after
being notified thereof or after being informed of modifications that would have
avoided the alleged infringement, or
6
<PAGE>
(vi) where Licensee's use of the Technology is incident to an infringement not
resulting primarily from the Technology or is not strictly in accordance with
the License; Licensee will indemnify Licensor and its officers, directors,
agents and employees from all damages, settlements, attorneys' fees and expenses
related to a claim of infringement or misappropriation excluded from Licensor's
indemnity obligation by this Section 9.2.
9.3 Licensor's duties herein are conditioned upon Licensee providing
Licensor with prompt written notice of any and all threats of, or the
commencement of any suit or proceeding for any claim of infringement and
Licensee shall provide Licensor with all authority (including the right to
control the defense of any suit or proceeding and all negotiations for
settlement of compromise) necessary to defend or settle such suit or proceeding.
Licensor shall not be bound by any settlement made without Licensor's prior
written consent.
THIS SECTION 9 STATES THE SOLE AND EXCLUSIVE LIABILITY OF LICENSOR AND
LICENSEE FOR MISAPPROPRIATION OR INFRINGEMENT OF PATENTS ANY OTHER PROPRIETARY
RIGHTS, AND IS IN LIEU OF ANY AND ALL WARRANTIES OF NON-INFRINGEMENT OR SIMILAR
OBLIGATIONS, EXPRESS OR IMPLIED, IN REGARD THERETO, AND WHICH ARE HEREBY
DISCLAIMED.
10. Limitation of Liability. NOTWITHSTANDING ANYTHING ELSE IN THIS
-----------------------
AGREEMENT OR OTHERWISE, LICENSOR WILL NOT BE LIABLE WITH RESPECT TO ANY SUBJECT
MATTER OF THIS AGREEMENT UNDER ANY CONTRACT, NEGLIGENCE, STRICT LIABILITY OR
OTHER LEGAL OR EQUITABLE THEORY (I) FOR ANY AMOUNTS IN EXCESS IN THE AGGREGATE
OF THE FEES PAID TO LICENSOR HEREUNDER DURING THE TWELVE (12) MONTH PERIOD PRIOR
TO THE DATE THE CAUSE OF ACTION AROSE OR, IF NO FEES HAVE BEEN PAID TO LICENSOR
HEREUNDER DURING SUCH TWELVE (12) MONTH PERIOD, FOR ANY AMOUNTS IN EXCESS OF ONE
HUNDRED THOUSAND DOLLARS ($100,000), (II) FOR ANY INCIDENTAL OR CONSEQUENTIAL
DAMAGES OR LOST DATA OR (III) FOR COST OF PROCUREMENT OF SUBSTITUTE GOODS,
TECHNOLOGY OR SERVICES; EVEN IF THE REMEDIES PROVIDED FOR IN THIS AGREEMENT FAIL
OF THEIR ESSENTIAL PURPOSE AND EVEN IF EITHER PARTY HAS BEEN ADVISED OF THE
POSSIBILITY OR PROBABILITY OF SUCH DAMAGES.
11. Term. Except as expressly provided in Section 12 below, this
----
Agreement and the license granted herein shall be effective from the Effective
Date of this Agreement and shall remain in effect in perpetuity.
12. Termination.
-----------
12.1 This Agreement may be terminated by a party for cause immediately
upon the occurrence of any of the following events:
7
<PAGE>
12.1.1 if the other ceases to do business, or otherwise
terminates its business operations; or
12.1.2 if the other shall fail to promptly secure or renew any
license, registration, permit, authorization or approval necessary for the
conduct of its business in the manner contemplated by this Agreement, or if any
such license, registration, permit, authorization or approval is revoked or
suspended and not reinstated within thirty (30) days; or
12.1.3 if the other materially breaches any material provision
of this Agreement and fails to cure such breach within thirty (30) days (ten
(10) days in the case of nonpayment and immediately in the case of a breach of
Section 7) of written notice describing the breach; or
12.1.4 if the other shall seek protection under any bankruptcy,
receivership, trust deed, creditors arrangement, composition or comparable
proceeding, or if any such proceeding is instituted against the other (and not
dismissed within ninety (90) days).
12.2 Neither party shall incur any liability whatsoever for any
damage, loss or expenses of any kind suffered or incurred by the other (or for
any compensation to the other) arising from or incident to any termination of
this Agreement by such party that complies with the terms of the Agreement
whether or not such party is aware of any such damage, loss or expenses.
12.3 Upon termination of this Agreement by either party, (i) all
rights and licenses of Licensee and obligations of and restrictions on Licensor
and Licensee hereunder shall terminate, except as expressly set forth in
subclause (iv) below and except that end user licenses granted to Products
customers in accordance with this Agreement will remain in effect in accordance
with their terms; (ii) Licensee will immediately return to Licensor all
Technology, Proprietary Information, master disks, catalogues and literature in
its possession, custody or control in whatever form held (including all copies
or embodiments thereof), (iii) to the extent Licensee has purchased or purchases
from Licensor any assets or inventory related to the Products, Licensor shall
have the right at its option to repurchase any or all such assets or inventory
at the original purchase price paid by Licensee, and (iv) in addition to the
rights to payment hereunder, the following provisions shall survive any
expiration or termination of this Agreement: Sections 6.5, 7, 8, 10, 12.2,
12.3, 12.4, 14 and 15.
12.4 Termination is not the sole remedy under this Agreement and,
whether or not termination is effected, all other remedies will remain
available.
13. Relationship of Parties. The parties hereto expressly understand
-----------------------
and
8
<PAGE>
agree that Licensee is an independent contractor in the performance of each and
every part of this Agreement, is solely responsible for all of its employees and
agents and its labor costs and expenses arising in connection therewith and is
responsible for and will indemnify Licensor from any and all claims,
liabilities, damages, debts, settlements, costs, attorneys' fees, expenses and
liabilities of any type whatsoever that may arise on account of Licensee's
activities or those of its employees or agents (including, without limitation,
Affiliates), including without limitation, providing unauthorized
representations or warranties to its customers or breaching any term,
representation or warranty of this Agreement. Licensor is in no manner
associated with or otherwise connected with the actual performance of this
Agreement on the part of Licensee, nor with Licensee's employment of other
persons or incurring of other expenses. Except as expressly provided herein,
Licensor shall have no right to exercise any control whatsoever over the
activities or operations of Licensee.
14. Assignment. The rights and obligations of the parties under this
----------
Agreement may not be assigned or transferred except (i) rights to payment of
money may be assigned and (ii) this Agreement, except that the rights and
obligations of Licensor hereunder may be assigned to an acquiror of all or
substantially all the assets, business or stock of Licensor without Licensor's
prior written consent.
15. Miscellaneous.
-------------
15.1 Amendment and Waiver - Except as otherwise expressly provided
herein, any provision of this Agreement may be amended and the observance of any
provision of this Agreement may be waived (either generally or any particular
instance and either retroactively or prospectively) only with the written
consent of the parties.
15.2 Governing Law and Legal Actions - This Agreement shall be
governed by and construed under the laws of the State of California and the
United States without regard to conflicts of laws provisions thereof. In any
action or proceeding to enforce rights under this Agreement, the prevailing
party shall be entitled to recover costs and attorneys' fees.
15.3 Headings - Headings and captions are for convenience only and are
not to be used in the interpretation of this Agreement.
15.4 Notices - Notices under this Agreement shall be sufficient only
if personally delivered, delivered by a major commercial rapid delivery courier
service or mailed by certified or registered mail, return receipt requested to a
party at its addresses set forth on the first page of this Agreement or as
amended by notice pursuant to this subsection. If not received sooner, notice by
mail shall be deemed received five (5) days after deposit in the U.S. mails.
15.5 Force Majeure - Neither party hereto shall be responsible for any
failure
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<PAGE>
to perform its obligations under this Agreement if such failure is caused by
acts of God, war, strikes, revolutions, lack or failure of transportation
facilities, laws or governmental regulations or other causes which are beyond
the reasonable control of such party. Obligations hereunder, however, shall in
no event be excused but shall be suspended only until the cessation of any cause
of such failure. In the event that such force majeure should obstruct
performance of this Agreement for more than six (6) months, the parties hereto
shall consult with each other to determine whether this Agreement should be
modified. The party facing an event of force majeure shall use its best
endeavors in order to remedy that situation as well as to minimize its effects.
A case of force majeure shall be notified to the other party by telex or telefax
within five (5) days after its occurrence and shall be confirmed by a letter.
15.6 Severability - If any provision of this Agreement is held
illegal, invalid or unenforceable by a court of competent jurisdiction, that
provision will be limited or eliminated to the minimum extent necessary so that
this Agreement shall otherwise remain in full force and effect and enforceable.
15.7 Further Assurances - Each party hereto shall execute, acknowledge
and deliver such further instruments and do all such other acts as may be
reasonably necessary or appropriate to carry out the purposes of this Agreement.
15.8 Remedies - The rights and remedies of a party set forth herein
with respect to failure of the other to comply with the terms and conditions of
this Agreement (including, without limitation, rights of termination of this
Agreement) are not exclusive, the exercise thereof shall not constitute an
election of remedies and the aggrieved party shall in all events be entitled to
seek whatever additional remedies may be available in law or equity.
15.9 Entire Agreement - This Agreement supersedes all proposals, oral
or written, all negotiations, conversations, or discussions between or among the
parties relating to the subject matter of this Agreement and all past dealing or
industry custom.
IN WITNESS WHEREOF, the parties have caused their duly authorized
representatives to execute this Agreement.
LICENSEE: KINETIX TEST SYSTEMS, LLC
By:
Its:
10
<PAGE>
LICENSOR: CREDENCE SYSTEMS CORPORATION
By:
Its:
11
<PAGE>
ATTACHMENT A
------------
LIST OF TECHNICAL INFORMATION TO BE PROVIDED BY LICENSOR
--------------------------------------------------------
12
<PAGE>
ATTACHMENT B
------------
Transition Plan for Completing the Transfer of Technology (12 week duration):
- ----------------------------------------------------------------------------
1. Within two weeks after Licensor's preliminary approval, Licensee
representatives will visit Licensor, Beaverton, to discuss with Licensor which
test benches and instrumentation will be transferred and to accomplish that
transfer. The STS/6560 currently located at Licensor's Fremont Technical Support
Center will also be transferred to Licensee at this time.
2. During the following four weeks, Licensee personnel will work with Licensor
in Beaverton to accomplish the transfer to Licensee of all necessary
intellectual property, documentation, technical information, purchasing
information, tooling, etc.
3. Licensee will then work for approximately four weeks to organize the
information derived in 6(b) above, and to plan and prepare for production
activities. During this period, Licensee may make certain specific requests for
transfer of inventory items to support its planning and preparation phase.
4. Finally, Licensee will again visit Licensor, Beaverton, to coordinate the
transfer of all remaining assets to Licensee.
13
<PAGE>
EXHIBIT 10.21
BUSINESS PARK LEASE
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<C> <S> <C>
1. BASIC LEASE TERMS 1
a. DATE OF LEASE EXECUTION 1
b. TENANT 1
c. LANDLORD 1
d. TENANT'S USE OF PREMISES 1
e. PREMISES AREA 1
f. PROJECT AREA 1
g. AGREED UPON PREMISES PERCENT OF PROJECT 1
h. TERM OF LEASE 1
i. BASE MONTHLY RENT 1
j. ANNUAL EXPENSE BASE 1
k. PREPAID RENT 1
1. TOTAL SECURITY DEPOSIT 1
m. BROKER(S) 1
n. GUARANTORS 1
2. PREMISES 1
3. TERM 1
4. RENT 1
a. Base Monthly Rent 1
b. Expenses 2
(1) Common Area Expenses 2
(2) Expenses Defined 2
(3) Annual Estimate of Expenses 2
(4) Monthly Payment of Expenses 2
(5) Rent Without Offset and Late Charge 2
5. PREPAID RENT 3
6. USE OF PREMISES AND PROJECT FACILITIES 3
7. SIGNAGE 3
5. PERSONAL PROPERTY TAXES 3
9. PARKING 3
10. UTILITIES 3
11. MAINTENANCE 4
12. ALTERATIONS 4
13. RELEASE AND INDEMNITY 4
14. INSURANCE 4
15. DESTRUCTION 4
16. CONDEMNATION 5
a. Definitions 5
b. Obligations to Be Governed by Lease 5
c. Total or Partial Taking 5
d. Landlord's Election 5
e. Award 5
f. Landlord Representation 5
17. ASSIGNMENT OR SUBLEASE 5
18. DEFAULT 5
19. LANDLORD'S REMEDIES 6
20. ENTRY ON PREMISES 6
</TABLE>
1
<PAGE>
<TABLE>
<C> <S> <C>
21. SUBORDINATION 6
22. NOTICE 6
23. WAIVER 7
24. SURRENDER OF PREMISES; HOLDING OVER 7
25. LIMITATION OF LIABILITY 7
</TABLE>
2
<PAGE>
<TABLE>
<C> <S> <C>
26. MISCELLANEOUS PROVISIONS 7
a. Time of Essence 7
b. Successor 7
c. Landlord Consent 7
d. Commissions 7
e. Other Charges 7
f. Landlord's Successors 7
g. Interpretation 7
h. Third Parties 8
i. Survival 8
27. EMISSIONS; STORAGE, USE AND DISPOSAL OF WASTE 8
a. Emissions 8
b. Storage and Use 8
(1) Storage 8
(2) Use 8
c. Disposal of Waste 8
(1) Refuse Disposal 8
(2) Sewage Disposal 8
(3) Disposal of Other Waste 8
d. Compliance with Law 8
e Indemnification 8
f. Additional Provisions 8
g. Information 9
28. EXHIBITS 9
Addendum A
</TABLE>
3
<PAGE>
BUSINESS PARK LEASE
1. BASIC LEASE TERMS.
a. DATE OF LEASE EXECUTION: 9/12/95
-----------------------------------------------------
b. TENANT: Credence Systems Corporation
Trade Name: N/A
Address (Leased Premises): Scholls Business Center, Building S, Tigard, OR
Building/Unit: Building S
Address (For Notices):
-------------------------------------------------------
-----------------------------------------------------------------------------
c. LANDLORD: Petula Associates, Ltd. and Koll Portland Associates, dba KBC -
Tigard II
Address (For Notices): 10240 S.W. Nimbus Avenue, Suite L3
Tigard, OR 97223
d. TENANT'S USE OF PREMISES: Office/Warehouse/Light Assembly
e. PREMISES AREA: Approximately 41,787 Square Feet
f. PROJECT AREA: Approximately 41,787 Square Feet
g. AGREED UPON PREMISES PERCENT OF PROJECT: 100%
h. TERM OF LEASE Commencement: 2/5/96 or date of occupancy, whichever first
occurs; Expiration: 2/4/01; Number of Months: 60
i. BASE MONTHLY RENT: $31,758
j. ANNUAL EXPENSE BASE:
Expense Rate $ -0-
Premises Area Square Feet X 41,787
Annual Expense Base $ -0-
Note: An Annual Expense Base of $0 does not mean Expenses are not payable by
Tenant. See Section 4 below. Currently, Expenses are estimated to be $.18 per
square foot per month, provided however, that Tenant shall not be required to
pay increases of more than 5% per year over the first fully assessed year.
k. PREPAID RENT: $ 31,758
l. TOTAL SECURITY DEPOSIT: $ -0-, including a $N/A nonrefundable cleaning fee.
The Security Deposit shall be paid by a separate check made payable to the
Landlord.
m. BROKER(S): None
n. GUARANTORS: None
2. PREMISES.
Landlord leases to Tenant the premises described in Section 1 and in Exhibit
A (the 'Premises'), located in the project described on Exhibit B (the
'Project'). Landlord reserves the right to decrease Tenant's percentage of the
Project as set forth in Section 1 if the Project size is increased through the
development of additional property. By taking occupancy of the Premises, Tenant
acknowledges that it has examined the Premises and accepts the Premises in their
then present condition, subject to latent defects covered by contractor
warranties and to any work which Landlord has herein agreed to perform prior to
commencement which Landlord and Tenant identify in writing, prior to occupancy,
as not completed.
3. TERM.
The term of this Lease is for the period set forth in Section 1, commencing
on the date in Section 1. If Landlord, for any reason, cannot deliver possession
of the Premises to Tenant upon the scheduled commencement date set forth in
Section 1, this Lease shall not be void or voidable, nor shall Landlord be
liable to Tenant for any loss or damage resulting from such delay. In that
event, however, Landlord shall deliver possession of the Premises as soon as
practicable and the commencement date shall be the date of such delivery with
the term of the Lease remaining unchanged, and all other terms and conditions of
this Lease remaining in full force and effect. However, if Landlord is delayed
in delivering possession to Tenant for any reason attributable to Tenant, this
Lease (including the obligation to pay all rents) shall commence on the
scheduled commencement date set forth in Section 1 above. If Landlord for any
reason not attributable to Tenant, is unable to deliver occupany of the Premises
within sixty (60) days following the scheduled commencement date, either party
may terminate this Lease by written notice given within ten (10) days following
expiration of such period. If such occurs, Landlord shall refund to Tenant all
monies paid by Tenant to or for the benefit of Landlord within thirty (30) days
of demand. Landlord intends to complete the Project by the
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scheduled commencement date based on the commencement of construction on August
28, 1995. Landlord shall keep Tenant reasonably informed of the progress of
construction through semi-monthly update meetings with the Tenant to discuss
schedule updates, change orders, the effect of change orders on scheduling,
move-in planning and strategies and other activities which may affect Project
completion.
4. RENT.
a. BASE MONTHLY RENT. Tenant shall pay to Landlord base monthly rent in the
initial amount in Section 1 which shall be payable monthly in advance on the
first day of each and every calendar month ("Base Monthly Rent"); provided,
however, the Base Monthly Rent for the first month of the term (or the first
month following any rental abatement period, if applicable) is due upon
execution of this Lease by Tenant. If the term of this Lease contains any
rental abatement period, Tenant hereby agrees that if Tenant breaches the
Lease and/or abandons the Premises before the end of the Lease term, or if
this Lease or Tenant's right to possession is terminated by Landlord because
of Tenant's breach of the Lease, Landlord shall, at its option, (1) void the
rental abatement period, and (2) recover from Tenant, in addition to all
other damages due Landlord, rent for the duration of the rental abatement
period at a rental rate equivalent to the highest Base Monthly Rent
specified herein. All charges and sums due from Tenant to Landlord hereunder
shall be deemed rent.
For purposes of Section 467 of the Internal Revenue Code, the parties to
this Lease hereby agree to allocate the stated rents, provided herein, to
the periods which correspond to the actual rent payments as provided under
the terms and conditions of this agreement,
b. EXPENSES. The purpose of this Section 4.b is to ensure that Tenant bears a
share of all Expenses related to the, use, maintenance, ownership, repair or
replacement, and insurance of the Project. Accordingly, beginning on the
date Tenant takes possession of the Premises, Tenant shall pay to Landlord
that portion of Tenant's share of Expenses related to the Project.
(1) COMMON AREA EXPENSES. Tenant will also be responsible for their share of
certain expenses which are on to all tenants of the entire park. These
expenses will be prorated based upon Tenant's project square footage
(41,787 sq. ft.) as it relates to the square footage of the entire
Scholls Business Park (355,166 sq. ft.). These expenses include but are
not limited to the following:
(a) Gazebo and pond maintenance;
(b) Sport court maintenance and repair;
(c) Common road and driveway maintenance and repairs;
(d) Minor common area maintenance items.
(2) EXPENSES DEFINED. The term 'Expenses' shall mean all costs and expenses
incurred by Landlord with respect to the ownership, operation,
maintenance, repair or replacement, and insurance of the Project,
including without limitation, the following costs:
(a) All supplies, materials, labor, equipment, and utilities used in or
related to the operation and maintenance of the Project;
(b) All management, janitorial, legal, accounting, insurance, and
service agreement costs related to the Project;
(c) All maintenance, replacement and repair costs relating to the areas
within or around the Project, including, without limitation, air
conditioning systems, sidewalks, landscaping, service areas,
driveways, parking areas (including resurfacing and restriping
parking areas), walkways, building exteriors (including painting),
signs and directories, repairing and replacing roofs, walls, etc.
These costs shall be based on actual expenditures.
(d) Amortization (along with reasonable financing charges) of capital
improvements made to the Project which may be required by any
government authority or which will improve the operating efficiency
of the Project (provided, however, that the amount of such
amortization for improvements not mandated by government authority
shall not exceed in any year the amount of costs reasonably
determined by Landlord in its sole discretion to have been saved by
the expenditure either through the reduction, or minimization of
increases, of costs which would have otherwise occurred).
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(e) All Real Property Taxes, which shall mean and include all taxes,
assessments (general and special) and other impositions or charges
which may be taxed, charged, levied, assessed or imposed and are
due and payable upon all or any portion of or In relation to the
Project or any portion thereof, any leasehold estate in the
Premises or measured by rent from the Premises, including any
increase caused by the transfer, sale or encumbrance of the Project
or any portion thereof. "Real Property Taxes' shall also include
any form of assessment, levy, penalty, charge or tax (other than
estate, inheritance, net income or franchise taxes) imposed by any
authority having a direct or indirect power to tax or charge,
including, without limitation, any city, county, state, federal or
any improvement or other district, whether such tax is (1 )
determined by the area of the Project or the rent or other sums
payable under this Lease; (2) upon or with respect to any legal or
equitable interest of Landlord in the Project or any part thereof;
(3) upon this transaction or any document to which Tenant is a
party creating a transfer in any interest in the Project; (4) in
lieu of or as a direct substitute in whole or in part of or in
addition to any real property taxes on the Project; (5) based on
any parking spaces or parking facilities provided in the Project;
or (6) in consideration for services, such as police protection,
fire protection, street, sidewalk and roadway maintenance, refuse
removal or other services that may be provided by any governmental
or quasi-governmental agency from time to time which were formerly
provided without charge or with less charge to property owners or
occupants. 'Real Property Taxes' shall also include all assessments
under recorded covenants or master plans and/or by owner's
associations.
(3) ANNUAL ESTIMATE OF EXPENSES. When Tenant takes possession of the
Premises, Landlord shall estimate Tenant's portion of Expenses for the
remainder of the calendar year based on the Tenant's portion of the
Project Area set forth in Section 1. At the commencement of each
calendar year thereafter, Landlord shall estimate Tenant's portion of
Expenses for the coming year based on the Tenant's portion of the
Project Area set forth in Section 1.
(4) MONTHLY PAYMENT OF EXPENSES. Tenant shall pay to Landlord, as additional
rent, its estimated share of expenses in monthly installments of one-
twelfth (1/12) beginning on the date Tenant takes possession of the
Premises. As soon as practical following each calendar year, Landlord
shall prepare an accounting of actual Expenses incurred during the prior
calendar year and such accounting shall reflect Tenant's share of
Expenses. Tenant, upon request, may review and audit the accounting from
original sources and Landlord's books and records at Tenant's expense.
If the additional rent paid by Tenant under this Section 4.c(4) during
the preceding calendar year was less than the actual amount of Tenant's
share of Expenses, Landlord shall so notify Tenant and Tenant shall pay
such amount to landlord within 60 days of receipt of such notice. Such
amount shall be deemed to have accrued during the prior calendar year
and shall be due and payable from Tenant even though the term of this
Lease has been terminated prior to Tenant's receipt of this notice.
Tenant shall have sixty (60) days from receipt of such notice to contest
the amount due; failure to so notify Landlord shall represent final
determination of Tenant's share of expenses. If Tenant's payments were
greater than the actual amount, then such overpayment shall be credited
by Landlord to all present rent due under this Section 4.c(4) but if no
rent is due, such overpayment shall be paid to Tenant within sixty (60)
days.
(5) RENT WITHOUT OFFSET AND LATE CHARGES. All rent shall be paid by Tenant
to Landlord monthly in advance on the first day of every calendar month,
at the address shown in Section 1, or such other place as Landlord may
designate in writing from time to time. All rent shall be paid without
prior demand or notice and without any deduction or offset whatsoever.
All rent shall be paid in lawful currency of the United States of
America. All rent due for any partial month shall prorated at the rate
of 1/30th of the total monthly rent per day. Tenant acknowledges that
late payment by Tenant to Landlord of any rent or other sums due under
this Lease will cause Landlord to incur costs not contemplated by this
Lease, the exact amount of such costs being extremely difficult and
impracticable to ascertain. Such costs include, without limitation,
processing and accounting charges and late charges that may be imposed
on Landlord by the terms of any encumbrance or note secured by the
Premises. Therefore, if any rent or other sum due from Tenant is not
received when due, Tenant shall pay to Landlord an additional sum equal
to 5% of such overdue payment. Landlord and Tenant hereby agree that
such late charge represents a fair and reasonable estimate of the costs
that Landlord will Incur by reason of any such Iate payment and that the
late charge is in addition to any and all remedies available to the
Landlord and thit the assessment and/or collection of the late charge
shall not be deemed a waiver of any default. Additionally, all such
delinquent rent or other sums, plus this late charge, shall bear
interest at the prime rate of the U.S. National Bank of Oregon, plus 2%,
on a fully floating basis (herein the 'Default Rate'), from the date
first due until the date paid in full. Any payments of any kind returned
for insufficient funds will be subject to an additional handling charge
of $25.00, and thereafter, Landlord may require Tenant to pay all future
payments of rent or other sums due by money order or cashier's check
5. PREPAID RENT.
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Upon the execution of this Lease, Tenant shall pay to Landlord the prepaid
rent set forth in Section 1, and it Tenant is not in default of any provisions
of this Lease, such prepaid rent shall be applied toward the Base Monthly Rent
due for the first month of the term (or the first month following any Base
Monthly Rent abatement period, if applicable). Upon a default by Tenant prior to
such application, Landlord shall have the right, without waiver of the default
or prejudice to other remedies. to use the prepaid rent or any of it to cure the
default or to compensate Landlord for all or any damages resulting from the
default. Landiord's obligations with respect to the prepaid rent are those of a
debtor and not of a trustee, and Landlord can commingle the prepaid rent with
Landlord's general funds. Landlord shall not be required to pay Tenant interest
on the prepaid rent. Landlord shall be entitled to immediately endorse and cash
Tenant's prepaid rent: however, such endorsement and cashing shall not
constitute Landiord's acceptance of this Lease. In the event Landlord does not
accept this Lease, Landlord shall return said prepaid rent.
6. USE OF PREMISES AND PROJECT FACILITIES.
Tenant shall use the Premises solely for the purposes set forth in Section I
and for no other purpose without obtaining the prior written consent of
Landlord. Tenant acknowledges that neither Landlord nor any agent of Landlord
has made any representation or warranty with respect to the Premises or with
respect to the suitability of the Premises or the Project for the conduct of
Tenant's business, nor has Landlord agreed to undertake any modification,
alteration or improvement to the Premises or the Project, except as provided in
writing in this Lease. Tenant acknowledges that Landlord may from time to time,
at its sole discretion, make such modifications, alterations, deletions or
improvements to the Project as Landlord may deem necessary or desirable, without
compensation or notice to Tenant. Tenant shall promptly and at all times comply
with all federal, state and local statutes, laws, ordinances, orders and
regulations affecting the Premises and the Project (herein 'Laws'), as well as
all master plans, restrictive covenants, and also any rules and regulations that
Landlord may adopt from time to time. Tenant shall not do or permit anything to
be done in or about the Premises or bring or keep anything in the Premises that
will in any way increase the premiums paid by Landlord on its insurance related
to the Project or which will in any way increase the premiums for fire or
casualty insurance carried by other tenants in the Project. Tenant will not
perform any act or carry on any practices that may injure the Promises or the
Project; that may be a nuisance or menace to other tenants in the Project; or
that shall in any way interfere with the quiet enjoyment of such other tenants.
Tenant shall not use the Premises for sleeping, washing clothes, manufacture or
mixing of anything that might emit any objectionable odor, noises, vibrations or
lights onto such other tenants. If sound insulation is required to muffle noise
produced by Tenant on the Premises, Tenant at its own cost shall provide all
necessary insulation. Tenant shall not do anything on the Premises which will
overload any existing parking or service to the Premises. Pets and/or animals of
any type shall not be kept on the Premises.
7. SIGNAGE.
All signage shall comply with rules and regulations set forth by Landlord
as may be modified from time to time. Current rules and regulations relating to
signs are described on Exhibit C. Tenant shall place no window covering (e.g.,
shades, blinds, curtains, drapes, screens, or tinting materials), stickers,
signs, lettering, banners or advertising or display material on or near exterior
windows or doors if such materials are visible from the exterior of the
Premises, without Landlord's prior written consent. Similarly, Tenant may not
install any alarm boxes, foil protection tape or other security equipment on the
Premises without Landlord's prior written consent. Any material violating this
provision may be destroyed by Landlord without compensation to Tenant, if Tenant
fails to correct the condition within thirty (30) days of written notice from
Landlord.
8. PERSONAL PROPERTY TAXES.
Tenant shall pay before delinquency all taxes, assessments, license fees and
public charges levied, assessed or imposed upon its business operations as well
as upon at( trade fixtures, leasehold improvements, merchandise and other
personal property in or about the Premises.
9. PARKING
Landlord grants to Tenant and Tenant's customers, suppliers, employees and
invitees, a nonexclusive license to use the designated parking areas in the
Project for the use of motor vehicles during the term of this Lease. Landlord
reserves the right at any time to grant similar nonexclusive use to other
tenants, to promulgate rules and regulations relating to the use of such parking
areas, including reasonable restrictions on parking by tenants and employees, to
designate specific spaces for the use of any tenant, and to make changes in the
parking layout from time to time. Landlord shall maintain a 3.5 cars per 1,000
square feet parking ratio.
10. UTILITIES
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Tenant shall pay for all water, gas, heat, light, power, sewer,
electricity, telephone or other service metered, chargeable or provided to the
Premises.
11. MAINTENANCE.
Landlord shall maintain, in good condition, the structural parts of the
Premises, which shall include only the foundations, bearing and exterior walls
(excluding glass), subflooring and roof (excluding skylights), the unexposed
electrical, plumbing and sewerage systems, including without limitation, those
portions of the systems lying outside the Premises, exterior doors (excluding
glass), window frames, gutters and downspouts on the Building and the heating,
ventilating and air conditioning system servicing the Premises; provided,
however, the cost of all such maintenance shall be considered 'Expenses' for
purposes of Section 4.e-b. Except as provided above, Tenant shall maintain and
repair the Premises in good condition, excepting ordinary wear and tear,
including, without limitation, maintaining and repairing all walls, floors,
ceilings, interior doors, exterior and interior windows and fixtures as well as
damage caused by Tenant, its agents, employees or invitees. Upon expiration or
termination of this Lease, Tenant shall surrender the Premises to Landlord in
the same condition as existed at the commencement of the term, except for
reasonable wear and tear or damage caused by fire or other casualty for which
Landlord has received all funds necessary for restoration of the Premises from
insurance proceeds. Nothing herein shall excuse Tenant from financial
responsibility for property damage caused by Tenant or Tenant's agents.
12. ALTERATIONS.
a. Tenant shall not make any alterations to the Premises, or to the Project,
including any changes to the existing landscaping, without Landlord's prior
written consent in each instance. If Landlord gives its consent to such
alterations, Landlord may post notices in accordance with the laws of the
state in which the Premises are located. Any alterations made shall remain
on and be surrendered with the Premises upon expiration or termination of
this Lease, unless otherwise agreed, except that Landlord may, within 30
days before or 30 days after the expiration or termination of this Lease or
the termination of Tenant's right of possession, elect to require Tenant to
remove any alterations which Tenant may have made to the Premises. If
Landlord so elects, at its own cost Tenant shall restore the Premises to
the condition designated by Landlord in its election, before the last day
of the term or within 30 days after notice of its election is given,
whichever is later.
b. Any request for Landlord's consent to alterations shall be made at least
thirty (30) days before any work may be commenced and shall be accompanied
by (i) detailed and costed plans and specifications for all alterations,
and (ii) Tenant's written agreement to provide, upon completion of work, a
complete set of as-built plans and specifications. Landlord may withhold
consent, in its sole discretion, or may issue such consent subject to
conditions. All alterations shall be constructed only after obtaining
Landlord's prior written consent and only in conformity with all Laws. The
issuance of Landlord's consent shall not be a waiver of nor an opinion
regarding Tenant's obligation to comply with all Laws.
c. Should Landlord consent in writing to Tenant's alteration of the Premises,
Tenant shall contract with a contractor approved by Landlord for the
construction of such alterations, shall secure all appropriate governmental
approvals and permits, and shall complete such alterations with due
diligence in compliance with the plans and specifications approved by
Landlord. All such construction shall be performed in a manner which will
not interfere with the quiet enjoyment of other tenants of the Project.
d. Tenant shall pay all costs for construction of alterations and shall keep
the Premises and the Project free and clear of all liens which may result
from work by third parties authorized by Tenant. Tenant may contest the
validity of any lien so long as Tenant deposits with Landlord sufficient
funds to pay said lien within ten (10) days of notice of filing of the lien
in the event the lien is valid. Tenant's failure to make the deposit or
remove the lien shall constitute a default.
13. RELEASE AND INDEMNITY.
As material consideration to Landlord, Tenant agrees that Landlord and
Landlord's partners, shareholders, officers, directors, employees and agents
(collectively the 'Protected Parties') shall not be liable to Tenant for any
damage to Tenant or Tenant's property from any cause, and Tenant waives all
claims against Landlord for damage to persons or property arising for any
reason, except for damage resulting directly from Landlord's breach of its
express obligations under this Lease which Landlord has not cured within a
reasonable time after receipt of written notice of such breach from Tenant.
Tenant shall defend,
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indemnify and hold Landlord and all other Protected Parties harmless from all
claims, losses, causes of action, costs and expenses, and damages arising out of
(a) any damage to any person or property occurring in, on or about the Premises,
(b) use by Tenant or its agents of the Premises and/or the Project or other
properties of Landlord, and/or (c) Tenant's breach or violation of any term of
this Lease. Tenant shall not be responsible to indemnify, defend or hold
harmless the Landlord for Landlord's intentional misconduct or criminal acts.
14. INSURANCE.
Tenant, at its cost, shall maintain public liability and property damage
insurance and products liability insurance with a single combined liability
limit of $1 000,000, insuring against all liability of Tenant and its authorized
representatives arising out of or in connection with Tenant's use or occupancy
of the Premises. Public liability insurance, products liability insurance and
property damage insurance shall insure performance by Tenant of the indemnity
provisions of Section 14. Landlord, Forum Properties, Inc. and the other
Protected Parties shall be named as additional insured and the policy shall
contain cross-liability endorsements. On all its personal property, at its
cost, Tenant shall maintain a policy of standard fire and extended coverage
insurance with vandalism and malicious mischief endorsements and "all risk"
coverage on all Tenant's improvements and alterations in or about the Premises,
to the extent of at least 90% of their full replacement value. The proceeds
from any such policy shall be used by Tenant for the replacement of personal
property and the restoration of Tenant's improvements or alterations. All
insurance required to be provided by Tenant under this Lease shall release
Landlord and the other protected parties from any claims for damage to any
person or the Premises and the Project, and to Tenant's fixtures, personal
property, improvements and alterations in or on the Premises or the Project
caused by or resulting from risks insured against under any insurance policy
carried by Tenant and in force at the time of such damage. All insurance
required to be provided by Tenant under this Lease: (a) shall be issued by
insurance companies authorized to do business in the state in which the Premises
are located with a financial rating of at least an A+ XII status as rated in the
most recent edition of Best's Insurance Reports; (b) shall be issued as a
primary policy; and (c) shall contain an endorsement requiring at least 30 days
prior written notice of cancellation to Landlord and Landlord's lender, before
cancellation or change in coverage, scope or amount of any policy. Tenant shall
deliver a certificate or copy of such policy together with evidence of payment
of all current premiums to Landlord within 30 days of execution of this Lease.
Tenant's failure to provide evidence of such coverage to Landlord may, in
Landlord's sole discretion, constitute a default of under this Lease.
15. DESTRUCTION.
If during the term, the Premises or Project is more than 25% destroyed
(based upon replacement cost) from any cause, or rendered inaccessible or
unusable from any cause, Landlord may, in its sole discretion, terminate this
Lease by delivery of notice to Tenant within 30 days of such event without
compensation to Tenant. If Landlord does not elect to terminate this Lease, and
if, in Landlord's estimation, the Premises cannot be restored within 180 days
following such destruction, the Landlord shall notify Tenant and Tenant may
terminate this Lease by delivery of notice to Landlord within 30 days of receipt
of Landlord's notice. If Landlord does not terminate this Lease and if in
Landlord's estimation the Premises can be restored within 1 80 days, then
Landlord shall commence to restore the Premises in compliance with then existing
laws and shall complete such restoration with due diligence. In such event, this
Lease shall remain in full force and effect, but there shall be an abatement of
Base Monthly Rent between the date of destruction and the date of completion of
restoration, based on the extent to which destruction interferes with Tenant's
use of the Premises; provided, there shall be no abatement if such damage is the
result of Tenant's negligence or wrongdoing. Tenant shall not be entitled to any
damages or compensation for loss of use or any inconvenience occasioned by
damage or any repair or restoration.
16. CONDEMNATION.
a. DEFINITIONS. The following definitions shall apply. (1) "Condemnation"
means (a) the exercise of any governmental power of eminent domain, whether
by legal proceedings or otherwise by condemnor and (b) the voluntary sale
or transfer by Landlord to any condemnor either under threat of
condemnation or while legal proceedings for condemnation are proceeding;
(2) "Date of Taking" means the date the condemnor has the right to
possession of the property being condemned; (3) "Award" means all
compensation, sums or anything of value awarded, paid or received on a
total or partial condemnation; and (4) "Condemnor"' means any public or
quasi-public authority, or private corporation or individual, having a
power of condemnation.
b. OBLIGATIONS TO BE GOVERNED BY LEASE. If during the term of the Lease there
is any taking of all or any part of the Premises or the Project, the rights
and obligations of the parties shall be determined pursuant to this Lease.
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c. TOTAL OR PARTIAL TAKING. If the Premises are totally taken by condemnation,
this Lease shall terminate on the Date of Taking. If any portion of the
Premises is taken by Condemnation, this Lease shall terminate as to the
part so taken as of the Date of Taking, but shall in all other respects
remain in effect, except that Tenant can elect to terminate this Lease if
the remaining portion of the Premises is rendered unsuitable for Tenant's
continued use of the Premises. If Tenant elects to terminate this Lease,
Tenant must exercise its right to terminate by giving notice to Landlord
within 30 days after the nature and extent of the Condemnation have been
finally determined. If Tenant elects to terminate this Lease, Tenant shall
also notify Landlord of the date of termination, which date shall not be
earlier than 30 days nor later than 90 days after Tenant has notified
Landlord of its election to terminate; except that this Lease shall
terminate on the Date of Taking if the Date of Taking falls on a date
before the date of termination as designated by Tenant. If any portion of
the Premises is taken by condemnation and this Lease remains in full force
and effect, on the Date of Taking the Base Monthly Rent shall be reduced by
an amount in the same ratio as the total number of square feet in the
Premises taken bears to the total number of square feet in the Premises
immediately before the Date of Taking.
d. LANDLORD'S ELECTION. Notwithstanding anything herein to the contrary, if
the Project or any portion thereof is taken by Condemnation and the portion
taken does not, in Landlord's sole judgment, feasibly permit the
continuation of the operation of the Project by Landlord, then Landlord
shall have the right to terminate this Lease by written notice given within
thirty (30) days following the Date of Taking.
e. AWARD. Tenant shall have no right or claim to all or any portion of ,he
Award; provided this shall not limit Tenant's right to seek and to receive
compensation for relocation expenses or the value of its personal property
taken, so long as receipt of such compensation does not decrease the Award
otherwise payable to Landlord.
f. LANDLORD REPRESENTATION. Landlord represents that it has no knowledge of
any condemnation, but upon notice shall inform Tenant in writing within ten
(1 0) days of Landlord's receipt of notice.
17. ASSIGNMENT OR SUBLEASE.
Tenant shall not assign or encumber its interest in this Lease or the
Premises or sublease all or any part of the Premises or allow any other person
or entity (except Tenant's authorized representatives, employees, invitees, or
guests) to occupy or use all or any part of the Premises without first obtaining
Landlord's consent which shall not be unreasonably withheld. Any assignment,
encumbrance or sublease without Landlord's written consent shall be voidable and
at Landlord's election, shall constitute a default. If Tenant is a partnership,
a withdrawal or change, voluntary, involuntary or by operation of law of any
partner, or the dissolution of the partnership, shall be deemed a voluntary
assignment. If Tenant consists of more than one person, a purported assignment,
voluntary or involuntary or by operation of law from one person to the other or
to a third party shall be deemed a voluntary assignment. If Tenant is a
corporation, any dissolution, merger, consolidation or other reorganization 6f
Tenant, or sale or other transfer of a controlling percentage of the capital
stock of Tenant, or the sale of at least 25% of the value of the assets of
Tenant shall be deemed a voluntary assignment. The phrase "controlling
percentage' means ownership of and right to vote stock possessing at least 25%
of the total combined voting power of all classes of Tenant's capital stock
issued, outstanding and entitled to vote for election of directors. The
preceding two sentences shall not apply to corporations the stock of which is
traded through an exchange or over the counter. All rent received by Tenant from
its subtenants in excess of the rent payable by Tenant to Landlord under this
Lease (allocated on a square footage basis in cases of partial subleasing) shall
be paid to Landlord, and any sums to be pal 'd by an assignee to Tenant in
consideration of the assignment of this Lease shall be paid to Landlord. If
Tenant requests Landlord to consent to a proposed assignment or subletting,
Tenant shall pay to Landlord, whether or not consent is ultimately given, $100
or Landlord's reasonable attorneys' fees incurred in connection with such
request, whichever is greater. No interest of Tenant in this Lease shall be
assignable by involuntary assignment through operation of law (including without
limitation the transfer of this Lease by Testacy or intestacy). Each of the
following acts shall be considered an involuntary assignment: (a) If Tenant is
or becomes bankrupt or insolvent, makes an assignment for the benefit of
creditors, or institutes proceedings under the Bankruptcy Act in which Tenant is
the bankrupt; or if Tenant is a partnership or consists of more than one person
or entity, if any partner of the partnership or other person or entity is or
becomes bankrupt or insolvent, or makes an assignment for the benefit of
creditors; or (b) If a writ of attachment or execution is levied on this Lease;
or (c) If any proceeding or action to which Tenant is a party, a receiver is
appointed with authority to take possession of the Premises. An involuntary
assignement shall onstiture a default by Tenant and Landlord shall have the
right to elect to terminate this Lease, in which case this Lease shall not be
treated as an asset of Tenant. Notwithstanding the other provisions of this
paragraph, Tenant may assign or sublease its interest under this Lease to an
entity of which Tenant is at least a twenty-five percent (25%) owner.
18. DEFAULT
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The occurrence of any of the following shall constitute a default by
Tenant: (a) A failure to pay rent or other charge when due; or (b) Failure to
perform any other provision of this Lease.
19. LANDLORD'S REMEDIES.
a. Landlord shall have the following remedies if Tenant is in default. These
remedies are not exclusive; they are cumulative and in addition to any
remedies now or later allowed by law. Landlord may terminate this Lease
and/or Tenant's right to possession of the Premises at any time. No act by
Landlord other than giving notice to Tenant shall terminate this Lease.
Acts of maintenance, efforts to relet the Premises, or the appointment of a
receiver on Landlord's initiative to protect Landlord's interest under this
Lease shall not constitute a termination of this Lease. Upon termination of
this Lease or of Tenant's right to possession, Landlord has the right to
recover from Tenant: (1) The worth of the unpaid rent that had been earned
at the time of such termination; (2) The worth of the amount of the unpaid
rent that would have been earned after the date of such termination; and
(3) Any other amount, including court, attorney and collection costs,
necessary to compensate Landlord for all detriment proximately caused by
Tenant's default. "The Worth," as used for Item 20(1) in this Paragraph 19
is to be computed by allowing interest at the Default Rate. "The worth" as
used for Item 20(2) in this Paragraph 19 is to be computed by discounting
the amount at the discount rate of the Federal Reserve Bank of San
Francisco at the time of termination of Tenant's right of possession.
b. All covenants and agreements to be performed by Tenant under any of the
terms of this Lease shall be performed by Tenant at Tenant's sole cost and
expense and without any abatement of rent. If Tenant shall fail to pay any
sum of money owed to any party other than Landlord, for which it is liable
hereunder, or if Tenant shall fail to perform any other act on its part to
be performed hereunder, and in the case of failure to pay money shall
continue for thirty (30) days after notice thereof by Landlord, or in the
case of any other failure shall continue for ten (10) days after notice
thereof by Landlord, Landlord may, without waiving such default or any
other right or remedy, but shall not be obligated to, make any such payment
or perform any such other act to be made or performed by Tenant. All sums
so paid by Landlord and all necessary incidental costs, together with
interest thereon at the Default Rate from the date of expenditure by
Landlord, shall be payable to Landlord on demand.
c. Landlord shall have a duty to mitigate its damages.
20. ENTRY ON PREMISES.
Landlord and its authorized representatives shall have the right to enter
the Premises at all reasonable times for any of the following purposes: (a) To
determine whether the Premises are in good condition and whether Tenant is
complying with its obligations under this Lease; (b) To do any necessary
maintenance and to make any restoration to the Premises or the Project that
Landlord has the right or obligation to perform; (c) To post "for sale' signs at
any time during the term, to post "for rent" or "for lease" signs during the
last 90 days of the term, or during any period while Tenant is in default and to
show the Premises to brokers, agents or potential tenants; (d) To show the
Premises to prospective buyers, or persons interested in purchasing the
Premises, at any time during the term; or (e) To repair, maintain or improve the
Project and to erect scaffolding and protective barricades around and about the
Premises but not so as to prevent entry to the Premises and to do any other act
or thing necessary for the safety or preservation of the Premises or the
Project. Landlord shall not be liable in any manner for any inconvenience,
disturbance, loss of business, nuisance or other damage arising out of
Landiord's entry onto the Premises as provided in this Section 20. Tenant shall
not be entitled to an abatement or reduction of rent if Landlord exercises any
rights reserved in this Section 20. Landlord shall conduct its activities on the
Premises as provided herein in a manner that will cause the least inconvenience,
annoyance or disturbance to Tenant. For each of these purposes, Landlord shall
at all times have and retain a key with which to unlock all the doors in, upon
and about the Premises, excluding Tenant's vaults and safes. Tenant shall not
alter any lock ,install a new or additional lock or bolt on any door of the
Premises without prior written consent of Landlord which shall not be
unreasonably withheld. If Landlord gives its consent, Tenant shall furnish
Landlord with a key for any such lock. Landlord shall honor Tenant's need for
security and further shall not unreasonably disturb Tenant's use of the
Premises.
21. SUBORDINATION.
Without the necessity of any additional document being executed by Tenant
for the purpose of effecting a subordination, and at the election of Landlord or
any mortgagee or any beneficiary of a Deed of Trust with a lien on the Project
or any ground lessor with respect to the Project, this Lease shall be subject
and subordinate at all times to (a) all ground leases or underlying leases which
may now exist or hereafter be executed affecting the Project, and (b) the lien
of any mortgage or deed of trust which may now exist or hereafter be executed in
any amount for which the Project, ground leases or underlying leases, or
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Landlord's interest or estate in any of said items is specified as security. In
the event that any ground lease or underlying lease terminates for any reason or
any mortgage or Deed of Trust is foreclosed or a conveyance In lieu of
foreclosure is made for any reason, Tenant shall, notwithstanding any
subordination, attorn to and become the Tenant of the successor in interest to
Landlord, at the option of such successor in interest. Tenant covenants and
agrees to execute and deliver, upon demand by Landlord and in the form requested
by Landlord any additional documents evidencing the priority or subordination of
this Lease with respect to any such ground lease or underlying leases or the
lien of any such mortgage or Deed of Trust. Tenant hereby irrevocably appoints
Landlord as attorney-in-fact of Tenant to execute, deliver and record any such
document in the name and on behalf of Tenant.
Tenant, within ten days from notice from Landlord, shall execute and
deliver to Landlord, in recordable form, certificates stating that this Lease is
not in default, is unmodified and in full force and effect, or in full force and
effect as modified, and stating the modifications. This certificate should also
state the amount of current monthly rent, the dates to which rent has been paid
in advance, the amount of any security deposit and prepaid rent, and such other
matters as Landlord may request. Failure to deliver this certificate to Landlord
within ten days shall be conclusive upon Tenant that this Lease is in full force
and effect and has not
22. NOTICE.
Any notice, demand, request, consent, approval or communication desired by
either party or required to be given, shall be in writing and either served
personally or sent by prepaid certified first class mail, addressed as set forth
in Section 1. Either party may change its address by notification to the other
party. Notice shall be deemed to be communicated 48 hours from the time of such
mailing, or upon the time of service as provided in this Section 22.
23. WAIVER.
No delay or omission in the exercise of any right or remedy by Landlord
shall impair such right or remedy or be construed as a waiver. No act or conduct
of Landlord, Including without limitation, acceptance of the keys to the
Premises, shall constitute an acceptance of the surrender of the Premises by
Tenant before the expiration of the term. Only written notice from Landlord to
Tenant shall constitute acceptance of the surrender of the Premises and
accomplish termination of the Lease. Landlord's consent to or approval of any
act by Tenant requiring Landlord's consent or approval shall not be deemed to
waive or render unnecessary Landlord's consent to or approval of any subsequent
act by Tenant. Any waiver by Landlord of any default must be in writing and
shall not be a waiver of any other default concerning the same or any other
provision of the Lease.
24. SURRENDER OF PREMISES; HOLDING OVER.
Upon expiration of the term or the termination of this Lease or of Tenant's
right of possession, Tenant shall surrender to Landlord the Premises and all
tenant improvements and alterations (except alterations which Tenant has the
right or obligation to remove) in good condition, except for ordinary wear and
tear and insured casualty loss. Tenant shall remove all personal property or
fixtures and shall perform all restoration made necessary by the removal of any
alterations or Tenant's personal property before the expiration of the term.
Landlord can elect to retain or dispose of in any manner Tenant's personal
property not removed from the Premises by Tenant prior to the expiration of the
term. Tenant waives all claims against Landlord for any damage to Tenant
resulting from Landlord's retention or disposition of Tenant's personal
property. Tenant shall be liable to Landlord for Landlord's costs for storage,
removal or disposal of Tenant's personal property. If Tenant fails to surrender
the Premises upon the expiration of the term, or upon the termination of this
Lease or of Tenant's right of possession, Tenant shall defend, indemnify and
hold Landlord harmless from all resulting loss or liability, including without
limitation, any claim made by any succeeding tenant founded on or resulting from
such failure.
If Tenant, with Landlord's consent, remains In possession of the Premises
after expiration of this Lease, such possession by Tenant shall be deemed to be
a month-to-month tenancy terminable on written 30-day notice at any time, by
either party. All provisions of this Lease, except those pertaining to term and
rent, shall apply to the month-to-month tenancy. Tenant shall pay Base Monthly
Rent in an amount equal to 120% of the Base Monthly Rent for the last full
calendar month during the regular term plus 100% of said last month's estimate
of Tenant's share of Expenses pursuant to Section 4.b. (2)
25. LIMITATION OF LIABILITY.
In consideration of the benefits accruing hereunder, Tenant agrees that,
regarding any claim against Landlord and/or any other Protected Party, including
in the event of any actual or alleged failure, breach or default by Landlord:
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a. The sole and exclusive remedy of Tenant shall be against the interest of
Landlord in the Project, and neither Landlord nor any other Protected Party
shall have any other liability whatsoever.
b. If Landlord is a partnership, the following provisions of this item b.
shall also apply: (i) No partner of Landlord shall be sued or named as a
party in any suit or action; (ii) No service of process shall be made
against any partner of Landlord (except as may be necessary to secure
jurisdiction of the partnership); (iii) No partner of Landlord shall be
required to answer or otherwise plead to any service or process; (iv) No
judgment may be taken against any partner of Landlord; (v) Any judgment
taken against any partner of Landlord may be vacated and set aside at any
time without hearing; and (vi) No writ of execution will ever be levied
against the assets of any partner of Landlord.
c. These covenants and agreements contained in this Section 25 are enforceable
both by Landlord and also by any other Protected Party.
d. Tenant agrees that each of the foregoing provisions shall be applicable to
any and all liabilities, claims and causes of action whatsoever, including
those based on any provision of this Lease, any implied covenant, and/or
any statute or common law principle.
26. MISCELLANEOUS PROVISIONS.
a. TIME OF ESSENCE. Time is of the essence of each provision of this Lease.
b. SUCCESSOR. This Lease shall I be binding on and inure to the benefit of the
parties and their successors, except as provided in Section 117 herein,
c. LANDLORD'S CONSENT. Any consent required by Landlord under this Lease must
be granted in writing. No such consent shall be unreasonably withheld or
delayed, but any consent may be issued subject to reasonable conditions. As
a condition to any consent, Landlord may require that any other party or
parties with a right of consent issue such consent on terms acceptable to
Landlord.
d. COMMISSIONS. Each party represents that it has not had dealings with any
real estate broker, finder or other person with respect to this Lease in
any manner, except for the broker identified in Section 1, who shall be
compensated by Landlord.
e. OTHER CHARGES. If either party becomes a party to any litigation concerning
this Lease, the Premises or the Project, by reason of any act or omission
of the other, the other shall be liable to the party and shall reimburse
the party for all attorneys' fees and costs incurred by the party in
connection with such litigation, including any appeal or review.
In the event of litigation between Tenant and Landlord and/or any other
Protected Party, the prevailing party shall be entitled to recover from the
losing party all costs and attorneys' fees incurred both at and in
preparation for trial and any appeal or review. If Landlord employs a
collection agency to recover delinquent charges, Tenant agrees to pay all
reasonable collection agency and attorneys' fees charged to Landlord in
addition to rent, late charges, interest and other sums payable under this
Lease. Tenant shall pay a charge of $75 to Landlord for preparation of a
demand for delinquent rent.
f. LANDLORD'S SUCCESSORS. In the event of a sale or conveyance by Landlord of
the Project or a portion thereof including the Premises, or of Landlord's
interest in the foregoing, the same shall operate to release Landlord from
any liability under this Lease, and in such event Landlord's successor In
interest shall be solely responsible for all obligations of Landlord under
this Lease.
g. INTERPRETATION. This Lease shall be construed and interpreted in accordance
with the laws of the state in which the Premises are located. This Lease
constitutes the entire agreement between the parties with respect to the
Premises and the Project, except for such guarantees or modifications as
may be executed in writing by the parties from time to time. When required
by the context of this Lease, the singular shall include the plural, and
the masculine shall include the feminine and/or neuter. "Party" shall mean
Landlord or Tenant. If more than one person or entity constitutes Tenant,
the obligations imposed upon Tenant shall be joint and several. The
enforceability, invalidity or illegality of any provision shall not render
the other provisions unenforceable, invalid or illegal.
h. THIRD PARTIES. The Protected Parties shall have the right to enforce the
provisions of this Lease which reference them. Except for the foregoing,
there are no third parties benefited hereby, this Lease being intended
solely for the benefit of Landlord and Tenant. Notwithstanding the
foregoing, the beneficiary under a trust deed, or a mortgagee, holding a
security interest in the Project shall be a third party beneficiary of the
Tenant's obligations set forth in Sections 26f. hereof and shall have the
right to enforce such provisions.
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i. SURVIVAL. The release and indemnity covenants of Tenant, the right of
Landlord to enforce its remedies hereunder, the attorneys' fees provisions
hereof, the provisions of Section 26 hereof, as well as all provisions of
this Lease which contemplate performance after the expiration or
termination hereof or the termination of Tenant's right to possession
hereunder, shall survive any-.such expiration or termination.
27. EMISSIONS; STORAGE, USE AND DISPOSAL OF WASTE
a. EMISSIONS. Neither Landlord nor Tenant shall:
(1) Discharge, emit or permit to be discharged or emitted, any liquid,
solid or gaseous matter, or any combination thereof, into the
atmosphere, the ground or any body of water, which matter, as
reasonably determined by Lessor or any governmental entity, does, or
may, pollute or contaminate the same, or is, or may become, radioactive
or does, or may, adversely affect the (1) health or safety of persons,
wherever located, whether on the Promises or anywhere else, (2)
condition, use or enjoyment of the Premises or any other real or
personal property, whether on the Premises or anywhere else, or (3)
Premises or any of the improvements thereto or thereon including
buildings, foundations, pipes, utility lines, landscaping or parking
areas;
(2) Produce, or permit to be produced, any intense glare, light or heat
except within an enclosed or screened area and then only in such manner
that the glare, light or heat shall not be discernible from outside the
Premises;
(3) Create, or permit to be created, any sound pressure level which will
interfere with the quiet enjoyment of any real property outside the
Premises; or which will create a nuisance or violate any Law, rule,
regulation or requirement;
(4) Create, or permit to be created, any ground vibration that is
discernible outside the Premises;
(5) Transmit, receive or permit to be transmitted or received, any
electromagnetic, microwave or other radiation which is harmful or
hazardous to any person or property in, on or about the Premises, or
anywhere else.
b. STORAGE AND USE.
(1) Storage. Subject to the uses permitted and prohibited to Tenant under
this lease, Tenant shall store in appropriate leakproof containers all
solid, liquid, or gaseous matter, or any combination thereof, which
matter, if discharged or emitted into the atmosphere, the ground or any
body of water, does or may (1) pollute or contaminate the same, or (2)
adversely affect the (i) health or safety of persons, whether on the
Premises or anywhere else, (ii) condition, use or enjoyment of the
Premises or any real or personal property, whether on the Premises or
anywhere else, or (iii) Premises or any of the improvements thereto or
thereon.
(2) Use. In addition, without Landlord's prior written consent, Tenant
shall not use, store or permit to remain on the Premises any solid,
liquid or gaseous matter which is, or may become, radioactive. If
Landlord does give its consent, Tenant shall store the materials in
such a manner that no radioactivity will be detectable outside a
designated storage area and Tenant shall use the materials in such a
manner that (1) no real or personal property outside the designated
storage area shall become contaminated thereby or (2) there are and
shall be no adverse effects on the (i) health or safety of persons,
whether on the Premises or anywhere else, (ii) condition, use or
enjoyment of the Premises or any real or personal property thereon or
therein, or (iii) Premises or any of the improvements thereto or
thereon.
c. DISPOSAL OF WASTE.
(1) Refuse Disposal. Tenant shall not keep any trash, garbage, waste or
other refuse on the Premises except in sanitary containers and shall
regularly and frequently remove same from the Premises. Tenant shall
keep all incinerators, containers or other equipment used for the
storage or disposal of such materials in a clean and sanitary
condition.
(2) Sewage Disposal. Tenant shall properly dispose of all sanitary sewage
and shall not use the sewage system (1) for the disposal of anything
except sanitary sewage or (2) in excess of the lesser of the amount (a)
reasonably contemplated by the uses permitted under this Lease or (b)
permitted by any governmental entity. Tenant shall keep the sewage
disposal system free of all obstructions and in good operating
condition.
(3) Disposal of Other Waste. Tenant shall properly dispose of all other
waste or other matter delivered to, stored upon, located upon or
within, used on, or removed from, the premises in such a manner that it
does not, and will not, adversely affect the (1 ) health or safety of
persons, wherever located, whether on the Premises or elsewhere, (2)
condition, use or enjoyment of the Premises or any other real or
personal property, wherever located, whether on the
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Premises or anywhere else, or (3) Premises or any of the improvements
thereto or thereon including buildings, foundations, pipes, utility
lines, landscaping or parking areas.
d. COMPLIANCE WITH LAW. Notwithstanding any other provision in the Lease to
the contrary, Tenant shall comply with all Laws in complying with its
obligations under this Lease, and in particular, Laws relating to the
storage, use and disposal of hazardous or toxic matter.
e. INDEMNIFICATION. Tenant shall defend, indemnify and hold Landlord, the
other Protected Parties, the Project and the beneficiary under a trust
deed, or mortgagee, holding a security interest in the Project harmless
from any loss, claim, liability or expense, including, without limitation,
attorneys' fees and costs, at trial and/or on appeal and review, arising
out of or in connection with its failure to observe or comply with the
provisions of this Section 27. This indemnity shall survive the expiration
or earlier termination of the term of the Lease or the termination of
Tenant's right of possession and be fully enforceable thereafter.
f. ADDITIONAL PROVISIONS. The following covenants and agreements shall in no
way diminish or limit the foregoing provisions of this Section 27. No use
may be made of, on or from the Premises relating to the handling, storage,
disposal, transportation, or discharge of Hazardous Substances (as defined
below). All of such use which does occur shall be in strict conformance
with all Laws. Tenant or Landlord shall give prior written notice to the
other of any use, whether incidental or otherwise, of Hazardous Substances
on the Premises. or of any notice of any violation of any Law with respect
to such use. Landlord and any ground lessor or master lessor of the
Premises and/or the Project shall have the right to request and to receive
information with respect to use of Hazardous Substances on the Premises in
writing.
In addition to the indemnity obligations contained elsewhere herein, Tenant
shall indemnify, defend and hold harmless Landlord, the other Protected
Parties, the Premises, the Project, and the beneficiary under a trust dead,
or a mortgages, holding a security interest in the Project, from and
against all claims, losses, damages, costs, response costs and expenses.
liabilities, and other expenses caused by, arising out of, or in connection
with, the generation, release, handling, storage, discharge,
transportation, deposit or disposal in, on, under or about the Premises by
Tenant or any of Tenant's Agents of the following (collectively referred to
as 'Hazardous Substances'): hazardous materials, hazardous substances,
toxic wastes, toxic substances, pollutants, petroleum products, underground
tanks, oils, pollution, asbestos, PCB'S, materials, or contaminants, as
those terms are commonly used or as defined by federal, state, and/or local
law or regulation related to protection of health or the environment,
including but not limited to, the Resource Conservation and Recovery Act
(RCRA) (42 U.S.C. (S) 6901 et seq.); the Comprehensive Environmental
Response, Compensation and Liability Act (CERCLA) (42 U.S.C. (S) 9601, et
seq.); the Toxic Substances Control Act (1 5 U.S.C. (S) 2601, et seq.); the
Clean Water Act (33 U.S.C. (S) 1251, et seq.); the Clean Air Act (42 U.S.C.
(S) 7401 et seq.); and ORS Chapters 453, 465 and 466 as any of same may be
amended from time to time, and/or by any rules and regulations promulgated
thereunder. Such damages, costs, liabilities, and expenses shall include
such as are claimed by any regulating and/or administering agency, any
ground lessor or master lessor of the Project, the holder of any Mortgage
or Deed of Trust on the Project, and/or any successor of the Landlord named
herein. This indemnity shall include (a) claims of third parties, including
governmental agencies, for damages, fines, penalties. response costs,
monitoring costs. injunctive or other relief; (b) the costs, expenses or
losses resulting from any injunctive relief, including preliminary or
temporary injunctive relief; (c) the expenses, including fees of attorneys
and experts, of reporting the existence of Hazardous Substances to an
agency of the State of Oregon or of the United States as required by
applicable laws and regulations; (d) any and all expenses or obligations,
including attorneys' and paralegal fees, incurred at, before and after any
trial or appeal therefrom or review thereof, or an administrative
proceeding or appeal therefrom or review thereof, whether or not taxable as
costs, including, without limitation, attorneys' fees, paralegal fees,
witness fees (expert and otherwise), deposition costs, photocopying and
telephone charges and other expenses related to the foregoing, all of which
shall be paid by Tenant to Landlord when such expenses are accrued. This
indemnity shall survive the expiration or earlier termination of the term
of the Lease or the termination of Tenant's right of possession and be
fully enforceable thereafter.
g. INFORMATION. Tenant shall provide Landlord with any and all information
regarding Hazardous Substances in the Premises, including contemporaneous
copies of all filing-s and reports to governmental entities, and any other
information requested by Landlord. In the event of any accident, spill or
other incident involving Hazardous Substances, Tenant shall immediately
report the same to Landlord and supply Landlord with all information and
reports with respect to the same. All information described herein shall be
provided to Landlord regardless of any claim by Tenant that it is
confidential or privileged.
28. EXHIBITS.
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Exhibits A - F and Addendum A. described below are incorporated into this
Lease by this reference and are effective as if fully set out herein.
TENANT:
-------------------------------------------
--------------------------------------------------
By:
--------------------------------------------
Its: Richard Y. Okumoto, Sr. V.P. & CFO
--------------------------------------------
LANDLORD:
Petula Associates, Ltd., an Iowa corporation, and Koll Portland Associates,
a California general partnership operating pursuant to a Jt. Development
agreement dba KBC Tigard II
--------------------------------------------------
By:
--------------------------------------------
Its: Timothy E. Minton, Vice President& Secretary
--------------------------------------------
By:
--------------------------------------------
Its: Michael S. Duffy, Vice President
--------------------------------------------
EXHIBITS
Addendum A
- ----------
A - Premises
B - Project
C - Signs
D - Space Plan
E - E-1 Tenant Improvement (Allowance)
F - Environmental Disclosure and Certification Statement
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ADDENDUM A
This Addendum is incorporated into the foregoing Lease and is an integral
part thereof.
(a) OPTION TO RENEW. Landlord grants Tenant the option to renew the Lease
for one successive five-year periods ("Renewal Term") upon the same terms and
conditions, except that Base Rent shall be set for each Renewal Term, at the
commencement of each Renewal Term, at the then market rate. Each option shall
be exercised, if at all, by Tenant giving Landlord written notice of exercise no
less than 240 days prior to the expiration of the immediately preceding term.
Base Rent shall be set by mutual agreement. If the parties cannot agree upon
the Base Rent rate for the Extension Term then the matter shall be settled by
final and binding arbitration. Each party shall appoint one of the arbitrators
and if the parties cannot agree upon a third arbitrator then the same shall be
appointed by a presiding judge of the Multnomah County (Oregon) Circuit Court.
All arbitrators shag be MAI certified appraisers experienced in the appraisal of
the fair market rental rent for first class suburban office buildings in the
Portland, Oregon metropolitan area. Each party shall submit its position to the
arbitrators and the jurisdiction of the arbitrators shall be limited to
selecting the entire position of one of the parties as the prevailing position.
Each party shall pay one-half of the costs of the arbitration, and shall beat,
its own attorneys fees incurred in the arbitration. Except as otherwise
provided herein, the procedures for the arbitration shall be in accordance with
the rules of the Multnomah County (Oregon) Circuit Court Arbitration Program.
(b) WARRANTY OF PREMISES. Landlord warrants that all construction and
improvements shag be completed in a timely and workmanlike manner.
(c) LANDLORD DEFAULT. The failure of Landlord to perform as required under
any provision of this Lease except as may be caused by circumstances outside the
control of Landlord shall constitute a default by Landlord after thirty (30)
days written notice. Landlord shall have thirty (30) days to cure default. In
the event Landlord's default cannot be reasonably cured within thirty (30) days,
then Landlord shall commence the cure within said thirty (30) day period and
complete the cure within a reasonable time.
(d) TENANT'S REMEDIES. Should Landlord be in default, Tenant shall have the
following remedies:
(1) terminate lease;
(2) perform Landlord's obligation and offset from the rent all expenses
incurred by Tenant.
(e) ENERGY CREDITS. Tenant shall be entitled to claim and receive the
benefit of any local, state or federal incentive or tax credit for any energy
saving improvements, if Tenant incurs the costs of said improvements.
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EXHIBIT "A" & "B"
This exhibit is a site plan labeled "Building S - Scholls Business Center," and
it shows a top view of the building site and adjacent walkways.
EXHIBIT "D"
This exhibit is labeled "Space Plan (to follow)"
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Tenant Name: Credence Systems Corporation
----------------------------
Date: 8/23/95
----------------------------
EXHIBIT E-1
TENANT IMPROVEMENTS INCLUDED IN RENT
(ALLOWANCE)
1. The following Improvements (the "Tenant Improvements") shall be made to the
Premises prior to occupancy by Tenant, all as generally shown and described
on the Space Plan (Exhibit D). Landlord's obligation is to improve the
building as shown on Exhibit D substantially in accordance with the above.
Landlord's obligation is fulfilled when this work is substantially
completed, meaning the work has been performed to the point where the
premises are fit for use in accordance with their intended purpose,
notwithstanding the fact that minor corrections or completion items
(commonly called "punch list items") remain.
2. The Costs (as defined below) of the Tenant Improvements described in
Section 1 above are included in the base monthly rent to the extent that
such Costs do not exceed the agreed allowance of $752,166 (the
"Allowance"). Any savings shall equally be shared between the parties
through base monthly rent adjustment. Tenant may review Landlord's books
and records relating to the construction costs.
3. A complete construction document package (the "CDP") with respect to the
Tenant Improvements, including floor plan, a reflected ceiling/lighting
plan, specifications, and any other documents required to describe the
Tenant Improvements, and if appropriate a statement of Costs, shall be
prepared as set forth herein. If any other Exhibit to this Lease also
requires a CDP, a single, combined CDP shall be used.
A. No later that 9/14/95, Tenant shall deliver to Landlord's designated
architect or space planner (the "Space Planner") all information
requested by the Space Planner to prepare the CDP (the "Tenant
Information"). Delays in receipt of this information from the Tenant
will result in at least a day for day delay in the promised Tenant
occupancy date.
B. Within 30 working days after Tenant's delivery of the Tenant
Information, Landlord and the Space Planner shall deliver to Tenant a
CDP.
C. Tenant shall approve the CDP in writing or by initialing the CDP no
later than 3 working days after Tenant's receipt thereof; Tenant shall
not have the right to withhold or condition such approval, except only
that Tenant may make corrections (the "Corrections") to the CDP to cause
the CDP to conform to the Tenant Information if this is not the case or
to reduce the Costs to the Allowance amount if the estimate exceeds the
Allowance. Any such Corrections must be in writing and must be delivered
by the date approval is otherwise required as set forth above.
D. The CDP, once corrected if necessary, shall constitute the working plans
and specifications for the Tenant Improvements, and Tenant shall approve
the same and pay to Landlord the amount shown on the statement of Costs
if and to the extent it exceeds the Allowance, both by the date
established under item C above (or within 3 working days following
Tenant's receipt of the corrected CDP, if applicable). Unless Landlord
elects otherwise, no permit applications or work regarding the Tenant
Improvements shall be undertaken until such approval (and payment, if
any) are received by Landlord. As total Costs are finalized from the
estimate, Landlord and Tenant shall adjust any difference, in all
events, any net increase in Costs shall be paid by Tenant to Landlord in
cash (to the extent the Allowance is exceeded) within five (5) working
days of notice from Landlord.
E. Time is of essence hereof. In the event Tenant does not comply with the
time deadlines set forth herein, (a) any additional Costs resulting from
such delays shall be paid by Tenant along with the payment required
under Item D above or when otherwise required by Landlord, and (b) any
delays in completion of the Premises may delay Tenant's occupancy of the
Premises, but the Commencement Date (and therefore the date upon which
the accrual of rent commences) shall nonetheless be the date set forth
in the Lease Agreement.
4. Landlord shall not be obligated to construct any further Improvements other
than those set forth in the approved CDP. If, after approval of the CDP,
Tenant desires further Improvements to be constructed, Tenant shall request
construction of the same, in writing. Landlord shall have no obligation to
agree to such request. If Landlord does agree to any such request, then (a)
all Costs related to such further Tenant Improvements shall be paid by
Tenant to Landlord in cash (to the extent the Allowance is exceeded) within
five (5) working days but in all events prior to commencement of
construction or other work related to the further Improvements, and (b) any
delays in completion of the Premises attributable to such request,
including delays caused by redesign time, reordering of the work, or
Landlord awaiting Tenant's payment of additional Costs, shall not change
the scheduled Commencement Date (and, therefore, the date upon which the
accrual of rent commences) as set forth in the Lease Agreement. However,
Tenant acknowledges that, because of further requested Improvements, the
Premises may not be available for Tenant to occupy on the scheduled
Commencement Date. If further improvements are required by building
officials in order to meet their interpretation of building codes, or if
further improvements are required due to unforeseen or concealed conditions
that are necessary to complete the work in accordance with the Construction
Documents or if additional work is required because of drawing omissions or
errors, this work will be priced, reviewed with the Tenant, and completed.
Reimbursement to the Landlord as well as all other terms and conditions
noted above for a "Tenant requested" change will apply to these revisions
as well.
19
<PAGE>
5. When used in this Exhibit, the capitalized term "Costs" means all costs and
expenses incurred by Landlord in connection with the subject work and/or
materials, including but not limited to the costs of labor, materials,
permits*, architect and space planner fees, general conditions,
construction management, or other professional fees, and all other costs
and expenses required to complete the Tenant Improvements after the
Building Shell is completed (as shown on VLM&K's Construction Documents
"Bid Set - Dated 7/10/95"), including Addendum #1, #2, #3, and all Proposal
Requests and Supplemental Instructions issued by VLM&K - except those
Proposal Requests that may be required to accommodate the Tenant
Improvements. The Tenant may review the Contractors price breakdown and any
necessary backup documents prior to award of the contract for Tenant
Improvement construction. Forum's Construction Management Fee will be 5% of
all "Costs" excluding space planning, architecture, and engineering.
* Traffic Impact Fee (for up to an 80% office buildout) and "Normal" Building
Permits will not be part of the allowance and shall be paid by Landlord.
6. If it is required that the site be "winterized" in order to meet the lease
commencement date, the tenant shall pay, in the form of increased rent,
half of the cost of said winterization. Said total cost not to exceed
$150,000 and Tenant's share shall not exceed $75,000. The rental increase
shall be determined by taking half of the cost of the winterized site
improvements and amortizing said cost over the term of the lease at the
annual rate of 11.72%. Tenant shall be allowed to audit or review said
winterization costs as there are needed.
20
<PAGE>
EXHIBIT F
ENVIRONMENTAL DISCLOSURE AND CERTIFICATION STATEMENT
_____________________________
(Project Name)
DATE:
------------------
TO: and and
------------------ --------------------- ------------------------
(Lender) (Owner) (Manager, if applicable)
FROM: Name Rich Okumoto
----------------------------------------------------------
Position V.P. Finance
----------------------------------------------------------
Company Credence Systems Corporation
----------------------------------------------------------
Address 3500 W. Warren Ave., Fremont, CA
----------------------------------------------------------
Phone (510) 623-4747
----------------------------------------------------------
RE: LEASE AGREEMENT DATED _________________ , 19___, BY AND BETWEEN
________________________, AS LANDLORD (THE "LANDLORD"), AND
________________________, AS TENANT,
FOR THE LEASING OF THESE CERTAIN PREMISES DESCRIBED IN THE ATTACHMENT
EXHIBIT A (THE "LEASED PREMISES").
- -------------------------------------------------------------------------------
Notwithstanding anything to the contrary contained in the Lease Agreement, I,
Rich Okumoto, acting with full authority, knowledge and on behalf of Credence
Systems Corporation, (hereinafter called "Company"), represent and warrant that
the following disclosure accurately reflects Company's operations as they
pertain to the use or proposed use of hazardous materials, petroleum, chemical
and waste products in, on or about the Leased Premises. I further certify that
after careful review of all anticipated Company operations and activities in
Leased Premises and thorough inquiry into any and all potentially applicable
governmental rules and regulations pertaining to health, safety and
environmental control, Company will operate in the Leased Premises in complete
and full compliance with all required standards.
Furthermore, the company will obtain and renew, as required by Landlord, all
applicable environmental, health and safety permits, registrations and
applications needed for Company operations on or about the Leased Premises.
Company will continue to review and inspect operations, chemical use and waste
streams activities for the purpose of identifying and eliminating any potential
environmental, health and safety concerns that could contaminate the property
and environment or represent safety and health concerns or increase
environmental risk and liability.
Company assures Landlord and its Lender, representatives, affiliated entities,
successors and assignees that any and all potential problems will be
communicated to Landlord promptly, fixed and the risk eliminated. All potential
problems will be communicated to Landlord by Company and remedied within forty-
eight (48) hours of identification or at another time acceptable to Landlord;
such remediation to be approved in writing by Landlord first and to be in
conformance with paragraph ____ of the Lease Agreement.
Company understands that it will be fully accountable to Landlord and any and
all applicable governmental agencies for any non-compliance items and
environmental contamination to the Leased Premises or adjacent property.
21
<PAGE>
Company also understands that this Environmental Disclosure and Certification
Statement is incorporated by reference into the Lease Agreement. Company agrees
to abide by the terms and conditions contained herein and in the Lease Agreement
at all times or at the sole discretion of Landlord, any such noncompliance will
be considered a default under the Lease Agreement. Landlord can then exercise
to the fullest extent any and all of its remedies in accordance with Lease
Agreement and any other legal remedies available.
Company also understands that this Environmental Disclosure and Certification
Statement be reissued by Company to Landlord annually within thirty (30) days of
the anniversary of the original lease date or at any ocher time during the term
of the L-ease Agreement.
"Company will not use, generate, store, treat or dispose of any hazardous
materials or waste as defined by any and all federal, state or local
environmental, health and safety rules, regulation decrees and laws
(collectively the "Environmental Laws"), that may apply to Company's operations
or the Leased Premises unless otherwise described below.
Company also assures Landlord that all Company's operations in or about the
leased premises will be conducted in full compliance with all the Environmental
Laws as required by any and all agencies with jurisdiction over the company's
operation or the Leased Premises.
Description of Company's operations.
- -----------------------------------
MANUFACTURER OF ATE EQUIPMENT. ALSO REPAIR AND TRAIN PERSONNEL USING
EQUIPMENT.
List all Petroleum products, chemicals, and waste to be used or generated by-
- ----------------------------------------------------------------------------
Company.
- -------
NONE
List container sizes, maximum amounts at any given time and estimated annual
- ----------------------------------------------------------------------------
throughput during term of Lease Agreement.
- -----------------------------------------
NONE
Describe storage location and method for petroleum, chemical, and wastes used
- -----------------------------------------------------------------------------
and generated at the facility.
- -----------------------------
NONE
List all potential operation discharges from pipes, vents, flues and to building
- --------------------------------------------------------------------------------
drain.
- -----
NONE
List all required environmental permits and registrations, their assigned number
- --------------------------------------------------------------------------------
and expiration dates.
- --------------------
NONE
- --------------------------------------------------------------------------------
COMPANY:
------------------------------------------------------
By: /s/ Richard Y. Okumoto
-----------------------------------------------
Its:
-----------------------------------------------
EXHIBIT F
<PAGE>
EXHIBIT 10.22
SIXTH AMENDMENT TO LEASE
------------------------
DATED: March 10, 1995
BETWEEN: NIMBUS OAKS L.L.C.,
an Oregon limited liability company
111 SW Columbia, Suite 1380
Portland, OR 97201 LANDLORD
AND: CREDENCE SYSTEMS CORPORATION
a Delaware corporation
3500 West Warren Avenue
Fremont, CA 94538 TENANT
Tenant and Pen Nom I Corporation are parties to a lease dated April 3,
1991 which was amended by the following amendatory documents:
First Amendment to Lease dated August 16, 1991;
Second Amendment to Lease;
Third Amendment to Lease dated August 7, 1992;
Fourth Amendment to Lease dated October 13, 1992; and
Fifth Amendment to Lease dated November 15, 1993.
All of the foregoing documents together comprise the "Lease." The Lease covers
approximately 83,680 square feet of rentable area in Buildings A, B and C and
show on Exhibits A attached hereto. The Lease runs through November 15, 1996.
("Existing Term").
Landlord is successor to the interest of Pen Nom I Corporation.
Landlord and Tenant desire to further extend and amend the Lease.
NOW THEREFORE, the parties agree as follows:
1. Term Extension. The Lease term shall be extended for a term of six
--------------
(6) years commencing November 16, 1996 and expiring on midnight November 15,
2002. ("Extended Term").
2. Rental. For the remainder of the Existing Term, rental is amended as
------
set forth on the following table which also sets forth the rental rates during
the Extended Term, based upon the square footages as shown on Exhibit A.
1
<PAGE>
02/01/95 - 04/30/95 $.72 sq. ft./mo/NNN
05/01/95 - 06/30/95 $-0- sq. ft./mo/NNN
07/01/95 - 04/30/96 $.72 sq. ft./mo/NNN
05/01/96 - 07/31/96 $-0- sq. ft./mo/NNN
08/01/96 - 11/15/96 $.72 sq. ft./mo/NNN
11/16/96 - 11/15/98 $.74 sq. ft./mo/NNN
11/16/98 - 11/15/00 $.77 sq. ft./mo/NNN
11/16/00 - 11/15/02 $.80 sq. ft./mo/NNN
3. First Right to Lease.
--------------------
3.1 Tenant shall have the first right to lease the following spaces
in Nimbus Oaks Industry Park according to the terms of paragraph 3.2:
(a) The remainder of Building D consisting of approximately 48,408
square feet of rentable area,
(b) A portion of Building E consisting of approximately 21,489 square
feet of rentable area,
(c) The remaining of portion of Building E consisting of
approximately 19,600 square feet of rentable area.
3.2 The foregoing spaces are hereafter referred to as the "Additional
Premises." Prior to Landlord commencing to advertise or otherwise market the
Additional Premises for lease, it will give written notice to Tenant (the
"Notice") of its intent to do so and the rent and other terms upon which the
Additional Premise shall be offered for lease, including tenant improvement
allowances. Tenant shall have thirty (30) days following receipt of the Notice
to accept a lease of the Additional Premises on the terms described in the
Notice and the other terms and conditions contained in this Lease. If Tenant
fails to give notice accepting the Additional Premises on the terms offered
within such 30-day period, then Landlord may thereafter lease the Additional
Premises to a third party at rent no less favorable to Landlord and on
substantially the same terms as those described in the Notice, without further
notice to Tenant. However, if the Additional Premises are offered it rent more
favorable than described in the Notice or on any substantially different terms,
then the right given to Tenant herein shall be revived and such Additional
Premises shall not be offered unless first reoffered to Tenant in accordance
herewith.
4. Options to Extend. Except as set forth in the preceding Section 3,
-----------------
there are no other options to expand the Premises subject to the Lease.
5. Tenant Improvement. Within ninety (90) days after the later of
------------------
execution of this Sixth Amendment to Lease or receipt of a building permit,
Landlord will build and complete, at
2
<PAGE>
its expense, a covered canopy over the outdoor patio located adjacent to
Tenant's lunchroom area which shall be to the reasonable satisfaction of Tenant.
6. Consultant Fee. Upon execution of this Sixth Amendment to Lease,
--------------
Landlord shall pay to Colliers Parrish International, Inc. a commission as
outlined in the letter from Melvin Mark Brokerage Company dated November 3, 1994
to Colliers Parrish International, Inc.
7. Force and Effect. Except as amended hereby, the Lease shall continue
----------------
in full force and effect between the parties; provided, however that any
inconsistency between the provisions of the Lease and this Sixth Amendment to
Lease shall be resolved in accordance with the terms of this Sixth Amendment to
8. Nondisturbance and Attornment. Landlord represents that it has
-----------------------------
obtained a mortgage against the property of which the Premises are a part.
Landlord will cause its lender to enter into written agreement with Tenant
agreeing not to disturb Tenant's possession of the Premises so long as Tenant is
materially in compliance with the terms of this Lease. Such agreement will also
require Tenant to attorn to and accept as its landlord the lender or any party
to whom the lender assigns, and to notify the lender in the event of any default
by Landlord so as to give such lender a reasonable time period in which to cure
such default before Tenant shall take any action to terminate the Lease.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
LANDLORD: NIMBUS OAKS L.L.C.
By: Marzer Venture, Authorized Member
By: Mark Group Partnership IV, Managing Partner
-------------------------------------------
Title:
-------------------------------------------
Melvin Mark, Jr., Managing Partner
TENANT: CREDENCE SYSTEMS CORPORATION
By:
-------------------------------------------
Title: Sr. V.P. & CFO
-------------------------------------------
3
<PAGE>
EXHIBIT "A"
This Exhibit consists of two drawings labeled North Site Plan and Plan-Site,
--------------- ----------
Building 'D' and Building 'E', for Nimbus Oaks Industry Park. These drawings
- -----------------------------
show a basic top view outline of the buildings and the adjacent parking.
4
<PAGE>
EXHIBIT 11.1
CREDENCE SYSTEMS CORPORATION
COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
---------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Weighted average shares outstanding......................... 21,531 20,273 18,521
Common equivalent shares from stock options................. 399 711 1,228
------- ------- -------
Number of shares used in computing per share amounts........ 21,930 20,984 19,749
======= ======= =======
Net income.................................................. $37,703 $30,354 $19,193
======= ======= =======
Net income per share........................................ $ 1.72 $ 1.45 $ 0.97
======= ======= =======
</TABLE>
51
<PAGE>
EXHIBIT 21.1
CREDENCE SYSTEMS CORPORATION
SUBSIDIARIES OF THE COMPANY
The following are wholly-owned subsidiaries of Credence Systems Corporation:
EPRO, a California corporation;
Credence Systems KK, a Japanese company;
Credence Systems International, Inc., a Barbados corporation;
Credence Systems Korea; and
Credence International Limited, Inc., a Delaware corporation.
52
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
on Form S-8 (File Nos. 333-3806, 33-71856, 33-90728, 33-76542, and 33-90366)
pertaining to the 1993 Stock Option Plan, 1994 Employee Stock Purchase Plan,
1992 EPRO Stock Option Plan, and the EPRO Incentive Stock Option Plan of
Credence Systems Corporation of our report dated December 2, 1996, with respect
to the consolidated financial statements and schedule of Credence Systems
Corporation included in the Annual Report (Form 10-K) for the year ended October
31, 1996.
/s/ ERNST & YOUNG LLP
San Jose, California
January 24, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> OCT-31-1996
<CASH> 48,649
<SECURITIES> 37,643
<RECEIVABLES> 50,806
<ALLOWANCES> 1,781
<INVENTORY> 35,721
<CURRENT-ASSETS> 177,883
<PP&E> 62,493
<DEPRECIATION> 29,729
<TOTAL-ASSETS> 223,042
<CURRENT-LIABILITIES> 33,260
<BONDS> 0
0
0
<COMMON> 22
<OTHER-SE> 189,760
<TOTAL-LIABILITY-AND-EQUITY> 223,042
<SALES> 238,788
<TOTAL-REVENUES> 238,788
<CGS> 97,010
<TOTAL-COSTS> 97,010
<OTHER-EXPENSES> 87,444
<LOSS-PROVISION> 270
<INTEREST-EXPENSE> 222
<INCOME-PRETAX> 58,267
<INCOME-TAX> 20,564
<INCOME-CONTINUING> 37,703
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 37,703
<EPS-PRIMARY> 1.72
<EPS-DILUTED> 1.72
</TABLE>
