<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended April 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-22366
CREDENCE SYSTEMS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-2878499
(State Or Other Jurisdiction) (IRS Employer
Of Incorporation Or Organization) (Identification No.)
215 FOURIER AVE., FREMONT, CALIFORNIA 94539
(Address Of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (510) 657-7400
- --------------------------------------------------------------------------------
FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORt.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 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 [_]
APPLICABLE ONLY TO CORPORATE ISSUERS:
At May 27, 1998, there were 21,648,914 shares of the Registrant's common
stock, $0.001 par value per share outstanding.
================================================================================
<PAGE>
CREDENCE SYSTEMS CORPORATION
<TABLE>
<CAPTION>
INDEX PAGE NO.
----- --------
<C> <S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements ........................................... 3
Condensed Consolidated Balance Sheets .......................... 3
Condensed Consolidated Income Statements ....................... 4
Condensed Consolidated Statements of Cash Flows ................ 5
Notes to Condensed Consolidated Financial Statements ........... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations .......................................... 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .............................................. 20
Item 2. Changes in Securities .......................................... 20
Item 3. Defaults Upon Senior Securities ................................ 20
Item 4. Submission of Matters to a Vote of Securityholders ............. 20
Item 5. Other Information .............................................. 20
Item 6. Exhibits and Reports on Form 8-K ............................... 20
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
CREDENCE SYSTEMS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
APRIL 30, OCTOBER 31,
1998 1997
----------- -----------
<S> <C> <C>
ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents ...................... $ 65,841 $132,761
Restricted cash ................................ 5,012 10,002
Short-term investments ......................... 78,313 35,013
Accounts receivable, net ....................... 60,770 55,246
Inventories .................................... 52,723 42,125
Other current assets ........................... 13,900 13,001
-------- --------
Total current assets ......................... 276,559 288,148
Long-term investments ............................ 27,980 8,561
Property and equipment, net ...................... 45,930 43,050
Other assets ..................................... 19,466 18,382
-------- --------
Total assets ................................. $369,935 $358,141
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................... $ 12,935 $ 13,182
Accrued liabilities ............................ 24,343 20,346
Income taxes payable ........................... 4,331 4,284
-------- --------
Total current liabilities .................... 41,609 37,812
Convertible subordinated notes ................... 115,000 115,000
Minority interest ................................ 312 418
Stockholders' equity ............................. 213,014 204,911
-------- --------
Total liabilities and stockholders' equity.... $369,935 $358,141
======== ========
</TABLE>
See accompanying notes.
<PAGE>
CREDENCE SYSTEMS CORPORATION
CONDENSED CONSOLIDATED INCOME STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales ............................... $ 74,660 $ 43,355 $157,035 $ 83,616
Cost of goods sold ...................... 31,664 18,374 67,102 37,813
-------- -------- -------- --------
Gross margin ............................ 42,996 24,981 89,933 45,803
Operating expenses:
Research and development ............. 12,233 8,953 25,724 17,759
Selling, general and administrative .. 17,931 11,989 38,239 23,420
-------- -------- -------- --------
Total operating expenses ......... 30,164 20,942 63,963 41,179
-------- -------- -------- --------
Operating income ........................ 12,832 4,039 25,970 4,624
Interest income and other expenses, net . 200 874 1,158 1,901
-------- -------- -------- --------
Income before income taxes .............. 13,032 4,913 27,128 6,525
Income taxes ............................ 4,290 1,627 9,224 2,185
Minority interest ....................... (45) -- (74) --
-------- -------- -------- --------
Net income .............................. $ 8,787 $ 3,286 $ 17,978 $ 4,340
======== ======== ======== ========
Net income per share:
Basic ............................... $ 0.41 $ 0.15 $ 0.83 $ 0.20
======== ======== ======== ========
Diluted ............................. $ 0.40 $ 0.15 $ 0.81 $ 0.20
======== ======== ======== ========
Number of shares used in computing per
share amount:
Basic ............................... 21,634 21,833 21,731 21,783
======== ======== ======== ========
Diluted ............................. 22,146 22,265 22,257 22,242
======== ======== ======== ========
</TABLE>
See accompanying notes.
<PAGE>
CREDENCE SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
APRIL 30,
---------------------
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................................. $ 17,978 $ 4,340
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ............................. 8,405 5,784
(Gain) on disposal of property and equipment .............. (7) (18)
Minority interest ......................................... 74 --
Changes in operating assets and liabilities:
Restricted cash, accounts receivable,
inventories and other current assets ................. (15,955) 988
Accounts payable, accrued liabilities and
income taxes payable ................................. 4,566 (6,468)
-------- --------
Net cash provided by operating activities .......... 15,061 4,626
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale securities .................. (103,387) (22,907)
Maturities of available-for-sale short-term investments ..... 34,668 29,503
Sales of available-for-sale securities ...................... 6,000 3,112
Acquisition of property and equipment ....................... (5,390) (5,018)
Other assets ................................................ (3,048) (1,533)
Proceeds from sale of property and equipment ................ -- 240
-------- --------
Net cash (used for) provided by investing activities .. (71,157) 3,397
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock .................................... 1,971 829
Repurchase of common stock .................................. (12,795) --
-------- --------
Net cash (used for) provided by financing activities .. (10,824) 829
-------- --------
Net increase (decrease) in cash and cash equivalents ........... (66,920) 8,852
Cash and cash equivalents at beginning of period ............... 132,761 48,649
-------- --------
Cash and cash equivalents at end of period ..................... $ 65,841 $ 57,501
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid ............................................... $ 3,103 $ 1
Income taxes paid ........................................... $ 8,187 $ 972
NONCASH INVESTING ACTIVITIES:
Net transfers of inventory to property and equipment ........ $ 3,924 $ 5,588
NONCASH FINANCING ACTIVITIES:
Income tax benefit from stock option exercises .............. $ 949 $ 149
</TABLE>
See accompanying notes.
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. QUARTERLY FINANCIAL STATEMENTS
The condensed consolidated financial statements and related notes for the
six months ended April 30, 1998 and 1997 are unaudited but include all
adjustments (consisting solely of normal recurring adjustments) which are, in
the opinion of management, necessary for a fair presentation of the financial
position and results of operations of the Company for the interim periods. The
results of operations for the three and six months ended April 30, 1998 are not
necessarily indicative of the operating results to be expected for the full
fiscal year. The information included in this report should be read in
conjunction with the Company's audited consolidated financial statements and
notes thereto for the fiscal year ended October 31, 1997 included in the Annual
Report on Form 10-K and the additional risk factors, including, without
limitation, risks relating to fluctuations in operating results, rapid
technological change, importance of timely product introduction, risks of
delays, limited system sales, backlog, cyclicality of semiconductor industry,
expansion of operations, management of growth, sole or limited sources of
supply, reliance on subcontractors, highly competitive industry, dependence on
key customers, lengthy sales cycle, dependence on key personnel, management
changes, international sales, proprietary rights, acquisitions, future capital
needs and volatility of stock price, as set forth in this Report. Any party
interested in reviewing these publicly available documents should write to the
Chief Financial Officer of the Company.
USE OF ESTIMATES - The preparation of the accompanying unaudited
consolidated condensed financial statements requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements. Actual results could differ from those estimates.
2. 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>
April 30, October 31,
1998 1997
--------- -----------
<S> <C> <C>
Raw materials ...................... $ 26,881 $ 24,862
Work-in-process .................... 21,501 14,173
Finished goods ..................... 4,341 3,090
-------- --------
$ 52,723 $ 42,125
======== ========
</TABLE>
3. NET INCOME PER SHARE
The Company has adopted Statement of Financial Accounting Standards No.128
"Earnings Per Share" (SFAS 128) beginning in the first quarter of fiscal 1998.
Accordingly, net income per share (basic) is based upon the weighted average
number of common shares outstanding during the period. Net income per share
(diluted) is based upon the weighted average number of common and dilutive
potential common shares outstanding during the period. The Company's convertible
subordinated notes are not dilutive potential common shares and, accordingly,
were excluded from the calculation of net income per share (diluted). Options to
purchase 756,132 shares at an average price of $29.63 per share were outstanding
at April 30, 1998 but were not included in the computation of diluted earnings
per share because the options' exercise price was greater than the average
market price of the common shares and, therefore, the effect would be
antidilutive. All earnings per share amounts for all periods have been presented
and where necessary, restated to conform to SFAS 128 requirements. The following
table sets forth the computation of basic and dilutive net income per share (in
thousands):
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
April 30, April 30,
------------------ ------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic and diluted
earnings per share - net income ....... $ 8,787 $ 3,286 $17,978 $ 4,340
------- ------- ------- -------
Denominator:
Denominator for basic earnings
per share - weighted-average shares ... 21,634 21,833 21,731 21,783
Effect of dilutive securities-employee
stock options ......................... 512 432 526 459
------- ------ ------- -------
Denominator for diluted earnings per
share - adjusted weighted-average
shares and assumed conversions ........ 22,146 22,265 22,257 22,242
------- ------- ------- -------
Basic earnings per share ................ $ 0.41 $ 0.15 $ 0.83 $ 0.20
======= ======= ======= =======
Diluted earnings per share .............. $ 0.40 $ 0.15 $ 0.81 $ 0.20
======= ======= ======= =======
</TABLE>
4. CONTINGENCIES
The Company is involved in various claims arising in the ordinary course of
business, none of which, 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.
5. COMMITMENTS
The Company currently has an agreement with Summit Design, Inc. to purchase
product licenses through 1999. The remaining commitment under this agreement as
of April 30, 1998 is approximately $5 million. Restricted cash represents cash
in escrow related to the remaining purchase commitments under this agreement.
6. SUBSEQUENT EVENTS
On June 1, 1998 the Company purchased from Heuristic Physics Laboratories,
Inc. ("HPL") certain assets and assumed certain liabilities relating to their
memory test business for $8.0 million.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion may contain predictions, estimates and other
forward-looking statements that involve a number of risks and uncertainties.
While this discussion represents the Company's current judgment on the future
direction of the business, such risks and uncertainties could cause actual
results to differ materially from any future performance suggested herein.
Factors that could cause actual results to differ are identified throughout the
discussion below, as well as the section entitled "Risk Factors" below, and
elsewhere in this report. The Company undertakes no obligation to publicly
release the result of any revisions to these forward-looking statements which
may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
The following table sets forth items from the Condensed Consolidated Income
Statements as a percentage of net sales for the periods indicated:
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
April 30, April 30,
------------------ -----------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales ............................. 100.0% 100.0% 100.0% 100.0%
Cost of goods sold .................... 42.4 42.4 42.7 45.2
----- ----- ----- -----
Gross margin .......................... 57.6 57.6 57.3 54.8
Operating expenses
Research and development ........... 16.4 20.7 16.4 21.2
Selling, general and administrative. 24.0 27.6 24.4 28.0
----- ----- ----- -----
Operating expenses .............. 40.4 48.3 40.8 49.2
----- ----- ----- -----
Operating income ...................... 17.2 9.3 16.5 5.6
Interest income and other expenses, net 0.3 2.0 0.7 2.2
----- ----- ----- -----
Income before income taxes ............ 17.5 11.3 17.2 7.8
Income taxes .......................... 5.7 3.7 5.8 2.6
----- ----- ----- -----
Net income ............................ 11.8% 7.6% 11.4% 5.2%
===== ===== ===== =====
</TABLE>
RESULTS OF OPERATIONS
NET SALES
Net sales consist of revenues from systems sales, spare parts sales,
maintenance contracts and software sales. Net sales were $74.7 million for the
second quarter and $157.0 million for the first six months of fiscal 1998,
representing an increase of 72.2% and 87.8% respectively, over the comparable
periods of fiscal 1997. These increases were due primarily to increased
worldwide demand for semiconductor automatic test equipment, particularly in the
Asia Pacific region. International net sales accounted for approximately 80.0%
and 74.0%, respectively, of the total net sales for the second quarter and first
six months of fiscal 1998, compared to approximately 71.0% and 73.0%,
respectively, for the comparable periods a year ago. The Company's international
sales of its products and spare parts and its service revenues are denominated
primarily in United States dollars. The increase in international net sales in
the second quarter and for the first six months of fiscal 1998 over the
comparable periods of fiscal 1997 was due to higher demand in Taiwan partially
offset by a decrease in demand in Europe. The Company believes that its net
sales for the short term will be lower on a sequential basis than in prior
periods.
GROSS MARGIN
The Company's gross margin has been and will continue to be affected by a
variety of factors, including manufacturing efficiencies, pricing by competitors
or suppliers, new product introductions, product sales mix, production volume,
customization and reconfiguration of systems, international and domestic sales
mix and field service margins. Gross margin was 57.6% for the second quarter and
57.3% for the first six months of fiscal 1998, compared with 57.6% for the
second quarter and 54.8% for the first six months of fiscal 1997. The slight
increase in gross margin as a percent of sales for the first six months of 1998
over the first six month of fiscal 1997 was due to increases in the efficiency
of the production process, as well as higher manufacturing and shipping volumes
which spread fixed production costs over a greater number of systems. Gross
margins in the first six months of 1997 was negatively impacted by reserves
taken for slow moving inventory resulting from accelerated new product
introductions.
<PAGE>
RESEARCH AND DEVELOPMENT
Research and development expenses were $12.2 million in the second quarter
of fiscal 1998, an increase of $3.3 million or 36.6% over the same period of
fiscal 1997. Research and development expenses were $25.7 million in the first
six months of fiscal 1998, an increase of $8.0 million or 44.9% over the same
period in fiscal 1997. This increase, in absolute dollars, reflected the
Company's continued development work on new products and product enhancements.
As a percentage of net sales, research and development expenses were 16.4% for
the second quarter and for the first six months of fiscal 1998, down from 20.7%
in the second quarter and 21.2% for the first six months of fiscal 1997. The
decrease in these expenses as a percentage of net sales is attributable
primarily to the significant increase in net sales in the second quarter and the
first six months of fiscal 1998 as compared with the comparable periods of
fiscal 1997. The Company currently intends to continue to invest significant
resources in the development of new products and enhancements of existing
products for the foreseeable future. Currently the Company expects these
expenses to decrease slightly in absolute dollars for the remainder of fiscal
1998.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were $17.9 million in the
second quarter of fiscal 1998, representing an $5.9 million or 49.6% increase
from the comparable period of fiscal 1997. Selling, general and administrative
expenses were $38.2 million in the first six months of fiscal 1998, an increase
of $14.8 million or 63.3% over the same period in fiscal 1997. The increase from
the prior period is primarily due to increased commissions payable on higher
sales and higher marketing, sales, and administrative overhead expenses to
support the Company's increased business levels. As a percentage of net sales,
selling, general and administrative expenses were 24.0% for the second quarter
and 24.4% for the first six months of fiscal 1998, compared with 27.6% and
28.0%, respectively, for the corresponding periods in fiscal 1997. This decrease
as a percentage of net sales is attributable primarily to the significant
increase in net sales in the second quarter and first half of fiscal 1998 as
compared with the comparable periods of fiscal 1997. Currently the Company
expects selling, general and administrative expenses for the remainder of fiscal
1998 to decrease slightly in absolute dollars.
INTEREST INCOME AND OTHER EXPENSES, NET
The Company generated net interest income and other expenses of $0.2
million for the second quarter and $1.2 million for the first six months of
fiscal 1998, compared to $0.9 million and $1.9 million, respectively, for the
corresponding periods of fiscal 1997. The decreases in net interest income and
other expenses over prior periods were primarily due to lower interest rate
earned on the purchase of additional tax exempt securities and lower average
investment balances.
INCOME TAXES
The Company's provision for income taxes for the second quarter and first
six months of fiscal 1998 and 1997 is computed based on the projected annualized
effective tax rate of 34.0% and 33.5% respectfully, applied to fiscal
year-to-date book income. The projected effective tax rate for fiscal 1998 is
expected to be less than the combined federal and state statutory rate due
primarily to the projected benefit of the Company's foreign sales corporation.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $15.1 million and $4.6
million for the six months ended April 30, 1998 and 1997, respectively. Net cash
flows provided by operating activities for the six months ended April 30, 1998
were primarily from net income of $18.0 million, depreciation and amortization
of $8.4 million and a net increase in accounts payable, accrued liabilities, and
income taxes payable of $4.6 million, partially offset by a net increase in
restricted cash, accounts receivable, inventories and other current assets of
$16.0 million.
<PAGE>
Investing activities used $71.2 million and provided $3.4 million for the six
months ended April 30, 1998 and 1997, respectively. In the first six months of
fiscal 1998, the Company experienced a net increase of $62.7 million in
short-term and long-term investments while also purchasing $5.4 million of
property and equipment. Net cash used by financing activities was $10.8 million
and provided $0.8 million for the six months ended April 30, 1998 and 1997,
respectively. The use of cash in the first six months of fiscal 1998 was
primarily due to the Company repurchasing 500,000 of its shares of common stock
at a cost of approximately $12.8 million. The purpose of the repurchase was to
offset potential future dilution resulting from increases in the Company's stock
option plan and employee stock purchase plan.
As of April 30, 1998, the Company had working capital of approximately
$235.0 million, including cash and short-term investments of $149.2 million,
$60.8 million of accounts receivable and $52.7 million of inventories. The
Company expects accounts receivable to continue to represent a significant
portion of working capital. The Company believes that because of the relatively
long manufacturing cycles of many of its testers and the new products it has and
plans to continue to introduce, investments in inventories will also continue to
represent a significant portion of working capital. Significant investments in
accounts receivable and inventories subject the Company to increased risks,
including uncollectability of receivables and write-offs of both hardware and
software inventories, which could materially adversely affect the Company's
business, financial condition and results of operations. Total current
liabilities of $37.8 million as of October 31, 1997 increased to $41.6 million
as of April 30, 1998. The $3.8 million increase was due primarily to increases
in accrued liabilities by $4.0 million, offset by a decrease in accounts payable
of $0.2 million.
The Company's principal sources of liquidity as of April 30, 1998 consisted
of approximately $65.8 million of cash and cash equivalents, short-term
investments of $78.3 million and $20.0 million available under the Company's
unsecured working capital line of credit expiring on July 24, 1998. In addition,
the Company has $28.0 million of available-for-sale investments, classified as
long-term. As of April 30, 1998, no amounts were outstanding under the unsecured
line of credit. Additionally, as of April 30, 1998, the Company has operating
leases for facilities and test and other equipment totaling approximately $46.0
million.
The Company is currently in the process of assessing and testing the
software components of its products for year 2000 compliance. The Company does
not believe that its products contain undetected errors or defects associated
with year 2000 date functions that may result in material costs to the Company,
including repair costs and costs incurred in litigation due to any such defects,
however, there can be no assurance that such errors or defects do not exist.
Although the Company is not aware of any material operational issues associated
with preparing its internal systems for the year 2000, there can be no assurance
that the Company will not experience serious unanticipated negative consequences
and/or material costs caused by undetected errors or defects in the technology
used in its internal operating systems, which are composed predominately of
third party software and hardware technology.
Many commentators have stated that a significant amount of litigation will
arise out of year 2000 compliance issues. Because of the unprecedented nature of
such litigation, there can be no assurance that the Company will not be
materially adversely affected by claims related to year 2000 compliance.
RISK FACTORS
The Company's results of operations are affected by a variety of factors,
including the following:
Fluctuations in Operating Results
The Company's operating results have in the past fluctuated significantly
and will in the future fluctuate significantly, due to a variety of factors. 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
<PAGE>
income, culminating in net sales of $67.2 million and net income of $11.5
million for the third fiscal quarter of 1996. The Company then reported two
consecutive quarters of decreasing net sales and decreasing net income, with
fourth quarter of fiscal 1996 net sales of $44.2 million and net income of $4.3
million, and first quarter of fiscal 1997 sales of $40.2 million and net income
of $1.0 million. During the subsequent four consecutive fiscal quarters, from
the second quarter of fiscal 1997 through the first quarter of fiscal 1998, the
Company's net sales and net income increased sequentially, excluding the net
loss reported in the third fiscal quarter of 1997 due to a pre-tax charge for in
process research and development related to an acquisition. With the charge,
results for the third quarter of fiscal 1997 reflected a net loss of $0.9
million. Without the charge, third quarter fiscal 1997 net income would have
been $4.4 million. At the peak of this four quarter period ending in the first
quarter of 1998, net sales for the first quarter reached $82.4 million and net
income reached $9.2 million. In the second quarter of fiscal 1998, net sales and
net income decreased from the first quarter of 1998. The decreases prior to the
fourth quarter of fiscal 1997 were due primarily to a significant weakness in
the ATE market which materially adversely affected the Company's business,
financial condition and results of operations and several other companies in the
semiconductor equipment industry. The ATE industry returned to a capacity
expansion mode in fiscal 1997, resulting in sequential increases in revenues
during the second, third, and fourth quarters of fiscal 1997 and the first
quarter of fiscal 1998. However in the second quarter of fiscal 1998, net sales
decreased 9% from the prior quarter due to an industry slowdown and the Company
believes that in the short term its net sales and net income, if any, will be
lower sequentially than in prior periods. There can be no assurance they will
not continue to decrease in subsequent quarters. Other factors that have caused
and will continue to cause the Company's results to fluctuate include 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 start up of new
products, changes in pricing or payment terms and cycles by the Company, its
competitors, customers or suppliers, manufacturing capacity, the ability to
volume produce systems and meet customer requirements, inventory obsolescence
and writeoffs, patterns of capital spending by customers, delays, cancellations
or reschedulings 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, product
reliability, 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, cyclicality or downturns in
the semiconductor market and the markets served by the Company's customers,
natural disasters, political and economic instability, regulatory changes and
outbreaks of hostilities. The Company presently intends to introduce many new
products and product enhancements in the future, which will affect its operating
results, financial condition and business. The Company's gross margins on system
sales have varied significantly, and will continue to vary significantly based
on a variety of factors, including manufacturing efficiencies, pricing by
competitors or suppliers, product sales mix, reserves, production volume, new
product introductions, product reliability, the rate of capacity utilization,
customization and reconfiguration of systems, international and domestic sales
mix and field service margins. 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.
Limited Systems 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 $3.6 million, excluding the EPRO memory products, for which the price range
is typically below $50,000. 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 orders necessary to achieve the Company's sales
objectives for that quarter. In addition, orders in backlog are subject to
cancellation, delay,
<PAGE>
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 could 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 continue to cause future 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, marketing and
other expenses for new products, capital equipment purchases and worldwide
training and customer service and support, among other factors, will make it
difficult for the Company to reduce its significant fixed expenses in a
particular period if the Company's net sales goals for such period are not met.
Accordingly, there can be no assurance that the Company will be 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 may 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 and companies
which specialize in contract packaging and/or testing of semiconductors,
including manufacturers and contractors that are opening new or expanding
existing fabrication facilities, or upgrading existing equipment, which in turn
depend upon the current and anticipated market demand for semiconductors and
products incorporating semiconductors. Historically and recently, 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. The Company has in
the past experienced shipment delays, delays in commitments and purchase order
restructurings by several of its customers and anticipates that this may
continue to occur in the future. Accordingly, the Company can give no assurance
that it will be able to achieve or maintain its current or prior level of sales
or rate of growth. Through the first three quarters of 1997, the Company's net
sales, gross margins and net income were significantly below the net sales,
gross margins and net income, respectively, of the comparable prior year's
quarterly results. In the fourth quarter of 1997 and the first quarter of 1998,
the Company's net sales and net income were significantly above the net sales
and net income of the fourth quarter of 1996 and the first quarter of 1997,
respectively. However, in the second quarter of fiscal 1998, net sales and net
income decreased over the first quarter of fiscal 1998, the Company believes
they will decrease further in the short term, and there can be no assurance that
they will not decrease from prior quarter or prior year amounts in future
quarters. The Company anticipates that a significant portion of new orders may
depend upon demand from semiconductor device manufacturers building or expanding
fabrication facilities and new device testing requirements that are not
addressable by currently installed test equipment, and there can be no assurance
that such demand will develop to a significant degree, or at all. 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 continue to be
materially adversely affected if downturns or slowdowns in the
<PAGE>
semiconductor industry continue or occur again in the future. Company net sales
to the Asia Pacific region accounted for approximately 68%, 63%, 66%, 58%, and
45% of total net sales in the second quarter and first half of fiscal 1998, and
fiscal years 1997, 1996, and 1995, and thus are subject to the risk of economic
instability in that region that might materially adversely affect the demand for
the Company's products. The current Asian financial crisis has contributed to a
widespread uncertainty and a slowdown in the semiconductor industry. This
slowdown in the semiconductor industry has resulted in reduced spending for
semiconductor capital equipment, including ATE which the Company sells. This
industry slowdown has had and may continue to have an adverse impact on the
Company's product backlog, balance sheet and results of operations.
Management of Fluctuations in Operating Results
The Company has over the last several years experienced significant
fluctuations in its operating results. Since 1993, the Company has overall
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, the Company's establishment of a joint venture
with Innotech, Inc., the Company's acquisition in July 1997 of the assets and
certain liabilities of Test Systems Strategies, Inc. ("TSSI"), the Company's
acquisition in August 1997 of a software product line from Zycad Corporation
("Zycad") and the June 1998 acquisition of assets and assumption of certain
liabilities from Heuristics Physics Laboratories, Inc. ("HPL"). However, the
Company has during certain historical periods, as discussed above, experienced
revenue declines and reductions in its operations. These fluctuations in the
Company's sales and operations have placed a considerable strain on its
management, financial, manufacturing and other resources. In order to
effectively deal with the changes brought on by the cyclical nature of the
industry, the Company has been required to implement and improve a variety of
highly flexible operating, financial and other systems, procedures and controls
capable of expanding or contracting consistent with the Company's business.
There can be no assurance that any existing or new systems, procedures or
controls will be adequate to support fluctuations in 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 or contract 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.
Expansion of Operations
Currently, the Company is devoting and will continue to devote significant
resources to the development of new products and technologies. During 1998, the
Company is conducting evaluations of these new products and will continue to
invest significant additional resources in plant and equipment, leased
facilities, inventory, personnel and other costs, to begin or prepare to begin
production of these products and to provide the marketing, administration and
after-sales service and support, if any, required to service and support these
new hardware and software products. Accordingly, there can be no assurance that
gross profit margin and inventory levels will not be adversely impacted in the
future by start-up costs associated with the initial production and installation
of these new product lines. These start-up costs include, but are not limited
to, additional manufacturing overhead, additional inventory and warranty reserve
requirements and the creation of after-sales service and support organizations.
In addition, the increases in inventory on hand for new hardware and software
product development and customer support requirements increase the risk of
inventory write-offs. Additionally, there can be no assurance that operating
expenses will not increase, relative to sales, as a result of adding additional
marketing and administrative personnel, among other costs, to support the
Company's additional products. If the Company is unable to achieve significantly
increased net sales or its sales fall below expectations, the Company's
operating results will be materially adversely affected. There can be no
assurance that net sales will increase or remain at recent levels or that any
new products will be successfully commercialized.
<PAGE>
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 limited group of
suppliers. The Company does not maintain long-term supply agreements with most
of its vendors and purchases most of 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 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. In addition, the Company and certain of its
subcontractors periodically experience 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 a limited group of suppliers and the Company's reliance on outside
subcontractors involve several risks, including a potential 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 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 automatic test equipment ("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 penetrate any large
ATE customer or achieve significant sales to any 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 recently 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, the Company will continue to face significant additional
competition from larger competitors that may offer more complete product lines
and services than the Company. The Company's competitors are continuing 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 continue to cause a decline in sales or loss of market
acceptance of the Company's existing products. Moreover, increased competitive
pressure could continue to lead to intensified price-based competition, which
<PAGE>
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 as the Company has experienced with sales of its older products. The
Company believes that to be competitive, it must continue to expend 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 hardware and software products
and enhancements and related software tools with greater features on a timely
and cost-effective basis, including the products under development acquired in
the EPRO merger and the TSSI, Zycad and HPL product line acquisitions. The
Company's customers require testers and software products 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 software products and related software tools. Any success by the
Company in developing new and enhanced systems and software products and new
features to its existing systems and software products depends upon a variety of
factors, including product selection, timely and efficient completion of product
design, implementation of manufacturing and assembly processes and coding and
debugging of software, product performance and reliability 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 hardware and software 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, financial condition or results of operations. 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. In addition, new product introductions by the Company may cause the
Company's customers to curtail purchases of the older products and delay new
product purchases. Any decline in demand for the Company's hardware or software
products, compared to the demand anticipated by the Company, could have a
materially adverse affect on the Company's business, financial condition or
results of operations.
<PAGE>
Significant delays can occur between a system's introduction and the
commencement by the Company of volume production of such system. The Company has
in the past experienced and continues to experience significant delays in the
introduction, volume production and sales of its systems and related feature
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 experienced 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 or 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 and to increase feature sets. If
the Company's systems continue to have reliability, quality or other problems,
or the market perceives certain of the Company's products to be feature
deficient, reduced orders, higher manufacturing costs, delays in collecting
accounts receivable and higher service, support and warranty expenses, or
inventory write-offs, 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 in the Asia Pacific Region) accounted for 40%,
34%, 30%, 25% and 17% of the Company's net sales in the second quarter of fiscal
1998 and in the first half of fiscal 1998 and fiscal years 1997, 1996 and 1995,
respectively. Another customer accounted for 11% of net sales in fiscal 1995.
The loss of or any reduction in orders by this or any other significant
customer, including losses or reductions due to continuing or other technical,
manufacturing or reliability problems with the Company's products, continued
slowdowns 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.
Acquisitions
The Company has developed in significant part through mergers and
acquisitions of other companies and businesses. Prior to its initial public
offering in 1993, the Company acquired two companies and the semiconductor test
division of Tektronix, Inc. In 1995, the Company acquired EPRO, a memory tester
company. In July 1997, the Company acquired the assets and assumed certain
<PAGE>
liabilities of TSSI and, in August 1997, acquired the fault simulation and test
program development products from Zycad. In June 1998 the Company acquired
certain assets and assumed certain liabilities of HPL. The Company intends in
the future to pursue additional acquisitions of complementary product lines,
technologies and businesses. Any future acquisitions by the Company 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 may exceed the benefits
actually derived from the acquisitions), which could materially adversely affect
the Company's business, financial condition or results of operations. The
Company's charge for in-process research and development for the TSSI asset
acquisition accounted for the Company's net loss for the third quarter of 1997.
In addition, acquisitions involve numerous other risks, including difficulties
in the assimilation of the operations, personnel, 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 will
continue to engage in discussions with third parties concerning potential
acquisitions of product lines, technologies and businesses. 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.
Dependence on Key Personnel
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 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.
International Sales
International sales accounted for approximately 80%, 74%, 70%, 67% and 55%
of total net sales for the second quarter and first half of fiscal 1998 and
fiscal years 1997, 1996 and 1995, respectively. As a result, the Company
anticipates that international sales will continue to account for a significant
portion of total net sales in the foreseeable future. These international 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, joint venture partners, 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. Company net sales to the Asia Pacific region accounted for
approximately 68%, 66%, 66%, 58% and 45% of total net sales in the second
quarter and first half of fiscal 1998 and fiscal years 1997, 1996, and 1995, and
thus are subject to the risk of economic instability in that region that might
materially adversely affect the demand for the Company's products. Countries in
the Asia Pacific region, including Japan, have recently experienced weaknesses
in their currency, banking and equity markets. These weaknesses could adversely
affect demand for the Company's products, the availability and supply of product
components to the Company, and ultimately the Company's consolidated results of
operations. The current Asian financial crisis has contributed to a widespread
uncertainty and a slowdown in the semiconductor industry. This slowdown in the
semiconductor industry has resulted in reduced spending for semiconductor
capital equipment, including ATE which the Company sells. This industry slowdown
has had and may continue to have an adverse impact on the Company's product
backlog, balance sheet and results of operations.
<PAGE>
Importance of Japanese Market
To date, the Company has made limited sales of its systems to Japanese
semiconductor manufacturers. The Japanese semiconductor market is large,
represents a substantial percentage of the worldwide semiconductor manufacturing
capacity, and is difficult for foreign companies to penetrate. The Company may
be at a competitive disadvantage with respect to Japanese semiconductor capital
equipment suppliers that have been engaged for some time in collaborative
efforts with Japanese semiconductor manufacturers. The Company believes that the
Japanese companies with which it competes have a competitive advantage because
of their dominance of the Japanese market segment. The Company believes that
increased penetration of the Japanese market is important to its financial
results and intends to continue to invest significant resources in Japan in
order to meet this objective. As part of its strategy to penetrate the Japanese
market, the Company entered into a joint venture agreement with Innotech
Corporation, a local distributor of its products, and set up a local subsidiary
in Japan. The Company believes that Innotech is an important element of its
strategy to increase its presence in Japan. If Innotech is not successful in
selling such systems or such agreement is terminated, the Company's strategy to
increase product sales into the Japanese market would be adversely affected. In
addition, in recent years, Japanese semiconductor manufacturers substantially
reduced their level of capital spending on new fabrication facilities and
equipment, thereby increasing competitive pressures in the Japanese market
segment. There can be no assurance, however, that the Company will be able to
achieve significant sales to, or will be able to compete successfully in, the
Japanese semiconductor market segment.
Proprietary Rights
The Company attempts to protect its intellectual property rights through
patents, copyrights, trademarks, 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.
There can be no assurance that patents owned by the Company will not be
invalidated, deemed unenforceable, circumvented or challenged, or 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. The Company has been involved in extensive, expensive and
time-consuming reviews of, and litigation concerning, 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 and
expects to continue to receive notice of such claims in the future.
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 outside patent counsel to the Company, the
Company believes that such prior art is unlikely to affect the validity or scope
of the claims of the United States issued patent.
This prior art may, however, render invalid or significantly narrow the
scope of certain claims set forth in the United States patent covering another
of the Company's proprietary CMOS stabilization methods. The European examiner
referred to this prior art in the corresponding European patent application. The
European application was approved, but with 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 outside patent counsel, 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 outside patent counsel, that the prior art alleged by
the third party is less relevant than the prior art referenced by the European
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
<PAGE>
invalidate or narrow the scope of any claim of the United States patents or any
other patents or other patent applications of the Company.
On November 13, 1997, the Company requested the United States Patent and
Trademark Office to re-examine the subject United States patent in light of the
two prior art references. On January 7, 1998, the United States Patent and
Trademark Office responded by granting the Company's request for re-examination.
The case is presently pending in the United States Patent and Trademark Office.
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 that 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.
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 other items. The Company expects that
cash on hand and cash equivalents, including restricted cash, short-term
investments, funds available under 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.
Year 2000 Compliance
Many currently installed computer systems and software products are coded
to accept only two-digit entries in the date code field. Beginning with the year
2000, these date code fields may need to accept four-digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and/or software used by many companies will need to be upgraded to
comply with such "Year 2000" requirements. Significant uncertainty exists
concerning the potential effects associated with such compliance. The Company is
currently in the process of assessing and testing the software components of its
products for year 2000 compliance. The Company does not believe that its
products contain undetected errors or defects associated with year 2000 date
functions that may result in material costs to the Company, including repair
costs and costs incurred in litigation due to any such defects, however, there
can be no assurance that such errors or defects do not exist. Many commentators
have stated that a significant amount of litigation will arise out of year 2000
compliance issues. Because of the unprecedented nature of such litigation, there
can be no assurance that the Company will not be materially adversely affected
by claims related to year 2000 compliance.
Although the Company is not aware of any material operational issues
associated with preparing its internal systems for the year 2000, there can be
no assurance that the Company will not experience serious unanticipated negative
consequences and/or material costs caused by undetected errors or defects in the
technology used in its internal operating systems, which are composed
predominately of third party software and hardware technology.
<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, 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 or an
outbreak of hostilities or natural disasters, 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. For example, in fiscal 1997, the price of the Company's
Common Stock ranged from a high of $55.00 to a low of $13.75. In the first six
months of fiscal 1998, the price of the Company's Common Stock has ranged from a
high of $35.25 to a low of $18.13. 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.
Leverage
In connection with the sale in September 1997 of Convertible Subordinated
Notes due 2002, the Company incurred $115 million of indebtedness which resulted
in a ratio of long-term debt to total capitalization at October 31, 1997 of
approximately 36%. As a result of this indebtedness, the Company's principal and
interest obligations has increased substantially. The degree to which the
Company is leveraged could materially adversely affect the Company's ability to
obtain financing for working capital, acquisitions or other purposes and could
make it more vulnerable to industry downturns and competitive pressures. The
Company's ability to meet its debt service obligations will be dependent upon
the Company's future performance, which will be subject to financial, business
and other factors affecting the operations of the Company, many of which are
beyond its control.
Effects of Certain Anti-Takeover Provisions
Certain provisions of the Company's Certificate of Incorporation, equity
incentive plans, Bylaws and Delaware law may discourage certain transactions
involving a change in control of the Company. In addition to the foregoing, the
Company's classified board of directors, the shareholdings of the Company's
officers, directors and persons or entities that may be deemed affiliates, the
recent adoption of a shareholder rights plan and the ability of the Board of
Directors to issue "blank check" preferred stock without further stockholder
approval could have the effect of delaying, deferring or preventing a change in
control of the Company and may adversely affect the voting and other rights of
holders of Common Stock.
<PAGE>
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Securityholders
The following proposals were voted upon by the Company's stockholders at
the Annual Meeting of Stockholders held on March 26, 1998:
1. The following persons were duly elected as directors of the Company to
serve for a three-year term ending upon the year 2000 Annual Stockholders'
Meeting or until their successors are elected and qualified:
<TABLE>
<CAPTION>
Votes For Votes Withheld
---------- --------------
<S> <C> <C>
Jos. C. Henkens .................... 20,427,773 20,942
William G. Howard, Jr .............. 20,414,423 34,292
</TABLE>
2. A proposal to amend the Company's 1993 Stock Option Plan (the "Option
Plan") to increase the maximum number of shares of Common Stock authorized
for issuance over the term of the Option Plan from 4,125,001 to 4,625,001
shares was approved as follows:
In Favor Opposed Withheld
---------- --------- --------
11,303,376 6,346,065 101,073
3. A proposal to amend the Company's the Option Plan to implement an automatic
share increase feature pursuant to which the number of shares available for
issuance under the Option Plan will automatically increase on the first
trading day of each fiscal year, subject to a formulated cap, was approved
as follows:
In Favor Opposed Withheld
---------- --------- --------
11,195,030 6,450,246 105,238
4. A proposal to ratify the election of Ernst & Young LLP, as the Company's
independent auditors for the fiscal year ending October 31, 1998 was
approved as follows:
In Favor Opposed Withheld
---------- --------- --------
20,335,613 95,099 18,003
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) See Exhibit Index on page 22.
(b) A report on Form 8-K was filed on February 23, 1998, reporting
earnings for first Quarter of fiscal 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, as
amended, the registrant duly caused this Report to be signed on its behalf by
the undersigned thereunto duly authorized.
CREDENCE SYSTEMS CORPORATION
------------------------------------
(Registrant)
June 10, 1998 /s/ DENNIS P. WOLF
------------------- ------------------------------------
Date Dennis P. Wolf
Senior Vice President,
Chief Financial Officer
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER PAGE
- ------- ----
<C> <S> <C>
2.11 Asset Purchase Agreement, dated as of June 1, 1998,
between Credence Systems Corporation, a Delaware corporation
and Yervant David Lepejian and Lawrence Kraus, as authorized
representatives of all of the shareholders of Heuristic Physics
Laboratories, Inc., a California corporation. The Company
shall furnish supplementally a copy of any omitted schedules
to the Commission upon request. 23
10.26 Lease Agreement between the Company and Pacific Realty
Associates, L.P., dated April 10, 1998. 54
27.1 EDGAR Financial Data Schedule 89
</TABLE>
<PAGE>
EXHIBIT 2.11
ASSET PURCHASE AGREEMENT
ASSET PURCHASE AGREEMENT dated as of June 1, 1998 between
CREDENCE SYSTEMS CORPORATION, a Delaware corporation ("Purchaser") and YERVANT
DAVID LEPEJIAN and LAWRENCE KRAUS, as authorized representatives (the
"Shareholder Representatives") of all of the shareholders of Heuristic Physics
Laboratories, Inc., a California corporation (the "Company").
WHEREAS, the Shareholder Representatives desire to cause the
Company and its wholly-owned subsidiary, Heuristic Physics Laboratories of
Armenia, a company organized under the laws of the Republic of Armenia (the
"Subsidiary" and, collectively with the Company, the "HPL Companies") to sell to
Purchaser, and Purchaser desires to purchase from the HPL Companies, all of the
Assets (as defined in Section 1.1);
WHEREAS, the Shareholder Representatives desire to cause the
transfer from the HPL Companies to Purchaser of, and Purchaser is willing to
accept such transfer from the HPL Companies, the Assumed Liabilities (as defined
in Section 2.1);
NOW, THEREFORE, in consideration of the mutual promises and
covenants set forth herein, the parties hereby agree as follows:
ARTICLE I
PURCHASE AND SALE OF ASSETS
---------------------------
SECTION 1. 1 DESCRIPTION OF ASSETS TO BE ACQUIRED. Upon the terms
and subject to the conditions set forth in this Agreement, at the Closing Time
(as defined in Section 7.1), the Shareholder Representatives agree to cause the
HPL Companies to convey, sell, transfer, assign, and deliver to Purchaser (and
any wholly-owned subsidiary of Purchaser designated by Purchaser prior to the
Closing Time to receive title to any of the Assets), and Purchaser (and any
wholly-owned subsidiary of Purchaser designated by Purchaser prior to the
Closing Time to receive title to any of the Assets) shall purchase from the HPL
Companies, all right, title, and interest of the HPL Companies in and to the
assets, properties, and rights of the HPL Companies specifically referred to in
this Section 1. 1 (collectively, the "Assets"). The Shareholder Representatives
represent and warrant to the Purchaser that the Assets are all of the assets of
the HPL Companies used exclusively by the Automatic Test Equipment Division and
the Design For Test Division of the HPL Companies (the business of the HPL
Companies' Automatic Test Equipment Division and the Design For Test Division
being, the "Business"):
(a) All interests in machinery, equipment, instruments, computer
hardware and software, tooling, furniture, fixtures, motor vehicles, supplies,
repair and maintenance parts, demonstration units, and other fixed assets,
together with manufacturer or vendor warranties associated therewith, listed on
Schedule 1.1 (a);
<PAGE>
(b) All inventories of raw materials (together with any
manufacturer or vendor warranties associated therewith), work-in-process,
finished goods and supplies, including scrapwork and rework, listed on Schedule
1.1 (b) (collectively, the "Inventory");
(c) All claims and rights under all agreements, contracts,
licenses, leases, franchises, instruments, documents, purchase and sale orders
and other executory commitments, and all permits, consents, and certificates of
any regulatory, administrative or other governmental agency or body, listed on
Schedule 1.1 (c) hereto (collectively, the "Contracts");
(d) All interests in the real property, including leasehold
interests (the "Leasehold Interests") listed on Schedule 1.1(d), and all related
rights, easements and uses which benefit or burden any such property
(collectively, the "Real Property");
(e) All right, title and interest to trademarks, trademark
rights, service marks, service mark rights, copyrights, trade names, trade name
rights, fictitious business names, nondisclosure agreements, confidentiality
agreements, assignment of inventions agreements, proprietary in formation and
inventions agreements, works of authorship, inventions, software, source code,
industrial models, industrial designs, utility models and certificates of
invention, designs emblems and logos, trade secrets, know-how, manufacturing
formulae, technical information, patents, patent applications, mask work
registrations, inventions, franchises, franchise rights, customer and supplier
lists together with the goodwill associated therewith and all other proprietary
rights, information and processes, in each case, related exclusively to the
Business, all of which are listed on Schedule 1.1(e) (collectively, the
"Proprietary Rights");
(f) All accounts and notes receivable of the HPL Companies
relating exclusively to the Business, all of which are listed on Schedule 1(f)
(collectively, the "Accounts");
(g) All original books of account, general ledgers, sales
invoices, purchase orders, accounts payable and payroll records, tax returns and
supporting schedules, drawings, files, papers, and all other records relating
exclusively to the Business and duplicates of all of the foregoing relating (but
not exclusively relating) to the Business (the "Records");
(h) All rights under express or implied warranties from suppliers
of the Business only to the extent such warranties relate to the Business;
(i) All of the causes of action, judgments, and claims or demands
of whatever kind or description arising out of the activities of the Business,
but only to the extent such causes of action, judgments, and claims or documents
relate to the Business; and
(j) All goodwill of the Business (the "Goodwill").
<PAGE>
SECTION 1.2 NON ASSIGNMENT OF CERTAIN ASSETS. Neither this
Agreement nor any action taken pursuant to its provisions shall constitute an
assignment if such assignment would constitute a breach of the terms of any
agreement or result in the loss or diminution or any rights thereof; provided,
however, that in each such case, the Shareholder Representatives shall use
their best efforts to obtain the consent to an assignment to Purchaser. If such
consent is not obtained by the Closing Time, the Shareholder Representatives
shall cooperate with Purchaser in any arrangement designed for Purchaser to
perform the HPL Companies' obligations with respect to such Asset after the
Closing Time and for Purchaser to receive the benefits under any such Asset
after the Closing Time, which arrangements may include enforcement, for the
account and benefit of Purchaser, of any and all rights of the HPL Companies
against any other person arising out of the breach or cancellation by such other
person or otherwise, all of such actions of the Shareholder Representatives to
be at the direction and expense of the Shareholder Representatives. The
Shareholder Representatives shall reimburse Purchaser for all reasonable
documented costs and expenses, including increased obligations, resulting from
an inability of Purchaser to receive the benefits of any such assignment.
ARTICLE II
LIABILITIES OF SELLER
---------------------
SECTION 2.1 ASSUMED LIABILITIES. Purchaser hereby agrees to
assume, satisfy, or perform when due only those liabilities and obligations of
the HPL Companies specifically identified on Schedule 2.1 attached hereto
(collectively, the "Assumed Liabilities").
SECTION 2.2 LIABILITIES NOT ASSUMED. Other than the Assumed
Liabilities, Purchaser shall not assume, nor shall Purchaser or any affiliate,
or any officer, director, employee, stockholder or agent of Purchaser, be deemed
to have assumed or guaranteed, any liabilities, obligations, litigation,
disputes, debts, payables, counterclaims, rights of set-off or return, or
commitments or claims, whether such liabilities are contingent or otherwise, or
direct or indirect, of either of the HPL Companies or any shareholder of the
Company in existence on or prior to or after the Closing Time or based on any
events, facts or circumstances in existence prior to or in connection with the
sale of the Assets or in connection with or arising from any activities of
either of the HPL Companies or any services provided by or goods or assets sold
by or products delivered by or to either of the HPL Companies (collectively, the
"Excluded Liabilities").
<PAGE>
ARTICLE III
PURCHASE PRICE
--------------
SECTION 3.1 CONSIDERATION. Upon the terms and subject to the
conditions contained in this Agreement, in consideration for the Assets and in
full payment therefor, Purchaser will pay, or cause to be paid, to the Company
the Purchase Price set forth in Section 3.2.
SECTION 3.2 PAYMENT OF PURCHASE PRICE. The purchase price
("Purchase Price") to be paid or payable by Purchaser to the Company shall
consist of cash in the amount of SEVEN MILLION NINE HUNDRED EIGHTY-TWO THOUSAND
FIVE HUNDRED TWENTY-SIX Dollars ($7,982,526).
SECTION 3.3 ROYALTY PAYMENTS. In addition to the Purchase Price,
for a period of two (2) years following the date of the Closing, Purchaser shall
pay to the Shareholder Representatives in the proportions set forth on Schedule
3.3 hereto royalty payments in the amount equal to ten percent (10%) of
Purchaser's net sales to third parties of products derived from those Assets
attributable to the HPL Companies Design For Test Division (subject to a
reasonable reserve for returns). Purchaser shall maintain books and records
relating to its sales of such products and the Shareholder Representatives shall
be entitled, at their own expense, to audit such books and records at
Purchaser's place of business during normal business hours upon five (5) days
prior written notice.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PURCHASER
-------------------------------------------
Purchaser hereby represents and warrants to the Shareholder
Representatives that:
SECTION 4.1 ORGANIZATION. Purchaser is a corporation duly
organized, validly existing, and in good standing under the laws of the State of
Delaware.
SECTION 4.2 AUTHORIZATION. Purchaser has full corporate power and
authority to enter into this Agreement, to perform its obligations hereunder,
and to consummate the transactions contemplated hereby. Purchaser has taken all
necessary and appropriate corporate action with respect to the execution and
delivery of this Agreement, and this Agreement constitutes a valid and binding
obligation of Purchaser, enforceable in accordance with its respective terms:
(i) except as limited by applicable bankruptcy, insolvency, moratorium,
reorganization, or other laws affecting creditors' rights and remedies
generally, (ii) except as may be required by the applicable provisions of the
bulk sales laws provisions of applicable state law, and ('iii') except as the
indemnification provisions contained in this Agreement may be limited by
principles of public policy.
<PAGE>
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF
---------------------------------
THE SHAREHOLDER REPRESENTATIVES
-------------------------------
Except as set forth in the corresponding sections or subsections
of the disclosure letter delivered to Purchaser by Shareholder Representatives
prior to entering into this Agreement (the "Disclosure Letter"), Shareholder
Representatives hereby represent and warrant to Purchaser:
SECTION 5.1 ORGANIZATION; GOOD STANDING.
The HPL Companies are corporations duly organized, validly
existing and in good standing under the laws of their respective state or
country of organization, and have the corporate power and authority to own,
lease and operate their properties and to carry on their businesses as the same
are now being conducted. The HPL Companies are qualified as foreign corporations
and are in good standing in such other jurisdictions in which the conduct of
their business or their ownership or leasing of property requires such
qualification. Except as set forth on Schedule 5.1, the HPL Companies do not
own, directly or indirectly, any equity or other ownership interest in or
control any corporation, partnership, joint venture or other entity. The Company
owns one hundred percent (100%) of the proprietary interests in the Subsidiary.
All of the proprietary or equity interests in the Subsidiary are fully paid,
nonassessable and not subject to any lien or encumbrance.
SECTION 5.2 AUTHORIZATION.
Shareholder Representatives have full power and authority, on
behalf of all of the shareholders of the Company, to enter into this Agreement
and the Related Agreements to which they are a party, to perform their
obligations hereunder and thereunder, and to consummate the transactions
contemplated hereby and thereby, including the execution and delivery of this
Agreement, general conveyances, bills of sale, assignments, and other documents
and instruments evidencing the conveyance of the Assets or delivered in
accordance with Section 7.2 hereunder (the "Closing Documents") and the Related
Agreements to which they are a party. The HPL Companies have taken all necessary
and appropriate corporate action with respect to the execution and delivery of
any Closing Documents and any Related Agreements to which they are a party. No
other corporate proceedings on the part of the HPL Companies are necessary to
authorize this Agreement and the Related Agreements or to consummate the
transactions contemplated hereby and thereby (other than, with respect to the
sale of Assets, the approval and adoption of this Agreement by the holders of a
majority of the outstanding shares of the HPL Companies' capital stock in
accordance with California law, Armenian law and the HPL Companies' charter
documents). This Agreement and the Related Agreements to which they are a party
constitute valid and binding obligations of the Shareholder Representatives,
enforceable in accordance with their terms: (i) except as limited by applicable
<PAGE>
bankruptcy, insolvency, moratorium, reorganization, or other laws affecting
creditors' rights and remedies generally, and (ii) except as the indemnification
provisions contained in this Agreement may be limited by principles of public
policy.
SECTION 5.3 FINANCIAL STATEMENTS.
(a) Each of the consolidated financial statements (including, in
each case, any related notes thereto) delivered by the HPL Companies to
Purchaser (the "Financial Statements") was prepared in accordance with generally
accepted accounting principles applied on a consistent basis throughout the
periods involved and each fairly presented the consolidated financial position
of the Company and its Subsidiaries as at the respective dates thereof and the
consolidated results of its operations and cash flows for the periods indicated,
except that the unaudited interim financial statements were or are subject to
normal and recurring year-end adjustments which were not or are not expected to
be material in amount. The Company's revenue recognition policies with respect
to the Financial Statements have been made in accordance with generally accepted
accounting principles. The Company maintains a standard system of accounting in
accordance with generally accepted accounting principles. All of the Company's
general ledgers, books and records are located at the Company's principal place
of business. The Company's financial reserves are adequate to cover claims
incurred.
(b) The projections which the Company has delivered to Purchaser
have been prepared by the Company in good faith and are based on assumptions
that are reasonable. Such projections do not contain any assumptions that are
false or misleading with respect to any material fact and do not omit to state
any material fact necessary in order to make such projections reasonable.
SECTION 5.4 ABSENCE OF CERTAIN CHANGES AND EVENTS.
1. Since March 31, 1998, there had not occurred any adverse
change in the financial condition, results of operation, assets, liabilities,
business, or prospects of the Business or any occurrence, circumstance, or
combination thereof which reasonably could have been expected to result in any
such adverse change.
2. Since March 31, 1998, there has not been:
a. Any event, including, without limitation, shortage of
materials or supplies, fire, explosion, accident, requisition or taking of
property by any governmental agency, flood, drought, earthquake, or other
natural event, riot, act of God or a public enemy, or damage, destruction, or
other casualty, whether covered by insurance or not, which has had an adverse
effect on the Business or the Assets or any such event which reasonably could be
expected to have such an effect on the Business or the Assets;
b. Any transaction relating to or involving the Business (other
than the transactions contemplated herein) which was entered into or carried out
other than in the ordinary and usual course of business;
<PAGE>
c. Any change made by the Company in its method of operating the
Business or its accounting practices relating thereto;
d. Any mortgage, pledge, lien, security interest, hypothecation,
charge, or other encumbrance imposed or agreed to be imposed on or with respect
to the Assets other than liens arising with respect to taxes not yet due and
payable, and such minor liens and encumbrances, if any, which arise in the
ordinary course of business and which do not detract from the value of the
Assets;
e. Any sale, lease, or disposition of, or any agreement to sell,
lease, or dispose of any of the Assets, other than sales, leases, or
dispositions in the usual and ordinary course of business and consistent with
prior practice;
f. Any modification, waiver, change, amendment, release,
rescission, accord and satisfaction, or termination of, or with respect to, any
term, condition, or provision of any contract, agreement, license, or other
instrument to which either Seller is a party and relating to or affecting the
Business or the Assets, other than any satisfaction by performance in accordance
with the terms thereof in the usual and ordinary course of business and
consistent with prior practice;
g. Any labor disputes or disturbances materially affecting in
an adverse manner the Business or financial condition of the HPL Companies,
including, without limitation, the filing of any petition or charge of unfair
labor practices with the National Labor Relations Board;
h. Any notice (written or unwritten)from any engineering or
technical personnel of the Business that such employee has terminated, or
intends to terminate, such employee's employment in the Business;
i. Any waivers of any rights of substantial value by either of
the HPL Companies related to the Business; or
j. Any purchase or lease of, or any agreements to purchase or
lease, capital assets for the Business by either of the HPL Companies in excess
of $10,000 individually, or in excess of $50,000 in the aggregate.
SECTION 5.5 UNDISCLOSED LIABILITIES.
There are no debts, liabilities or obligations, other than the
Excluded Liabilities with respect to which the Assets are subject, liquidated,
unliquidated, accrued, absolute, contingent, or otherwise, that are not
specifically identified in the Financial Statements. Neither of the HPL
Companies has guaranteed the repayment of any obligations of any third party,
including affiliates and affiliated entities or persons.
<PAGE>
SECTION 5.6 PROPERTIES.
The HPL Companies have good, valid and marketable title to all
Assets, tangible and intangible, purported to be owned by either of them,
including the Assets reflected on the Financial Statements. All such Assets
purported to be owned by the HPL Companies are free and clear of all mortgages,
liens, charges, security interests or other encumbrances of any nature
whatsoever except as reflected in the Financial Statements and except for liens
for current taxes not delinquent, liens imposed by operation of law and liens
incurred in the ordinary course of business. All Assets, including machinery and
equipment, owned, leased or otherwise used by the HPL Companies are in good
operating condition and repair, reasonable wear and tear excepted, and are
suitable and adequate for use in the ordinary course of business and conform in
all material respects to all applicable laws. All leases relating to the
Business are binding, valid and enforceable in accordance with their terms.
After the Closing Time, Purchaser will be entitled to the continued use and
possession of the property leased by them, for the terms specified in such
leases and for the purposes for which such property is used. There is no pending
or threatened condemnation or similar proceeding affecting any of the real
property used in the Business owned or leased by the HPL Companies.
SECTION 5.7 TAXES.
1. No Tax is required to be withheld pursuant to Section 1445 of
the Code as a result of the transfers contemplated by this Agreement.
2. There are no liens for Taxes upon the Assets except liens for
current Taxes not yet due. The unpaid Taxes of the HPL Companies do not exceed
the reserve for Taxes established on the books and records of the Company. No
governmental entity (a "Taxing Authority") responsible for the imposition of any
Tax (domestic or foreign), has asserted that the HPL Companies owe any Taxes
other than as shown on their tax returns and paid with such returns.
3. None of the assets (including the Assets) of the HPL Companies
(i) is property that is required to be treated as owned by any other person
pursuant to the so-called "safe harbor lease" provisions of former Section
168(f)(8) of the Code, (ii) directly or indirectly secures any debt the interest
on which is tax exempt under Section 103(a) of the Code or (iii) is "tax exempt
use property" within the meaning of Section 168(h) of the Code. The transactions
contemplated herein are not subject to the tax withholding provisions of Code
Section 3406, or of Subchapter A of Chapter 3 of the Code or of any other
provision of law in any jurisdiction. The HPL Companies are not and have never
been members of a group permitted or required to file consolidated Tax returns
and are not party to any agreement relating to the payment or sharing of
liability for Taxes. The Company has not filed a consent under Section 341(f) of
the Code.
4. For purposes of this Agreement, "Tax" (and, with correlative
meaning, "Taxes" and "Taxable") means (i) any net income, alternative or add-on
minimum tax, gross income, gross receipts, sales, use, ad valorem, transfer,
<PAGE>
franchise, profits, license, withholding, payroll, employment, excise,
severance, stamp, occupation, premium, property, environmental or windfall
profit tax, custom, duty or other tax, governmental fee or other like assessment
or charge of any kind whatsoever, together with any interest or any penalty,
addition to tax or additional amount imposed by any Taxing Authority responsible
for the imposition of any such tax (domestic or foreign), (ii) any liability for
the payment of any amounts of the type described in (i) as a result of being a
member of an affiliated, consolidated, combined or unitary group for any Taxable
period and (iii) any liability for the payment of any amounts of the type
described in (i) or (ii) as a result of any express or implied obligation to
indemnify any other person.
SECTION 5.8 COMPLIANCE WITH LAWS.
Each of the HPL Companies has complied and is in compliance with
all applicable foreign, federal, state, and local laws, statutes, licensing
requirements, rules, and regulations, and judicial or administrative decisions
applicable to the Business. Each of the HPL Companies has been granted all
licenses, permits (temporary and otherwise), authorizations, and approvals from
foreign, federal, state, and local government regulatory bodies necessary to
carry on the Business as currently conducted, all of which are currently valid
and in full force and effect. There is no claim, action, litigation, order
investigation, or proceeding pending or threatened, or notice served with
respect to any violation of any law, ordinance, order, writ, decree, rule, or
regulation issued by any federal, state, local, or foreign court or governmental
agency or instrumentality applicable to the Business.
SECTION 5.9 CONSENTS.
The execution and delivery of this Agreement by the HPL Companies
does not, and the performance of this Agreement and the Related Agreements by
the HPL Companies shall not, require any consent, approval, authorization or
permit of, or filing with or notification to, any governmental or regulatory
authority, domestic or foreign, or any other third party, including licensors
and lenders, except for applicable requirements, if any, of the bulk sales laws.
SECTION 5.10 PRODUCT LIABILITY.
There are no defects in the design or technology embodied in any
product of the Business which HPL Companies currently market or have marketed in
the past that impair or are likely to impair the intended use of the product or
injure any consumer of the product or third party, except that warranty claims
may arise in the normal course of business, for products shipped prior to the
Closing Time, in an aggregate amount of no more than the warranty reserves
established on the most recent balance sheet of the Company. HPL Companies have
delivered to Purchaser copies of their warranty policies and all outstanding
warranties or guarantees relating to any of products of the Business other than
warranties or guarantees implied by law. There is no claim asserting (a) any
damage, loss or injury caused by any product of the Business, or (b) any breach
of any express or implied product warranty or any other similar claim with
<PAGE>
respect to any product of the Business other than standard warranty obligations
(to replace, repair or refund) made by HPL Companies in the ordinary course of
business.
SECTION 5.11 PROPRIETARY RIGHTS.
1. Schedule 5.11 sets forth all of the Proprietary Rights. Any of
the Proprietary Rights that require the execution and filing with an appropriate
governmental agency have been so indicated on Schedule 5.11.
2. Schedule 5.11 sets forth a true and complete list of all
contracts, licenses and other agreements to which either of the HPL Companies is
a party, which affect any item of the Proprietary Rights, except commercially
available (i.e., off-the-shelf) software. Schedule 5.11 specifically designates
all such contracts, licenses or other agreements (i) pursuant to which either
Seller is a direct or indirect licensor or licensee of Proprietary Rights, (ii)
under which either of the HPL Companies has granted or been granted exclusive
rights, (iii) under which either of the HPL Companies is obligated to pay in
excess of (or under which the consideration is reasonably expected to exceed)
$50,000 in any one year period and (iv) all parties to whom either of the HPL
Companies has delivered their source code, whether pursuant to an escrow
arrangement or otherwise and all parties who have the right to receive such
source code.
3. Except in each case as set forth in Schedule 5.11:
a. The HPL Companies either own or have the exclusive
right to use, sell, license and dispose of, to bring actions for the
infringement of and otherwise exercise all Proprietary Rights,
including Proprietary Rights which comprise trade secret rights, to
the extent permitted by law (hereinafter, "Trade Secrets"), free and
clear of all encumbrances.
b. The HPL Companies have the non-exclusive right to
use, sell, license and dispose of all Proprietary Rights listed on
Schedule 5.11 as exceptions to the previous paragraph.
c. The HPL Companies have taken all appropriate actions
and made all applicable applications and filings pursuant to
applicable laws to perfect or protect their interests in all
Proprietary Rights.
d. The execution, delivery and performance of this
Agreement and the Related Agreements and the consummation of the
transactions contemplated hereby and thereby will not (A) breach,
violate or conflict with any instrument or agreement governing any
Proprietary Right, (B) cause the forfeiture or termination or give
rise to a right of forfeiture or termination of any Proprietary Right,
or (C) in any way impair the right of Purchaser to use, sell, license
or dispose of or to bring any action for the infringement of, any
Proprietary Right or any products or technology designed, developed,
manufactured, sold or serviced by the Business (collectively,
"Products").
<PAGE>
e. The manufacture, marketing, license, sale or use of any
Products anywhere in the world does not or would not (A) violate any
license or agreement with any third party, (B) infringe on any
non-patent Proprietary Right of any third party or (C) infringe any
third party patent rights. Neither the HPL Companies nor any of their
employees have misappropriated any third party trade secrets. There is
no claim or litigation pending or threatened contesting the validity,
ownership or right to use, sell, license or dispose of any Proprietary
Right, or claiming that the HPL Companies or any of their employees
have misappropriated any third party trade secrets nor is there any
basis for any such claim.
f. No third party is infringing on any Proprietary Right
where such infringement could limit the protection afforded by the
Proprietary Rights to the use, sale, license, sublicense or
disposition of the Products or prevent the future enforcement of such
Proprietary Right.
g. The HPL Companies have taken all steps reasonably
necessary or appropriate (including, entering into appropriate
confidentiality, nondisclosure and noncompetition agreements, the
forms of which have been delivered to Purchaser or their counsel, with
all officers, directors, subcontractors, employees, licensees and
entities that serve the Business) to safeguard and maintain the
secrecy and confidentiality of, and the proprietary rights in, all
Proprietary Rights.
h. All Trade Secrets are presently and as of the Closing
Time will be located at the HPL Companies' addresses as shown in this
Agreement and have not been used, divulged or appropriated for the
benefit of any person other than the HPL Companies or to the detriment
of the HPL Companies.
4. Except in each case as set forth in Schedule 5.11:
a. Each of the licenses and agreements listed or required
to be listed in the Schedules to this Section 5.11 is in full force
and effect and is a valid obligation enforceable against each of the
HPL Companies (to the extent it is a party thereto), and against the
other party thereto in accordance with its terms.
b. HPL Companies have performed, or are now performing,
their obligations, and HPL Companies are not in default (or would by
the lapse of time or the giving of notice or both be in default),
under any license or agreement listed or required to be listed in
Schedule 5.11. No other party to such licenses and agreements is in
default (or would by the lapse of time or the giving of notice or
both, be in default) thereunder or has breached any terms or
provisions thereof.
<PAGE>
c. No third party has raised against either of the HPL
Companies or any of their current or former service providers any
claim, dispute or controversy with respect to any of the licenses or
agreements which is listed or required to be listed in Schedule 5.11.
Neither of the HPL Companies has received notice or warning of alleged
nonperformance, delay in delivery or other noncompliance by either of
the HPL Companies with respect to their obligations under any such
licenses or agreements.
SECTION 5.12 CONTRACTS AND COMMITMENTS.
1. Schedule 5.12 lists all outstanding Contracts, whether or not
in writing, to which either of the HPL Companies is a party or to which any of
the Assets are subject that may: (i) involve obligations (contingent or
otherwise) or unwritten agreements of, or payments to, either of the HPL
Companies in excess of $50,000; (ii) involve written agreements with suppliers
and customers of either of the HPL Companies; (iii) involve the license of any
Proprietary Rights to or from either Seller; (iv) contain provisions restricting
and/or affecting the development, manufacture, or distribution of HPL Companies'
products or services; (v) relate to any aspect of the Business in which any
person who was or is an officer, director, or employee of either of the HPL
Companies (or any person, firm, partnership, trust, or corporation affiliated
with any such persons or any family members of such persons) has an interest; or
(vi) involve agreements (written or unwritten) on which the Business is
dependent.
2. Each of the HPL Companies has performed all of its obligations
under the terms of each Contract listed in Schedule 5.12 to which it is a party,
and is not in default thereunder. No event has occurred which but for the giving
of notice or lapse of time or both would constitute a default by any party
thereto under any such Contract. Each such Contract is valid and binding on all
parties thereto and in full force and effect. Neither of the HPL Companies has
received a notice of default, cancellation, or termination in connection with
any such Contract.
SECTION 5.13 ASSETS.
The Assets include all intellectual property, inventory and all
other property, in which either of the HPL Companies has any right, title and
interest, necessary to operate the Business in the same manner as the Business
was operated by the HPL Companies prior to the Closing Time. The Assets are
suitable for the purpose or purposes for which they are being used, are in good
operating condition and in reasonable repair, and free from any known defects,
except such minor defects as do not interfere with the continued use thereof.
Each tangible Asset has been serviced and maintained in accordance with
customary industry practices. Subject to normal wear and tear, and to financial
reserves on the Company's most recent balance sheet that are adequate, such
plants, facilities, machinery, and equipment are capable of and are producing
sound and merchantable products.
<PAGE>
SECTION 5.14 NO CONFLICT OR DEFAULT.
Neither the execution and delivery of this Agreement or the
Related Agreements, nor compliance with the terms and provisions hereof and
thereof, including the consummation of the transactions contemplated hereby and
thereby, will violate any statute, regulation, or ordinance of any governmental
authority, or conflict with or result in the breach of any term, condition, or
provision of either of the HPL Companies' Articles of Incorporation or Bylaws
(or similar constituent documents), as presently in effect, or of any agreement,
deed, contract, mortgage, indenture, writ, order, decree, legal obligation, or
instrument to which either of the HPL Companies is a party or by which it or
they or any of the Assets are or may be bound, or constitute a default (or an
event which, with the lapse of time or the giving of notice, or both, would
constitute a default) thereunder.
SECTION 5.15 LABOR RELATIONS.
1. With respect to the Business, the Company has not failed to
comply in any respect with Title VII of the Civil Rights Act of 1964, as
amended, the Fair Labor Standards Act, as amended, the Occupational Safety and
Health Act of 1970, as amended, all applicable federal, state, and local laws,
rules, and regulations relating to employment, and all applicable laws, rules
and regulations governing payment of minimum wages and overtime rates, and the
withholding and payment of taxes from compensation of employees.
2. There are no labor controversies pending or threatened
between either Seller and any of its employees or any labor union or other
collective bargaining unit representing any of the employees.
3. Neither of the HPL Companies has ever entered into a
collective bargaining agreement or other labor union contract relating to the
Business and applicable to the employees.
4. There are no written employment or separation agreements, or
oral employment or separation agreements other than those establishing an
"at-will" employment relationship between either of the HPL Companies and any of
the employees.
SECTION 5.16 EMPLOYEE BENEFIT PLANS.
1. Schedule 5.16 lists all employee benefit plans (as defined
in Section 3(3) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA")) and all bonus, stock option, stock purchase, incentive,
deferred compensation, supplemental retirement, severance and other similar
fringe or employee benefit plans, programs or arrangements, and any current or
former employment or executive compensation or severance agreements, written or
otherwise, for the benefit of, or relating to, any employee of the HPL
Companies, any trade or business (whether or not incorporated) which is a member
or which is under common control with the Company (an "ERISA Affiliate") within
<PAGE>
the meaning of Section 414 of the Code or any Subsidiary of the Company
(together, the "Employee Plans"), and a copy of each such Employee Plan has been
provided to Purchaser.
2. a. None of the Employee Plans promises or provides retiree
medical or other retiree welfare benefits to any person; (ii) there has been no
"prohibited transaction," as such term is defined in Section 406 of ERISA and
Section 4975 of the Code, with respect to any Employee Plan, which could result
in any material liability of the Company or any of its Subsidiaries; (iii) all
Employee Plans are in compliance in all respects with the requirements
prescribed by any and all statutes (including ERISA and the Code), orders, or
governmental rules and regulations currently in effect with respect thereto
(including all applicable requirements for notification to participants or the
Department of Labor, Internal Revenue Service or Secretary of the Treasury), and
the Company and each of its Subsidiaries have performed all material obligations
required to be performed by them under, are not in any material respect in
default under or violation of, and have no knowledge of any default or violation
by any other party to, any of the Employee Plans; (iv) each Employee Plan
intended to qualify under Section 401(a) of the Code and each trust intended to
qualify under Section 501(a) of the Code does so qualify and a favorable
determination letter with respect to each such Employee Plan and trust has been
received from the Internal Revenue Service (the "IRS"), and nothing has occurred
which may reasonably be expected to cause the loss of such qualification or
exemption; (v) all contributions required to be made to any Employee Plan
pursuant to Section 412 of the Code, the terms of the Employee Plan or any
collective bargaining agreement, have been made on or before their due dates and
a reasonable amount has been accrued for contributions to each Employee Plan for
the current plan years; (vi) with respect to each Employee Plan, no "reportable
event" within the meaning of Section 4043 of ERISA (excluding any such event for
which the thirty (30) day notice requirement has been waived under the
regulations to Section 4043 of ERISA) nor any event described in Section 4062,
4063 or 4041 of ERISA has occurred; and (vii) no Employee Plan is covered by,
and neither the Company nor any Subsidiary has incurred or expects to incur any
liability under, Title IV of ERISA or Section 412 of the Code.
SECTION 5.17 BROKERS' AND FINDERS' FEES/CONTRACTUAL LIMITATIONS.
Neither of the HPL Companies is obligated to pay any fees or
expenses of any broker or finder in connection with the origin, negotiation, or
execution of this Agreement or in connection with any transactions contemplated
hereby. Neither of the HPL Companies, nor any officer, director, employee, agent
or representative of either of the HPL Companies (collectively
"Representatives") are or have been subject to any agreement, letter of intent,
or understanding of any kind which prohibits, limits, or restricts either of the
HPL Companies or the Representatives from negotiating, entering into and
consummating this Agreement, the Related Agreements and the transactions
contemplated hereby and thereby.
SECTION 5.18 INTERESTED PARTY RELATIONSHIPS.
Except as set forth in the footnotes to the Company's most recent
financial statements provided to Purchaser, neither the HPL Companies, nor any
<PAGE>
shareholder of the Company, nor any officer and director or family member
thereof, or any corporation, partnership, or other entity which, directly or
indirectly, alone or together with others, controls, is controlled by, or is in
common control with any officer and director or family member thereof has any
material financial interest, direct or indirect, in any material supplier or
customer, any party to any contract which is material to the Business, or any
competitor with the Business.
SECTION 5.19 ENVIRONMENTAL MATTERS.
The Company and the Subsidiary (i) has obtained all applicable
permits, licenses and other authorizations which are required under foreign,
federal, state or local laws relating to pollution or protection of the
environment, including laws relating to emissions, discharges, releases or
threatened releases of pollutants, contaminants, or hazardous or toxic materials
or wastes into ambient air, surface water, ground water, or land or otherwise
relating to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport, or handling of pollutants, contaminants or hazardous or
toxic materials or wastes by the Company and the Subsidiary (or their respective
agents); (ii) are in compliance with all terms and conditions of such required
permits, licenses and authorization, and also are in compliance with all other
limitations, restrictions, conditions, standards, prohibitions, requirements,
obligations, schedules and timetables contained in such laws or contained in any
regulation, code, plan, order, decree, judgement, notice or demand letter
issued, entered, promulgated or approved thereunder; (iii) are not aware of nor
have received notice of any event, condition, circumstance, activity, practice,
incident, action or plan which is reasonably likely to interfere with or prevent
continued compliance or which would give rise to any common law or statutory
liability, or otherwise form the basis of any claim, action, suit or proceeding,
based on or resulting from the Company's or the Subsidiary (or any of their
respective agents') manufacture, processing, distribution, use, treatment,
storage, disposal, transport, or handling, or the emission, discharge, or
release into the environment, of any pollutant, contaminant, or hazardous or
toxic material waste; (iv) have taken all actions necessary under applicable
requirements of Federal, state or local environmental laws, rules or regulations
to register any products or materials required to be registered by the Company
or the Subsidiary (or any of their respective agents) thereunder; and (v) are
not aware of any contaminated soil or groundwater at any of the properties or
portions thereof owned or operated, leased or previously owned or leased by the
Company or the Subsidiary. The Company does not require any permits relating to
pollution or protection of the environment, including laws relating to
emissions, discharges, releases or threatened releases of pollutants,
contaminants, or hazardous or toxic materials or wastes into ambient air,
surface water, ground water, or land or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport, or
handling of pollutants, contaminants or hazardous or toxic materials or wastes
by the Company or the Subsidiary (or their respective agents). The Company has
disclosed to Purchaser in the Disclosure Letter all documents relating to tests
previously conducted or to be conducted in the future for potential
contamination at any of the Company's or such Subsidiary's facilities, whether
owned or leased, including soil and water tests.
<PAGE>
SECTION 5.20 CERTAIN PAYMENTS.
In connection with the Business, the HPL Companies have not and
no person directly or indirectly on behalf of the HPL Companies has made or
received any payment that was not legal to make or receive.
SECTION 5.21 BOOKS AND RECORDS.
The books and records of the HPL Companies to which Purchaser has
been given access are the true books and records of the HPL Companies and truly
and fairly reflect the underlying facts and transactions in all respects.
SECTION 5.22 COMPLETE DISCLOSURE.
No representations or warranties made by the Shareholder
Representatives in this Agreement, nor any financial statements prepared and
furnished or to be prepared and furnished by the HPL Companies or their
representatives to Purchaser pursuant hereto or in connection with the
transactions contemplated hereby, contains or will contain any untrue statement
of a material fact, or omits or will omit to state a material fact necessary to
make the statements or facts contained herein or therein not misleading.
SECTION 5.23 BACKLOG.
Schedule 5.23 sets forth the backlog of orders that the HPL
Companies are to ship and contract work to be performed as of March 31, 1998.
The HPL Companies either possess sufficient inventory of parts, materials and
personnel to produce the same within their scheduled delivery dates or such
parts or materials have lead times such that the HPL Companies can acquire such
parts and materials in time to produce and ship such backlog in accordance with
its schedule shipping date.
SECTION 5.24 CUSTOMERS AND SUPPLIERS.
None of the HPL Companies' ten largest customers and ten largest
suppliers during the twelve months ended March 31, 1998 (determined on the basis
of both revenues and bookings during such period) has terminated, or intends to
materially reduce or terminate, the amount of its business with the HPL
Companies, and no such termination or alteration will occur as a result of the
consummation of this Agreement.
SECTION 5.25 BEST EFFORTS.
Each of the Shareholder Representatives shall use their best
efforts to effectuate the transactions contemplated hereby and to fulfill and
cause to be fulfilled the conditions to Closing under this Agreement. Each of
the Shareholder Representatives shall promptly apply for or otherwise seek, and
use their best efforts to obtain, all consents and approvals required for the
consummation of the transactions set forth hereby.
<PAGE>
SECTION 5.26 EMPLOYMENT AGREEMENTS.
Prior to the Closing Time, each of the Shareholder
Representatives shall use their best efforts to assist Purchaser in persuading
employees of the Business to be willing to accept employment with Purchaser.
SECTION 5.27 INVENTORY.
Schedule 5.27 sets forth a list of all of the inventories of the
Business as of the date hereof (the "Inventories"). The Inventories are valued
at cost (determined on a first-in first-out basis) or market, whichever is
lower, with adequate allowances for excess and obsolete materials and materials
below standard quality in accordance with GAAP consistently applied. The quality
and quantity of the Inventories are such that the Inventories are readily usable
and saleable in the normal course of business of the Business, except such
amounts as are reserved in accordance with GAAP consistently applied. All items
included in such Inventories are owned by the HPL Companies. All Inventories
materially in excess of reasonable estimated requirements for the Business based
on current operations for the three (3) months from the date hereof are set
forth in Schedule 5.27. Except as disclosed in Schedule 5.27, the HPL Companies
hold no Inventories manufactured to customer specifications effectively
rendering the Inventories saleable only to that customer.
SECTION 5.28 PAYABLES; RECEIVABLES.
All the accounts receivable and notes receivable owing to the
Business as of the date hereof are set forth in Schedule 5.28 and constitute
valid and enforceable claims arising from bona fide transactions in the ordinary
course of business, and there are no contingent or asserted claims, refusals to
pay, rights of return, or other rights of set-off against any thereof. As of the
date hereof, except as set forth in Schedule 5.28, there is (i) no account
debtor or note debtor delinquent in its payment by more than 30 days, (ii) no
account debtor or note debtor that has refused (or threatened to refuse) to pay
its obligations for any reason, (iii) no account debtor or note debtor that is
insolvent or bankrupt, and (iv) no account receivable or note receivable which
is pledged to any third party by either of the HPL Companies. Neither of the HPL
Companies holds deposits from customers or has received prepaid service contract
revenue or other prepaid revenue.
SECTION 5.29 SERVICE PROVIDER AGREEMENTS.
No service provider of the HPL Companies is in violation of any
term of any employment agreement (whether written or verbal), patent or
trademark disclosure agreement or any other contract or agreement relating to
the relationship of any such service provider with the HPL Companies or any
other party (including prior employers) or any term of any judgment, decree, or
order, because of the nature of the business now conducted or now proposed to be
conducted by the HPL Companies. Each current and former service provider of the
HPL Companies has executed a proprietary information and inventions agreement
(or similar agreement) with the HPL Companies in the form then being used by the
HPL Companies, all of which forms have been previously delivered to Purchaser by
<PAGE>
the HPL Companies. Each employee or consultant-inventor has executed a written
agreement validly assigning his or her rights to the HPL Companies on all
inventions, pending patent applications, all patents issued, and all other
intellectual property rights developed by such service provider while working
for or on behalf of the HPL Companies. To the extent the HPL Companies have ever
utilized consultants or independent contractors, each consultant or independent
contractor has executed a written agreement, validly assigning to the HPL
Companies his or her rights in and to all copyrights and works of authorship
relating to products, services or technology designed, developed, manufactured,
licensed, sold, marketed or serviced by the HPL Companies and its business. The
HPL Companies are not aware that any of its service providers is in violation
thereof and will use all efforts to prevent any such violation. The HPL
Companies are not aware that any of its service providers are obligated under
any contract (including licenses, covenants or commitments of any nature) or
other agreement, or subject to any judgment, decree or order of any court or
administrative agency, that would interfere with the use of his or her best
efforts to promote the interests of the HPL Companies or that would conflict
with the HPL Companies business as conducted or as proposed to be conducted or
that would prevent any such service provider from assigning inventions to the
HPL Companies. The HPL Companies do not believe that it is or will be necessary
for the HPL Companies to utilize any inventions of any of its service providers
(or people it currently intends to hire) made prior to their employment by or
relationship with the HPL Companies.
ARTICLE VI
COVENANTS
---------
SECTION 6.1 CONSENTS. The Shareholder Representatives shall use
their best efforts to obtain, or to cause the HPL Companies to obtain, all
consents of and authorizations by third parties and to make all filings with and
give all notices to third parties that may be necessary or required in order to
consummate the sale of the Assets, and shall take such additional actions as
Purchaser may reasonably request so that the transactions contemplated by this
Agreement may be expeditiously consummated.
SECTION 6.2 EMPLOYMENT OFFERS. Purchaser shall offer to employ
all employees of the HPL Companies employed exclusively in the Business, all of
such employees (and only such employees) being listed on Schedule 6.2; provided,
however, that Purchaser shall not agree to maintain such employment for any
particular period of time and, if such offers are accepted, such employees will
be employed on an "at will" basis. Purchaser shall not solicit any employees of
the HPL Companies other than those set forth on Schedule 6.2.
SECTION 6.3 COBRA. The Shareholder Representatives shall ensure
that the HPL Companies comply with the health care continuation coverage
requirements of the Consolidated Omnibus Budget Reconciliation Act of 1985
("COBRA") applicable to employees of the HPL Companies who are terminated by the
HPL Companies on or before the Closing Time.
<PAGE>
SECTION 6.4 MAIL AND RECEIVABLES PAYMENTS. From and after the
Closing Time, the Shareholder Representatives shall endorse, or shall ensure
that the HPL Companies endorse, any check or any other evidence of indebtedness
or payment received by the HPL Companies on account of any Accounts after the
Closing Time to the order of Purchaser or take other appropriate actions and
shall promptly forward such payment to Purchaser no later than five (5) business
days after actual receipt by the HPL Companies. Purchaser and the Shareholder
Representatives shall each provide to the other all the cooperation which the
other may reasonably request in connection with the collection of the Accounts.
SECTION 6.5 NOTIFICATION OF CERTAIN MATTERS. Each party shall
give prompt notice to the other of (i) the occurrence, or non-occurrence, of any
event the occurrence, or non-occurrence, of which would be likely to cause any
representation or warranty contained in this Agreement to be untrue or
inaccurate and (ii) any failure of Purchaser or the Shareholder Representatives,
as the case may be, to comply with or satisfy any covenant, condition or
agreement to be complied with or satisfied by them hereunder; provided, however,
that the delivery of any notice pursuant to this Section 6.5 shall not limit or
otherwise affect the remedies available hereunder to the party receiving such
notice.
SECTION 6.6 FURTHER ACTION. Upon the terms and subject to the
conditions hereto, each of the Purchaser and each of the Shareholder
Representatives hereto shall use all reasonable efforts to take, or cause to be
taken, all actions and to do, or cause to be done, all other things necessary,
proper or advisable to consummate and make effective as promptly as practicable
the transactions contemplated by this Agreement to obtain in a timely manner all
necessary waivers, consents and approvals and to effect all necessary
registrations and filings, and to otherwise satisfy or cause to be satisfied all
conditions precedent to its obligations under this Agreement. The Shareholders
Representatives shall ensure that the Company changes its corporate name within
30 days of the Closing Time to a name which does not uses any of the words, or
any combination thereof, "Heuristic", "Physics" and "Laboratories" and to ensure
that Purchaser have all rights to the name "Heuristic Physics Laboratories,
Inc."
SECTION 6.7 COVENANTS AGAINST DISCLOSURE. The Shareholder
Representatives and Purchaser agree to maintain the confidentiality of the terms
and conditions of this Agreement; provided, however, that the Shareholder
Representatives may provide copies of this Agreement and related documents to
the Company or to any party who acquires, or proposes to acquire, all or
substantially all of the capital stock or remaining assets of the HPL Companies;
provided, further, however, any party hereto may disclose information to the
extent required by securities laws or as compelled by court order. Neither of
the Shareholder Representatives nor Purchaser shall disseminate (except to each
other) any press release or announcement concerning the transactions
contemplated by this Agreement without the prior written consent of the other
parties; provided, however, that any of the parties hereto may disseminate
information to employees and legal and accounting representatives.
SECTION 6.8. NO SHOP. The Shareholder Representatives shall not,
nor shall they permit any of their legal or financial advisors or any officers
or directors of the Company to, solicit, negotiate or discuss the disposition of
any of the Assets to any person other than Purchaser.
<PAGE>
ARTICLE VII
CLOSING
-------
SECTION 7.1 CLOSING TIME. The transactions contemplated by this
Agreement shall be completed on June 4, 1998 (the time of the Closing on such
date being, the "Closing Time"), unless otherwise agreed to in writing by
Purchaser and the Shareholder Representatives. The Closing shall take place at
the offices of Brobeck, Phleger & Harrison LLP, Two Embarcadero Place, 2200 Geng
Road, Palo Alto, California 94303, or at such other place as may be agreed to in
writing by Purchaser and the Shareholder Representatives. The "Closing," shall
mean the deliveries to be made by the Shareholder Representatives and the
Purchaser at the Closing Time in accordance with this Agreement.
SECTION 7.2 DELIVERIES BY THE SHAREHOLDER REPRESENTATIVES. At the
Closing, the Shareholder Representatives shall deliver to Purchaser all duly and
properly executed, the following:
(a) (1) A good and sufficient bill of sale in the form attached
as Exhibit 7.2(a) (the "Bill of Sale") for the Assets to be transferred from the
Company to Purchaser and (ii) if Purchaser designates any of its wholly-owned
subsidiaries to receive the Assets currently held by Subsidiary a good and
sufficient Bill of Sale for the Assets to be transferred from the Subsidiary to
such designated subsidiary of Purchaser, in each case selling, delivering,
transferring, and assigning to Purchaser (and any designated subsidiary) title
to all of the HPL Companies' right, title, and interest to the Assets, free and
clear of all mortgages, pledges, liens, encumbrances, security interests,
equities, charges, and restrictions of any nature whatsoever.
(b) An opinion of General Counsel Associates LLP, counsel to the
HPL Companies, dated the date of the Closing, in the form attached hereto as
Exhibit 7.2(b).
(c) An opinion of Armenian legal counsel to the Subsidiary, dated
the date of the Closing, in the form attached hereto as Exhibit 7.2(c).
(d) An affidavit of the Shareholder Representatives, in the form
attached hereto as Exhibit 7.2(d), stating, under penalty of perjury, the
Shareholder Representatives' United States taxpayer identification numbers and
that the Shareholder Representatives are not foreign persons, pursuant to
Section 1445(b)(2) of the Code.
(e) Valid assignments of rights for all Contracts and other
third party or governmental consents necessary in order for Purchaser to operate
the Business.
<PAGE>
(f) Valid patent, patent application, trademark, trademark
application, trade secret, domain name and other intellectual property
assignments in the forms attached as Exhibit 7.2(f).
(g) Valid proprietary information and invention agreements
executed by the employees of the Business listed in Schedule 6.2.
(h) Evidence, satisfactory to Purchaser, of the HPL Companies'
title to all of the Assets and right to fully convey all Assets free and clear
of any lien, encumbrances or restrictions on transfer.
(i) Evidence satisfactory to Purchaser of the Shareholder
Representatives' authority to act on behalf of all the Company's shareholders
including with respect to receipt of the Purchase Price and the royalty payments
referred to in Section 3.4.
(j) A certificate executed by the Shareholder Representatives,
dated the date of the Closing, to the effect that all of the conditions to
Closing set forth in this Section 7.2 have been satisfied.
(k) An accepted offer of employment with Purchaser from all the
employees of the Business listed on Schedule 6.2.
(l) All licenses from all appropriate governmental agencies or
third parties to operate the Business in the same manner as the HPL Companies
operated the Business prior to the Closing Time, including a file format license
in the form attached hereto as Exhibit 7.2(l).
(m) all books and records (or copies thereof) related to the
Business.
SECTION 7.3 DELIVERIES BY PURCHASER. At the Closing, Purchaser
shall deliver, or cause to be delivered, to the Company, the Purchase Price and
a Waiver and Release in the form attached hereto as Exhibit 7.3.
SECTION 7.4 FURTHER ASSURANCES. At or after the Closing Time,
each of the Shareholder Representatives and Purchaser shall prepare, execute,
and deliver, at its expense, such further instruments of conveyance, sale,
assignment, or transfer, and shall take or cause to be taken such other or
further action, as any party shall reasonably request of any other party at any
time or from time to time in order to perfect, confirm, or evidence in
Purchaser's title to all or any part of the Assets or to consummate, in any
other manner, the terms and provisions of this Agreement.
<PAGE>
ARTICLE VIII
SETTLEMENT AND GENERAL RELEASE
------------------------------
SECTION 8.1 SETTLEMENT AND GENERAL RELEASE. For the consideration
set forth in Article III herein, each of the Shareholder Representatives waives
and releases Purchaser and each of its successors, officers, directors,
affiliates, agents, employees and/or assigns, and covenants not to sue or
otherwise institute or cause to be instituted or in any way participate in
(except at the request of Purchaser or as required by legal process) legal or
administrative proceedings against Purchaser and each of its successors,
officers, directors, affiliates, agents, employees and/or agents with respect to
any matter of any kind arising out of, relating to or connected with any
Excluded Liabilities.
This waiver and release extends to all claims of every nature and
kind, known or unknown, suspected or unsuspected, past, present or future,
arising from Excluded Liabilities. The Shareholder Representatives acknowledge
that any and all rights granted to them under Section 1542 of the California
Civil Code or any analogous state law or federal law or regulation are hereby
expressly waived. Said Section 1542 of the Civil Code of the State of California
reads as follows:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR
DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF
EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY
AFFECTED ITS SETTLEMENT WITH THE DEBTOR."
This Section 8.1 shall constitute a complete defense to any claim
released herein. Notwithstanding any other provision of this Agreement, this
Section 8.1 shall survive indefinitely.
ARTICLE IX
CONDITIONS PRECEDENT TO OBLIGATIONS
-----------------------------------
SECTION 9.1 CONDITIONS TO OBLIGATIONS OF PURCHASER. Each and
every obligation of Purchaser to be performed at the Closing shall be subject to
the satisfaction as of or before the Closing Time of the following conditions
(unless waived in writing by Purchaser):
(a) Representations and Warranties. The representations and
warranties of the Shareholder Representatives set forth in this Agreement shall
have been true and correct when made and shall be true and correct at and as of
the Closing Time as if such representations and warranties were made as of such
date and time.
(b) Performance of Agreement. All covenants, conditions, and
other obligations under this Agreement and the Related Agreements which are to
be performed or complied with by the Shareholder Representatives, including
necessary approvals of the HPL Companies' Boards of Directors and shareholders,
<PAGE>
shall have been fully performed and complied with at or prior to the Closing
Time, including the delivery of the instruments and documents in accordance with
Section 7.2 hereof.
(c) No Material Adverse Change. There shall have been no
material adverse change in the financial condition, business, properties or
prospects of the Business since March 31, 1998.
(d) Absence of Governmental or Other Objection. There shall be no
pending or threatened lawsuit challenging the transaction by any body or agency
of the federal, state, or local government or by any third party, and the
consummation of the transaction shall not have been enjoined by a court of
competent jurisdiction as of the Closing Time.
(e) Evidence of Title. Purchase shall have received evidence
satisfactory to it, at or prior to the Closing Time, of the HPL Companies' title
to all of the Assets and right to fully convey all Assets free and clear of any
lien, encumbrances or restrictions on transfer.
(f) Certificate of Shareholder Representatives. Shareholder
Representatives shall have delivered to Purchaser a certificate executed by
them, dated the date of the Closing, to the effect that all of the conditions to
Closing set forth in this Section 9.1 have been satisfied.
(g) Approval of Documentation. The form and substance of all
certificates, instruments, opinions, and other documents delivered or to be
delivered to Purchaser under this Agreement shall be satisfactory to Purchaser
in all respects.
(h) Key Employees. All employees of the Business listed on
Schedule 6.2 shall have accepted offers of employment with Purchaser.
(i) Licenses. Purchaser shall have received all licenses from all
appropriate governmental agencies or third parties to operate the Business in
the same manner as the HPL Companies operated the Business prior to the Closing
Time.
SECTION 9.2 CONDITIONS TO OBLIGATIONS OF THE SHAREHOLDER
REPRESENTATIVES. Each and every obligation of the Shareholder Representatives to
be performed at the Closing Time shall be subject to the satisfaction as of or
before such time of the following conditions (unless waived in writing by the
Shareholder Representatives):
(a) Representations and Warranties. Purchaser's representations
and warranties set forth in this Agreement shall have been true and correct when
made and shall be true and correct at and as of the Closing Time as if such
representations and warranties were made as of such time and date.
<PAGE>
(b) Absence of Governmental or Other Objection. There shall be no
pending or threatened lawsuit challenging the transaction by any body or agency
of the federal, state, or local government or by any third party, and the
consummation of the transaction shall not have been enjoined by a court of
competent jurisdiction as of the Closing Time.
ARTICLE X
INDEMNIFICATION
---------------
SECTION 10.1 SURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS
AND AGREEMENTS.
(a) Notwithstanding any investigation conducted at any time with
regard thereto by or on behalf of any party to this Agreement, all
representations, warranties, covenants, and agreements of each party in this
Agreement shall survive for eighteen (18) months following the Closing. No
investigation made by or on behalf of Purchaser with respect to the HPL
Companies or the Shareholder Representatives shall be deemed to affect
Purchaser's reliance on the representations, warranties, covenants and
agreements made by the Shareholder Representatives contained in this Agreement
and shall not be a waiver of Purchaser' rights to indemnity as provided herein
for the breach or inaccuracy of or failure to perform or comply with any of the
Shareholder Representative's representations, warranties, covenants or
agreements under this Agreement.
(b) Nothing in this Agreement shall be construed as limiting in
any way the remedies that may be available to a party in the event of fraud
relating to the representations, warranties, agreements or covenants made by any
party in this Agreement.
SECTION 10.2 INDEMNIFICATION BY SHAREHOLDER REPRESENTATIVES.
The Shareholder Representatives hereby agree to indemnify, defend
and hold harmless Purchaser and its affiliates against any and all losses,
liabilities, damages, demands, claims, suits, actions, judgments, and causes of
action, assessments, costs, and expenses, including interest, penalties,
attorneys' fees, any and all expenses incurred in investigating, preparing, and
defending against any litigation, commenced or threatened, and any claim
whatsoever, and any and all amounts paid in settlement of any claim or
litigation (collectively, "Damages"), asserted against, resulting from, imposed
upon, or incurred or suffered by Purchaser and any of its affiliates, directly
or indirectly, as a result of or arising from or in connection with any
inaccuracy in or breach or nonfulfillment of any of the representations,
warranties, covenants, or agreements made by the Shareholder Representatives in
this Agreement or any facts or circumstances constituting such an inaccuracy,
breach, or nonfulfillment (all of which shall also be referred to as
"Identifiable Claims"); provided, however, that, except with respect to Damages
arising out of (i) any violation of any applicable bulk sales laws, (ii) the
Excluded Liabilities, (iii) Taxes accruing prior to, or in connection with, the
Closing, (iv) any breach of Section 5.11 (Proprietary Rights), and (v) any
breach of the last sentence of Section 5.1 including any claim by any
shareholder of the Company (other than the Shareholder Representatives) that
such person has not received their share of the Purchase Price or their share of
the royalty payments provided for in Section 3.3. Shareholder Representatives
<PAGE>
shall be so liable only to the extent of aggregate Damages in excess of
$250,000. The maximum monetary liability of the Shareholder Representatives
under this Section 10.2 shall be (i) with respect to any notice or notices of
Identifiable Claims delivered by Purchaser to Shareholder Representatives during
the thirty day period following the Closing Time, the Purchase Price, and (ii)
with respect to any notice of notices of Identifiable Claims delivered by
Purchaser to Shareholder Representatives from the period commencing on the 31st
day after Closing Time until the 540th day after the Closing Time, $2,000,000.
SECTION 10.3 PROCEDURE FOR NOTIFICATION WITH RESPECT TO
THIRD-PARTY CLAIMS.
(a) If Purchaser determines to seek indemnification under this
Article IX with respect to the existence of any claim giving rise to Damages
resulting from the assertion of liability by third parties, Purchaser shall give
notice to the Shareholder Representatives within 20 days of Purchaser becoming
aware of any such Identifiable Claim or of facts upon which any such
Identifiable Claim will be based. The notice shall set forth such material
information with respect thereto as is then reasonably available to Purchaser.
In case any such liability is asserted against Purchaser, and Purchaser notifies
the Shareholder Representatives thereof, the Shareholders Representatives will
be entitled, if they so elect by written notice delivered to Purchaser within 20
days after receiving Purchaser's notice, to assume the defense thereof with
counsel satisfactory to Purchaser. Notwithstanding the foregoing, (i) Purchaser
shall also have the right to employ its own counsel in any such case, but the
fees and expenses of such counsel shall be at the expense of Purchaser unless
Purchaser shall reasonably determine that there is a conflict of interest
between Purchaser and the Shareholder Representatives with respect to such
Identifiable Claim, in which case the fees and expenses of such counsel will be
borne by the Shareholder Representatives, and (ii) the rights of Purchaser to be
indemnified hereunder in respect of Identifiable Claims resulting from the
assertion of liability by third parties shall not be adversely affected by their
failure to give notice pursuant to the foregoing unless, and, if so, only to the
extent that, the Shareholder Representatives are materially prejudiced thereby.
With respect to any assertion of liability by a third party that results in an
Identifiable Claim, the parties hereto shall make available to each other all
relevant information in their possession material to any such assertion.
(b) In the event that the Shareholder Representatives, within 20
days after receipt of the aforesaid notice of an Identifiable Claim, fail to
assume the defense of Purchaser against such Identifiable Claim, Purchaser shall
have the right to undertake the defense, compromise, or settlement of such
action on behalf of and for the account, expense, and risk of the Shareholder
Representatives.
(c) Notwithstanding anything in this Agreement to the contrary,
if there is a reasonable probability that an Identifiable Claim may materially
adversely affect Purchaser, Purchaser shall have the right to participate in
such defense, compromise, or settlement and Shareholder Representatives shall
not, without Purchaser' written consent (which consent shall not be unreasonably
<PAGE>
withheld), settle or compromise any Identifiable Claim or consent to entry of
any judgment in respect thereof unless such settlement, compromise, or consent
includes as an unconditional term thereof the giving by the claimant or the
plaintiff to Purchaser a release from all liability in respect of such
Identifiable Claim.
SECTION 10.4 PROCEDURE FOR INDEMNIFICATION WITH RESPECT TO
NON-THIRD PARTY CLAIMS.
In the event that Purchaser asserts the existence of a claim
giving rise to Damages (but excluding claims resulting from the assertion of
liability by third parties), it shall give written notice to the Shareholder
Representatives. Such written notice shall state that it is being given pursuant
to this Section 10.4, specify the nature and amount of the claim asserted and
indicate the date on which such assertion shall be deemed accepted and the
amount of the claim deemed a valid claim (such date to be established in
accordance with the next sentence). If the Shareholder Representatives, within
20 days after the mailing of notice by Purchaser, shall not give written notice
to Purchaser announcing their intent to contest such assertion of Purchaser,
such assertion shall be deemed accepted and the amount of claim shall be deemed
a valid claim. In the event, however, that the Shareholder Representatives
contest the assertion of a claim by giving such written notice to Purchaser
within said period, then the parties shall act in good faith to reach agreement
regarding such claim. In the event that litigation shall arise with respect to
any such claim, the prevailing party shall be entitled to reimbursement of costs
and expenses incurred in connection with such litigation including attorney
fees, if the parties hereto, acting in good faith, cannot reach agreement with
respect to such claim within ten days after such notice.
SECTION 10.5 INDEMNIFICATION BY PURCHASER.
Purchaser hereby agrees to indemnify, defend and hold harmless
the Shareholder Representatives and their respective affiliates against any and
all Damages asserted against, resulting from, imposed upon, or incurred or
suffered by Shareholders Representatives, directly or indirectly, as a result of
or arising from or in connection with (i) any of the Assumed Liabilities or (ii)
the Purchaser's conduct of the Business after the Closing Time; provided,
however, that no payment shall be payable by Purchaser under this Section 10.5
at any time when Shareholder Representatives shall be in breach of any of their
representations, warranties, covenants and agreements in this Agreement.
ARTICLE XI
MISCELLANEOUS PROVISIONS
------------------------
SECTION 11.1 NOTICE. All notices and other communications
required or permitted under this Agreement shall be delivered to the parties at
the address set forth below, or at such other address that they designate by
notice to all other parties in accordance with this Section 11.1. All notices
and communications shall be deemed to have been received: (i) in the case of
personal delivery, on the date of such delivery; (ii) in the case of telex or
facsimile transmission, on the date on which the sender receives confirmation by
telex or facsimile transmission that such notice was received by the addressee,
provided that a copy of such transmission is additionally sent by mail as set
<PAGE>
forth in (iv) below; (iii) in the case of overnight air courier, on the second
business day following the day sent, with receipt confirmed by the courier; and
(iv) in the case of mailing by first class certified or registered mail, postage
prepaid, return receipt requested, on the fifth business day following such
mailing:
If to the Purchaser: Credence Systems Corporation
215 Fourier Avenue
Fremont, CA 94539
Attention- Chief Executive Officer
Telephone: (510) 657-7400
Telecopy: (510) 623-2522
with a copy to: Brobeck, Phleger & Harrison LLP Two Embarcadero Place
2200 Geng Road Palo Alto, CA 94303
Attention: Warren T. Lazarow, Esq. & Robert H. Sweeny, Esq.
Telephone: (650) 496-2887
Telecopy: (650) 496-2733
If to the Shareholder
Representatives: David Lepejian
340 Cowper Street
Palo Alto, CA 94301
Telephone: (650) 321-9947
Telecopy: (650) 321-1830
with a copy to:
Charles Wagner
1022 W. Hedding Street
San Jose, CA 95126
Telephone: (408) 244-6222
Telecopy: (408) 247-7081
SECTION 11.2 ENTIRE AGREEMENT. This Agreement, the exhibits and
schedules hereto, and the documents referred to herein embody the entire
agreement and understanding of the parties hereto with respect to the subject
matter hereof, and supersede all prior and contemporaneous agreements and
understandings, oral or written, relative to said subject matter.
SECTION 11.3 REMEDIES OF PURCHASER. The Shareholder
Representatives agree that the Assets are unique and not otherwise readily
available to Purchaser. Accordingly, the Shareholder Representatives acknowledge
that, in addition to all other remedies to which Purchaser are entitled,
Purchaser shall have the right to enforce the terms of this Agreement by a
decree of specific performance, provided Purchaser is not in material default
hereunder.
<PAGE>
SECTION 11.4 BINDING EFFECT, ASSIGNMENT. This Agreement and the
various rights and obligations arising hereunder shall inure to the benefit of
and be binding upon the Shareholder Representatives, their successors and
permitted assigns, and Purchaser and its successors and permitted assigns.
Neither this Agreement nor any of the rights, interests, or obligations
hereunder shall be transferred or assigned (by operation of law or otherwise) by
either of the parties hereto without the prior written consent of the other
party.
SECTION 11.5 EXPENSES OF TRANSACTION, TAXES. Each party shall
bear its own costs and expenses in connection with this Agreement. The
Shareholder Representatives shall pay or cause the HPL Companies to pay all
applicable Taxes, including, without limitation, sales, use, excise, transfer,
documentary and any other similar Taxes, arising out of the purchase and sale of
the Assets.
SECTION 11.6 WAIVER, CONSENT. This Agreement may not be amended
except by a writing executed by the parties hereto, and no waiver of any of the
provisions or conditions of this Agreement or any of the rights of a party
hereto shall be effective or binding unless such waiver shall be in writing and
signed by the party claimed to have given or consented thereto. Except to the
extent that a party hereto may have otherwise agreed in writing, no waiver by
that party of any condition of this Agreement or breach by the other party of
any of its obligations or representations hereunder or thereunder shall be
deemed to be a waiver of any other condition or subsequent or prior breach of
the same or any other obligation or representation by the other party, nor shall
any forbearance by the first party to seek a remedy for any noncompliance or
breach by the other party be deemed to be a waiver by the first party of its
rights and remedies with respect to such noncompliance or breach.
SECTION 11.7 THIRD-PARTY BENEFICIARIES. Except as otherwise
expressly provided for in this Agreement, nothing herein, expressed or implied,
is intended or shall be construed to confer upon or give to any person, firm,
corporation, or legal entity, other than the parties hereto, any rights,
remedies, or other benefits under or by reason of this Agreement.
SECTION 11.8 SEVERABILITY. If one or more provisions of this
Agreement are held to be unenforceable under applicable law, such provision
shall be excluded from this Agreement and the balance of the Agreement shall be
interpreted as if such provision were so excluded and shall be enforceable in
accordance with its terms.
SECTION 11.9 GOVERNING LAW. This Agreement shall in all respects
be construed in accordance with and governed by the laws of the State of
California as applied to agreements among California residents entered into and
to be performed entirely within the State of California.
SECTION 11.10 ATTORNEYS' FEES. If any action at law or in equity
is necessary to enforce or interpret the terms of this Agreement or to protect
the rights obtained hereunder the prevailing party shall be entitled to its
reasonable attorneys' fees, costs, and disbursements in addition to any other
relief to which it may be entitled.
SECTION 11.11 COOPERATION AND RECORDS RETENTION. The Shareholder
Representatives and Purchaser shall (i) each provide the other with such
assistance as may reasonably be requested by them in connection with the
preparation of any tax return, statement, report form or other document
(hereinafter collectively a "Tax Return"), or in connection with any audit or
other examination by any taxing authority or any judicial or administrative
proceedings relating to liability for Taxes, (ii) each retain and provide the
other, with any records or other information which may be relevant to any such
Tax Return, audit or examination, proceeding or determination, and (ii) each
provide the other with any final determination of any such audit or examination,
proceeding or determination that affects any amount required to be shown on any
Tax Return of the other for any period. Without limiting the generality of the
foregoing, the Shareholder Representatives and Purchaser shall retain, until the
<PAGE>
applicable statute of limitations (including any extensions) have expired,
copies of all Tax Returns, supporting work schedules and other records or
information which may be relevant to such Tax Returns for all tax periods or
portions thereof ending before or including the Closing Time and shall not
destroy or otherwise dispose of any such records without first providing the
other party with a reasonable opportunity to review and copy the same. Purchaser
shall keep the original copies of the records at its facilities in California
and elsewhere, if applicable, and, at the Shareholder Representatives' expense,
shall provide copies of the Records to the Shareholder Representatives upon
request.
SECTION 11.12 COUNTERPARTS. This Agreement may be executed
simultaneously in multiple counterparts, each of which shall be deemed an
original, but all of which taken together shall constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed as of the day and year first above written.
CREDENCE SYSTEMS CORPORATION
By: /s/ WILMER R. BOTTOMS
-----------------------------------------
Name: Wilmer R. Bottoms
Title: President, Chief Executive Officer
SHAREHOLDER REPRESENTATIVES:
/s/ YERVANT DAVID LEPEJIAN
-----------------------------------------
Yervant David Lepejian
/s/ LAWRENCE KRAUSE
-----------------------------------------
Lawrence Krause
The Company shall furnish supplementally a copy of any omitted schedule to the
Commission upon request.
EXHIBIT 10.26
LEASE
DATED: April 10, 1998
BETWEEN: PACIFIC REALTY ASSOCIATES, L.P.,
a Delaware limited partnership, hereinafter referred to as "LANDLORD"
AND: CREDENCE SYSTEMS CORPORATION,
a California corporation, hereinafter referred to as "TENANT"
Tenant wishes to lease from Landlord the following described property,
hereinafter referred to as "the Premises":
A total of approximately 183,315 square feet of warehouse and office space
comprised of approximately 71,265 square feet of office space located in a three
(3) story office building ("Space One") and approximately 112,050 square feet of
warehouse and manufacturing space located in two (2) connected single story
buildings ("Space Two") located at Five Oaks West Business Park, on Pine Farm
Road in Hillsboro, Oregon (and generally as located on the attached Exhibit A.)
Landlord leases the Premises to Tenant for a term of 182 months commencing
February 1, 1999 and continuing through March 31, 2014. Base rent shall be
according to the following schedule:
- --------------------------------------------------------------------------------
Total
Estimated Base Rent Amortized Base Rent
Period*** Per Month Amount Per Month
- --------------------------------------------------------------------------------
February 1, 1999 through March 31, 1999 $91,881.00* $0.00 $91,881.00
- --------------------------------------------------------------------------------
April 1, 1999 through March 31, 2004 $150,318.00** $14,347.00 $164,665.00
- --------------------------------------------------------------------------------
April 1, 2004 through March 31, 2009 $165,350.00** $14,347.00 $179,697.00
- --------------------------------------------------------------------------------
April 1, 2009 through March 31, 2014 $181,848.00** $0.00 $181,848.00
- --------------------------------------------------------------------------------
* This rental amount assumes that possession of only the Space Two portion
of the Premises has been delivered.
** This rental amount assumes that possession of both the Space One and the
Space Two portions of the Premises have been delivered.
*** Subsequent to Tenant's occupancy of both Space One and Space Two, a
lease amendment shall be executed by both Landlord and Tenant confirming the
lease commencement date, the lease termination date, adjusted rental amounts and
any other provisions as appropriate.
Rent for the first month of the Lease term shall be paid upon execution of
this Lease. All rent, including base rent together with the charges, taxes and
expenses to be paid to Landlord specified in Paragraphs 3 and 4 of this Lease,
is payable in advance on the first day of each calendar month. If Landlord
consents, Tenant may occupy the Premises prior to such commencement date upon
payment of rent on a prorated basis and compliance with all terms of this Lease.
Delivery of possession of Space Two shall establish the commencement of the
182 month lease term. Delivery of possession of Space Two shall be 120 days
after the date the Space Two shells are sufficiently complete that Tenant can
commence Space Two tenant improvements pursuant to Paragraph 23.4 of this Lease.
Such date is estimated to be October 1, 1998. If such date will be earlier or
later than October 1, 1998, Landlord shall provide Tenant with sixty (60) days
advance written notice of the actual date. Notwithstanding the foregoing, if
Landlord fails to deliver Space Two on or before October 1, 1998 or to provide
such notification on or before January 1, 1999, Tenant may rescind this Lease by
notice in writing to Landlord on or before January 15, 1999. Delivery of
possession of Space One shall be on April 1, 1999. However, delivery of
possession of Space One shall occur when Space One is occupied by Tenant or is
ready to be occupied by Tenant with all work to be performed by Landlord
substantially completed. No notice shall be required
N-CREDENCE.rtf / SKB / LMH 5Oaks/304, 305 & 306
5/18/98
Page 1 of 1 Hillsboro, OR
<PAGE>
from Landlord if Space One is ready on April 1, 1999 or on the first business
day thereafter. If it appears that such date will be earlier than or later than
April 1, 1999, then Landlord shall provide Tenant with ten (10) days advance
written notice of same. If Landlord is unable to deliver possession of Space One
to Tenant because of strikes, acts of God, or any other cause beyond Landlord's
control, then Tenant may take possession within ten (10) days of when Landlord
notifies Tenant that Space One is ready for possession, and rent for Space One
shall commence on the first day that Tenant takes possession of Space One.
Tenant shall owe no rent on either Space One or Space Two until such space is
ready for possession. Landlord shall have no liability for such delays in
delivery of possession, and neither party shall have the right to terminate
except that Landlord may cancel this Lease without liability if permission to
construct, use, or furnish necessary utilities to the Premises is denied or
revoked by any governmental agency or public utility with such authority.
This Lease is subject to the following additional terms to which the
parties agree:
1. USE OF THE PREMISES.
1.1. Tenant shall use the premises only for the purpose of conducting
the following business:
Light manufacturing, assembly, testing, warehousing and distribution of
finished testing equipment and general office related thereto.
If such use is prevented by any law or governmental regulation, Tenant
may use the Premises for other uses allowed under law or governmental regulation
subject to the reasonable approval of Landlord.
1.2. In connection with its use, Tenant shall at its expense comply with
all applicable laws, ordinances, and regulations of any public authority,
including those requiring alteration of the Premises because of Tenant's
specific use; shall create no nuisance nor allow any objectionable liquid, odor,
or noise to be emitted from the Premises; shall store no gasoline or other
highly combustible materials on the Premises which would violate any applicable
fire code or regulation nor conduct any operation that will increase Landlord's
fire insurance rates for the Premises; and shall not overload the floors or
electrical circuits of the Premises. Landlord shall have the right to approve
the installation of any power-driven machinery by Tenant and may select a
qualified electrician whose opinion will control regarding electrical circuits.
1.3. Tenant may erect a sign stating its name and business or product
after first securing Landlord's written approval of the size, color, design,
wording, location, and method of attachment and all necessary governmental
approvals. No signs shall be painted on either the Space One or the Space Two
buildings or project above the height of either the Space One or the Space Two
buildings. All signs installed by Tenant shall be removed upon termination of
this Lease with the sign location restored to its former state.
1.4. Tenant shall make no alterations, additions, or improvements to the
Premises or change the color of the exterior without Landlord's prior written
consent and without a valid building permit issued by the appropriate
governmental agency. Upon termination of this Lease, any such alterations,
additions, or improvements (including without limitation all electrical,
lighting, plumbing, heating and air-conditioning equipment, doors, windows,
partitions, drapery, carpeting, shelving, counters, and physically attached
fixtures) shall at once become part of the realty and belong to Landlord unless
the terms of the applicable consent provide otherwise.
2. SECURITY DEPOSIt. None Required.
3. UTILITY CHARGES; MAINTENANCE.
3.1. Tenant shall pay when due all charges for electricity, natural gas,
water, garbage collection, janitorial service, sewer, and all other utilities of
any kind furnished to the Premises during the lease term. If charges are not
separately metered or stated, Landlord shall apportion the utility charges on an
N-CREDENCE.rtf / SKB / LMH 5Oaks/304, 305 & 306
5/18/98
Page 2 of 12 Hillsboro, OR
<PAGE>
equitable basis. Landlord shall have no liability resulting from any
interruption of utility services caused by fire or other casualty, strike, riot,
vandalism, the making of necessary repairs or improvements, or any other cause
beyond Landlord's reasonable control. Tenant shall control the temperature in
the Premises to prevent freezing of any sprinkler system.
3.2. Landlord shall repair and maintain the roof, gutters, downspouts,
exterior walls, building structure, foundation, exterior paved areas, curbs, and
landscaping of the Premises in good condition. Except for such obligations of
Landlord, Tenant shall keep the Premises neatly maintained and in good order and
repair. Tenant's responsibility shall include maintenance and repair of the
electrical system, plumbing, drainpipes to sewers, air-conditioning and heating
systems, overhead and personnel doors, and the replacement of all broken or
cracked glass with glass of the same quality. Tenant shall refrain from any
discharge that will damage the sewers serving the Premises.
3.3. If the Premises have a separate entrance, Tenant shall keep the
sidewalks abutting the Premises or the separate entrance free and clear of snow,
ice, debris, and obstructions of every kind.
4. TAXES, ASSESSMENTS, AND OPERATING EXPENSES.
4.1. In conjunction with monthly rent payments, Tenant shall each month
pay a sum representing Tenant's proportionate share of real property taxes and
operating expenses for the Premises. Such amount shall annually be estimated by
Landlord in good faith to reflect actual or anticipated costs. At periodic
intervals during the term hereof and upon termination of this Lease, Landlord
shall compute its actual costs for such expenses during such period. Any
overpayment by Tenant shall be credited to Tenant, and any deficiency shall be
paid by Tenant within thirty (30) days after receipt of Landlord's statement.
Landlord's records of expenses for taxes and operating expenses may be inspected
by Tenant at reasonable times and intervals.
4.2. Tenant's proportionate share of real property taxes shall mean that
percentage of the total assessment affecting the Premises which is the same as
the percentage which the rentable area of the Premises bears to the total
rentable area of all buildings covered by the tax statement. If in Landlord's
reasonable judgment this method of allocation results in an inappropriate
allocation to Tenant, Landlord shall select some other reasonable method of
determining Tenant's proportionate share. If the local assessment authority has
ascribed specific values to each of the buildings covered by the tax statements,
those values shall be used in computing Tenant's relative share of the assessed
real property taxes.
4.3. Real property taxes charged to Tenant hereunder shall include all
general real property taxes assessed against the Premises or payable during the
lease term, installment payments on Bancrofted special assessments, and any rent
tax, tax on Landlord's interest under this Lease, or any tax in lieu of the
foregoing, whether or not any such tax is now in effect. Tenant shall not,
however, be obligated to pay any tax based upon Landlord's net income.
4.4. Operating expenses charged to Tenant hereunder shall include all
usual and necessary costs of operating and maintaining the Premises, Building,
and any surrounding common areas including, but not limited to, the cost of all
utilities or services not paid directly by Tenant, property insurance, property
management, maintenance and repair of landscaping, parking areas, and any other
common facilities. Operating expenses shall not include roof replacement or
correction of structural deficiencies of either the Space One or the Space Two
buildings.
5. PARKING AND STORAGE AREAS.
5.1. Tenant, its employees, and customers shall have the exclusive right
to use any private parking spaces immediately adjacent to or part of the
Premises. Tenant shall control the use of such parking spaces so that there will
be no unreasonable interference with the normal traffic flow, and shall permit
no parking on any landscaped or unpaved surface. Under no circumstances shall
trucks serving the Premises be permitted to block streets.
5.2. Tenant shall not store any materials, supplies, or equipment
outside in any unapproved or unscreened area. If Tenant erects any visible
N-CREDENCE.rtf / SKB / LMH 5Oaks/304, 305 & 306
5/18/98
Page 3 of 12 Hillsboro, OR
<PAGE>
barriers for storage areas, Landlord shall have the right to approve the design
and location of the barriers. Trash and garbage receptacles shall be kept
covered at all times.
6. TENANT'S INDEMNIFICATION; LIABILITY INSURANCE.
6.1. Tenant shall not allow any liens to attach to the Premises as a
result of its activities. Tenant shall indemnify and defend Landlord from any
claim, liability, damage, or loss arising out of any activity on the Premises or
within either the Space One or the Space Two buildings or the common areas
serving either the Space One or the Space Two buildings, by Tenant, its agents,
or invitees or resulting from Tenant's failure to comply with any term of this
Lease.
6.2. Tenant shall carry general liability insurance on an occurrence
basis with combined single limits of not less than $2,000,000. Landlord shall
have the right to require Tenant to increase this minimum liability insurance
limit by such reasonable amounts as may be required to adequately protect
Landlord and Tenant in the future as a result of general increases in liability
awards in the courts but in no event shall Landlord be allowed to require Tenant
to carry more than $7,000,000 of liability insurance. Such insurance shall be
provided by an insurance carrier reasonably acceptable to Landlord and shall be
evidenced by a certificate delivered to Landlord stating that the coverage will
not be canceled or materially altered without ten (10) days' advance written
notice to Landlord. Landlord shall be named as an additional insured on such
policy, but only with respect to the indemnity granted by Tenant in
Paragraph 6.1 above.
7. PROPERTY DAMAGE; SUBROGATION WAIVER.
7.1. If fire or other casualty causes damage to either the Space One or
the Space Two buildings in an amount exceeding fifty percent (50%) of the full
construction-replacement cost of either the Space One or the Space Two
buildings, respectively, Landlord may elect to terminate this Lease as of the
date of the damage by notice in writing to Tenant within thirty (30) days after
such date. Otherwise, Landlord shall promptly repair the damage and restore the
Premises to their former condition as soon as practicable. Rent shall be abated
during the period for that portion of the Premises not reasonably usable for the
use permitted by this Lease because of such damage and required repairs.
7.2. Landlord shall be responsible for insuring both the Space One and
the Space Two buildings, and Tenant shall be responsible for insuring its
personal property and trade fixtures located on the Premises.
7.3. Landlord and Tenant each hereby releases the other, and the other's
partners, officers, directors, agents and employees, from any and all liability
and responsibility to the releasing party and to anyone claiming by or through
it or under it, by way of subrogation or otherwise, for all claims, or demands
whatsoever which arise out of damage or destruction of property occasioned by
perils which can be insured by an All Risk Property Insurance Coverage Form.
Landlord and Tenant grant this release on behalf of themselves and their
respective insurance companies and each represents and warrants to the other
that it is authorized by its respective insurance company to grant the waiver of
subrogation contained in this Paragraph 7.3. This release and waiver shall be
binding upon the parties whether or not insurance coverage is in force at the
time of the loss or destruction of property referred to in this Paragraph 7.3.
8. CONDEMNATION.
If a condemning authority takes the entire Premises or a portion
sufficient to render the remainder unsuitable for Tenant's use, then either
party may elect to terminate this Lease effective on the date that title passes
to the condemning authority. Otherwise, Landlord shall proceed as soon as
practicable to restore the remaining Premises to a condition comparable to that
existing at the time of the taking. Rent shall be abated during the period of
restoration to the extent the Premises are not reasonably usable by Tenant, and
rent shall be reduced for the remainder of the term in an amount equal to the
reduction in rental value of the Premises caused by the taking. All condemnation
proceeds for the land and buildings shall belong to Landlord however Tenant may
separately pursue a claim for award for business interruption and relocation
costs.
N-CREDENCE.rtf / SKB / LMH 5Oaks/304, 305 & 306
5/18/98
Page 4 of 12 Hillsboro, OR
<PAGE>
9. ASSIGNMENT AND SUBLETTING.
9.1. Tenant shall not assign its interest under this Lease nor sublet
the Premises without first obtaining Landlord's consent in writing, which
consent shall not be unreasonably withheld or delayed. Landlord will consent to
assignment if the party to which the Tenant's interest in this Lease shall be
assigned has a financial capacity at the time of assignment, as demonstrated by
audited financial statements of both Tenant and Assignee, at least equal to the
financial capacity of Tenant and Assignee will use the Premises for a lawful
purpose not materially different from the ordinary use of the Premises or uses
for which the Premises are adapted or for which they were constructed, or a
purpose approved by Landlord pursuant to Paragraph 1.1. If the party to which
the Tenant's interest in this Lease shall be assigned does not meet the test
called for in the preceding sentence Landlord may withhold its consent.
Landlord's prior consent shall not be required for any assignment, sublease or
other transfer of Tenant's interest in the Premises or the lease to any
corporation with which Tenant may merge or consolidate or become affiliated as a
parent, subsidiary, holding company otherwise, or to an entity in which Tenant
has a controlling interest. A subsequent public offering and sale of stock in
Tenant's business, or a transfer of any amount of Tenant's stock shall not
constitute a change in ownership of Tenant or an assignment of this Lease. This
provision shall apply to all transfers by operation of law or through mergers
and changes in control of Tenant. No assignment shall relieve Tenant of its
obligation to pay rent or perform other obligations required by this Lease and
no one assignment or subletting shall be a consent to any further assignment or
subletting.
9.2. Subject to the above limitations on transfer of Tenant's interest,
this Lease shall bind and inure to the benefit of the parties, their respective
heirs, successors, and assigns.
10. DEFAULT.
Any of the following shall constitute a default by Tenant under this
Lease:
10.1. Tenant's failure to pay rent or any other charge under this Lease
within ten (10) days after it is due, or failure to comply with any other term
or condition within twenty (20) days following written notice from Landlord
specifying the noncompliance. If such noncompliance cannot be cured within the
twenty (20) day period, this provision shall be satisfied if Tenant commences
correction within such period and thereafter proceeds in good faith and with
reasonable diligence to effect compliance as soon as possible.
10.2. Tenant's insolvency; assignment for the benefit of its creditors;
Tenant's voluntary petition in bankruptcy or adjudication as bankrupt, or the
appointment of a receiver for Tenant's properties.
11. REMEDIES FOR DEFAULT.
In case of default as described in Paragraph 10 above, Landlord shall
have the right to the following remedies which are intended to be cumulative and
in addition to any other remedies provided under applicable law:
11.1. Terminate this Lease without relieving Tenant from its obligation
to pay damages.
11.2. Retake possession of the Premises by summary proceedings or
otherwise, in which case Tenant's liability to Landlord for damages shall
survive the tenancy. Landlord may, after such retaking of possession, relet the
Premises upon any reasonable terms. No such reletting shall be construed as an
acceptance of a surrender of Tenant's leasehold interest.
11.3. Recover damages caused by Tenant's default which shall include
reasonable attorneys' fees at trial and on any appeal therefrom. Landlord may
sue periodically to recover damages as they occur throughout the lease term, and
no action for accrued damages shall bar a later action for damages subsequently
accruing. Landlord may elect in any one action to recover accrued damages plus
damages attributable to the remaining term of the Lease equal to the difference
between the rent under this Lease and the reasonable rental value of the
Premises for the remainder of the term, discounted to the time of judgment at
the rate of six (6%) percent per annum.
N-CREDENCE.rtf / SKB / LMH 5Oaks/304, 305 & 306
5/18/98
Page 5 of 12 Hillsboro, OR
<PAGE>
11.4. Make any payment or perform any obligation required of Tenant so
as to cure Tenant's default, in which case Landlord shall be entitled to recover
all amounts so expended from Tenant, plus interest at the rate of ten percent
(10%) per annum from the date of the expenditure.
12. SURRENDER ON TERMINATION.
12.1. On expiration or early termination of this Lease, Tenant shall
deliver all keys to Landlord, have final utility readings made on the date of
move out, and surrender the Premises clean and free of debris inside and out,
with all mechanical, electrical, and plumbing systems in good operating
condition, all signing removed and defacement corrected, and all repairs called
for under this Lease completed. The Premises shall be delivered in the same
condition as at the commencement of the term, subject only to depreciation and
wear from ordinary use. Tenant shall remove all of its furnishings and trade
fixtures that remain its property and restore all damage resulting from such
removal. Failure to remove said property shall be an abandonment of same, and
Landlord may dispose of it in any manner without liability.
12.2. If Tenant fails to vacate the Premises when required, Landlord may
elect either to treat Tenant as a tenant from month to month, subject to all
provisions of this Lease except the provision for term, or to eject Tenant from
the Premises and recover damages caused by wrongful holdover.
13. LANDLORD'S LIABILITY.
13.1. Landlord warrants that so long as Tenant complies with all terms
of this Lease it shall be entitled to peaceable and undisturbed possession of
the Premises free from any eviction or disturbance by Landlord or persons
claiming through Landlord.
13.2. All persons dealing with Pacific Realty Associates, L.P.
("Partnership") must look solely to the property and assets of Partnership for
the payment of any claim against Partnership or for the performance of any
obligation of Partnership as neither the general partner, limited partners,
employees, nor agents of Partnership assume any personal liability for
obligations entered into on behalf of Partnership (or its predecessors in
interest) and their respective properties shall not be subject to the claims of
any person in respect of any such liability or obligation. As used herein, the
words "property and assets of partnership" exclude any rights of Partnership for
the payment of capital contributions or other obligations to it by the general
partner or any limited partner in such capacity.
14. MORTGAGE OR SALE BY LANDLORD; ESTOPPEL CERTIFICATES.
14.1. This Lease is and shall be prior to any mortgage or deed of
trust ("Encumbrance") recorded after the date of this Lease and affecting either
the Space One or the Space Two buildings and the land upon which both the Space
One and the Space Two buildings are located. However, if any lender holding an
Encumbrance secured by either the Space One or the Space Two buildings and the
land underlying either the Space One or the Space Two buildings requires that
this Lease be subordinate to the Encumbrance, then Tenant agrees that this Lease
shall be subordinate to the Encumbrance if the holder thereof agrees in writing
with Tenant that so long as Tenant performs its obligations under this Lease no
foreclosure, deed given in lieu of the foreclosure, or sale pursuant to the
terms of the Encumbrance, or other steps or procedures taken under the
Encumbrance shall affect Tenant's rights under this Lease. If the foregoing
condition is met, Tenant shall execute the written agreement and any other
documents required by the holder of the Encumbrance to accomplish the purposes
of this paragraph.
14.2. If either the Space One or the Space Two building is sold as a
result of foreclosure of any Encumbrance thereon or otherwise transferred by
Landlord or any successor, Tenant shall attorn to the purchaser or transferee
according to the terms and conditions of this Lease, and the transferor shall
have no further liability hereunder.
14.3. Either party shall within twenty (20) days after notice from the
other execute and deliver to the other party a certificate stating whether or
not this Lease has been modified and is in full force and effect and specifying
N-CREDENCE.rtf / SKB / LMH 5Oaks/304, 305 & 306
5/18/98
Page 6 of 12 Hillsboro, OR
<PAGE>
any modifications or alleged breaches by the other party. The certificate shall
also state the amount of monthly base rent, the dates to which rent has been
paid in advance, and the amount of any security deposit or prepaid rent. Failure
to deliver the certificate within the specified time shall be conclusive upon
the party of whom the certificate was requested that the Lease is in full force
and effect and has not been modified except as may be represented by the party
requesting the certificate.
15. DISPUTES - ATTORNEYS' FEES.
In the event of any litigation arising out of this Lease, the prevailing
party shall be entitled to recover from the other party, in addition to all
other relief provided by law or judgement, its reasonable costs and attorneys'
fees incurred both at and in preparation for trial and any appeal or review,
such amount to be as determined by the court(s) before which the matter is
heard. Disputes between the parties which are to be litigated shall be tried
before a judge without a jury.
16. SEVERABILITY.
If any provision of this Lease is held to be invalid, unenforceable or
illegal the remaining provisions shall not be affected and shall be enforced to
the fullest extent permitted by law.
17. INTEREST AND LATE CHARGES.
Rent not paid within ten (10) days of when due shall bear interest from
the date due until paid at the rate of eight percent (8%) per annum.
18. GENERAL PROVISIONS.
18.1. Waiver by either party of strict performance of any provision of
this Lease shall not be a waiver of nor prejudice the party's right otherwise to
require performance of the same provision or any other provision.
18.2. Subject to the limitations on transfer of Tenant's interest, this
Lease shall bind and inure to the benefit of the parties, their respective
heirs, successors, and assigns.
18.3. Landlord shall have the right to enter upon the Premises during
normal working hours after reasonable notice to Tenant, emergencies excepted, at
any time to determine Tenant's compliance with this Lease, to make necessary
repairs to the Premises, or to show the Premises to any prospective tenant or
purchasers. During the last two months of the term, Landlord may place and
maintain upon the Premises notices for leasing or sale of the Premises.
18.4. If this Lease commences or terminates at a time other than the
beginning or end of one of the specified rental periods, then the rent
(including Tenant's share of real property taxes, if any) shall be prorated as
of such date, and in the event of termination for reasons other than default all
prepaid rent shall be refunded to Tenant or paid on its account.
18.5. Either party shall within ten (10) days following the other
party's written request deliver to the other party a written statement
specifying the dates to which the rent and other charges have been paid, whether
the Lease is unmodified and in full force and effect, and any other matters that
may reasonably be requested by the other party.
18.6. Notices between the parties relating to this Lease shall be in
writing, effective when delivered, or if mailed, effective on the second day
following mailing, certified mail, postage prepaid, to the address for the party
stated in this Lease or to such other address as either party may specify by
notice to the other. Rent shall be payable to Landlord at the same address and
in the same manner.
19. ENVIRONMENTAL.
19.1. DEFINITIONS. The term "Environmental Law" shall mean any federal,
state or local statute, regulation or ordinance or any judicial or other
governmental order pertaining to the protection of health, safety or the
N-CREDENCE.rtf / SKB / LMH 5Oaks/304, 305 & 306
5/18/98
Page 7 of 12 Hillsboro, OR
<PAGE>
environment. The term "Hazardous Substance" shall mean any hazardous, toxic,
infectious or radioactive substance, waste and material as defined or listed by
any Environmental Law and shall include, without limitation, petroleum oil and
its fractions.
19.2. USE OF HAZARDOUS SUBSTANCES. Tenant shall not cause or permit any
Hazardous Substance to be spilled, leaked, disposed of or otherwise released on
or under the Premises. Tenant may use and sell on the Premises only those
Hazardous Substances typically used and sold in the prudent and safe operation
of the business permitted by Paragraph 1 of this Lease. Tenant may store such
Hazardous Substances on the Premises, but only in quantities necessary to
satisfy Tenant's reasonably anticipated needs. Tenant shall comply with all
Environmental Laws and exercise the highest degree of care in the use, handling
and storage of Hazardous Substances and shall take all practicable measures to
minimize the quantity and toxicity of Hazardous Substances used, handled or
stored on the Premises.
19.3. NOTICES. Tenant shall immediately notify Landlord upon becoming
aware of the following: (a) any spill, leak, disposal or other release of a
Hazardous Substance on, under or adjacent to the Premises; (b) any notice or
communication from a governmental agency or any other person relating to any
Hazardous Substance on, under or adjacent to the Premises; or (c) any violation
of any Environmental Law with respect to the Premises or Tenant's activities on
or in connection with the Premises.
19.4. SPILLS AND RELEASES. In the event of a spill, leak, disposal or
other release of a Hazardous Substance on or under the Premises caused by Tenant
or any of its contractors, agents or employees or invitees, or the suspicion or
threat of the same, Tenant shall (i) immediately undertake all emergency
response necessary to contain, cleanup and remove the released Hazardous
Substance, (ii) promptly undertake all investigatory, remedial, removal and
other response action necessary or appropriate to ensure that any Hazardous
Substances contamination is eliminated to Landlord's reasonable satisfaction,
and (iii) provide Landlord copies of all correspondence with any governmental
agency regarding the release (or threatened or suspected release) or the
response action, a detailed report documenting all such response action, and a
certification that any contamination has been eliminated. All such response
action shall be performed, all such reports shall be prepared and all such
certifications shall be made by an environmental consultant reasonably
acceptable to Landlord.
19.5. CONDITION UPON TERMINATION. Upon expiration of this Lease or
sooner termination of this Lease for any reason, Tenant shall remove all
Hazardous Substances and facilities used for the storage or handling of
Hazardous Substances from the Premises and restore the affected areas by
repairing any damage caused by the installation or removal of the facilities.
Following such removal, Tenant shall certify in writing to Landlord that all
such removal is complete.
19.6. ASSIGNMENT AND SUBLETTING. Notwithstanding the provisions of
Paragraph 9 of this Lease, it shall not be unreasonable for Landlord to withhold
its consent to any assignment, sublease or other transfer of the Tenant's
interest in this Lease if a proposed transferee's anticipated use of the
Premises involves the generation, storage, use, sale, treatment, release or
disposal of any Hazardous Substance.
19.7. INDEMNITY.
19.7.1. BY TENANT. Tenant shall indemnify, defend and hold
harmless Landlord, its employees and agents, any persons holding a security
interest in the Premises, and the respective successors and assigns of each of
them from and against any and all claims, demands, liabilities, damages, fines,
losses, costs (including without limitation the cost of any investigation,
remedial, removal or other response action required by Environmental Law) and
expenses (including without limitation attorneys' fees and expert fees in
connection with any trial, appeal, petition for review or administrative
proceeding) arising out of or in any way relating to the use, treatment,
storage, generation, transport, release, leak, spill, disposal or other handling
of Hazardous Substances on the Premises by Tenant or any of its contractors,
agents or employees or invitees. Tenant's obligations under this paragraph shall
survive the expiration or termination of this Lease for any reason. Landlord's
rights under this paragraph are in addition to and not in lieu of any other
rights or remedies to which Landlord may be entitled under this agreement or
otherwise.
N-CREDENCE.rtf / SKB / LMH 5Oaks/304, 305 & 306
5/18/98
Page 8 of 12 Hillsboro, OR
<PAGE>
19.7.2. BY LANDLORD. Landlord shall indemnify, defend and hold
harmless Tenant and its employees and agents and the respective successors and
assigns of each of them from and against any and all claims, demands,
liabilities, damages, fines, losses, costs (including without limitation the
cost of any investigation, remedial, removal or other response action required
by Environmental Law) and expenses (including without limitation attorneys' fees
and expert fees in connection with any trial, appeal, petition for review or
administrative proceeding) arising out of or in any way relating to the actual
or alleged use, treatment, storage, generation, transport, release, leak, spill,
disposal or other handling of Hazardous Substances on the Premises by Landlord,
or any of its contractors, agents or employees or by Landlord's previous tenants
of the Premises. Landlord's obligations under this paragraph shall survive the
expiration or termination of this Lease for any reason. Tenant's rights under
this paragraph are in addition to and not in lieu of any other rights or
remedies to which Tenant may be entitled under this Agreement or otherwise.
20. BROKER REPRESENTATION.
Each party represents and warrants to the other that it has had no
dealings with or in any way engaged the services of any real estate broker or
agent in connection with the negotiation or execution of this Lease. Each party
hereby agrees to indemnify and hold the other party harmless from and against
any and all costs, expenses and liabilities for commissions and other
compensation claimed by any broker or agent in connection herewith resulting
from breach of the representation and warranty contained in this paragraph.
21. OPTION TO RENEW.
If not then in default, Tenant shall have the option to renew this
Lease for two (2) additional 5-year terms by giving Landlord written notice of
its intent to extend at least 180 days prior to expiration of the preceding
term. All provisions of this Lease shall apply during the extended term, except
that rent for the renewal period shall be an amount agreed upon by the parties
at least ninety (90) days prior to commencement of the renewal period. If Tenant
elects not to exercise the first 5-year option period, then the second 5-year
option period shall be null and void.
22. DESIGN OF BUILDING SHELLS.
Landlord shall provide improvements consisting of site improvements
and the building shells for Space One and Space Two. The Space One building
shall be designed by Curtis Beattie & Associates. Site improvements for both the
Space One and Space Two buildings and the Space Two building shells shall be
designed by Group Mackenzie. Landlord may contract with additional engineering
firms and design-build contractors as Landlord shall select.
22.1. The Space One building shall be designed and constructed using
the standards set forth in Exhibit B attached hereto. The building shell of
Space One shall, from an exterior appearance and interior core standpoint be
substantially in accordance with the floor plans and elevations attached hereto
as Exhibit E.
22.2. The Space Two buildings shall be designed and constructed using
using the standards set forth in Exhibit C attached hereto. The building shells
of Space Two shall, from an exterior appearance standpoint, be substantially in
accordance with the floor plans and elevations attached hereto as Exhibit F. The
building shells of Space Two will be connected by a 13,000 square foot
connection at a location west of the mid point of the long axis of the two
building shells (the "Westerly Connection") and a 7,800 square foot connection
at a location east of the mid point of the long axis of the two building shells
(the "Easterly Connection").
22.3. The building shells (including the interior core of Space One)
shall be designed and approved as follows:
22.3.1. Within ten (10) days following the full execution of
this Lease by the parties, Landlord shall cause preliminary plans and
specifications (the "Preliminary Review Documents") to be prepared and submitted
to Tenant for review and approval. Said Preliminary Review Documents shall be
sufficiently detailed to indicate the exterior appearance of the buildings, the
N-CREDENCE.rtf / SKB / LMH 5Oaks/304, 305 & 306
5/18/98
Page 9 of 12 Hillsboro, OR
<PAGE>
layout of the interior core elements of Space One, the location of major utility
elements in all buildings and on the site, the general description of major
structural elements including roof structure, location and size of overhead
doors for Space Two as well as a description of landscape elements for the site.
Tenant shall have five (5) business days following receipt of the Preliminary
Review Documents to review said documents and provide review comments and/or
approval of the items proposed by Landlord. Following receipt of Tenant's review
comments Landlord shall within five (5) business days make necessary changes to
conform the Preliminary Review Documents to Tenant's review comments, and in
areas not conformed, provide to Tenant Landlord's reason for non-conformance.
Following receipt of the Preliminary Review Documents, Tenant shall thereafter
have five (5) business days (the "Final Review Period") to review and approve
the revised documents. If final revisions are not acceptable to Tenant by the
end of the Final Review Period, Tenant may, by giving written notice to Landlord
pursuant to Paragraph 18.6, terminate this Lease, whereupon Tenant shall be
liable to Landlord for 50% of the cost incurred by Landlord for all elements of
the Preliminary Review Documents, not to exceed $5,000.00.
22.3.2. Tenant shall have the option to cause to be designed and
constructed a covered walkway connecting Space One to Space Two (the "Covered
Walkway"). The cost of the design and construction of the Covered Walkway shall
be paid by Tenant. Tenant may also design landscape elements between the
Easterly Connection and the Westerly Connection. The design of the Covered
Walkway and the landscaped area between the connections shall be subject to the
reasonable approval of Landlord and if Landlord and Tenant cannot agree on the
design of the Covered Walkway and/or the landscaped area between, and/or the
Easterly and Westerly Connections, the dispute shall be settled by arbitration
under Paragraph 24 of this Lease.
22.3.3. Following approval of the Preliminary Review Documents,
or in the case of arbitration, upon the decision by the arbitrator, Landlord
shall, within fifteen (15) business days, cause construction documents (the
"Construction Documents") to be commenced. When prepared, Tenant shall receive
three (3) copies of the Construction Documents and may within five (5) business
days following receipt of such documents provide to Landlord notice in writing
of any contention by Tenant that the Construction Documents do not conform to
the approved Preliminary Review Documents. If Tenant provides such notice and
Landlord refuses to comply with Tenant's request for changes to the Construction
Documents, then the dispute may be submitted by either party for arbitration
pursuant to Paragraph 24. A request for arbitration must be made within ten (10)
days following Tenant's notice to Landlord of non-conformance provided for in
this paragraph. The decision of the arbitrator shall be binding upon both
parties. The time taken for such arbitration shall be added to the time Landlord
has for delivery of the Premises.
22.3.4. Following final approval of the Construction Documents by
either mutual agreement or by arbitration, Landlord shall promptly pursue the
issuance of all necessary building permits and shall cause construction of the
building shells to be undertaken by contractors selected by Landlord at
Landlord's expense.
23. TENANT IMPROVEMENTS.
23.1. Landlord shall be responsible for construction of tenant
improvements within Space One in accordance with the approved Plans and
Specifications called for in this paragraph. Exhibit D sets forth the standards
for the tenant improvements to be constructed within Space One. Tenant shall be
responsible for construction of all tenant improvements to be constructed within
Space Two. The tenant improvements within Space One and Space Two shall be
funded through the allowance provided for in Paragraph 23.2 below. All items
charged against the Allowance shall be pre-approved by Tenant prior to
construction of such items. All improvements shall be designed and constructed
using Landlord's building standard finishes or alternate materials mutually
acceptable to both Tenant and Landlord. Tenant improvements shall be constructed
using industry standard materials installed in a good and workmanlike manner by
qualified craftsmen. Said tenant improvements shall be constructed from plans
and specifications (the "Plans and Specifications") prepared by an architectural
firm mutually acceptable to both Landlord and Tenant (the "Architectural Firm")
which Plans and Specifications shall be subject to applicable building codes as
interpreted by all governing jurisdictions, including City of Hillsboro, Oregon.
N-CREDENCE.rtf / SKB / LMH 5Oaks/304, 305 & 306
5/18/98
Page 10 of 12 Hillsboro, OR
<PAGE>
The Plans and Specifications shall be approved by Landlord within ten (10) days
of Landlord's receipt of same, which approval shall not be unreasonably
withheld. Changes from Landlord approved Plans and Specifications shall be
approved in writing by Landlord.
23.2. Landlord shall provide Tenant with a tenant improvement allowance
of $3,212,375.00 (the "Allowance") for all tenant improvement work to be done
hereunder. The Allowance is based upon the following calculations:
<TABLE>
<S> <C> <C> <C>
Office Space: $25.00 per square foot for - 71,265 square feet $1,781,625.00
Manufacturing Space: $15.00 per square foot for - 87,050 square feet $1,305,750.00
Warehouse Space: $5.00 per square foot for - 25,000 square feet $ 125,000.00
------- ------------
Total: 183,315 square feet $3,212,375.00
</TABLE>
All tenant improvements within Space One shall be charged against
the Allowance. When Space One Plans and Specifications have been bid, the cost
of the work shall be reviewed and approved by Tenant within ten (10) business
days of receipt by Tenant. The cost of any subsequent changes requested by
Tenant or of additional work required which is not within the scope of the Plans
and Specifications shall be approved by Tenant prior to commencement of such
work. If the tenant improvements cannot be constructed within the balance of the
Allowance remaining after the Space One tenant improvement costs have been set
aside for completion of Space One, Tenant agrees to pay its Space Two tenant
improvement contractor the amount by which this cost exceeds the remaining
balance of the Allowance.
23.3. Landlord agrees to amortize up to $1,000,000.00 of additional
tenant improvement costs in excess of the Allowance over 120 months at twelve
(12%) percent interest. Amortization of $1,000,000.00 will result in a rental
increase of $14,347.00 (the "Amortized Amount") per month as shown in the rent
schedule on Page 1 of this Lease.
23.4. Tenant shall, as referenced in Paragraph 23.2 above, contract
with a tenant improvement contractor approved by Landlord, to complete
improvements within Space Two in accordance with the Plans and Specifications.
Tenant shall be responsible for payment of all contractor billings for such work
and will submit proof of such payments to Landlord. Each proof of payment shall
be accompanied by a copy of the contractor's most recent draw request presented
on AIA form number G702 or similar. Landlord shall, within fifteen (15) days of
receipt of Tenant's proof of payment, reimburse Tenant for amounts up to the
remaining balance of the Allowance as referenced in Paragraph 23.2 above, plus
any additional funds to be amortized pursuant to Paragraph 23.3 above.
23.5. Should Tenant elect to have Landlord amortize an amount less
than $1,000,000.00, then the Amortized Amount shall be modified by the lease
amendment referenced on Page 1, Line 30 of this Lease using the amortization
schedule used to set the amortized amount.
23.6. Landlord shall not charge Tenant any construction or development
fees nor charge any of its employees' time against the Allowance. Any sums paid
to the Architectural Firm or other consultants and any out of pocket costs
incurred by Landlord as part of the tenant improvement shall be charged against
the Allowance.
24. ARBITRATION OF DESIGN DISPUTE.
24.1. Tenant intends to construct a covered walkway between Space One
and Space Two. Any dispute regarding the design of the covered walkway and/or
the landscaped area between the Easterly or Westerly Connection or conformance
of the Space One or Space Two building shell Construction Documents to the
approved Preliminary Review Documents shall be decided by arbitration in
accordance with the then current Construction Industry Arbitration Rules of the
American Arbitration Association, unless the parties mutually agree otherwise.
The arbitration shall take place in Portland, Oregon, and shall be subject to
the arbitration statutes of the state of Oregon. Disputes shall be decided by a
single arbitrator. This agreement to arbitrate shall be specifically enforceable
under the prevailing arbitration law.
N-CREDENCE.rtf / SKB / LMH 5Oaks/304, 305 & 306
5/18/98
Page 11 of 12 Hillsboro, OR
<PAGE>
24.2. Notice of the demand for arbitration shall be filed in writing
with the other party to this Agreement. The demand for arbitration shall be made
within ten (10) days following Tenant's notice to Landlord of the existence of a
dispute.
24.3. The decision rendered by the arbitrator shall be final, and
judgment may be entered upon it in accordance with applicable law in any court
having jurisdiction thereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
respective dates set opposite their signatures below, but this Agreement on
behalf of such party shall be deemed to have been dated as of the date first
above written.
LANDLORD:
PACIFIC REALTY ASSOCIATES, L.P.,
a Delaware limited partnership
By: PacTrust Realty, Inc.,
a Delaware corporation,
its General Partner
4/22 /s/ SAM K. BRIGGS
Date: -------------, 1998 By: ----------------------------------
Sam K. Briggs
Vice President
Address for Notices/Rent Payments to Landlord:
15350 S.W. Sequoia Parkway, #300-WMPC
Portland, OR 97224
TENANT:
CREDENCE SYSTEMS CORPORATION,
a California corporation
APRIL 16 /s/ W.R. BOTTOMS
Date: --------------, 1998 By: ----------------------------------
Name: W.R. Bottoms
Title: CEO
Date: ________________, 1998 By:
Name:
Title:
Address for Legal Notices to Tenant:
Address for Invoices to Tenant:
Tenant Employer Identification Number:
N-CREDENCE.rtf / SKB / LMH 5Oaks/304, 305 & 306
5/18/98
Page 12 of 12 Hillsboro, OR
<PAGE>
EXHIBIT "A"
MAP OF FIVE OAKS WEST BUSINESS PARK
HILLSBORO, OREGON
Not to Scale.
<PAGE>
EXHIBIT "B"
CREDENCE SYSTEMS CORPORATION
BUILDING SHELL DESCRIPTION AND DEFINITION
OFFICE BUILDING (SPACE ONE)
FIVE OAKS WEST BUSINESS PARK
March 27, 1998
GENERAL -
The building architectural features to meet ADA compliance requirements at the
time of project design. Any design changes subsequent to Final Construction
Documents shall be approved in writing by Tenant's designated representative.
SITEWORK -
All site improvements required for a complete and operable facility are
included. Sitework includes utilities such as water, sanitary sewer, natural
gas, power, and phone system conduits. Sitework also includes storm water
collection, detention, and disposal; asphalt paving; concrete sidewalks;
landscaping; and site lighting.
BUILDING ENVELOPE -
The building envelope includes shallow, spread footing foundations; concrete
slab on grade; composite steel and concrete upper floor structures; steel roof
structure; structural metal stud exterior wall framing; exterior brick veneer;
and exterior aluminum and glass window and storefront systems. The roofing
system shall be constructed using rigid insulation and built-up roofing with
mineral cap sheet using a steel roof structure.
BUILDING INTERIOR IMPROVEMENTS -
EXTERIOR WALLS: Exterior walls shall be insulated with R-19 batt
insulation. Vapor barrier and gypsum board shall be provided and installed
under tenant improvement construction.
CORRIDOR AND COMMON AREA WALLS: Shell construction includes framing,
insulation, and finished gypsum board on the improved side of corridor and
common area walls (rest rooms, stairs, utility rooms, etc.). Corridor and
other common area walls shall be constructed using 3-5/8" metal studs,
3 1/2" fiberglass batt insulation, and 5/8" smooth finished gypsum board.
Exposed framing and insulation will remain facing areas for tenant
improvements.
BUILDING COLUMNS: Building structural columns are left exposed under shell
construction.
INTERIOR PARTITIONS: Interior partitions are not included in shell
construction.
INTERIOR DOORS: Common area interior doors shall be nominal 3'-0" by 9'-0"
solid core ribbon sapele, stained to a dark cherry wood finish ("Building
Standard Finish") in Timely II door frames, factory painted to approximate
door color ("Building Standard Frame"). Door hardware for common area doors
to include 2 pair butts, Schlage "D" series (or similar) lever latch, and
wall stop for each door. Door hardware finish to be polished brass.
Interior doors for tenant areas are part of tenant improvement
construction.
N-CREDEN-B.DOC / SKB / LMH / Exhibit B 5Oaks
4/9/98
Page 1 of 3 Hillsboro, OR
<PAGE>
ACOUSTICAL CEILINGS: The acoustical ceiling suspension system shall be
installed in a 4' by 4' grid, and ceiling tile and remaining tee's supplied
under building shell construction. Tenant improvement construction includes
installation of 2' by 2' tegular edge ceiling tile (Armstrong Minatone #705
Fissured) and necessary tee's in the building shell ceiling grid.
PAINTING: All common area interior walls and ceilings shall receive primer
and two coats of finish paint on improved surfaces. Painting within tenant
areas is part of tenant improvement construction.
FLOOR COVERINGS: All improved common areas shall receive appropriate floor
covering. Carpet shall be provided at corridors and stairs; ceramic tile
and carpet shall be provided in toilet rooms; and exposed, sealed concrete
will be provided in elevator machine, janitor, fire sprinkler riser, and
electrical rooms. Carpet shall be Atlas "Custom Multituff," Bently
"Mirano," or equal, over pad, at common area locations except for fire exit
stairs. Fire exit stairs to receive 26 ounce direct glue loop carpet, Atlas
"Oxford Place," or equal. Wainscot wall tile in toilet rooms to be Daltile
4 1/4" by 4 1/4" glazed ceramic with Group 2 color. Floor tile in toilet
rooms to be Daltile 2" by 2" unglazed porcelain with Group 2 color. Floor
covering within tenant areas is part of tenant improvement construction.
WINDOW COVERINGS: Window coverings are not included under shell
construction.
CABINETS AND MILLWORK: Cabinets and other special millwork are not included
under shell construction.
APPLIANCES: The cost of appliances such as dishwashers, refrigerators, and
microwave ovens, and vending machines, coffee makers or other similar
equipment are part of tenant improvement costs.
FURNITURE AND ACCESSORIES: Furniture, coat hooks, desk partitions, tack
boards, projection screens, fire extinguishers and cabinets, and other
miscellaneous accessories shall be provided and installed by tenant.
SIGNAGE: Toilet room signs are included. Toilet room signs to approximately
8" by 8", constructed of phenolic base with white raised letters and
graphics. Signs to be ADA compliant with Grade 2 Braille feature. Other
interior and exterior signage shall be provided and installed by tenant.
ELEVATORS: Two (2) each, 3-stop hydraulic elevators are included by Otis,
Dover, Schindler, Montgomery, or equal. Each car to have 3,000 pound
capacity at 150 f.p.m. Doors, door frames and control panels to be finished
in satin bronze. Interior cab panels to be constructed of wood grain
laminate. Interior cab ceiling to be mirror bronze finish with incandescent
downlights. Cab protection blankets for moving are included.
PLUMBING: Shell plumbing work includes underslab sanitary sewer and
overhead water piping to common area plumbing fixtures. Common area
plumbing fixtures include water closets, urinals, and lavatories in main
toilet rooms on each floor, a drinking fountain (handicap accessible) for
each floor, one janitor sink, and one water heater. Each Men's room to have
two (2) wall-hung urinals, two (2) water closets, and two (2) counter
mounted lavatories. Each Women's room to have four (4) water closets and
two (2) counter mounted lavatories. Two (2) "wet" columns are included
within the tenant space. Wet columns include waste and vent piping and cold
water only. Extension of plumbing within tenant areas is tenant improvement
work.
FIRE PROTECTION: Building shell fire protection system includes service to
the building and overhead sprinkler piping. Tenant improvement fire
protection work includes the addition of "drops" to the area below ceilings
and chrome, semi-recessed sprinkler heads. Special fire suppression systems
such as intergen or preaction systems, if required, are part of tenant
improvement work.
- -CREDEN-B.DOC / SKB / LMH / Exhibit B 5Oaks
4/9/98
Page 2 of 3 Hillsboro, OR
<PAGE>
H.V.A.C.: Building shell construction includes a closed loop, water-source
heat pump system with high efficiency cooling tower and boiler. Roof-top
cooling tower has approximately 200 ton capacity. Gas fired boiler has
approximately 1,000,000 BTU (input) capacity. System includes DDC automated
control with central panel operation of energy management functions.
Modulating outside air supply and exhaust is managed by the DDC controller
and ducted to and from each zone. Supply and return air main trunk ducts
and main water loop piping shall be provided under the building shell HVAC
work. Heat pumps, thermostats, duct extensions, connections to the water
loop, and supply and return air diffusers are tenant improvement
construction. Special computer room, conference room, and lunch room
cooling and ventilation, if required, are tenant improvement work.
ELECTRICAL: Building shell electrical work includes a 1200 amp,
277/480 volt, 3-phase, 4-wire main distribution panel with wires in conduit
to electrical distribution panels on each floor. Building shell electrical
work also includes lighting and miscellaneous convenience outlets in
building common areas (i.e., toilet rooms, electrical rooms, stairs,
utility rooms, etc.). Tenant improvement electrical work includes breakers
in shell electrical panels, extension of power from the electrical room to
the tenant space, the addition of any tenant subpanels within the space,
and furnishing and installation of lighting and power outlets.
Three-tube fluorescent light fixtures with 18-cell parabolic lenses shall
be supplied under building shell construction. One fixture is included for
each 90 square feet of tenant office area. Fixtures shall be stocked on the
floor for installation and wiring under tenant improvement construction.
Generators, uninterruptable power supplies, and special electrical work for
computer and phone systems, if required, are tenant improvement work.
FIRE ALARM: Fire alarm system includes flow and tamper switches for the
sprinkler system and smoke detection only as required for elevator and
common area features. Fire alarm systems related to tenant improvements are
not part of shell construction.
SECURITY SYSTEMS: Security systems shall be provided and installed by
tenant.
TELEPHONE AND COMPUTER SYSTEMS: Telephone, data, and computer system
equipment and wiring shall be provided and installed by tenant.
N-CREDEN-B.DOC / SKB / LMH / Exhibit B 5Oaks
4/9/98
Page 3 of 3 Hillsboro, OR
<PAGE>
EXHIBIT "C"
CREDENCE SYSTEMS CORPORATION
BUILDING SHELL DESCRIPTION AND DEFINITION
WAREHOUSE AND MANUFACTURING BUILDINGS (SPACE TWO)
FIVE OAKS WEST BUSINESS PARK
April 10, 1998
SITEWORK -
All site improvements required for a complete and operable facility are
included. Sitework includes utilities such as water, sanitary sewer, natural
gas, power, and phone system conduits. Sitework also includes storm water
collection, detention, and disposal; asphalt paving; concrete sidewalks;
landscaping; and site lighting.
BUILDING ENVELOPE -
The building envelope includes shallow, spread footing foundations; concrete
slab on grade; steel and wood roof structure; tilt-up concrete exterior walls
with partial brick veneer, Mutual Materials "Inca" or similar; and exterior
aluminum and glass window and storefront systems, U.S. Aluminum painted frames
with PPG insulated solarcool azurlite glass. The roof membrane shall be built-up
roofing with mineral cap sheet.
BUILDING SHELL -
TENANT ENTRIES AND MAN-DOORS: Tenant doors in aluminum systems include
single storefront doors with push-pull hardware and deadbolt locks.
Exterior man-doors in concrete and brick walls shall be 3' x 7' hollow
metal with Schlage "D" series lever locks. Special access and security
systems, card lock entries, and other special door hardware, if required,
are part of tenant improvement work.
EXTERIOR WALLS: Exterior concrete walls within the building shall remain
unpainted, exposed concrete. Metal stud furring and/or insulation for
exterior concrete walls is part of tenant improvement work. Framed exterior
walls shall be insulated with R-19 batt insulation. Vapor barrier and
gypsum board for framed exterior walls shall be provided and installed
under tenant improvement construction.
ROOF STRUCTURE: The roof structure shall be constructed using open web
steel girders and joists, wood sub-purlins, and plywood deck. Roof
structure is insulated with R-19 insulation and shall remain exposed.
Painting of roof structure and supporting elements, if required, shall be
done under tenant improvement work.
OVERHEAD DOORS: Four (4) each, 9' by 10' dock doors are included. Exterior
dock doors shall be steel sectional type, motor operated, vertical or high
lift configuration. Approximately 50 linear feet of steel canopy is
included over the loading dock doors. Canopy to extend approximately 3'
from building face. Up to four (4) drive-in doors, each 12' by 14', are
included. Drive-in doors shall be steel sectional type, chain operated,
vertical or high lift configuration and shall be located in concrete panels
which do not have brick veneer facing.
FLOORING: Warehouse floor shall be exposed, sealed concrete.
PAINTING: All exterior concrete walls will be painted with exterior latex
paint. Exterior masonry walls to receive clear sealer. Interiors of
buildings shall remain unpainted.
WINDOW COVERINGS: Window coverings are not included under shell
construction.
N-Creden-c.doc / SKB / LMH / Exhibit C 5Oaks
5/26/98
Page 1 of 2 Hillsboro, OR
<PAGE>
PLUMBING: One 4" diameter sanitary sewer waste line shall be installed
under slab running the entire length of each building. A 1-1/2" insulated
overhead copper water line shall be installed below the roof structure
directly above the sanitary sewer. Any other water, waste, and vent piping
and furnishing and installation of plumbing fixtures is tenant improvement
work. Air piping, gas piping, process piping, and other special piping, if
required, shall be part of tenant improvement work.
FIRE PROTECTION: Building shell fire protection system includes service to
the buildings and overhead sprinkler piping and heads. The system shall be
designed for Ordinary Hazard, Group 2 occupancies. Tenant improvement fire
protection work includes the addition of "drops" to the area below ceilings
and chrome, semi-recessed sprinkler heads. Special fire suppression systems
such as intergen or preaction systems, if required, are part of tenant
improvement work.
H.V.A.C.: HVAC systems shall be installed under tenant improvement
construction.
ELECTRICAL: Building shell electrical work includes a 6000 Amp (2 building
total), 277/480 Volt, 3-phase main electrical service. Site lighting in the
vicinity of the buildings shall be served from the shell electrical
service. Tenant improvement electrical work includes distribution of power
from the main building service to tenant subpanels and the addition of any
tenant subpanels within the tenant space. Generators and UPS systems, if
required, are part of tenant improvement work. Interior electrical work
shall be installed under tenant improvement construction.
FIRE ALARM: The fire alarm system includes flow and tamper switch
monitoring for the sprinkler system only. Fire alarm systems related to
tenant improvements are not part of shell construction.
SECURITY SYSTEMS: Security systems shall be provided and installed by
tenant.
TELEPHONE AND COMPUTER SYSTEMS: Telephone, data, and computer system
equipment and wiring shall be provided and installed by tenant.
N-Creden-c.doc / SKB / LMH / Exhibit C 5Oaks
5/26/98
Page 2 of 2 Hillsboro, OR
<PAGE>
EXHIBIT "D"
CREDENCE SYSTEMS CORPORATION
TENANT IMPROVEMENT STANDARDS
OFFICE BUILDING (SPACE ONE)
FIVE OAKS WEST BUSINESS PARK
April 10, 1998
GENERAL -
Items noted as "excluded" are items which Landlord will consider for inclusion
but are not included in a typical improvement and do not generally fit within a
building standard tenant improvement allowance.
CONCRETE -
Existing concrete slab on grade shall be sawcut, removed, and poured back for
underslab utilities as necessary. Existing upper floor slabs shall be core
drilled for utilities as necessary; new penetrations in upper floor slabs shall
be sealed tight.
DEMISING WALLS -
Demising walls are not applicable to this project. When used, demising walls
shall extend from floor level to the underside of the ceiling grid. Demising
walls shall be constructed using 3-5/8" metal studs, 3-1/2" unfaced fiberglass
batt insulation, and 5/8" smooth finished gypsum board on each side. Raco FS4
black reveal header shall be used at connection of walls to ceiling. 4' wide,
3-1/2" unfaced fiberglass batt insulation shall be provided above ceiling,
centered over demising walls.
EXTERIOR WALLS -
Exterior walls shall receive 5/8" smooth finished gypsum board over existing
framing and thermal insulation. Raco FS4MB black recessed reveal molding to be
used at connections of walls to ceilings.
CORRIDOR AND COMMON AREA WALLS -
Corridor and other common area walls (rest rooms, stairs, utility rooms, etc.)
shall be constructed using 3-5/8" metal studs, 3-1/2" unfaced fiberglass batt
insulation, and 5/8" smooth finished gypsum board each side. Shell construction
includes framing, insulation, and finished gypsum board on the corridor side of
corridor walls. Tenant improvement construction includes furnishing and
installation of smooth finished gypsum board on the tenant side of corridor and
common area walls.
BUILDING COLUMNS -
Building structural columns shall be furred with metal stud framing and 5/8"
smooth finished gypsum board. Building "wet" columns to be furred, insulated
with high density sound insulation, and covered with 5/8" smooth finished gypsum
board. Raco FS4MB black recessed reveal molding to be used at connections of
columns to ceilings.
INTERIOR PARTITIONS -
Interior partitions shall extend from floor level to the underside of ceiling
grid. Interior partitions shall be constructed using 3-5/8" metal studs and 5/8"
smooth finished gypsum board each side. Raco FS4 black reveal header shall be
used at connection of walls to ceiling.
N-CREDEN-D.DOC/SKB/LMH/Exhibit D 5Oaks
4/10/98
Page 1 of 4 Hillsboro, OR
<PAGE>
INSULATION -
3-1/2" unfaced fiberglass batt insulation shall be provided in walls surrounding
conference and lunch rooms. Insulation around private offices is excluded. 4'
wide, 3-1/2" unfaced fiberglass batt insulation shall be provided above ceiling,
centered above walls receiving insulation.
INTERIOR DOORS -
Interior doors shall be nominal 3'-0" by 9'-0" solid core ribbon sapele, stained
to a dark cherry wood finish ("Building Standard Finish") in Timely II door
frames, factory painted to approximate door color ("Building Standard Frame").
Door hardware to include 2 pair butts, Schlage "AL" series (or similar) lever
latch, and wall stop for each door. Door hardware finish to be polished brass.
RELITES -
Relites are not included for standard tenant improvements. When used, relites
shall include 1/4" tempered glass in Timely II frames, factory painted to match
door frames.
SUITE ENTRIES -
Suite entries are not applicable to this project. When used, suite entry shall
include a nominal 3'-0" by 9'-0" solid core ribbon sapele door, stained to
Building Standard Finish in Building Standard Frame. Door hardware to include
closer, butts, Schlage "D" series (or similar) lever lock, and stop. Door
hardware finish to be polished brass. Glass doors, card entry systems, and
special access systems shall be supplied and installed by tenant.
FOLDING PARTITIONS AND OPERABLE WALLS -
Folding partitions and operable walls are not included for standard tenant
improvements.
ACOUSTICAL CEILINGS -
The acoustical ceiling suspension system shall be installed in a 4' by 4' grid,
and ceiling tile and remaining tee's supplied under building shell construction.
Tenant area construction includes installation of 2' by 2' tegular edge ceiling
tile (Armstrong Minatone #705 Fissured) and necessary tee's in the building
shell ceiling grid.
PAINTING -
All interior walls shall receive primer and two coats of finish paint. Paint
color is to match approved drawdowns.
WALL COVERING -
Vinyl, fabric, tile, and other wall coverings are not included for standard
tenant improvements.
FLOOR COVERINGS -
Floor covering colors shall be selected by Tenant from Landlord's standard
finish options. Carpet shall be 30 oz. cut pile or 26 oz. level loop. Cut pile
carpet shall be installed on carpet pad. Armstrong Exelon or equal VCT shall be
installed in lunch rooms, copy rooms, storage rooms, and other appropriate
locations. Sheet vinyl flooring is not included for standard tenant
improvements. Rubber base to be 4" in continuous lengths. Coved base to be used
in areas with resilient flooring; flat base to be used in carpeted areas. Quarry
or ceramic tiles, wood flooring, raised computer floors, and other special floor
finishes are not included for standard tenant improvements.
WINDOW COVERINGS -
Building Standard window covering (off-white, non-perforated, vertical louver
blinds) shall be provided at exterior windows. Window coverings on interior
relites are not included for standard tenant improvements.
N-CREDEN-D.DOC/SKB/LMH/Exhibit D 5Oaks
4/10/98
Page 2 of 4 Hillsboro, OR
<PAGE>
CABINETS AND MILLWORK -
Cabinet work includes lunch/break room upper and lower units and cabinets for a
work/copy room only. Built-in desks, shelving, and furniture are not included
for standard tenant improvements. Tenant cabinets to be constructed to A.W.I.
standards with plastic laminate tops, fronts, and sides, color as selected by
Tenant from standard high pressure laminates. Cabinet interiors shall be
constructed of melamine or standard low pressure laminate. Concealed hinges,
heavy-duty drawer hardware, and wire pulls shall be included for all drawers or
doors. One (1) 4' x 4' plywood phone board is included. Wall paneling, wood
base, shelving, and other special millwork items are not included for standard
tenant improvements.
APPLIANCES -
Appliances such as dishwashers, refrigerators, and microwave ovens, and vending
machines, coffee makers or other similar equipment shall be supplied and
installed by tenant.
FURNITURE AND ACCESSORIES -
Furniture, coat hooks, desk partitions, tack boards, projection screens, fire
extinguishers and cabinets, and other miscellaneous accessories shall be
supplied and installed by tenant.
SIGNAGE -
Interior and exterior signage shall be supplied and installed by tenant.
PLUMBING -
Plumbing within a tenant space is not included for standard tenant improvements.
If tenant elects to have plumbing, it shall be connected to existing plumbing
services. Available tie-in locations include two (2) building "wet" columns and
the central utility room and rest room locations. All above slab waste and vent
piping to be cast iron. When used, typical lunch room sink to be Elkay CR2522
with Delta 100 faucet.
FIRE PROTECTION -
Fire protection system shall be modified as required for tenant improvement
layout. Building shell fire protection system includes service to the building
and overhead sprinkler piping. Tenant improvement fire protection work includes
the addition of "drops" to ceilings and chrome, semi-recessed sprinkler heads.
Special fire suppression systems such as intergen or preaction systems are not
included for standard tenant improvements.
H.V.A.C. -
Heating, ventilation, and air conditioning systems shall be extended to serve
the tenant improvement layout. The building shell includes a closed loop,
water-source heat pump system with high efficiency cooling tower and boiler.
System includes DDC automated control with central panel operation of energy
management functions. Modulating outside air supply and exhaust is managed by
the DDC controller and ducted to and from each zone. Supply and return air main
trunk ducts and main water loop piping shall be provided under the building
shell HVAC work. Heat pumps, thermostats, duct extensions, connections to the
water loop, and supply and return air diffusers shall be added under tenant
improvement construction. Tenant spaces to be connected to dedicated channel of
the DDC control system with programmable override for after hour use. Tenant
HVAC zones to be provided 1 each per approximate 1000 square feet. Each zone to
be thermostatically controlled. Special computer room, conference room, and
lunch room cooling and ventilation are not included for standard tenant
improvements.
- -CREDEN-D.DOC/SKB/LMH/Exhibit D 5Oaks
4/10/98
Page 3 of 4 Hillsboro, OR
<PAGE>
ELECTRICAL -
Building shell electrical work includes the main building electrical
service with wires in conduit to electrical distribution panels on each
floor. Tenant improvement electrical work includes breakers in shell
electrical panels, extension of power from the electrical room to the
tenant space, the addition of any tenant subpanels within the space, and
furnishing and installation of lighting and power outlets.
Lighting shall be provided using 2' by 4' fluorescent light fixtures with
18-cell parabolic lenses. Wattage available for lighting for each tenant
space is governed by the State of Oregon Energy Code. Special architectural
lighting (track lighting, spot lighting, down lights, wall sconces, etc.)
and dual level switching are not included for standard tenant improvements.
Lighting lamps, ballasts, and controls shall meet electrical energy
consumption code requirements. Duplex outlets shall be provided 1 each per
120 square feet of Tenant area.
Power connections to Tenant desk partitions to be provided at wall, floor,
or power pole locations only; wiring within desk partitions is not included
for standard tenant improvements. Mud rings with pull strings to the area
above ceiling shall be provided 1 each per 240 square feet of Tenant area
for Tenant installed telephone and data wiring. Cover plates and
receptacles for telephone and data wiring shall be provided by the Tenant.
Generators, uninterruptable power supplies, and special electrical work for
computer and phone systems are not included for standard tenant
improvements.
FIRE ALARM -
Fire alarm and smoke detection systems shall be provided if required by the
local governing jurisdictions.
SECURITY SYSTEMS -
Security systems shall be provided and installed by tenant.
TELEPHONE AND COMPUTER SYSTEMS -
Telephone, data, and computer system equipment and wiring shall be provided and
installed by tenant.
N-CREDEN-D.DOC/SKB/LMH/Exhibit D 5Oaks
4/10/98
Page 4 of 4 Hillsboro, OR
<PAGE>
"EXHIBIT E"
CREDENCE SYSTEMS CORPORATION
BUILDING SHELL FLOOR PLANS AND ELEVATIONS
OFFICE BUILDING (SPACE ONE)
FIVE OAKS WEST BUSINESS PARK
Plan diagram - WEST ELEVATION AND PARTIAL SOUTH ELEVATION SECTIONS 1 & 2
<PAGE>
"EXHIBIT E"
CREDENCE SYSTEMS CORPORATION
BUILDING SHELL FLOOR PLANS AND ELEVATIONS
OFFICE BUILDING (SPACE ONE)
FIVE OAKS WEST BUSINESS PARK
Plan diagram - EAST ELEVATION AND PARTIAL NORTH ELEVATION SECTIONS 1 & 2
<PAGE>
"EXHIBIT E"
CREDENCE SYSTEMS CORPORATION
BUILDING SHELL FLOOR PLANS AND ELEVATIONS
OFFICE BUILDING (SPACE ONE)
FIVE OAKS WEST BUSINESS PARK
Plan diagram - FIRST FLOOR PLAN
<PAGE>
"EXHIBIT E"
CREDENCE SYSTEMS CORPORATION
BUILDING SHELL FLOOR PLANS AND ELEVATIONS
OFFICE BUILDING (SPACE ONE)
FIVE OAKS WEST BUSINESS PARK
Plan diagram - SECOND FLOOR PLAN
<PAGE>
"EXHIBIT E"
CREDENCE SYSTEMS CORPORATION
BUILDING SHELL FLOOR PLANS AND ELEVATIONS
OFFICE BUILDING (SPACE ONE)
FIVE OAKS WEST BUSINESS PARK
Plan diagram - THIRD FLOOR PLAN
<PAGE>
"EXHIBIT F"
CREDENCE SYSTEMS CORPORATION
BUILDING SHELL FLOOR PLANS AND ELEVATIONS
WAREHOUSE AND MANUFACTURING BUILDINGS (SPACE TWO)
FIVE OAKS WEST BUSINESS PARK
Plan diagram - SOUTH ELEVATION BLDG. 306
Plan diagram - SOUTH ELEVATION BLDG. 306
<PAGE>
"EXHIBIT F"
CREDENCE SYSTEMS CORPORATION
BUILDING SHELL FLOOR PLANS AND ELEVATIONS
WAREHOUSE AND MANUFACTURING BUILDINGS (SPACE TWO)
FIVE OAKS WEST BUSINESS PARK
Plan diagram - WEST ELEVATION BLDG. 305 AND 306
Plan diagram - EAST ELEVATION BLDG. 305 AND 306
<PAGE>
"EXHIBIT F"
CREDENCE SYSTEMS CORPORATION
BUILDING SHELL FLOOR PLANS AND ELEVATIONS
WAREHOUSE AND MANUFACTURING BUILDINGS (SPACE TWO)
FIVE OAKS WEST BUSINESS PARK
Plan diagram - FLOOR PLAN BUILDING 305
<PAGE>
"EXHIBIT F"
CREDENCE SYSTEMS CORPORATION
BUILDING SHELL FLOOR PLANS AND ELEVATIONS
WAREHOUSE AND MANUFACTURING BUILDINGS (SPACE TWO)
FIVE OAKS WEST BUSINESS PARK
Plan diagram - FLOOR PLAN BUILDING 306
<PAGE>
LEASE AMENDMENT
DATED: April 17, 1998
BETWEEN: PACIFIC REALTY ASSOCIATES, L.P.,
a Delaware limited partnership LANDLORD
AND: CREDENCE SYSTEMS CORPORATION,
a California corporation, hereinafter referred to as TENANT
By written lease dated April 10, 1998, Tenant leased from Landlord
total of approximately 183,315 square feet of warehouse and office space
comprised of approximately 71,265 square feet of office space located in a three
(3) story office building ("Space One") and approximately 112,050 square feet of
warehouse and manufacturing space located in two (2) connected single story
buildings ("Space Two") located at Five Oaks West Business Park, on Pine Farm
Road in Hillsboro, Oregon (and generally as located on the attached Exhibit A).
Such document is hereinafter referred to as the "Lease." The Lease expires
March 31, 2014.
Tenant now wishes to amend the Lease.
NOW, THEREFORE, the parties agree as follows:
1. Exhibit A shall be modified by the new Exhibit A which is attached
hereto.
2. On Exhibit C, the paragraph titled "SITEWORK" shall be modified to
include the following language: "ASPHALT PAVING: 2-1/2" of asphalt paving shall
be provided over 6" crushed rock base in automobile traffic and parking areas,
and 3" of asphalt paving shall be provided over 9" crushed rock base in truck
loading dock and maneuvering areas in accordance with the recommendation of the
geotechnical engineer."
3. On Exhibit C, the paragraph titled "BUILDING SHELL" shall be
modified to include the following language: "CONCRETE SLAB ON GRADE: The
concrete slab on grade shall be 5" thick, unreinforced concrete, with
compressive strength design of 3000 psi at 28 days. Seismic reinforcing steel is
included along the building perimeter if required by code. Interior floor slabs
to be smooth trowel finished."
4. The following language shall be included in Exhibit C: "TENANT
IMPROVEMENTS - FLOOR SLAB RECESS: A recessed floor slab shall be constructed if
requested by Tenant in the location indicated on the attached C-1. The finished
surface of the recessed floor shall be 12" maximum below the adjacent floor
surfaces. The recessed floor will be 5" thick, unreinforced concrete with smooth
trowel finish. Raised floor systems are not included. Tenant shall be
responsible for the cost of filling in the recess with smooth finished concrete
upon lease termination or earlier vacation of the premises."
5. Paragraph 6.2. shall be deleted and the following language
substituted: "Tenant shall carry general liability insurance on an occurrence
basis with combined single limits of not less than $1,000,000. Landlord shall
have the right to require Tenant to increase this minimum liability insurance
limit by such reasonable amounts as may be required to adequately protect
Landlord and Tenant in the future as a result of general increases in liability
awards in the courts but in no event shall Landlord be allowed to require Tenant
to carry more than $5,000,000 of liability insurance. Such insurance shall be
provided by an insurance carrier reasonably acceptable to Landlord and shall be
evidenced by a certificate delivered to Landlord stating that the coverage will
not be canceled or materially altered without ten (10) days' advance written
notice to Landlord. Landlord shall be named as an additional insured on such
policy, but only with respect to the indemnity granted by Tenant in
Paragraph 6.1 above."
6. Except as expressly modified hereby, all terms of the Lease shall
remain in full force and effect and shall continue through the existing term.
N-CREDENCE.DOC/SKB/LMH 5Oaks/304, 305 & 306
4/17/98
Page 1 of 2 Hillsboro, OR
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the respective dates set opposite their signatures below, but this Agreement on
behalf of such party shall be deemed to have been dated as of the date first
above written.
LANDLORD:
PACIFIC REALTY ASSOCIATES, L.P.,
a Delaware limited partnership
By: PacTrust Realty, Inc.,
a Delaware corporation,
its General Partner
4/22 /s/ SAM K. BRIGGS
Date: -------------, 1998 By: ----------------------------------
Sam K. Briggs
Vice President
TENANT:
CREDENCE SYSTEMS CORPORATION,
a California corporation
APRIL 20 /s/ W.R. BOTTOMS
Date: --------------, 1998 By: ----------------------------------
Name: W.R. Bottoms
Title: CEO
N-CREDENCE.DOC/SKB/LMH 5Oaks/304, 305 & 306
4/17/98
Page 2 of 2 Hillsboro, OR
<PAGE>
"EXHIBIT C-1"
CREDENCE SYSTEMS CORPORATION
BUILDING SHELL FLOOR PLANS AND ELEVATIONS
WAREHOUSE AND MANUFACTURING BUILDINGS (SPACE TWO)
FIVE OAKS WEST BUSINESS PARK
Plan diagram - FLOOR PLAN BUIDLING 306
N-CREDEN-F.doc / SKB / LMH /Exhibit C-1 5Oaks
5/20/98
Page 1 of 1 Hillsboro, OR
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Credence
Systems 2nd Quarter 10-Q and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> APR-30-1998
<CASH> 70,853
<SECURITIES> 78,813
<RECEIVABLES> 63,263
<ALLOWANCES> 2,493
<INVENTORY> 52,723
<CURRENT-ASSETS> 276,559
<PP&E> 86,098
<DEPRECIATION> 40,168
<TOTAL-ASSETS> 369,935
<CURRENT-LIABILITIES> 41,609
<BONDS> 115,000
0
0
<COMMON> 22
<OTHER-SE> 213,528
<TOTAL-LIABILITY-AND-EQUITY> 369,935
<SALES> 157,035
<TOTAL-REVENUES> 157,035
<CGS> 67,102
<TOTAL-COSTS> 67,102
<OTHER-EXPENSES> 63,963
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,300
<INCOME-PRETAX> 27,202
<INCOME-TAX> 9,224
<INCOME-CONTINUING> 17,978
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,978
<EPS-PRIMARY> .83
<EPS-DILUTED> .81
</TABLE>
