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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999
OR
[__] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-22366
CREDENCE SYSTEMS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-2878499
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
215 FOURIER AVENUE, FREMONT, CALIFORNIA 94539
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (510) 657-7400
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS: NAME OF EACH EXCHANGE ON WHICH REGISTERED:
------------------- -----------------------------------------
NONE NONE
SECURITIES REGISTERED PURSUANT
TO SECTION 12(B) OF THE ACT: COMMON STOCK, $0.001 PAR VALUE
PREFERRED STOCK PURCHASE RIGHTS
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [_]
Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of voting stock held by non-affiliates of
the Registrant, as of January 3, 2000 was approximately $1,903,000,000 (based
upon the closing price for shares of the Registrant's common stock as reported
by the Nasdaq National Market for the last trading date prior to that date).
Shares of common stock held by each officer, director and holder of 5% or more
of the outstanding common stock have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
On January 3, 2000, approximately 22,517,384 shares of the Registrant's
common stock, $0.001 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 2000 Annual
Meeting of Stockholders to be held on March 22, 2000 are incorporated by
reference into Part III.
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PART I
ITEM 1. BUSINESS
Credence Systems Corporation designs, manufactures, sells and services
automatic test equipment, or ATE, used for testing semiconductor integrated
circuits, or ICs. We also develop, license and distribute related software
products. We serve a broad spectrum of the semiconductor industry's testing
needs through a wide range of products that test digital logic, mixed-signal and
non-volatile memory semiconductors. We utilize our proprietary technologies to
design products which are intended to provide a lower total cost of ownership
than many competing products currently available while meeting, the increasingly
demanding performance requirements of today's ATE market. Our products are
primarily designed to test semiconductors that are produced in high volume. Our
customers include major semiconductor manufacturers as well as assembly and test
services companies.
We were incorporated in California in March 1982 to succeed to the
business of a sole proprietorship and were reincorporated in Delaware in October
1993. "Credence" or the "Company", "we," us" and "our" refers to Credence
Systems Corporation, and our subsidiaries. Our principal executive offices are
located at 215 Fourier Avenue, Fremont, CA 94539, and our telephone number is
(510) 657-7400. Our worldwide website address is www.credence.com.
"Credence Systems Corporation," "Credence," "Fluence," "SC," "ValStar,"
"Quartet," "Quartet One," "Wavebridge," "MemBIST," "TDS," "TDX," "Triton,"
"EPRO," "BOST," "Kalos," "DUO," and "Opmaxx" are our trademarks. This Annual
Report on Form 10-K also includes trademarks of other companies. "Matrix Test"
is a trademark of Amkor Technology, Inc.
BACKGROUND
Dramatic advances in semiconductor process technology have improved the
performance and lowered the average selling prices of semiconductors to levels
that now support their use in a wide range of office, consumer, automotive,
communications, industrial and other products. In order to maintain or improve
gross margins as semiconductor devices decline, semiconductor manufacturers are
constantly seeking ways to reduce manufacturing costs.
Testing is a principal element in the cost structure of high volume
production of semiconductors. As a result of improved efficiencies in wafer
fabrication, test costs have become a higher percentage of the total cost of
manufacturing. This shift in cost structure has changed the traditional criteria
for selection of ATE. Although performance was the dominant factor in the
selection of ATE in the past, we believe that economic considerations
have assumed much greater importance to semiconductor manufacturers. Purchasers
of ATE now examine more carefully the total cost of ownership of ATE. Total cost
of ownership includes the initial purchase price of the tester, as well as the
tester's reliability, flexibility, size, power and air conditioning
requirements, upgradeability and maintenance costs, including spare parts.
Traditionally, semiconductor die were minimally tested at wafer probe
and underwent rigorous performance testing to full specification only at the
completion of final packaging. Today, assembly and packaging have become
increasingly expensive compared with the cost of the die, such that their costs
may exceed the cost of the die itself. This trend has influenced semiconductor
manufacturers to shift performance testing increasingly toward wafer probe. By
subjecting devices to performance testing earlier in the manufacturing process,
defective die are detected and eliminated before assembly and packaging costs
are incurred.
Increased facility costs and the trend toward performance testing at
wafer probe have led to the increased importance of smaller testers in the
semiconductor manufacturing process. Performance testing at wafer probe requires
that the device under test be located in close physical proximity to the
measuring circuits of the tester in order to minimize potential signal
distortions that can negatively impact testing yields. Smaller testers can more
easily be placed in close physical proximity to the circuits. In addition, wafer
probe test typically occurs in a clean room where potential contaminants must be
continually removed and temperatures kept constant. These special maintenance
requirements make clean rooms expensive to operate. Smaller testers occupy less
floor space and therefore assist in reducing clean room costs. In addition,
smaller testers that consume less power generally have reduced air conditioning
requirements.
For over 20 years, emitter-coupled logic, ECL, has been the
conventional process technology used by us and others for the ICs used in ATE
due to its speed, repeatability and precision. ECL technology, however, results
in low
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functionality per chip and requires continuous power. As a result,
conventional ATE systems generally are larger, expensive and require significant
electrical power to operate.
Another process technology commonly used in the manufacture of
semiconductors is complementary metal oxide semiconductor, or CMOS. As compared
to ECL, CMOS technology allows higher functionality for a given chip size and
requires less power to operate. Some ATE manufacturers use a combination of ECL
and CMOS to lower the cost of ATE by reducing the use of ECL.
The production of ATE based exclusively on CMOS technology, however,
had been limited by the inability of CMOS to meet the timing and measurement
demands of semiconductor testing. Although the speed of CMOS was acceptable, its
timing stability was not. This problem results from the tendency of CMOS
circuits to experience timing drift as a function of temperature and voltage
variation during tests. To fully benefit from the economic and other advantages
of CMOS technology, the challenge has been to control this drift characteristic
in order to produce semiconductors for ATE that meet the performance
requirements of semiconductor testing.
THE CREDENCE SOLUTION AND STRATEGY
We have developed proprietary CMOS stabilization methods that
minimize the drift characteristic of CMOS and enable us to produce testers that
are smaller and require less power than those based upon ECL technology. These
testers are intended to provide a lower total cost of ownership than many
competing products currently available while meeting the performance demands of
today's ATE market. CMOS technology allows the circuits used in our testers to
be reduced, or scaled down in size as IC process technology improves. This
should result in higher performance and free space on the die for additional
functionality. This scalability feature enables us to develop and manufacture
smaller, higher performance ICs for use in our testers at what we believe to be
a lower cost, and with a potentially shorter development cycle, than traditional
process technologies.
Our objective is to be the leading supplier of cost-effective ATE for
production testing of ICs used in high volume applications. Our business
strategy incorporates the following key elements:
- TECHNOLOGY LEADERSHIP. We believe that our proprietary CMOS
stabilization technology enables the development of ATE that is
designed to meet the performance and cost of ownership requirements of
semiconductor manufacturers and assembly and test services companies.
In addition, we believe the scalability of this technology will allow
us to offer new products and enhancements in a potentially shorter
time and at a lower cost than many of our competitors that base our
products on traditional less-scalable architecture.
- LOWER TOTAL COST OF OWNERSHIP. We seek to provide ATE to our customers
at a lower total cost of ownership than many competing products
currently available while meeting the performance requirements of our
customers. We believe that the system price, reliability, flexibility,
size, power and air conditioning requirements, upgradeability and
maintenance costs, including spare parts, of our testers enable our
customers to more cost effectively test ICs.
- DIVERSE, HIGH-VOLUME MARKETS. Our products target the testing of
digital logic, mixed-signal and nonvolatile memory devices that are
used in a broad range of growing end-user market segments. Our
products are designed to test semiconductors that are manufactured in
high volume and are used in a variety of applications such as
automobiles, appliances, personal computers, personal communications
products, networking products, digital televisions and multimedia
hardware.
- WORLDWIDE TECHNICAL SUPPORT AND CUSTOMER SERVICE. As semiconductor
manufacturers expand their operations worldwide, they require that
their ATE suppliers have the capability to provide global support and
service and training. To meet this requirement, we utilize a
combination of direct sales, service and support personnel and a broad
network of independent distributors located in close proximity to
major customer sites. We and our distributors currently maintain
locations throughout the world to service and support our customers.
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- REDUCE TIME-TO-MARKET. We believe that our customers require
increasing levels of sophisticated software tools to assist in the
utilization of ATE that minimizes time-to-market. We are focusing our
software efforts on internal development of and acquisition of
companies or businesses that develop such tools. Through Fluence, we
have acquired the test development series, or TDS, and TDX product
lines from Summit Design, Inc. and Zycad, respectively, and acquired
the Analog Test and Analog BIST products of Opmaxx. In addition,
through the acquisition of certain assets of Heuristics, we obtained
memory BIST and related in-process software products. These
acquisitions are expected to add market opportunities for growth in
the future. We believe we are positioned to capitalize on the
Design-to-Test and the Design-for-Test markets with our new software
product lines that integrate design and test.
PRODUCTS
We currently offer a wide variety of products that test digital logic,
mixed-signal and non-volatile memory ICs. Digital logic semiconductors produce
discrete on and off logical sequences that control functions, store data,
retrieve data and move and manipulate data at high rates of speed. An example of
digital logic semiconductors include logic devices such as microcontrollers.
Some digital devices which store and retrieve data are memory semiconductors.
Non-volatile memory semiconductors retain their data when the power is turned
off. Mixed-signal semiconductors combine both digital and analog functions.
Analog semiconductors control external functions such as sound, graphics, and
motor controls by producing continuous varying voltage or current. When these
analog functions are combined onto a digital integrated circuit, the resulting
device is considered a mixed-signal device.
Our CMOS-based ATE products--the SC, Valstar, DUO and Quartet
series--are designed to test high speed devices used in applications such as
networking and personal computing as well as multimedia, digital television,
high-definitions television and personal communications. Our memory
products, Kalos Series, Delphi, EPRO 142 and BTMA test non-volatile memory, or
NVM, devices, including ROM, EPROM, EEPROM and Flash memories, are used in high
volume applications in the consumer, automotive and telecommunications markets.
During 1997, we introduced the ValStar 2000, a system which enables the testing
of very complex devices, with up to 1024 pins with high-speed requirements. Also
introduced in 1997 was the Kalos Flash memory test system, a highly integrated
parallel system that provides multi-site testing and is designed to lower the
overall cost of test.
During fiscal 1999, we acquired Opmaxx. The Opmaxx products are
targeted at analog and mixed signal design and test applications.
During fiscal 1998, we introduced the Quartet series. The Quartet
system is compatible with DUO, provides the enhanced capabilities required to
test consumer mixed signal products with 200 MHz I/O 20 bit analog, video, and
radio frequency, or RF, input and output. Quartet directly addresses the cost
sensitive needs of consumer related system-on-a-chip, or SOC, devices.
The MemBIST products, acquired from Heuristics in fiscal 1998, generate
built-in self-test logic for embedded memories.
During fiscal 1997, we acquired two software products lines: the Test
Development Series product line in the Summit acquisition and the Test Design
expert product line in the Zycad acquisition. TDS converts simulation waveform
data and modifies it under user control to generate test programs for use on
ATE. TDX grades test vector coverage, and provides other tools that enhance
design testability.
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The following table sets forth our current product offerings, their
features and examples of typical devices tested by each product. Included in
some of the basic features are the anticipated cycle speed in megahertz, timing
accuracy in either picoseconds, or ps, or nanoseconds, or ns, the number and
characteristics of the pins and the density in megabits, or Mb, of the device
that can be tested:
<TABLE>
- --------- ------------ --------------- --------------------------------------- ----------------------------------------------------
PRODUCT SERIES MODELS BASIC FEATURES TYPICAL DEVICES
- --------- ------------ --------------- --------------------------------------- -----------------------------------------------------
<S> <C> <C> <C> <C>
DIGITAL SC SC312 50-100 MHz Microcontrollers, ASSPs, DSPs and FPGAs
SC Micr- 64-304 Pins
+ 350-500 ps accuracy
-
- --------- ------------ --------------- --------------------------------------- -----------------------------------------------------
ValStar VS2000 200 MHZ Microprocessors, RISC circuits, PLDs, FPGAs,
+ 200 ps accuracy ASICs, core logic and graphic chip sets
384-1024 Pins
- --------- ------------ --------------- --------------------------------------- -----------------------------------------------------
MIXED- DUO DUO DUO-100 MHz Multimedia devices, mass storage, DSPs, ASICs,
SIGNAL DUO-SE DUO-SE-50 MHz Datacom and specialty devices, mobile
DUO-SX DUO-SX-200 MHz communication devices, complex audio devices
DUO-RF DUO-RF-50-100 MHz
- --------- ------------ --------------- --------------------------------------- -----------------------------------------------------
Quartet ONE 512 digital Multimedia devices, mass storage, DSPs, ASICs,
200 MHz Datacom and specialty devices, mobile communication
+ 175 ps accuracy devices, complex audio devices
Analog, Video, Audio, RF
- --------- ------------ --------------- --------------------------------------- -----------------------------------------------------
MEMORY KALOS Kalos 50 MHz Flash memories, EEPROM, EPROM, Microcontrollers and
PRODUCTS 256 Mb NVM ASICs
Kalos xp + 1ns
Personal Kalos
- --------- ------------ --------------- --------------------------------------- -----------------------------------------------------
BTMA 2001 Benchtop Memory Analysis and ROM, EEPROM, EPROM, Flash and SRAM
2555 Verification Testers
2555A
Delphi
- --------- ------------ --------------- --------------------------------------- -----------------------------------------------------
EPRO 142/AX 10 MHz
256 Mb
- --------- ------------ --------------- --------------------------------------- -----------------------------------------------------
BOST MemBOST "Built-Off Self-Test" Processors, graphics engines, network controllers,
Embedded memory test ASIC's and other multimedia devices
External solution for digital
and mixed signal devices
- --------- ------------ --------------- --------------------------------------- -----------------------------------------------------
WORKCELL Triton Memory Kalos tester integrated into 8" wafer ROM, EEPROM, EPROM, and Flash memories
prober, without extending outside the
prober perimeter
- --------- ------------ --------------- --------------------------------------- -----------------------------------------------------
Matrix Test Memory Kalos tester integrated with a FICO EEPROM, EPROM, Flash memories
strip handler for testing NVM devices
packaged prior to singulation
- --------- ------------ --------------- --------------------------------------- -----------------------------------------------------
SOFTWARE TDS tools Design to Test Generates tester specific programs Tools apply to digital logic devices
Verifies timing specification
- --------- ------------ --------------- --------------------------------------- -----------------------------------------------------
TDX tools Design to Test Verifies test vector quality Tools apply to digital logic devices
Supports design for test strategies
- --------- ------------ --------------- --------------------------------------- -----------------------------------------------------
HPL MemBIST Generates BIST logic, Partitioned Tools apply to all memory devices
solutions using BIST, ATE and BOST
- --------- ------------ --------------- --------------------------------------- -----------------------------------------------------
Opmaxx Design Maxx Design verification and sensitivity Tools apply to analog and mixed-signal devices
Design FaultMaxx analysis, design fault coverage, test
Test TestMaxx evaluation and optimization
- --------- ------------ --------------- --------------------------------------- -----------------------------------------------------
Opmaxx BISTMaxx BIST generation for analog and Tools apply to analog and mixed-signal devices
Analog mixed-signal devices
BIST
- --------- ------------ --------------- --------------------------------------- -----------------------------------------------------
</TABLE>
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DIGITAL PRODUCTS
SC. The model SC 212 was first shipped in 1992 and incorporates one of
our proprietary CMOS stabilization methods. This product requires approximately
30 square feet of floor space and 4 kilowatts of power for 304 pins. The SC
Micro is a cost-reduced version of the SC 312. This system offers our customers
a full capability test system at a price currently below $2,000 per digital pin
channel. This per channel price has previously been available only in test
systems with reduced functionality-requiring users to compromise the quality of
their device testing. The SC Micro retains the customer's test quality while
lowering its test costs. In 1997, we expanded the SC series by
introducing and shipping the SC 312, which runs at a higher speed (100 MHz) and
has improved accuracy over the SC 212. The purchase price of these testers
typically ranges from $350,000 to $850,000 depending upon configuration.
VALSTAR. The VS2000 was introduced in 1997, and we believe it is one of
the first systems designed specifically with the desired performance cost
structure for volume production of high pin count VLSI devices. This product
offers up to 1,024 input/output, or I/O, pins at 200 MHz data rates, and
requires less than four square meters of floor space, A fully loaded system
consumes only 16 kilowatts of power, which is generally less than many
competitive systems, thus lowering operating costs. The purchase price of the VS
2000 typically ranges from $1,000,000 to $3,600,000 depending on configuration.
MIXED-SIGNAL PRODUCTS
QUARTET. Quartet is our new high performance mixed-signal
product series. The Quartet One was introduced in 1998 and started shipping in
early fiscal 1999. Quartet builds on the Duo series by addressing the needs of
device manufacturers serving the consumer mixed-signal, or CMS, marketplace. CMS
devices combine the power of digital processors with CD quality audio, broadcast
video and wireless communications onto a single, cost sensitive SOC. The Quartet
One, the first of the Quartet series, addresses all four of these requirements
in an integrated, ready for volume production package. With 200 MHz digital, 20
bit audio, 300 MHz video and 6GHz RF, Quartet One is designed to meet the
demands of the most complex SOC devices. With typical system prices between
$750,000 and $2,000,000 depending on configuration, the Quartet provides a low
cost of test required by the CMS market.
DUO. The Duo series is our solution for high volume mixed-signal
testing. With over 450 systems in the field, Duo has become an important
component of the testing solution for both integrated device manufacturers and
the semiconductor manufacturing service companies. The typical purchase price of
the Duo ranges from $600,000 to $1,500,000 depending on configuration.
MEMORY PRODUCTS
KALOS. Introduced in November 1997, the Kalos is a highly integrated,
parallel system designed to test flash memory. Running at 50 MHz, it provides
multi-site testing and is designed to lower the customer's cost of test. The
Kalos features a unique tester-on-a-card architecture, which places all test
functions for each site on a single card and thus reduces floor space and power
consumption while increasing performance. The typical purchase price of the
Kalos ranges from $400,000 to $800,000 depending on configuration.
KALOS XP. Introduced in 1999, the Kalos xp is based upon the Kalos
tester. The Kalos xp features a wider, 96 pin test site enabling testing of high
pin count NVM and flash memory core microcontroller devices. Kalos xp provides
up to eight site-in-parallel test capabilities in a small footprint tester
package.
PERSONAL KALOS. Personal Kalos is a desktop engineering version of the
high-throughput Kalos tester. The typical price for a Personal Kalos ranges
from $100,000 to $120,000 depending on configuration.
BTMA. The 2001, 2555 and 2555A are NVM engineering testers focused on
the lab environment. Acquired from Heuristics in 1998, the BTMA line is designed
to be usable by design engineers and other non-test specialists to debug and
characterize NVM designs and yield problems. The BTMA software user interface
makes it a platform for this function. The purchase price for these testers
typically ranges from $50,000 to $250,000 depending on configuration.
DELPHI. Introduced in 1999, the Delphi is an updated version of the
BTMA 2001 platform that uses a Windows NT-based work station. The purchase price
of this tester is typically $50,000 to $70,000 depending on configuration.
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EPRO. Our EPRO memory product line includes the model 142/AX. The model
142/AX was first shipped by EPRO in 1982. The purchase price of these
non-volatile memory testers typically ranges from $30,000 to $80,000, depending
upon configuration.
BOST. Built-Off Self-Test, or BOST, technology is a new process in
transforming the role of test from an expensive and passive device validation
procedure into a series of solutions that can shrink development cycles, reduce
costs, meet time-to-market demands and improve die yields. BOST integrates a
device specific BIST engine directly into a custom circuit on the load board.
Consulting services for BOST memory testing are currently available and pricing
is dependent on configuration.
WORKCELL PRODUCTS
In 1996, we established the Workcell product group. A Workcell enhances
manufacturing productivity by integrating previously distinct equipment into a
single, highly efficient tool. In 1997, we debuted our sophisticated Triton
series of wafer test systems. Triton Memory--the industry's first suite of
Workcell wafer test solutions--features a production worthy wafer prober
integrated with a robust NVM ATE test system.
TRITON MEMORY. Leveraging our tester-on-a-card architecture, Triton
Memory tests as many as 16 sites in parallel at speeds of 50 MHz. All functions
required to test a Flash memory device appear on one card. An inherently
parallel, high-performance system that improves throughput rates, the Triton
Memory tests each device asynchronously from one another--while embedded within
an 8" wafer prober. The tester is an integral part of the prober's structure,
minimizing independent vibrations associated with current interface concepts.
The typical price of a Triton memory ranges from $450,000 to $1,300,000
depending on configuration.
MATRIX TEST(TM). The Matrix Test was introduced in 1999 in conjunction
with Amkor Technology and FICO BV. The Matrix Test process is a zero-footprint
in-line flash memory test system and it integrates a Kalos non-volatile memory
test system with a Fico strip-based test handler to improve the test process.
This integrated solution is able to test a strip of flash memory devices without
singulating the parts, or separating them from the strip.
SOFTWARE PRODUCTS
Our software products provide tools to IC manufacturers to
help create detailed tests to ensure product quality and shorten time-to-market.
TDS. The TDS product line consists primarily of Converter, Conditioner,
and WaveBridge products. Converters take waveform data from simulator-specific
representations into an industry-standard representation. Conditioners modify
waveform data to enable it to fit specific tester environments. WaveBridge
modules generate the actual test programs. Converters are available to support
most commonly used simulators, and WaveBridge modules are available for a
variety of ATE models. Other programs that analyze waveform data and provide
other design-to-test functions are also included in the TDS product line.
TDX. The TDX product line allows the design engineer to verify complex
designs with full timing accuracy, Iddq, pattern generation, scan Generation and
testability analysis.
MEMBIST. MemBIST software generates built-in self-test logic for
designs that use embedded memories. The software minimizes the test time and
chip area required for self-test logic of embedded memories. Users can also
designate varying levels of detail for the diagnostic information to be produced
by the BIST logic, from simple pass/fail to topologically correct bitmaps that
can be used in failure analysis.
OPMAXX. The Opmaxx product line provides a set of software tools for
testing analog and mixed signal devices, as well as designing them for
testability. DesignMaxx provides analog design optimization, verification, and
sensitivity analysis. TestMaxx evaluates analog/mixed-signal fault coverage and
fault grades test stimulus. TestMaxx evaluates and optimizes analog/mixed-signal
tests. BISTMaxx generates built-in self-test for analog/mixed signal device
functionality both on-chip and off-chip.
CUSTOMERS, MARKETS AND APPLICATION
We target digital logic, mixed-signal, non-volatile memory
device and system-on-a-chip manufacturers that serve a broad range of growing
end-user market segments. Our customers manufacture semiconductors in high
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volume for use in applications such as automobiles, appliances, personal
computers, personal communications products, networking products, digital
televisions and multimedia hardware.
In addition to marketing our products to major semiconductor
manufacturers, we have developed relationships with numerous assembly and test
services companies. Semiconductor manufacturers and fabless semiconductor
companies utilize these subcontractors as a means of lowering their fixed
production costs, thus minimizing the effects of cyclicality inherent in the
semiconductor industry. As a result, these assembly and test services companies
have become an increasingly important segment of the ATE market.
We believe that our success depends in large part upon the success of
our major customers. The loss of or any reduction in orders by a significant
customer (including the potential for reductions in orders by assembly and test
services companies which that customer may utilize), including reductions due to
market, economic or competitive condition in the semiconductor industry or in
other industries that manufacture products utilizing semiconductors has
materially adversely affected, and may continue to materially adversely affect
our business, financial condition or results of operations. Our ability to
increase sales in the future will depend in part upon our ability to obtain
orders from new customers as well as upon the financial condition and success of
our customers and the general global economy. There can be no assurance that our
sales will not decrease in the future or that we will be able to retain existing
customers or to attract new ones.
For information on our geographic data and major customers, see Note 4
to the Consolidated Financial Statements included elsewhere herein. Our
international sales are primarily denominated in United States dollars. We
anticipate that our international business will continue to account for a
significant portion of net sales in the foreseeable future.
We schedule production of our systems based upon order backlog and
order forecast. We include in our backlog only those customer orders for systems
(including upgrades) for which we have accepted purchase orders and assigned
shipment dates in approximately the following six months. Substantially all of
our orders are subject to cancellation or rescheduling by the customer with
limited or no penalties. Our backlog at any particular date may not necessarily
be representative of actual sales for any succeeding period due to orders
received for systems to be shipped in the same quarter, possible changes in
system delivery schedules, cancellation of orders and potential delays in system
shipments. As of October 31, 1999, our order backlog for systems, exclusive of
orders for spare parts and service and support, was approximately $124.5
million, as compared with $32.3 million as of October 31, 1998.
SALES, SERVICE AND SUPPORT
We currently market and sell our products in the United States
principally through our direct sales organization, with direct sales employees
and representatives in over 16 locations. Outside the United States, we utilize
both direct sales employees and a broad network of distributors, with direct
sales employees and distributors in over 20 countries. Sales through
distributors represented approximately 47%, 45% and 36% of net sales during
fiscal years 1999, 1998 and 1997, respectively.
We and our distributors have sales and support centers located in
the United States, Europe, Israel, and throughout Asia from which both direct
Credence personnel and independent sales and service representatives sell and
support the equipment. We believe that field support is critical to our
customers. Support encompasses many of the components of the total cost of
ownership for ATE. We seek to develop long-term relationships with major
ATE customers through extensive support consisting of teams of professional
sales, applications, training and service personnel. These personnel are located
in close physical proximity to key customer sites in order to provide the
required support in a timely fashion. The sales process includes consultations
with customers to help them purchase the most cost-effective equipment for their
needs, to help develop custom test programs to optimize production throughput,
to assist in long-term self-sufficiency through training of customer test
engineering personnel and to provide the service capacity and preventive
maintenance to reduce downtime for customers' systems. Customer support includes
field personnel and in-house applications personnel who work closely with design
engineering groups to modify existing equipment to meet the latest performance
requirements.
In Japan a wholly-owned subsidiary provides sales and service to our
customers. In addition, we have a relationship with Innotech Corporation, a
distributor of our products in Japan. In 1997, we formed a joint venture with
Innotech to engage in the customization and manufacture of ATE products for sale
by both companies. In
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March 1996, we established a service and support in Korea. We also have a
relationship with Itek, Inc., a distributor of our products in Korea.
Our standard policy is to warrant our new systems against defects in
design, materials and workmanship for one year for parts and labor. We offer
customers additional support after the warranty period in the form of
maintenance contracts for specified time periods. Such contracts include various
options such as board replacement, priority response, planned preventive
maintenance, scheduled one-on-one training, daily on-site support and monthly
system and performance analysis.
RESEARCH AND DEVELOPMENT
The ATE market is subject to rapid technological change and new product
introductions. Our ability to be competitive in this market will depend in
significant part upon our ability to successfully develop and introduce new
products, enhancements and related software tools on a timely and cost-effective
basis. This will enable customers to integrate such products into their
operations as they begin volume manufacturing of the next generation of
semiconductors.
We have pursued a technology acquisition strategy to complement our
internal research and development efforts, including:
- in 1988, we completed the acquisition of Axiom Technology
Corporation, which added mixed-signal testing capability;
- in 1989, we completed the acquisition of ASIX Systems Corporation,
which added one of our proprietary CMOS stabilization methods;
- in 1990, we acquired the STS Division of Tektronix Inc., which added
a second proprietary CMOS stabilization method;
- in 1993, we acquired various patents from Tektronix;
- in March 1995, we acquired EPRO, which added non-volatile memory
testing capability;
- in July 1997, we acquired specified assets and assumed specified
liabilities of Test Systems Strategies, Inc., a wholly owned
subsidiary of Summit Design, Inc.;
- in August 1997, we acquired through Test Systems Strategies fault
simulation and test program development products of Zycad;
- in June 1998, we purchased specified assets from Heuristics which
added memory BIST design and test applications capability; and
- in September 1999, we acquired Opmax through Fluence, which added
analog and mixed signal BIST design and test applications
capability.
Each of the stabilization methods acquired by Credence provides a
different solution to the tendency of CMOS to experience timing drift as a
function of temperature and voltage variation. The first proprietary solution
uses a timing phase detection circuit combined with a voltage control mechanism
to compensate for thermal, voltage and process drift. The second uses a unique
combination of counters and heating circuits to provide stability through
thermal means. These methods allow our CMOS-based ICs to achieve the timing
repeatability necessary to meet the performance requirements of ATE and to
realize the economic and other advantages of CMOS technology over ECL
technology. CMOS circuits use less space than those based on ECL as the circuits
require less power and can be more closely packed together. In addition to these
acquired stabilization methods, we have also developed and continue to develop
new and/or improved stabilization techniques for our tester products.
During 1998, we enhanced our Duo product line with new capabilities
including high performance audio testing, testing of analog circuitry for
wireless communication applications and embedded memory test capability. These
features enable single insertion system-on-a-chip testing capability. These
capabilities resulted in the Quartet product line which was introduced in 1999.
We will continue to focus research and development efforts on ensuring that its
products have the ability to efficiently test state-off-the-art customer devices
which combine analog, high speed digital logic, and memory on a single circuit.
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Our ongoing research and development efforts also include focusing on
increased cycle speed, accuracy and pin counts of our testers. In addition, we
are working on a software development program that is intended to provide for
upward compatibility through our products. We will also continue to focus
efforts on providing software solutions which allow more rapid, cost-effective
development of ATE test programs which reduce time-to-market of customer
integrated circuit designs. We currently intend to continue to invest
significant resources in the development of new products and enhancements for
the foreseeable future.
Research and development expenses were $38.9 million in 1999, excluding
a $0.9 million charge for acquired IPR&D, $47.5 million in fiscal 1998,
excluding a $2 million charge for acquired IPR&D, and $37.4 million in fiscal
1997, excluding a $6 million charge for acquired IPR&D.
PROPRIETARY RIGHTS
We currently hold 52 active United States patents, which expire over
time through April 2018. In addition, we currently have 16 foreign patents,
which expire over time through September 2011. The two United States patents,
acquired from ASIX and Tektronix underlying our proprietary CMOS stabilization
methods expire in February 2007 and December 2007, respectively.
In 1993, we granted a license to Tektronix with respect to patents
obtained in the acquisition of the STS Division of Textronix, and certain other
intellectual property rights, the Tektronix Rights, including a patent covering
one of our proprietary CMOS stabilization technologies, that were assigned to us
by Tektronix in 1993. Tektronix has a worldwide, perpetual, irrevocable,
non-exclusive, royalty free, fully-paid, sublicensable and transferable license
to the Tektronix Rights. Tektronix may not grant rights under the Tektronix
Rights to make, use, sell or otherwise distribute ATE for testing ICs to any
entity other than a Tektronix joint venture affiliate and to a
successor-in-interest to Tektronix. Tektronix may not grant or assign such
rights to any other party that is a Credence competitor. In addition, Tektronix
may not knowingly sell components incorporating the Tektronix Rights to any
other party. We and Tektronix have granted to each other a worldwide, perpetual,
irrevocable, non-exclusive, royalty free, fully-paid, sublicensable and
transferable license to all improvements, enhancements, modifications or
derivative works created before August 1996, or the Improvements, of
intellectual property that was licensed or assigned pursuant to a Technology
Agreement dated December 31, 1990, as amended on August 12, 1993, including the
Tektronix Rights, to make, use and sell ATE for testing ICs. Tektronix's license
to the Improvements is subject to the same restrictions as its license to the
Tektronix Rights.
We attempt to protect our intellectual property rights through patents,
copyrights, trademarks and maintenance of trade secrets and other measures.
There can be no assurance that others will not independently develop equivalent
intellectual property or that we can meaningfully protect our intellectual
property. There can be no assurance that any patent we own will not be
invalidated, circumvented or challenged, that the rights granted thereunder will
provide competitive advantages to us or that any of our pending patent
applications will be issued. Furthermore, there can be no assurance that others
will not develop similar products, duplicate our products or design around the
patents owned by us. In addition, litigation has been and may continue to be
necessary to enforce our patents and other intellectual property rights, to
protect our trade secrets, to determine the validity and scope of the
proprietary rights of others, or to defend against claims of infringement or
invalidity. For additional information with respect to our intellectual
property, review the information set forth under "Risk Factors--If the
protection of proprietary rights is inadequate, our business could be harmed"
and "--Our business may be harmed if we are found to infringe proprietary rights
of others."
MANUFACTURING AND SUPPLIERS
Our manufacturing objective is to produce ATE that conforms to our
customers' requirements at the lowest commercially practical manufacturing cost.
We rely on outside vendors to manufacture certain components and subassemblies
including several custom integrated circuits. We seek to manage our inventory
levels through agreements with both suppliers and subcontractors that provide
just-in-time delivery of these components and subassemblies. We assemble these
components and subassemblies to create finished testers in the configuration
specified by our customers. In general, we use standard components and
prefabricated parts available from numerous suppliers. However, some components
and subassemblies necessary for the manufacture of our testers are obtained from
a sole supplier or a limited group of suppliers and that we are in the process
of qualifying a second source for some of those components. There can be no
assurance that such alternative source will be qualified or available. Our
reliance on a sole or a limited group of suppliers and on outside subcontractors
involves certain risks, including a potential inability to obtain an adequate
supply of required components, and reduced control over pricing
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and timely delivery of components. See "Risk Factors--There are
limitations on our ability to find the supplies and services necessary to
run our business."
COMPETITION
The ATE industry is intensely competitive. We face substantial
competition throughout the world, primarily from ATE manufacturers located in
the United States, Europe and Japan, as well as from some of our customers.
Our competitors in the digital semiconductor testing market include:
- Advantest Corporation;
- Ando Electric Co. Ltd.;
- LTX Corporation;
- Schlumberger Ltd.;
- Agilent Technologies, Inc. (formerly a division of Hewlett-Packard
Company); and
- Teradyne, Inc.
In the mixed-signal semiconductor testing market our competitors include:
- Teradyne;
- LTX;
- Agilent;
- Schlumberger; and
- Advantest.
In the non-volatile memory testing market our competitors include:
- Teradyne;
- Agilent; and
- Advantest.
Fluence's principal competitors in the software design to test market are:
- Simutest, Inc.;
- Integrated Measurement Systems, Inc.; and
- in-house applications developed by companies in the semiconductor
industry.
The competitors in the software design for test and BIST market place include:
- Mentor Graphics, Inc.; and
- LogicVision, Inc. See "Risk Factors--The ATE industry is intensely
competitive which can adversely affect our revenue growth."
The principal elements of competition in our markets and the basis upon
which ATE customers select testers include throughput, tools for reducing
customer product time-to-market, product performance and total cost of
ownership. We believe that we compete favorably with respect to these factors.
EMPLOYEES
As of October 31, 1999, we had a total of 713 permanent employees and
112 temporary or contract employees. Of this total, 230 are engaged in
manufacturing, 197 are in research and development, 60 in applications, 175 in
sales, marketing and service, and 101 in general administration. Fluence has 62
employees primarily engaged in the development, sales and marketing of software
products. Our employees are highly skilled, and we believe our future results of
operations will depend in large part on our ability to attract and retain such
employees. None of our employees are represented by a labor union, and we have
not experienced any work stoppages. We consider our employee relations to be
good.
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RISK FACTORS
OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY WHICH MAY ADVERSELY AFFECT
OUR STOCK PRICE
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
1997 1998 1999
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales 40 43 51 69 82 75 37 22 26 38 53 80
Net Income (loss) 1 3 (1) 7 9 9 (34) (11) (7) (9) 3 8
</TABLE>
A variety of factors affect our results of operations. The above graph
illustrates that our quarterly net sales and operating results have fluctuated
significantly. We believe they will continue to fluctuate for a number of
reasons, including:
- economic conditions in the semiconductor industry in general and
capital equipment industry specifically;
- manufacturing capacity and ability to volume produce systems,
including our newest systems, and meet customer requirements;
- timing of new product announcements and new product releases by us
or our competitors;
- market acceptance of our new products and enhanced versions of
existing products;
- manufacturing inefficiencies associated with the start-up of our new
products, changes in our pricing or payment terms and cycles, and
those of our competitors, customers and suppliers;
- write-offs of excess and obsolete inventories and accounts
receivable that are not collectible; o supply constraints;
- integration into our new facilities in Oregon;
- the implementation of our new ERP system;
- patterns of capital spending by our customers, delays, cancellations
or reschedulings of customer 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 including customs ICs, subassemblies and
services, customization and reconfiguration of our systems and
product reliability;
- expenses associated with acquisitions and alliances;
- operating expense reductions associated with cyclical industry
downturns, including costs relating to facilities consolidations and
related expenses;
- the proportion of our direct sales and sales through third parties,
including distributors and OEMS, the mix of products sold, the
length of manufacturing and sales cycles, product discounts;
- natural disasters, political and economic instability, regulatory
changes and outbreaks of hostilities; and
- ability to hire and retain employees in a competitive market.
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We presently intend to introduce new products and product enhancements
in the future, the timing and success of which will affect our business,
financial condition and results of operations. Our gross margins on system sales
have varied significantly and will continue to vary significantly based on a
variety of factors including:
- manufacturing inefficiencies; o pricing concessions by us and our
competitors and pricing by our suppliers;
- hardware and software product sales mix;
- inventory write-downs;
- production volumes;
- new product introductions;
- product reliability;
- absorption levels and the rate of capacity utilization;
- customization and reconfiguration of systems;
- international and domestic sales mix and field service margins; and
- facility relocations and consolidations.
New and enhanced products typically have lower gross margins in the
early stages of commercial introduction and production. Although we have
recorded and continue to record provisions for estimated sales returns, accounts
receivable that might not be collectible, and product warranty costs, we cannot
be certain that our estimates will be adequate.
We cannot forecast with any certainty the impact of these and other
factors on our sales and operating results in any future period. Results of
operations in any period, therefore, should not be considered indicative of the
results to be expected for any future period. Because of this difficulty in
predicting future performance, our operating results may fall below the
expectations of securities analysts or investors in some future quarter or
quarters. Our failure to meet these expectations would likely adversely affect
the market price of our common stock. In addition, our 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 will impact our sales and operations results in
the future. Other significant expenditures may make it difficult for us to
reduce our significant fixed expenses in a particular period if we do not meet
our net sales goals for that period. These other expenditures include:
- research and development;
- distribution channels;
- marketing and other expenses for new products;
- capital equipment purchases and world-wide training; and
- customer support and service.
As a result, we cannot be certain that we will be profitable or that we
will not again sustain losses in the future.
WE HAVE A LIMITED BACKLOG AND OBTAIN MOST OF OUR NET SALES FROM A RELATIVELY FEW
NUMBER OF SYSTEM SALES TRANSACTIONS WHICH CAN RESULT IN FLUCTUATIONS OF
QUARTERLY RESULTS
Other than some memory products and software products, for which the
price range is typically below $50,000, we obtain most of our net sales from the
sale of a relatively few number of systems that typically range in price from
$350,000 to $3.6 million. This has and could continue to result in our net sales
and operating results for a particular period being significantly impacted by
the timing of recognition of revenue from a single transaction. Our net sales
and operating results for a particular period could also be materially adversely
affected if an anticipated order from even one customer is not received in time
to permit shipment during that period. Backlog at the beginning of a quarter
typically does not include all orders necessary to achieve our sales objectives
for that quarter. In addition, orders in backlog are subject to cancellation,
delay, deferral or rescheduling by customers with limited
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or no penalties. Consequently, our quarterly net sales and operating results
have in the past and will in the future depend upon our obtaining orders for
systems to be shipped in the same quarter that the order is received.
We believe that some of our customers may from time to time, place
orders with us for more systems than they will ultimately accept or for a more
rapid delivery than they will ultimately require. For this reason, our backlog
may include customer orders in excess of those actually delivered to them or
other customers.
Furthermore, we generally ship products generating most of our net
sales near the end of each quarter. Accordingly, our failure to receive an
anticipated order or a delay or rescheduling in a shipment near the end of a
particular period may cause net sales in a particular period to fall
significantly below expectations, which could have a material adverse effect on
our business, financial condition or results of operations. The relatively long
manufacturing cycle of many of our testers has caused and could continue to
cause future shipments of testers to be delayed from one quarter to the next.
Furthermore, as we and our competitors announce new products and technologies,
customers may defer or cancel purchases of our existing systems. We cannot
forecast the impact of these and other factors on our sales and operating
results.
THE SEMICONDUCTOR INDUSTRY HAS BEEN CYCLICAL
Our business and results of operations depend largely upon the capital
expenditures of manufacturers of semiconductors and companies that specialize in
contract packaging and/or testing of semiconductors. This includes 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. 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 we manufacture and market. We believe that the markets for newer
generations of semiconductors will also be subject to similar fluctuations.
We have experienced shipment delays, delays in commitments and
restructured purchase orders by customers and we expect this activity to
continue. Accordingly, we cannot be certain that we will be able to achieve or
maintain our current or prior level of sales or rate of growth. We anticipate
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 significant degree, or at all. In addition, our business, financial
condition or results of operations may be adversely affected by any factor
adversely affecting the semiconductor industry in general or particular segments
within the semiconductor industry. For example, the Asian financial crisis
contributed to widespread uncertainty and, in part, a slowdown in the
semiconductor industry. This slowdown in the semiconductor industry resulted in
reduced spending for semiconductor capital equipment, including ATE which we
sell. This industry slowdown had and may in the future have a material adverse
effect on our product backlog, balance sheet, financial condition and results of
operations. Therefore, there can be no assurance that our operating results will
not continue to be materially adversely affected if downturns or slowdowns in
the semiconductor industry occur again in the future.
WE HAVE OVER THE LAST SEVERAL YEARS EXPERIENCED SIGNIFICANT FLUCTUATIONS IN OUR
OPERATING RESULTS AND INCREASED THE SCALE OF OPERATIONS
In fiscal 1999, we generated revenue of $26.5 million in the first
quarter and $80.2 million in the fourth quarter, an increase of 203%. In fiscal
1998, we generated revenue of $82.4 million for the first quarter and $22.4
million for the fourth quarter, a decrease of 73%. Since 1993, except for
cost-cutting efforts during fiscal 1998 and most of 1999, we have overall
significantly increased the scale of our operations in general to support
periods of generally increased sales levels and expanded product offerings and
have expanded 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 new
facilities in Oregon, a new ERP system and numerous acquisitions. These
fluctuations in our sales and operations have placed and are placing a
considerable strain on our management, financial, manufacturing and other
resources. In order to effectively deal with the changes brought on by the
cyclical nature of the industry, we have 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 our business.
However, we cannot be certain that any existing or new systems,
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procedures or controls, including our new ERP system, will be adequate to
support fluctuations in our operations or that our systems, procedures and
controls will be cost-effective or timely. Any failure to implement, improve and
expand or contract such systems, procedures and controls efficiently and at a
pace consistent with our business could have a material adverse effect on our
business, financial condition or results of operations.
WE ARE EXPANDING AND INTEND TO CONTINUE THE EXPANSION OF OUR PRODUCT LINES
We are currently devoting and intend to continue to devote significant
resources to the development, production and commercialization of new products
and technologies. During fiscal 1999, we launched three major new products. We
invested and continue to invest significant resources in plant and equipment,
leased facilities, inventory, personnel and other costs, to begin or prepare to
increase production of these products. A significant portion of these
investments will provide the marketing, administration and after-sales service
and support required to service and support these new hardware and software
products. Accordingly, we cannot be certain that gross profit margin and
inventory levels will not be adversely impacted by delays in new product
introductions or start-up costs associated with the initial production and
installation of these new product lines. We also cannot be certain that we can
manufacture these systems per the time and quantity required by our customers.
The start-up costs include additional manufacturing overhead, additional
inventory and warranty reserve requirements and the enhancement 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 have increased and will continue to increase the risk of inventory
write-offs. We cannot be certain that our net sales will increase or remain at
recent levels or that any new products will be successfully commercialized or
contribute to revenue growth or that any of our additional costs will be
covered.
THERE ARE LIMITATIONS ON OUR ABILITY TO FIND THE SUPPLIES AND SERVICES
NECESSARY TO RUN OUR BUSINESS
We obtain certain components, subassemblies and services necessary for
the manufacture of our testers from a limited group of suppliers. We do not
maintain long-term supply agreements with most of our vendors and we purchase
most of our components and subassemblies through individual purchase orders. The
manufacture of certain of our components and subassemblies is an extremely
complex process. We also rely on outside vendors to manufacture certain
components and subassemblies and to provide certain services. We have recently
experienced and continue to experience significant reliability, quality and
timeliness problems with several critical components including certain custom
integrated circuits. In addition, we and certain of our subcontractors are
experiencing significant shortages and delays in delivery of various components
and subassemblies. We cannot be certain that these or other problems will not
continue to occur in the future with our suppliers or outside subcontractors.
Our reliance on a limited group of suppliers and on outside subcontractors
involves several risks, including an inability to obtain an adequate supply of
required components, subassemblies and services and reduced control over the
price, timely delivery, reliability and quality of components, subassemblies and
services. Shortages, delays, disruptions or terminations of the sources for
these components and subassemblies have delayed and could continue to delay
shipments of our systems and new products and could continue to have a material
adverse effect on our business. Our continuing inability to obtain adequate
yields or timely deliveries or any other circumstance that would require us to
seek alternative sources of supply or to manufacture such components internally
could also have a material adverse effect on our business, financial condition
or results of operations. Such delays, shortages and disruptions would also
damage relationships with current and prospective customers and have and could
continue to allow competitors to penetrate our customer accounts. We cannot be
certain that our internal manufacturing capacity or that of our suppliers and
subcontractors will be sufficient to meet customer requirements.
THE ATE INDUSTRY IS INTENSELY COMPETITIVE WHICH CAN ADVERSELY AFFECT OUR REVENUE
GROWTH
With the substantial investment required to develop test application
software and interfaces, we believe that once a semiconductor manufacturer has
selected a particular ATE vendor's tester, the 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. Our inability to
penetrate any large ATE customer or achieve significant sales to any ATE
customer could have a material adverse effect on our business, financial
condition or results of operations.
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We face substantial competition from ATE manufacturers throughout the
world, as well as several of our customers. We do not currently compete in the
testing of microprocessors, linear ICs or DRAMs. Moreover, approximately
two-thirds of our net sales in fiscal 1998 and 1999 were derived from sales of
mixed-signal testers. Many competitors have substantially greater financial and
other resources with which to pursue engineering, manufacturing, marketing and
distribution of their products. Certain competitors have recently introduced or
announced new products with certain performance or price characteristics equal
or superior to products we currently offer. These competitors have recently
introduced products that compete directly against our products. We believe that
if the ATE industry continues to consolidate through strategic alliances or
acquisitions, we will continue to face significant additional competition from
larger competitors that may offer product lines and services more complete than
ours. Our 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 our competitors could cause a decline in our sales or loss of
market acceptance of our existing products.
Moreover, our business, financial condition or results of operations
could continue to be materially adversely affected by increased competitive
pressure and continued intense price-based competition. We have experienced and
continue to experience significant price competition in the sale of our testers.
In addition, pricing pressures typically become more intense at the end of a
product's life cycle and as competitors introduce more technologically advanced
products. We believe that, to be competitive, we must continue to expend
significant financial resources in order to, among other things, invest in new
product development and enhancements and to maintain customer service and
support centers worldwide. We cannot be certain that we will be able to compete
successfully in the future.
THE ATE MARKET IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE
Our ability to compete in this market depends upon our 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 products under development internally as well as
products obtained in acquisitions. Our customers require testers and software
products with additional features and higher performance and other capabilities.
We are therefore required to enhance the performance and other capabilities of
our existing systems and software products and related software tools. Any
success we may have in developing new and enhanced systems and software products
and new features to our existing systems and software products will depend upon
a variety of factors, including:
- product selection;
- timely and efficient completion of product design;
- implementation of manufacturing and assembly processes;
- successful coding and debugging of software;
- product performance;
- reliability in the field; and
- effective sales and marketing.
Because we must make new product development commitments well in
advance of sales, new product decisions must anticipate both future demand and
the availability of technology to satisfy that demand. We cannot be certain that
we will be successful in selecting, developing, manufacturing and marketing new
hardware and software products or enhancements and related software tools. Our
inability 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 our business, financial condition and results of operations.
New product or technology introductions by our competitors could cause a decline
in sales or loss of market acceptance of our existing products. In addition, if
we introduce new products, existing customers may curtail purchases of the older
products and delay new product purchases. Any unanticipated decline in demand
for our hardware or software products could have a materially adverse effect on
our business, financial condition or results of operations.
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SIGNIFICANT DELAYS CAN OCCUR BETWEEN THE TIME WE INTRODUCE A SYSTEM AND THE TIME
WE ARE ABLE TO PRODUCE THAT SYSTEM IN VOLUME
We have in the past experienced significant delays in the
introduction, volume production and sales of our new systems and related feature
enhancements. We have experienced significant delays in the introduction
of our VS2000 and Kalos series testers as well as certain enhancements to our
existing testers. These delays have been primarily related to our inability to
successfully complete product hardware and software engineering within the time
frame originally anticipated, including design errors and redesigns of ICs. As a
result, some customers have experienced significant delays in receiving and
using our testers in production. We cannot be certain that these or additional
difficulties will not continue to arise or that delays will not continue to
materially adversely affect customer relationships and future sales. Moreover,
we cannot be certain that we will not encounter these or other difficulties that
could delay future introductions or volume production or sales of our systems or
enhancements and related software tools. We have incurred and may continue to
incur substantial unanticipated costs to ensure the functionality and
reliability of our testers and to increase feature sets. If our systems continue
to have reliability, quality or other problems, or the market perceives our
products to be feature deficient, we may suffer reduced orders, higher
manufacturing costs, delays in collecting accounts receivable and higher
service, support and warranty expenses, or inventory write-offs, among other
effects. Our failure to have a competitive tester and related software tools
available when required by a semiconductor manufacturer could make it
substantially more difficult for us to sell testers to that manufacturer for a
number of years. We believe that the continued acceptance, volume production,
timely delivery and customer satisfaction of our newer digital, mixed signal and
non-volatile memory testers are of critical importance to our future financial
results. As a result, our inability to correct any technical, reliability, parts
shortages or other difficulties associated with our systems or to manufacture
and ship the systems on a timely basis to meet customer requirements could
damage our relationships with current and prospective customers and would
continue to materially adversely affect our business, financial condition and
results of operations.
WE MAY NOT BE ABLE TO DELIVER CUSTOM HARDWARE OPTIONS AND SOFTWARE APPLICATIONS
TO SATISFY SPECIFIC CUSTOMER NEEDS IN A TIMELY MANNER
We must develop and deliver customized hardware and software to meet
our customers' specific test requirements. We must be able to manufacture these
systems on a timely basis. Our test equipment may fail to meet our customers'
technical or cost requirements and may be replaced by competitive equipment or
an alternative technology solution. Our inability to meet such hardware and
software requirements could impact our ability to recognize revenue on the
related equipment. Our inability to provide a test system that meets requested
performance criteria when required by a device manufacturer would severely
damage our reputation with that customer. This loss of reputation may make it
substantially more difficult for us to sell test systems to that manufacturer
for a number of years.
WE RELY ON SPIROX CORPORATION FOR A SIGNIFICANT PORTION OF OUR REVENUES AND THE
TERMINATION OF THIS DISTRIBUTION RELATIONSHIP WOULD ADVERSELY AFFECT OUR
BUSINESS
One distributor, Spirox Corporation, a distributor in Taiwan that sells
to end-user customers in Taiwan and China, accounted for 39%, 34% and
30% of our net sales in fiscal 1999, 1998, and 1997, respectively. The
semiconductor industry is highly concentrated, and a small number of
semiconductor device manufacturers and contract assemblers account for a
substantial portion of the purchases of semiconductor test equipment generally,
including our test equipment. Our top ten customers have recently accounted for
at least a majority of our net sales. Consequently, our business, financial
condition and results of operations could be materially adversely affected by
the loss of or any reduction in orders by Spirox or any other significant
customer, including losses, the potential for reductions in orders by assembly
and tester service companies which that customer may utilize or reductions due
to continuing or other technical, manufacturing or reliability problems with our
products or continued slow-downs in the semiconductor industry or in other
industries that manufacture products utilizing semiconductors. Our ability to
maintain or increase sales levels will depend upon:
- our ability to obtain orders from existing and new customers;
- our ability to manufacture systems on a timely and cost-effective
basis;
- our ability to complete the development of our new hardware and
software products;
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- our customers' financial condition and success;
- general economic conditions; and
- our ability to meet increasingly stringent customer performance and
other requirements and shipment delivery dates.
OUR LONG AND VARIABLE SALES CYCLE DEPENDS UPON FACTORS OUTSIDE OF OUR CONTROL
AND COULD CAUSE US TO EXPEND SIGNIFICANT TIME AND RESOURCES PRIOR TO EARNING
ASSOCIATED REVENUES
Sales of our systems depend in part upon the decision of semiconductor
manufacturers to develop and manufacture new semiconductor devices or to
increase manufacturing capacity. As a result, sales of our testers are subject
to a variety of factors we cannot control. 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, our systems have lengthy sales cycles during which we may
expend substantial funds and management effort to secure a sale, subjecting us
to a number of significant risks. We cannot be certain that we will be able to
maintain or increase net sales in the future or that we will be able to retain
existing customers or attract new ones.
IF WE ENGAGE IN ACQUISITIONS, WE WILL INCUR A VARIETY OF COSTS, AND THE
ANTICIPATED BENEFITS OF THE ACQUISITIONS MAY NEVER BE REALIZED
We have developed in significant part through mergers and acquisitions
of other companies and businesses. We intend in the future to pursue additional
acquisitions of complementary product lines, technologies and businesses. We may
have to issue debt or equity securities to pay for future acquisitions, which
could be dilutive. We have also incurred and may continue to incur certain
liabilities or other expenses in connection with acquisitions, which have and
could continue to materially adversely affect our business, financial condition
and results of operations.
In addition, acquisitions involve numerous other risks, including:
- difficulties assimilating the operations, personnel, technologies
and products of the acquired companies;
- diversion of our management's attention from other business
concerns;
- risks of entering markets in which we have no or limited experience;
and
- the potential loss of key employees of the acquired companies.
For these reasons, we cannot be certain what effect future acquisitions may have
on our business, financial condition and results of operations.
CHANGES TO FINANCIAL ACCOUNTING STANDARDS MAY EFFECT OUR REPORTED RESULTS
OF OPERATIONS
We prepare our financial statements to conform with generally accepted
accounting principles, or GAAP. GAAP are subject to interpretation by the
American Institute of Certified Public Accountants, the SEC and various bodies
formed to interpret and create appropriate accounting policies. A change in
those policies can have a significant effect on our reported results and may
even affect our reporting of transactions completed before a change is
announced. Accounting policies affecting many other aspects of our business,
including rules relating to purchase and pooling-of-interests accounting for
business combinations, in-process research and development charges, employee
stock purchase plans and stock option grants have recently been revised or are
under review. Changes to those rules or the questioning of current practices may
have a material adverse effect on our reported financial results or on the way
we conduct our business. In addition, our preparation of financial statements in
accordance with GAAP requires that we make estimates and assumptions that affect
the recorded amounts of assets and liabilities, disclosure of those assets and
liabilities at the date of the financial statements and the recorded amounts of
expenses during the reporting period. A change in the facts and circumstances
surrounding those estimates could result in a change to our estimates and could
impact our future operating results.
17
<PAGE>
OUR EXECUTIVE OFFICERS AND CERTAIN KEY PERSONNEL ARE CRITICAL TO OUR BUSINESS
Our future operating results depend substantially upon the continued
service of our executive officers and key personnel, none of whom are bound by
an employment or non-competition agreement. Our future operating results also
depend in significant part upon our ability to attract and retain qualified
management, manufacturing, technical, engineering, marketing, sales and support
personnel. Competition for personnel is intense, and we cannot ensure success in
attracting or retaining 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 us to hire personnel over time. Our business, financial condition
and results of operations could be materially adversely affected by the loss of
any of our key employees, by the failure of any key employee to perform in his
or her current position, or by our inability to attract and retain skilled
employees.
WE HAVE A NEW EXECUTIVE MANAGEMENT TEAM AND IF THEY ARE UNABLE TO WORK TOGETHER
EFFECTIVELY, OUR BUSINESS MAY BE HARMED
In July 1999, we announced the appointment of Dr. Graham J. Siddall as
our new President and Chief Executive Officer. Dr. Siddall joined Credence from
KLA-Tencor where he was Executive Vice President of the Wafer Inspection Group.
We have experienced several other transitions in executive management in recent
years. In conjunction with the departure in December 1998 of our former Chairman
and Chief Executive Officer, our Board of Directors appointed David A. Ranhoff,
Executive Vice President, and Dennis P. Wolf, Executive Vice President, Chief
Financial Officer and Secretary, jointly to the office of the President. The
Board also named a new Chairman, Dr. William Howard, Jr., and began a search for
a new chief executive officer which culminated in the appointment of Dr.
Siddall. These transitions have placed significant demands on our operational,
administrative and financial staff and we anticipate that these demands will not
decline in the near term. We cannot be certain that such transitions will not
have a material adverse effect on our business, financial condition and results
of operations, or the way we are perceived by the market or on the price of our
common stock.
OUR INTERNATIONAL BUSINESS EXPOSES US TO ADDITIONAL RISKS
International sales accounted for approximately 64%, 69% and 70% of our
total net sales for the fiscal years 1999, 1998 and 1997, respectively. As a
result, we anticipate that international sales will continue to account for a
significant portion of our 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.
We are also subject to the risks associated with the imposition of
domestic and foreign legislation and regulations relating to the import or
export of semiconductor equipment. We cannot predict whether the import and
export of our products will be subject to quotas, duties, taxes or other charges
or restrictions imposed by the United States or any other country in the future.
Any of these factors or the adoption of restrictive policies could have a
material adverse effect on our business, financial condition or results of
operations. Net sales to the Asia Pacific region accounted for approximately
55%, 60% and 66% of our total net sales in the fiscal years 1999, 1998 and 1997,
and thus, demand for our products is subject to the risk of economic instability
in that region and could continue to be materially adversely affected. Countries
in the Asia Pacific region, including Korea and Japan, have experienced
weaknesses in their currency, banking and equity markets in the recent past.
These weaknesses could
18
<PAGE>
continue to adversely affect demand for our products, the availability and
supply of our product components, and our consolidated results of operations.
The recent Asian financial crisis contributed to a widespread uncertainty and a
slowdown in the semiconductor industry. This slowdown resulted in reduced
spending on semiconductor capital equipment, including ATE, and has had, and may
in the future have, a material adverse effect on our product backlog, balance
sheet and results of operations.
In addition, one of our major customers, Spirox Corporation, is a
Taiwanese distributor. This subjects a significant portion of our receivables
and future revenues to the risks associated with doing business in a foreign
country, including political and economic instability, currency exchange rate
fluctuations and regulatory changes. Disruption of business in Asia caused by
the previously mentioned factors could continue to have a material impact on the
Company's business, financial condition or results of operations.
IF THE PROTECTION OF PROPRIETARY RIGHTS IS INADEQUATE, OUR BUSINESS COULD BE
HARMED
We attempt to protect our intellectual property rights through patents,
copyrights, trademarks, maintenance of trade secrets and other measures,
including entering into confidentiality agreements. However, we cannot be
certain that others will not independently develop substantially equivalent
intellectual property or that we can meaningfully protect our intellectual
property. Nor can we be certain that our patents will not be invalidated, deemed
unenforceable, circumvented or challenged, or that the rights granted thereunder
will provide us with competitive advantages, or that any of our pending or
future patent applications will be issued with claims of the scope we seek, if
at all. Furthermore, we cannot be certain that others will not develop similar
products, duplicate our products or design around our patents, or that foreign
intellectual property laws, or agreements into which we have entered will
protect our intellectual property rights. Inability or failure to protect our
intellectual property rights could have a material adverse effect upon our
business, financial condition and results of operations. We have been involved
in extensive, expensive and time-consuming reviews of, and litigation
concerning, patent infringement claims.
OUR BUSINESS MAY BE HARMED IF WE ARE FOUND TO INFRINGE PROPRIETARY RIGHTS OF
OTHERS
We have at times been notified that we may be infringing intellectual
property rights of third parties and we have litigated patent infringement
claims in the past. We expect to continue to receive notice of such claims in
the future. In July 1998, inTEST IP Corporation, or inTEST, alleged in writing
that one of our products is infringing a patent held by inTEST. We may also be
obligated to other third parties relating to this allegation. We believe we have
meritorious defenses to the claims. However, we cannot be certain of success in
defending this patent infringement claim or claims for indemnification resulting
from infringement claims.
Some of our customers have received notices from Mr. Jerome Lemelson
alleging that the manufacture of semiconductor products and/or the equipment
used to manufacture semiconductor products infringes certain patents issued to
Mr. Lemelson. We have been notified by customers that we may be obligated to
defend or settle claims that our products infringe Mr. Lemelson's patents, and
that if it is determined that the customers infringe Mr. Lemelson's patents,
that customer intends to seek indemnification from us for damages and other
related expenses.
We cannot be certain of success in defending current or future patent
infringement claims or claims for indemnification resulting from infringement
claims. Our business, financial condition and results of operations could be
materially adversely affected if we must pay damages to a third party or suffer
an injunction or if we expend significant amounts in defending any such action,
regardless of the outcome. With respect to any claims, we may seek to obtain a
license under the third party's intellectual property rights. We cannot be
certain, however, that the third party will grant us a license on reasonable
terms or at all. We could decide, in the alternative, to continue litigating
such claims. Litigation has been and could continue to be extremely expensive
and time consuming, and could materially adversely affect our business,
financial condition or results of operations, regardless of the outcome.
19
<PAGE>
OUR HIGH CAPITAL EXPENDITURES MAY REQUIRE US TO OBTAIN ADDITIONAL FINANCING
WHICH MAY NOT BE AVAILABLE ON TERMS SATISFACTORY TO US
Developing and manufacturing new ATE systems and enhancements is highly
capital intensive. In order to be competitive, we must make significant
investments in, among other things:
- capital equipment;
- expansion of operations;
- systems;
- procedures and controls;
- research and development and worldwide training; and
- customer service and support.
We may be unable to obtain additional financing in the future on
acceptable terms, or at all. In connection with our issuance in September 1997
of convertible promissory notes, we currently have outstanding $96.6 million of
these notes which resulted in a ratio of long-term debt to total capitalization
at October 31, 1999 of approximately 35%. As a result, our principal and
interest obligations are substantial. The degree to which we are leveraged could
materially adversely affect our ability to obtain financing for working capital,
acquisitions or other purposes and could make our business more vulnerable to
industry downturns and competitive pressures. Our ability to meet debt service
obligations will be dependent upon our future performance, which will be subject
to financial, business and other factors affecting our operations, many of which
are beyond our control. If we raise additional funds by issuing equity
securities, our stockholders could be significantly diluted. We may exchange
notes for shares of our common stock or may refinance, exchange or redeem the
notes, which may also dilute stockholders and may make it difficult for us to
obtain additional future financing, if needed.
If we are unable to obtain adequate funds, we may be required to
restructure or refinance our debt or to delay, scale back or eliminate certain
of our research and development, acquisition or manufacturing programs. We may
also need to obtain funds through arrangements with partners or others and we
may be required to relinquish rights to certain of our technologies or potential
products or other assets.
A VARIETY OF FACTORS MAY CAUSE THE PRICE OF OUR STOCK TO BE VOLATILE
In recent years, the stock market in general, and the market for shares
of high-tech companies in particular, including ours, have
experienced extreme price fluctuations, which have often been unrelated to the
operating performance of affected companies. For example, in fiscal 1998, the
price of our common stock ranged from a high of $35.25 to a low of $9.31. In
fiscal 1999, the price of our common stock ranged from a high of $49.88 to a low
of $14.38. The market price of our common stock is likely to continue to
fluctuate significantly in the future, including fluctuations unrelated to our
performance.
We believe that fluctuations of our stock price may be caused by a
variety of factors, including:
- announcements of developments related to our business;
- fluctuations in our financial results;
- general conditions or developments in the semiconductor and capital
equipment industry and the general economy;
- sales or purchases of our common stock in the marketplace;
- announcements of our technological innovations or new products or
enhancements or those of our competitors;
- developments in patents or other intellectual property rights;
- developments in our relationships with 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.
20
<PAGE>
WE ARE SUBJECT TO ANTI-TAKEOVER PROVISIONS THAT COULD DELAY OR PREVENT AN
ACQUISITION OF OUR COMPANY
Provisions of our amended and restated certificate of incorporation,
shareholders rights plan, equity incentive plans, bylaws and of Delaware law may
discourage transactions involving a change in corporate control. In addition to
the foregoing, our classified board of directors, the stockholdings of our
officers, directors and persons or entities that may be deemed affiliates, the
adoption of our shareholder rights plan and the ability of our board of
directors to issue preferred stock without further stockholder approval could
have the effect of delaying, deferring or preventing a third party to acquire us
and may adversely affect the voting and other rights of holders of our common
stock.
ITEM 2. PROPERTIES
We maintain our corporate headquarters in Fremont, California. This
leased facility, comprised of three buildings totalling 142,000 square feet,
contains corporate administration, sales, marketing, applications, engineering,
local customer support and memory products manufacturing. Approximately 26,000
square feet of one of the buildings has been subleased until February 2005 when
the lease on this facility expires. Our digital and mixed signal manufacturing
facilities, as well as additional marketing, applications, engineering and
customer support functions, are located in a 180,000 square foot facility,
comprised of two buildings in Hillsboro, Oregon. The lease covering this
facility expires in March 2014. Our software business is primarily located in a
22,000 square foot facility in Beaverton, Oregon. The lease on this building
expires in August 2002. We maintain various remote sales and service offices in
the United States.
ITEM 3. LEGAL PROCEEDINGS
In July 1998, we received a written allegation from in TEST Corporation
that we were infringing on a patent held by in TEST. In addition to direct costs
and diversion of resources which may result, we may be obligated to indemnify
third parties for costs related to this allegation. We are involved in various
other claims arising in the ordinary course of business, none of which, in the
opinion of management, if determined adversely against the us, will have a
material adverse effect on our business, financial condition or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
None
21
<PAGE>
EXECUTIVE OFFICERS AND KEY EMPLOYEES
The executive officers and key employees of the Company and their ages
and positions as of January 15, 2000, are as follows:
NAME AGE POSITION
Dr. William Howard, Jr.. 58 Chairman
Dr. Graham J. Siddall... 53 President and Chief Executive Officer*
David A. Ranhoff........ 44 Executive Vice President, Chief Operating
Officer*
Dennis P. Wolf.......... 47 Executive Vice President, Chief Financial Officer
and Secretary*
George W. DeGeer........ 53 Senior Vice President, Consumer Mixed Signal
Business Line
Gary Smith.............. 53 Vice President, Low Cost Performance Business
Line
Paul Sakamoto........... 45 Vice President, Memory Products Business Line
John DiGirolamo......... 58 CEO and President of Fluence Technology, Inc.
Debbie Moberly.......... 45 Vice President, Operations
Bart Freedman........... 42 Vice President, Worldwide Field Operations
Robert E. Huston........ 58 Vice President, Test Technology
Dave O'Brien............ 43 Senior Vice President, Chief Information Officer
John R. Detwiler........ 39 Vice President, Corporate Controller
- ---------------
* Executive Officer
DR. WILLIAM HOWARD, JR., has served as a Director of the Company
since February 1995 and as Chairman since December 1998. His current term
as Director ends in 2001. Dr. Howard has been a self-employed consultant for
various semiconductor and microelectronics companies since December 1990.
From October 1987 to December 1990, Dr. Howard was a senior fellow at the
National Academy of Engineering conducting studies of technology management.
Dr. Howard held various management positions at Motorola, Inc. between 1969 and
1987, most recently as Senior Vice President and Director of Research and
Development. Dr. Howard serves on the boards of directors of BEI Electronics,
Inc., Ramtron International, Inc. and Xilinx, Inc., as well as several private
companies.
DR. GRAHAM J. SIDDALL has served as the President, Chief Executive
Officer and as a Director of the Company since July 1999. His current term as a
Director ends in 2002. Dr. Siddall joined Credence from KLA-Tencor where he had
been Executive Vice President of the Wafer Inspection Group from May 1997 to May
1999. From December 1995 until May 1997, he served as Executive Vice President
and chief operating officer of Tencor Instruments, Inc. Previously Dr. Siddall
served as Senior Vice President for the Tencor Wafer Inspection Division from
November 1994 to December 1995. He joined Tencor as a vice president in 1988.
Prior to joining Tencor, Dr. Siddall served in a number of key roles at GCA
Corporation, Hewlett Packard Laboratories and Rank Taylor Hobson.
DAVID A. RANHOFF has served as Executive Vice President and Chief
Operating Officer since November 1999. Mr. Ranhoff was Executive Vice President,
Sales and Marketing from January 1997 to November 1999, and along with Mr. Wolf,
was named to the Office of the President from December 1998 until July 1999. Mr.
Ranhoff served as Senior Vice President Sales and Marketing from July 1996 to
January 1997, as Senior Vice President, Sales, Marketing and Service from July
1995 to June 1996, as Senior Vice President, Sales and Service from August 1993
to July 1995 and as Vice President, Sales from January 1993 to August 1993. He
served as Vice President, European Operations from July 1990 to December 1992.
From March 1988 to June 1990, Mr. Ranhoff served as Managing Director of
European Operations of the Company and as National Sales Manager from July 1985
to March 1988. Prior to joining the Company, Mr. Ranhoff served for eight years
in various sales and management positions for GenRad, Inc.
22
<PAGE>
DENNIS P. WOLF has served as Executive Vice President, Chief Financial
Officer and Secretary, since he joined Credence in March of 1998 and, along with
Mr. Ranhoff, was named to the Office of the President from December 1998 until
July 1999. Prior to joining Credence, Mr. Wolf was the acting Co-Chief Executive
Officer from April 1997 to September 1997 and the Senior Vice President and
Chief Financial Officer from January 1997 to March 1998 at Centigram
Communications Corporation. Prior to joining Centigram, from October 1995 to
January 1997 Mr. Wolf was Vice President and Chief Financial Officer of Pyramid
Technology and served as Vice President and Chief Financial Officer of
Dynacraft, a National Semiconductor Company, from October 1993 to October 1995.
Additionally, he had held various executive and managerial positions at Apple
Computer from 1989 to 1993.
GEORGE W. DEGEER has served as Senior Vice President, of the Consumer
Mixed Signal Business Line since December 1998. Prior to that Mr. DeGeer was
Senior Vice President, Operations since August, 1996, as Senior Vice President,
Manufacturing, from January 1995 to August, 1996, as Vice President,
Manufacturing from October 1993 to January 1995, as Director of Manufacturing,
from July 1992 to October 1993, and as Vista Manufacturing Manager from January
1991 to July 1992. Prior to joining the Company, Mr. DeGeer held various
manufacturing management positions at Tektronix for more than twenty years.
GARY SMITH has served as Vice President, of the Low Cost Performance
Business Line since December 1998. Prior to that Mr. Smith was Marketing
Director for the ValStar and SC Series products from February 1996 to December
1998. Prior to joining Credence, from September 1985 to February 1996 Mr. Smith
has held various senior management positions in sales, marketing, and operations
at Schlumberger Technologies, Inc. Mr. Smith possesses over 30 years of
experience in engineering, and management in high technology industries.
PAUL SAKAMOTO has served as Vice President, of the Memory Products
Business Line since November 1998. Prior to this position, Mr. Sakamoto served
as the Vice President of the North American Sales organization from February
1997 to November 1998. He was Vice President of the Customer Marketing function
and Vice President of Digital Product Marketing between February 1995 and
February 1997. Prior to joining Credence, Mr. Sakamoto held various sales and
engineering positions including Vice President of Sales at Micro Component
Technology, Director of Sales Development at Megatest Corporation and six years
of experience at Intel Corporation. Mr. Sakamoto has over 22 years of experience
in the semi-conductor and semiconductor equipment industry.
JOHN DIGIROLAMO has served as Chief Executive Officer and President of
Fluence Technology, Inc. since October 1997. From July 1997 to October 1997, Mr.
DiGirolamo served as Vice President of Worldwide Sales and Marketing for
Fluence. Mr. DiGirolamo served as Director of Sales at Summit Design, Inc., from
May 1996 to July 1997. Mr. DiGirolamo served at the Company as Vice President,
Worldwide Sales from June 1995 to April 1996. Prior to joining the Company in
1995, Mr. DiGirolamo held a variety of senior level positions within the
industry, including a tenure at GenRad, Inc. as General Manager and Director of
Sales & Marketing for Western operations. Mr. DiGirolamo possesses over 33 years
of experience in the semiconductor equipment and test industry.
DEBRA MOBERLY has served as Vice President, Operations since December
1998. Prior to that Ms. Moberly was Vice President, Manufacturing from February
1996 to December 1998, as Director, Marketing Operations from December 1994 to
February 1996, and Director, Materials from May 1993 to December 1994. Ms.
Moberly joined the Company in January 1991 as Manufacturing Manager, joining the
Company from Tektronix where she held various positions of increasing
responsibility in the manufacturing function for more than seventeen years.
ROBERT E. HUSTON has served as Vice President, Test Technology since
August 1992. From February 1983 to August 1992 Mr. Huston was a co-founder and
fellow of Trilium Corporation and was the architect of the Micromaster series of
test systems. Mr. Huston was a fellow at LTX from August 1988 to August 1992,
developing high frequency test strategies. He served in various senior
engineering positions beginning in 1967 at Fairchild working with a team to
develop the LSI test system.
BART FREEDMAN has served as our Vice President, Worldwide Field
Operations since January 2000. From October 1996 to January 2000, he was our
Vice President of Asian Operations. From 1994 to 1996, Mr. Freedman served as
Vice President of North American Sales for Schlumberger. From 1985 to 1994, Mr.
Freedman held a variety of senior level positions at Tektronix, Inc., including
U.S. Regional Sales Manager for the Semiconductor Test Systems Division that we
bought in December 1990. From 1980 through 1985, Mr. Freedman was a design
engineer and applications manager for Teradyne, Inc.
23
<PAGE>
DAVID O'BRIEN has served as Senior Vice President, Chief Information
Officer since February 1999. Prior to that Mr. O'Brien was Senior Vice
President, Information Technology from February 1999 to July 1995. Mr. O'Brien
served as Senior Vice President, Marketing, from May 1994 to July 1995, as
Senior Vice President, Engineering from August 1993 to May 1994 and as Vice
President, Engineering from July 1992 to August 1993. Mr. O'Brien served as Vice
President, Beaverton Business Unit from October 1991 to July 1992; Vice
President, Marketing-Vista from August 1991 to September 1991; Vice President
Software Products from October 1990 to July 1991; Vice President, Engineering
from July 1987 to September 1990; Director of Engineering, from October 1986 to
June 1987; and Software Engineering Manager of the Company from January 1983 to
September 1986.
JOHN R. DETWILER has served as Vice President, Corporate Controller
since April 1999. Mr. Detwiler joined Credence from Silicon Wireless, Ltd., a
start-up in the wireless infrastructure products business, where he was the Vice
President of Finance from April 1998 to March 1999. From August 1992 to March
1998, Mr. Detwiler was at Madge Networks N.V., a developer and manufacturer of
LAN and WAN equipment, where he was the Senior Director of Finance. Prior to
Madge, Mr. Detwiler held positions of increasing responsibility in the audit and
consulting practices of Price Waterhouse LLP in Denver, Saudi Arabia and London.
Mr. Detwiler serves on the board of directors of Credence Capital Remarketing
Corporation.
Officers serve at the discretion of the Board of Directors, until their
successors are appointed. There are no family relationships among executive
officers or directors of the Company.
24
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on the Nasdaq National Market
under the symbol CMOS. High and low stock prices for the last two fiscal years
were:
<TABLE>
<CAPTION>
1999 1998
---------------------------------------- ----------------------------------------------
QUARTER ENDED HIGH LOW HIGH LOW
- ------------------- --------------- ---------------------- ---------------------- ---------------------
<S> <C> <C> <C> <C>
January 31.............. $29.88 $14.38 $35.25 $18.13
April 30................ 30.88 17.88 34.00 24.87
July 31................. 41.50 24.13 28.50 16.87
October 31.............. 49.88 36.88 20.56 9.31
</TABLE>
There were approximately 216 stockholders of record at December 10,
1999. To date, the Company has not declared or paid any cash dividends on its
common stock. The Company does not anticipate paying any dividends on its common
stock in the foreseeable future and, under its current credit agreements, such
payment would require prior bank approval.
ITEM 6. SELECTED FINANCIAL DATA
The comparability of the following selected financial data is affected
by a variety of factors, and this data is qualified by reference to and should
be read in conjunction with the consolidated financial statements and notes
thereto elsewhere in this Annual Report on Form 10-K and the Management's
Discussion and Analysis of Financial Condition and Results of Operations.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
--------------------------------------------------------------------------------
(in thousands, except per share amounts) 1999 1998 1997 1996 1995
--------------- -------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Net sales....................................... $197,183 $216,803 $204,092 $238,788 $176,805
Operating income (loss)......................... (4,013) (42,572) 15,063 54,334 43,817
Income (loss) before taxes...................... (3,752) (41,270) 18,230 58,267 46,649
Net income (loss) before extraordinary items.... (2,455) (26,282) 10,693 37,703 30,354
Net income (loss)............................... (809) (26,282) 10,693 37,703 30,354
Net income (loss) per basic share............... $ (0.04) $ (1.22) $ 0.49 $ 1.75 $ 1.50
Net income (loss) per diluted share............. $ (0.04) $ (1.22) $ 0.47 $ 1.72 $ 1.45
Consolidated Balance Sheet Data:
Working capital................................. $166,727 $184,606 $250,336 $144,623 $126,395
Total assets.................................... 340,420 306,189 358,141 233,042 186,593
Long-term debt.................................. 96,610 115,000 115,000 -- --
Retained earnings............................... 57,348 58,157 94,722 84,029 46,326
Stockholders' equity............................ 181,408 150,017 204,911 189,782 150,286
</TABLE>
25
<PAGE>
QUARTERLY 1999
<TABLE>
<CAPTION>
1999 Quarter Ended
---------------------------------------------------------------
(in thousands, except per share amounts) January 31, April 30, July 31, October 31,
---------------- ------------ ------------- ----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales.......................................................... $ 26,490 $38,100 $52,378 $80,215
Gross margin....................................................... 11,214 19,099 27,552 44,113
Operating income (loss)............................................ (10,020) (10,150) 3,737 12,420
Income (loss) before taxes......................................... (10,321) (9,910) 3,731 12,748
Net income (loss) before extraordinary items....................... (6,554) (6,331) 2,364 8,066
Net income (loss).................................................. (6,554) (5,173) 2,852 8,066
Net income (loss) per basic share before extraordinary items....... $ (0.32) $(0.30) $ 0.11 $ 0.37
Net income (loss) per basic share ................................. $ (0.32) $(0.25) $ 0.13 $ 0.37
Net income (loss) per diluted share before extraordinary items..... $ (0.32) $(0.30) $ 0.11 $ 0.35
Net income (loss) per diluted share................................ $ (0.32) $(0.25) $ 0.13 $ 0.35
QUARTERLY 1998
1998 Quarter Ended
--------------------------------------------------------------
(in thousands, except per share amounts) January 31, April 30, July 31, October 31,
--------------- ------------ --------------- --------------
(UNAUDITED)
Net sales.......................................................... $82,375 $ 74,660 $ 37,322 $22,446
Gross margin....................................................... 46,937 42,996 (531) 2,045
Operating income (loss)............................................ 13,138 12,832 (49,311) (19,231)
Income before taxes................................................ 14,096 13,032 (49,318) (19,080)
Net income (loss).................................................. 9,191 8,787 (33,586) (10,674)
Net income (loss) per basic share.................................. $ 0.42 $ 0.41 $ (1.55) $ (0.51)
Net income (loss) per diluted share................................ $ 0.41 $ 0.40 $ (1.55) $ (0.51)
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
In addition to the historical information contained in this document,
the discussion in this Annual Report on Form 10-K contains forward-looking
statements, within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
that involve risks and uncertainties, such as statements of the Company's plans,
objectives, expectations and intentions. The cautionary statements made in this
Annual Report on Form 10-K should be read as being applicable to all related
forward-looking statements whenever they appear in this Annual Report on Form
10-K. The Company's actual results could differ materially from those discussed
herein. Factors that could cause or contribute to such differences include those
discussed below as well as those cautionary statements and other factors set
forth in "Risk Factors" and elsewhere herein.
Our sales, gross margins and operating results have in the past
fluctuated significantly and will, in the future, fluctuate significantly
depending upon a variety of factors. The factors that have caused and will
continue to cause our results to fluctuate include cyclicality or downturns in
the semiconductor market and the markets served by our customers, the timing of
new product announcements and releases by us or our competitors, market
acceptance of new products and enhanced versions of our products, manufacturing
inefficiencies associated with the start up of new products, changes in pricing
by us, our competitors, customers or suppliers, the ability to volume produce
systems and meet customer requirements, inventory obsolescence, patterns of
capital spending by customers, delays, cancellations or reschedulings of orders
due to customer financial difficulties or otherwise, expenses associated with
acquisitions and alliances, product discounts, 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, natural disasters, political and
economic instability, regulatory changes and outbreaks of hostilities. Due to
these and additional factors, historical results and percentage relationships
discussed in this Annual Report on Form 10-K will not necessarily be indicative
of the results of operations for any future
26
<PAGE>
period. For a further discussion of our business, and risk factors affecting
our results of operations, please refer to the section entitled "Risk Factors"
included elsewhere herein.
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage
of net sales for the fiscal years indicated:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED OCTOBER 31,
----------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net sales....................................... 100% 100% 100%
Cost of goods sold--on net sales................. 48 45 44
Cost of goods sold--special charges.............. -- 13 --
----------- ----------- -----------
Gross margin.................................. 52 42 56
----------- ----------- -----------
Operating expenses:
Research and development...................... 20 22 18
Selling, general and administrative........... 30 30 27
In-process research and development........... -- 1 3
Special charges............................... 4 9 --
----------- ----------- -----------
Total operating expenses................. 54 62 48
----------- ----------- -----------
Operating income (loss)......................... (2)% (20)% 8%
=========== =========== ===========
</TABLE>
1999 VS 1998
NET SALES. Net sales consist of revenues from the sale of systems,
upgrades, spare parts, maintenance contracts and software. Net sales declined 9%
to $197.2 million in fiscal 1999 from $216.8 million in fiscal 1998. Our net
sales increased from $26.5 million in the first quarter of fiscal 1999 to $80.2
million for the fourth quarter of fiscal 1999. This was in sharp contrast to
1998 when our net sales decreased from $82.4 million in the first quarter of
fiscal 1998 to $22.4 million for the fourth quarter of fiscal 1998. During
fiscal 1999, our net sales improved each sequential quarter because of three
principal factors:
- a significant increase in the worldwide demand for semiconductor
ATE;
- improved business and economic conditions in Asia and particularly
in Taiwan; and
- the launch of three major products: the Valstar high-performance
digital tester, the Quartet high-performance mixed signal tester and
the Kalos memory tester.
These factors resulted in our experiencing increasing net sales
activity through fiscal 1999. The improved worldwide demand for semiconductor
ATE has led to customers purchasing for increased capacity and the launch of our
new products has led to some customers purchasing products with new features or
capabilities.
International net sales accounted for approximately 64% and 69% of
total net sales in fiscal 1999 and 1998, respectively. Our net sales to the Asia
Pacific region accounted for approximately 55% and 60% of total net sales in
fiscal 1999 and 1998, respectively, and thus are subject to the risk of economic
instability in that region that materially adversely affected the demand for our
products in 1998. Capital markets in Korea and other areas of Asia have been
highly volatile, resulting in economic instabilities. These instabilities may
reoccur or worsen, which could materially adversely affect demand for our
products.
Our net sales by product line in fiscal 1999 and 1998 consisted of:
1999 1998
------------ -----------
------------ -----------
Mixed-Signal........................... 65% 66 %
Logic.................................. 16 18
Memory................................. 7 4
Service and software................... 12 12
------------ -----------
Total.................................. 100% 100 %
============ ===========
27
<PAGE>
The increase in the memory percentage and the high percentage of net
sales attributable to mixed-signal products is principally derived from the
sales of the new Kalos and Quartet products. Revenues from software were not
material to our operations in fiscal 1999 and 1998, representing less than 4% of
our net sales in each period.
GROSS MARGIN. Our gross margin as a percentage of net sales increased
to 51.7% in fiscal 1999 from 42.2% in fiscal 1998. The increase in 1999 was due
primarily to relatively low gross margins in 1998 attributable to the special
charges taken in that year. We recorded special charges to cost of goods sold in
1998 totaling $28.4 million, consisting primarily of write-offs for excess or
obsolete inventory, as more fully described below. Additionally, gross margins
were negatively impacted due to lower average selling prices caused by increased
competition in the markets the Company serves and due to inefficiencies caused
by the lower manufacturing volumes.
RESEARCH AND DEVELOPMENT. Research and development expenses as a
percentage of net sales were 19.7% and 21.9%, in fiscal 1999 and 1998,
respectively. R&D expenses declined in absolute dollars to $38.9 million in
fiscal 1999 from $47.5 million in fiscal 1998, reflecting lower investments in
the development of new products, and enhancements of existing product lines. We
restructured our business in the third and fourth quarters of fiscal 1998 in
response to a major downturn in the business at that time. As a result of that
industry downturn, we downsized our operations including reduced headcount,
reduced and delayed projects including facility expansions and certain research
and development projects. We currently intend to continue to invest significant
resources in the development of new products and enhancements for the
foreseeable future and would expect R&D expenses to be higher in absolute
dollars in fiscal 2000 than those recorded in fiscal 1999.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative, or SG&A, expenses decreased to $58.7 million in fiscal 1999 from
$64.2 million in fiscal 1998, a decrease of 8.6%. The decrease in absolute
dollars in fiscal 1999 resulted primarily from our downsizing which occurred in
the latter half of fiscal 1998. We restructured our business in the third and
fourth quarters of fiscal 1998 in response to a major downturn in the business
at that time. As a result of that industry downturn, we downsized our operations
including reduced headcount, reduced and delayed projects including facility
expansions. During early fiscal 1999, we undertook a project to replace a
majority of our financial, manufacturing, distribution, planning and control
systems with the R/3 system from SAP America, Inc. This system became
operational in June 1999. In September 1999, we relocated our Oregon operations
to a newly constructed facility in Hillsboro, Oregon. Because of these and other
investments, we anticipate that SG&A expenses will be higher in absolute dollars
in fiscal 2000 than those recorded in fiscal 1999.
IN-PROCESS RESEARCH AND DEVELOPMENT. In September 1999, we purchased
Opmaxx, Inc. for $8.0 million in cash and the assumption of liabilities and the
conversion of employee stock options worth $0.6 million. Additionally, we agreed
to make payments to the common shareholders of Opmaxx in an amount equal to 10%
of the net receipts from sales of the Opmaxx products from September 1999
through December 31, 2003. In connection with this acquisition, we recognized
$0.9 million of acquired in-process research and development, or IPR&D. The
remaining $7.7 million has been capitalized, of which $7.5 million is for
purchased technology and other intangible assets which will be amortized ratably
over their estimated useful lives, ranging from two to five years. Opmaxx is
being integrated with our subsidiary, Fluence Technology, Inc.
Our management made certain assessments with respect to the
determination of all identifiable assets resulting from, or to be used in,
research and development activities as of the acquisition date. Each of these
activities was evaluated by both interviews and data analysis to determine our
state of development and related fair value. Our review indicated that the IPR&D
had not reached a state of technological feasibility and the underlying
technology had no alternative future use to us in other research and development
projects or otherwise. In the case of IPR&D, fair values of the corresponding
technologies were determined using an income approach, which included a
discounted future earnings methodology. Under this methodology, the value of the
in-process technology is comprised of the total present value of the anticipated
after-tax cash flows attributable to the in-process project, discounted to net
present value, taking into account the uncertainty surrounding the successful
development of the purchased IPR&D.
The IPR&D acquired from Opmaxx consists of products and projects
related to analog and mixed-signal self test. These products and projects are
aimed at the development of design verification and sensitivity analysis, design
fault coverage, test evaluation and optimization. We estimated that
approximately 55% of the research and development effort, based on time spent
and complexity, had been completed at the date of the acquisition. The
significant work remaining to complete the current versions of the products was
estimated to take approximately 8 engineering person years, at a cost of
approximately $1 million and be completed by the end of fiscal 2000.
28
<PAGE>
SPECIAL CHARGES. In the second quarter of fiscal 1999, we recorded
special charges totaling $6.2 million, of which $0.3 million was for employee
severance and $5.9 million was for abandoned facilities. These charges were
recorded as a result of our response to a major downturn in the business outlook
for the ATE and related semiconductor and semiconductor equipment industries at
that time as well as the decision to relocate our Oregon operations from a
facility in Beaverton to a newly constructed facility in Hillsboro, Oregon.
In the fourth quarter of fiscal 1999, we recorded special charges
totaling $1.3 million. This charge included expenses related to the Opmaxx
acquisition of $0.6 million as well as the $0.7 million write-down of certain
intangible assets from another acquisition in the integration of Opmaxx with
Fluence.
EXTRAORDINARY GAIN--EXTINGUISHMENT OF DEBT. In fiscal 1999, we recorded
a pre-tax extraordinary gain of $2.6 million for the retirement of $18.4 million
of our convertible subordinated notes in exchange for 603,000 shares of our
common stock held in treasury.
INTEREST INCOME. We generated interest income of $6.6 million and $8.5
million in fiscal 1999 and 1998, respectively. The decrease was due to lower
average cash and investment balances in 1999 as compared to 1998. These lower
average balances were the result of our net losses in fiscal 1998 as well as
$32.8 million dispersed for the repurchase of our common stock during 1998.
INTEREST AND OTHER EXPENSES. Interest and other expenses decreased to
$6.4 million in fiscal 1999 from $7.2 million in fiscal 1998, primarily due to
lower interest expense on a lower outstanding balance of our convertible
subordinated notes.
INCOME TAX. Our effective tax benefit rate was 36% for fiscal 1999 and
1998. The tax benefit rate for both years was less than the combined federal and
state statutory rate primarily due to non-deductible in-process research and
development expenses.
Realization of the net deferred tax assets is dependent on our ability
to generate approximately $40,000,000 of future taxable income. Management
believes that it is more likely than not that the assets will be realized, based
on forecasted income. However, there can be no assurance that we will meet our
expectations of future income. A valuation allowance was established in both
fiscal 1999 and 1998 to offset a portion of the deferred tax assets attributable
to the in-process research and development. Due to the period over which these
tax benefits will be recognized, sufficient uncertainty exists regarding the
realizability of a portion of these assets to warrant a valuation allowance.
Management will evaluate the realizability of the deferred tax assets on a
quarterly basis and assess the need for additional valuation allowances.
1998 VS 1997
NET SALES. Net sales increased 6% to $216.8 million in fiscal 1998 from
$204.1 million in fiscal 1997; however our net sales decreased from $82.4
million in the first quarter of fiscal 1998 to $22.4 million for the fourth
quarter of fiscal 1998. The year-over-year increase over 1997 was driven
primarily by increased worldwide demand for semiconductor ATE, including our
products, during the end of calendar 1997 and including the first quarter of our
fiscal 1998. This was followed by a very significant decline in worldwide demand
for semiconductor ATE, which led to a material decline in net sales of our
products in the last three quarters of fiscal 1998. During fiscal 1998, our net
sales were also materially adversely affected by our inability to complete three
major product introductions, consisting of the ValStar high-performance digital
tester, the Quartet high-performance mixed-signal tester and the Kalos memory
tester. We believe that our existing completed products were being primarily
purchased when our customers required increased capacity and that these three
newer products, once completed, will be primarily purchased by customers seeking
increased functionality instead of or in addition to increased capacity. We
believe we will be unable to achieve a significant increase in our net sales
until either increased demand for semiconductors causes an increase in capacity
buys or until we complete our major product introductions and can generate
increased functionality buys with our newer products.
International net sales accounted for approximately 69% and 70% of
total net sales in fiscal 1998 and 1997, respectively. Our net sales to the Asia
Pacific region accounted for approximately 60% and 66% of total net sales in
fiscal 1998 and 1997, respectively, and thus are subject to the risk of economic
instability in that region that materially adversely affected the demand for our
products in 1998. Capital markets in Korea and other areas of Asia
29
<PAGE>
have been highly volatile, resulting in economic instabilities. These
instabilities may continue or worsen, which could continue to materially
adversely affect demand for our products.
GROSS MARGIN. Our gross margin as a percentage of net sales decreased
to 42.2% in fiscal 1998 from 55.9% in fiscal 1997. The decrease was due
primarily to special charges taken in fiscal 1998 as a result of a significant
decrease in net sales in the last three quarters of fiscal 1998. We recorded
special charges to cost of goods sold in 1998 totaling $28.4 million, consisting
primarily of write-offs for excess or obsolete inventory, as more fully
described below. Additionally, gross margins were negatively impacted due to
lower average selling prices caused by increased competition in the markets we
serve and due to inefficiencies caused by the lower manufacturing volumes.
RESEARCH AND DEVELOPMENT. R&D expenses as a percentage of net sales
were 21.9% and 18.3%, in fiscal 1998 and 1997, respectively. R&D expenses
increased to $47.5 million in fiscal 1998 from $37.4 million in fiscal 1997,
reflecting continued investments in the development of new products, as well as
enhancements of existing product lines.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses increased to $64.2
million in fiscal 1998 from $55.7 million in fiscal 1997, an increase of 15.3%.
The increase in fiscal 1998 resulted primarily from marketing costs associated
with new product introductions and higher operating expenses associated with
acquisitions made during 1998 and the last half of fiscal 1997, partially offset
by decreases in expenditures in the latter three quarters of fiscal 1998 as we
responded to the general downturn in the semiconductor industry. During this
period of depressed revenues, we undertook a project to replace a majority of
our financial, manufacturing, distribution, planning and control systems with
the R/3 system from SAP America, Inc. This system became operational in June
1999.
IN-PROCESS RESEARCH AND DEVELOPMENT. In June 1998, the Company
purchased from Heuristics Physics Laboratories, Inc. certain assets and assumed
certain liabilities relating to their memory self test business for $8.0 million
in cash and the assumption of $0.2 million in liabilities. Additionally, the
Company agreed to make payments to the shareholder representatives of Heuristics
in an amount equal to 10% of our net sales of products derived from the assets
acquired from Heuristics' design for test division for a period of two years
following the acquisition. The amounts paid in 1999 under this arrangement were
insignificant. In connection with the Heuristics acquisition, we recognized $2.0
million of acquired in-process research and development. The remaining $6.2
million has been capitalized, of which $5.3 million is for purchased technology
and other intangible assets which will be amortized ratably over their estimated
useful lives of five years.
Our management made certain assessments with respect to the
determination of all identifiable assets resulting from, or to be used in,
research and development activities as of the acquisition date. Each of these
activities was evaluated, by both interviews and data analysis, to determine our
state of development and related fair value. Our review indicated that the IPR&D
had not reached a state of technological feasibility and the underlying
technology had no alternative future use to us in other research and development
projects or otherwise. In the case of IPR&D, fair values of the corresponding
technologies were determined using an income approach, which included a
discounted future earnings methodology. Under this methodology, the value of the
in-process technology is comprised of the total present value of the anticipated
after-tax cash flows attributable to the in-process project, discounted to net
present value, taking into account the uncertainty surrounding the successful
development of the purchased IPR&D.
The Heuristics acquired IPR&D consists of projects related to memory
self test. These projects are aimed at the development of products that can
perform self testing of on-chip memories, self testing of off-chip memories,
automated memory test vector generation, built-in memory repair analysis and
built-in automated memory circuit repair. The Company estimated that
approximately 50% of the research and development effort, based on complexity,
had been completed at the date of the acquisition. As of October 31, 1999, the
Company has introduced memory BOST products and has largely completed
development of a memory BIST software product. The Company recorded a $0.7
million write-down of the intangible assets acquired from Heuristics in
conjunction with the integration of Opmaxx with Fluence in September 1999. This
asset write-down was made based on an assessment of the current market potential
for these products. There can be no assurance that these projects or products
will achieve technological feasibility or that the Company will be able to
successfully market these products.
30
<PAGE>
During fiscal 1997, the Company expensed $6.0 million of IPR&D
resulting from the acquisition of certain assets of Summit Design, Inc. and
Summit's wholly owned subsidiary, Test Systems Strategies, Inc. The IPR&D
associated with the Test Systems Strategies acquisition related to the
development of Standard Tester Interface Language, or STIL, tools. The STIL
development project is an ongoing program that will provide a foundation for and
be integrated into most of the Fluence software products. We believe the life of
this program will continue into the foreseeable future.
SPECIAL CHARGES. In the third and fourth quarters of fiscal 1998, we
recorded special charges totaling $48.7 million, of which $28.4 million was
classified as cost of goods sold and the balance was classified as operating
expenses. These charges were recorded as a result of our response to a major
downturn in the current and forecasted business outlook for the ATE and related
semiconductor and semiconductor equipment industries which took place during the
period. As a result of this industry downturn, we have downsized our operations
including reducing headcount, reducing the volume of products being produced and
canceling and delaying various projects, including facilities expansions and
certain research and development projects. The impact of this downturn and these
decisions is that significant amounts of our inventories, receivables, fixed
assets, prepaid expenses, investments and purchased technologies have been
impaired and certain liabilities have been incurred. As a result, we have
written down the related assets to their net realizable values and made
provision for the estimated liabilities.
Of the $48.7 million in charges, approximately $28.4 million was
charged as cost of goods sold, of which approximately $26.7 million was related
to write-down of excess or obsolete inventories. The elements of the charges
during fiscal 1998 are as follows (in thousands):
Write-down of inventories to net realizable value
(including expected losses on supplier commitments)............... $26,678
Write-down of excess fixed assets to fair value....................... 7,272
Write-down of purchased technology and investments to fair value...... 5,118
Write-off of prepaid and other current assets......................... 2,444
Excess facility costs................................................. 2,641
Provision for uncollectible receivables............................... 3,389
Employee termination benefits and accrued liabilities................. 1,196
----------
$48,738
==========
At October 31, 1998, approximately $4.8 million in accrued liabilities
related to special charges remained on our balance sheet, primarily the accrued
loss on supplier commitments of $2.4 million and approximately $1.9 million for
rent on excess facilities. The cash expenditures associated with these
obligations will occur primarily in fiscal 1999. Cash expenditures associated
with the special charges during fiscal 1998 were approximately $700,000,
relating primarily to excess facilities and to severance costs.
INTEREST INCOME. We generated interest income of $8.5 million and $4.8
million in fiscal 1998 and 1997, respectively. The increase was due to interest
earned on significantly higher average cash and investments balances provided by
the receipt of proceeds from the convertible subordinated notes issued in late
fiscal 1997.
INTEREST AND OTHER EXPENSES. Interest and other expenses increased to
$7.2 million in fiscal 1998 from $1.6 million in fiscal 1997, primarily due to
the interest expense on our convertible subordinated notes.
INCOME TAX. Our effective tax benefit rate for fiscal 1998 was 36%, and
the effective tax rate for fiscal 1997 was 41%. The effective tax benefit rate
in 1998 was reduced, and the effective tax rate in 1997 was increased by
non-deductible in-process research and development expenses.
YEAR 2000 READINESS
The Year 2000 issue results from the use in computer hardware and
software of two digits rather than four digits to define the applicable year.
When computer systems must process dates both before and after January 1, 2000,
two-digit year "fields" may create processing ambiguities that can cause errors
and system failures. The results of these errors may range from minor undetected
errors to the complete shutdown of an affected system. These errors or failures
may have limited effects, or the effects may be widespread, depending on the
computer chip, system or software, and its location and function. The effects of
the Year 2000 problem are exacerbated because of the interdependence of computer
and telecommunications systems in the United States and throughout the world.
31
<PAGE>
Because of this interdependence, the failure of one system may lead to the
failure of many other systems, even though the other systems are themselves Year
2000 compliant.
Our Board of Directors has reviewed the Year 2000 issue generally and
as it may affect our business activity. We implemented a Year 2000 plan which is
designed to cover all of our activities. The plan will be modified as
circumstances change and is monitored by our Board of Directors.
The impact of Year 2000 issues on our business will depend not only on
corrective actions that we have taken and will continue to take, but also on the
way Year 2000 issues are addressed by governmental agencies, businesses and
other third parties that provide us with services or data or receive services or
data from us, or whose financial condition or operational capability is
important to us. To reduce this exposure, we have an ongoing process of
identifying and contacting mission-critical third party vendors and other
significant third parties to determine their Year 2000 issues and results. Risks
associated with any such third parties located outside the United States may be
higher insofar as it is generally believed that non-U.S. businesses may not be
addressing their Year 2000 issues on as timely a basis as U.S. businesses.
Notwithstanding our efforts, we cannot be certain that we, mission-critical
third party vendors or other significant third parties will adequately address
their Year 2000 issues.
Although it is difficult for us to estimate the total costs of
implementing the plan, our current estimate is that such costs have been
approximately $1.9 million through October 1999 and will be approximately
$200,000 additionally thereafter. However, although we believe that our
estimates are reasonable, we cannot be certain, for the reasons stated in the
next paragraph, that the actual costs of implementing the plan will not differ
materially from the estimated costs. A significant portion of total Year 2000
project expenses is represented by existing staff that have been redeployed to
this project. We do not believe that the redeployment of existing staff will
have a material adverse effect on our business, results of operations or
financial position. Nor do we expect incremental expenses related to the Year
2000 project to materially impact operating results in any one period.
Although we are not aware of any material operational issues associated
with the Year 2000, we cannot ensure that we will not experience material
unanticipated negative consequences and/or material costs caused by undetected
errors or defects in such systems or by our failure to adequately prepare for
the results of such errors or defects, including the costs of related
litigation, if any. The impact of such consequences could have a material
adverse effect on our business, financial condition or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
In fiscal 1999, net cash provided by operating activities was $22.0
million. This cash flow from operating activities was primarily attributable to
net income before depreciation and amortization, extraordinary gain and special
charges of $27.7 million, income tax refunds of $20.0 million, offset by cash
used for net changes in the remaining operating assets and liabilities,
particularly accounts receivable.
Net cash used in investing activities during fiscal 1999 was $30.5
million. This cash was primarily used for net purchases of property and
equipment of $18.0 million, $7.6 million was used to purchase other assets
including Opmaxx, Inc. and $6.6 million was used to purchase available-for-sale
securities.
Net cash provided by financing activities in fiscal 1999 of $12.6
million was primarily due to the issuance of common stock and treasury stock in
accordance with our employee stock option and stock purchase plans. We also
recorded non-cash transactions during the year for the exchange of 603,000
shares of our common stock held in treasury for an aggregate of $18.4 million of
its convertible subordinated notes. These transactions resulted in an
extraordinary gain of $1.6 million, net of tax of $0.9 million, as well as an
increase in paid-in capital of $15.4 million.
As of October 31, 1999, our principal sources of liquidity consisted of
$141.9 million in cash, cash equivalents, and available-for-sale securities,
compared with $133.9 million at October 31, 1998. We have $20.0 million
available under its unsecured bank line of credit expiring in July 2000. At
October 31, 1999, there were no amounts outstanding under these agreements.
Borrowings are subject to our compliance with financial and other covenants. We
have outstanding long term debt of $96.6 million consisting of convertible
subordinated notes due in September 2002. Additionally, as of October 31, 1999,
we have operating leases for facilities and test and other equipment totaling
approximately $35.8 million due through 2014. We expect that our existing cash,
cash equivalents and available-for-sale investment balances, together with our
current line of credit, net proceeds for a
32
<PAGE>
public offering of our common stock in February 2000 and anticipated cash
flow from operations will satisfy its financing requirements for at least the
next 12 months.
We believe that because of the relatively long manufacturing cycles of
many of our testers and the new products we have introduced and plan to continue
to introduce, investments in inventories will continue to represent a
significant portion of working capital. Significant investments in accounts
receivable and inventories subject us to increased risks, and could continue to
materially adversely affect our business, financial condition and results of
operations. The semiconductor industry has historically been highly cyclical and
has experienced downturns, which have had a material adverse effect on the
semiconductor industry's demand for automatic test equipment, including
equipment manufactured and marketed by us. In addition, the automatic test
equipment industry is highly competitive and subject to rapid technological
change. It is reasonably possible that events related to the above factors may
occur in the near term which would cause a change to our estimate of the net
realizable value of receivables, inventories or other assets, and the adequacy
of costs accrued for warranty and other liabilities. Such changes could
materially adversely affect our business, financial condition and results of
operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates
primarily to our investment portfolio and long-term debt obligations. We
maintain a strict investment policy which ensures the safety and preservation of
our invested funds by limiting default risk, market risk, and reinvestment risk.
Our investments consist primarily of commercial paper, medium term notes, asset
backed securities, U.S. Treasury notes and obligations of U.S. Government
agencies, bank certificates of deposit, auction rate preferred securities,
corporate bonds and municipal bonds. The table below presents notional amounts
and related weighted-average interest rates by year of maturity for our
investment portfolio and long-term debt obligations (in thousands, except
percentages).
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002 2003 THEREAFTER
------------- ------------ -------------- -------------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash equivalents
Fixed rate.............. $42,379 $52,104 -- -- -- -- --
Average rate............ 5.04% 4.84 % -- -- -- -- --
Restricted cash
Fixed rate.............. $ 2,400 -- -- -- -- -- --
Average rate............ 4.11% -- -- -- -- -- --
Short term investments
Fixed rate.............. $62,777 $1,191 $38,583 -- -- -- --
Average rate............ 5.74% 8.11% 6.14% -- -- -- --
Long term investments
Fixed rate.............. $20,357 -- $3,957 $24,435 $9,517 $3,035 $9,061
Average rate............ 5.81% -- 5.24% 6.07% 6.31% 5.61% 6.76%
------------- ------------ -------------- -------------- ------------ ------------ --------------
Total investment securities $127,913 $53,295 $42,540 $24,435 $9,517 $3,035 $9,061
Average rate................. 6.76% 4.91% 6.05% 6.07% 6.31% 5.61% 6.76%
Long term debt............... $115,000 -- -- -- $96,610 -- --
Fixed rate...................
Average rate................. 5.25% -- -- -- 5.25% -- --
</TABLE>
We mitigate default risk by attempting to invest in high credit quality
securities and by constantly positioning our portfolio to respond appropriately
to a significant reduction in a credit rating of any investment issuer or
guarantor. The portfolio includes only marketable securities with active
secondary or resale markets to ensure portfolio liquidity and maintains a
prudent amount of diversification.
We have no cash flow exposure due to rate changes for our $96.6 million
convertible subordinated notes. We have a $20.0 million line of credit under
which we can borrow either at the bank's prime rate or as a function of the
LIBOR rate. As of October 31, 1999, we had no borrowings under our line of
credit.
33
<PAGE>
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
For the years ended October 31, 1999, 1998 and 1997
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors....................................................... 35
Consolidated Balance Sheets--October 31, 1999 and 1998 ................................................. 36
Consolidated Statements of Operations--Years Ended October 31, 1999, 1998 and 1997...................... 37
Consolidated Statements of Stockholders' Equity--Years Ended October 31, 1999, 1998 and 1997............ 38
Consolidated Statements of Cash Flows--Years Ended October 31, 1999, 1998 and 1997...................... 39
Notes to Consolidated Financial Statements.............................................................. 40
</TABLE>
34
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND STOCKHOLDERS
CREDENCE SYSTEMS CORPORATION
We have audited the accompanying consolidated balance sheets of
Credence Systems Corporation as of October 31, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended October 31, 1999. Our audits also
included the financial statement schedule listed in the index at item 14(a).
These financial statements and this schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and this schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Credence Systems Corporation at October 31, 1999 and 1998, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended October 31, 1999, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
/s/ ERNST & YOUNG LLP
San Jose, California
November 24, 1999
35
<PAGE>
CREDENCE SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
OCTOBER 31,
-------------------------------
ASSETS 1999 1998
--------------- --------------
<S> <C> <C>
Current assets:
Cash and cash equivalents......................................... $52,104 $48,391
Restricted cash................................................... -- 2,400
Short-term investments............................................ 39,774 62,777
Accounts receivable, net of allowance for doubtful accounts
of $3,216 and $5,409 in 1999 and 1998, respectively.............
Inventories....................................................... 41,218 37,406
Deferred income taxes............................................. 13,687 16,609
Prepaid expenses and other current assets......................... 9,424 24,067
--------------- --------------
Total current assets........................................ 227,713 225,551
Long-term investments................................................... 50,005 20,357
Property and equipment, net............................................. 43,063 41,764
Other assets, net of accumulated amortization of $4,677 and $10,102 in
1999 and 1998, respectively..........................................
19,639 18,517
--------------- --------------
Total assets................................................. $340,420 $306,189
=============== ==============
LIABILITY AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................... $23,611 $ 8,090
Accrued expenses and other liabilities.............................. 31,163 26,978
Income taxes payable................................................ 6,212 5,877
--------------- --------------
Total current liabilities..................................... 60,986 40,945
Convertible subordinated notes............................................. 96,610 115,000
Other liabilities.......................................................... 1,134 --
Minority interest.......................................................... 282 227
Commitments and contingencies
Stockholders' equity:
Preferred stock:
Authorized shares--1,000 ($0.001 par value); no shares issued.. -- --
Common stock:
Authorized shares--40,000 ($0.001 par value) issued and
outstanding shares--22,517 in 1999 and 21,723 in 1998.......... 22 21
Additional paid-in capital..................................... 135,221 112,059
Treasury stock, at cost, 702 shares in 1999 and 1,332 shares in
1998......................................................... (10,522) (19,979)
Accumulated other comprehensive loss................................. (661) (241)
Retained earnings.................................................... 57,348 58,157
--------------- --------------
Total stockholders' equity..................................... 181,408 150,017
--------------- --------------
Total liabilities and stockholders' equity..................... $340,420 $306,189
=============== ==============
</TABLE>
See accompanying notes.
36
<PAGE>
CREDENCE SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------------------------------
1999 1998 1997
-------------- ---------------- --------------
<S> <C> <C> <C>
Net sales:
Systems and upgrades................................ $172,584 $187,887 $186,264
Service, spare parts and software................... 24,599 28,916 17,828
-------------- ---------------- --------------
Total net sales............................... 197,183 216,803 204,092
Cost of goods sold--on net sales............................. 95,205 97,004 89,956
Cost of goods sold--special charges.......................... -- 28,352 --
-------------- ---------------- --------------
Gross margin................................................. 101,978 91,447 114,136
Operating expenses:
Research and development............................ 38,908 47,484 37,350
Selling, general and administrative................. 58,660 64,151 55,701
In-process research and development................. 858 1,998 6,022
Special charges..................................... 7,565 20,386 --
-------------- ---------------- --------------
Total operating expenses............................ 105,991 134,019 99,073
-------------- ---------------- --------------
Operating income (loss)...................................... (4,013) (42,572) 15,063
Interest income.............................................. 6,631 8,497 4,769
Interest and other (expenses), net........................... (6,370) (7,195) (1,602)
-------------- ---------------- --------------
Income (loss) before income tax provision (benefit) ......... (3,752) (41,270) 18,230
Income tax provision (benefit)............................... (1,372) (14,785) 7,531
-------------- ---------------- --------------
Income (loss) before minority interest....................... (2,380) (26,485) 10,699
Minority interest (benefit).................................. 75 (203) 6
Net income (loss) before extraordinary items................. $ (2,455) $ (26,282) $ 10,693
Gain on extinguishment of debt, net of $926 taxes............ 1,646 -- --
-------------- ---------------- --------------
Net income (loss)............................................ $ (809) $ (26,282) $ 10,693
============== ================ ==============
Net income (loss) per share
Basic before extraordinary item.................... $ (0.12) $ (1.22) $ 0.49
Basic extraordinary item........................... $ 0.08 -- --
-------------- ---------------- --------------
Basic ............................................. $ (0.04) $ (1.22) $ 0.49
============== ================ ==============
Diluted before extraordinary item.................. $ (0.12) $ (1.22) $ 0.47
Diluted extraordinary item......................... $ 0.08 -- --
-------------- ---------------- --------------
Diluted............................................ $ (0.04) $ (1.22) $ 0.47
============== ================ ==============
Number of shares used in computing per share amounts
Basic.............................................. 21,088 21,533 21,865
============== ================ ==============
Diluted............................................ 21,088 21,533 22,512
============== ================ ==============
</TABLE>
See accompanying notes.
37
<PAGE>
CREDENCE SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY STOCK
------------------------ PAID-IN ------------------------
SHARES AMOUNT CAPITAL SHARES AMOUNT
----------- ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Balance at October 31, 1996 ........ 21,643 $ 22 $ 105,731 -- --
Issuance of common stock under
stock option plans ........... 226 -- 1,971 -- --
Issuance of common stock under
employee purchase plan ....... 112 -- 1,564 -- --
Income tax benefit from stock plans -- -- 901 -- --
Net income ......................... -- -- -- -- --
--------- --------- --------- --------- ---------
Balance at October 31, 1997 ........ 21,981 $ 22 $ 110,167 -- --
--------- --------- --------- --------- ---------
Issuance of common stock under
stock option plans ........... 141 -- 1,260 -- --
Issuance of common stock under
employee purchase plan ........... 101 -- 2,172 -- --
Retirement of common stock ......... (500 (1) (2,512) -- --
Purchase of treasury shares ........ -- -- -- (1,332) (19,979)
Income tax benefit from stock plans -- -- 972 -- --
Net loss ........................... -- -- -- -- --
Currency translation adjustment .... -- -- -- -- --
--------- --------- --------- --------- ---------
Comprehensive income (loss) ........ -- -- -- -- --
--------- --------- --------- --------- ---------
Balance at October 31, 1998 ........ 21,723 $ 21 $ 112,059 (1,332) $ (19,979)
--------- --------- --------- --------- ---------
Issuance of common stock under
stock option plans ........... 692 1 10,659 4 61
Issuance of common stock under
employee purchase plan ....... 102 -- 1,561 23 347
Exchange of treasury shares for
convertible notes ............ -- -- 6,383 603 9,049
Income tax benefit from stock plans -- -- 4,559 -- --
Net loss ........................... -- -- -- -- --
Unrealized loss on securities ...... -- -- -- -- --
Currency translation adjustment .... -- 97 97
--------- --------- --------- --------- ---------
Comprehensive income (loss) ........ -- -- -- -- --
--------- --------- --------- --------- ---------
Balance at October 31, 1999 ........ 22,517 $ 22 $ 135,221 (702) $ (10,522)
========= ========= ========= ========= =========
ACCUMULATED
OTHER TOTAL
RETAINED COMPREHENSIVE STOCKHOLDERS'
EARNINGS LOSS EQUITY
---------- --------------- -------------------
Balance at October 31, 1996 ........ $ 84,029 -- $ 189,782
Issuance of common stock under
stock option plans ........... -- -- 1,971
Issuance of common stock under
employee purchase plan ....... -- -- 1,564
Income tax benefit from stock plans -- -- 901
Net income ......................... 10,693 -- 10,693
--------- --------- ---------
Balance at October 31, 1997 ........ $ 94,722 -- $ 204,911
--------- --------- ---------
Issuance of common stock under
stock option plans ........... -- -- 1,260
Issuance of common stock under
employee purchase plan ........... -- 2,172
Retirement of common stock ......... (10,283) -- (12,796)
Purchase of treasury shares ........ -- -- (19,979)
Income tax benefit from stock plans -- -- 972
Net loss ........................... (26,282) -- (26,282)
Currency translation adjustment .... -- (241) (241)
--------- --------- ---------
Comprehensive income (loss) ........ -- -- (26,523)
--------- --------- ---------
Balance at October 31, 1998 ........ $ 58,157 $ (241) $ 150,017
--------- --------- ---------
Issuance of common stock under
stock option plans ........... -- -- 10,721
Issuance of common stock under
employee purchase plan ....... -- -- 1,908
Exchange of treasury shares for
convertible notes ............ -- -- 15,432
Income tax benefit from stock plans -- -- 4,559
Net loss ........................... (809) -- (809)
Unrealized loss on securities ...... -- (517) (517)
Currency translation adjustment .... 97 97
--------- --------- ---------
Comprehensive income (loss) ........ -- -- (1,229)
--------- --------- ---------
Balance at October 31, 1999 ........ $ 57,348 $ (661) $ 181,408
========= ========= =========
</TABLE>
See accompanying notes.
38
<PAGE>
CREDENCE SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
1999 1998 1997
-------------- ---------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)........................................................... $ (809) $(26,282) $10,693
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization............................................ 22,693 21,146 13,984
Acquired in-process research and development and special charges......... 8,423 50,736 --
Gain from extinguishment of debt ........................................ (2,572) -- --
Loss (gain) on disposal of property and equipment........................ 328 (38) 430
Deferred income taxes.................................................... 1,169 (10,504) (3,432)
Minority interest........................................................ 75 (203) 6
Changes in operating assets and liabilities
Restricted cash...................................................... 2,400 7,602 (10,002)
Accounts receivable.................................................. (37,605) 17,955 (6,221)
Inventories.......................................................... (8,654) (31,094) (16,440)
Prepaid expenses and other current assets............................ 14,643 (19,363) (4,242)
Accounts payable..................................................... 14,521 (5,292) (660)
Accrued expenses and other liabilities............................... 2,522 2,995 2,517
Income taxes payable................................................. 4,894 2,565 3,654
-------------- ---------------- --------------
Net cash provided by (used in) operating activities............ 22,028 10,223 (9,713)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of available-for-sale securities.................................. (94,307) (152,808) (68,983)
Maturities of available-for-sale securities................................. 26,394 90,548 56,663
Sales of available-for-sale securities...................................... 61,268 22,700 10,673
Other liabilities........................................................... 1,295 -- --
Acquisition of property and equipment....................................... (17,952) (11,268) (16,223)
Acquisition of other assets................................................. (7,615) (15,022) (9,201)
Proceeds from sale of property and equipment................................ 414 829 2,007
-------------- ---------------- --------------
Net cash used in investing activities.......................... (30,503) (65,021) (25,064)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock.................................................... 12,629 3,191 3,477
Repurchase of common stock.................................................. -- (32,775) --
Issuance of 5 1/4% convertible subordinated notes........................... -- -- 115,000
Other....................................................................... (441) 12 412
-------------- ---------------- --------------
Net cash provided by (used in) financing activities............ 12,188 (29,572) 118,889
-------------- ---------------- --------------
Net increase (decrease) in cash and cash equivalents............................. 3,713 (84,370) 84,112
Cash and cash equivalents at beginning of the period............................. 48,391 132,761 48,649
-------------- ---------------- --------------
Cash and cash equivalents at end of the period................................... $ 52,104 $48,391 $132,761
============== ================ ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid............................................................... $ 5,554 $ 6,121 $ 1
Income taxes paid (refunded)................................................ $(20,010) $11,746 $ 7,443
NONCASH INVESTING ACTIVITIES:
Income tax benefit from stock option exercises.............................. $ 4,559 $ 972 $ 901
Paid-in capital increase--treasury stock for convertible notes.............. $ 15,432 -- --
Exchange of convertible notes for treasury stock, net of discount........... $ 18,004 -- --
Net transfers of inventory to property and equipment........................ $ 4,842 $ 9,135 $10,036
</TABLE>
See accompanying notes.
39
<PAGE>
CREDENCE SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Credence Systems Corporation ("Credence" or the "Company") was
incorporated under the laws of the State of California in March 1982 and was
reincorporated in Delaware in October 1993. The principal business activity of
the Company is the design, development, manufacture, sale and service of
automatic test equipment used in the production of semiconductors. As a result
of acquisitions made in fiscal years 1997 through 1999, Credence is also
involved in the design, development, sale and service of software enabling the
development of customer test programs used by automatic test equipment. The
Company has a subsidiary in Japan engaged in sales, marketing and service of the
Company's products and a subsidiary in Korea engaged in service of the Company's
products. Also, the Company has a joint venture with Innotech Corporation in
Japan engaged in the customization, development and manufacture of product for
sale by both companies. The joint venture is 50.1% owned by the Company and is
consolidated in the financial statements. The operations of and net investment
in foreign subsidiaries are not material.
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts
of the Company and its wholly owned and majority owned subsidiaries. All
significant intercompany transactions and balances have been eliminated. Certain
prior year amounts in the Consolidated Financial Statements and related notes
have been reclassified to conform to the current year's presentation.
REVENUE RECOGNITION
Revenue and related warranty expenses are recognized upon product
shipment. Net sales consist of product and service sales, less discounts and
estimated allowances. A provision for the estimated costs to enhance the
functionality and reliability of the installed base is recorded when such
requirements become known. Revenues from service contracts are recognized
ratably over the contract period. The Company recognizes software revenue in
accordance with the American Institute of Certified Public Accountants Statement
of Position 97-2, which calls for recognizing revenue when a non-cancellable
license agreement has been signed, the software product has been shipped, there
are no uncertainties surrounding product acceptance, the fees are fixed and
determinable, and collection is considered probable. For customer license
agreements that meet the Company's revenue recognition policy, the portion
allocated to software license fees will generally be recognized in the current
period, while the portion allocated to services is recognized as the services
are performed.
CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS
For purposes of cash flow reporting, the Company considers all highly
liquid investments with minimum yield risks and original maturity dates of three
months or less to be cash equivalents. Short-term investments consist primarily
of commercial paper, medium term notes, asset-backed securities, U.S. Treasury
notes and obligations of U.S. Government agencies, bank certificates of deposit,
auction rate preferred securities, corporate bonds and municipal bonds carried
at amortized costs adjusted to fair market value.
Management classifies investments as trading, available-for-sale or
held-to-maturity at the time of purchase and periodically re-evaluates such
classification. At October 31, 1999 and 1998, the Company classified all
investments as available-for-sale and reported their fair market value.
Unrealized gains or losses on available-for-sale securities, if material, are
included, net of tax, in equity until disposition. Realized gains and losses and
declines in value judged to be other-than-temporary on available-for-sale
securities are included in interest income. The cost of securities sold is based
on the specific identification method.
40
<PAGE>
The fair market value of cash equivalents, restricted cash and
short-term and long-term investments is substantially equal to the carrying
value and represents the quoted market prices at the balance sheet dates. Cash
and cash equivalents are categorized as follows (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
-----------------------------
1999 1998
------------- ------------
<S> <C> <C>
Money market............................................. $20,179 $11,799
Commercial paper......................................... 1,147 28,304
Municipal bonds.......................................... 2,079 --
Corporate bonds.......................................... 22,030 2,061
Obligations of U.S. Government agencies.................. 2,454 215
------------- ------------
Cash equivalents......................................... 47,889 42,379
Cash..................................................... 4,215 6,012
------------- ------------
Cash and cash equivalents............................... $52,104 $48,391
============= ============
</TABLE>
The short-term investments mature in less than one year. All long-term
investments have maturities of one to five years. At October 31, 1999 and 1998,
these investments are classified as available-for-sale and are categorized as
follows (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
-----------------------------
1999 1998
------------- ------------
<S> <C> <C>
Commercial paper and medium term notes.................... $ -- $28,048
Treasury notes and obligations of U.S. Government
agencies .............................................. 8,401 8,542
Asset backed securities................................... 30,684 13,332
Auction rate preferred securities......................... -- 2,060
Certificates of deposits.................................. -- 1,999
Corporate bonds........................................... 50,694 18,345
Municipal bonds .......................................... -- 10,808
------------- ------------
------------- ------------
$89,779 $83,134
============= ============
</TABLE>
RESTRICTED CASH
Restricted cash at October 31, 1998 represented cash in escrow related
to commitments by the Company under an agreement with Summit Design, Inc. to
purchase product licenses.
INVENTORIES
Inventories are stated at the lower of standard cost (which
approximates first-in, first-out cost) or market. Inventories consist of the
following (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Raw materials............................................... $13,772 $9,860
Work-in-process............................................. 21,281 21,609
Finished goods.............................................. 6,165 5,937
------------- -------------
$41,218 $37,406
============= =============
</TABLE>
PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following (in
thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Prepaid and refundable income taxes.......................... $6,404 $18,682
Prepaid expenses and other................................... 3,020 5,385
------------- -------------
$9,424 $24,067
============= =============
</TABLE>
41
<PAGE>
PROPERTY AND EQUIPMENT AND OTHER ASSETS
Property and equipment are stated at cost and are depreciated using the
straight-line method over the assets' estimated useful lives of three to five
years. Assets under capitalized leases are amortized using the straight-line
method over the shorter of the estimated useful life of the asset or the lease
term. Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Machinery and equipment........................................... $ 48,902 $43,013
Software.......................................................... 15,948 10,223
Leasehold improvements............................................ 12,375 11,798
Furniture and fixtures............................................ 5,885 4,840
Spare parts....................................................... 17,682 18,390
------------- -------------
100,792 88,264
Less accumulated depreciation and amortization.................... 57,729 46,500
------------- -------------
Net property and equipment........................................ $ 43,063 $41,764
============= =============
</TABLE>
Other assets consist primarily of purchased technologies, other
intangible assets and related rights which are amortized using the straight-line
method over the assets' estimated useful lives of three to five years.
Accumulated amortization associated with intangible assets is approximately
$4,677,000 and $10,102,000 at October 31, 1999 and 1998, respectively.
ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following (in
thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Accrued payroll and related liabilities.............................. $ 8,338 $ 6,767
Accrued warranty..................................................... 7,327 3,874
Accrued distributor commissions...................................... 2,785 1,706
Deferred revenue..................................................... 3,351 3,065
Accrued loss on supplier commitments................................. -- 2,400
Customer deposit .................................................... 3,269 --
Other accrued liabilities............................................ 6,093 9,166
------------- -------------
$31,163 $26,978
============= =============
</TABLE>
42
<PAGE>
NET INCOME (LOSS) PER SHARE
The Company computes earnings per share in accordance with SFAS No.
128. Accordingly, basic net income (loss) per share is based upon the weighted
average number of common shares outstanding during the period. Diluted net
income (loss) per share is based upon the weighted average number of common
shares 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 diluted net
income (loss) per share. The following table sets forth the computation of basic
and diluted net income (loss) per share (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
1999 1998 1997
--------------- ---------------- -------------
<S> <C> <C> <C>
Numerator:
Numerator for basic and diluted net income (loss) per share--net
income (loss).................................................... $ (809) $(26,282) $10,693
=============== ================ =============
Denominator:
Denominator for basic net income (loss) per share--weighted-average
shares................................................................ 21,088 21,533 21,865
Effect of dilutive securities--employee stock options.................... -- -- 647
--------------- ---------------- -------------
Denominator for diluted net income (loss) per share--adjusted
weighted-average shares and assumed exercises......................... 21,088 21,533 22,512
=============== ================ =============
Basic net income (loss) per share.................................... $(0.04) $ (1.22) $0.49
Diluted net income (loss) per share.................................. $(0.04) $ (1.22) $ 0.47
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," (SFAS 133), which is required to be adopted
in fiscal years beginning after June 15, 1999. The Statement permits early
adoption as of the beginning of any fiscal quarter after its issuance. The
Company is currently evaluating whether to adopt the new statement earlier than
is required. SFAS 133 will require the Company to recognize all derivatives on
the balance sheet at fair value. Derivatives that are not hedges must be
adjusted to fair value through earnings. If the derivative is a hedge, depending
on the nature of the hedge, changes in the fair value of derivatives will either
be offset against the change in the fair value of the hedged assets, liabilities
or firm commitments through earnings, or recognized in other comprehensive
income until the hedged item is recognized in earnings. The ineffective portion
of a derivative's change in fair value will be immediately recognized in
earnings. Adoption of SFAS 133 is not expected to have a material impact on the
Company's financial condition or results of operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.
Actual results inevitably will differ from those estimates and such
differences may be material to the financial statements.
NOTE 2 -- ACQUISITIONS
In July 1997, the Company, through a subsidiary, Fluence Technology,
Inc. (formerly known as Test Systems Strategies, Inc.), a Delaware corporation
("Fluence"), acquired certain assets and assumed certain liabilities from Summit
Design, Inc. and its wholly owned subsidiary, Test Systems Strategies, Inc., an
Oregon corporation, including the test development series software products
("TDS") and TSSI trademark of Test Systems Strategies, Inc, the Oregon
corporation (the "TSSI acquisition"). TDS includes tools designed to convert
gate-level simulation data from electronic design automation simulators to
programs that operate on targeted automatic test equipment ("ATE") for testing
integrated circuits characterized by the gate-level simulation data. TDS
facilitates simulation
43
<PAGE>
analysis, stimulus generation, simulation rules checking,
tester resource checking, ATE test program generation, and test program
conversion. The consolidated financial statements reflect the impact of TDS
operations subsequent to the acquisition date.
The purchase price of $7.3 million consisted of a cash payment of $7.0
million to Summit Design, Inc. and $300,000 for the assumption of liabilities.
Acquired assets and liabilities were recorded at their estimated fair market
value at the date of the acquisition. The aggregate purchase price, plus related
acquisition expenses, have been allocated to the assets and liabilities acquired
based on valuations. Amounts allocated to in-process research and development
("IPR&D") of approximately $6.0 million were written off at the acquisition
date, representing an estimated value (using risk-adjusted cash flows,
discounted at 35%) of development programs that had not yet reached
technological feasibility. Amounts allocated to developed technology, $1.0
million, and workforce in place, $0.3 million, are being amortized on a
straight-line basis over periods of six and three years, respectively.
The IPR&D associated with the TSSI acquisition related to the
development of a standard tester interface language ("STIL"). The STIL
development project is an ongoing program that will provide a foundation for and
be integrated into most of the Fluence software products. The Company believes
the life of this program will continue into the foreseeable future.
In June 1998, the Company purchased from Heuristics Physics
Laboratories, Inc. ("HPL") certain assets and assumed certain liabilities
relating to its memory self test business for $8.0 million in cash and the
assumption of $0.2 million in liabilities. Additionally, the Company agreed to
make payments to the shareholder representatives of HPL in an amount equal to
10% of the Company's net sales of products derived from the assets acquired from
HPL's design for test division for a period of two years following the
acquisition. The amounts paid in 1999 under this arrangement were insignificant.
In connection with the HPL acquisition, the Company recognized $2.0 million of
acquired IPR&D. The remaining $6.2 million has been capitalized, of which $5.3
million is for purchased technology and other intangible assets which will be
amortized ratably over their estimated useful lives of five years.
The HPL acquired IPR&D consists of projects related to memory self
test. These projects are aimed at the development of products that can perform
self testing of on-chip memories, self testing of off-chip memories, automated
memory test vector generation, built-in memory repair analysis and built-in
automated memory circuit repair. The Company estimated that approximately 50% of
the research and development effort, based on complexity, had been completed at
the date of the acquisition. As of October 31, 1999 the Company has introduced
memory BOST products and has largely completed development of a memory BIST
software product. The Company recorded a $0.7 million write-down of the
intangible assets acquired from HPL in conjunction with the integration of
Opmaxx with Fluence in September 1999. This asset write-down was made based on
an assessment of the current market potential for these products.
In September 1999, the Company purchased Opmaxx, Inc. for $8.0 million
in cash and the assumption of liabilities and the conversion of employee stock
options of approximately $0.6 million. Additionally, the Company agreed to make
payments to the common shareholders of Opmaxx in an amount equal to 10% of the
net receipts from sales of the Opmaxx products from September 1999 through
December 31, 2003. These payments, if any, will be an adjustment to the acquired
goodwill and be amortized over a five year period. In connection with this
acquisition, the Company recognized $0.9 million of acquired in-process research
and development ("IPR&D"). The remaining $7.7 million has been capitalized, of
which $7.5 million is for purchased technology and other intangible assets which
will be amortized ratably over their estimated useful lives, ranging from two to
five years. Opmaxx is being integrated with the Company's subsidiary, Fluence
Technology, Inc.
The IPR&D acquired from Opmaxx consists of products and projects
related to analog and mixed signal self test. These products and projects are
aimed at the development of design verification and sensitivity analysis, design
fault coverage, test evaluation and optimization. The Company estimated that
approximately 55% of the research and development effort, based on time spent
and complexity, had been completed at the date of the acquisition. The
significant work remaining to complete the current versions of the products was
estimated to take approximately 8 engineering person years, at a cost of
approximately $1 million and be completed by the end of fiscal 2000.
There can be no assurance that the in-process projects acquired, as
noted above, will achieve technological feasibility or that the Company will be
able to successfully market products based on such technology. Should these
in-process projects fail, the value of the Company's investment in these
incomplete technologies would be
44
<PAGE>
insignificant or zero. A failure to successfully develop and market self
test products could have a material adverse affect on the Company's business,
financial condition or results of operations.
NOTE 3 -- SPECIAL CHARGES
In the second quarter of fiscal 1999, the Company recorded special
charges totaling $6.2 million, of which $0.3 million was for employee severance
and $5.9 million was for abandoned facilities. These charges were recorded as a
result of the Company's response to a major downturn in the business outlook for
the ATE and related semiconductor and semiconductor equipment industries at that
time as well as the decision to relocate the Company's Oregon operations from a
facility in Beaverton to a newly constructed facility in Hillsboro, Oregon. At
October 31, 1999, approximately $1.7 million of this charge remained accrued on
the balance sheet with approximately $1.2 million scheduled to be paid in
January 2000.
In the fourth quarter of fiscal 1999, the Company recorded special charges
totaling $1.3 million. This charge included expenses related to the Opmaxx
acquisition of $0.6 million as well as the $0.7 million write-down of certain
intangible assets from another acquisition in the integration of Opmaxx with the
Company's subsidiary Fluence Technology, Inc.
In the third and fourth quarters of fiscal 1998, the Company recorded
special charges totaling $48.7 million, of which $28.4 million were classified
as cost of goods sold and the balance was classified as operating expenses.
These charges are the result of the Company's response to a major downturn in
the business outlook for the ATE and related semiconductor and semiconductor
equipment industries which took place during the period. As a result of this
industry downturn, the Company downsized its operations, including reducing
headcount, reducing the volume of products being produced and canceling and
delaying various projects, including facilities expansions and certain research
and development projects. The impact of this downturn and these decisions was
that significant amounts of the Company's inventories, receivables, fixed
assets, prepaid expenses, investments and purchased technologies were impaired
and certain liabilities had been incurred. As a result, the Company wrote down
the related assets to their net realizable values and made provision for the
estimated liabilities.
Of the $48.7 million in charges, approximately $28.4 million was
charged as cost of goods sold, of which approximately $26.7 million was related
to write-down of excess or obsolete inventories. The elements of the charges
during fiscal 1998 are as follows (in thousands):
<TABLE>
<S> <C>
Write-down of inventories to net realizable value
(including expected losses on supplier commitments).......................... $26,678
Write-down of excess fixed assets to fair value................................. 7,272
Write-down of purchased technology and investments to fair value................ 5,118
Write-off of prepaid and other current assets................................... 2,444
Excess facility costs........................................................... 2,641
Provision for uncollectible receivables......................................... 3,389
Employee termination benefits and accrued liabilities........................... 1,196
---------------
$48,738
===============
</TABLE>
At October 31, 1998, approximately $4.8 million in accrued liabilities
related to special charges remained on the Company's balance sheet, primarily
the accrued loss on supplier commitments of $2.4 million and approximately $1.9
million for rent on excess facilities. The cash expenditures associated with
these obligations were made in fiscal 1999 and no further accruals remain at
October 31, 1999. Cash expenditures associated with the special charges during
fiscal 1998 were approximately $700,000, relating primarily to excess facilities
and to severance costs.
NOTE 4 -- INDUSTRY SEGMENTS AND CONCENTRATION OF RISKS
CREDIT RISK, PRODUCT LINE AND SEGMENT/GEOGRAPHIC DATA
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of investments in cash
equivalents, short-term and long-term investments and trade receivables. The
Company is exposed to credit risks in the event of default by the financial
institutions or customers to the extent of the amount recorded on the balance
sheet. See Note 1 for a description of these investment assets at October 31,
1999 and 1998.
45
<PAGE>
The Company and its subsidiaries operate in two industry segments: the
design, development, manufacture, sale and service of ATE used in the production
of semiconductors; and, as a result of acquisitions made in fiscal 1999 and
1998, the design, development, sale and service of software that assists in the
development of test programs used in ATE. Revenues from software were not
material to the Company's operations in fiscal 1999 and 1998, representing less
than 4% of revenue.
The Company's net sales by product line consisted of:
1999 1998 1997
----------- ---------- ---------
Mixed Signal.............................. 65% 66% 60%
Logic 16 18 30
Memory 7 4 3
Service and software...................... 12 12 7
----------- ---------- ---------
Total net sales........................... 100% 100% 100%
=========== ========== =========
As of November 1, 1997, the Company adopted SFAS No. 131, "Disclosure
about Segments of an Enterprise and Related Information."
The Company sells its products primarily to distributors and
semiconductor manufacturers located in the United States, Asia Pacific and
Europe. The Company performs ongoing credit evaluations of its customers and
generally does not require collateral. The Company maintains reserves for
potential credit losses and such losses historically have been both immaterial
and within management's expectations.
Export sales, which are denominated in U.S. dollars and represent
substantially all of the Company's international sales, represent sales to the
Company's customers primarily throughout Asia Pacific and Europe. Sales by the
Company to customers in different geographic areas, expressed as a percentage of
revenue, for the periods ended were:
YEAR ENDED OCTOBER 31,
----------------------------------
1999 1998 1997
----------- ---------- ---------
Domestic................................... 36% 31% 30%
Asia Pacific............................... 55 60 66
Europe 9 9 4
----------- ---------- ---------
Total net sales............................ 100% 100% 100%
=========== ========== =========
One customer, Spirox Corporation (a distributor in Taiwan), accounted
for 39%, 34% and 30% of the Company's net sales in fiscal 1999, 1998 and 1997,
respectively. This subjects a significant portion of the Company's receivables
and future revenues to the risks associated with doing business in a foreign
country, including political and economic instability, currency exchange rate
fluctuations and regulatory changes. At October 31, 1999 this distributor's
accounts receivable balance with the Company was approximately $21 million.
Disruption of business in Asia caused by the previously mentioned factors could
have a material impact on the Company's business, financial condition or results
of operations.
OTHER RISKS
The semiconductor industry has historically been cyclical and has
experienced downturns, which have had a material adverse effect on the
semiconductor industry's demand for ATE, including equipment manufactured and
marketed by the Company. Differences between the Company's forecast of market
demand for its products and actual demand could have a material effect on the
financial statements. In addition, the ATE industry is highly competitive, and
subject to rapid technological change. The Company has experienced and is
continuing to experience significant delays in the introduction of new products.
It is reasonably possible that events related to the above factors may occur in
the near term which would cause a change to the Company's estimate of the net
realizable value of receivables, inventories or other assets, and the adequacy
of costs accrued for warranty and other liabilities. Such changes have and could
continue to materially adversely affect the Company's business, financial
condition and results of operations.
In addition, the Company relies on several suppliers and manufacturing
subcontractors to provide many of the key components and subassemblies used in
the Company's products. Some of these items are available from only
46
<PAGE>
one supplier or a limited group of suppliers. Any disruption in the delivery
of these items could materially adversely affect the Company's business,
financial condition and results of operations.
NOTE 5 -- CREDIT FACILITIES
The Company has a $20,000,000 unsecured bank line of credit, with
interest at the bank's prime rate (8.25% at October 31, 1999) which expires July
22, 2000. This line supports the issuance of letters of credit and foreign
exchange contracts. At October 31, 1999, the Company had no borrowings
outstanding under this line of credit. Borrowings under the line of credit are
subject to the Company's ability to meet certain financial covenants including
profitability and leverage ratios and require the Company to obtain certain bank
approvals for the payment of dividends. The Company was in compliance with all
financial covenants at October 31, 1999. There were no foreign exchange
contracts outstanding at October 31, 1999 or 1998.
NOTE 6 -- LEASE OBLIGATIONS AND OTHER COMMITMENTS
The Company leases its facilities under operating leases that expire
periodically through 2014.
The approximate future minimum lease payments under operating leases
for facilities and equipment at October 31, 1999 are as follows (in thousands):
LEASE PAYMENTS
-------------------
2000.................................. $ 3,613
2001.................................. 3,394
2002.................................. 3,380
2003.................................. 3,086
2004.................................. 2,900
Thereafter............................ 19,434
-------------------
$35,807
===================
Rent expense was approximately $1,918,000, $4,336,000, and $4,174,000
for the years ended October 31, 1999, 1998 and 1997, respectively.
The Company has an agreement with a distributor whereby the Company
issued a guaranty in favor of a bank with respect to certain obligations of the
distributor to the bank. Under this agreement, the distributor agreed to grant
to the Company a security interest to secure the obligations of the distributor
as a result of any payments by the Company pursuant to the guaranty. At October
31, 1999, the maximum allowable debt of the distributor subject to this
guaranty, $1,000,000, was outstanding.
NOTE 7 -- CONVERTIBLE SUBORDINATED NOTES
In September 1997, the Company sold $115 million of 5 1/4% convertible
subordinated notes (the "Notes") due September 2002 through a private placement.
The Notes are unsecured obligations of the Company and are subordinated to all
present and future senior indebtedness of the Company. The Notes do not provide
for a sinking fund and are redeemable at the option of the Company, in whole or
in part, at any time on or after September 20, 2000, at certain redemption
prices. Interest is payable semiannually on March 15 and September 15,
commencing March 15, 1998. The Notes are convertible into common stock of the
Company at an initial conversion price of $69.15 per share. Expenses of $3.3
million associated with the offering have been deferred and included in other
assets. Such expenses are being amortized to interest expense over the term of
the Notes. In November 1997, the Company filed a Registration Statement with the
Securities and Exchange Commission under Form S-3 to permit public secondary
trading of the Notes, and, upon conversion, the underlying common stock. Such
registration statement was declared effective in December 1997.
In fiscal 1999, the Company recorded pre-tax extraordinary gains of
$2.6 million for the retirement of $18.0 million of its Notes and $0.4 million
related to issuance expenses and discount on the notes in exchange for 603,000
shares of the Company's common stock held in treasury. As of October 31, 1999,
the fair value of the Notes based on quotes from a major brokerage firm was
approximately $92.5 million.
47
<PAGE>
NOTE 8 -- STOCKHOLDERS' EQUITY
TREASURY STOCK AND COMMON STOCK REPURCHASES
During fiscal 1998, the Company repurchased a total of 1.8 million
shares of its common stock at a cost of $32.8 million. Out of the total 1.8
million shares, 500,000 were canceled and retired and the balance of 1.3 million
shares were put in treasury stock.
In fiscal 1999, the Company retired $18.4 million of its Notes in
exchange for 603,000 shares of the Company's common stock held in treasury. In
addition the Company issued approximately 27,000 shares that were held in
treasury to employees as part of the equity compensation plans.
STOCK OPTION PLANS AND STOCK PURCHASE PLAN
The Company grants options to employees and members of the Board of
Directors under the 1993 Stock Option Plan (the "1993 Plan"). The 1993 Plan is
divided into two separate components: (i) the Discretionary Option Grant Program
and (ii) the Automatic Option Grant Program. Options granted under the
Discretionary Option Grant Program will have an exercise price equal to 100% of
the fair market value of such shares on the date of grant, and a maximum term of
ten years, and are exercisable over a vesting period, generally four to five
years. Under the Automatic Option Grant Program, options are granted
automatically at periodic intervals to non-employee members of the Board at an
exercise price equal to 100% of the fair market value of the option shares on
the date of grant and a maximum term of ten years, and are exercisable over a
vesting period, generally four to five years.
On March 25, 1998, the stockholders approved an amendment to the
Company's 1993 Stock Option Plan that implemented an automatic share increase
feature pursuant to which the number of shares available for issuance under the
1993 Stock Option Plan (the "1993 Plan") will automatically increase on the
first trading day of each fiscal year (the "First Trading Day"), beginning with
the 1999 fiscal year and continuing through the fiscal year 2003, by an amount
equal to two percent (2%) of the total number of shares outstanding on the last
trading day of the immediately preceding fiscal year. The 1993 Plan provides
that at the end of each First Trading Day the number of then outstanding options
under the Company's stock option plans shall not exceed fifteen percent (15%) of
the then outstanding voting shares of capital stock of the Company, together
with all then actually outstanding stock options under the Company's stock
option plans, together with all options in the reserve then available for future
grant under the Company's Stock Option Plans.
On November 5, 1998, the Compensation Committee of the Company's Board
of Directors approved a stock option repricing program pursuant to which
employees of the Company (excluding Board members and consultants) could elect
to cancel certain unexercised stock options in exchange for new stock options
with an exercise price of $17.19 per share equal to the closing price of the
Company's common stock on the Nasdaq National Market on December 14, 1998.
Approximately 898,000 options were eligible for repricing, of which
approximately 571,000 were repriced. The vesting schedules and expiration dates
of the repriced stock options were restarted at the new vesting commencement
date of December 14, 1998.
48
<PAGE>
A summary of the activity under all plans, excluding the Fluence Plan,
as defined below (in thousands, except per share amounts) is as follows:
<TABLE>
<CAPTION>
OPTIONS AVAILABLE NUMBER OF PRICE WEIGHTED
FOR GRANT SHARES PER AVERAGE
(AUTHORIZED) OUTSTANDING SHARE EXERCISE PRICE
--------------------- ------------------ --------------------- -------------------
<S> <C> <C> <C> <C>
Balance at October 31, 1996........... 264 1,788 $0.44 - $33.00 $ 14.29
Increase in authorized shares......... 500 -- -- --
Options granted....................... (408) 408 $19.00 - $29.50 $ 25.23
Options canceled...................... 170 (170) $1.00 - $33.00 $ 19.11
Options exercised..................... -- (226) $0.44 - $33.00 $ 9.69
Options expired....................... (2) -- -- --
--------------------- ------------------ --------------------- -------------------
Balance at October 31, 1997........... 524 1,800 $0.44 - $33.00 $16.90
Increase in authorized shares......... 500 -- -- --
Options granted....................... (699) 699 $14.50 - $29.50 $26.31
Options canceled...................... 145 (145) $0.54 - $30.00 $19.47
Options exercised..................... -- (141) $0.44 - $23.12 $ 9.09
--------------------- ------------------ --------------------- -------------------
Balance at October 31, 1998........... 470 2,213 $0.44 - $33.00 $20.20
Increase in authorized shares......... 1,408 -- -- --
Options granted....................... (3,041) 3,041 $14.63 - $43.56 $29.30
Options canceled...................... 1,400 (1,400) $0.44 - $41.31 $23.55
Options exercised..................... -- (696) $0.44 - $30.00 $14.61
--------------------- ------------------ --------------------- -------------------
Balance at October 31, 1999........... 237 3,158 $0.54 - $43.56 $28.67
===================== ================== ===================== ===================
</TABLE>
The Company has reserved for issuance approximately 3,395,000 shares of
common stock in connection with the stock option plans. At October 31, 1999,
approximately 348,000 shares were exercisable at an aggregate exercise price of
$5,890,000.
The following table summarizes information about options outstanding
and exercisable at October 31, 1999, excluding the Fluence Plan (in thousands
except per share amounts).
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------------------------------------- -------------------------------------
WEIGHTED-AVG. WEIGHTED OPTIONS WEIGHTED
OPTIONS REMAINING AVERAGE CURRENTLY AVERAGE
RANGE OF OUTSTANDING AT CONTRACTUAL LIFE EXERCISE EXERCISABLE AT EXERCISE
EXERCISE PRICES OCT. 31, 1999 (YEARS) PRICE OCT. 31, 1999 PRICE
- ----------------------- ------------------- --------------------- ------------ ------------------ -----------------
<S> <C> <C> <C> <C> <C>
$0.54 - $13.25 170,721 5.36 $ 9.19 103,996 $6.90
$14.17 - $26.25 1,273,544 8.70 $17.43 211,423 $8.13
$26.44 - $43.56 1,713,836 9.76 $38.96 32,090 $29.90
- ----------------------- ------------------- --------------------- ------------ ------------------ -----------------
$0.54 - $43.56 3,158,101 9.09 $28.67 347,509 $16.95
======================= =================== ===================== ============ ================== =================
</TABLE>
These options will expire, if not exercised, at specific dates from
October 2000 to October 2009.
49
<PAGE>
In 1997, the Company's subsidiary, Fluence, adopted a 1997 Stock Option
Plan (the "Fluence Plan") under which incentive stock options to purchase
Fluence common stock could be granted to employees, non-employee members of the
Board or the non-employee members of the Board of Directors of any parent or
subsidiary, and consultants and other independent advisors who provide services
to Fluence (or any parent or subsidiary). Under the Fluence Plan, options to
purchase Fluence common stock can be granted at prices no less than 85% of their
fair value on the date of grant. Generally, options granted are immediately
exercisable and the resulting shares issued to employees under the Fluence Plan
are subject to certain repurchase rights by Fluence, at the discretion of
Fluence, upon the individual's cessation of service prior to vesting in the
shares at the original purchase price. As of October 31, 1999, 2,324,770 options
were granted and outstanding at fair value to employees and are exercisable by
employees at exercise prices between $0.06 and $0.60 per share. These shares
vest over a four-year period. Activity under this plan (in thousands, except per
share amounts) is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------
OPTIONS AVAILABLE NUMBER WEIGHTED AVERAGE
FOR GRANT OF SHARES EXERCISE PRICE
---------------------- ----------------- -----------------------
<S> <C> <C> <C>
Balance at October 31, 1996......... -- -- $ --
Initial shares authorized........... 2,000 -- --
Options granted..................... (851) 851 0.10
---------------------- ----------------- -----------------------
Balance at October 31, 1997......... 1,149 851 0.10
Grants.............................. (195) 195 0.10
Cancellations....................... 410 (410) 0.10
Exercises........................... -- (2) 0.10
---------------------- ----------------- -----------------------
Balance at October 31, 1998......... 1,364 634 $0.10
---------------------- ----------------- -----------------------
Increase in shares authorized....... 1,000 --
Grants.............................. (1,757) 1,757 0.24
Cancellations....................... 45 (45) 0.10
Exercises........................... -- (22) 0.10
---------------------- ----------------- -----------------------
Balance at October 31, 1999......... 652 2,324 $0.19
====================== ================= =======================
</TABLE>
Fluence has reserved for issuance approximately 3,000,000 shares of
common stock in connection with the Fluence Plan.
The following table summarizes information about options outstanding
under the Fluence Plan at October 31, 1999 (option amounts are recorded in
thousands except per share amounts):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------------------------------------------- ----------------------------------
WEIGHTED-AVG. OPTIONS WEIGHTED
OPTIONS REMAINING CURRENTLY AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL LIFE WEIGHTED-AVG. EXERCISABLE AT EXERCISE
EXERCISE PRICE AT OCT. 31, 1999 (YEARS) EXERCISE PRICE OCTOBER 31, 1999 PRICE
- ---------------------- --------------------- -------------------- -------------------- -------------------- ------------
<S> <C> <C> <C> <C> <C>
$0.06 - $0.60 2,324 8.74 $0.19 1,379 $0.29
</TABLE>
These options will expire, if not exercised, at specific dates from
July 2007 to September 2009.
In 1994, the Company adopted the 1994 Employee Stock Purchase Plan,
which provides eligible employees with the opportunity to acquire shares of the
Company's common stock. The purchase price is 85% of the fair market value per
share of common stock on the date on which the purchase period begins or on the
date on which the purchase period ends, whichever is lower. Approximately
125,083, 101,023, and 114,940 shares were issued pursuant to the plan in 1999,
1998 and 1997, respectively. At October 31, 1999, approximately 288,251 shares
were reserved for issuance under the plan.
The Company has elected to follow APB Opinion No. 25, "Accounting for
Stock Issued to Employees," in accounting for its employee stock options
because, as discussed below, the alternative fair value accounting provided for
under SFAS No. 123, "Accounting for Stock-Based Compensation," requires the use
of option valuation models that were not developed for use in valuing employee
stock options. Under APB No. 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of the grant, no compensation expense is recognized in the Company's
financial statements.
50
<PAGE>
Pro forma information regarding net income (loss) and net income (loss)
per share is required by SFAS No. 123. This information is required to be
determined as if the Company had accounted for its employee stock options
(including shares issued under the Employee Stock Purchase Plan, collectively
called "options") granted subsequent to October 31, 1995 under the fair value
method of SFAS No. 123.
In calculating pro forma compensation, the fair value of each option
grant is estimated on the date of grant using the Black-Scholes option pricing
model. The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, the Black-Scholes model requires the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's stock-based awards to employees have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of its stock-based awards to its
employees. The fair value of each option grant is estimated assuming no expected
dividends and the following weighted-average assumptions:
1999 1998 1997
------ ------ ------
Expected life (years)................... 3.06 3.03 3.35
Expected stock price volatility......... 0.72 0.70 0.65
Risk-free interest rate................. 5.97% 4.28% 5.67%
The grant date weighted-average fair value of options granted during
the year were $14.62, $12.58 and $25.23 for 1999, 1998 and 1997, respectively.
The pro forma net income (loss) and net income (loss) per share include
expense related to the Company's Employee Stock Purchase Plan. The fair value of
issuances under the Employee Stock Purchase Plan is estimated on the issuance
date using the Black-Scholes model assuming no expected dividends and the
following weighted-average assumptions for issuances made in 1999, 1998 and
1997:
1999 1998 1997
------ ------ ------
Expected life (years)................... 0.50 0.50 0.50
Expected stock price volatility......... 0.76 0.82 0.65
Risk-free interest rate................. 5.65% 4.55% 5.67%
The weighted-average fair value of purchase rights granted during the
year were $6.84, $9.42 and $7.49 for 1999, 1998 and 1997, respectively.
For pro forma purposes, the estimated fair value of the Company's
stock-based awards to its employees is amortized over the option's vesting
period and the Employee Stock Purchase Plan's six-month purchase period. The
Company's pro forma information is as follows (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
1999 1998 1997
------------- -------------- ------------
<S> <C> <C> <C>
Net income (loss) as reported......................... $ (809) $(26,282) $10,693
Pro forma net income (loss)........................... $ (5,010) $(30,725) $ 8,316
Basic net income (loss) per share..................... $ (0.04) $ (1.22) $ 0.49
Pro forma basic net income (loss) per share........... $ (0.24) $ (1.43) $ 0.38
Diluted net income (loss) per share as reported....... $ (0.04) $ (1.22) $ 0.47
Pro forma diluted net income (loss) per share......... $ (0.24) $ (1.43) $ 0.37
</TABLE>
Because SFAS 123 is applicable only to options granted subsequent to
October 31, 1995, its pro forma effect will not be fully reflected until fiscal
2000.
RIGHTS PLAN
On June 1, 1998, the Company adopted the Credence Systems Corporation
Stockholder Rights Plan (the "Rights Plan"). Pursuant to the Rights Plan, rights
were distributed as a dividend at the rate of one right for each share of
Credence common stock, par value $0.001 per share ("Right") of the Company held
by stockholders of record as of the close of business on June 22, 1998. The
Rights will expire on June 22, 2008, unless redeemed or exchanged. Under the
Rights Plan, each Right initially will entitle the registered holder to buy one
unit of a share of
51
<PAGE>
preferred stock for $165.00. The Rights will become exercisable only if a person
or group (other than stockholders currently owning 15% of Credence common stock)
acquires beneficial ownership of 15% or more of Credence's common stock, or
commences a tender offer or exchange offer upon consummation of which such
person or group would beneficially own 15% or more of Credence's common stock.
NOTE 9 -- EMPLOYEE BENEFIT PLANS
The Company maintains a 401(k) retirement savings plan for its
full-time domestic employees, which allows them to contribute up to 20% of their
pre-tax wages subject to IRS limits. The Company's only contribution to this
plan was $441,000 in fiscal 1997. At October 31, 1999 the Company had accrued
approximately $350,000 to be paid as a Company contribution to this plan for
employees in the plan at December 31, 1999.
The Company maintains a profit sharing plan for those domestic
employees that are not otherwise eligible for incentive-based compensation.
Contributions to this plan are subject to the discretion of the Board of
Directors. The Company made contributions of $892,000, $1,285,000 and $476,000
in fiscal 1999, 1998 and 1997, respectively.
NOTE 10 -- INCOME TAXES
The tax provision consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-----------------------------------------------
1999 1998 1997
------------ -------------- ---------------
<S> <C> <C> <C>
Federal:
Current................ $ (704) $ (3,786) $ 9,062
Deferred............... (788) (8,868) (3,059)
------------ -------------- ---------------
(1,492) (12,654) 6,003
State:
Current................ (160) (539) 1,818
Deferred............... 119 (1,636) (373)
------------ -------------- ---------------
(41) (2,175) 1,445
Foreign:
Current................ 161 44 83
------------ -------------- ---------------
$ (1,372) $ (14,785) $7,531
============ ============== ===============
</TABLE>
Pre-tax income (loss) from foreign operations was approximately
$364,000 in 1999, $6,000 in 1998 and $(206,000) in 1997.
A reconciliation between the Company's effective tax rate (36% in 1999
and 1998, 41% in 1997) and the U.S. statutory rate is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
---------------------------------------------
1999 1998 1997
-------------- -------------- -------------
<S> <C> <C> <C>
Tax computed at statutory rate.................................. $(1,339) $(14,373) $6,380
State income tax (net of federal benefit)....................... (27) (1,414) 935
Foreign sales corporation benefit............................... -- -- (862)
In-process research and development not currently benefited..... 301 466 1,264
Net operating loss carryforward benefit......................... -- -- (141)
Research and development credits................................ (300) (300) (370)
Other items..................................................... (7) 836 325
-------------- -------------- -------------
$(1,372) $(14,785) $7,531
============== ============== =============
</TABLE>
At October 31, 1999, the Company has unused net operating loss and
research tax credit carryforwards for federal income tax purposes of
approximately $3,300,000 and $194,000, respectively, which expire in 2003
through 2018. Utilization of the net operating loss carryforwards at October 31,
1999 is limited to approximately $401,000 annually under the provisions of
Section 382 of the Internal Revenue Code of 1986, as amended. Utilization of the
credit carryforwards is similarly limited.
52
<PAGE>
Significant components of the Company's deferred tax assets are as
follows (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
--------------------------------------
1999 1998
---------------- ----------------
<S> <C> <C>
Deferred tax assets:
Accounting for inventories........................... $ 6,758 $ 8,277
Allowance for doubtful accounts...................... 1,289 2,168
Accruals not currently deductible.................... 5,994 6,506
Net operating loss carryforwards..................... 1,170 703
Acquired technology.................................. 1,478 2,766
Book over tax depreciation........................... 2,877 --
Research credit carryforwards........................ 194 194
---------------- ----------------
Total deferred tax assets.................... 19,760 20,614
Valuation allowance for deferred tax assets.......... (2,572) (2,572)
---------------- ----------------
17,188 18,042
Deferred tax liability:
Tax over book depreciation........................... -- (166)
---------------- ----------------
Total deferred tax liability................. -- (166)
---------------- ----------------
Net deferred tax assets...................... $17,188 $17,876
================ ================
</TABLE>
There was no change in the valuation allowance in 1999 and a net
increase of $466,000 and $1,209,000 in 1998 and 1997, respectively.
Realization of the Company's net deferred tax assets is dependent upon
the Company generating sufficient taxable income in future years in appropriate
tax jurisdictions to obtain benefit from the reversal of temporary differences
and from tax credit carryforwards. The amount of deferred tax assets considered
realizable is subject to adjustment in future periods if estimates of future
taxable income are reduced.
NOTE 11 -- 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.
NOTE 12 -- ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income and changes thereto consist of:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------------------------------------
1999 1998 1997
----------------- ------------- -------------
<S> <C> <C> <C>
Beginning balance gain (loss), net of tax..................... $(241) $ -- $--
Unrealized gain (loss) on available-for-sale securities....... (517) -- --
Currency translation adjustment............................... 97 (241) --
----------------- ------------- -------------
Ending balance (loss)......................................... $(661) $(241) $--
================= ============= =============
</TABLE>
NOTE 13 -- RELATED PARTY TRANSACTIONS
Bernard V. Vonderschmitt, a director of the Company, is the founder and
chairman of Xilinx, Inc. and Dr. William G. Howard, the Company's Chairman, is a
director of Xilinx. For the years ended October 31, 1999, 1998 and 1997, the
Company sold approximately $4,551,000, $2,868,000, and $1,356,000 respectively,
of products and 99 and 1998, respectively.
Dr. William G. Howard, a director of the Company, was a director of
VLSI Technology, Inc. ("VLSI") from May 31, 1996 until June 1999. The Company's
sales to VLSI were approximately $5,625,000, $2,011,000, and
53
<PAGE>
$171,000 in fiscal 1999, 1998 and 1997, respectively. The amounts receivable
from VLSI were approximately $1,525,000 and $568,000 at October 31, 1999 and
1998, respectively. Dr. Howard also serves as a director of Ramtron
International, Inc. ("Ramtron"). The Company's sales to Ramtron were
approximately $1,000, $151,000, and $6,000 in fiscal 1999, 1998 and 1997,
respectively. Amounts receivable from Ramtron were approximately zero and $1,000
at October 31, 1999 and 1998, respectively.
The Company sells products and services to Israeli Test House, Inc.
("ITH"), a company in which the Company has an investment. For the years ended
October 31, 1999, 1998 and 1997, sales to ITH totaled approximately $14,700,
$21,000, and $6,000, respectively. The amounts receivable from ITH were
approximately $11,900 and $345,000 at October 31, 1999 and 1998, respectively.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
Not Applicable.
54
<PAGE>
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT.
The information required by this item relating to the Company's
directors and nominees and disclosure relating to compliance with Section 16(a)
of the Securities Exchange Act of 1934 is included under the captions "Election
of Directors" and "Compliance with Section 16(a) of the Securities Exchange Act
of 1934" in the Company's Proxy Statement for the 2000 Annual Meeting of
Stockholders and is incorporated herein by reference. The information required
by this item relating to the Company's executive officers and key employees is
included under the caption "Executive Officers and Key Employees" in Part I of
this Form 10-K Annual Report.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is included under the caption
"Executive Compensation and Related Information" in the Company's Proxy
Statement for the 2000 Annual Meeting of Stockholders and is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information required by this item is included under the caption
"Ownership of Securities" in the Company's Proxy Statement for the 2000 Annual
Meeting of Stockholders and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is included under the caption
"Certain Relationships and Related Transactions" in the Company's Proxy
Statement for the 2000 Annual Meeting of Stockholders and is incorporated herein
by reference.
55
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of the Annual Report on
Form 10-K:
1. FINANCIAL STATEMENTS. The following Consolidated Financial
Statements of Credence Systems Corporation are included in
Item 8 of this Annual Report on Form 10-K:
<TABLE>
<S> <C>
PAGE
----
Report of Ernst & Young LLP, Independent Auditors....... 35
Consolidated Balance Sheets--
October 31, 1999 and 1998........................... 36
Consolidated Statements of Operations--
Years Ended October 31, 1999, 1998 and 1997......... 37
Consolidated Statements of Stockholders' Equity--
Years Ended October 31, 1999, 1998 and 1997......... 38
Consolidated Statements of Cash Flows--
Years Ended October 31, 1999, 1998 and 1997......... 39
Notes to Consolidated Financial Statements.............. 40
</TABLE>
2. FINANCIAL STATEMENT SCHEDULE. The following financial
statement schedule of Credence Systems Corporation, for
the years ended October 31, 1999, 1998 and 1997, is
filed as part of this Annual Report on Form 10-K and
should be read in conjunction with the Consolidated
Financial Statements of Credence Systems Corporation:
PAGE
----
Schedule II--Valuation and Qualifying Accounts 59
Schedules other than the one listed above have been
omitted since they are either not required, are not
applicable or the required information is shown in the
consolidated financial statements or related notes.
3. EXHIBITS. See Exhibit Index on page 60.
(b) Reports on Form 8-K were filed during the last quarter of the fiscal
year covered by this Annual Report on Form 10-K. The Company filed a
Current Report on Form 8-K on December 15, 1999, reporting its
financial results for the fourth fiscal quarter ended October 31,
1999.
(c) See Exhibit Index on page 60.
(d) The following financial statement schedule of Credence Systems
Corporation, for the years ended October 31, 1999, 1998 and 1997, is
filed as part of this Annual Report on Form 10-K and should be read
in conjunction with the Consolidated Financial Statements of
Credence Systems Corporation:
PAGE
----
Schedule II--Valuation and Qualifying Accounts 59
Schedules other than the one listed above have been omitted since
they are either not required, are not applicable or the required
information is shown in the consolidated financial statements or
related notes.
56
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on
January 27, 2000.
CREDENCE SYSTEMS CORPORATION
--------------------------------------------
(Registrant)
By: /S/ GRAHAM J. SIDDALL
----------------------------------------
Graham J. Siddall
PRESIDENT AND CHIEF EXECUTIVE OFFICER
/S/ DENNIS P. WOLF
----------------------------------------
Dennis P. Wolf
EXECUTIVE VICE PRESIDENT, CHIEF
FINANCIAL OFFICER AND SECRETARY
(PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER)
57
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Graham Siddall and Dennis P. Wolf, and
each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and re-substitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments to this Report
on Form 10-K, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming that
said attorneys-in-fact and agents, or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ GRAHAM J. SIDDALL President and Chief Executive Officer January 27, 2000
- ----------------------------------
Graham J. Siddall
/s/ DENNIS P. WOLF Executive Vice President, Chief January 27, 2000
- ---------------------------------- Financial Officer and Secretary
Dennis P. Wolf
/s/ WILLIAM G. HOWARD, JR. Chairman of the Board of Directors January 27, 2000
- ----------------------------------
William G. Howard, Jr.
/s/ HENK J. EVENHUIS Director January 27, 2000
- ----------------------------------
Henk J. Evenhuis
/s/ JOS C. HENKENS Director January 27, 2000
- ----------------------------------
Jos C. Henkens
/s/ BERNARD V. VONDERSCHMITT Director January 27, 2000
- ----------------------------------
Bernard V. Vonderschmitt
/s/ JON D. TOMPKINS Director January 27, 2000
- ----------------------------------
Jon D. Tompkins
</TABLE>
58
<PAGE>
SCHEDULE II
CREDENCE SYSTEMS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END
OF YEAR EXPENSES WRITE-OFFS OF YEAR
------------------ ------------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Year ended October 31, 1999
Allowance for doubtful accounts....... $5,409 $ (645)(a) $1,548 $3,216
Year ended October 31, 1998
Allowance for doubtful accounts....... $1,763 $4,325 $ 679 $5,409
Year ended October 31, 1997
Allowance for doubtful accounts....... $1,781 $ 762 $ 780 $1,763
</TABLE>
- --------------------------
(a) During fiscal 1999 the Company reclassified $1,000,000 from the allowance
for doubtful accounts to the other costs incurred related to the fiscal
1998 special charges. This $1,000,000 was offset by $355,000 in additional
expenses recorded during the year.
59
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER PAGE
- ------ ----
<C> <S> <C>
2.1(1) Agreement and Plan of Merger dated October 5, 1993 between Credence
Systems Corporation, a California Corporation, and the Company.
2.2(1) Asset Purchase Agreement dated December 31, 1990 between Tektronix,
Inc. and the Company, including Amendment No. 1 to the asset Purchase
Agreement dated December 31, 1990.
2.3(1) Technology Agreement between Tektronix, Inc. and the Company dated
December 31, 1990.
2.4(1) Letter Agreement between Tektronix, Inc. and the Company dated
September 30, 1992.
2.5(1) Amendment Agreement dated as of August 12, 1993 between Tektronix,
Inc. and the Company.
2.6(1) 1990 Plan of Purchase Price Adjustment Recapitalization.
2.7(1) Letter Agreement between Tektronix, Inc. and the Company dated
August 11, 1993.
2.8(11) Agreement and Plan of Reorganization dated as of February 6, 1994
among the Registrant, Semiconductor Test Solutions, Inc., EPRO and
the shareholders of EPRO listed therein.
2.9(13) Asset Purchase Agreement, dated as of May 19, 1997, among Credence
Systems Corporation, Test Systems Strategies, Inc., a Delaware
corporation and wholly-owned subsidiary of Credence Systems
Corporation, and Test Systems Strategies, Inc. an Oregon
Corporation and wholly-owned subsidiary of Summit Design, Inc,.
2.10(26) Asset Purchase Agreement, dated as of August 20, 1997, among Zycad
Corporation, a Delaware Corporation, its wholly owned subsidiary,
Attest Software and Test Systems Strategies, Inc., a Delaware
Corporation and wholly owned subsidiary of the Company.
2.11(24) 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 Heuristics Physics Laboratotires, Inc., a
California Corporation.
2.12 Agreement and Plan of Merger dated as of February 16, 1999, between
Fluence Technology, Inc., a Delaware corporation and wholly-owned
subsidiary of Credence Systems COrporation, and Opmaxx, Inc., a
a Delaware Corporation.
2.13 Amendment No. 1 to the Agreement and Plan of Merger dated as of
August 31, 1999, to the Agreement and Plan of Merger dated as of
February 16, 1999, between Fluence Technology, Inc., a Delaware
corporation and wholly owned subsidiary of Credence Systems
Corporation and Opmaxx, Inc., a Delaware Corporation.
3.1(11) Amended and Restated Certificate of Incorporation of the Company.
3.2(1) Bylaws of the Company.
4.1(1) Investor Rights Agreement dated October 15, 1989 by and among the
Company and the investors listed therein, including Amendment
Agreement to the Investor Rights Agreement dated June 15, 1990,
Second Amendment Agreement to the Investor Rights Agreement dated
September 30, 1992 and the Third Amendment Agreement to Investor
Rights Agreement dated August 8, 1993.
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER PAGE
- ------ ----
<C> <S> <C>
4.2(4) Fourth Amendment Agreement to the Investor Rights Agreement dated
March 10, 1994.
4.3(19) Purchase Agreement between the Company and Smith Barney, Inc. for
purchase of $115,000,000 5 1/4% Convertible Subordinated Notes due
2002, dated September 4, 1997.
4.4(19) Indenture between the Company and State Street Bank and Trust
Company of California, N.A., as Trustee dated September 10, 1997.
4.5(19) Form of 5 1/4% Convertible Subordinated Note due 2002.
4.6(19) Registration Rights Agreement between the Company and Smith Barney,
Inc. dated as of September 4, 1997.
4.7(21) Form of Rights Agreement, dated as of June 2, 1998, by and between
the Company and BankBoston, N.A., as Rights Agent.
4.8(21) Form of Certificate of Designation for the Series A Junior
Participating Preferred Stock of the Company.
4.9(21) Form of Rights Certificate.
4.10(10) Fifth Amendment Agreement to the Investor Rights Agreement dated May
26, 1995.
10.1(1) Form of Indemnification Agreement Between the Company and each of
its officers and directors.
10.2(1) Underwriting Agreement dated October 28, 1993 by and among the
Company and the underwriters named therein.
10.3(4) Underwriting Agreement dated March 31, 1994 by and among the Company
and the underwriters named therein.
10.4(10) Underwriting Agreement dated June 14, 1995 by and among the Company
and the underwriters named therein.
10.5(1) Industrial Space Lease between Renco Investment Company and the
Company dated August 12, 1992 including the First Addendum dated
August 14, 1992, Option to renew Lease dated August 14, 1992, First
Amendment to Lease dated October 22, 1992 and Acceptance Agreement
dated November 25, 1992.
10.6(1) Indenture (lease agreement) between Pen Nom I Corporation and the
Company dated April 3, 1991, including the First Amendment to Lease
dated August 16, 1991, the Second AMendment to Lease dated December
10, 1991, the Third Amendment to Lease dated August 7, 1992, the
Fourth Amendment to Lease dated October 13, 1992 and the Fifth
Amendment to Lease dated November 15, 1993.
10.7(1) Master Equipment Lease Agreement between the Company and Financing
for Science and Industry, Inc. dated February 26, 1993.
10.8(7) Leaseline Agreement between Comdisco and the Company dated July 29,
1994.
10.9(2) Indemnification and Security Agreement between Credence Capital
Corporation and the Company dated October 28, 1994.
10.10(4) Stock Transfer Agreement by and among the Company, Richard Cann,
Rene Verhaegen and Credence Europa Limited dated as of February 28,
1994.
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER PAGE
- ------ ----
<C> <S> <C>
10.11(4) Secured Line of Credit Agreement between Credence Europa Limited and
the Company dated as of February 28, 1994.
10.12(9) Lease by and between the Company and The Mutual Life Insurance
Company of New York dated June 16, 1995.
10.13(13) First Amendment to Lease by and between the Company and The Mutual
Life Insurance Company of New York dated December 29, 1995.
10.14(14) Loan and Security Agreement between the Company and Silicon Valley
Bank and Comerica Bank-California dated April 28, 1995, as amended.
10.15(12) Domestic and International Master Agreement for Purchase of
Equipment and Product Support between the Company and Comdisco,
Inc., dated January 31, 1995.
10.16(13) Employment Agreement by and between the Company and Elwood H.
Spedden dated October 31, 1995.
10.17(14) Master Lease Purchase Agreement, Lease Purchase Closing Schedule and
Lease Purchase Addendum No. One between Metlife Capital Corporation
and the Company dated April 30, 1996.
10.18(15) Loan Agreement among Silicon Valley Bank, Bank of Hawaii and the
Company, dated July 26, 1996.
10.19(16) License Agreement between the Company and Kinetix Test Systems, LLC,
dated July 31, 1996.
10.20(16) Lease Agreement between Petula Associates, Ltd and Koll Portland
Associates, dba KBC Tigard II and the Company dated September 12,
1995.
10.21(16) Sixth Amendment to Lease by and between the Company and Pen Nom I
Corporation dated March 10, 1995.
10.22(27) Software OEM License Agreement between the Company, Test Systems
Strategies, Inc. and Summit Design, Inc. dated May 19, 1997.
10.23(18) Joint Venture Agreement dated June 10, 1997, between the Company and
Innotech Corporation.
10.24(23) Lease Agreement between the Company and Bedford Property Investors,
Inc. dated December 10, 1997.
10.25(24) Lease Agreement between the Company and Pacific Realty Associates,
L.P., dated April 10, 1998.
10.26(25) Amendment to Loan Agreement dated July 24, 1998 between the Company,
Silicon Valley Bank and Bank of Hawaii.
10.27(25) Non-Recourse Receivables Purchase Agreement dated May 1, 1998
between the Company and Silicon Valley Financial Services.
10.28(31) Employment offer letter, dated March 24, 1998, by and between the
Company and Dennis P. Wolf.
10.29(31) Letter Agreement, dated January 19, 1999, by and between the Company
and Dr. Wilmer R. Bottoms.
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER PAGE
- ------ ----
<C> <S> <C>
10.30(29) Amendment to Loan Agreement dated February 5, 1999 between Silicon
Valley Bank, Bank of Hawaii and the Company.
10.31(30) Amendment to Loan Agreement dated July 23, 1999 between Silicon
Valley Bank and the Company.
10.32(30) Employment Agreement by and between the Company and Graham J.
Siddall, dated July 29, 1999.
21.1 Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney (reference is made to page 58 of this report).
27.1 EDGAR Financial Data Schedule.
99.1(28) 1993 Stock Option Plan, as Amended and Restated through March 24,
1999.
99.2(20) Form of Notice of Grant to be generally used in connection with the
1993 Stock Option Plan.
99.3(20) Form of Stock Option Agreement to be generally used in connection
with the 1993 Stock Option Plan.
99.4(20) Addendum to the Stock Option Agreement (Special Tax Elections).
99.5(20) Addendum to the Stock Option Agreement (Limited Stock Appreciation
Rights).
99.6(20) Addendum to the Stock Option Agreement (Change in Control).
99.7(20) Addendum to the Stock Option Agreement (Financial Assistance).
99.8(20) Form of Notice of Grant of Stock Option (Non-Employee Director) to
be generally used in connection with the automatic option grant of
the 1993 Stock Option Plan.
99.9(20) Form of Stock Option Agreement (Non-Employee Director) to be
generally used in connection with the automatic option grant program
of the 1993 Stock Option Plan.
99.10 Employee Stock Purchase Plan, as Amended and Restated through June
14, 1998.
99.11(8)(13) Compensation Agreement between the Company and Jos C. Henkens,
dated November 5, 1993.
99.12(8)(13) Compensation Agreement between the Company and Wilmer R. Bottoms,
dated November 5, 1993.
99.13(8)(13) Compensation Agreement between the Company and Robert F. Kibble,
dated November 5, 1993.
99.14(8)(13) Compensation Agreement between the Company and Bernard V.
Vonderschmitt, dated November 5, 1993.
99.15(8)(13) Compensation Agreement between the Company and Henk J. Evenhuis,
dated November 4, 1993.
99.16(20) Form of Stock Purchase Agreement
99.17(20) Form of Enrollment/Change Form
</TABLE>
63
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER PAGE
- ------ ----
<C> <S> <C>
99.18(29) Employment Agreement by and between the Company and David A.
Ranhoff, dated March 31, 1999.
99.19(29) Employment Agreement by and between the Company and Dennis P. Wolf,
dated March 31, 1999.
99.20(29) Employment Agreement by and between the Company and William G.
Howard, dated March 31, 1999.
</TABLE>
- --------------------------
(1) Incorporated by reference to an exhibit to the Company's Registration
Statement on Form S-1 (Registration No. 33-68438) as amended.
(2) Incorporated by reference to an exhibit to the Company's 1994 Annual
Report on Form 10-K.
(3) Incorporated by reference to an exhibit to the Company's Registration
Statement on Form S-8 (Registration No. 33-71856).
(4) Incorporated by reference to an exhibit to the Company's Registration
Statement on Form S-1 (Registration No. 33-76264) as amended.
(5) Incorporated by reference to an exhibit to the Company's Registration
Statement on Form S-8 (Registration No. 33-76542).
(6) Incorporated by reference to an exhibit to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended April 30, 1994.
(7) Incorporated by reference to an exhibit to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended July 31, 1994.
(8) Management contract or compensatory plan filed pursuant to Item 14(c).
(9) Incorporated by reference to an exhibit to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended July 31, 1995.
(10) Incorporated by reference to an exhibit to the Company's Registration
Statement on Form S-3 (Registration No. 33-92802), as amended.
(11) Incorporated by reference to an exhibit to the Company's Current Report on
Form 8-K as filed with the Commission on March 29, 1995, as amended on May
26, 1995.
(12) Incorporated by reference to an exhibit to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended April 30, 1995.
(13) Incorporated by reference to an exhibit to the Company's 1995 Annual
Report on Form 10-K.
(14) Incorporated by reference to an exhibit to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended April 30, 1996.
(15) Incorporated by reference to an exhibit to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended July 31, 1996.
(16) Incorporated by reference to an exhibit to the Company's 1996 Annual
Report on Form 10-K.
(17) Incorporated by reference to an exhibit to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended April 30, 1997.
64
<PAGE>
(18) Incorporated by reference to an exhibit to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended July 31, 1997.
(19) Incorporated by reference to an exhibit to the Company's Registration
Statement on Form S-3 (Registration No. 333-39387) as amended.
(20) Exhibits 99.2 through 99.9 and Exhibit 99.16 and 99.17 are incorporated
herein by reference to identically numbered exhibits included in the
Company's Registration Statement on Form S-8 (File No. 333-27499) declared
effective with the Securities and Exchange Commission on May 20, 1997.
(21) Incorporated by reference to an exhibit to the Company's Current Report on
Form 8-K as filed with the Commission on June 3, 1998.
(22) Incorporated by reference to an exhibit to the Company's Registration
Statement on Form S-8 (File No. 333-59051) as filed with the Commission on
July 4, 1998.
(23) Incorporated by reference to an exhibit to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended January 31, 1998.
(24) Incorporated by reference to an exhibit to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended April 30, 1998.
(25) Incorporated by reference to an exhibit to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended July 31, 1998.
(26) Incorporated by reference to an exhibit to the Company's Annual Report on
Form 10-K for the year ended October 31, 1997.
(27) Filed herewith. This agreement was previously filed as an exhibit to the
Company's Quarterly Report on Form 10-Q for the quarterly period ended
July 31, 1997. Confidential treatment had been granted to certain portions
of this exhibit but no longer applies.
(28) Incorporated by reference to an exhibit to the Company's Registration
Statement on Form S-8 (File No. 333-77007) as filed with the Commission On
April 26, 1999.
(29) Incorporated by reference to an exhibit to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended April 30, 1999.
(30) Incorporated by reference to an exhibit to the Company's Quarterly Report
on Form 10-Q for the quarterly period ended July 31, 1999.
(31) Incorporated by reference to an exhibit to the Company's Annual Report on
Form 10-K for the year ended October 31, 1998.
65
<PAGE>
EXHIBIT 2.12
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "AGREEMENT") is made as
of February 16, 1999, between Fluence Technology, Inc., a Delaware corporation
("FLUENCE" or "BUYER"), and Opmaxx, Inc., a Delaware corporation ("OPMAXX" or
the "COMPANY"). Fluence and Opmaxx are each sometimes referred to as a "PARTY"
and collectively as the "PARTIES".
RECITALS
A. Fluence, Opmaxx, and their respective Boards of Directors
deem it advisable for Opmaxx to merge with and into Merger Sub (defined below)
in accordance with the terms and provisions of this Agreement (the "MERGER").
B. Holders in each class and series of issued and outstanding
Common and Preferred Stock of Opmaxx (collectively, the "OPMAXX STOCK") have
reviewed the terms of this Agreement; holders of at least a majority of the
shares of Opmaxx Class A Common, Series A Preferred, and Series B Preferred
Stock (treated as a single class) and the holders of at least two-thirds of the
Series A Preferred Stock (voting as a separate class) have executed irrevocable
proxies authorizing Douglas L. Goodman to vote their shares in favor of the
Merger.
C. As a result of the Merger the holders of the Shares will
receive a portion of eight million dollars ($8,000,000.00) in cash (minus the
amount required to pay in full the outstanding debt of the Company at the
Effective Time of the Merger), as more fully described in and subject to the
specific terms and provisions of this Agreement.
D. Immediately prior to the Effective Time of the Merger, all
outstanding vested employee stock options shall be exercised for Common Stock
(all Common Stock and Preferred Stock outstanding immediately prior to the
Effective Time of the Merger being, the "SHARES").
E. The transactions contemplated by this Agreement shall be
consummated only if Buyer, in its sole discretion, indicates to the Company its
desire to do so. Prior to or contemporaneously with its decision to consummate
such transactions, Fluence shall incorporate Opmaxx Acquisition Company, Inc., a
Delaware corporation, as its wholly-owned subsidiary ("MERGER SUB").
F. This Agreement sets forth the terms and conditions to which
the parties hereto have agreed and further contemplates the consummation of
certain related transactions hereinafter described.
Agreement and Plan of Merger
Page 1
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AGREEMENT
NOW, THEREFORE, in consideration of the premises and the
mutual promises and covenants of the parties hereto, and subject to the terms
and conditions set forth herein, the parties herein agree as follows:
1. DEFINITIONS.
Certain terms used in this Agreement and the Exhibits hereto
are specifically defined herein or therein. Unless elsewhere defined in this
Agreement or the Exhibits, these definitions are set forth or referred to in
EXHIBIT A of this Agreement.
2. REORGANIZATION AND MERGER.
Subject to the terms and conditions of this Agreement, the
parties hereto agree that, following the Closing (as defined in Section 3
below), Merger Sub and Opmaxx shall execute and file the Certificate of Merger
in substantially the form attached hereto as EXHIBIT B with the Delaware
Secretary of State, whereupon Opmaxx shall be merged with and into Merger Sub
and Merger Sub shall be the surviving corporation in such merger and shall
become a wholly owned subsidiary of Fluence. The parties intend that the Merger
shall be accounted for using the purchase method of accounting.
2.1 SURVIVING CORPORATION.
Upon the effectiveness of the Merger (hereinafter referred to
as the "EFFECTIVE TIME OF THE MERGER"), Opmaxx shall be merged with and into
Merger Sub and the separate existence of Opmaxx shall cease. Merger Sub shall be
the corporation surviving the Merger.
2.2 CERTIFICATE OF INCORPORATION AND BYLAWS OF OPMAXX.
The Certificate of Incorporation and Bylaws of Merger Sub at
and immediately prior to the Effective Time of the Merger (as restated to effect
a change of name to "Opmaxx, Inc."), shall be the Certificate of Incorporation
and Bylaws of Merger Sub following the Effective Time of the Merger.
2.3 COMMON STOCK OF MERGER SUB.
Each share of the common stock of Merger Sub (the "MERGER SUB
COMMON STOCK") issued and outstanding immediately prior to the Effective Time of
the Merger shall, by virtue of the Merger and without any action on the part of
any holder thereof, continue to be one share of Merger Sub Common Stock.
Agreement and Plan of Merger
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2.4 MERGER CONSIDERATION ALLOCATION AND CANCELLATION OF
THE SHARES.
Subject to the other terms of this Section 2, each of the
Shares shall, by virtue of the Merger and without any action on the part of any
holder thereof, be converted into the right to receive a portion of the
$8,000,000.00 Merger Consideration (the "MERGER CONSIDERATION"), and each of the
Shares shall be deemed canceled and retired. The Merger Consideration shall be
allocated among the outstanding debt of the Company immediately prior to the
Effective Time of the Merger, the Class A Common Stock, the Class B Common
Stock, the Series A Preferred Stock and the Series B Preferred Stock as
indicated on EXHIBIT C. The Company and the Opmaxx Common Stockholders hereby
fully exculpate and indemnify Buyer and its officers, directors, advisors,
representatives and affiliates from any and all claims in any way related to the
allocation of the Merger Consideration and the Additional Merger Consideration
amongst holders of the Shares.
2.5 CONVERSION OF OPMAXX OPTIONS.
Subject to the other terms of this Section 2, each of the
unvested options outstanding immediately prior to the Effective Time of the
Merger ("OPMAXX OPTIONS") to purchase Opmaxx Common Stock shall, by virtue of
the Merger and without any action on the part of any holder thereof, be
converted into the right to acquire that number of shares of Fluence Stock
determined by multiplying the number of shares of Opmaxx Stock into which such
Opmaxx Options are convertible immediately prior to the Effective Time of the
Merger by the Option Conversion Number (as defined below), at an exercise price
per share of Fluence Common Stock equal to the exercise price per share of such
Opmaxx Option divided by the Option Conversion Number, subject to the provisions
of Section 2.7 regarding the elimination of fractional shares. Each Opmaxx
Option and the Opmaxx 1997 Stock Option/Issuance Plan shall be assumed by
Fluence. The Option Conversion Number shall be the fair market value of a share
of Common Stock of Opmaxx, without regard to class, divided by the fair market
value of one share of Fluence Common Stock on the day of Closing. The fair
market value of one share of Common Stock of Opmaxx and Fluence on the date of
Closing shall be determined by an independent third party mutually agreeable to
Fluence and Opmaxx. If they cannot agree on an appraiser, Fluence and Opmaxx
shall each select an appraiser and those appraisers shall select a third
appraiser whose determination of fair market value shall be binding on the
parties. It is a condition to Fluence's assumption under this paragraph that
each holder of unvested options to purchase Opmaxx Common Stock shall have
furnished Fluence with a signed waiver agreement (in form and substance
satisfactory to Fluence) in which such person, as consideration for the
assumption of his or her Opmaxx Options by Fluence in the Merger, waives any and
all right he or she may otherwise have under the Agreement or the agreements
evidencing his or her Opmaxx Options or otherwise, to receive any portion of the
Merger Consideration or Additional Merger Consideration upon the subsequent
exercise of the assumed options which would reflect, or otherwise compensate
such person for, the cash consideration payable per share of Opmaxx Common Stock
to the actual holders of Opmaxx Common Stock in conversion of their shares of
such Common Stock in the Merger.
Agreement and Plan of Merger
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2.6 EXCHANGE OF STOCK CERTIFICATES.
At the Effective Time of the Merger, Opmaxx and Fluence shall
submit to Fluence's registrar and transfer agent, Marianne Brannock at Credence
Systems Corporation, 215 Fourier Avenue, Fremont, CA 94539 (the "EXCHANGE
AGENT"), an instruction letter including a list of the names, addresses and
social security numbers/taxpayer identification numbers or other appropriate
documentation of each holder of shares of Opmaxx Stock outstanding immediately
prior to the Effective Time of the Merger. As soon as reasonably practicable
following the Effective Time of the Merger, Fluence shall cause the Exchange
Agent to cause each such Opmaxx Stockholder to receive, in exchange for the
Opmaxx Stock held by such Opmaxx Stockholder, a cash payment representing the
Opmaxx Stockholder's share of the Merger Consideration as determined by the type
or types of securities of Opmaxx held and exchanged by such stockholder and by
reference to EXHIBIT C. A holder of Opmaxx Stock whose stock certificate(s) have
been lost or destroyed shall, upon providing satisfactory evidence of ownership
of such shares and appropriate indemnification, have the right to the delivery
of the appropriate cash amount.
2.7 TRANSFER BOOKS.
The stock transfer books of Opmaxx pertaining to Opmaxx Stock
outstanding at the Effective Time of the Merger shall be closed at the Effective
Time of the Merger, and thereafter no transfer of any such shares of Opmaxx
Stock shall be recorded thereon.
2.8 OPMAXX DISSENTING SHARES.
Opmaxx Stockholders holding any shares of Opmaxx stock that
are eligible to be "DISSENTING SHARES" within the meaning of the Delaware
General Corporate Law ("DELAWARE CODE") with respect to the Merger and as to
which dissenter's rights to require the purchase of such shares have been
properly exercised will be entitled to their rights under the Delaware Code with
respect to such shares. Merger Sub shall pay all amounts to which dissenting
stockholders of Opmaxx may be entitled by reason of the Merger. Shares of Opmaxx
Stock as to which dissenting stockholders' rights of appraisal have not been
properly perfected under the Delaware Code will be converted to cash as provided
in Section 2.4 above.
2.9 FURTHER ASSURANCES.
Fluence and Opmaxx agree that if, at any time after the
Effective Time of the Merger, any further deeds, assignments or assurances are
reasonably necessary or desirable to be obtained from Opmaxx, Fluence or its
officers or directors, to consummate the Merger or to carry out the purposes of
this Agreement at or after the Effective Time of the Merger, then Fluence,
Opmaxx and their respective officers and directors shall execute and deliver all
such proper deeds, assignments and assurances and do all other things necessary
or desirable to consummate the Merger and to carry out the purposes of this
Agreement, in the name of Opmaxx, Fluence or otherwise.
Agreement and Plan of Merger
Page 4
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3. THE CLOSING.
Subject to the satisfaction or waiver of the closing
conditions set forth in Section 6 of this Agreement, the closing of the Merger
(the "CLOSING") and other transactions contemplated by this Agreement shall take
place at 8700 SW Creekside Place, Beaverton, OR 97008 at 10:00 a.m. local time
on such date as is set by Buyer (the "CLOSING DATE").
4. REPRESENTATIONS AND WARRANTIES OF OPMAXX.
The Company makes the representations and warranties set forth
at EXHIBIT D hereto to the Buyer.
5. REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer makes the representations and warranties set forth at
EXHIBIT E hereto to the Company.
6. CONDITIONS TO THE CLOSING
6.1 BUYER'S CONDITIONS.
The parties hereto acknowledge that Buyer is under no
obligation to consummate the Merger contemplated by this Agreement. Subject to
Section 11.6, should Buyer determine, in its sole discretion, to consummate the
Merger, the Company agrees to cause the following to be true at or prior to the
Closing (PROVIDED, however, that the Company shall have no obligation to cause
actions or events over which it has no control):
(a) The representations and warranties of the Company
contained in this Agreement shall be true and correct in all material respects
on and as of the date hereof except as set forth in the Disclosure Schedule, and
shall also be true and correct in all material respects on and as of the
Closing, except as set forth in the Revised Disclosure Schedule.
(b) The Company shall have performed or complied in all
material respects with all covenants required under this Agreement to be
performed or complied with by the Company at or prior to the Closing.
(c) At the Closing, there shall be no injunction, restraining
order or decree of any nature of any court or government authority of competent
jurisdiction that is in effect that restrains or prohibits the consummation of
the transactions contemplated by this Agreement.
(d) All third party consents and approvals, including
governmental consents and approvals, required to consummate the transactions
contemplated by this Agreement shall have been obtained.
Agreement and Plan of Merger
Page 5
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(e) All holders of unvested options to acquire Common Stock
shall have waived any and all rights they may have in respect thereof in
exchange for the right to receive stock options issued by Buyer.
(f) The Company shall have executed and delivered to Buyer an
Escrow Agreement in the form of EXHIBIT F hereto.
(g) All Vested Options and the Tektronix Warrant shall have
been exercised at or prior to Closing.
(h) Counsel for the Company shall have provided a legal
opinion in a form satisfactory to Fluence.
6.2 CONDITIONS TO THE COMPANY'S OBLIGATIONS.
The Company's obligation to effect the Merger hereunder is
subject to the satisfaction at or prior to the Closing of the following
conditions:
(a) The representations and warranties of Buyer contained in
this Agreement shall be true and correct in all material respects on and as of
the Closing Date with the same force and effect as though made on and as of the
Closing Date (except that to the extent that any such representation or warranty
relates to a particular date, such representation or warranty shall be so true
and correct as of that particular date).
(b) Buyer shall have performed or complied in all material
respects with all covenants required under this Agreement to be performed or
complied with by Buyer at or prior to the Closing.
(c) At the Closing, there shall be no injunction, restraining
order or decree of any nature of any court or government authority of competent
jurisdiction that is in effect that restrains or prohibits the consummation of
the transactions contemplated hereby.
(d) All third party consents and approvals, including
governmental consents and approvals, required to consummate the transactions
contemplated by this Agreement shall have been obtained.
(e) Buyer shall have tendered the Merger Consideration to the
Exchange Agent for delivery to the Company's stockholders in accordance with
Sections 2.4 and 3 above.
(f) Buyer shall have executed and delivered to the Company an
Escrow Agreement in the form of EXHIBIT F hereto.
(g) Counsel for the Buyer shall have provided a legal opinion
in a form satisfactory to the Company.
Agreement and Plan of Merger
Page 6
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7. COVENANTS OF THE COMPANY
7.1 NEGATIVE COVENANTS
The Company shall not, without the approval of the Buyer:
(a) create, incur, assume or permit to exist any indebtedness,
except for indebtedness for borrowed money owed to Fluence or Silicon Valley
Bank or their affiliates and indebtedness in the form of accounts payable
incurred in the Ordinary Course of Business;
(b) create, incur, assume or permit to exist any lien on any
property or assets of the Company now owned or hereafter acquired by it or on
any income or revenues or rights in respect thereof, except for liens in favor
of Fluence or Silicon Valley Bank or their affiliates;
(c) enter into any arrangement, directly or indirectly, with
any person whereby it shall sell or transfer any property, real or personal,
used or useful in its business, whether now owned or hereafter acquired, and
thereafter rent or lease such property or other property which it intends to use
for substantially the same purpose or purposes as the property being sold or
transferred;
(d) purchase, hold or acquire any capital stock, evidences of
indebtedness or other securities of, make or permit to exist any loans or
advances to, or make or permit to exist any investment or any other interest in,
any other person;
(e) merge into or consolidate with any other person, or permit
any other person to merge into or consolidate with it, or sell, transfer, lease
or otherwise dispose of (in one transaction or in a series of transactions) all
or any substantial part of its assets (whether now owned or hereafter acquired)
or any capital stock of any subsidiary, or purchase, lease or otherwise acquire
(in one transaction or a series of transactions) all or any substantial part of
the assets of any other person, except that the Company may purchase and sell
inventory in the Ordinary Course of Business;
(f) declare or pay, directly or indirectly, any dividend or
make any other distribution, whether in cash, property, securities or a
combination thereof, with respect to any shares of its capital stock or directly
or indirectly redeem, purchase, retire or otherwise acquire for value any shares
of any class of its capital stock or set aside any amount for any such purpose,
except that the Company may redeem unvested shares at cost from terminated
employees or consultants under the terms of the Company's 1997 Stock
Option/Issuance Plan.
(g) issue any capital stock or options or warrants to acquire
such to any Person other than Buyer and its affiliates, except for shares of
Common Stock issued pursuant to the exercise of outstanding options or warrants
or under future options to be granted or exercised under the Company's 1997
Stock Option/Issuance Plan.
Agreement and Plan of Merger
Page 7
<PAGE>
(h) sell or transfer any property or assets to, or purchase or
acquire any property or assets from, or otherwise engage in any other
transactions with, any of its affiliates, except under any agreements that exist
as of the date of this Agreement and are disclosed on the Disclosure Schedule,
or that exist as of Closing and are disclosed on the Revised Disclosure
Schedule;
(i) engage in any other activity outside the Ordinary Course
of Business or engage at any time in any business or business activity other
than the business currently conducted by it and business activities reasonably
incidental thereto;
(j) nor shall it permit any directors, officers, agents or
representatives to, directly or indirectly, initiate, solicit, encourage,
negotiate with respect to, provide any confidential information in connection
with, or otherwise facilitate, any inquiries or the making of any proposal or
offer with respect to a merger, reorganization, share exchange, consolidation or
similar transaction involving, or any purchase of all or any significant portion
of the assets or any equity securities of, it or any of its subsidiaries;
(k) purposely cause any material adverse change in the
Business Condition of the Company (or any occurrence, circumstance, or
combination thereof which could reasonably be expected to result in any such
material adverse change) from that reflected in the Company Financial Statements
as of December 31, 1997;
(l) create any contractual obligation for any material
transaction (other than the transactions contemplated herein) other than in the
Ordinary Course of Business;
(m) increase or modify the compensation or benefits payable or
to become payable by the Company to any of its Officers and Executive Staff, or
changes pursuant to employment agreements currently in effect or changes in
position of such Officers and Executive Staff other than through the voluntary
termination of such position by the officer or executive staff member or
termination for cause;
(n) increase or modify any bonus, pension, insurance or other
employee benefit plan, payment or arrangement (including, without limitation,
the granting of stock options, restricted stock awards or stock appreciation
rights) made to, for or with any of its Officers and Executive Staff, unless
such increase or modification includes all Service Providers of the Company;
(o) alter any term of any outstanding security of the Company,
unless such alteration is necessary to meet the terms of this Agreement;
(p) make any loan, advance or capital contribution to, or
investment in, any person other than advances made in the Ordinary Course of
Business of the Company;
(q) make any material change in its method of operating the
business or in its accounting practices relating thereto;
Agreement and Plan of Merger
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(r) make any mortgage, pledge, lien, security interest,
hypothecation, charge or other encumbrance imposed or agreed to be imposed on
the assets of the Company other than liens arising with respect to taxes not yet
due and payable, and such liens and encumbrances, if any, which arise in the
ordinary course of business and are not material in nature or amount either
individually or in the aggregate, and which do not detract from the value of the
assets of the Company or impair the operations conducted thereon;
(s) sell, lease, or dispose of, or make any agreement to sell,
lease, or dispose of any of the assets of the Company, other than sales, leases,
or dispositions in the usual and ordinary course of business and consistent with
prior practice;
(t) make any (A) incurrence, assumption or guarantee by the
Company of any debt for borrowed money other than trade indebtedness incurred in
the ordinary course of business consistent with past practice, provided that
such loan or loans are at market rates, the proceeds therefrom are used solely
for working capital purposes by the Company and the total outstanding
indebtedness of the Company at any time does not exceed $2,200,000; (B) waiver
or compromise by it of a valuable right or of a debt owed to it; (C) any
satisfaction or discharge of any lien, claim, or encumbrance or payment of any
obligation by it, except that which is not material to its Business Condition;
(D) issuance or sale of any securities convertible into or exchangeable for debt
securities of the Company; or (E) issuance or sale of options or other rights to
acquire from the Company, directly or indirectly, debt securities of the Company
or any securities convertible into or exchangeable for any such debt securities;
and
(u) transfer or grant any right under Intellectual Property
Rights other than those transferred or granted in the Ordinary Course of
Business consistent with past practice.
7.2 AFFIRMATIVE COVENANTS
(a) This Agreement and the transaction contemplated hereby
have been approved by the Board of Directors of the Company, and holders
representing at least a majority of the Opmaxx Class A Common, Series A
Preferred, and Series B Preferred shares (treated as a single class) and holders
representing at least two-thirds of the Opmaxx Series A Preferred Stock (voting
as a separate class) have executed irrevocable individual proxies authorizing
Douglas L. Goodman to vote their shares in favor of the Merger. Douglas L.
Goodman shall convene a meeting of the stockholders and vote thereat all shares
as authorized by such proxies in favor of the Merger, as promptly as practicable
after being requested to do so by Buyer.
(b) At or before the Closing Date, the Company will prepare
and deliver to Buyer a revised Disclosure Schedule ("REVISED DISCLOSURE
SCHEDULE"), as if the Company were making the representations and warranties set
forth in this Agreement as of the Closing Date.
Agreement and Plan of Merger
Page 9
<PAGE>
8. COVENANTS OF THE BUYER
8.1 AFFIRMATIVE COVENANTS
(a) Buyer agrees to extend credit to the Company up to a
maximum amount of $1,750,000. One million one hundred and fifty thousand dollars
($1,150,000) of such credit has already been provided. The remaining $600,000 of
credit will be made available to the Company immediately upon execution of this
Agreement, on a revolving basis, for use by the Company at any time, from time
to time, and for any reason, provided that the Company's withdrawals be made in
increments of $50,000 or more (or, if less than $50,000 of the original $750,000
credit facility remains, then that lesser amount). Buyer agrees to disburse the
amount requested by the Company within five (5) business days of receiving the
Company's request. The additional $600,000 in revolving credit will be evidenced
by a promissory note substantially in the form of Exhibit G attached hereto, and
secured by certain assets of the Company as provided in the existing Security
Agreement between the parties.
(b) Buyer agrees to forgive fifty percent (50%) of the
outstanding loan amount owed by the Company pursuant to Section 8.1(a) as of the
termination date of this Agreement indicated in Section 11.6, provided that: (i)
Buyer has not obligated itself to consummate the transactions contemplated by
this Agreement prior to such date by providing notice to the Company of its
intent to do so prior to December 31, 1999; and (ii) the Company is not in
material breach of any covenants set forth in Section 7 hereof as of the
termination date.
(c) During the term of this Agreement and throughout the
period in which Additional Merger Consideration may be earned pursuant to
Section 9, Buyer agrees to take necessary steps to cause the worldwide sales and
distribution organization of its parent corporation, Credence Systems
Corporation ("Credence"), to participate in sales efforts to promote the
Company's Products as it promotes Buyer's products.
(d) During the term of this Agreement and throughout the
period in which Additional Merger Consideration may be earned pursuant to
Section 9, Buyer agrees that its worldwide sales and distribution organization
will pursue sales of the Company's Products as it pursues sales of its own
products.
(e) During the term of this Agreement and throughout the
period in which Additional Merger Consideration may be earned pursuant to
Section 9, Buyer agrees that its marketing organization will promote the
Company's Products as it promotes its own products.
(f) During the term of this Agreement and throughout the
period in which Additional Merger Consideration may be earned pursuant to
Section 9, Buyer agrees that its marketing communications organization will
support promotion of the Company's Products through trade shows, press releases,
and the like, at no charge and as requested by the Company.
(g) Buyer agrees that within six (6) months after execution of
this Agreement, it will make available to the Company at no charge, four (4)
software engineers to perform
Agreement and Plan of Merger
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development work for the Company. Buyer agrees that these four engineers will be
available to the Company on an exclusive basis, and will remain so until
termination of this Agreement. Buyer further agrees that the work product of
these four engineers will be the sole and exclusive intellectual property of the
Company (notwithstanding their employment status), and that Buyer will take all
actions and execute any further agreements necessary to ensure that such work
product remains the sole and exclusive property of the Company, including,
without limitation, requiring each of such engineers to execute confidentiality
and development agreements in the Company's favor and the appropriate
assignments of intellectual property.
(h) During the term of this Agreement and throughout the
period in which Additional Merger Consideration may be earned pursuant to
Section 9, Buyer agrees to take necessary steps to cause Credence to provide a
source code copy of its Analog Wave Tool to the Company at no charge for
development purposes, and to license the Company to distribute binary executable
versions of the Analog Wave Tool to its customers.
9. ADDITIONAL MERGER CONSIDERATION
The Opmaxx Common Stockholders shall be entitled to receive the
following amounts in addition to the Merger Consideration:
9.1 DEFINITION OF NET RECEIPTS FOR PAYMENT OF ROYALTIES. The
term "NET RECEIPTS" shall mean any money actually received by Buyer from the
sale, lease, rental, license or other commercial exploitation of the Products,
including maintenance fees, but excluding fees for engineering consulting
services and after deduction of all amounts related to returns and allowances
and uncollectible accounts. The term "PRODUCTS", as used herein, shall mean the
computer software programs sold or under development by Opmaxx or on the Opmaxx
sales price list as of the Closing Date as such Products are further developed,
extended, modified, enhanced and otherwise customized after the Closing. The
term Products shall also include all present and future enhancements,
corrections, modifications, upgrades, variations, revisions, improvements,
translations in human or machine-readable languages and codes, conversions,
derivatives, new versions or releases of or to the Products at any time
developed after the Closing. Buyer agrees not to incorporate products, whether
developed by Buyer or alternative sources, into its distribution that reduces
the expected revenue stream from the Additional Merger Consideration.
9.2 PAYMENT OF ADDITIONAL MERGER CONSIDERATION. Subsequent to
the Closing, Buyer shall be obligated to pay to the Escrow Agent within
forty-five (45) days of the end of each calendar quarter additional Merger
Consideration (the "ADDITIONAL MERGER CONSIDERATION") equal to ten percent (10%)
of Net Receipts for sales of the Products from the Closing Date through December
31, 2003. Such payments of Additional Merger Consideration are required for all
sales made through December 31, 2003, even if payments for such sales are not
received until a later date. The Additional Merger Consideration payments will
be held, administered, and disbursed by the Escrow Agent, subject to offset
according to Section 10.3, pursuant to the terms of the Escrow Agreement.
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9.3 BUNDLED SALES OF THE PRODUCTS. In the event the Company's
successor sells, rents, leases or sublets the Products in conjunction with other
products where the Products are not separately itemized and invoiced, then the
Opmaxx Common Stockholders shall be entitled to receive, and Buyer shall be
obligated to pay, Additional Merger Consideration, at the applicable rate set
forth in Section 9.2 above, based upon the proportionate percentage of the
catalog value of the Product or Products in relation to the aggregate catalog
value of the Product or Products and the other products sold and invoiced as a
bundled package.
9.4 RECORDS. Buyer covenants and agrees to maintain adequate
records of all transactions contemplated hereby, subject to the Nondisclosure
Agreement. The Common Stockholder Representative shall be entitled to audit and
examine the records maintained by Buyer in connection with the transactions
contemplated hereby at Buyer's principal executive offices during customary
business hours and upon five (5) business days' prior notice, and to make copies
of said financial records of Buyer reflecting transactions directly related to
sale of the Products. The Common Stockholder Representative shall pay for costs
of any audits conducted by the Common Stockholder Representative, except that if
Buyer's royalty calculations are determined to be greater than 2% in error,
Buyer shall pay the costs of such audit.
9.5 GOOD FAITH EFFORTS. Buyer covenants and agrees to provide
the funding, staffing and support necessary or desirable to further develop,
market, and distribute the Products at least equivalent to the funding, staffing
and support expended by the Company prior to the Merger.
10. INDEMNIFICATION
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 and warranties of the Company and the Buyer shall survive the
execution, delivery, and performance of this Agreement until January 1, 2004. No
investigation made by or on behalf of Buyer with respect to the Company shall be
deemed to affect Buyer's reliance on the representations, warranties, covenants
and agreements made by the Company contained in this Agreement and shall not be
a waiver of Buyer's right to indemnity as herein provided for the breach or
inaccuracy of or failure to perform or comply with any of the Company's
representations, warranties, covenants or agreements in this Agreement. No
investigation made by or on behalf of the Company with respect to the Buyer
shall be deemed to affect the Company's reliance on the representations,
warranties, covenants and agreements made by the Buyer contained in this
Agreement and shall not be a waiver of the Company's right to indemnity as
herein provided for the breach or inaccuracy of or failure to perform or comply
with any of the Buyer's representations, warranties, covenants or agreements in
this Agreement.
Agreement and Plan of Merger
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(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
other party in this Agreement.
(c) Notwithstanding anything in this Agreement to the
contrary, the Company shall have liabilities and obligations for Claims and
Liabilities (as defined herein) under this Section 10 only with respect to
claims submitted or notices of claims provided to the Escrow Agent and the
Common Stockholder Representative on or before December 31, 2003.
Notwithstanding the expiration date of the representations, warranties,
covenants and agreements set forth herein, if Buyer shall notify the Escrow
Agent and the Common Stockholder Representative with respect to the submission
of a claim prior to January 1, 2004, the Company's liability or obligation for
Claims and Liabilities shall continue in full force and effect until settled in
accordance with the terms and conditions of the Escrow Agreement.
10.2 INDEMNIFICATION OF FLUENCE
Subject to the limitations contained in this section, the
Opmaxx Common Stockholders shall indemnify and hold harmless Fluence, its
affiliates, officers, directors, stockholders, employees and agents from and
against any and all losses, claims, judgments, liabilities, demands, charges,
suits, penalties, costs or expenses, including court costs and attorneys' fees
("CLAIMS AND LIABILITIES") with respect to or arising from (i) the breach of any
warranty or any inaccuracy of any representation made by Opmaxx in this
Agreement, or (ii) the breach of any covenant or agreement made by Opmaxx in
this Agreement. The Company shall not have breached a representation or warranty
in this Agreement to the extent that the Company became required to disclose a
new item or matter on the Revised Disclosure Schedule if the Company learns of
the fact, condition or circumstance requiring such disclosure after the date of
this Agreement and prior to Closing.
10.3 LIMITATIONS TO THE INDEMNIFICATION OF FLUENCE
Anything to the contrary notwithstanding, Fluence shall not be
indemnified and held harmless in respect of any Claims and Liabilities which are
covered by insurance owned by Opmaxx to the extent that any net loss is reduced
by such insurance. Fluence's recourse in respect of its right to indemnity by
and from the Opmaxx Common Stockholders shall be limited to the Additional
Merger Consideration held or to be deposited into escrow under the Escrow
Agreement; Fluence's indemnity shall not extend to Additional Merger
Consideration once it is paid out to the Opmaxx Common Stockholders pursuant to
the Escrow Agreement. Fluence shall not be permitted to enforce any claim for
indemnification under this Section 10 until the aggregate amount of Claims and
Liabilities exceeds $50,000 (the "THRESHOLD"). Once Claims and Liabilities in
excess of the Threshold have been asserted by Fluence, all Claims and
Liabilities above that amount may be pursued by Fluence unless otherwise limited
by this Agreement or the Escrow Agreement, provided, however, that the Agreement
will control in the case of any conflicts between it and the Escrow Agreement.
The parties understand and agree that: (i) the obligation of the Opmaxx Common
Stockholders to indemnify Fluence and its related parties as provided in this
Section 10 shall be the exclusive remedy for Fluence and such
Agreement and Plan of Merger
Page 13
<PAGE>
related parties in the event of any breach of any express or implied
representation, warranty or covenant of Opmaxx under this Agreement; (ii) the
only recourse for Fluence and such related parties to enforce such
indemnification obligations shall be through the Escrow Agreement against the
Additional Merger Consideration; and (iii) the indemnity obligations of the
Opmaxx Common Stockholders under this Section 10 shall terminate after 11:59
p.m. (PST) on December 31, 2003, except insofar as Fluence has properly asserted
a claim for indemnification under this Section 10 and pursuant to the terms of
the Escrow Agreement and such claim has not been resolved in accordance with the
terms of the Escrow Agreement.
10.4 INDEMNIFICATION OF OPMAXX
Fluence shall defend, indemnify and hold harmless Opmaxx, and
its officers, directors, stockholders, employees and agents against and in
respect to all Claims and Liabilities with respect to or arising from (i) breach
of any warranty or any inaccuracy of any representation made by Fluence, or (ii)
breach of any covenant or agreement made by Fluence in this Agreement.
10.5 LIMITATIONS TO THE INDEMNIFICATION OF OPMAXX
Anything to the contrary notwithstanding, Opmaxx shall not be
indemnified and held harmless in respect of any Claims and Liabilities which are
covered by insurance owned by Fluence to the extent that any net loss is reduced
by such insurance. Opmaxx shall not be permitted to enforce any claim for
indemnification under this Section 10 until the aggregate amount of Claims and
Liabilities exceeds the Threshold indicated in Section 10.3. Once Claims and
Liabilities in excess of the Threshold have been asserted by Opmaxx, all Claims
and Liabilities above that amount may be pursued by Opmaxx unless otherwise
limited by this Agreement. The parties understand and agree that the indemnity
obligations of Fluence under this Section 10 shall terminate after 11:59 p.m.
(PST) on December 31, 2003, except insofar as Opmaxx has properly asserted a
claim for indemnification under this Section 10.
11. MISCELLANEOUS
11.1 SUCCESSORS AND ASSIGNS.
The provisions of this Agreement shall inure to the benefit
of, and be binding upon, the successors and assigns of the Parties. Nothing in
this Agreement, express or implied, is intended to confer upon any Party other
than the parties hereto or their respective successors and assigns any rights,
remedies, obligations, or liabilities under or by reason of this Agreement,
except as expressly provided in this Agreement.
11.2 GOVERNING LAW AND DISPUTE RESOLUTION.
This Agreement shall be governed by and construed under the
laws of the State of Oregon without giving effect to any choice of law rule that
would cause the application of the laws of any jurisdiction other than the
internal laws of the State of Oregon to the rights and duties
Agreement and Plan of Merger
Page 14
<PAGE>
of the Parties hereunder. Any disputes arising among the Parties in
connection with this Agreement shall be settled by the Parties amicably through
good faith discussions upon the written request of any Party. In the event that
any such dispute cannot be resolved through such discussions within a period of
sixty (60) days after delivery of such notice, the dispute shall be finally
settled by arbitration in Portland, Oregon, in accordance with the rules then in
effect of the American Arbitration Association. The arbitrator(s) shall have the
authority to grant specific performance, and to allocate between the Parties the
costs of arbitration in such equitable manner as the arbitrator(s) may
determine. The prevailing party in the arbitration shall be entitled to receive
reimbursement of its reasonable expenses incurred in connection therewith.
Judgment upon the award so rendered may be entered in any court having
jurisdiction or application may be made to such court for judicial acceptance of
any award and an order of enforcement, as the case may be.
11.3 NOTICES.
Any and all notices, requests, demands and other
communications required or otherwise contemplated to be made under this
Agreement, shall be in writing and shall be deemed to have been duly given (i)
if delivered personally, when received, (ii) if transmitted by facsimile, on the
first (1st) business day following receipt of a confirmation of receipt, or
(iii) if by overnight courier service, on the second (2nd) business day
following the date of deposit with such courier service. All such notices,
requests, demands and other communications shall be addressed as follows:
If to the Company:
Opmaxx, Inc.
8700 SW Creekside Place
Beaverton, OR 97008
Attention: Douglas Goodman, President and CEO
Telephone: (503) 520-9200
Facsimile: (503) 520-1636
with a copy to:
Tonkon Torp
1600 Pioneer Tower
888 S.W. Fifth Avenue
Portland, OR 97204-2099
Attention: Brendan R. McDonnell
Telephone: (503) 221-1440
Facsimile: (503) 972-3754
If to Buyer:
Fluence Technology, Inc.
Agreement and Plan of Merger
Page 15
<PAGE>
8700 S.W. Creekside Place
Beaverton, OR 97008
Attention: John DiGirolamo, President and CEO
Telephone: (503) 672-8744
Facsimile: (503) 672-8700
with a copy to:
Brobeck, Phleger & Harrison LLP
Two Embarcadero Place
2200 Geng Road
Palo Alto, CA 94303-0913
Attention: Warren T. Lazarow
Telephone: (650) 496-2887
Facsimile: (650) 496-2733
11.4 EXPENSES.
Each Party shall pay all costs and expenses incurred by it in
connection with this Agreement. Each Party agrees to cooperate with the other
Party (at the other Party's expense) in obtaining any regulatory approvals
required in connection with the transactions contemplated hereby.
11.5 AMENDMENTS AND WAIVERS.
Any term of this Agreement may be amended only with the
written consent of each of the Parties. No waiver of any term or condition of
this Agreement shall be valid or binding on any Party unless the same shall have
been mutually assented to in writing by each Party. The failure of a Party to
enforce at any time any of the provisions of this Agreement, or the failure to
require at any time performance by one or both of the other Parties of any of
the provisions of this Agreement, shall in no way be construed to be a present
or future waiver of such provisions, nor in any way affect the ability of a
Party to enforce each and every such provision thereafter.
11.6 TERMINATION.
If the Closing shall not have occurred by the earlier of (a)
January 1, 2000, and (b) the date sixty days after the Company shall have
provided to Buyer financial statements of the Company prepared using GAAP
applied consistent with past practices showing two consecutive financial
quarters of positive net income, then this Agreement shall terminate.
Agreement and Plan of Merger
Page 16
<PAGE>
11.7 SEVERABILITY.
If any provision in this Agreement shall be found or be held
to be invalid or unenforceable then the meaning of said provision shall be
construed, to the extent feasible, so as to render the provision enforceable,
and if no feasible interpretation would save such provision, it shall be severed
from the remainder of this Agreement which shall remain in full force and effect
unless the severed provision is essential and material to the rights or benefits
received by any Party. In such event, the Parties shall use best efforts to
negotiate, in good faith, a substitute, valid and enforceable provision or
agreement which most nearly affects the Parties' intent in entering into this
Agreement.
11.8 FURTHER ASSURANCES.
The Parties shall each perform such acts, execute and deliver
such instruments and documents, and do all such other things as may be
reasonably necessary to accomplish the transactions contemplated in this
Agreement.
11.9 SPECIFIC PERFORMANCE.
Without prejudice to the rights and remedies otherwise
available to Buyer, Buyer shall be entitled to equitable relief by way of
injunction or otherwise if the Company breaches or threatens to breach any of
the provisions of this Agreement.
11.10 REFERENCES; SUBJECT HEADINGS.
Unless otherwise indicated, references to Sections and
Exhibits herein are to Sections of, and Exhibits to, this Agreement. The subject
headings of the Sections of this Agreement are included for the purpose of
convenience of reference only, and shall not affect the construction or
interpretation of any of its provisions.
11.11 COUNTERPARTS.
This Agreement may be executed in one or more counterparts,
but all of which together shall constitute one and the same instrument.
11.12 ENTIRE AGREEMENT.
This Agreement and the Schedules and Exhibits referred to
herein embody the entire agreement and understanding of the parties and
supersede any and all prior agreements, arrangements and understandings relating
to matters provided for herein, with the express exception of the Mutual
Nondisclosure Agreement between Opmaxx and Fluence dated October 30, 1998, and
any amendments thereto ("NONDISCLOSURE AGREEMENT"), which will continue in force
for the full term thereof.
Agreement and Plan of Merger
Page 17
<PAGE>
11.13 NONSOLICITATION.
Each party agrees that prior to the Closing Date or for a two
(2) year period after termination pursuant to Section 11.6, it will not solicit
for itself or any affiliated competing company or business organization, any
employee of the other party, whether or not such employee's employment is
pursuant to a written agreement and whether or not such employment is for a
determined period or is at will.
[The Remainder of this Page Left Intentionally Blank]
Agreement and Plan of Merger
Page 18
<PAGE>
IN WITNESS WHEREOF, the Parties have caused their respective
duly authorized representatives to execute this Agreement as of the date first
written above.
OPMAXX, INC.
By:
---------------------
Douglas L. Goodman
President and CEO
FLUENCE TECHNOLOGY, INC.
By:
---------------------
John DiGirolamo
President and CEO
Agreement and Plan of Merger
Page 19
<PAGE>
EXHIBIT A
As used in this Agreement, the following terms shall have the
meanings specified below:
"ADDITIONAL MERGER CONSIDERATION" shall have the meaning
assigned in Section 9.2.
"AGREEMENT" shall have the meaning assigned in the heading of
this Agreement.
"BUSINESS CONDITION" shall have the meaning assigned in the
opening paragraph of Exhibit D.
"BUSINESS MATERIALS" shall have the meaning assigned in
Section D.14(a) of Exhibit D.
"BUYER" shall have the meaning assigned in the heading of this
Agreement.
"BUYER'S FINANCIAL STATEMENTS" shall have the meaning assigned
in Section E.5 of Exhibit E.
"BUYER'S INTERIM FINANCIAL STATEMENTS" shall have the meaning
assigned in Section E.5 of Exhibit E.
"CLAIMS AND LIABILITIES" shall have the meaning assigned in
Section 10.2.
"CLASS A WARRANTS" shall have the meaning assigned in Section
D.3(a) of Exhibit D.
"CLOSING" shall have the meaning assigned in Section 3.
"CLOSING DATE" shall have the meaning assigned in Section 3.
"COBRA" shall have the meaning assigned in Section D.19 of
Exhibit D.
"COMMON STOCK" shall have the meaning assigned in Recital B.
"COMMON STOCKHOLDER REPRESENTATIVE" shall have the meaning
assigned in the Escrow Agreement.
"COMPANY" shall have the meaning assigned in the heading of
this Agreement.
"COMPANY FINANCIAL STATEMENTS" shall have the meaning assigned
in Section D.7 of Exhibit D.
"COMPANY OPTIONS" shall have the meaning assigned in Section
D.3(a) of Exhibit D.
Page 1 - Exhibit A
to Agreement and Plan of Merger
<PAGE>
"COMPANY RETURNS" shall have the meaning assigned in Section
D.11 of Exhibit D.
"CONTRACTS" shall have the meaning assigned in Section D.13 of
Exhibit D.
"DELAWARE CODE" shall have the meaning assigned in Section
2.8.
"DISCLOSURE SCHEDULE" shall have the meaning assigned in the
opening paragraph of Exhibit D.
"DISSENTING SHARES" shall have the meaning assigned in Section
2.8.
"EXCHANGE AGENT" shall have the meaning assigned in Section
2.6.
"EXECUTIVE STAFF" shall mean the installed officers of Opmaxx.
"EFFECTIVE TIME OF THE MERGER" shall have the meaning assigned
in Section 2.1.
"ERISA" shall have the meaning assigned in Section D.19 of
Exhibit D.
"ERISA AFFILIATE" shall have the meaning assigned in Section
D.19 of Exhibit D.
"FLUENCE" shall have the meaning assigned in the heading of
this Agreement.
"GAAP" shall have the meaning assigned in Section D.7 of
Exhibit D.
"GOVERNMENTAL ENTITY" shall have the meaning assigned in
Section D.5 of Exhibit D.
"HSR ACT" shall have the meaning assigned in Section D.5 of
Exhibit D.
"INTELLECTUAL PROPERTY RIGHTS" shall have the meaning assigned
in Section D.14 of Exhibit D.
"INTERIM FINANCIAL STATEMENTS" shall have the meaning assigned
in Section D.7 of Exhibit D.
"INTERESTED PARTIES" shall have the meaning assigned in
Section D.20 of Exhibit D.
"IRS" shall have the meaning assigned in Section D.11 of
Exhibit D.
"MATERIAL ADVERSE EFFECT" shall mean that the condition or
event has had a material and substantial adverse effect on the
financial condition, property, assets, prospects or results of
the Company.
"MERGER" shall have the meaning assigned in Recital A.
"MERGER CONSIDERATION" shall have the meaning assigned in
Section 2.4.
Page 2 - Exhibit A
to Agreement and Plan of Merger
<PAGE>
"MERGER SUB" shall have the meaning assigned in Recital E.
"MERGER SUB COMMON STOCK" shall have the meaning assigned in
Section 2.3.
"NET RECEIPTS" shall have the meaning assigned in Section 9.1.
"NON-DISCLOSURE AGREEMENT" shall have the meaning assigned in
Section 11.12.
"1933 ACT" shall have the meaning assigned in Section E.4 of
Exhibit E.
"1997 FINANCIAL STATEMENTS" shall have the meaning assigned in
Section D.7 of Exhibit D.
"OFFICERS" shall have the meaning assigned in the Delaware
Code.
"OPMAXX" shall have the meaning assigned in the heading of
this Agreement.
"OPMAXX COMMON STOCKHOLDERS" shall mean all record holders of
Opmaxx Class A or Class B Common Stock as of the Effective
Time of the Merger.
"OPMAXX OPTIONS" shall have the meaning assigned in Section
2.5.
"OPMAXX STOCK" shall have the meaning assigned in Recital B.
"OPTION CONVERSION NUMBER" shall have the meaning assigned in
Section 2.5.
"ORDINARY COURSE OF BUSINESS" shall mean the Company's usual
manner and methods of conducting its business, as well as
market, commercial, and financial events which ordinarily
occur.
"PARTIES" and "PARTY" shall have the meanings assigned in the
heading of this Agreement.
"PLANS" shall have the meaning assigned in Section D.19 of
Exhibit D.
"PREFERRED STOCK" shall have the meaning assigned in Recital
B.
"PRODUCTS" shall have the meaning in Section 9.1.
"REVISED DISCLOSURE SCHEDULE" shall have the meaning in
Section 7.2(b).
"RULE 144" shall have the meaning assigned in Section E.5 of
Exhibit E.
"SERIES B WARRANTS" shall have the meaning assigned in Section
D.3(a) of Exhibit D.
"SERVICE PROVIDERS" shall mean employees, consultants and
independent contractors.
Page 3 - Exhibit A
to Agreement and Plan of Merger
<PAGE>
"SHARES" shall have the meaning assigned in Recital D.
"TAX," "TAX RETURNS", and "TAXES" shall have the meanings
assigned in Section D.11 of Exhibit D.
"TEKTRONIX WARRANT" shall mean the Warrant to purchase the
Company's Common Stock pursuant to that certain Warrant
Agreement dated August 28, 1998.
"THRESHOLD" shall have the meaning given it in Section 10.3.
"VESTED OPTIONS" shall mean all vested options to purchase the
Company's Common Stock pursuant to the terms of the Company's
1997 Stock Option/Issuance Plan.
Page 4 - Exhibit A
to Agreement and Plan of Merger
<PAGE>
EXHIBIT B
CERTIFICATE OF MERGER
OF
OPMAXX ACQUISITION CORPORATION, A DELAWARE CORPORATION
WITH AND INTO
OPMAXX, INC., A DELAWARE CORPORATION
Opmaxx, Inc. a corporation organized under the Delaware
General Corporation Act (the "Act"), hereby certifies that:
1. The name and state of incorporation of each of the constituent
corporations are:
NAME STATE OF INCORPORATION
---- ----------------------
Opmaxx Acquisition Corporation Delaware
Opmaxx, Inc. Delaware
2. An Agreement and Plan of Merger has been adopted, certified,
executed and acknowledged by each of the constituent corporations in accordance
with the Act.
3. Opmaxx, Inc. will be the surviving corporation in the merger.
4. The Restated Certificate of Incorporation of Opmaxx, Inc. attached
as EXHIBIT A shall be the certificate of incorporation of the surviving
corporation.
5. The executed Agreement and Plan of Merger is on file at the
following place of business of the surviving domestic corporation:
Opmaxx, Inc.
8700 S.W. Creekside Place
Beaverton, OR 97008
6. A copy of the Agreement and Plan of Merger will be furnished by the
surviving corporation on request and without cost to any stockholder of the
constituent corporations.
IN WITNESS WHEREOF, this Certificate of Merger has been duly
executed as of the 7th day of September 1999, and is being filed in accordance
with Section 251 of the Act by an authorized person of the surviving
corporation.
OPMAXX, INC., a Delaware
corporation
By:
-----------------------
[Name]
-----------------------
[Position]
Page 1 - Exhibit B
to Agreement and Plan of Merger
<PAGE>
EXHIBIT C
The eight million dollar ($8,000,000.00) Merger Consideration
will be allocated in the following manner:
1. Retire any debt obligations of the Company
outstanding as of immediately prior to the Effective
Time of the Merger (including any Accounts Payable
and other Current Liabilities). The Company's debt
will first be reduced by the amount of any Accounts
Receivable (net of reserves) or cash on the balance
sheet as of the Effective Time of the Merger.
2. Holders of the Company's Series A Preferred Stock
will receive $4.89 per Series A Preferred share.
3. Holders of the Company's Series B Preferred Stock
will receive $2.55 per Series B Preferred share.
4. Holders of the Company's Class A and B Common Stock
will receive a dollar amount per share equal to the
amount of the remaining Merger Consideration divided
by the number of issued and outstanding shares of the
Company's Class A and B Common Stock at the Effective
Time of the Merger.
Page 1 - Exhibit C
to Agreement and Plan of Merger
<PAGE>
EXHIBIT D
Except as set forth in the corresponding Sections or
subsections of the disclosure schedule (the "DISCLOSURE SCHEDULE") delivered by
the Company to Buyer and attached hereto, the Company makes the representations
and warranties set forth below, which shall be true and correct as of the date
hereof. Except as set forth on the Revised Disclosure Schedule, to be delivered
by the Company to the Buyer at or prior to the Closing, the representations and
warranties set forth below shall also be true and correct as of the Closing. As
used in this Agreement, "BUSINESS CONDITION" shall refer to the Company's
financial condition, properties, assets, liabilities, prospects and results of
operations.
D.1 ORGANIZATION AND EXISTENCE OF OPMAXX.
Opmaxx is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware and has all requisite
corporate power to carry on its business as now conducted and as proposed to be
conducted and to enter into and, subject to stockholder approval, perform its
obligations under this Agreement and the other agreements contemplated hereby to
which it is as party. Opmaxx is qualified to do business as a foreign
corporation and is in good standing in every jurisdiction in which the character
or location of the assets owned by it or the nature of the business transacted
by it requires such qualification where the failure to so qualify would have a
Material Adverse Effect. Opmaxx has delivered to Fluence, or will deliver at the
Closing, true, correct and complete copies of (a) the Certificate of
Incorporation (duly certified by the Delaware Secretary of State), (b) the
Bylaws (certified by the Secretary of Opmaxx), and (c) the Minute and Stock
Books (certified by the Secretary of Opmaxx) of Opmaxx.
D.2 AUTHORITY AND BINDING EFFECT.
The Company has full power and authority to enter into this
Agreement to perform its obligations hereunder and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
by all parties, the performance by the Company of its obligations hereunder and
thereunder, and the consummation of the transactions contemplated hereby have
been duly and validly authorized by all necessary corporate or other action. The
Company has taken all necessary action with respect to the execution and
delivery of this Agreement. This Agreement constitutes a legal, valid and
binding obligation of the Company, enforceable in accordance with its respective
terms, except as limited by applicable bankruptcy, insolvency, moratorium,
reorganization or other laws affecting creditors' rights and remedies generally.
D.3 AUTHORIZED CAPITAL STOCK OF OPMAXX.
(a) The authorized capital stock of the Company consists of
15,000,000 shares of Class A Common Stock, 10,000,000 shares of Class B Common
Stock, and 2,000,000 shares of Preferred Stock, of which 639,423 shares have
been designated as Series A Preferred Stock and
Page 1 - Exhibit D
to Agreement and Plan of Merger
<PAGE>
400,000 shares have been designated as Series B Preferred Stock. As of the date
of this Agreement, there were issued and outstanding 2,061,439 shares of Class A
Common Stock, 1,851,571 shares of Class B Common Stock, 352,920 shares of Series
A Preferred Stock, 375,112 shares of Series B Preferred Stock, and options to
purchase 498,087 shares of Class B Common Stock (the "COMPANY OPTIONS"),
warrants to purchase 224,198 shares of Class A Common Stock (the "CLASS A
WARRANTS"), and warrants to purchase 53,000 shares of Series B Preferred Stock
(the "SERIES B WARRANTS"). As of the date of this Agreement, there were 750,000
shares of Class B Common Stock reserved for issuance upon the exercise of
outstanding Company Options. Except as set forth above, there are no outstanding
shares of Company capital stock or options, warrants, calls, conversion rights,
commitments or agreements of any character to which the Company is a party or by
which the Company may be bound that do or may obligate the Company to issue,
deliver or sell, or cause to be issued, delivered or sold, additional shares of
the Company capital stock or that do or may obligate the Company to grant,
extend or enter into any such option, warrant, call, conversion right,
commitment or agreement.
(b) All outstanding shares of capital stock are, and any
shares of Common Stock issued upon exercise of any Company Option will be, duly
authorized, validly issued, fully paid and nonassessable and not subject to
preemptive rights created by statute, the Company's Certificate of Incorporation
or Bylaws, or any agreement to which the Company is a party or by which the
Company may be bound. All outstanding capital stock or other Company securities
have been issued in compliance with applicable foreign, federal and state
securities laws. Holders of issued and outstanding capital stock have no basis
for asserting rights to rescind the purchase of any such capital stock.
(c) SCHEDULE D.3 contains a complete and accurate list of, and
the number of shares or Company Options owned of record by, all holders of
outstanding capital stock and outstanding vested and unvested Company Options
and their current residence address.
(d) Except for any restrictions imposed by applicable state
and federal securities laws, there is no right of first refusal, co-sale right,
right of participation, right of first offer, option or other restriction on
transfer applicable to any shares of the Company capital stock to which the
Company is a party or which are known to Company.
(e) The Company is not a party or subject to any agreement or
understanding, and there is no agreement or understanding between or among any
persons that affects or relates to the voting or giving of written consent with
respect to any outstanding security of the Company, except for those referred to
in Recital B and Section 7.2 of the Agreement.
D.4 CONFLICTS.
The execution and delivery of this Agreement does not and the
performance and consummation of the transactions contemplated hereby will not,
conflict with or result in any conflict with, breach or violation of any
statute, law, rule, regulation, judgment, order, decree, or ordinance applicable
to the Company or its properties or assets, or conflict with or result in any
conflict with, breach or violation of or default (with or without notice or
lapse of time, or both)
Page 2 - Exhibit D
to Agreement and Plan of Merger
<PAGE>
under, or give rise to a right of termination, cancellation, forfeiture or
acceleration of any obligation or the loss of a benefit under, or result in the
creation of a lien or encumbrance on any of the properties or assets of the
Company pursuant to (i) any provision of the current Certificate of
Incorporation or Bylaws of the Company or (ii) any agreement, contract, note,
mortgage, indenture, lease, instrument, permit, concession, franchise or license
to which the Company is a party or by which the Company or any of its property
or assets may be bound or affected.
D.5 CONSENTS.
No consent, approval, order or authorization of, or
registration, declaration of, or qualification or filing with, any court,
administrative agency, commission, regulatory authority or other governmental or
administrative body or instrumentality, whether domestic or foreign (a
"GOVERNMENTAL ENTITY"), is required by or with respect to the Company in
connection with the execution and delivery of this Agreement by the Company or
the consummation by the Company of the transactions contemplated hereby, except
for filings, if any, required to be made by each of Buyer and the Company under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR ACT").
D.6 NO SUBSIDIARIES.
Opmaxx has no subsidiaries or equity investments in any
person.
D.7 FINANCIAL STATEMENTS; LIABILITIES.
The Company has furnished to Buyer a complete and accurate
copy of its audited balance sheet as of December 31, 1997 and its audited
statements of operations, cash flow and stockholders' equity for the fiscal year
ending December 31, 1997 (the "1997 FINANCIAL STATEMENTS") and its unaudited
balance sheet as of December 31, 1998 and its unaudited interim statements of
operation, cash flow and stockholders' equity for the period ended December 31,
1998 (the "INTERIM FINANCIAL STATEMENTS") (collectively the 1997 and Interim
Financial Statements are referred to herein as the "COMPANY FINANCIAL
STATEMENTS"). The Company Financial Statements are attached hereto as SCHEDULE
D.7. The Company Financial Statements have been prepared in accordance with
generally accepted accounting principles ("GAAP") consistently applied and
fairly present the consolidated financial position of the Company as and at the
dates thereof and the Company's consolidated results of operations and cash
flows for the periods then ended. Subject, in the case of the Interim Financial
Statements, to normal year end adjustments.
D.8 LEASES
Except as indicated in SCHEDULE D.8, the leases set forth in
SCHEDULE D.8 hereto are in full force and effect and there is no existing
default of a material nature under any of such leases on the part of Opmaxx or,
to the best knowledge of Opmaxx, the other party thereunder. Such leases consist
only of documents described in SCHEDULE D.8 hereto, complete and correct copies
of which have been provided by Opmaxx to Fluence. The buildings and any major
items
Page 3 - Exhibit D
to Agreement and Plan of Merger
<PAGE>
of equipment and machinery reflected on the Company Financial Statements are
generally in such operating condition and repair, ordinary wear and tear
excepted, as is adequate for the conduct of Opmaxx's business.
D.9 ABSENCE OF CERTAIN EVENTS.
Except as set forth in SCHEDULE D.9 attached hereto or as
updated pursuant to Section 7.2(b) of the Agreement, since December 31, 1997,
there has not been:
(a) any material adverse change in the Business Condition of
the Company (or any occurrence, circumstance, or combination thereof which could
reasonably be expected to result in any such material adverse change) from that
reflected in the Company Financial Statements as of December 31, 1997; or
(b) any increase in or modification of the compensation or
benefits payable or to become payable by the Company to any of its Service
Providers or changes pursuant to employment agreements currently in effect or
changes in position; or
(c) any increase in or modification of any bonus, pension,
insurance or other employee benefit plan, payment or arrangement (including,
without limitation, the granting of stock options, restricted stock awards or
stock appreciation rights) made to, for or with any of its Service Providers; or
(d) any modification, waiver, change, amendment, release,
rescission, accord and satisfaction, or termination of, or with respect to, any
material term, condition, or provision of any contract, agreement, license, or
other instrument to which the Company is a party and relating to or affecting
the Company's Business Condition, 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; or
(e) any labor disputes or disturbances affecting in an adverse
fashion the Business Condition, including, without limitation, the filing of any
petition or charge of unfair labor practices with the National Labor Relations
Board; or
(f) any notice (written or unwritten) from any employee of the
Company who provides any services to the Company that such employee has
terminated, or intends to terminate, such employee's employment with the
Company; or
(g) any notice (written or unwritten) from any of the
Company's suppliers that any such supplier will not continue to supply the
current level and type of goods currently being provided by such supplier to the
Company on similar terms and conditions; or
(h) any adverse relationships or conditions with vendors or
customers that could have a material adverse effect on the Company's Business
Condition; or
(i) any waivers, compromises or discharges of any rights or
debt owed of substantial value to the Company; or
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(j) any other event or condition of any character which has
materially adversely affected the Company's Business Condition; or
(k) any purchase or lease of or any agreements to purchase or
lease capital assets by the Company in excess of $25,000 individually or in the
aggregate; or
(l) any issuance, redemption, repurchase or other acquisition
of shares of the Company capital stock (other than issuances pursuant to
exercise of the Company Options or repurchases of the Company Common Stock at
cost in the ordinary course under the terms of vesting agreements) or any
declaration, setting aside or payment of any dividend or other distribution
(whether in cash, stock or property) with respect to the Company capital stock;
or
(m) any agreement or arrangement made by the Company to take
any action which, if taken prior to the date hereof, would have made any
representation or warranty set forth in this Section D.9 untrue or incorrect as
of the date when made.
D.10 ABSENCE OF UNDISCLOSED LIABILITIES.
There are no debts, liabilities, or obligations with respect
to the Company or to which the assets of the Company or its business, property
or assets are subject, whether liquidated, unliquidated, accrued, absolute,
contingent or otherwise, that are not identified in the Disclosure Schedule or
reflected in the Interim Financial Statements, except for liabilities and
obligations arising subsequent to December 31, 1998 from the operations of the
business of the Company in the ordinary course consistent with prior practices.
D.11 TAXES AND TAX RETURNS.
(a) Except as set forth on SCHEDULE D.11: (i) Opmaxx has
accurately prepared and duly filed all Tax Returns (as hereinafter defined)
which are required by law to be filed by it on or prior to the date hereof; (ii)
Opmaxx has duly paid all Taxes (as hereafter defined) due or claimed to be due
from it with respect to all taxable periods or portions of periods ended on or
before the date hereof (whether or not shown on any Tax Return), and there are
no assessments or claims for payment of Taxes now pending or, to the best
knowledge of Opmaxx, threatened, nor any audit of the records of Opmaxx being
made or threatened by any taxing authority for any such periods or portions
thereof; and (iii) to the knowledge of Opmaxx, there are no facts or
circumstances which could reasonably be expected to constitute a basis for
assessments or claims for the payment of additional Taxes. The amounts set up as
provisions for Taxes, if any, on the most recent balance sheet included in the
Financial Statements are sufficient for the payment of all unpaid Taxes of
Opmaxx, accrued for or applicable to the periods ended on such date and all
years and periods prior thereto and for which Opmaxx, at those dates, was
liable. Opmaxx has properly withheld and paid, or accrued for payment, when due,
to appropriate state and/or federal authorities, all sales and use taxes, if
any, and all amounts required to be withheld from payments made to its
employees, independent contractors, creditors, stockholders, or other third
parties and has also paid all employment taxes as required under applicable
laws.
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(b) Opmaxx has not waived any statute of limitation in respect
of any Taxes or assessments by any federal, state, county, local, foreign or
other taxing jurisdiction or agreed to any extension of time with respect to an
assessment or deficiency in any Tax. Opmaxx has not filed a consent under
Section 341(f) of the Tax Code concerning collapsible corporations. Opmaxx has
not made a consent dividend election under Section 565 of the Code, and has not
been a personal holding company under Section 542 of the Code.
(c) Opmaxx has not made any payments, and is not obligated to
make any payments, nor is Opmaxx a party to any agreement that under any
circumstances could obligate it to make any payments, that would not be
deductible under Section 280G of the Tax Code. Opmaxx has not been a United
States real property holding corporation within the meaning of Section 897(c)(2)
of the Tax Code during the applicable period specified in Section
897(c)(1)(A)(ii) of the Tax Code. Opmaxx is not a party to or bound by any tax
indemnity, tax allocation or tax sharing agreement, or any closing agreement or
offer in compromise with any taxing authority.
(d) Except as set forth on SCHEDULE D.11, Opmaxx is not, and
has never been, required to file a consolidated or combined state or federal
income Tax Return with any other person or entity and is not liable for the
Taxes of any person under Treas. Reg. Section 1.1502-6 (or any similar provision
of state, local, or foreign law), as transferee or successor, by contract or
otherwise. Opmaxx is not a party to any joint venture, partnership, or other
arrangement or contract which could be treated as a partnership for federal
income tax purposes. Opmaxx has not been a distributing corporation in a
transaction described in Section 355(a)(1) of the Code.
(e) For purposes of this Agreement, the term "Tax" or "Taxes"
means any federal, state, local, or foreign income, gross receipts, license,
payroll, employment, excise, severance, stamp, occupation, premium, windfall
profits, environmental (including taxes under Tax Code Section 59A), customs
duties, capital stock, franchise, profits, withholding, social security,
unemployment, disability, real property, personal property, sales, use,
transfer, registration, value added, alternative or add-on minimum, estimated,
or other tax of any kind whatsoever, including any interest, penalty, or
addition thereto, whether disputed or not.
(f) For purposes of this Agreement, the term "Tax Return"
means any return, declaration, report, claim for refund, or information return
or statement relating to Taxes, including any schedule or attachment thereto,
and including any amendment thereof.
D.12 FIXED ASSETS.
SCHEDULE D.12 is a list of all of the fixed assets used in the
Ordinary Course of Business, other than any fixed asset the replacement cost of
which would be less than $5,000.00 and which is not of material importance to
Opmaxx's operations. The fixed assets are in good working order and condition,
ordinary wear and tear excepted.
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D.13 MATERIAL CONTRACTS.
(a) SCHEDULE D.13 lists all material outstanding agreements,
contracts, contract rights, licenses, purchase and sale orders, quotations and
other executory commitments (collectively, the "CONTRACTS"), whether or not in
writing, to which the Company is a party that relate to any aspect of the
business, assets, services or properties of the Company.
(b) The Company has performed all of its obligations under the
terms of each Contract and is not in default thereunder. No event or omission
has occurred which but for the giving of notice or lapse of time or both would
constitute a default by the Company under any such Contract; and each such
Contract is valid and binding on all parties thereto and in full force and
effect. The Company has received no written or unwritten notice of default,
cancellation, or termination in connection with any such Contract.
D.14 INTELLECTUAL PROPERTY
(a) The Company owns, or is licensed or otherwise entitled to
exercise, without restriction (other than pursuant to applicable law and the
terms of each such license) all rights to all inventions, patents, trademarks,
trade names, service marks, copyrights, trade secrets, domain names and other
intellectual property rights, and any applications or registrations therefor
(collectively, the "INTELLECTUAL PROPERTY RIGHTS"), and all schematics,
technology, source code, know-how, computer software programs and all other
tangible and intangible information or material used or usable by the Company in
its business (collectively, the "THE BUSINESS MATERIALS") without any conflict
or infringement of the rights of others. All of such Intellectual Property
Rights and Business Materials are set forth in SCHEDULE D.14.
(b) SCHEDULE D.14 also lists (i) the jurisdictions or
countries in which each such Intellectual Property Right has been registered and
its registration number, or has been applied for and its application number;
(ii) all licenses, sublicenses and other agreements as to which the Company is a
party and pursuant to which the Company or any other person is authorized to use
any Intellectual Property Right except for licenses for software which is
generally available; and (iii) if applicable, all parties to whom the Company
has delivered copies of the Company source code, whether pursuant to an escrow
arrangement or otherwise, or parties who have the right to receive such source
code. Copies of all such licenses, sublicenses or other agreements identified
pursuant to clause (ii) above have been delivered by the Company to Buyer.
(c) The Company is not, or as a result of the execution and
delivery of this Agreement or the performance of the Company's obligations
hereunder will not be, in violation of, or lose or in any way impair any
material rights pursuant to any license, sublicense or agreement described in
SCHEDULE D.14.
(d) The Company is the absolute owner or licensee of, with all
necessary right, title and interest in and to (free and clear of any liens,
encumbrances or security interests), the Intellectual Property Rights and has
rights to the use, sale, license or disposal thereof or the material covered
thereby in connection with the services or products in respect of which the
Intellectual Property Rights are being used, sold, licensed or disposed of. The
Company has
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taken all commercially reasonable actions and made all applicable applications
and filings pursuant to applicable laws to perfect or protect its interests in
such Intellectual Property Rights.
(e) No claims with respect to the Intellectual Property Rights
or Business Materials have been asserted or are threatened by any person, and
there are no claims (i) to the effect that the manufacture, marketing, license,
sale or use of any product as now used or offered or proposed for use or sale by
the Company infringes any copyright, patent, trade secret or other intellectual
property right of any third party or violates any license or agreement with any
third party; (ii) contesting the right of the Company to use, sell, license or
dispose of any Intellectual Property Rights or Business Materials; or (iii)
challenging the ownership, validity or effectiveness of any of the Intellectual
Property Rights or Business Materials.
(f) All patents and registered trademarks, service marks and
other company, product or service identifiers and registered copyrights held by
the Company are valid and subsisting.
(g) There has not been and there is not now any unauthorized
use, infringement or misappropriation of any of the Intellectual Property Rights
by any third party, including, without limitation, any service provider of the
Company; the Company has not been sued or charged as a defendant in any claim,
suit, action or proceeding which involves a claim of infringement of any
patents, trademarks, service marks, copyrights or other intellectual property
rights and which has not been finally terminated prior to the date hereof; and
there are no such charges or claims outstanding
(h) No Intellectual Property Right is subject to any
outstanding order, judgment, decree, or, except as provided for in the terms of
the relevant license, stipulation or agreement restricting in any manner the
licensing thereof by the Company. The Company has not entered into any agreement
granting any third party the right to bring infringement actions with respect
to, or otherwise to enforce rights with respect to, any Intellectual Property
Right owned by the Company. The Company has the exclusive right to file,
prosecute and maintain all applications and registrations with respect to the
Intellectual Property Rights owned by the Company.
D.15 LICENSES, PERMITS, ETC.
Attached hereto as SCHEDULE D.15 is a list and description of
all material licenses, franchises, permits, easements, certificates, consents,
rights and privileges, and other governmental authorizations necessary or
appropriate to the conduct of the business of Opmaxx other than those listed on
SCHEDULE D.1. All such items are in full force Opmaxx has not received any
notice, nor does Opmaxx have any knowledge that any governmental authority
intends to cancel, terminate or modify any of such licenses or permits or that
valid grounds for any such cancellation, termination or modification currently
exist.
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D.16 LITIGATION.
Neither the Company nor any of the Company's officers or
directors is engaged in, or has received any threat of, any litigation,
arbitration, investigation, claim or other proceeding relating to the Company or
its officers, directors, employees, benefit plans, properties, Intellectual
Property Rights, the business, properties or assets of the Company, licenses,
permits or goodwill, or against or affecting the actions taken or contemplated
in connection therewith, nor, to the best of the Company's knowledge is there
any basis therefor. There is no action, suit, proceeding, or investigation
pending or threatened against the Company, or the officers or directors of the
Company, that questions the validity of this Agreement or the right of the
Company to enter into this Agreement or to consummate the transactions
contemplated hereby or thereby, or which might reasonably be expected to result
in any adverse change in the business, condition or properties of the Company's
Business Condition. There is no action, suit, proceeding, or investigation by
the Company currently pending or which any of them currently intends to
initiate. None of the Company, nor any of the Company's officers or directors is
bound by any judgment, decree, injunction, ruling or order of any court,
governmental, regulatory or administrative department, commission, agency or
instrumentality, arbitrator or any other person which would or could have a
material adverse effect on the Company's Business Condition.
D.17 COMPLIANCE WITH LAWS.
Since the date of its incorporation the Company has complied
in all material respects with all applicable foreign, federal, state, municipal
and other political subdivision or governmental agency statutes, ordinances and
regulations, including, without limitation, those imposing taxes, in every
applicable jurisdiction, in respect of the ownership of its assets and
properties and the conduct of its business where the effect of failure to so
comply would have a Material Adverse Effect.
D.18 LABOR RELATIONS/PERSONNEL.
(a) The Company has not failed to comply in any material
respect with the Americans with Disabilities Act, as amended, 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 other
applicable, foreign, federal, state, and local laws, rules, and regulations
relating to employment (including without limitation any age discrimination
laws), 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. All payments due from Company on account of employee
health and welfare insurance have been paid.
(b) Except as set forth on SCHEDULE D.18, there are no written
employment or separation agreements, or oral employment or separation agreements
other than those establishing an "at-will" employment relationship between the
Company and any of its employees.
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(c) SCHEDULE D.18 contains a list of all current directors,
officers and employees of the Company setting forth the job title and salary
(including bonuses and commissions) payable to each such person. SCHEDULE D.18
also includes independent contractors and consultants of the Company, none of
which receive hourly wages or possess job titles.
D.19 EMPLOYEE PLANS.
(a) All plans, programs, policies, commitments or other
arrangements (whether or not set forth in a written document) maintained or
contributed to by the Company or any subsidiary or other trade or business
(whether or not incorporated) treated as a single employer with the Company (an
"ERISA AFFILIATE") pursuant to Code Section 414(b), (c), (m) or (o) which
provide deferred or incentive compensation, stock options or other stock
purchase rights, severance or termination pay, medical, dental, life, disability
or accident benefits (whether or not insured), collective bargaining agreements,
benefits described in Code Sections 125 or 129, or pension, profit sharing or
retirement benefits to, or for the benefit of, any active, former or retired
employee or other service provider of the Company or their spouses or dependents
are set forth in SCHEDULE D.19 (collectively, the "PLANS"). Each Plan has been
maintained and administered in all respects in compliance with its terms and
with the requirements prescribed by all statutes, orders, rules and regulations,
including but not limited to ERISA and the Code, which are applicable to such
Plan, except to the extent such noncompliance would not have a material and
adverse effect on the operation of such Plan. All contributions, reserves or
premium payments required to be made or accrued as of the date hereof to the
Plans have been made or accrued.
(b) The Company and each ERISA Affiliate has complied with (i)
the applicable health care continuation and notice provisions of the
Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") and the
regulations (including proposed regulations) thereunder, (ii) the applicable
requirements of the Family Medical and Leave Act of 1993 and the regulations
thereunder and (iii) the applicable requirements of the Health Insurance
Portability and Accountability Act of 1996 and the regulations (including
proposed regulations) thereunder, except to the extent that any such failure to
comply would not, in the aggregate, have a material adverse effect on the
Company.
D.20 INTERESTED PARTY RELATIONSHIPS.
Except as set forth on SCHEDULE D.20, neither the Company nor
any officer, director nor five percent security holder of the Company
(collectively, the "INTERESTED PARTIES") (nor any family member of any
Interested Party 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 Interested Party, the Company or any such family
member) have any material financial interest, direct or indirect, in any
material supplier or customer, any party to any contract which is material to
the Company or any competitor of the Company.
D.21 PRODUCTS LIABILITY.
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(a) There are no claims against the Company, fixed or
contingent, asserting (i) any damage, loss or injury caused by any product or
(ii) any breach of any express or implied product warranty or any other similar
claim with respect to any product other than standard warranty obligations (to
replace, repair or refund) made by the Company in the Ordinary Course of
Business, except for those claims that, if adversely determined against the
Company, would not have a material adverse effect on the Business Condition of
the Company. As used herein, "product" shall mean any products manufactured,
designed, developed, distributed, sold, re-sold, customized or serviced by the
Company, including Products.
(b) None of the products and services sold, licensed,
rendered, or otherwise provided by the Company (or by any of its subsidiaries)
in the conduct of its business will malfunction, will cease to function, will
generate materially incorrect data or will produce materially incorrect results
or will cause any of the above with respect to the property or business of third
parties using such products or services when processing, providing or receiving
(i) date-related data from, into and between the Twentieth (20th) and
Twenty-First (21st) centuries, or (ii) date-related data in connection with any
valid date in the Twentieth (20th) or Twenty-First (21st) centuries, causing a
material adverse effect on the Company, its business or the property or business
of any third parties using such products or services.
(c) Except as set forth on SCHEDULE D.21, neither the Company
nor any subsidiary has made any representations or warranties specifically
relating to the ability of any product or service sold, licensed, rendered, or
otherwise provided by the Company (or by any of its subsidiaries) in the conduct
of their respective businesses to operate without malfunction, to operate
without ceasing to function, to generate correct data or to product correct
results when processing, providing or receiving (i) date-related data from, into
and between the Twentieth (20th) and Twenty-First (21st) centuries, or (ii)
date-related data in connection with any valid date in the Twentieth (20th) or
Twenty-First (21st) centuries.
D.22 PRODUCT WARRANTIES.
The Company has provided to Buyer copies or descriptions of
its warranty policies and all outstanding oral and written warranties or
guarantees relating to any of the Company's products, if any, other than
warranties or guarantees implied by law.
D.23 CUSTOMERS.
SCHEDULE D.23 lists all customers of the Company during the
twelve-month period ended December 31, 1998. The Company has furnished Buyer
with complete and accurate copies or descriptions of all current agreements
(written or unwritten) with such customers. There is no complaint, event,
happening or fact which would lead the Company to believe that any relationship
with any of such customers has deteriorated or that any of such customers
intends to cancel any orders in backlog.
D.24 SUPPLIERS.
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SCHEDULE D.24 lists all suppliers of goods to the Company
during the prior two (2) years and the value of goods supplied to the Company in
each such year where such value exceeds $100,000 per annum. There has not been
any event, happening or fact which would lead the Company to believe any of such
suppliers will not continue to supply the current level and type of goods
currently being provided to the Company on similar terms and conditions.
D.25 BOOKS AND RECORDS.
The books and records of the Company to which Buyer and its
accountants and attorneys have been given access are the true books and records
of the Company and truly and fairly reflect the underlying facts and
transactions in all material respects.
D.26 BANK ACCOUNTS AND POWERS OF ATTORNEY.
Set forth in SCHEDULE D.26 is an accurate and complete list
showing (a) the name and address of each bank in which the Company has an
account or safe deposit box, the number of any such account or any such box, and
the names of all persons authorized to draw thereon or to have access thereto
and (b) the names of all persons, if any, holding powers of attorney from the
Company and a summary statement of the terms thereof.
D.27 COMPLETE DISCLOSURE.
No representation or warranty made by the Company in this
Agreement, nor any document, written information, statement (oral or written),
financial statement, certificate, schedule or exhibit prepared and furnished, or
to be prepared and furnished by the Company or its representatives 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 in light of the circumstances under which they were
furnished which has not been corrected in subsequent documents, written
information, written statements, financial statements or by certificates,
schedules or exhibits, as the case may be, and provided to Buyer. All schedules
and exhibits prepared by the Company shall be updated as of the Closing in a
form reasonably acceptable to Buyer.
D.28 INSURANCE.
SCHEDULE D.28 lists all insurance policies and fidelity bonds
covering the assets, business, equipment, properties, operations, employees,
officers and directors of the Company, the amounts of coverage under each such
policy and bond of the Company.
D.29 ACCOUNTS RECEIVABLE.
The amount of all accounts receivable of the Company will be
good and collectible in full in the ordinary course of business within 90 days
of Closing; all accounts receivable arise from bona fide transactions in the
ordinary course of business; no contest with
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respect to the amount or validity of any amount is pending; and none of such
accounts receivable is subject to any counterclaim, rights of return, refusals
to pay or setoff except to the extent of the allowance therefor recorded in
accordance with GAAP.
D.30 EXPORTS TO CERTAIN COUNTRIES.
For the five years preceding the date hereof, the Company has
made no sales to entities located or residing or domiciled in, directly or
indirectly, Cuba, North Korea, Libya, Iraq, Iran or any other countries
prohibited by U.S. export control laws.
D.31 FOREIGN CORRUPT PRACTICES ACT.
None of the activities or types of conduct below have been or
may have been engaged in by the Company, either directly or indirectly:
(a) Any bribes or kickbacks to government officials or their
relatives, or any other payments to such persons, whether or not legal, to
obtain or retain business or to receive favorable treatment with regard to
business; or
(b) Any bribes or kickbacks to persons other than government
officials, or to relatives of such persons, or any other payments to such
persons or their relatives, whether or not legal, to obtain or retain business
or to receive favorable treatment with regard to business; or
(c) Any illegal contributions made to any political party,
political candidate or holder of governmental office; or
(d) Any bank accounts, funds or pools of funds created or
maintained without being reflected on the corporate books of account, or as to
which the receipts and disbursements therefrom have not been reflected on such
books; or
(e) Any receipts or disbursements, the actual nature of which
has been "disguised" or intentionally misrecorded on the corporate books of
account; or
(f) Fees paid to consultants or commercial agents which
exceeded the reasonable value of the services purported to have been rendered;
or
(g) Any payments or reimbursements made to personnel of the
Company for the purposes of enabling them to expend time or to make
contributions or payments of the kind or for the purpose referred to above. In
addition, the Company has not violated the United States Corrupt Foreign
Practices Act or any other similar laws, statute, rule or regulation of any
country.
D.32 TAKEOVER STATUTES.
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No "fair price," "moratorium," "control share acquisition" or
other similar anti-takeover statute or regulation or any applicable
anti-takeover provision in the Company's charter or bylaws is, or at the Closing
will be, applicable to the Buyer.
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EXHIBIT E
E.1 ORGANIZATION.
Buyer is a corporation duly organized and validly existing
under the laws of the jurisdiction of its incorporation.
E.2 AUTHORIZATION.
Buyer has the corporate power and authority to execute,
deliver and perform this Agreement and to pay the Merger Consideration. This
Agreement constitutes Buyer's valid and legally binding obligation, enforceable
against Buyer in accordance with its terms, except as such enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting rights of creditors generally and by general principles
of equity (regardless of whether enforcement is sought in a proceeding at law or
in equity). The execution, delivery and performance of this Agreement by Buyer
have been duly authorized by all necessary corporate action.
E.3 NO CONSENT OR APPROVAL REQUIRED.
No consent, approval or authorization of, or filing with, any
third party, including any governmental or regulatory authority, is required for
the valid authorization, execution and delivery by Buyer of this Agreement or
the consummation of the transactions contemplated hereby.
E.4 INVESTMENT EXPERIENCE.
Buyer (i) is an "accredited investor" as such term is defined
in Rule 501(a) under the Securities Act of 1933, as amended (the "1933 ACT");
(ii) has such knowledge, sophistication and experience in business and financial
matters so as to be capable of evaluating the merits and risks of the
prospective Merger, and has so evaluated the merits and risks of such Merger;
and (iii) is able to bear the economic risk of such Merger and, at the present
time, is able to afford a complete loss of its investment in the Merger.
E.5 FINANCIAL STATEMENTS
The Buyer has furnished to the Company a complete and accurate
copy of its unaudited balance sheet as of October 31, 1997 and its unaudited
statements of operations, cash flow and stockholders' equity for the fiscal year
ending October 31, 1997 and its unaudited balance sheet as of July 31, 1998 and
its unaudited interim statements of operation, cash flow and stockholders'
equity for the nine month period ended July 31, 1998 (the "Buyer's Interim
Financial Statements") (collectively the 1997 and Interim Financial Statements
are referred to herein as the "BUYER'S FINANCIAL STATEMENTS"). The Buyer's
Financial Statements are attached hereto as SCHEDULE E.5. The Buyer's Financial
Statements have been prepared in accordance
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with generally accepted accounting principles ("GAAP") consistently applied and
fairly present the consolidated financial position of the Buyer as and at the
dates thereof and the Buyer's consolidated results of operations and cash flows
for the periods then ended. Subject, in the case of the Buyer's Interim
Financial Statements, to normal year end adjustments.
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EXHIBIT F
ESCROW AGREEMENT
This Escrow Agreement (the "Agreement") is made and entered
into as of _____________, 1999 (the "Effective Date"), by and among Fluence
Technology, Inc., a Delaware corporation ("Fluence"), Opmaxx, Inc., a Delaware
corporation ("Opmaxx" or the "Company"), Douglas Goodman as the representative
of the Opmaxx Common Stockholders (the "Common Stockholder Representative" or
the "Representative"), and _________________, as escrow agent (the "Escrow
Agent").
RECITALS
A. Opmaxx and Fluence have entered into an Agreement and Plan
of Merger dated as of February 16, 1999, (the "Plan"), pursuant to which Opmaxx
Acquisition Corporation ("Merger Sub"), a wholly-owned subsidiary of Fluence to
be formed by Fluence prior to or contemporaneously with consummation of the
transactions contemplated by the Plan, shall be merged with Opmaxx (the
"Merger"), with Merger Sub to be the surviving corporation of the Merger (the
"Surviving Corporation"). In the Merger, the outstanding shares of Opmaxx Common
and Preferred Stock ("Opmaxx Stock") will be converted into the right to receive
a portion of the $8,000,000 Merger Consideration, with the Opmaxx Common
Stockholders entitled to receive Additional Merger Consideration as more fully
described in the Plan.
B. The Plan provides that the Additional Merger Consideration
will be placed in an escrow established in accordance with this Agreement to
secure the indemnification obligations under Section 10 of the Plan.
C. The parties desire to enter into this Agreement to
establish the terms and conditions under which the escrow will be established
and maintained.
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. CERTAIN DEFINED TERMS.
1.1 TERMS DEFINED IN PLAN.
Capitalized terms used in this Agreement and not otherwise
defined herein shall have the same meanings given to such terms in the Plan.
1.2 ESCROW.
As used herein, the "Escrow" means the escrow and the Escrow
Account (as defined in Section 2.1 below) established pursuant to this Agreement
in which the Additional Merger Consideration (as defined in Section 9.2 of the
Plan) will be held to secure indemnification.
Escrow Agreement
Page 1
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1.3 TERMINATION DATE.
"Termination Date" means January 1, 2004, the date on which
the parties' indemnification obligations expire pursuant to Section 10.1 of the
Plan.
2. FORMATION OF ESCROW ACCOUNTS.
2.1 DELIVERY AND DEPOSIT OF ADDITIONAL MERGER
CONSIDERATION.
Upon the execution of this Agreement by all parties hereto,
and until the Termination Date, Fluence will deliver to the Escrow Agent the
Additional Merger Consideration in the manner specified in Section 9.2 of the
Plan. The Escrow Agent agrees to accept delivery of the above-mentioned
Additional Merger Consideration, and to hold the same in escrow in an escrow
account (the "Escrow Account"), subject to the terms and conditions of this
Agreement.
2.2 TREATMENT OF ADDITIONAL MERGER CONSIDERATION.
The Additional Merger Consideration shall be held by the
Escrow Agent and shall not be subject to any lien, attachment, trustee process
or any other judicial process of any creditor of any party hereto.
3. ADMINISTRATION OF ESCROW ACCOUNT.
The Escrow Agent shall administer the Escrow Account as
follows:
3.1 INTEREST BEARING ACCOUNT.
The Escrow Agent shall keep the Additional Merger
Consideration in an account bearing interest at a rate not less than the daily
money market rate at U.S. Bank National Association (or similar bank).
3.2 CLAIM NOTICE.
If Fluence asserts a claim for indemnification under Section
10 of the Plan on or prior to the Termination Date, then Fluence shall promptly
give written notice of such claim (a "Claim Notice"), including a copy of such
claim and/or process and all legal pleadings in connection therewith, to the
Common Stockholder Representative and the Escrow Agent in accordance with
Section 11 hereof. Each Claim Notice shall state the amount of claimed Claims
and Liabilities (the "Claimed Amount") and the basis for such claim. Fluence
shall assert any claim for indemnification promptly following its discovery of
the facts giving rise to such claim and in no event more than sixty (60) days
from such discovery so long as such period does not extend beyond the
Termination Date of this Agreement.
Escrow Agreement
Page 2
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3.3 RESPONSE NOTICE.
Within thirty (30) days after delivery of a Claim Notice to
the Common Stockholder Representative, the Representative shall give to Fluence,
with a copy to the Escrow Agent, a written response (the "Response Notice") in
which the Representative shall either:
(a) agree to the full Claimed Amount and instruct the Escrow
Agent to release and deliver such portion of the Additional Merger Consideration
having a value equal to the full Claimed Amount from the Escrow Account to
Fluence; or
(b) agree to a portion of the Claimed Amount (the "Agreed
Amount") and instruct the Escrow Agent to release and deliver such portion of
the Additional Merger Consideration having a value equal to the Agreed Amount
from the Escrow Account to Fluence, and contest the remainder of the Claimed
Amount and instruct the Escrow Agent to hold present and future, if necessary,
portions of the Additional Merger Consideration equal to such contested amount
in the Escrow Account until such contested amount is resolved pursuant to
Section 4 below; or
(c) contest the full amount of the Claimed Amount and instruct
the Escrow Agent to hold present and future, if necessary, portions of the
Additional Merger Consideration equal to such contested amount in the Escrow
Account until such contested amount is resolved pursuant to Section 4 below.
The Representative may contest the Claimed Amount and withhold release
of Additional Merger Consideration only based upon a good faith belief that all
or such portion of the Claimed Amount does not constitute Claims and
Liabilities, or does not constitute the actual amount of Claims and Liabilities
incurred, for which Fluence is entitled to indemnification under Section 10 of
the Plan. If no Response Notice is delivered by the Representative within such
thirty (30) day period, then the Representative shall be deemed to have agreed
that the full Claimed Amount may be released and delivered from the Escrow
Account to Fluence.
3.4 RELEASE WITHOUT CONTEST.
(a) If in his Response Notice the Representative agrees (or if
the Representative fails to deliver a Response Notice within the required time
period and as such is deemed to have agreed) that the Additional Merger
Consideration having a value equal to the full Claimed Amount may be released
from the Escrow Account to Fluence, then the Escrow Agent shall promptly
thereafter deliver to Fluence from the Escrow Account Additional Merger
Consideration having a value equal to the Claimed Amount (or such lesser amount
as is then held in the Escrow Account).
(b) If the Representative in the Response Notice agrees that
Additional Merger Consideration having a value equal to the Agreed Amount may be
released from the Escrow Account to Fluence in the respective amounts set forth
in the Response Notice, then the Escrow Agent shall promptly thereafter deliver
to Fluence such Agreed Amount from present and future, if necessary, portions of
the Additional Merger Consideration, and the provisions of Section 4 shall apply
to any and all of the Claimed Amount being contested by the Representative.
Escrow Agreement
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4. ARBITRATION OF CONTESTED RELEASES.
4.1 ARBITRATION OF DISPUTES OVER ESCROW RELEASE.
If the Representative gives a Response Notice contesting the release of
Additional Merger Consideration equal to all or any part of the Claimed Amount
set forth in the applicable Claim Notice, as provided in Sections 3.3(b) and (c)
above (the "Contested Amount"), then such dispute shall be settled by mandatory
binding arbitration pursuant to the terms of Section 11.2 of the Plan.
4.2 ACTIONS OF ESCROW AGENT PENDING ARBITRATION.
Upon receipt of a Claim Notice from Fluence, the Escrow Agent
shall continue to hold in the Escrow Account Additional Merger Consideration
having a value sufficient to cover the Claimed Amount from present and future,
if necessary, deposits of such from Fluence, notwithstanding the intervening
expiration of a calendar quarter or the occurrence of the Termination Date,
until: (a) receipt of a Response Notice instructing the Escrow Agent to release
and deliver an amount of such Additional Merger Consideration equal to all or a
portion of such Claimed Amount from the Escrow Account to Fluence; (b) delivery
of a copy of a settlement agreement executed by Fluence and the Representative
setting forth instructions to the Escrow Agent as to the release of such
Additional Merger Consideration that shall be made with respect to any Contested
Amount; (c) delivery of a copy of the final decision of the arbitrator setting
forth instructions to the Escrow Agent as to the release of Additional Merger
Consideration that shall be made with respect to any Contested Amount; or (d)
receipt of a court order or judgment directing Escrow Agent to act with respect
to the distribution of any Additional Merger Consideration. The Escrow Agent
shall thereupon release Additional Merger Consideration from the Escrow Account
in accordance with such Response Notice, settlement agreement, arbitrator's
instructions, court order or judgment, as applicable.
4.3 NO RESPONSIBILITY OF ESCROW AGENT TO RESOLVE DISPUTE.
If any controversy arises involving any party to this
Agreement (other than the Escrow Agent) concerning the subject matter of this
Agreement, including a Contested Amount, the Escrow Agent will not be required
to determine the controversy or to take any action until such dispute has been
resolved.
4.4 BURDEN OF PROOF.
For any claim submitted to an arbitration hereunder, the
burden of proof will be as it would be if the claim were litigated in a judicial
proceeding.
Escrow Agreement
Page 4
<PAGE>
5. PAYMENT OF REMAINING ADDITIONAL MERGER CONSIDERATION
TO OPMAXX COMMON STOCKHOLDERS.
5.1 QUARTERLY DISBURSEMENTS.
At the end of each calendar quarter (and on the Termination
Date), the Escrow Agent shall deliver to Fluence and the Representative a
statement summarizing the Additional Merger Consideration deposited into the
Escrow Account that quarter by Fluence, the interest accrued in the Escrow
Account that quarter, and the total amount of all Claimed Amounts made pursuant
to Sections 3 or 4 hereof in connection with the Escrow Account (the excess, if
any, of such balance in such Escrow Account over the total amount of such
Claimed Amounts against such Escrow Account shall be referred to as the "
Quarterly Escrow Balance"). Fluence and the Representative each shall review the
accuracy of the Quarterly Escrow Balance and notify the Escrow Agent and each
other of any asserted discrepancy or of the absence of any discrepancy within
ten (10) business days of receipt of the foregoing statement. Upon the Escrow
Agent's notification of no discrepancy by Fluence and the Representative within
the ten (10) business day period specified in the preceding sentence, then
within ten (10) business days thereafter, the Escrow Agent shall deliver to each
of the Opmaxx Common Stockholders an amount of the Additional Merger
Consideration representing such Opmaxx Common Stockholder's share of the
Quarterly Escrow Balance less a portion of the accrued interest allocable, on a
proportional basis, to the Claimed Amounts, free and clear of the Escrow created
by this Agreement. If either Fluence or the Representative notifies the Escrow
Agent of a discrepancy, any dispute with respect to such discrepancy shall be
resolved by mandatory binding arbitration as provided in Section 4. After the
last claim shall have been resolved pursuant to Sections 3 and 4 hereof and all
Additional Merger Consideration deliverable to Fluence upon the resolution of
all such Claimed Amounts and their allocated interest have been delivered to
Fluence, the remaining balance, if any, of the Additional Merger Consideration
shall be delivered by the Escrow Agent to each Opmaxx Common Stockholders free
and clear of the Escrow created by this Agreement.
5.2 DISTRIBUTION OF THE ADDITIONAL MERGER CONSIDERATION.
All distributions of Additional Merger Consideration to the
Opmaxx Common Stockholders to be made by the Escrow Agent under this Section 5
shall be made in the amounts specified in Exhibit C to the Plan.
5.3 DELIVERY METHODS.
Delivery of Additional Merger Consideration by the Escrow
Agent shall be by registered mail or by nationally recognized overnight courier.
The Escrow Agent shall not be responsible for obtaining insurance in connection
with such delivery.
6. FEES AND EXPENSES OF ESCROW AGENT.
6.1 ESCROW AGENT FEES.
All fees of the Escrow Agent for the services to be rendered
by the Escrow Agent hereunder, will be paid fifty percent (50%) by Fluence and
fifty percent (50%) by the Opmaxx
Escrow Agreement
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<PAGE>
Common Stockholders. Fees owed by the Opmaxx Common Stockholders under this
Section 6 shall be paid out of the Additional Merger Consideration.
6.2 ESCROW AGENT'S EXTRAORDINARY FEES.
Fluence and the Representative hereby acknowledge that all
fees and usual charges for services of the Escrow Agent hereunder shall be
considered compensation for ordinary services as contemplated by this Agreement.
In the event that the Escrow Agent renders any service not provided for in this
Agreement, or if the parties hereto request a substantial modification of the
terms of this Agreement, or if any controversy arises and the Escrow Agent is
made a party to any litigation pertaining to this Agreement or its subject
matter, then the Escrow Agent shall be reasonably compensated for such
extraordinary services and reimbursed for all reasonable costs, attorney's fees
and expenses incurred by the Escrow Agent in rendering such extraordinary
services, which costs, fees and expenses shall be borne by Fluence and the
Opmaxx Common Stockholders as provided in Section 6.1 above.
7. LIABILITY AND AUTHORITY OF REPRESENTATIVE; SUCCESSORS
AND ASSIGNEES.
7.1 LIMITS ON LIABILITY.
The Representative shall incur no liability with respect to
any action taken or suffered by him in his capacity as Representative in
reliance upon any note, direction, instruction, consent, statement or other
documents believed by him to be genuinely and duly authorized, nor for other
action or inaction except his own willful misconduct or gross negligence. The
Representative may, in all questions arising under this Escrow Agreement, rely
on the advice of counsel, and for anything done, omitted or suffered in good
faith by the Representative based on such advice, the Representative shall not
be liable to anyone.
7.2 SUCCESSOR REPRESENTATIVES.
In the event of the death or permanent disability of the
Representative, or the resignation of Representative as the representative of
the Opmaxx Common Stockholders hereunder, a successor Representative shall be
elected by a majority vote of the Opmaxx Common Stockholders. Each successor
Representative shall have all of the power, authority, rights and privileges
conferred by this Agreement upon the original Representative, and the term
"Representative" as used herein shall be deemed to include each successor
Representative. Unless and until the Escrow Agent receives written notice from
all of the Opmaxx Common Stockholders identifying a new representative, the
Escrow Agent shall at all times be entitled to assume that the Representative
set forth in this Agreement is the Representative hereunder. Upon receipt of
such written notice, the Escrow Agent shall be fully protected and not be held
liable for any instructions received by the new representative of the Escrow
Indemnitors.
Escrow Agreement
Page 6
<PAGE>
7.3 AUTHORITY OF REPRESENTATIVE.
The Representative shall have full power and authority to
represent the Opmaxx Common Stockholders and their successors with respect to
all matters arising under this Agreement or related to the subject matter hereof
and all actions taken by the Representative hereunder shall be binding upon each
and all of the Opmaxx Common Stockholders and their successors, as if expressly
confirmed and ratified in writing by each of them. Without limiting the
generality of the foregoing, the Representative shall have full power and
authority to interpret all of the terms and provisions of this Agreement, to
compromise and settle any claims asserted hereunder and to authorize payments to
be made with respect hereto, on behalf of the Opmaxx Common Stockholders and
their successors. The Opmaxx Common Stockholders (with respect to the Additional
Merger Consideration) have consented to the appointment of the Representative as
representative of the Opmaxx Common Stockholders (with respect to the Additional
Merger Consideration) and as the attorney-in-fact and agent for and on behalf of
each Opmaxx Common Stockholder for the purposes of taking actions and executing
agreements and documents on behalf of any of the Opmaxx Common Stockholders as
provided in this Agreement, and, subject to the express limitations set forth
below, the taking by the Representative of any and all actions and the making of
any decisions required or permitted to be taken by him under this Agreement,
including, but not limited to, the exercise of the power to authorize delivery
to Fluence of Additional Merger Consideration and to take all actions necessary
in the judgment of the Representative for the accomplishment of the foregoing
and all of the other terms, conditions and limitations of this Agreement. The
Representative will have unlimited authority and power to act on behalf of each
Opmaxx Common Stockholder with respect to this Agreement and the disposition,
settlement or other handling of all claims, rights or obligations arising under
this Agreement with respect to Additional Merger Consideration so long as all
Opmaxx Common Stockholders are treated in the same manner (unless the Opmaxx
Common Stockholders otherwise consent). The Opmaxx Common Stockholders will be
bound by all actions taken by the Representative in connection with this
Agreement, and Fluence will be entitled to rely on any action or decision of the
Representative.
8. LIMITATION OF ESCROW AGENT'S RESPONSIBILITY AND
LIABILITY.
8.1 LIMITATION OF RESPONSIBILITY.
The Escrow Agent's duties are limited to those set forth in
this Agreement, and the Escrow Agent, acting as such under this Agreement, is
not charged with knowledge of or any duties or responsibilities under any other
document or agreement, including, without limitations the Plan. The Escrow Agent
may execute any of its powers or responsibilities hereinafter and exercise any
rights hereunder either directly or by or through its agents or attorneys.
Nothing in this Escrow Agreement will be deemed to impose upon the Escrow Agent
any duty to qualify to do business or to act as a fiduciary or otherwise in any
jurisdiction. The Escrow Agent will not be responsible for, and will not be
under a duty to examine into or pass upon, the validity, binding effect,
execution or sufficiency of this Escrow Agreement or of any agreement mandatory
or supplemental hereto.
Escrow Agreement
Page 7
<PAGE>
8.2 LIMITATION OF LIABILITY.
The Escrow Agent will incur no liability with respect to any
action taken, not taken or suffered by it in reliance upon any notice,
direction, instruction, consent, statement or other document believed by it to
be genuine and duly authorized, nor for any other action or inaction, except its
own willful misconduct or gross negligence. In all questions arising under this
Agreement, the Escrow Agent may rely on the advice of counsel, and for anything
done, omitted or suffered in good faith by the Escrow Agent based on such
advice, the Escrow Agent will not be liable to anyone. The Escrow Agent will not
be required to take any action hereunder involving any expense unless the
payment of such expense is made or provided for in a manner satisfactory to it.
The Escrow Agent will not be liable for any action taken or omitted to be taken
by it in good faith unless a court of competent jurisdiction determines that the
Escrow Agent's willful misconduct or gross negligence was the cause of any loss
to Fluence, the Representative, or any Opmaxx Common Stockholder. The Escrow
Agent will have no obligations with respect to the investment of Additional
Merger Consideration except as expressly provided in Section 3.1. Any dispute
which may arise with respect to the payment or ownership or right of possession
of all or any part of the Escrow or the Additional Merger Consideration, or the
duties of the Escrow Agent hereunder, shall be satisfied pursuant to the
provisions of Section 4. The Escrow Agent shall be under no duty to institute or
defend any proceeding unless the subject of such proceeding is part of its
duties hereunder. In the event of any dispute between the parties to this Escrow
Agreement, or between any of them and any other person, resulting in adverse
claims or demands being made upon any of the Additional Merger Consideration, or
in the event that Escrow Agent, in good faith, is in doubt as to what action it
should take hereunder, the Escrow Agent may, at its option, file a suit as
interpleader in a court of appropriate jurisdiction, or refuse to comply with
any claims or demands on it, or refuse to take any other action hereunder, so
long as such dispute shall continue or such doubt shall exist. The Escrow Agent
shall be entitled to continue so to refrain from acting until (i) the rights of
all parties have been fully and finally adjudicated by a court of appropriate
jurisdiction or (ii) all differences and doubt shall have been resolved by
agreement among all of the interested persons, and the Escrow Agent shall have
been notified thereof in writing signed by all such persons. The rights of the
Escrow Agent under this Section 8 are cumulative of all other rights which it
may have by law or otherwise.
8.3 INDEMNITY.
Fluence and the Opmaxx Common Stockholders (collectively, the
"Indemnifying Parties"; individually, an "Indemnifying Party") hereby jointly
and severally covenant and agree to reimburse, indemnify and hold harmless the
Escrow Agent and its employees and agents from and against any loss, damage or
liability suffered or incurred by or asserted against the Escrow Agent
(including amounts paid in settlement of any action, suit, proceeding, or claim
brought or threatened to be brought and including reasonable expenses of legal
counsel) arising out of, in connection with or based upon any act or omission by
the Escrow Agent relating in any way to this Agreement or the Escrow Agent's
services hereunder. This indemnity will not apply to any such loss, damage or
liability arising from the gross negligence or willful misconduct on the Escrow
Agent's part. Anything in this Agreement to the contrary notwithstanding, in no
event will the Escrow Agent be liable for special, indirect or consequential
damage or loss of any kind whatsoever (including but not limited to lost
profits), even if the Escrow Agent has been advised of the likelihood of such
loss or damage and regardless of the form of action.
Escrow Agreement
Page 8
<PAGE>
8.4 PARTICIPATION IN DEFENSE OF THE ESCROW AGENT.
Each Indemnifying Party may participate at its own expense in
the defense of any claim or action that may be asserted against the Escrow
Agent, and if the Indemnifying Parties so elect, the Indemnifying Parties may
assume the defense of such claim or action; provided, however, that if there
exists a conflict of interest that would make it inappropriate for the same
counsel to represent both the Escrow Agent and the Indemnifying Parties, the
Escrow Agent's retention of separate counsel will be reimbursable as provided in
Section 8.3. The Escrow Agent's right to indemnification hereunder will survive
the Escrow Agent's resignation or removal as escrow agent hereunder and will
survive the termination of this Agreement by lapse of time or otherwise.
8.5 NOTICE OF CLAIMS AGAINST ESCROW AGENT.
The Escrow Agent will notify each Indemnifying Party by
letter, or by telephone or telecopy confirmed by letter sent U.S. first class
mail, registered or certified, of any receipt by the Escrow Agent of a written
assertion of a claim against the Escrow Agent related to this Agreement, or any
action commenced against the Escrow Agent, within ten (10) business days after
the Escrow Agent's receipt of written notice of such claim. However, the Escrow
Agent's failure to so notify each Indemnifying Party will not operate in any
manner whatsoever to relieve an Indemnifying Party from any liability it may
have otherwise on account of this Section 8. In the event the Escrow Agent fails
to so notify each Indemnifying Party and an Indemnifying Party is prejudiced
thereby, then such Indemnifying Party will not have liability to Escrow Agent
under this Section 8.
9. SUCCESSOR ESCROW AGENT.
In the event the Escrow Agent becomes unavailable or unwilling
to continue in its capacity herewith, the Escrow Agent may resign at any time
and be discharged from its duties or obligations hereunder by giving a written
resignation to the parties to this Escrow Agreement, specifying not less than
thirty (30) days prior written notice of the date when such resignation shall
take effect; provided, however, that no such resignation shall become effective
until the appointment of a successor Escrow Agent and acceptance of such
appointment by such successor Escrow Agent. Fluence may appoint a successor
Escrow Agent without the consent of the Representative so long as such successor
is a bank with assets of at least Fifty Million Dollars ($50,000,000) which has
no direct depository or lending relationship with Fluence and which is qualified
to do business in the State of Oregon, and may appoint any other successor
Escrow Agent with the consent of the Representative, which shall not be
unreasonably withheld. If, within such notice period, Fluence provides to the
Escrow Agent written instructions with respect to the appointment of a successor
Escrow Agent in accordance with this Section 9 and directions for the transfer
of any Additional Merger Consideration then held by the Escrow Agent to such
successor, the Escrow Agent shall act in accordance with such instructions and
promptly transfer such Additional Merger Consideration to such designated
successor. If no successor Escrow Agent is appointed within sixty (60) days of
the date specified for the Escrow Agent's resignation
Escrow Agreement
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<PAGE>
to take effect, the Escrow Agent shall have the right to apply to a court of
competent jurisdiction for such appointment at the expense of Fluence. Each
successor Escrow Agent shall execute and deliver an instrument accepting such
appointment and shall, without further acts, be vested in all the estates,
properties, rights, powers and duties of the Escrow Agent or any other
predecessor Escrow Agent as if originally named as Escrow Agent hereunder.
10. TERMINATION.
This Agreement shall terminate upon the later of (a) the
Termination Date, or (b) the release by the Escrow Agent of all of the
Additional Merger Consideration in accordance with this Agreement.
Notwithstanding any termination of this Escrow Agreement, the provisions of
Sections 6.1, 7.1, and 8.3 hereof shall survive such termination and remain in
full force and effect.
11. NOTICES.
All notices, requests, consents, and other communications
hereunder shall be in writing and shall be deemed to have been properly given or
made on the date personally delivered or on the date mailed, by first class
registered or certified mail with postage prepaid, by private nationally
recognized courier service or by facsimile and confirmed, if delivered, mailed,
courier or facsimile to the respective parties hereto at the following
addresses:
If the Escrow Agent:
If to Fluence or Merger Sub, to:
Fluence Technology, Inc.
8700 S.W. Creekside Place
Beaverton, OR 97008
Attention: John DiGirolamo, President and CEO
Telephone: (503) 672-8744
Facsimile: (503) 672-8700
With a copy to:
Brobeck, Phleger & Harrison LLP
Two Embarcadero Place
2200 Geng Road
Palo Alto, CA 94303-0913
Attention: Warren T. Lazarow
Telephone: (650) 496-2887
Facsimile: (650) 496-2733
Escrow Agreement
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<PAGE>
if to the Representative, to:
Douglas Goodman
c/o Opmaxx, Inc.
8700 SW Creekside Place
Beaverton, OR 97008
Telephone: (503) 520-9200
Facsimile: (503) 520-1636
With a copy to:
Tonkon Torp LLP
1600 Pioneer Tower
888 S.W. Fifth Avenue
Portland, OR 97204-2099
Attention: Brendan R. McDonnell
Telephone: (503) 221-1440
Facsimile: (503) 972-3754
Any party hereto may designate a different address by providing written notice
of such new address to the other parties hereto.
12. MISCELLANEOUS.
12.1 GOVERNING LAW; ASSIGNS.
This Agreement will be governed by and construed in accordance
with the internal laws of the State of Oregon without regard to conflict of law
principles and will be binding upon, and inure to the benefit of, the parties
hereto and their respective successors and permitted assigns.
12.2 COUNTERPARTS.
This Agreement may be executed in two or more counterparts,
each of which will be deemed an original, but all of which together will
constitute one and the same instrument.
12.3 ENTIRE AGREEMENT; SEVERABILITY.
Except as otherwise set forth in the Plan, this Agreement
constitutes the entire understanding and agreement of the parties with respect
to the subject matter of this Agreement and supersedes all prior agreements or
understandings, written or oral, between the parties with respect to the subject
matter hereof. If any provision of this Agreement is held to be illegal or
unenforceable by a tribunal of competent jurisdiction, then such provision shall
not be voided,
Escrow Agreement
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<PAGE>
but shall be deemed modified to the extent necessary to make such provision
lawful and enforceable, and the other provisions of this Agreement shall remain
in full force and effect.
12.4 WAIVERS.
No waiver by any party hereto of any condition or of any
breach of any provision of this Agreement will be effective unless in writing.
No waiver by any party of any such condition or breach, in any one instance,
will be deemed to be a further or continuing waiver of any such condition or
breach or a waiver of any other condition or breach of any other provision
contained herein.
12.5 AMENDMENT.
This Agreement may be amended by the written agreement of
Fluence, the Escrow Agent and the Representative, provided that, if the Escrow
Agent does not agree to an amendment agreed upon by Fluence and the
Representative, the Escrow Agent will resign (which resignation shall be
effective immediately and, in any event, prior to the effective date of the
amendment) and Fluence will appoint a successor Escrow Agent in accordance with
Section 9 hereof. No such amendment may treat any one Opmaxx Common Stockholder
differently from the other Opmaxx Common Stockholders unless consented to in
writing by Opmaxx Common Stockholders having beneficial ownership in a majority
of the outstanding Additional Merger Consideration, as well as the consent of
any Opmaxx Common Stockholder who is to be treated differently.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the day
and year first above written.
Escrow Agreement
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<PAGE>
EXHIBIT 2.13
AMENDMENT NO. 1
dated as of August 31, 1999
to the
AGREEMENT AND PLAN OF MERGER
dated as of
February 16, 1999
This AMENDMENT NO. 1 dated as of August 31, 1999 ("AMENDMENT NO. 1") to
the AGREEMENT AND PLAN OF MERGER, dated as of February 16, 1999 (the "ORIGINAL
MERGER AGREEMENT"), is made and entered into by and between Fluence Technology,
Inc., a Delaware corporation ("FLUENCE" or "BUYER"), Opmaxx Acquisition
Corporation, a Delaware Corporation ("MERGER SUB"), and Opmaxx, Inc., a
Delaware Corporation ("OPMAXX" or the "COMPANY"). The Original Merger
Agreement as amended by this Amendment No. 1 is hereinafter referred to as
the "Merger Agreement". Capitalized terms not otherwise defined herein have
the meanings set forth in the Original Merger Agreement.
RECITALS
The parties have heretofore entered into the Original Merger Agreement.
The parties now wish to amend the Original Merger Agreement to provide that
Opmaxx rather than Merger Sub shall be the surviving corporation in the Merger
and to effect certain other technical clarifications. In addition, Merger Sub,
having been formed after the execution and delivery of the Original Merger
Agreement, wishes to become a party to the Merger Agreement, and Opmaxx and
Fluence wish to include Merger Sub as a party to the Merger Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth in this Amendment No. 1, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
Section 1. Merger Sub is hereby added as a party to the Merger
Agreement, and by execution of this Amendment No. 1 Merger Sub agrees to be
bound by all of the provisions of the Original Merger Agreement (as amended by
this Amendment No. 1) to the same extent as if it had executed and delivered the
Original Merger Agreement as a party thereto. The forepart and signature page of
the Original Merger Agreement, and the definition of "Party" and "Parties" in
the forepart of the Original Merger Agreement, are hereby amended to add Merger
Sub as a party.
Section 2. The first sentence of Section 2 of the Original Merger
Agreement is hereby amended and restated so as to read in its entirety as
follows: "Subject to the terms and conditions of this Agreement, the Parties
agree that, following the Closing (as defined in Section 3 below), Merger Sub
and Opmaxx shall execute and file the Certificate of Merger in substantially the
form attached hereto as Exhibit B with the
<PAGE>
Delaware Secretary of State, whereupon Merger Sub shall be merged with
and into Opmaxx, and Opmaxx shall be the surviving corporation in such merger
and shall become a wholly owned subsidiary of Fluence."
Section 3. Section 2.1 of the Original Merger Agreement is hereby
amended and restated so as to read in its entirety as follows: "Upon the
effectiveness of the Merger (hereinafter referred to as the "EFFECTIVE TIME OF
THE MERGER"), Merger Sub shall be merged with and into Opmaxx and the separate
existence of Merger Sub shall cease. Opmaxx shall be the corporation surviving
the Merger (the "Surviving Corporation")."
Section 4. Section 2.3 of the Original Merger Agreement is hereby
amended and restated so as to read in its entirety as follows: "Each share of
the common stock of Merger Sub (the "MERGER SUB COMMON STOCK") issued and
outstanding immediately prior to the Effective Timer of the Merger shall, by
virtue of the Merger and without any action on the part of any holder thereof,
be converted into one share of Surviving Corporation Common Stock."
Section 5. Exhibit B to the Original Merger Agreement (Certificate of
Merger of Opmaxx, Inc., a Delaware corporation, with and into Opmaxx Acquisition
Corporation, a Delaware corporation) is hereby amended and restated, in the form
attached hereto as EXHIBIT A.
Section 6. Section 12.5 of the Original Merger Agreement is hereby
amended and restated to read in its entirety as follows: "The boards of
directors of Merger Sub and Opmaxx may amend this Agreement at any time prior to
the time that the Certificate of Merger filed with the Delaware Secretary of
State becomes effective, in accordance with Section 103 of the Delaware General
Corporation Law, provided that an amendment made subsequent to the adoption of
the agreement by the stockholders of Merger Sub or Opmaxx shall not (i) alter or
change the amount or kind of shares, securities, cash, property and/or rights to
be received in exchange for or on conversion of all or any of the shares of any
class or series thereof of Merger Sub or Opmaxx; (ii) alter or change any term
of the certificate of incorporation of the Surviving Corporation to be effected
by the Merger; or (iii) alter or change any of the terms and conditions of this
Agreement if such alteration or change would adversely affect the holders of any
class or series thereof of such constituent corporation.
Section 7. Except as expressly set forth herein, all terms and
conditions of the Original Merger Agreement shall remain unchanged.
<PAGE>
IN WITNESS WHEREOF, this Amendment No. 1 has been duly executed and
delivered by the duly authorized officer of each party hereto as of the date
first written above.
FLUENCE TECHNOLOGY, INC.
By:/s/ John DiGirolamo
Name: John DiGirolamo
Title: President
OPMAXX ACQUISITION CORPORATION
By:/s/ John DiGirolamo
Name: John DiGirolamo
Title: President
OPMAXX, INC.
By:/s/ Douglas L. Goodman
Name: Douglas L. Goodman
Title: President
<PAGE>
EXHIBIT 10.22
SOFTWARE OEM LICENSE AGREEMENT
This Software License and OEM Agreement ("Agreement") is entered into
this 19th day of May, 1997 (the "Effective Date") by and between Summit Design,
Inc., a Delaware corporation with principal offices at 9305 SW Gemini Drive,
Beaverton, Oregon 97008 and Test Systems Strategies, Inc., an Oregon corporation
(collectively, "SDI"), and Credence Systems Corporation, a Delaware corporation
with principal offices at 215 Fourier Avenue, Fremont, California 94539 ("CSC").
RECITALS
WHEREAS, CSC desires to purchase licenses to certain SDI software
products, and SDI desires to sell such licenses to CSC in accordance with the
terms of this Agreement; and
WHEREAS, SDI desires to grant to CSC, and CSC desires to receive from
SDI, a non-exclusive license to bundle certain of SDI's products with certain
CSC products and to distribute such SDI products, in object code format only,
with CSC's products in accordance with the terms of this Agreement;
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants contained herein, the parties agree as follows:
Section 1
DEFINITIONS
For purposes of this Agreement the following terms shall have the
meanings set forth below:
1.1 CSC PRODUCTS. "CSC Products" means those CSC automatic test
equipment products which are described on SCHEDULE A attached to this Agreement,
as it may be amended from time to time by mutual agreement of the parties.
1.2 SDI DOCUMENTATION. "SDI Documentation" means all written or
electronic technical documentation furnished by SDI during the term of this
Agreement that relates to the VTB Software.
1.3 VTB. "VTB Software" means SDI's proprietary software, in
machine-readable, compiled object code format only, as more fully described on
SCHEDULE B, including any bug fixes, corrections, or other modifications
hereinafter furnished to CSC by SDI in connection with the VTB Software, whether
requested by CSC pursuant to a Maintenance Agreement between CSC and SDI or
initiated by SDI.
1.4 MAINTENANCE AGREEMENT. "Maintenance Agreement" shall mean the
maintenance agreement for maintenance of the VTB Software in the form set forth
in SCHEDULE C.
1.5 END USER LICENSE AGREEMENT. "End User License Agreement" shall
mean the end user license agreement for the VTB Software in the form set forth
in SCHEDULE E.
<PAGE>
Section 2
PURCHASE GRANT AND DELIVERABLES
2.1 VTB SOFTWARE LICENSE PURCHASE. CSC shall purchase licenses to the
VTB Software for the prices and in the quantity set forth in SCHEDULE D, in
accordance with the terms set forth in SCHEDULE D. Each of such licenses shall
be subject to the terms of the End User License Agreement.
2.2 MAINTENANCE PURCHASE. CSC and SDI shall execute the Maintenance
Agreement set forth in SCHEDULE C, as of the date hereof. CSC shall sign an
irrevocable purchase order for such Maintenance Agreement for eighteen (18)
months of maintenance for an aggregate purchase price of $2,000,000. Payment
shall be made upon Closing (as defined in the Asset Purchase Agreement among
CSC, SDI and Test Systems, Inc.) ("Closing") by wire transfer to a bank account
designated by SDI.
2.3 DISTRIBUTION LICENSE. Subject to the terms and conditions of this
Agreement, SDI hereby grants to CSC and its affiliates, under all of SDI's
intellectual property rights in and to the VTB Software, a worldwide,
non-exclusive, non-transferable (except as provided in Section 10.2 below)
license to use the VTB Software for internal purposes (provided a license for
such use has been purchased from SDI) and distribute units of VTB Software
purchased hereunder through its normal distribution channels, in
machine-readable, compiled object code format only, and only when bundled with
CSC Products or sold to customers of CSC who have purchased CSC Products. For
each CSC Product sold to a customer, CSC shall only issue one (1) VTB Software
license and the VTB Software shall only be distributed to end users who agree to
be bound by the terms of the End User License Agreement. Except as expressly
provided in Section 2.4 below, CSC shall have no right to sublicense the rights
granted hereunder by SDI, provided that CSC and its affiliates may use
subdistributors in their distribution efforts ' CSC agrees that it shall be
responsible for the compliance of its affiliates and subdistributors of the
relevant terms of this Agreement. CSC shall not distribute or market the VTB
Software in any manner except as expressly provided in this Section 2.3.
Notwithstanding the foregoing, SDI agrees that it shall not distribute the VTB
Software through OEM's which are automatic test equipment vendors to the
semiconductor industry prior to January 1, 2000.
2.4 SUBLICENSING OF VTB SOFTWARE BY CSC.
2.4.1 RESTRICTIONS. Each unit of VTB Software shall be
distributed by CSC with a license in the form set forth on SCHEDULE E.
2.4.2 INDEMNITY. CSC shall be solely responsible for, and
SDI shall have no obligation to honor, any warranties that CSC provides to its
customers with respect to the VTB Software that are in addition to, or
inconsistent with, the warranties provided by SDI in this Agreement or the End
User License Agreement. CSC shall defend any claim against SDI arising in
connection with any such warranties to CSC's customers, express, implied,
statutory, or otherwise, and shall pay any settlements or damages awarded to SDI
that are based on any such warranty.
2.4.3 INFRINGEMENTS. CSC agrees to use reasonable
commercial efforts to enforce violations or infringements under any agreements
for the VTB Software with its customers and to inform SDI promptly of any known
violation, infringement or breach.
2.5 DOCUMENTATION. SDI shall provide the SDI Documentation include
with each unit of the VTB Software.
<PAGE>
2.6 PROPRIETARY NOTICES. CSC shall not remove, efface or obscure any
copyright notices or other proprietary notices or legends from any SDI materials
provided hereunder.
2.7 OWNERSHIP. SDI shall retain all right, title and interest,
including all intellectual property rights, in and to the VTB Software and SDI
Documentation, except as otherwise provided in the Software Development
Agreement of even date herewith.
2.8 REPORTING. CSC shall, within thirty (30) days of the end of each
calendar quarter during the term of this Agreement, prepare a report summarizing
the number and type of copies of VTB Software distributed during such quarter.
2.9 AUDIT. CSC shall maintain complete and accurate accounting
records, in accordance with sound accounting practices, to support and document
VTB Software licenses distributed in connection with this Agreement. Such
records shall be retained for a period of at least two (2) years after the year
to which they pertain.
2.10 VTB SOFTWARE STEERING COMMITTEE. SDI and CSC will each appoint
two (2) representatives to a steering committee to coordinate information on the
development of the VTB Product in accordance with Section 2.1 of the Software
Development Agreement of even date herewith.
Section 3
SDI TRADEMARKS
CSC acknowledges that the symbols, trademarks and service marks
adopted by SDI or its suppliers to identify the VTB Software, as set forth in
SCHEDULE F attached to this Agreement (the "Trademarks"), belong to SDI and its
suppliers and that CSC shall have no rights in such Trademarks except as
expressly set forth herein. All VTB Software distributed by CSC hereunder and
all documentation, associated brochures, packaging and advertising shall display
the Trademarks in accordance with SDI's reasonable instruction, samples of all
materials that may be distributed by CSC displaying the Trademarks shall be
submitted to SDI upon SDI's reasonable request, and the Trademarks shall be used
only in a form so approved by SDI.
Section 4
TERM
4.1 INITIAL TERM. This Agreement shall become effective on the
Effective Date and shall remain in effect until January 1, 2000. This Agreement
may be renewed upon the mutual written agreement of the parties. Each party's
remedy for breach of this Agreement shall be an action for damages or injunctive
relief; neither party shall be entitled to terminate this Agreement for any
reason.
4.2 SURVIVAL. The sublicenses granted to end users pursuant to Section
2.4.1 shall survive the expiration of this Agreement pursuant to their terms.
Also, provisions of Sections 2.7 (Ownership), 2.10 (Audit), 4 (Term), 5
(Confidentiality), 9 (Limitation of Liability) and 10 (Miscellaneous) shall
survive the expiration of this Agreement.
<PAGE>
Section 5
CONFIDENTIALITY
5.1 OBLIGATIONS. Each party (the "receiving party") acknowledges and
agrees that any business and technical information PROVIDED TO THE RECEIVING
PARTY BY the other party (the "disclosing party") hereunder constitutes the
confidential and proprietary information of the disclosing party, and that the
receiving party's protection thereof is essential to this Agreement and a
condition to the receiving party's use and possession thereof. The receiving
party shall retain in strict confidence and not disclose to any third party
(except as authorized by this Agreement) without the disclosing party's express
written consent, any and all such information. CSC acknowledges and agrees that
the VTB Software is confidential and proprietary information of SDI.
5.2 EXCEPTIONS. The receiving party shall be relieved of this
obligation of confidentiality to the extent any such information:
(i) was in the public domain at the time it was disclosed or has
become in the public domain through no fault of the receiving party;
(ii) the receiving party can prove was known to the receiving
party, without restriction, at the time of disclosure as shown by the
files of the receiving party in existence at the time of disclosure;
(iii) is disclosed by the receiving party with the prior
written approval of the disclosing party;
(iv) the receiving party can prove was independently developed by
the receiving party without any use of the disclosing party's
confidential information and by employees or other agents of the
receiving party who have not had access to any of the disclosing
party's confidential information; or
(v) becomes known to the receiving party, without restriction,
from a source other than the disclosing party without breach of this
Agreement by the receiving party and otherwise not in violation of the
disclosing party's rights.
5.3 SOURCE CODE PROTECTIONS. Unless as otherwise permitted under this
Agreement or another written agreement between CSC and SDI, CSC shall not under
any circumstances attempt, or knowingly permit others to attempt, to decompile,
decipher, disassemble, reverse engineer or otherwise determine the source code
for the VTB Software.
5.4 CONFIDENTIALITY AGREEMENTS. The receiving party, prior to
permitting access by any individual to any of the disclosing party's
confidential information, shall enter into a confidentiality agreement with each
such individual which (i) incorporates the protections and restrictions set
forth herein for the disclosing party's confidential information; (ii) provides
that the individual's obligations with respect to the disclosing party's
confidential information shall continue after termination of the individual's
employment, consulting relationship or other relationship with the receiving
party; and (iii) provides that the disclosing party is a direct and intended
beneficiary of the agreement and entitled to enforce it directly against the
individual.
5.5 NOTIFICATION OF SECURITY BREACH. The receiving party agrees to
notify the disclosing party promptly in the event of any breach of its security
under conditions in which it would appear that the trade secrets contained in
the VTB Software were prejudiced or exposed to loss. The receiving party shall,
upon request of the disclosing party, take all other reasonable steps necessary
to
<PAGE>
recover any compromised trade secrets disclosed to or placed in the
possession of the receiving party by virtue of this Agreement. The cost of
taking such steps shall be borne solely by the receiving party.
5.6 INJUNCTIVE RELIEF. Each receiving party acknowledges that any
breach of any of its obligations with respect to confidentiality or use of the
disclosing party's confidential information hereunder is likely to cause or
threaten irreparable harm to the disclosing party, and, accordingly, the
receiving party agrees that in the event of such breach the disclosing party
shall be entitled to seek equitable relief to protect its interest therein,
including but not limited to preliminary and permanent injunctive relief, as
well as money damages.
Section 6
REPRESENTATIONS AND WARRANTIES
6.1 WARRANTY OF TITLE. SDI warrants and represents to CSC that (i) CSC
shall acquire good and clear title to the VTB Software, free and clear of all
liens and encumbrances, (ii) all materials and services provided hereunder
including, without limitation, the VTB Software, are either owned or properly
licensed by SDI or are in the public domain and the use thereof by CSC, its
representatives, distributors or dealers will not infringe any proprietary
rights of any third party; provided, however, that SDI's obligations under
Section 7 shall be CSC's sole remedy for any breach of this warranty; and (iii)
SDI has the full power to enter into this Agreement, to carry out its
obligations under this Agreement and to grant the rights and licenses granted to
CSC in this Agreement.
6.2 PRODUCT WARRANTY. SDI warrants the VTB Software under the warranty
set forth in the End User License Agreement.
Section 7
INDEMNIFICATION
7.1 INDEMNIFICATION BY SDI. SDI agrees to indemnify, defend and hold
harmless CSC, its affiliates, and their respective officers, directors,
employees, distributors, agents, successors and assigns from and against any and
all loss, damage, settlement or expense (including reasonable legal expenses),
as incurred, resulting from or arising out of any claims which allege that the
VTB Software or the use or sale thereof infringe upon, misappropriate or violate
any patents, copyrights, or trade secret rights or other proprietary rights of
persons, firms or entities who are not parties to this Agreement; provided that
CSC (i) promptly notifies SDI, in writing, of any notice or claim of such
alleged infringement or misappropriation involving the VTB Software of which it
becomes aware; (ii) permits SDI to control, the defense, settlement, adjustment
or compromise of any such claim; (iii) the claim does not result from
modification of the VTB Software which modification is not authorized by SDI;
and (iv) the claim does not result from the COMBINATION OF THE VTB SOFTWARE WITH
SOFTWARE OR EQUIPMENT NOT PROVIDED BY SDI if the VTB Software alone would not be
the subject of the claim. CSC may employ counsel, at its own expense (provided
that if such counsel is necessary because SDI does not assume control, SDI will
bear such expense), to assist it with respect to any such claim. CSC shall have
no authority to settle any claim on behalf of SDI.
7.2 INJUNCTION. If by reason of such infringement claim, CSC or its
customers shall be prevented or are likely to be prevented by legal means from
selling or using any VTB Software, or if, in SDI's opinion, such claim is likely
to occur, SDI will use its commercially reasonable efforts, at its
<PAGE>
expense, to: (i) obtain all rights required to permit the sale or use of the VTB
Software BY CSC; or (ii) modify or replace such VTB Software to make then
non-infringing (and extend this indemnity thereof), provided that any such
replacement or modified VTB is functionally equivalent to the VTB Software. If
SDI is unable to achieve either of the options set forth above within a
reasonable period of time after the issuance of the injunction, or reasonably
believes that an injunction will issue and that such options cannot be achieved
within a reasonable period of time, then neither party will sell or distribute
the VTB Software in accordance with the terms of such injunction-or SDI's
reasonable instructions. Notwithstanding the foregoing, all payments due from
CSC hereunder shall be paid whether or not the VTB Software may be used, sold or
distributed by any of the parties under such injunction or instructions of SDI.
This Section 7 states SDI's entire obligation with respect to claims that the
VTB Software or any rights therein infringe or misappropriate the rights of any
third party.
Section 8
CSC WAVEBRIDGE PRODUCTS
CSC agrees to sell CSC Wavebridge products to SDT's customers who have
purchased VTB Software from SDI. Upon CSC's approval, subject to SDI executing
CSC's standard Sales Representative Agreement, SDI may solicit orders from its
VTB Software customers for CSC Wavebridge products, in which case CSC shall pay
to SDI a commission of forty percent (40%) of the amount received from CSC under
such sale.
Section 9
LIMITATION OF LIABILITY
EXCEPT FOR THE INDEMNIFICATION OBLIGATIONS IN SECTIONS 2.4.2 AND 7,
AND THE CONFIDENTIALITY OBLIGATIONS IN SECTION 5, IN NO EVENT SHALL EITHER
PARTY'S LIABILITY ARISING OUT OF THIS AGREEMENT OR THE TERMINATION OF THIS
AGREEMENT EXCEED THE AMOUNTS PAID BY CSC TO SDI PURSUANT TO THIS AGREEMENT. IN
NO EVENT SHALL EITHER PARTY HAVE ANY LIABILITY FOR ANY INDIRECT, INCIDENTAL,
SPECIAL OR CONSEQUENTIAL DAMAGES, HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY,
ARISING OUT OF THIS AGREEMENT, INCLUDING BUT NOT LIMITED TO LOSS OF ANTICIPATED
PROFITS, EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
THESE LIMITATIONS SHALL APPLY NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE
OF ANY LIMITED REMEDY.
Section 10
MISCELLANEOUS
10.1 CONFIDENTIALITY OF AGREEMENT. Both SDI and CSC agree that the
terms and conditions of this Agreement shall be treated as confidential
information and that no reference to the terms and conditions of this Agreement
or to activities pertaining thereto can be made in any form without the prior
written consent of the other party; provided, however, that the general
existence of this Agreement shall not be treated as confidential information and
that either party may disclose the terms and conditions of this Agreement:
<PAGE>
(i) as required by any court or other governmental body;
(ii) as otherwise required by law including SDI's obligations
under applicable securities laws;
(iii) to legal counsel of the parties;
(iv) in confidence, to accountants, banks, proposed investors,
and financing sources and their advisors;
(v) in confidence, in connection with the enforcement of this
Agreement or rights under this Agreement; or
(vi) in confidence, in connection with a merger or acquisition
or proposed merger or acquisition, or the like.
10.2 ASSIGNMENT. Neither this Agreement nor any rights, licenses or
obligations hereunder, may be assigned by either party without the prior written
approval of the non-assigning party. Notwithstanding the foregoing, either party
may assign this Agreement to a subsidiary or any acquiror of all or of
substantially all of such party's may assign this Agreement to any acquiror of
all or of substantially all of such party's equity securities, assets or
business relating to the subject matter of this Agreement, except to a direct
competitor of the other party. As a condition to such purported assignment, the
purported assignor shall provide to the other party written confirmation prior
to such assignment of such successor's assumption of this Agreement. Any
attempted assignment in violation of this Section shall be void and without
effect. Subject to the foregoing, this Agreement will benefit and bind the
parties' successors and assigns.
10.3 NOTICES. All notices between the parties shall be in writing and
shall be deemed to have been given if personally delivered or sent by certified
or registered mail (return receipt) or telecopy to the addresses set forth as
follows, or such other address as is provided by notice as set forth herein:
If to SDI to: Summit Design, Inc.
9305 SW Gemini Drive
Beaverton, Oregon 97008
Attn.: Larry J. Gerhard
with a copy to: Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304-1050
Attn.: Steven Bernard
If to CSC to: Credence Systems Corporation
215 Fourier Avenue
Fremont, California 94539
Attn.: Wilmer R. Bottoms
with a copy to: Brobeck, Phleger & Harrison LLP
2200 Geng Road
Palo Alto, California 94303
Attn.: Warren Lazarow
<PAGE>
Notices shall be deemed effective upon receipt or, if delivery is not effected
by reason of some fault of the addressee, when tendered.
10.4 RELATIONSHIP OF THE PARTIES. The parties hereto expressly
understand and agree that each party is an independent contractor in the
performance of each and every part of this Agreement, is solely responsible for
all of its employees and agents and its labor costs and expenses arising in
connection therewith. Neither party nor its agents or employees are the
representatives of the other party for any purpose and neither party has the
power or authority as agent, employee or any other capacity to represent, act
for, bind or otherwise create or assume any obligation on behalf of the other
party for any purpose whatsoever.
10.5 IMPORT AND EXPORT. Upon CSC's request, SDI shall provide all
information under its control which is necessary or useful for CSC to obtain any
export or import licenses required for CSC to ship or receive VTB Software,
including, but not limited to, certificates of origin, (NAFTA, etc.),
manufacturer's affidavits, and Buy America qualification, if applicable. This
information is to be provided within ten (10) business days of CSC's request.
10.6 GOVERNING LAW; FORUM SELECTION. This Agreement shall be governed
by the laws of the State of California, without reference to its conflict of
laws principles. All disputes arising out of this Agreement shall be subject to
the exclusive jurisdiction and venue of the California state courts of Santa
Clara County, California (or, if there is exclusive federal jurisdiction, the
United Stated District Court for the Northern District of California), and the
parties consent to the personal and exclusive jurisdiction of these courts.
10.7 SEVERABILITY. Any term or provision of this Agreement held to be
illegal or unenforceable shall, if possible, be interpreted so as to be
construed as valid, but in any event the validity or enforceability of the
remainder hereof shall not be affected.
10.8 EXPORT REGULATIONS. CSC understands that SDI is subject to
regulation by agencies of the U.S. government, including the U.S. Department of
Commerce, which prohibit export or diversion of certain technical products to
certain countries. CSC warrants that it will comply in all respects with the
export and re-export restrictions applicable to the technology and documentation
licensed hereunder.
10.9 WAIVER. The waiver of, or failure to enforce, any breach or
default hereunder shall not constitute the waiver of any other or subsequent
breach or default.
10.10 ENTIRE AGREEMENT. This Agreement, along with the Schedules
attached hereto which are incorporated herein by reference, sets forth the
entire Agreement between the parties and supersedes any and all prior proposals,
agreements, and representations between them, whether written or oral. This
Agreement may be changed only by mutual agreement of the parties in writing.
[Remainder of page intentionally left blank.]
-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be signed by duly authorized officers or representatives as of the Effective
Date.
SUMMIT DESIGN, INC. CREDENCE SYSTEMS CORPORATION
BY: /s/ Larry J. Gerhard BY: /s/ Richard Y. Okumoto
Name: Larry J. Gerhard Name: Richard Y. Okumoto
Title: President, CEO Title: Executive Vice President & CFO
Date: 5/19/97 Date: Date: 5/19/97
-10-
<PAGE>
SCHEDULE A
CSC PRODUCTS
VISTA/DUO SERIES TESTERS
SC SERIES TESTERS
<PAGE>
SCHEDULE B
VTB SOFTWARE
VISUAL TESTBENCH COMPONENTS
Visual Testbench consists of modified Visual HDL for Verilog and VHDL, Visual IF
Testbench harness code, Visual HDL simulation interface, various internal TDS
routines, WDB input/output routines and Visual Testbench on-line documentation.
For customer delivery these source code modules are compiled to a single Visual
Testbench binary executable module.
A Testbench is created using the Visual HDL Flow chart editor, Block diagram
editor and Waveform/Timing diagram editor. The Testbench is connected to the
simulated circuit using the Visual HDL Block Diagram editor and the Visual
Testbench Launch editor.
The Testbench harness is compiled with the customer's simulator and design as to
stimulate and examine the circuit under investigation. The Testbench harness
reads and writes TSSI WDB databases through binary linkable library functions.
The examples include Visual HDL databases and Verilog or VHDL codes sufficient
to demonstrate basic and advanced product operation. The examples are
operational and will produce legitimate WDB output.
DOCUMENTATION
Visual Testbench documentation consists of a binary file in Framemaker mif
format describing theory of operation, external controls, and function call
interface of the product. The mif file is interpreted by a view for run time
viewing of the test.
<PAGE>
SCHEDULE C
MAINTENANCE AGREEMENT
This Maintenance Agreement ("Agreement") is entered into between Summit Design,
Inc., a Delaware Corporation ("Summit") and Credence Systems Corp. ("CSC") for
the products described in the Software OEM License Agreement between Summit and
CSC ("the Software"), which is incorporated herein by this reference.
IN CONSIDERATION OF THE MUTUAL COVENANTS SET FORTH HEREIN, THE PARTIES AGREE AS
FOLLOWS:
1. FEES
During the term of this Agreement and any renewal term thereof, Customer shall
pay a maintenance fee for each term ("the Maintenance Feel') as determined by
the parties. The Maintenance Fee is due upon the execution of this Agreement, or
the expiration of any applicable warranty period for the above-described
Software ("Software"), whichever last occurs.
2. TERM
The term of this Agreement shall be eighteen (18) months. Thereafter, this
Agreement can be renewed for successive annual day period immediately prior to
the expiration renewal term. After the eighteen months, this by either party
upon thirty (30) days' written event of termination by Customer, Summit shall
any advance maintenance fees, and any fees due terms within the ninety (90) of
the current term or any Agreement may be terminated notice: however, in the not
be obligated to refund and payable shall remain due and payable without
adjustment for early termination.
3. CUSTOMER OBLIGATIONS
To facilitate Summit's performance under this Agreement, Customer shall:
3.1 Promptly notify Summit in writing or by telephone of the need for
maintenance services, the Software License Agreement Number, the
Serial Numbers and Release Numbers of the Software, the location of
the Software site number, a description of the CPU on which the
Software is being used, and the nature of the problem.
3.2 Cooperate with Summit as reasonably necessary to identify the nature
and cause of the problem.
3.3 Allow Summit access to Customers' hardware, products, systems and
information (including confidential information), as may be reasonably
necessary to facilitate Summit's identification of the nature, cause
and potential remedy of the problem, all subject to Customers'
security and safety rules.
4. SUMMIT'S OBLIGATIONS
4.1 During the term of the Agreement and any renewal term thereof, Summit
shall respond to CSC requirements for telephone technical support and
bug fix requests.
<PAGE>
5. SPECIAL TERMS AND CONDITIONS
5.1. This maintenance agreement does not provide for upgrade releases.
5.2 This Agreement shall apply to the Software in its standard form, and
shall not apply to custom enhancements and modifications. Any
requested service on custom enhancements and modifications shall be
charged to Customer at Summit Design's standard service rates then in
effect.
5.3 This Agreement shall apply only to the original release of the
Software.
5.4 Although Summit will exert reasonable efforts to provide prompt
service, Summit is not liable for damages resulting from delay in the
provision of service caused by circumstances beyond reasonable
control.
5.5 Summit's maintenance obligations under this Agreement do not include;
(a) services connected with system reconfiguration or relocation, (b)
service resulting from neglect, misuse or accidental damages to the
Software, (c) service resulting from modifications or repairs of the
Software without Summit's authority, (d) service resulting from the
failure of Customer to provide and maintain a suitable installation
environment, (e) service resulting from the use of the Software for
other than the purposes for which it was designed, (f) the provision
of supplies, accessories, or media.
<PAGE>
SCHEDULE D
LICENSE FEE AND PAYMENT
Per Copy License Fee:
US $40,000.00
Payment and Delivery Schedule:
CSC shall issue to SDI an irrevocable purchase order for four hundred
(400) VTB Software licenses for the amount of $16,000,000 on the Closing. Also
on the Closing, CSC shall establish an irrevocable letter of credit with a
nationally recognized financial institution reasonably acceptable to SDI, in the
amount of $16,000,000 for payment of such four hundred (400) VTB Software
licenses. SDI shall have the right to ship up to the number of licenses
corresponding to the maximum payments set forth below and SDI shall receive the
payment calculated at $40,000 per license, drawn from the letter of credit upon
each such shipment. If SDI does not ship the permitted maximum during a quarter,
the shortfall will be carried forward to the next quarter's maximum amount.
<TABLE>
<CAPTION>
Year and
Calendar Quarterly Annual
Quarter Maximum Maximum
------------ ------------ ------------
<S> <C> <C> <C> <C>
1997 Ql
1997 Q2
1997 Q3 $ 3,900,000
1997 Q4 $ 3,300,000
1997 Total $ 6,200,000
1998 Ql $ 2,900,000
1998 Q2 $ 2,300,000
1998 Q3 $ 2,200,000
1998 Q4 $ 1,400,000
1998 Total $ 8,800,000
1999 Ql $ 400,000
1999 Q2 $ 300,000
1999 Q3 $ 250,000
1999 Q4 $ 50,000
1999 Total $ 1,000,000
</TABLE>
Shipment of VTB Software shall be made by the fifteenth day of the first month
for each quarter and payment shall be drawn from the letter of credit on the
same day. VTB Software will be shipped to CSC via overnight courier.
<PAGE>
SCHEDULE E
END USER LICENSE AGREEMENT
This is a legal Agreement between you, the end user, and Summit Design, Inc. By
opening this sealed media package and/or by using the Software, you are agreeing
to be bound by the terms of this Agreement.
GRANT OF LICENSE. Summit Design, Inc. ("Summit") grants you the right to use one
(1) copy of the enclosed Summit software program and accompanying documentation
(together with any upgrades supplied by Summit, the "Software") according to the
conditions specified below. Usage area to be less than one kilometer in radius
and subject to the terms and conditions of this Agreement. All rights not
expressly granted herein are reserved by Summit, its suppliers, licensors, or
successors.
YOU MAY:
a. Install the Software and its License Manager (FlexLM) on only one computer
or workstation;
b. make no more than one (1) copy of the Software in machine readable form,
solely for back-up purposes, provided that you reproduce all
proprietary notices on the copy; and
c. physically transfer the Software from one computer to another, provided
that the Software is used on only one computer at a time, and within a
usage area to be less than one kilometer in radius.
YOU MAY NOT:
a. Use the Software on more than one computer or workstation at a time;
b. modify, translate, reverse engineer, decompile, disassemble, create
derivative works based on, or copy (except to create the back-up copy) the
Software;
c. rent, lend, transfer, distribute, or grant any rights in the Software in
any form to any person without the written consent of Summit;
d. remove any proprietary notices, labels, or marks from the Software; or
e. operate the Software on networks where two client nodes using Summit
products of this type are greater than two (2) kilometers from each other
(WAN).
UPGRADE PRODUCTS. Any upgrades to the Software may only be used in conjunction
with the prior version of the Software.
LIMITED WARRANTY AND DISCLAIMER. Summit warrants that for a period of ninety
(90) days from the date of sale of the Software to you, the media on which the
Software is furnished will, under normal use, be free from defects in materials
and workmanship. Summit's entire liability and your exclusive remedy under this
warranty (which is subject to you returning the Software to Summit) will be, at
Summit's option, to replace the media or to refund the purchase price and
terminate this Agreement. Except for these express limited warranties, Summit
makes, and you receive, no warranties or conditions, express, implied,
statutory, or otherwise, and Summit specifically disclaims any implied
warranties of merchantability, noninfringement and fitness for a particular
purpose. Summit does not warrant that the Software will meet your requirements
or that the operation of the Software will be uninterrupted or error free. You
assume the responsibility for the selection of your requirements, software, and
hardware to achieve your intended results; for installation; for use; and that
the operations of the Software will be uninterrupted or error free. Some States
do not allow the exclusion of implied warranties so that the above exclusions
may not apply to you. This warranty gives you specific legal rights. You may
also have other rights which vary from State to State.
<PAGE>
PROPRIETARY RIGHTS. This license is not a sale. Title and copyrights to the
Software and accompanying documentation, including the enclosed copies and any
copy made by you, remain with Summit or its suppliers, licensors, or successors.
LIMITATION OF LIABILITY. Summit's liability arising out of this Agreement shall
not exceed the amounts paid by you to obtain the Software. In no event will
Summit be liable for any loss of data, lost opportunity of profits, cost of
cover, or special, incidental, consequential, or indirect damages arising from
the use of the Software in this Agreement, however caused and on any theory of
liability. These limitations will apply even if Summit or an authorized dealer
has been advised of the possibility of such damage, and notwithstanding any
failure of essential purpose of any limited remedy. You acknowledge that the
amount paid for the Software reflects this allocation of risk. Some States do
not allow the limitation or exclusion of liability for incidental or
consequential damages, so the above limitation or exclusion may not apply to
you.
EXPORT RESTRICTIONS. You agree that you will not export or re-export the
Software in any form without the appropriate United States and foreign
government licenses, and Summit written approval. Your failure to comply with
this provision is a material breach of this contract. If you need advice on such
export laws and regulations, you should contact the U.S. Department of Commerce,
Export Division, Washington, DC 20230, USA , for clarification.
TERMINATION. This Agreement is effective until terminated. You may terminate
this Agreement at any time by removing from your system and destroying all
copies of the Software and the accompanying documentation. Unauthorized copying
of the software or the accompanying documentation or otherwise failing to comply
with the terms and conditions of this Agreement will result in automatic
termination of this Agreement and will make available to Summit other legal
remedies. Upon termination of this Agreement, the license granted herein will
terminate and you must immediately destroy the Software and accompanying
documentation, and all back-up copies thereof.
U.S. GOVERNMENT USE. The Software and accompanying documentation are deemed to
be "commercial computer software" and "commercial computer software
documentation," respectively, pursuant to DFAR Section 227.7202 and FAR Section
12.212, as applicable. Any use, modification, reproduction, release, performing,
displaying or disclosing of the Software and accompanying documentation by the
U. S. Government shall be governed solely by the terms of this Agreement and
shall be prohibited except to the extent expressly permitted by the terms of
this Agreement.
MISCELLANEOUS. This is the entire Agreement between the parties relating to the
subject matter hereof and no waiver or modification of the Agreement shall be
valid unless signed by each party. The waiver of a breach of any term hereof
shall in no way be construed as a waiver of any other term or breach hereof. If
any provision of this Agreement shall be held by a court of competent
jurisdiction to be contrary to law, the remaining provisions of this Agreement
shall remain in full force and effect. This Agreement is governed by the laws of
the State of Oregon without reference to conflict of laws principles. All
disputes arising out of this Agreement shall be subject to the exclusive
jurisdiction of the state and federal courts located in Multnomah County,
Oregon, and the parties agree and submit to the personal and exclusive
jurisdiction and venue of these courts. Should you have any question about this
Agreement, or if you desire to contract Summit Design, Inc., please write:
Summit Design, Inc., 9305 S.W. Gemini Drive, Beaverton, Oregon 97008 USA
(503-643-9281).
BEFORE OPENING THIS ENVELOPE, carefully read the License Agreement on the
reverse side of this envelope. By opening this envelope and/or by using the
software contained herein, you are agreeing to be bound by the terms of the
License Agreement.
<PAGE>
SCHEDULE F
TRADEMARKS
Visual Test Serial No. 75/002, 501 US
Visual Test 11216-TM1003 US
Visual Testbench 11216-TM1034 International Class 9
<PAGE>
EXHIBIT 21.1
CREDENCE SYSTEMS CORPORATION
SUBSIDIARIES OF THE COMPANY
The following are wholly-owned or majority-owned subsidiaries of Credence
Systems Corporation:
Credence Systems KK, a Japanese company;
Credence Systems International, Inc., a Barbados corporation;
Fluence Technology, Inc. (formerly Test Systems Strategies, Inc.),
a Delaware corporation;
Credence International Limited, Inc., a Delaware corporation;
Credence Systems Korea, a South Korea company (a wholly owned
subsidiary of Credence International Limited, Inc.);
Credence Systems Armenia L.L.C., an Armenian limited liability
company; and
Innotech-Credence Corporation, a Japanese company (a joint venture
with Innotech Corporation, majority owned by the Company).
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statements on Form S-3 (File No. 333-39387) and Form S-8 (File Nos. 333-77007,
333-59051, 333-27499, 333-03806 and 33-90728) pertaining to the 1993 Stock
Option Plan and the 1994 Employee Stock Purchase Plan, of Credence Systems
Corporation, of our report dated November 24, 1999, with respect to the
consolidated financial statements and schedule of Credence Systems Corporation
included in the Annual Report (Form 10-K) for the year ended October 31, 1999.
/s/ ERNST & YOUNG LLP
San Jose, California
January 26, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF OPERATIONS, THE CONSOLIDATED BALANCE SHEETS, AND THE
ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> OCT-31-1999
<CASH> 52,104
<SECURITIES> 89,779
<RECEIVABLES> 71,506
<ALLOWANCES> 3,216
<INVENTORY> 41,218
<CURRENT-ASSETS> 227,713
<PP&E> 100,792
<DEPRECIATION> 57,729
<TOTAL-ASSETS> 340,420
<CURRENT-LIABILITIES> 60,986
<BONDS> 96,610
0
0
<COMMON> 22
<OTHER-SE> 181,386
<TOTAL-LIABILITY-AND-EQUITY> 340,420
<SALES> 197,183
<TOTAL-REVENUES> 197,183
<CGS> 95,205
<TOTAL-COSTS> 95,205
<OTHER-EXPENSES> 105,991
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,099
<INCOME-PRETAX> (3,752)
<INCOME-TAX> (1,372)
<INCOME-CONTINUING> (2,455)
<DISCONTINUED> 0
<EXTRAORDINARY> 1,646
<CHANGES> 0
<NET-INCOME> (809)
<EPS-BASIC> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
<PAGE>
EXHIBIT 99.10
CREDENCE SYSTEMS CORPORATION
EMPLOYEE STOCK PURCHASE PLAN
(As Amended and Restated Through June 14, 1999)
1. PURPOSE OF THE PLAN
The Credence Systems Corporation 1994 Employee Stock Purchase Plan
(the "Plan") is intended to provide a suitable means by which eligible employees
of the Credence Systems Corporation (the "Company") may accumulate, through
voluntary, systematic payroll deductions, amounts regularly credited to their
account to be applied to the purchase of shares of the Company's common stock,
par value $0.001 (the "Common Stock"), pursuant to the exercise of options
granted from time to time hereunder. The Plan provides employees with the
opportunities to acquire proprietary interests in the Company, and will also
provide them with additional incentives to continue their employment and promote
the best interests of the Company. Options granted under the Plan are intended
to qualify under Section 423 of the Internal Revenue Code of 1986, as amended
(the "Code").
2. SHARES OF STOCK SUBJECT TO THE PLAN
Subject to the provisions of Section 12, the maximum number of shares
of Common Stock which may be issued on the exercise of options granted under the
Plan is limited to 800,000 shares of the Company's Common Stock. Such share
reserve includes (i) the initial share reserve of 300,000(1) shares; (ii) an
additional 200,000 share increase authorized by the Board on February 12, 1997
and approved by the stockholders at the 1997 Annual Meeting; and (iii) an
additional 300,000 share increase authorized by the Board on January 22, 1999
and approved by the stockholders at the 1999 Annual Meeting.
Any shares subject to an option under the Plan, which option for any
reason expires or is terminated unexercised as to such shares, shall again be
available for issuance on the exercise of other options granted under the Plan.
Shares delivered on the exercise of options may, at the election of the Board of
Directors of the Company, be authorized but previously unissued Common Stock or
Common Stock reacquired by the Company, or both.
3. ADMINISTRATION
The Plan shall be administered by the Compensation Committee (the
"Committee") of the Company's Board of Directors, which shall be composed of not
less than two non-employee members of the Board of Directors of the Company, all
of whom shall be ineligible to participate in this Plan and shall otherwise
qualify as disinterested persons under
- ---------------------
(1) Reflects the 3-for-2 split of the Corporation's outstanding Common Stock
effected June 5, 1995.
1.
<PAGE>
Rule 16b-3(b)(3)(i) promulgated by the Securities and Exchange Commission.
Subject to the provisions of the Plan, the Committee shall have full discretion
and exercise power (i) to determine the terms and conditions under which the
shares shall be offered and corresponding options shall be granted under the
Plan for the Purchase Period (as defined in Section 6) consistent with the
provisions of the Plan, and (ii) to resolve all questions relating to the
administration of the Plan.
The interpretation and application by the Committee of any provision of
the Plan shall be final and conclusive on all employees and others persons
having, or claiming to have, an interest under the Plan. The Committee may, in
its discretion, establish such rules and guidelines relating to the Plan as it
may deem desirable.
The Committee may employ such legal counsel, consultants and agents as
it may deem desirable for the administration of the Plan and may rely upon any
opinion received from any such counsel or consultant and any computation
received from any such counsel or consultant or agent. The Committee shall keep
minutes of its actions under the Plan.
No member of the Board of Directors or the Committee shall be liable
for any action or determination made in good faith with respect to the Plan or
any options granted hereunder.
4. ELIGIBILITY TO PARTICIPATE
The persons eligible to participate in this Plan shall be all employees
(including officers) of the Company, or any participating affiliate, who have
been actively employed by the Company, or such affiliate, for thirty (30)
consecutive days as of the first day of any Purchase Period, but excluding
employees whose customary employment is for not more than five (5) months in any
calendar year or is for twenty (20) hours or less per week. An employee who is
eligible to participate in this Plan pursuant to the foregoing sentence is
hereinafter referred to as an "Employee". A participating affiliate, for
purposes of the Plan, shall include any now existing or hereafter established
parent or subsidiary corporation of the Company, as determined in accordance
with Code Sections 424(e) and 424(f), which elects with the consent of the
Company's Board of Directors, to extend the benefits of the Plan to its eligible
employees.
Nothing contained in the Plan shall confer upon any Employee any right
to continue in the employ of the Company or any of its affiliates, or interfere
in any way with the right of the Company or any of its affiliates to terminate
his or her employment at any time.
5. PARTICIPATION IN THE PLAN
An Employee may participate in the Plan only as of the beginning of the
Purchase Period. If an Employee becomes eligible to participate in the Plan
after the commencement of a Purchase Period, that Employee may not participate
in the Plan until the beginning of the next Purchase Period. A copy of the Plan
will be furnished to each Employee prior to the beginning of the first Purchase
Period during which he or she may participate in the Plan. To participate in
2.
<PAGE>
the Plan, an Employee must deliver (or cause to be delivered) to the Company,
within seven (7) days prior to the commencement of the first Purchase Period
during which participation in the Plan is desired, a contingent subscription
for Common Stock and authorization for payroll deductions to effect the
purchase of Common Stock (hereinafter called a "Participation Election"). In
the Participation Election an Employee must:
(i) authorize payroll deductions within the limits prescribed in
Sections 8 and 9 and specify the percentage to be deducted regularly
from his or her Compensation (as defined in Section 8);
(ii) elect and authorize the purchase for each Purchase Period of a
specific number of shares of Common Stock on the Exercise Date (as
defined in Section 7) with respect to the applicable Purchase Period,
provided that such specific number of shares shall not exceed a total
of 750 shares in any Purchase Period;
(iii) furnish the exact name or names and address or addresses in
which the stock certificates for Common Stock purchased by him or her
under the are to be issued; and
(iv) agree to notify the Company if he or she should dispose of
Common Stock purchased through the Plan within two (2) years of the
commencement of the Purchase Period in which the Common Stock was
purchased.
Stock certificates for shares of Common Stock purchased under the Plan
may be issued in the Employee's name or, if so designated by the Employee, in
his or her name and the name of another person who is a member of his or her
family, with right of survivorship; for this purpose the "family" of an Employee
shall include only his or her spouse, ancestors and lineal descendants and
brothers and sisters.
An Employee need not, and may not, make a down payment in order to
participate in the Plan.
Participation in the Plan is entirely voluntary, and a participating
Employee may withdraw from participation, as provided in Section 15, during any
Purchase Period at any time prior to the Exercise Date for such Purchase Period.
6. PURCHASE PERIOD: GRANT OF OPTIONS
Through the end of calendar year 1999, each Purchase Period under the
Plan shall commence on the first day of a calendar half (or, for the first
Purchase Period, such date established by the Committee following the effective
date specified in Section 20) and end on the last day of such calendar half, and
shall include all pay periods ending within it. For this purpose, calendar
halves begin on January 1 and July 1. The Purchase Period commencing January 1,
2000 shall continue through August 14, 2000, and subsequent Purchase Periods
shall
3.
<PAGE>
run from August 15 each year to February 14 of the following year and from
February 15 to August 14 each year. During each Purchase Period, participating
Employees shall accumulate credits to a bookkeeping account maintained by the
Company (hereinafter referred to as a "Stock Purchase Account") through payroll
deductions to be made at the close of each pay period for the purchase of shares
of Common Stock under the Plan. For each Purchase Period, the Company shall
grant options to participating Employees with respect to the number of shares of
Common Stock (subject to the provisions of sections 2, 5, 11 and 12) which shall
be purchasable through the application of the amounts credited to such
Employee's Stock Purchase Account at the purchase price per share determined on
the Exercise Date for the Purchase Period (such number of shares to be subject
to reduction in the event of a pro rata apportionment provided for in Section
17).
7. EXERCISE DATES, AND PURCHASE PRICES
The last business day of each Purchase Period shall constitute the
"Exercise Date" for such Purchase Period. Subject to the provisions of Section
12, the purchase price per share of Common Stock to be purchased on an Exercise
Date pursuant to the exercise of options granted for the Purchase Period,
through the application of amounts credited during such Purchase Period to the
Stock Purchase Accounts of participating Employees, shall be the lesser of-
(A) an amount equal to 85% of the Fair Market Value of the Common
Stock at the time such option is granted (i.e., the first day of
the Purchase Period), or
(B) an amount equal to 85% of the Fair Market Value of the Common
Stock at the time each option is exercised (i.e., the Exercise
Date).
For purposes of the Plan, the Fair Market Value of a share of Common
Stock on any date shall be (i) if the Common Stock is traded on an established
securities market, the mean between the high and low prices of such Common Stock
for such date, and (ii) if the Common Stock is not so traded, an amount
determined by the Committee in good faith and based upon such factors as it
deems relevant to such determination.
8. PAYROLL DEDUCTIONS - AUTHORIZATION AND AMOUNT
Employees shall authorize in their Participation Elections from 1% to
10% (in whole percentage increments) of their Compensation to which such
election relates (subject to the limitations of Section 9). For purposes of the
Plan, the "Compensation" of an Employee for any Purchase Period shall mean the
gross amount of his or her base pay on the basis of his or her regular,
straight-time hourly, weekly or monthly rate for the number of hours normally
worked, exclusive of overtime, sales commissions, bonuses, shift premiums and
other forms of compensation.
A participating Employee may, at any time during a Purchase Period,
reduce the amount of Compensation to be deducted from his or her Compensation
pursuant to his or her Participant Election.
4.
<PAGE>
By delivering to the Company within seven (7) days prior to the
commencement of the next Purchase Period a revised Participation Election, a
participating Employee may either increase or decrease the amount to be deducted
from his or her Compensation during the next Purchase Period, subject to the
limitations of Sections 8 and 9.
A participating Employee's authorization for payroll deductions will
remain in effect for the duration of the Plan, subject to the provisions of
Sections 11 and 14, unless his or her election to purchase Common Stock shall
have been terminated pursuant to the provisions of section 13, the amount of the
deduction is changed, as provided in this Section 8, or the Employee withdraws
or is considered to have withdrawn from the Plan under Section 15 or 16.
Prior to the split of the Common Stock effected June 5, 1996, the
maximum number of shares of Common Stock purchasable per participating Employee
on any one Exercise Date under the Purchase Plan was limited to 500 shares. To
reflect such stock split, the limit has been increased to 750 shares per
participating Employee for each Exercise Date after May 26, 1995.
All amounts credited to the Stock Purchase Accounts of participating
Employees shall be held in the general funds of the Company but shall be used
from time to time in accordance with the provisions of the Plan.
9. LIMITATIONS ON THE GRANTING OF OPTIONS
Anything in the Plan to the contrary notwithstanding, no participating
Employee may be granted an option which permits his or her rights to purchase
Common Stock under all employee stock purchase plans of the Company and its
parent and subsidiary companies (if any) to accrue at a rate which exceeds
$25,000 of the Fair Market Value of such Common Stock (determined at the time
such option is granted) for each calendar year in which such option is
outstanding at any time. For purposes of this Section 9:
(i) the right to purchase stock under an option accrues when the
option (or any portion thereof) first becomes exercisable during the
calendar year;
(ii) the right to purchase stock under an option accrues at the rate
provided in the option, but in no case may such rate exceed $25,000 of
the Fair Market Value of such stock (determined at the time such option
is granted) for any one calendar year; and
(iii) a right to purchase stock which has accrued under one option
granted pursuant to the Plan may not be carried over to any other
option.
No participating Employee may be granted an option hereunder if such
Employee, immediately after the option is granted, owns (within the meaning of
Section 423 (b) (3) of the Code) stock possessing five (5) percent or more of
the total combined voting power or value of
5.
<PAGE>
all classes of stock of the Company or of its parent or subsidiary corporation.
For purposes of the Plan, the terms "parent corporation" and "subsidiary
corporation" shall have the respective meanings set forth in section 424
of the Code.
10. STOCK PURCHASE AMOUNTS
The amount deducted from the Compensation of each participating
Employee shall be credited to his or her individual Stock Purchase Account.
Employees participating in the Plan may not make direct cash payments to their
Stock Purchase Accounts.
Following the close of each Purchase Period, the Company will furnish
to each participating Employee a statement of that Employee's individual Stock
Purchase Account. This statement shall show (i) the total amount of payroll
deductions for the Purchase Period just closed, (ii) the number of full shares
(and the purchase price per share) of Common Stock purchased, pursuant to the
provisions of Section 11, by the participating Employee for the Purchase Period,
and (iii) any remaining balance of payroll deductions which are to be refunded
to the Employee following the close of the Purchase Period (or carried forward
to the next Purchase Period in the case of amounts representing fractional
shares).
11. ISSUANCE AND PURCHASE OF COMMON STOCK
Shares of Common Stock may be purchased by a participating Employee
only on the Exercise Date for each Purchase Period; and the options which the
Company grants to participating Employees for the purchase of Common Stock for a
Purchase Period may be exercised only on the Exercise Date. No fractional shares
of Common Stock may be purchased hereunder. The purchase price per share shall
be determined as set forth in Section 7.
A participating Employee who purchased Common Stock, pursuant to the
exercise of options granted under the Plan, shall purchase as many full shares
as shall be stated in the Participation Election that the Employee has
completed, subject to the limitations set forth in Sections 5, 8, 9, 12 and 17;
provided that in no even may shares be purchased other than by application of
the balance in the Stock Purchase Account on the Exercise Date and that in no
event may a participating Employee purchase a greater number of shares than
would be purchasable at the purchase price determined in accordance with Section
7 through the application of the balance in his or her Stock Purchase Account on
the Exercise Date for the Purchase Period to which the option relates. Any
balance remaining in such a participating Employee's Stock Purchase Account
following an Exercise Date shall be refunded to the Employee as soon as
practicable thereafter; provided, however, that any such balance representing a
fractional share shall be carried over to the next succeeding Purchase Period.
Certificates for Common Stock so purchased shall be delivered to the
participating Employee as soon as practicable.
6.
<PAGE>
All rights as an owner of shares of the Common Stock purchased under
the Plan shall accrue to the participating Employee who purchased the shares
effective as of the Exercise Date on which the amounts credited to his or her
Stock Purchase Account were applied to the purchase of the shares; and such
Employee shall not have any rights as a shareholder prior to such Exercise Date
by reason of his or her having elected to purchase such shares.
12. DILUTIONS OR OTHER ADJUSTMENT
If the Company is a party to any merger or consolidation, or undergoes
any separation, reorganization (other than a reincorporation in another state),
or liquidation, then the options outstanding under the Plan shall be exercised
immediately prior to the effective date of such transaction, and such date shall
accordingly qualify as an Exercise Date under Section 7. In addition, in the
event of a reclassification, stock split, combination of shares, separation
(including a spin-off), dividend on shares of the Common Stock payable in stock,
or other similar change in capitalization or in the corporate structure of the
shares of the Common Stock of the Company, the Committee shall conclusively
determine the appropriate adjustment in the purchase price and other terms of
purchase for shares subject to outstanding Participation Elections for the
Purchase Period occurring at such time, in the number and kind of shares or
other securities which may by purchased for such Purchase Period, in the
aggregate number of shares which may be purchased under the Plan, and in the
maximum number and kind of shares which may be purchased per Employee in any
Purchase Period. Any such adjustment in the shares or other securities subject
to the outstanding options granted to such Employee (including any adjustments
in the option price) shall be made in such manner as not to constitute a
modification as defined by Section 424(h)(3) of the Code and only to the extent
permitted by Sections 423 and 424 of the Code.
13. NO ASSIGNMENT OF PLAN RIGHTS OR OF PURCHASED STOCK
An Employee must promptly advise the Company if a disposition shall be
made of any shares of Common Stock purchased by him or her under the Plan if
such disposition shall have occurred within two years of the commencement of the
Purchase Period in which he or she purchased such shares.
A participating Employee's privilege to purchase Common Stock under the
Plan can be exercised only by him or her; and he or she cannot purchase Common
Stock for someone else, although he or she may designate (in accordance with the
provisions of Section 5) that stock certificates of Common Stock purchased by
the Employee be issued in the joint names of the Employee and a family member.
An Employee participating in the Plan may not sell, transfer, pledge,
or assign to any other person any interest, privilege or right under the Plan or
in any amounts credited to his or her Stock Purchase Account; and if this
provision shall be violated, his or her election to purchase Common Stock shall
terminate, and the only right remaining thereunder will be to have paid to the
person entitled thereto the amount then credited to the Employee's Stock
Purchase Account.
7.
<PAGE>
14. SUSPENSION OF DEDUCTIONS
A participating Employee's payroll deductions under the Plan shall be
suspended if on account of a leave of absence, layoff or other reason a
participating Employee does not have sufficient Compensation in any payroll
period to permit payroll deductions authorized under the Plan to be made in
full. The suspension will last until the participating Employee again has
sufficient Compensation to permit such payroll deductions to be made in full;
but if the suspension shall not have been removed by the Exercise Date for the
Purchase Period in which it began, shares will be purchased to the extent that
the employee contributed funds prior to the suspension of deductions. In the
event of voluntary withdrawal or termination of employment, funds will be
returned to the Employee as provided in Section 15.
15. WITHDRAWAL FROM, AND REPARTICIPATION IN THE PLAN
During any Purchase Period a participating Employee may withdraw from
the Plan at any time prior to the Exercise Date for the Purchase Period; and,
subject to, and in accordance with the provisions of Sections 5 and 8, he or she
may again participate in the Plan at the beginning of any Purchase Period
subsequent to the Purchase Period in which he or she withdrew. Withdrawal of a
participating Employee shall be effected by written notification prior to such
Exercise Date to the Company on a form which the Company shall provide for this
purpose ("Notice of Withdrawal"). In the event a participating Employee shall
withdraw from the Plan, all amounts then credited to his or her Stock Purchase
Account shall be returned as soon as practicable after his or her Notice of
Withdrawal shall have been received.
If an Employee's payroll deductions shall be interrupted by any legal
process, a Notice of Withdrawal will be considered as having been received on
the day the interruption shall occur.
16. TERMINATION OF PARTICIPATION
A participating Employee's right to continue participation in the Plan
will terminate upon the earliest to occur of (i) the Company's termination of
the Plan, (ii) the Employee's transfer to ineligible employment status, or (iii)
retirement, disability, death or other termination of employment with the
Company. Upon the termination of an Employee's right to continue participation
in the Plan on account of the occurrence of any of the foregoing events, all
amounts then credited to the individual's Stock Purchase Account not already
used for the purchase of Common Stock will be repaid as soon as practicable.
Such repayments shall be made to the participating Employee unless the
termination of participation occurred by reason of such Employee's death, in
which event such repayment shall be made to such Employee's beneficiary. For
this purpose, an Employee's beneficiary shall be the person, persons or entity
designated by the Employee on a form prescribed by and delivered to the Company
or, in the absence of an effective beneficiary designation, the Employee's
estate; provided, however, that the determination of the Employee's beneficiary
hereunder shall be subject to any applicable community property or other laws.
8.
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17. APPORTIONMENT OF STOCK
If at any time shares of Common Stock authorized for purposes of the
Plan shall not be available in sufficient number to meet the purchase
requirements under all outstanding Participation Elections, the Committee shall
apportion the remaining available shares among the participating Employees on a
pro rata basis. In no case shall any apportionment of shares be made with
respect to a participating Employee's election to purchase unless such election
is then in effect (subject only to any suspension provided for in the Plan). The
Committee shall give notice of such apportionment and of the method of
apportionment used to each participating Employee to whom shares shall have been
apportioned.
18. GOVERNMENT REGULATIONS
The Plan, and the obligation of the Company to issue, sell and deliver
Common Stock under the Plan are subject to all applicable laws and to all
applicable rules, regulations and approvals of government agencies.
19. AMENDMENT OR TERMINATION
The Board of Directors of the Company may at any time amend, suspend or
terminate the Plan; provided, however, that no amendment (other than an
amendment authorized by Section 12) may be made increasing the maximum number of
shares of Common Stock which may be issued pursuant to the Plan, reducing the
minimum purchase price at which shares may be purchased hereunder or changing
the class of employees eligible to participate hereunder; without the approval
of the holders of a majority of the outstanding voting shares of the Company.
20. EFFECTIVE DATE
The Purchase Plan became effective upon adoption by the Board on
January 20, 1994 and was approved by the Company's stockholders at the 1994
Annual Meeting. The Purchase Plan was subsequently amended by the Board on
February 12, 1997 to (i) increase the maximum number of shares of Common Stock
authorized for issuance over the term of the Plan from 300,000 to 500,000 shares
and (ii) extend the termination date of the Purchase Plan from December 31, 1998
to December 31, 2003. The February 1997 Amendment was approved by the
stockholders at the 1997 Annual Meeting. The Purchase Plan was again amended by
the Board on January 22, 1999 to increase the maximum number of shares of Common
Stock authorized for issuance over the term of the Purchase Plan from 500,000
shares, to 800,000, and such increase was approved by the stockholders at the
1999 Annual Meeting. No purchase rights were granted, and no shares of Common
Stock were issued, on the basis of such 300,000 share increase until such
shareholder approval had been obtained.
9.
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21. TERMINATION
The Plan shall terminate on December 31, 2003. Any unexpired Purchase
Period that commenced prior to such termination date shall forthwith expire on
such termination date, which shall be deemed the Exercise Date for such Purchase
Period.
10.
