-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ARJ9FmeZOhX0Rx6neKBaMqSIYiqpjGMk5A6lWrsqynPL9/mCujguMzc6BtltB08z FkmZhytwZ7ov2wejyquevg== 0000891618-95-000612.txt : 19951027 0000891618-95-000612.hdr.sgml : 19951027 ACCESSION NUMBER: 0000891618-95-000612 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19950831 FILED AS OF DATE: 19951026 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEGATEST CORP CENTRAL INDEX KEY: 0000745213 STANDARD INDUSTRIAL CLASSIFICATION: LABORATORY APPARATUS & FURNITURE [3821] IRS NUMBER: 942422195 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-17393 FILM NUMBER: 95584529 BUSINESS ADDRESS: STREET 1: 1321 RIDDER PARK DR CITY: SAN JOSE STATE: CA ZIP: 95131 BUSINESS PHONE: 4084379700 MAIL ADDRESS: STREET 1: 1321 RIDDER PARK DR CITY: SAN JOSE STATE: CA ZIP: 95131 10-K405 1 FORM 10-K FOR THE YEAR ENDED AUGUST 31, 1995 1 ============================================================================== 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 [Fee Required] [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required] FOR THE FISCAL YEAR ENDED AUGUST 31, 1995 COMMISSION FILE NUMBER 0-17393 MEGATEST CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 94-2422195 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1321 RIDDER PARK DRIVE, SAN JOSE, CALIFORNIA 95131 (408) 437-9700 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, $0.001 par value Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this 10-K or any amendment to this Form 10-K. [X] The aggregate market value of voting stock held by non-affiliates of the Registrant was approximately $189,861,000 as of October 17, 1995, based upon the last reported sales price on the Nasdaq National Market on such date. Shares of Common Stock held by each officer and director 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. There were 7,434,720 shares of the Registrant's Common Stock issued and outstanding as of October 17, 1995. DOCUMENTS INCORPORATED BY REFERENCE: None ============================================================================== 2 PART I ITEM 1. BUSINESS Megatest Corporation ("Megatest" or the "Company") designs, manufactures, markets and services automatic test equipment (ATE) for the integrated circuit industry. Megatest currently offers four product lines--one for testing memory ICs and three for testing logic ICs. The Company's Genesis IIex and Genesis G-III memory test systems test a broad range of memory ICs, such as DRAMs and non-volatile memories ("NVMs"), including FLASH memories and EPROMs. The Company believes that it is the leading supplier of ATE for testing FLASH memories, the fastest growing type of standard memory IC. The Polaris and Vega Series, Megatest's second and third generation logic testers using its Tester-Per-Pin architecture, test a wide variety of high-performance logic ICs, including RISC and CISC processors, digital signal processors, and custom, semi-custom and application specific ICs. The Voyager Series tests logic devices such as FPGAs, PLDs and microcontrollers and some memory IC devices. The Polaris and Vega systems support a recently introduced option which incorporates certain analog functions to address the growing mixed-signal requirements of some logic ICs. The Company markets its test equipment worldwide to IC producers, both those who manufacture ICs for resale and those who manufacture ICs for inclusion in their own products, as well as to IC customers such as manufacturers of computers and other electronic systems. PROPOSED MERGER WITH TERADYNE On September 5, 1995, the Company entered into an Agreement and Plan of Merger and Reorganization (the "Merger Agreement") with Teradyne, Inc. ("Teradyne") and M Merger Corp., a Delaware corporation and wholly-owned subsidiary of Teradyne ("Merger Sub"). Pursuant to the Merger Agreement, and upon the satisfaction of all closing conditions, Merger Sub will merge (the "Merger") with and into Megatest, and Megatest will become a wholly-owned subsidiary of Teradyne. Upon the closing of the Merger each outstanding share of Megatest common stock will be converted into the right to receive 0.9091 shares of Teradyne common stock, subject to the following adjustment (.9091 shares, as adjusted, the "Exchange Ratio"): (i) if the Final Teradyne Stock Price (as defined below) is equal to or less than $36.00 per share, no adjustment to the Exchange Ratio shall be made; (ii) if the Final Teradyne Stock Price is greater than $36.00 per share then the Exchange Ratio shall be adjusted pursuant to the following formula: 1 Exchange Ratio = ---------------------------------------- (Final Teradyne Stock Price x .02) + .38 but in no event will the Exchange Ratio be greater than .9091 or less than .8333. "Final Teradyne Stock Price" shall mean the average of the closing prices of Teradyne common stock for the twenty consecutive days on which Teradyne common stock is traded on The New York Stock Exchange ending on the fifth calendar day immediately preceding the Special Meeting of Megatest stockholders held for the purpose of approving the Merger. The closing of the transaction is subject to certain conditions, including approval by Megatest's stockholders. The transaction is expected to be accounted for as a pooling-of-interests. 1 3 PRODUCTS Since introducing its first tester in 1976, the Company has sold approximately 2,850 memory and logic testers. Megatest's Polaris, Vega and Genesis test systems are composed of a "mainframe" unit and one or more test heads. The mainframe contains most of the testing circuitry, including the computer control unit, test pattern and timing generators, as well as the power supplies and cooling systems necessary for operation. The test heads contain highly specialized pin electronics that connect to the IC being tested. The Voyager Series utilizes "tester-in-a-testhead" architecture, in which all tester modules reside in the testhead, close to the ICs under test. The base unit of a Voyager Series thus contains only the computer control unit, power supplies and cooling system. For each of the Company's testers, the test head is brought into contact with the ICs being tested through use of the tester's own manipulator system and IC handlers and wafer probers provided by other manufacturers. Megatest's products range in price from approximately $200,000 for a minimally configured memory tester to over $4,000,000 for a fully configured logic system. GENESIS MEMORY TEST SYSTEMS The Genesis memory test systems are used for a variety of different memory IC types. The wide range of memory IC configurations necessitates testers that can accommodate varying data formats, operating speeds and specialty modes. The Genesis systems are designed for cost-effective, general-purpose, high-volume memory IC testing. All versions feature a parallel-test architecture. The Company's original Genesis II was introduced in 1988, an enhanced Genesis IIex version was introduced in 1991, and the current Genesis G-III system was introduced in July 1993. The Company shipped its first Genesis G-III in February 1994. The Genesis systems are designed with the high-voltage capability required for testing many currently available NVMs, such as FLASH memories, EPROMs and EEPROMs. This high-voltage feature is also used to test special access modes for certain specialty memory ICs. The Genesis IIex is capable of fully testing memory ICs at up to 33 MHz, and has the ability to test special access modes at up to 50 MHz. The Genesis G-III is capable of fully testing memory ICs at up to 66 MHz. The Company believes these capabilities enable either Genesis system to test virtually all DRAMs and NVMs currently in volume production. In addition, the added capabilities of the Genesis G-III are designed to enable it to test new, high-performance DRAMs and NVMs. The Genesis systems incorporate a number of features to increase tester throughput. They allow parallel testing of up to 32 DRAMs at one time, and their modular test head design allows easy integration with standard wafer probers and IC handlers. The Company offers interfaces for most wafer probers and IC handlers currently available, and designs custom interface applications for others as necessary. The Genesis systems are available in configurations with one to four test heads. Field upgrades are available to expand testers up to their maximum configuration. VLSI LOGIC TEST SYSTEMS Megatest's family of VLSI Logic test systems is used to test a wide variety of logic IC devices. This family of systems is based on a Tester-Per-Pin architecture pioneered by Megatest. Tester-Per-Pin provides individual testing resources for each pin of the IC being tested, including a timing generator, pin driver and comparator, parametric test unit, dynamic current load, vector memory and serial scan path. Megatest believes such architecture offers greater efficiency and flexibility in testing than other current architectures. The high level of control of complex test patterns and increased timing flexibility provided by the Tester-Per-Pin architecture are critical for uncompromised, cost-efficient testing of the many different logic IC types, speeds and configurations. The VLSI logic family was designed to optimize high-volume IC manufacturing applications in order to reduce the customer's total cost of ownership. The family consists of two models: the Polaris series designed to test the current generation of high performance processors, and the Vega Series, introduced in January 1995 and targeted at the most advanced high performance processors under development. Logic ICs are tested by using a truth table containing input test patterns and anticipated results. The more complex the logic IC, the longer the truth table must be. The Polaris series permits truth tables of up to thirty two million vectors, while the Vega permits truth tables of up to sixty four million vectors. To support the varying testing demands of complex logic ICs, the testers are offered in configurations ranging from 32 to 384 pins and support a recently introduced option which incorporates certain analog functions to address the growing "mixed-signal" requirements of some ICs. The 2 4 Polaris and Vega series incorporate a Sun Microsystems SPARC central processor as their test system controller and SPARC workstations and fileservers as their front-end user interface. These systems facilitate access to testing data and integration into engineering and test floor management systems. In addition, the Vega is compatible with the Company's previous generations of logic testers, in that test programs written for the MegaOne and Polaris can be used on the Vega. The Vega and Polaris are available in configurations of one or two test heads, allowing different ICs to be tested on each head, thereby increasing tester utilization and IC test throughput while minimizing factory floor space. In addition, both testers have the capability to test multiple ICs in parallel on each test head. Each test head is mounted on a pneumatically controlled test head manipulator which allows the operator to position the test head easily in virtually any orientation for docking to a wide range of wafer probing and IC handling equipment. The manipulator and docking mechanism are designed to enable rapid reconfiguration from one IC type to another. The design also includes a chilled water cooling system, which maintains a lower internal operating temperature than conventional air cooling systems. This lower temperature extends the operating life of the internal electronic components, improves overall system reliability, and provides quieter operation. Efficient cooling also improves the stability and repeatability or accuracy of testing results. Expandability in pin count, upgradeability in test speed and test system controllers, and the ability to add a second test head at a much lower cost than purchasing a new tester are available to customers as field modifications. These modifications permit customers to purchase only the capability they currently require, while preserving the option to upgrade later as their testing needs grow. VOYAGER TEST SYSTEM The Voyager test system tests logic IC devices such as FPGAs, PLDs and microcontrollers, and some memory IC devices. The Voyager system employs a tester-in-a-testhead design concept to meet special needs of high-volume, high-speed device manufacturers. Introduced in 1993 by Micro Component Technology, Inc. (MCT) as the Model 1149, the system offers configuration flexibility for supporting boundary scan and other built-in self test IC circuits. All tester modules reside in the testhead, close to the ICs under test, which enables higher accuracy and throughput at reduced costs. Several kinds of pin electronic modules can be placed in any position to accommodate special test needs. The Voyager's testhead configuration flexibility allows IC manufacturers to optimize testing costs for special purpose products. Manufacturers of field programmable logic devices such as FPGAs and PLDs, for example, often require multiple level, high-voltage programming pulses to load program data into ICs. The Voyager offers an optimized pin electronics module for such needs. Manufacturers can populate Voyager testheads with up to 768 pin channels for testing devices in parallel, and can easily optimize Voyager system configurations to accomplish proprietary device programming techniques at low cost. The Company believes the combination of parallelism and accuracy offers favorable cost of ownership benefits for its customers. Megatest offers interfaces for most wafer probers and IC handlers currently available, and designs custom interfaces for others as necessary. CUSTOMERS AND MARKETS The Company believes that once an IC manufacturer has selected a particular ATE vendor's tester for a generation of ICs, and made the substantial investment required to develop test program software and interfaces, the manufacturer will tend to purchase testers from that ATE vendor for the entire generation of ICs, and subsequent generations of similar ICs as well. Accordingly, Megatest expends substantial efforts to maintain its relationship with its existing key customers in order to increase the likelihood that these manufacturers will continue to select the Company's testers for their future generations of ICs. Sales to four customers accounted for approximately 67% of net revenues in fiscal 1993, sales to four customers accounted for approximately 71% of net revenues in fiscal 1994, and sales to three customers accounted for approximately 58% of net revenues in fiscal 1995. In particular, sales to Texas Instruments, Inc., which purchases logic and memory testers, accounted for approximately 27%, 34% and 25% of net revenues, respectively, during those periods; sales to Intel Corporation, which purchases memory testers, accounted for approximately 10%, 15% and 19% of net revenues, respectively, during those periods; and sales to Samsung Electronics 3 5 Company, which purchases memory and logic testers, accounted for approximately 10%, 4% and 14% of net revenues during those periods. The Company expects that sales of its products to TI, Intel and Samsung will continue to account for a high percentage of net revenues in the foreseeable future, and believes that its success depends in large part upon the success of the ICs being tested by these and other key customers. The loss of a major customer or a reduction in orders by such customers, including reductions due to market or competitive conditions in the IC industry, would have an adverse effect on the Company's results of operations. In addition, the Company's ability to increase its sales will depend in part upon its ability to obtain orders from new customers. No assurance can be given that the Company will be able to do so. As of August 31, 1995, the Company's backlog of scheduled but unfilled orders was approximately $51.1 million, compared with approximately $16.2 million as of August 31, 1994. Substantially all of the backlog as of August 31, 1995 is expected to be shipped in fiscal 1996. The Company includes in backlog only those orders for which a signed purchase order has been received from the customer and for which a delivery schedule has been specified. All orders are subject to cancellation by the customer with limited charges. Because of orders received for test systems to be shipped in the same quarter and possible customer changes in delivery schedules and cancellation of orders, the Company's backlog at a particular date is not necessarily indicative of actual sales for any succeeding period. The Company's business depends upon the capital expenditures of manufacturers of ICs and products utilizing ICs. The IC industry is highly cyclical and has historically experienced recurring periods of oversupply, which often have had a severe negative effect on the IC industry's demand for test equipment. The Company's business and operating results in prior years were adversely affected by industry-wide downturns. In recent years, the Company's revenues have increased substantially, reflecting increased demand for ICs by manufacturers of computers and other electronics systems. There can be no assurance as to how long demand for ICs will continue to increase, and the Company believes that the market for semiconductor capital equipment will continue to be susceptible to significant fluctuations. In particular, the Company experienced a drastic reduction in new orders from major memory and logic customers during the first quarter of fiscal 1995, followed by record orders for the final three quarters of fiscal 1995 and record revenues in the third and fourth quarters of fiscal 1995. Although the Company attempts to mitigate the risk of cyclicality in the IC industry and changes in any segment of the industry by participating in both the memory and logic IC testing markets, factors affecting both markets such as reduced demand by computer manufacturers would, and factors adversely affecting either market or particular segments within either market could, adversely affect the Company's business and financial performance. No assurance can be given that the Company's revenues and operating results will not be materially and adversely affected if slowdowns or changes in the IC industry occur, especially if both the memory and logic IC markets experience slowdowns at the same time. SALES, SERVICE AND CUSTOMER SUPPORT Megatest sells and services its products worldwide, primarily through its own sales and support organization and through independent representatives in certain areas of the world. Megatest provides its customers with comprehensive support and service before, during and after delivery of its products. As is typical for the ATE industry, Megatest experiences a long sales cycle for new customers and new products. To support the sales process and enhance customer relationships, the Company endeavors to add value prior to selling a test system by working closely with the prospective customers to develop hardware and software test specifications and benchmarks, and often designs customized applications to enable customers to evaluate its testers. Prior to system shipment, Megatest's support personnel assist the customer in site preparation and inspection and provide customers with training at Megatest's facility or on-site. The customer's employees receive instruction both in system hardware and in software tools developed specifically for writing and debugging test programs for the Company's systems. The Company's customer training program also includes instruction in the maintenance of its testers. In addition, the Company's support personnel assist the customer in the development of software test programs and handler/prober interface designs customized for the ICs to be tested. The Company's field support personnel work closely with the customer's employees to install the system and demonstrate system readiness. The Company typically provides a one-year warranty against defects in its testers, computer peripherals and related system components, and offers its customers additional support after the warranty period in the form of 4 6 maintenance contracts for specified time periods. The Company's service personnel perform necessary maintenance of the Company's products, including module repair, hardware and software problem resolution, preventive maintenance and field upgrades. Megatest also provides after-sales support in the form of engineering assistance for developing testing techniques and test plans for particular applications. The Company believes that its ability to provide complete solutions to testing problems enhances its ability to sell multiple systems to the same customer and, in general, assists the Company in the development of its future products. During fiscal 1994 and 1995, export sales, primarily to customers in the Asia-Pacific region, accounted for 52% and 58% of net revenues, respectively. The Company's export sales are generally made in United States dollars or dollar equivalents. To support its customers, Megatest maintains customer support centers at its San Jose, California headquarters and in 13 other offices located near key customer sites in Arizona, Colorado, Idaho, Minnesota, Massachusetts, New York and Texas in the United States; in Korea, Singapore, Taiwan and the Philippines in the Far East; and in France. ENGINEERING AND PRODUCT DEVELOPMENT The market for IC testing is characterized by rapid technological change. The Company believes that continued and timely development and introduction of new products and enhancements to existing products are essential for the Company to maintain its competitive position. Accordingly, Megatest has allocated in the past, and expects to continue to allocate in the future, significant resources to engineering and product development activities. The Company's products must be available on a timely and cost-effective basis to enable customers to integrate them into their operations as they begin volume manufacturing of the next generation of ICs. Failure to have a competitive tester available when required by an IC manufacturer could make it substantially more difficult for the Company to sell testers to that manufacturer for a number of years. The Company has in the past experienced delays in introducing certain of its products and enhancements, and there can be no assurance that it will not encounter technical or other difficulties that could in the future delay the introduction of new products or enhancements. The Company works closely with its customers to define new product features and to identify emerging applications for its products. A significant portion of the Company's current efforts are focused on two new products: the recently introduced Vega series logic tester, and the Company's next-generation memory tester. In addition, the Company continues to focus engineering and product development resources on product features and product upgrades in each of the memory and logic test product lines, involving activities in mechanical, electrical and software design. The Company's inability to complete the development of its new products or its inability to manufacture and ship these products in volume and in time to meet the requirements for testing the next generation of ICs could adversely affect the Company. There can be no assurance that the Company will be successful in the introduction and volume manufacture of its new products, that such introduction will coincide with the development by IC manufacturers of their next generation of ICs, or that such products will satisfy customer needs or achieve market acceptance. In addition, the Company may incur substantial costs to ensure the functionality and reliability of its next-generation testers, including the Vega series, early in their product life-cycles. Any of such events would adversely affect the Company's business. Furthermore, announcements by the Company or its competitors of new products could cause customers to defer purchases of the Company's existing products, which would also adversely affect the Company. Engineering and product development expenses were $12.2 million, $15.9 million and $20.2 million in fiscal 1993, 1994 and 1995, respectively. Included in fiscal 1995 expenses was approximately $2.2 million attributable to the Company's engineering and product development activity in Minnesota. The Company acquired this activity in connection with its acquisition of the Voyager product line from MCT. In addition, the Company wrote off $8.8 million of in-process technology in connection with the Voyager product line acquisition. MANUFACTURING AND SUPPLIERS The Company's manufacturing strategy is to perform only those manufacturing activities which yield the greatest added value or which require unique technology or specialized knowledge. The Company seeks to subcontract all other manufacturing activities to established fabricators and assemblers who can perform these activities more cost-effectively. The Company's principal in-house manufacturing activities consist of subassembly testing, final system integration and test. 5 7 The Company relies on Solectron Corporation as well as other outside contractors to procure components and assemble them into the highly-complex circuit boards used by the Company in its testers. These circuit boards, which are manufactured to the Company's design specifications, constitute a significant portion of the Company's testers. This arrangement provides the Company with access to advanced circuit board manufacturing technology without requiring the Company to expend significant resources to acquire, develop and maintain such technology. Assembly of these circuit boards is an extremely complex process. The Company's reliance on Solectron in particular and other outside contractors in general involves several risks, including reduced control over pricing and timely delivery of components. While the timeliness, yield and quality of deliveries to date from the Company's outside contractors have been acceptable, the Company has experienced delays in deliveries and quality problems, which have adversely affected the Company's ability to ship products, and there can be no assurance that manufacturing problems will not occur in the future. The Company uses standard components and prefabricated parts manufactured to its design specifications. Most components are available from a number of different suppliers, although certain components and subassemblies are obtained from a single supplier or a limited group of suppliers. The Company has experienced, and may in the future experience, delays in obtaining adequate supplies of certain Ics and other components and sub-assemblies used in its current products and products under development, and in some cases the Company has been required to modify the design of its products to address the inability to obtain components. The manufacture of many of the Company's sole and limited source components is extremely complex. The Company's reliance on the suppliers of these components exposes it to production difficulties and yield and quality variations experienced by these suppliers. Although the Company seeks to reduce its dependence on its sole and limited source suppliers, and attempts to maintain an adequate inventory of all single-source components, disruption or termination of certain of these sources could occur and could have an adverse effect on the Company's operating results. A prolonged inability to obtain adequate yields or deliveries from its sole or limited source suppliers, or any other circumstance that would require the Company to seek alternative sources of supply or to manufacture its circuit boards or other components internally, would significantly delay shipments of the Company's products and have an adverse effect on the Company's operating results. COMPETITION The integrated circuit ATE industry is highly competitive. Megatest faces substantial competition throughout the world, primarily from ATE manufacturers in the United States and Japan. The Company's primary competitors in the memory IC testing market are Advantest Corporation, Teradyne, Inc., Minato Electronics, Inc., Ando Electric Co., Ltd. and Asia Electronics, Inc., and in the logic IC testing market are Advantest Corporation, Teradyne, Inc., Schlumberger Limited, LTX Corporation, Hewlett-Packard Company and Credence Systems Corporation. Many of the Company's competitors have substantially greater financial resources, more extensive engineering, manufacturing, marketing and customer service and support capabilities, and greater name recognition than the Company. Megatest expects its competitors to continue to improve the performance of their current products and to introduce new products with improved price and performance characteristics. From time to time the Company's testers are sold as used equipment at prices substantially below the prices of new testers sold by the Company. Such sales of used testers may materially and adversely affect the Company's sale of new testers. Certain of the Company's customers, including IBM and TI, have also developed testers. The principal elements of competition in the Company's markets include price, product performance and throughput capability, quality and reliability, customer service and support including the availability of applications packages. Although the Company believes that it competes favorably with respect to each of these factors, new product introductions by the Company's competitors could cause a decline in sales or loss of market acceptance of the Company's existing products. The Company believes that to remain competitive, it will require significant financial resources in order to invest in new product development, to introduce next generation memory and logic test systems on a timely basis, and to maintain customer service and support centers worldwide. In addition, increased competitive pressure could lead to intensified price-based competition, resulting in lower prices and adversely affecting the Company's operating results. In particular, at the end of a product life cycle and as competitors introduce more technologically advanced products, pricing pressure for that product typically becomes more intense. There can be no assurance that the Company will continue to compete successfully in the future. 6 8 Japanese IC manufacturers have a dominant share of the market for DRAMs and certain other types of ICs for which the Company's testers are used. Japanese ATE manufacturers are well-established in the Japanese ATE market, and it is difficult for non-Japanese test equipment companies to penetrate the Japanese ATE market. To date, the Company has not established itself as a major competitor in the Japanese ATE market. There can be no assurance that the Company will be able to achieve significant sales to Japanese IC manufacturers. PATENTS AND LICENSES The Company holds seven United States patents. Although the Company believes that these patents may have value, the Company also believes that its future success will depend primarily on the technical competence and creative skills of its personnel, rather than on its patents. However, in the absence of patent protection, the Company may be vulnerable to competitors who attempt to imitate the Company's products. In addition, other companies and inventors may receive patents that contain claims applicable to the Company's products. The sale of the Company's products covered by such patents could require licenses that may not be available on acceptable terms. As is typical in its industry, the Company has at times been notified of claims that it may be infringing patents issued to others. Historically, the Company has been able to negotiate licenses on terms which it believes are reasonable. With respect to one claim pending against the Company, see Item 3 of this Annual Report on Form 10-K. No assurance can be given that infringement claims by third parties in the future will not materially and adversely affect the Company's business and operating results. EMPLOYEES As of August 31, 1995, the Company had a total of 580 full-time employees. In addition, the Company had 81 consultants and agency temporaries. Many of the Company's employees are highly skilled, and the Company believes its future success will depend in large part on its ability to attract and retain such employees. None of the Company's employees are represented by a labor union, and the Company has experienced no work stoppages. The Company considers its employee relations to be good. The Company's future success depends in part upon its ability to attract and retain qualified management, technical, sales and support personnel for its operations. Competition for such personnel is intense, and there can be no assurance that the Company will be successful in attracting or retaining such personnel. The loss of any key employee, the failure of any key employee to perform in their current positions or the Company's inability to attract and retain new skilled employees as needed could materially and adversely affect the Company's performance. 7 9 ITEM 2. PROPERTIES The Company maintains its headquarters in San Jose, California. This facility, totaling 112,000 square feet, contains corporate administration, sales and customer support, manufacturing and engineering. In addition, the Company executed a lease in August 1995 for 17,000 square feet adjacent to its corporate headquarters. This facility will house sales and certain customer service departments. The lease on this facility expires in September 1997. In the United States, the Company maintains seven sales and customer support offices in Newton, Massachusetts; Austin, Texas; Dallas, Texas; Monument, Colorado; Fishkill, New York; Boise, Idaho and Phoenix, Arizona, and an engineering operation in Fridley, Minnesota. Sales and customer support are also provided in five additional facilities located in Europe and the Far East. The Company believes that its existing facilities are adequate to meet its current and foreseeable requirements and that suitable additional or substitute space will be available as needed. ITEM 3. LEGAL PROCEEDINGS On March 27, 1995, Credence Systems Corporation ("Credence") named the Company as a defendant in a patent infringement lawsuit originally filed by Credence against MCT in the U.S. District Court for the Northern District of California (the "Court"). The suit alleges that the Company's manufacture and sale of certain Voyager assets acquired by the Company from MCT infringe a U.S. patent held by Credence. On April 24, 1995, the Company filed with the Court a counterclaim against Credence for a declaratory judgment that the Credence patent is invalid and unenforceable, and that the manufacture and sale of Voyager assets do not infringe the Credence patent. Although the outcome of any litigation is uncertain, the Company believes that the resolution of such matter will not have a material adverse effect on the Company's operating results or financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of fiscal 1995. 8 10 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET FOR COMMON STOCK The Company's Common Stock trades on the Nasdaq National Market under the symbol "MEGT." The following table sets forth for the periods indicated the high and low sale prices for the Common Stock as reported by the Nasdaq National Market.
HIGH LOW ---- --- FISCAL 1994 Quarter ending November 30, 1993 . . . . . . . . . . . . . . . . . . . . . . 23 1/4 10 1/8 Quarter ending February 28, 1994 . . . . . . . . . . . . . . . . . . . . . . 20 1/2 11 1/2 Quarter ending May 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . 23 1/2 13 1/2 Quarter ending August 31, 1994 . . . . . . . . . . . . . . . . . . . . . . . 20 1/4 13 1/2 FISCAL 1995 Quarter ending November 30, 1994 . . . . . . . . . . . . . . . . . . . . . . 20 1/2 8 1/4 Quarter ending February 28, 1995 . . . . . . . . . . . . . . . . . . . . . . 11 3/8 5 1/8 Quarter ending May 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . 14 8 1/2 Quarter ending August 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . 24 1/8 11 7/8
The Company believes that factors such as announcements of developments related to the Company's business, quarterly fluctuations in the Company's financial results and general conditions in the IC equipment industry, the IC industry or the economy could cause the price of the Company's Common Stock to fluctuate, perhaps substantially. In addition, in recent years the stock market in general, and the market for shares of small capitalization stocks in particular, have experienced extreme price fluctuations, which have often been unrelated to the operating performance of affected companies. Many companies in the IC equipment industry, including the Company, have recently experienced historical highs in the market prices of their common stock. No assurance can be given that the market price of the Company's Common Stock will not experience significant fluctuations in the future, including fluctuations which are unrelated to the Company's performance. BENEFICIAL OWNERS As of October 13, 1995, there were approximately 1,900 beneficial owners of the Common Stock. DIVIDENDS To date, the Company has not paid any cash dividends on shares of its Common Stock. The Company presently intends to retain all future earnings for its business and does not anticipate paying cash dividends on its Common Stock in the foreseeable future. 9 11 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data of the Company are qualified by reference to and should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. The selected consolidated financial data set forth below as of August 31, 1995 and 1994 and for the years ended August 31, 1995, 1994 and 1993 have been derived from the audited consolidated financial statements of the Company included elsewhere in this Annual Report on Form 10-K. The selected consolidated financial data set forth below as of August 31, 1993, 1992 and 1991 and for the years ended August 31, 1992 and 1991 are derived from audited consolidated financial statements of the Company not included in this Annual Report on Form 10-K.
Year Ended August 31, ------------------------------------------------------------ 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- (in thousands, except per share amounts) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Product sales . . . . . . . . . . . . . . $ 97,459 $ 99,441 $77,818 $63,077 $53,459 Development revenues . . . . . . . . . . -- 850 587 2,414 6,217 -------- -------- ------- ------- ------- Net revenues . . . . . . . . . . . . 97,459 100,291 78,405 65,491 59,676 Cost of sales(1) . . . . . . . . . . . . 59,537 56,196 44,065 35,814 35,690 -------- -------- ------- ------- ------- Gross profit . . . . . . . . . . . . 37,922 44,095 34,340 29,677 23,986 -------- -------- ------- ------- ------- Engineering and product development . . . 20,158 15,878 12,205 11,097 9,574 Selling, general and administrative . . . 21,364 18,069 16,032 13,917 11,810 Write-off of acquired in-process technology 8,837 -- -- -- -- -------- -------- ------- ------- ------- Total operating expenses . . . . . . 50,359 33,947 28,237 25,014 21,384 -------- -------- ------- ------- ------- Income (loss) from operations . . . . . . (12,437) 10,148 6,103 4,663 2,602 Interest income (expense), net . . . . . (167) 1,315 (139) (499) (105) -------- -------- ------- ------- ------- Income (loss) before income taxes and cumulative effect of accounting change (12,604) 11,463 5,964 4,164 2,497 (Provision) benefit for income taxes . . 414 (2,364) (685) (300) (271) -------- -------- ------- ------- ------- Income (loss) before accounting change . (12,190) 9,099 5,279 3,864 2,226 Cumulative effect of change in accounting for income taxes . . . . . . . . . . -- 1,700 -- -- -- -------- -------- ------- ------- ------- Net income (loss) . . . . . . . . . . . $(12,190) $ 10,799 $ 5,279 $ 3,864 $ 2,226 ======== ======== ======= ======= ======= Income (loss) before cumulative effect of accounting change per share . . . . $ (1.69) $ 1.26 $ 1.11 $ 0.95 $ 0.58 ======== ======== ======= ======= ======= Net income (loss) per share . . . . . . . $ (1.69) $ 1.50 $ 1.11 $ 0.95 $ 0.58 ======== ======== ======= ======= ======= Average common and common equivalent shares outstanding . . . . . . . . . 7,230 7,204 4,752 4,075 3,823 ======== ======== ======= ======= =======
August 31, ------------------------------------------------------------- 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- (in thousands) CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents . . . . . . . . $ 11,609 $ 19,404 $17,278 $ 6,877 $ 6,038 Working capital . . . . . . . . . . . . . 44,859 55,846 43,868 19,031 16,606 Total assets . . . . . . . . . . . . . . 118,858 101,083 67,664 41,157 40,412 Long-term obligations . . . . . . . . . . 11,728 414 804 2,181 2,075 Total stockholders' equity . . . . . . . 65,408 76,247 51,813 22,532 18,628
______________ (1) Cost of sales does not include costs of $0.2 million, $0.2 million, $2.5 million and $3.5 million in fiscal 1994, 1993, 1992 and 1991, respectively, relating to development revenues. Such costs are included in engineering and product development expenses. 10 12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Megatest was founded in 1975 and introduced its first product, which tested both memory and logic ICs, in 1976. Since then, the Company has sold approximately 2,850 testers to manufacturers of memory and logic ICs as well as to IC customers such as electronic systems manufacturers. The Company's strategy has been to participate in both the memory and logic IC test markets, to help reduce the effects of cyclicality in each of these markets. The Company's principal product lines are its Genesis memory test systems and its Polaris, Vega and Voyager logic test systems. Megatest's net revenues increased in fiscal 1993 and 1994 principally due to demand for memory ICs, particularly FLASH memories and DRAMs. Increased sales of the Company's memory testers more than offset a decline in sales of logic testers to IBM, which significantly reduced its purchases from the Company during fiscal 1993, due in part to the Company's completion of development agreements for the Polaris and declines in the market for the mainframe computers which used the logic ICs tested by Polaris testers. In addition, memory product sales in fiscal 1994 were enhanced by the introduction in the second quarter of the Genesis G-III tester. The Company believes that its sales growth in recent years has been due in large part to strong demand by manufacturers of personal computers for ICs tested by the Company's products, and expects to remain susceptible to the volatility of the computer market. During the first two quarters of fiscal 1995, the Company experienced a severe slowdown in sales of all of the Company's products and from all of its major customers. Sales of both logic and memory products began to rebound late in the second quarter of fiscal 1995, to customers in all geographic areas, and the Company achieved record incoming orders in each of the final three quarters of fiscal 1995. The Company returned to quarterly profitability in the third quarter. On November 22, 1994, the Company acquired the 1149 Tester product line and follow-on in-process technology (the "Voyager") from Micro Component Technology, Inc. ("MCT") for $13.9 million, which includes acquisition related expenses of $1.1 million. The purchase of the product line included substantially all of the assets and intellectual property and the assumption of certain liabilities, approximating $2.1 million, associated with the Voyager. As a result of the acquisition of the Voyager, the Company recorded a one-time write-off of in-process technology of $8.8 million, which contributed to the Company's losses in its first quarter and for the fiscal year ended August 31, 1995. Excluding the one-time write-off of in-process technology, the results of operations for the Voyager product line from the date of acquisition through August 31, 1995 increased Megatest's loss from operations approximately $2.4 million. On September 5, 1995, the Company entered into the Merger Agreement with Teradyne and Merger Sub. Pursuant to the Merger Agreement, and upon the satisfaction of all closing conditions, Megatest will become a wholly-owned subsidiary of Teradyne. See Item 1 of this Annual Report on Form 10-K. 11 13 RESULTS OF OPERATIONS The following table sets forth the percentage relationships of certain items from the Company's consolidated statements of operations.
Year Ended August 31, 1995 1994 1993 ------ ------ ------ Net revenues . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% Cost of sales . . . . . . . . . . . . . . . . . . 61.1 56.0 56.2 ----- ----- ----- Gross margin . . . . . . . . . . . . . . . . 38.9 44.0 43.8 ----- ----- ----- Engineering and product development . . . . . . . 20.7 15.8 15.6 Selling, general and administrative . . . . . . . 21.9 18.1 20.4 Write-off of acquired in-process technology . . . 9.1 -- -- ----- ----- ----- Total operating expenses . . . . . . . . . . 51.7 33.9 36.0 ----- ----- ----- Income (loss) from operations . . . . . . . . . . (12.8) 10.1 7.8 Other income (expense), net . . . . . . . . . . . (0.1) 1.3 (0.2) ----- ----- ----- Income (loss) before income taxes and cumulative effect of accounting change . . . . . . . . (12.9) 11.4 7.6 (Provision) benefit for income taxes . . . . . . 0.4 (2.3) (0.9) Cumulative effect of change in accounting for income taxes . . . . . . . . . . . . . . -- 1.7 -- ----- ----- ----- Net income (loss) . . . . . . . . . . . . . . . . (12.5)% 10.8% 6.7% ===== ===== =====
Net Revenues The Company's net revenues increased from $78.4 million in fiscal 1993 to $100.3 million in fiscal 1994 and decreased to $97.5 million in fiscal 1995. The increase in fiscal 1994 was primarily attributable to increased sales of memory testers, which grew 45% from fiscal 1993, while sales of logic testers increased 13%. The Company encountered a slowdown in sales in early fiscal 1995. During the first half of fiscal 1995, sales of all of the Company's products, in all geographic areas, were well below the comparable periods of fiscal 1994. However, beginning in the second quarter of fiscal 1995, orders for all products rebounded significantly, enabling the Company to achieve record net revenues for the final two quarters of fiscal 1995. The increased demand for the Company's products is attributable to increased demand for FLASH memories and DRAMs from customers using the Company's memory testers and for DSP devices from customers using the Company's logic testers. Memory testers as a percentage of systems revenue has increased from 55% in fiscal 1993 to 61% in fiscal 1994 and 68% in fiscal 1995. Service revenue, which includes product revenue from sales of spare parts and service contracts, was 24% of total revenue in fiscal 1995, compared to 18% in fiscal 1994 and 20% in fiscal 1993. Service revenue is expected to continue to represent a significant portion of the Company's revenue as the installed base of testers increases and as a result of the Company's continued emphasis on the sales of spare parts, custom interfaces and service contracts. Gross Margin The Company's gross margin increased from 43.8% in fiscal 1993 to 44.0% in fiscal 1994, reflecting a shift in product sales mix from Polaris logic testers to higher margin Genesis IIex memory testers, offset by incremental manufacturing costs incurred in bringing the Genesis G-III tester to market. The Company's gross margin decreased to 38.9% in fiscal 1995, due to the low sales volume during the first half of fiscal 1995. Manufacturing spending could not be scaled back during the first half of fiscal 1995 in proportion to the decline in revenues. Also, in the latter part of fiscal 1995, the Company encountered delays in receiving certain critical components and sub-assemblies which caused the Company to incur higher levels of overtime and to incur certain incremental costs to expedite deliveries of these parts in order to meet customers' demand. It is anticipated that such component availability issues will continue into fiscal 1996, and thus may result in continuing costs associated with overtime, expedite fees and other related incremental production costs. In addition, the Company expects to incur certain costs associated with the production ramp of the Vega series logic tester and the introduction of its next generation memory during fiscal 1996. Accordingly, the Company expects its gross margin 12 14 in fiscal 1996 to continue to be below fiscal 1994 levels until the fourth quarter of fiscal 1996, and for the year as a whole. Engineering and Product Development Expense The Company's engineering and product development expense increased from $12.2 million in fiscal 1993 to $15.9 million in fiscal 1994 and to $20.2 million in fiscal 1995. Engineering and product development expense, net of development revenues, increased from $11.6 million in fiscal 1993 to $15.0 million in fiscal 1994 and to $20.2 million in fiscal 1995. Such net expense, which represents the Company's internally funded development efforts, reflects the Company's commitment to maintaining a high level of engineering and product development effort to enhance its competitive position. Engineering and product development expense in fiscal 1995 includes approximately $2.2 million related to the Voyager engineering organization in St. Paul, Minnesota. The low sales volume achieved during the first two quarters of the year further contributed to the percentage increase in engineering and product development from 15.8% of revenue in fiscal 1994 to 20.7% in fiscal 1995. The Company considered the slowdown in the first half of fiscal 1995 to be temporary and thus did not scale back critical long-term resources in proportion with the shortfall in incoming orders. The Company intends to continue to invest significant resources in the development of next-generation products for both memory and logic applications, and thus expects engineering and product development expenses in fiscal 1996 to increase as compared to fiscal 1995. Selling, General and Administrative Expense Selling, general and administrative expense increased from $16.0 million in fiscal 1993 to $18.1 million in fiscal 1994 and to $21.4 million in fiscal 1995. The increase is attributable primarily to an increase in headcount from 148 at August 31, 1994 to 162 at August 31, 1995. In particular, the Company expanded its hiring efforts in the sales, marketing and service organizations in support of its continued emphasis on expanding its customer base and in response to the higher sales levels achieved during the second half of fiscal 1995. As a percentage of net revenues, selling, general and administrative expenses declined from 20.4% of revenue in fiscal 1993 to 18.1% in 1994 and increased to 21.9% in 1995. The primary cause of the percentage increase in fiscal 1995 was the low sales volume achieved during the first two quarters of the year. The Company considered the slowdown in the first half of fiscal 1995 to be temporary and thus did not scale back critical long-term resources in proportion with the shortfall in incoming orders. The Company expects selling, general and administrative expense to decline as a percentage of net revenues in fiscal 1996. Other Income and Expense Net other expense consists primarily of interest expense on notes payable and long-term obligations and the amortization of goodwill related to the acquisition of the Voyager, offset by interest income from the investment of the Company's cash balances. In fiscal 1993, funds from the Company's initial public offering in May 1993 were used to repay debt. Interest income was generated from the investment of the remaining funds and the proceeds of the Company's second public offering in October 1993, resulting in net interest income of $1.3 million in fiscal 1994. In fiscal 1995, net other expense totaled $0.2 million as the Company's cash balances were utilized for the MCT acquisition and to fund operations. In addition, the Company borrowed $22.4 million during fiscal 1995, resulting in additional interest expense. Income Taxes Effective September 1, 1993, the Company adopted the provisions of Statement of Financial Accounting Standards No. 109 (FAS 109), "Accounting for Income Taxes." FAS 109 is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or income tax returns. In estimating future tax consequences, FAS 109 generally considers all expected future events other than enactments of changes in the tax law or rates. Previously, the Company used the FAS 96 asset and liability approach that gave no recognition to future events other than the recovery of assets and settlement of liabilities at their carrying amounts. The cumulative effect of adopting FAS 109 resulted in a one-time credit to fiscal 1994 net income of $1.7 million or $0.24 per share. 13 15 In connection with adopting FAS 109, management fully reserved net deferred tax assets that may be realized beyond one year after the date of adoption because of the uncertainty regarding their realization. At August 31, 1995, management again fully reserved deferred tax assets which may be realized beyond the ensuing twelve-month period because of the uncertainty regarding their realization. The Company's effective tax rate for fiscal 1995 was 3% (benefit) compared to 21% for fiscal 1994 and 11% for fiscal 1993. The low benefit rate in fiscal 1995 was due primarily to losses incurred early in the year. A substantial portion of the benefit has not been recognized due to the uncertainty of its realization. The Company's tax rate in the third and fourth quarters of fiscal 1995 was 22.5% as the Company returned to profitability. The Company expects its tax rate to increase to approximately 25% in fiscal 1996, although the actual effective tax rate achieved will vary depending on the level of profitability realized. The lower rates achieved in prior years were due primarily to unrestricted utilization of net operating loss carryforwards. 14 16 LIQUIDITY AND CAPITAL RESOURCES Operating activities provided net cash of $5.3 million and $5.1 million in fiscal 1993 and 1994, respectively, and used cash of $13.1 million in fiscal 1995. Cash flow from operations in fiscal 1993 was primarily attributable to net income in that year. In fiscal 1994, cash generated by net income was partially offset by the Company's investment in inventory for certain strategic programs designed to bolster relationships with major customers and an increase in accounts receivable caused by a disproportionate percentage of shipments occurring late in the fiscal year. In fiscal 1995, net cash used for operations was primarily attributable to the Company's net loss and to further increases in inventories and accounts receivable, offset by a non-cash write-off of acquired in-process technology and depreciation and amortization and by increased accounts payable and accrued liabilities. The increase in inventory in fiscal 1995 was primarily to facilitate anticipated new product shipments, to meet expected shipment levels, and to increase service and spares inventory to support the Company's growing installed base of testers, while the increase in accounts receivable was related to a disproportionate percentage of shipments occurring late in the fiscal year. Investing activities, other than purchases of short-term investments, consisted of property and equipment purchases and, in fiscal 1995, the purchase of the Voyager product line from MCT. Investing activities used net cash of $13.3 million, $16.7 million and $18.3 million in fiscal 1993, 1994 and 1995, respectively. The purchase of securities pledged as collateral under the Company's San Jose facility leases used $7.7 million of cash in fiscal 1994, and the termination in fiscal 1995 of the leases (see below) provided $7.7 million in cash. Net purchases of short-term investments used $7.9 million and $2.1 million of cash in fiscal 1993 and 1994, respectively, and net sales of short-term investments provided $10.1 million in fiscal 1995. During 1995, the Company purchased its general operating facilities and land for $8.6 million and purchased evaluation and test equipment associated with new products totalling approximately $6.2 million. Financing activities provided net cash of $18.4 million, $13.7 million and $23.6 million in fiscal 1993, 1994 and 1995, respectively. The Company's initial public offering of its common stock in May 1993 provided $23.9 million in fiscal 1993. The Company used $3.4 million from the proceeds of its initial public offering to pay $1.6 million on its working capital lines of credit and $1.8 million of equipment notes payable during fiscal 1993. A second public offering of common stock in October 1994 provided $13.6 million in fiscal 1994. The Company borrowed a total of $22.4 million during fiscal 1995 under its working capital lines of credit, a new $5.5 million real estate mortgage and $6.9 million in equipment financing. At August 31, 1995, the Company's cash, cash equivalents and short-term investments were $11.6 million, compared to $29.5 million at August 31, 1994. The decrease primarily reflects the cash used to acquire the Voyager from MCT and to fund operations during fiscal 1995. The Company maintains a $10.0 million bank line of credit which expires in January 1996. The agreement provides for borrowings not to exceed 80% of eligible domestic accounts receivable. The Company also maintains an additional $5.0 million line of credit guaranteed by the Export-Import Bank of the United States to support export sales. This agreement provides for borrowings not to exceed 90% of eligible foreign accounts receivable plus 70% of eligible inventory to support such receivables. Borrowings under these lines bear interest at prime (8.75% at August 31, 1995) plus 1.0% and 0.5% for the domestic and export lines of credit, respectively, and are collateralized by a security interest in substantially all of the Company's previously unencumbered tangible and intangible assets. The terms of the credit agreements require, among other terms, quarterly profitability, minimum amounts of tangible net worth, a minimum ratio of current assets to current liabilities, and a maximum ratio of indebtedness to net worth. The credit agreements also preclude the Company from taking certain actions without prior bank approval. Transactions subject to such prohibition include the declaration of cash dividends, certain significant asset acquisitions or dispositions, incurrence of certain additional indebtedness, and changing the nature of the Company's business. At August 31, 1995, the Company had borrowed $10.0 million under these lines of credit. During August, 1995, the Company entered into two agreements for additional working capital. The Company entered into a four-year, $1.9 million loan agreement to finance certain of the Company's testers used for customer demonstrations. The loan bears interest at 8.4%. The Company also obtained a four-year, $5.0 million loan secured by substantially all of the Company's previously unencumbered fixed assets and bearing interest at approximately 9.5% and payable in forty eight equal monthly installments. Each of these agreements contains cross-default provisions with the Company's bank lines of credit. 15 17 On August 25, 1995, the Company purchased its general operating facilities and land in San Jose that was previously leased for $8.6 million. As a result of the transaction, the Company removed certain restrictions on $7.7 million of cash which was pledged as collateral under the first-loss guarantee of the terminated operating lease. The Company used approximately $3.3 million of the cash and a $5.5 million mortgage, secured by the property to acquire the land and building and to pay associated transaction fees. The mortgage loan bears interest at a rate of 8.125% per annum and is payable in 59 monthly installments of approximately $50,000 with a $4.6 million balloon payment in the final month. sam As of August 31, 1995, the Company had net working capital of approximately $44.9 million, including $31.4 million of accounts receivable and $38.1 million of inventories. The Company believes that because of the relatively long manufacturing cycle of its testers, and due to lengthening vendor lead times on certain critical components used in the manufacture of the Company's products, the Company's investment in inventories will continue to represent a significant portion of working capital. The Company's principal sources of liquidity as of August 31, 1995 consisted of approximately $11.6 million of cash and cash equivalents and $5.0 million of borrowings available under its domestic line of credit. The Company's liquidity is affected by many factors, including internal factors associated with normal, on-going operations, and external factors related to market dynamics and global economies. Although the Company's cash requirements will fluctuate based on the nature, timing, and extent of these factors, the Company believes that its cash flow from operations together with its cash, cash equivalents and available credit will be sufficient to meet both working capital and capital expenditure requirements throughout fiscal 1996. 16 18 FUTURE OPERATING RESULTS The Company's future revenues and operating results could fluctuate significantly from quarter to quarter due to a combination of factors, including the mix between and configuration of memory and logic testers sold in a particular quarter. Given the relatively large selling price of the Company's testers, sales of a limited number of testers account for a substantial portion of revenues in any particular quarter and a single transaction could therefore have a significant impact on revenues and gross margins for that quarter. The Company's backlog at the beginning of each quarter generally does not include orders for all tester sales needed to achieve the Company's objectives for that quarter. Consequently, the Company depends on obtaining orders for shipment in the same quarter that the purchase order is received. Furthermore, a substantial portion of the Company's net revenues have historically been realized near the end of the quarter. Accordingly, the failure to receive anticipated orders or delays in shipments, particularly those related to Polaris or Vega logic testers, near the end of a quarter, due, for example, to unanticipated customer delays or cancellations or to manufacturing difficulties experienced by the Company or delays in deliveries by suppliers, may cause quarterly net revenues to fall significantly short of the Company's objectives, which would adversely affect the Company's operating results. The Company experienced significant quarterly fluctuations in its net revenues in prior fiscal years. The Company believes that such fluctuations in part reflect capital equipment buying patterns in the IC industry. In particular, the Company experienced reduced order levels in the first five months of fiscal 1995, which had an adverse effect on operating results in the first half of fiscal 1995. There can be no assurance that such an order weakness will not recur or that such a weakness will not materially and adversely affect future revenues and operating results. The markets served by the Company are characterized by rapid technological change, intense competition, increasingly precise customer specifications and global service requirements. The Company's future success will depend in part on its ability to meet these inherent challenges and maintain a competitive advantage in both the products and services it provides. The need for continued investment in research and development, for capital requirements and for extensive ongoing customer service and support capability worldwide result in significant fixed costs which will be difficult to reduce in the event that the Company does not meet its operating objectives, as was the case in the first half of fiscal 1995. The Company's future results may be affected by the actions of existing or future competitors, including the development of new technologies, new product introductions and intensified price-based competition. In addition, adverse changes in general economic conditions (both foreign and domestic), the availability of needed components and fluctuations in foreign exchange rates may also affect the Company's future operating results. The Company may in the future pursue acquisitions of complementary product lines or businesses. Future acquisitions by the Company may result in potentially dilutive issuances of equity securities, the incurring of additional debt and amortization expenses related to goodwill and intangible assets, which could adversely affect the Company's profitability. In addition, acquisitions involve numerous risks, including difficulties in the assimilation of the operations and products of the acquired companies, the diversion of management's attention from other business concerns, risks of entering markets in which the Company has no or limited direct prior experience, and the potential loss of key employees of the acquired Company. In the event that such an acquisition does occur, no assurance can be given as to the effect thereof on the Company's business or operating results. Based on the factors described above, recent operating results should only be one input in evaluating the future financial performance of the Company. In March, 1995, the Financial Accounting Standards Board issued Statement on Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" (SFAS 121), which is effective for financial statements for fiscal years beginning after December 15, 1995. Management does not believe that adoption of SFAS 121 will have a significant impact on the Company's financial position or results of operations. 17 19 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX Report of Price Waterhouse LLP, Independent Accountants . . . . . . . . . . 19 Report of Deloitte & Touche LLP, Independent Auditors . . . . . . . . . . . 20 Consolidated Balance Sheets at August 31, 1995 and 1994 . . . . . . . . . . 21 Consolidated Statements of Operations for the years ended August 31, 1995, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . 22 Consolidated Statements of Stockholders' Equity for the years ended August 31, 1995, 1994 and 1993 . . . . . . . . . . . . . . . 23 Consolidated Statements of Cash Flows for the years ended August 31, 1995, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . 24 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . 25
18 20 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Megatest Corporation: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Megatest Corporation and its subsidiaries at August 31, 1995 and 1994, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for income taxes effective September 1, 1993. PRICE WATERHOUSE LLP San Jose, California September 20, 1995 19 21 INDEPENDENT AUDITORS' REPORT To the Stockholders and Board of Directors of Megatest Corporation: We have audited the accompanying consolidated statements of operations, stockholders' equity, and cash flows of Megatest Corporation and its subsidiaries for the year ended August 31, 1993. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects the results of operations and cash flows of Megatest Corporation and its subsidiaries for the year ended August 31, 1993 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP San Jose, California September 21, 1993 20 22 MEGATEST CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNT) ASSETS
AUGUST 31, ------------------------------- 1995 1994 ---- ---- Current assets: Cash and cash equivalents $ 11,609 $ 19,404 Short-term investments -- 10,069 Accounts receivable, less allowances of $261 and $262 31,386 23,064 Inventories 38,116 23,531 Deferred taxes 3,852 3,532 Prepaid expenses and other current assets 1,618 668 --------- --------- Total current assets 86,581 80,268 Property and equipment--net 28,882 12,122 Restricted investments -- 7,659 Other assets 3,395 1,034 --------- --------- $ 118,858 $ 101,083 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable $ 10,000 $ -- Current portion of long-term obligations 1,657 66 Accounts payable and accrued liabilities 26,659 18,075 Income taxes payable 1,655 4,198 Customer advances and deferred revenues 1,751 2,083 --------- --------- Total current liabilities 41,722 24,422 --------- --------- Long-term obligations 11,728 414 --------- --------- Commitments and contingencies Stockholders' equity: Preferred stock, $0.001 par value: 5,000 shares authorized; no shares outstanding -- -- Common stock, $0.001 par value: 20,000 shares authorized; 7,422 and 7,171 shares outstanding 7 7 Additional paid-in capital 82,007 80,656 Accumulated deficit (16,606) (4,416) --------- --------- Total stockholders' equity 65,408 76,247 --------- --------- $ 118,858 $ 101,083 ========= =========
The accompanying notes are an integral part of these financial statements. 21 23 MEGATEST CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
YEAR ENDED AUGUST 31, ------------------------------------------ 1995 1994 1993 ---- ---- ---- Product sales $ 97,459 $ 99,441 $ 77,818 Development revenues -- 850 587 -------- --------- --------- Net revenues 97,459 100,291 78,405 -------- --------- --------- Cost of sales 59,537 56,196 44,065 Engineering and product development 20,158 15,878 12,205 Selling, general and administrative 21,364 18,069 16,032 Write-off of acquired in-process technology 8,837 -- -- -------- --------- --------- Total costs and expenses 109,896 90,143 72,302 -------- --------- --------- Income (loss) from operations (12,437) 10,148 6,103 Interest income 578 1,433 225 Interest expense (571) (118) (364) Other expense (174) -- -- -------- --------- --------- Income (loss) before income taxes and cumulative effect of accounting change (12,604) 11,463 5,964 (Provision) benefit for income taxes 414 (2,364) (685) -------- --------- --------- Income (loss) before cumulative effect of accounting change (12,190) 9,099 5,279 Cumulative effect of change in accounting for income taxes -- 1,700 -- -------- --------- --------- Net income (loss) $(12,190) $ 10,799 $ 5,279 ======== ========= ========= Per share data: Income (loss) before cumulative effect of accounting change $ (1.69) $ 1.26 $ 1.11 Cumulative effect of change in accounting for income taxes -- 0.24 -- -------- --------- --------- Net income (loss) $ (1.69) $ 1.50 $ 1.11 ======== ========= ========= Average common and common equivalent shares outstanding 7,230 7,204 4,752 ======== ========= =========
The accompanying notes are an integral part of these financial statements. 22 24 MEGATEST CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
CONVERTIBLE PREFERRED STOCK COMMON STOCK ADDITIONAL ---------------- ---------------- PAID-IN ACCUMULATED SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL ------ ------ ------ ------ ---------- ----------- -------- Balances, September 1, 1992 4,631 $ 5 2,605 $ 3 $43,018 $(20,494) $ 22,532 Sale of common stock 2,216 2 23,914 23,916 Conversion of preferred stock into common stock (4,631) (5) 1,211 1 4 -- Exercise of stock options 101 -- 86 86 Net income 5,279 5,279 ------ ---- ----- --- ------- -------- -------- Balances, August 31, 1993 -- -- 6,133 6 67,022 (15,215) 51,813 Sale of common stock 983 1 13,574 13,575 Exercise of stock options and warrant 55 -- 60 60 Net income 10,799 10,799 ------ ---- ----- --- ------- -------- -------- Balances, August 31, 1994 -- -- 7,171 7 80,656 (4,416) 76,247 Employee Stock Purchase Plan 93 -- 491 491 Exercise of stock options 158 -- 272 272 Income tax benefit from exercise of stock options 588 588 Net loss (12,190) (12,190) ------ ---- ----- --- ------- -------- -------- Balances, August 31, 1995 -- $ -- 7,422 $ 7 $82,007 $(16,606) $ 65,408 ====== ==== ===== === ======= ======== ========
The accompanying notes are an integral part of these financial statements. 23 25 MEGATEST CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED AUGUST 31, -------------------------------------- 1995 1994 1993 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $(12,190) $ 10,799 $ 5,279 Reconciliation to net cash provided by (used for) operating activities: Depreciation and amortization 4,612 3,142 2,258 Cumulative effect of change in accounting for income taxes -- (1,700) -- Provision for deferred income taxes 223 (2,375) -- Provision for bad debts (1) 112 -- Write-off of acquired in-process technology 8,837 -- -- Changes in: Accounts receivable (8,321) (4,885) (4,845) Inventories (8,924) (8,368) (304) Prepaid expenses and other current assets (950) (427) 52 Accounts payable and accrued liabilities 6,484 5,088 2,015 Income taxes payable (2,543) 3,570 392 Customer advances and deferred revenues (332) 679 367 Other -- (525) 110 -------- -------- -------- Net cash provided by (used for) operating activities (13,105) 5,110 5,324 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of tester product line and related technology (13,897) -- -- Property and equipment purchases (20,160) (6,750) (5,393) (Purchases) sales of restricted investments 7,659 (7,659) -- Purchases of short-term investments -- (27,975) (7,942) Proceeds from sale of short-term investments 10,069 25,848 -- Investment in equity securities (1,500) -- -- Other assets, net (456) (147) (1) -------- -------- -------- Net cash used for investing activities (18,285) (16,683) (13,336) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings (repayments) under line of credit 10,000 -- (3,500) Additions to long-term obligations 12,350 145 1,420 Reductions in long-term obligations -- (81) (3,509) Sale of common stock 1,351 13,635 24,002 Debt issuance costs (106) -- -- -------- -------- -------- Net cash provided by financing activities 23,595 13,699 18,413 -------- -------- -------- Net increase in cash and cash equivalents (7,795) 2,126 10,401 CASH AND CASH EQUIVALENTS: Beginning of period 19,404 17,278 6,877 -------- -------- -------- End of period $ 11,609 $ 19,404 $ 17,278 ======== ======== ======== SUPPLEMENTAL CASH FLOW INFORMATION: Net cash paid during the year for: Interest $ 474 $ 79 $ 405 Taxes 1,558 847 236
The accompanying notes are an integral part of these financial statements. 24 26 MEGATEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) NOTE 1. SIGNIFICANT ACCOUNTING POLICIES: Line of business Megatest designs, manufactures, markets and services automatic test equipment for the integrated circuit ("IC") industry. Megatest currently offers four product lines, one for testing memory ICs and three for testing logic ICs. Principles of consolidation The consolidated financial statements include the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions are eliminated. Fiscal period The Company uses a 52-53 week fiscal year ending on the last Saturday in August. The Company's fiscal years in the accompanying financial statements have been shown as ending on August 31. Fiscal years 1995, 1994 and 1993 each include 52 weeks. Cash equivalents and short-term investments The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Short-term investments at August 31, 1994 include commercial paper and T-bills purchased with a maturity of twelve months or less. Inventories Inventories are stated at the lower of cost (first-in, first-out) or market. Property and equipment Property and equipment are stated at cost. Depreciation on equipment, furniture and fixtures is computed using the straight-line method over the estimated useful lives of the assets, which is generally three to five years. Leasehold improvements are amortized over the shorter of the useful life or the lease term. The building is being depreciated over fifteen years. Revenue recognition Product sales are recognized upon shipment and are recorded net of related trade discounts and estimated allowances. The Company provides for installation and normal warranty costs at the time the sales are recognized and, if applicable, for any significant cost to enhance the functionality and reliability of the installed base when such need becomes known. Revenues from development contracts are recognized over the term of the contracts based on the relation of actual costs incurred to the total estimated cost for completion. Revenues from service contracts are recognized ratably over the service period. 25 27 MEGATEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Income taxes Effective September 1, 1993, the Company adopted the provisions of Statement of Financial Accounting Standards No. 109 (FAS 109), "Accounting for Income Taxes." FAS 109 is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's financial statements or income tax returns. In estimating future tax consequences, FAS 109 generally considers all expected future events other than enactments of changes in the tax law or rates. Previously, the Company used the FAS 96 asset and liability approach that gave no recognition to future events other than the recovery of assets and settlement of liabilities at their carrying amounts. The cumulative effect of adopting FAS 109 resulted in a one-time credit to net income of $1,700 or $0.24 per share and is reported separately in the consolidated statement of operations. Net income per share Net income per share is computed using the weighted average number of common shares plus common stock equivalent shares from dilutive stock options. Translation of foreign currency The Company's subsidiaries use the U.S. dollar as the functional currency. Accordingly, assets and liabilities are translated at year-end exchange rates, except for inventories and property and equipment, which are translated at historical rates. Revenues and expenses are translated at average exchange rates in effect during the year, except for costs related to those balance sheet items which are translated at historical rates. Foreign currency transaction gains and losses are included in income as they occur. Concentration of credit risk Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash equivalents and trade accounts receivable. The Company invests in a variety of financial instruments such as certificates of deposit, commercial paper, municipal debt and U.S. Government agency debt. The Company, by policy, limits the amount of credit exposures to any one financial institution or commercial issuer. The Company sells its systems to semiconductor manufacturers and manufacturers of computers and other electronic systems throughout the world. The Company performs ongoing credit evaluations of its customers' financial condition and, generally, requires no collateral from its customers. The Company maintains an allowance for uncollectible accounts receivable based upon expected collectibility of all accounts receivable. NOTE 2. INVENTORIES:
AUGUST 31, ------------------------- 1995 1994 ---- ---- Purchased parts $ 11,812 $ 5,705 Assemblies in process 13,888 8,285 Finished goods 12,416 9,541 -------- -------- $ 38,116 $ 23,531 ======== ========
26 28 MEGATEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3. PROPERTY AND EQUIPMENT:
AUGUST 31, ------------------------- 1995 1994 ---- ---- Land and buildings $ 8,600 $ -- Computer and test equipment 26,966 18,064 Leasehold improvements 3,514 1,227 Furniture and fixtures 625 568 -------- -------- 39,705 19,859 Accumulated depreciation and amortization (10,823) (7,737) -------- -------- $ 28,882 $ 12,122 ======== ========
NOTE 4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
AUGUST 31, ------------------------- 1995 1994 ---- ---- Accounts payable $ 17,077 $ 9,037 Accrued salaries and benefits 4,759 3,972 Accrued installation and warranty costs 3,023 2,900 Other accrued liabilities 1,800 2,166 -------- -------- $ 26,659 $ 18,075 ======== ========
NOTE 5. PRODUCT LINE ACQUISITION: On November 22, 1994, the Company acquired the 1149 Tester product line and follow-on in-process technology (the "Voyager") of Micro Component Technology, Inc. ("MCT"). The assets acquired include substantially all of the equipment, inventory and intellectual property including the follow-on in-process technology, and the assumption of certain liabilities associated with the Voyager. Of the amount paid, $2,000 was placed in escrow (i) to indemnify the Company in the event of a breach of any of the representations and warranties made by MCT in the purchase agreement, (ii) to secure performance of MCT's obligations under the purchase agreement, and (iii) to insure against any shortfalls discovered in the equipment or inventory intended to be acquired through the Company's post-closing audit of the assets acquired. The acquisition of the Voyager has been accounted for as a purchase and, accordingly, the results of operations and cash flows of the Voyager have been included only from the date of acquisition. Excluding the one-time write-off of in-process technology of $8,837, the results of operations for the Voyager from the date of acquisition through August 31, 1995 increased Megatest's loss from operations by approximately $2,400. The total purchase price of the acquisition was as follows: Cash paid to MCT $ 12,800 Other acquisition costs 1,097 --------- $ 13,897 =========
27 29 MEGATEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The allocation of the Company's purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed is based on an independent appraisal. A final allocation of the purchase price will be determined when matters relating to the escrow deposit are settled. The preliminary purchase price allocation is summarized as follows: Inventories $ 5,661 Property and equipment 1,038 In-process technology 8,837 Goodwill 461 -------- Assets acquired 15,997 -------- Accounts payable 1,903 Accrued warranty 197 -------- Liabilities assumed 2,100 -------- Net assets acquired $ 13,897 ========
The in-process technology was charged to income during the quarter ended November 30, 1994. Unaudited proforma combined net revenues of the Company and the Voyager for the years ended August 31 1995 and 1994 were $100,652 and $111,261, respectively. Proforma combined net income (loss) and proforma combined net income (loss) per share were not materially different from the amounts reported in the accompanying statement of operations. In addition, the Company purchased 315,790 shares of MCT's nonvoting Series A Preferred Stock at a price of $4.75 per share for a total of $1,500 cash on November 23, 1994. The investment in equity securities is recorded at fair market value, which approximates its cost, and is included in other assets at August 31, 1995. NOTE 6. NOTES PAYABLE: The Company maintains a $10,000 domestic bank line of credit which expires in January 1996. The line of credit agreement provides for borrowings up to the lesser of 80% of eligible domestic accounts receivable or the $10,000 committed credit amount. In addition, the Company maintains an additional $5,000 line of credit guaranteed by the Export-Import Bank of the United States to support export sales. This agreement provides for borrowings up to the lesser of 90% of eligible foreign accounts receivable plus 70% of eligible inventory to support such receivables, or the $5,000 committed credit amount. Borrowings under these lines bear interest at prime (8.75% at August 31, 1995) plus 1.0% and 0.5% for the domestic and export lines of credit, respectively, and are collateralized by a security interest in substantially all of the Company's previously unencumbered tangible and intangible assets. The terms of the credit agreements require, among other terms, quarterly profitability, minimum amounts of tangible net worth, a minimum ratio of current assets to current liabilities, and a maximum ratio of indebtedness to net worth. The credit agreements preclude the Company from taking certain actions without prior bank approval. Transactions subject to such prohibition include the declaration of cash dividends, certain significant asset acquisitions or dispositions, incurrence of certain additional indebtedness, and changing the nature of the Company's business. At August 31, 1995, the Company had borrowed $10,000 under these lines of credit. 28 30 MEGATEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7. LONG-TERM OBLIGATIONS: Long-term obligations at August 31, 1995 and 1994 are as follows:
August 31, --------------------- 1995 1994 --------- -------- Mortgage on land and building $ 5,450 -- Notes payable 6,900 -- Other 1,035 480 -------- -------- 13,385 480 Less: current portion of long-term obligations (1,657) (66) -------- -------- Long-term obligations $ 11,728 414 ======== ========
In conjunction with the Company's purchase of general operating facilities and land in San Jose, California in August 1995, the Company entered into a $5,450 mortgage agreement. The mortgage loan is secured by the property purchased. The mortgage loan bears interest at approximately 8.125% per annum and is payable in 59 monthly installments of approximately $50 with a $4,550 balloon payment due on August 31, 2000, the maturity date of the loan. During August 1995 the Company issued a $5,000 promissory note secured by certain capital equipment of the Company. The note is payable in 48 monthly installments including interest of approximately 9.5% per annum. In addition, in August 1995 the Company entered into a four-year $1,900 loan agreement secured by certain of the Company's testers used for customer demonstrations. The agreement bears interest at approximately 8% per annum and is payable in equal monthly installments of $39 and a $380 balloon payment due on the maturity date of the loan. In connection with the above-noted borrowing arrangements, the Company must comply with certain financial covenants relating to profitability, liquidity, leverage and tangible net worth. Maturities of long-term obligations are as follows:
August 31, ---------- 1996 $ 1,657 1997 1,765 1998 1,902 1999 2,049 2000 6,012 -------- Total $ 13,385 ========
29 31 MEGATEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8. INCOME TAXES: Income before taxes and cumulative effect of accounting change has been primarily generated in the United States. The components of the provision for income taxes were as follows:
YEAR ENDED AUGUST 31, ---------------------------------- 1995 1994 1993 ---- ---- ---- Current: U.S. $ (1,291) $ 3,956 $ 333 Foreign 408 84 120 State 246 699 232 -------- ------- ------- (637) 4,739 685 -------- ------- ------- Deferred: U.S. 223 (2,308) -- Foreign -- -- -- State -- (67) -- -------- ------- ------- 223 (2,375) -- -------- ------- ------- Provision for income taxes $ (414) $ 2,364 $ 685 ======== ======= =======
The provision for income taxes differs from the amount computed by applying the statutory U.S. federal income tax rate as follows:
YEAR ENDED AUGUST 31, ---------------------------------- 1995 1994 1993 ---- ---- ---- Tax provision at U.S. statutory rate $(4,285) $ 4,012 $ 2,028 State income taxes, net of federal benefit (267) 632 153 R&D credits (646) -- -- Increase in valuation allowance 4,671 -- -- Reduction in valuation allowance, including utilization of net operating loss carryforwards of $1,596 -- (3,356) -- Utilization of net operating loss carryforwards -- -- (1,560) Other 113 1,076 64 ------- ------- ------- Provision for income taxes $ (414) $ 2,364 $ 685 ======= ======= =======
The components of the net deferred income tax asset under FAS 109 are as follows:
AUGUST 31, AUGUST 31, 1995 1994 ---- ---- Inventory reserves $ 4,213 $ 2,950 Federal and state loss and credit carryforwards 5,074 4,840 In-process research and development 3,374 -- Other asset valuation reserves 264 214 Employee benefit accruals 455 389 Warranty and installation accruals 1,015 1,106 Other 322 422 -------- -------- Gross deferred tax assets 14,717 9,921 -------- -------- Depreciation (850) (713) -------- -------- Deferred tax assets valuation allowance (10,015) (5,133) -------- -------- $ 3,852 $ 4,075 ======== ========
30 32 MEGATEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) At August 31, 1995, the Company had net operating loss and credit carryforwards for federal income tax purposes of approximately $7,262 and $1,755, respectively, and net operating loss and credit carryforwards for state income tax purposes of $3,950 and $604, respectively. These carryforwards, if not utilized to offset future federal taxable income and income taxes payable, will expire in the years 1999 through 2005. In connection with adopting FAS 109, management fully reserved net deferred tax assets that may be realized beyond one year after the date of adoption because of the uncertainty regarding their realization. At the end of each quarter of fiscal 1995 and 1994, management again fully reserved deferred tax assets which may be realized beyond the ensuing twelve-month period because of the uncertainty regarding their realization. The change in the valuation allowance attributable to these quarterly reassessments regarding future taxable income aggregated $1,070 in fiscal 1995 and $1,534 in fiscal 1994. The deferred tax assets valuation allowance at August 31, 1995 and 1994 is attributed to U.S. federal and state deferred tax assets. The Company had $13,867 and $9,208 of net deferred tax assets in the U.S. at August 31, 1995 and 1994, respectively. Management believes sufficient uncertainty exists such that a valuation allowance of $10,015 and $5,133 against those net deferred tax assets is required at August 31, 1995 and 1994, respectively. When these reserved deferred tax assets are recognized, they will reduce the Company's federal and state tax provisions, except for approximately $1,135 related to the tax benefit of stock options, which will be credited directly to additional paid-in capital. Under Section 382 of the Internal Revenue Code and the Regulations issued thereunder, the Company's ability to use its net operating loss and tax credit carryforwards are limited to approximately $3,000 per year as a result of an "ownership change" in fiscal 1994. 31 33 NOTE 9. STOCKHOLDERS' EQUITY: In May and June 1993, the Company sold 2,216 shares of common stock in its initial public offering with proceeds to the Company of $23,916, net of underwriting discounts and offering expenses of $2,681. In connection with such offering, all shares of convertible preferred stock converted into 1,211 shares of common stock. In October 1993, the Company sold an additional 983 shares in a second public offering with proceeds to the Company of $13,575 net of underwriting discounts and offering expenses of $1,409. Under the Company's stock option plans, options may be granted to employees, consultants and non-employee directors to purchase shares of common stock at prices not less than the fair market value at the date of grant. Options generally become exercisable as determined by the Board of Directors and expire up to ten years after the grant date. At August 31, 1995, options to purchase 126 shares of common stock were exercisable and 851 shares were available for future option grants. Additional information with respect to stock options follows:
NUMBER OF SHARES PRICE PER UNDER OPTIONS SHARE ------------- ----- Outstanding, September 1, 1992 356 $0.04 - $8.00 Granted 34 4.00 - 21.25 Exercised (101) 0.04 - 4.00 Canceled (9) 0.04 - 4.00 -------- Outstanding, August 31, 1993 280 0.04 - 21.25 Granted 351 13.25 - 21.75 Exercised (53) 1.00 - 10.00 Canceled (39) 1.00 - 21.25 -------- Outstanding, August 31, 1994 539 0.04 - 21.25 Granted 460 6.25 - 20.50 Exercised (158) 0.04 - 15.00 Canceled (146) 0.04 - 21.75 --------- Outstanding, August 31, 1995 695 1.00 - 21.75 =========
The Company has an employee stock purchase plan covering most U.S. employees. Under the plan, employees may contribute up to 10% of their compensation to purchase shares of the Company's common stock at 85% of the stock's fair market value at the beginning or end of each six-month offering period. During fiscal 1995, 93 shares were purchased under this plan. At August 31, 1995, the Company had reserved shares of common stock for issuance as follows: Issuance under stock option plans 1,546 Issuance under stock purchase plan 407 ------- 1,953 ======
NOTE 10. EMPLOYEE BENEFIT PLAN: Substantially all full-time employees are entitled to participate in the Company's Retirement Savings Plan (401(k) Plan). The Company is not required to contribute, nor has it contributed, to the Plan. NOTE 11. COMMITMENTS AND CONTINGENCIES: In August 1995, the Company terminated its leases for general operating facilities and land in San Jose, CA. As a result, certain restrictions were removed on $7,659 of investments which were previously used as collateral under the first-loss clause of the terminated leases. 32 34 MEGATEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company leases certain facilities under operating leases for terms of up to five years. Rent is expensed on a straight line basis over the term of each lease. Future minimum commitments under all operating leases at August 31, 1995 are as follows:
Fiscal year ending August 31: 1996 $ 618 1997 508 1998 380 1999 344 2000 239 -------- Total $ 2,089 ========
Rent expense was $960, $953 and $1,626 in fiscal 1995, 1994 and 1993, respectively. On March 27, 1995, Credence Systems Corporation ("Credence") named the Company as a defendant in a patent infringement lawsuit originally filed by Credence against MCT in the U.S. District Court for the Northern District of California (the "Court"). The suit alleges that the Company's manufacture and sale of certain Voyager assets acquired by the Company from MCT infringe a U.S. patent held by Credence. On April 24, 1995, the Company filed with the Court a counterclaim against Credence for a declaratory judgment that the Credence patent is invalid and unenforceable, and that the manufacture and sale of Voyager assets do not infringe the Credence patent. Although the outcome of any litigation is uncertain, the Company believes that the resolution of such matter will not have a material adverse effect on the Company's operating results or financial condition. As is typical in its industry, the Company has at times been notified of claims that it may be infringing patents issued to others. Historically, the Company has been able to negotiate licenses on terms which it believes are reasonable. No assurance can be given that infringement claims by third parties in the future will not materially and adversely affect the Company's business and operating results. NOTE 12. REVENUE INFORMATION: A significant portion of the Company's revenues are derived from sales to a limited number of large IC manufacturers. Three customers accounted for 25%, 19% and 14% (aggregating to 58%) of net revenues in fiscal 1995, four customers accounted for 34%, 15%, 11% and 11% (aggregating to 71%) of net revenues in fiscal 1994 and four customers accounted for 27%, 20%, 10% and 10% (aggregating to 67%) of net revenues in fiscal 1993. Accounts receivable from the major customers at August 31, 1995 and 1994 represented 57% and 55% of the total accounts receivable, respectively. Export sales were 58%, 52% and 42% of net revenues in fiscal 1995, 1994 and 1993, respectively, including sales to Europe (3%, 5% and 5%) and to the Far East (55%, 47% and 37%). NOTE 13. DEVELOPMENT ARRANGEMENTS: Beginning in fiscal 1988, the Company entered into a series of development contracts, primarily with IBM, for partial funding related to the development of the Company's Polaris logic tester and certain customer-specific applications for this product. The Company recognized development revenues of $850 and $587 in fiscal 1994 and 1993, respectively, under these contracts. Related development costs were $185 and $197 in fiscal 1994 and 1993, respectively. Such costs were included in engineering and product development expense. 33 35 MEGATEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 14. SUBSEQUENT EVENT: On September 5, 1995, the Company entered into an Agreement and Plan of Merger and Reorganization (the "Merger Agreement") with Teradyne, Inc. ("Teradyne") and M Merger Corp., a Delaware corporation and wholly owned subsidiary of Teradyne ("Merger Sub"). Pursuant to the Merger Agreement, and upon the satisfaction of all closing conditions, Merger Sub will merge (the "Merger") with and into Megatest, and Megatest will become a wholly-owned subsidiary of Teradyne. Upon the closing of the Merger each outstanding share of Megatest common stock will be converted into the right to receive 0.9091 shares of Teradyne common stock, subject to the following adjustment (.9091 shares, as adjusted, the "Exchange Ratio"): (i) if the Final Teradyne Stock Price (as defined below) is equal to or less than $36.00 per share, no adjustment to the Exchange Ratio shall be made; (ii) if the Final Teradyne Stock Price is greater than $36.00 per share then the Exchange Ratio shall be adjusted pursuant to the following formula: 1 Exchange Ratio = ---------------------------------------- (Final Teradyne Stock Price x .02) + .38 but in no event will the Exchange Ratio be greater than .9091 or less than .8333. "Final Teradyne Stock Price" shall mean the average of the closing prices of Teradyne common stock for the twenty consecutive days on which Teradyne common stock is traded on The New York Stock Exchange ending on the fifth calendar day immediately preceding the Special Meeting of Megatest stockholders held for the purpose of approving the Merger. The closing of the transaction is subject to certain conditions, including clearance under the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended, and approval by Megatest's stockholders. The transaction is expected to be accounted for as a pooling-of-interests. NOTE 15. UNAUDITED QUARTERLY CONSOLIDATED FINANCIAL DATA:
Fiscal Quarter -------------------------------------------- Total First Second Third Fourth Year ----- ------ ----- ------ ----- 1995: Net revenues $12,202 $18,247 $28,941 $38,069 $ 97,459 Gross Profit 4,089 5,324 12,165 16,344 37,922 Net income (loss) (12,466) (3,628) 792 3,112 (12,190) Net income (loss) per share $(1.74) $ (0.51) $ 0.11 $ 0.41 $ (1.69) 1994: Net revenues $22,447 $23,291 $27,009 $27,544 $100,291 Gross profit 10,402 10,471 11,090 12,132 44,095 Income before cumulative effect of accounting change 1,778 2,091 2,531 2,699 9,099 Net income 3,478 2,091 2,531 2,699 10,799 Income before cumulative effect of accounting change per share $ 0.26 $ 0.29 $ 0.34 $ 0.37 $ 1.26 Net income per share 0.51 0.29 0.34 0.37 1.50
34 36 PART III ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (a) The directors of the Company, and their ages at October 20, 1995, are as follows:
DIRECTOR NAME AGE POSITION SINCE ---- --- -------- ----- John E. Halter . . . . . . . 62 President, Chief Executive Officer and Chairman of the Board of the Company 1990 James W. Bagley 56 Vice Chairman of Applied Materials, Inc. 1986 Stephen J. Bisset . . . . . . 44 Director, TouchPad Business for Logitech, Inc. 1975 Winston H. Chen, Ph.D. . . . 54 Chairman of the Paramitas Foundation 1994 David A. Hodges . . . . . . . 58 Professor and Dean of the College of Engineering at University of California, Berkeley 1994 Steven J. Sharp . . . . . . . 54 President, Chief Executive Officer and Chairman of the Board of TriQuint Semiconductor 1987
JOHN E. HALTER joined the Company in June 1990 as President, Chief Executive Officer and Chairman of the Board. From 1987 to 1990, Mr. Halter served as Senior Vice President of Operations for the technology industries sector of General Signal Corporation. From 1985 to 1987, he served as group executive of General Signal's semiconductor equipment group. Prior to joining General Signal, Mr. Halter had spent over 20 years in the semiconductor industry. JAMES W. BAGLEY is Vice Chairman of Applied Materials, Inc., a manufacturer of wafer fabrication systems, where he has been employed since 1981. Mr. Bagley also serves as a member of the Board of Directors of Tencor Instruments, Kulicke & Soffa Industries, Inc. and Extraction Systems, Inc.. STEPHEN J. BISSET co-founded the Company in 1975 and served as its President until 1990. Mr. Bisset has served as a director of the Company since its inception. Prior to his association with the Company, Mr. Bisset worked at Hewlett-Packard Company and Intel Corporation. From December 1990 to June 1993, Mr. Bisset served as a Senior Vice President of Synaptics, Inc., a manufacturer and developer of neural networks. Mr. Bisset currently serves as the Director, TouchPad Business for Logitech, Inc., a manufacturer of computer peripheral products. WINSTON H. CHEN, PH.D. has served as Chairman of the Paramitas Foundation since April 1994. Dr. Chen served as Chairman of the Board of Solectron Corporation ("Solectron"), an electronics manufacturing services Company, from September 1990 to March 1994, and served as President of Solectron from 1979 to 1990. Dr. Chen also serves as a member of the Board of Directors of Solectron and Intel Corporation. DAVID A. HODGES has served as Dean of the College of Engineering at University of California, Berkeley since July 1990. Mr. Hodges is a professor in the University's Department of Electrical Engineering and Computer Sciences and has been a member of the University's College of Engineering staff 1970. His current research emphasis is on semiconductor manufacturing. Mr. Hodges has served as a consultant to a number of technology companies. Mr. Hodges also serves as a member of the Board of Directors of the International Computer Science Institute. STEVEN J. SHARP has served as President and Chief Executive Officer of TriQuint Semiconductor, Inc., a manufacturer and developer of gallium arsenide integrated circuits, since September 1991. In May 1992, he became Chairman of the Board of Directors of TriQuint. From 1987 to September 1991, Mr. Sharp was an independent venture capitalist, and from 1985 to 1987, he was with Hambrecht & Quist Venture Capital Fund. Mr. Sharp also serves on the Board of Directors of a number of privately held companies. 35 37 (b) The executive officers of the Company, and their ages at October 20, 1995, are as follows:
NAME AGE POSITION ---- --- -------- John E. Halter . . . . . . . . . . . 62 President, Chief Executive Officer and Chairman of the Board Paul W. Emery II . . . . . . . . . . 54 Vice President, Finance and Chief Financial Officer Fred Azad . . . . . . . . . . . . . . 49 Vice President of Engineering Vickie K. Eckert . . . . . . . . . . 45 Vice President of Business Process Improvement Craig Z. Foster . . . . . . . . . . . 43 Vice President of Service and Corporate Development Richard C. Carmichael . . . . . . . . 46 Vice President of Marketing Timothy F. Moriarty . . . . . . . . . 34 Vice President of Worldwide Sales Mark L. Siegel . . . . . . . . . . . 57 Vice President of Operations
See Item 10(a) of this Annual Report on Form 10-K for information regarding Mr. Halter. PAUL W. EMERY, II joined the Company in February 1995 as Vice President of Finance and Chief Financial Officer. From 1993 to 1995, Mr. Emery served as a management consultant. From 1989 to 1993, he served as President and Chief Executive Officer of System Industries, a supplier of mass storage systems for the computer industry. Prior to rejoining System Industries in 1989, Mr. Emery was a senior vice president with the Santa Cruz Operation. From 1984 to 1988, he served as Chief Operating Officer of System Industries. FRED AZAD joined the Company in 1993 as Vice President of Engineering. From 1991 to 1993, Mr. Azad served as Director of Engineering for the ATS Division of KLA Instruments, a semiconductor equipment supplier. For five years prior to joining KLA Instruments, he served as Director of Engineering for the Switches and Editors business units of Ampex Corporation, an electronics supplier. VICKIE K. ECKERT joined the Company in 1990 as the Company's Director of Quality Improvement, became Vice President of Quality Improvement and Information Services in 1992, and Vice President of Business Process Improvement in 1994. From 1989 to 1990, she served as Director of Quality Improvement at Wyse Technology, a manufacturer of microcomputer products. For 11 years prior to 1989, she served as Quality Manager at Xerox Corporation. CRAIG Z. FOSTER joined the Company in 1983 and became Vice President of Service and Corporate Development in 1992. From 1986 to 1992, Mr. Foster served as Vice President of Marketing and Service. He has also served as Applications Manager and Product Marketing Manager with the Company. Prior to joining Megatest, Mr. Foster held product engineering and management positions at Intel Corporation. RICHARD C. CARMICHAEL joined the Company in August 1995 and was appointed Vice President of the Marketing in September 1995. From 1991 to 1995, he served as Sales Manager and Vice President of Marketing for Credence Systems Corporation, a semiconductor automatic test equipment Company. Prior to joining Credence Systems, Mr. Carmichael was a sales manager for Tektronix, Inc. TIMOTHY F. MORIARTY joined the Company in 1985 and held various sales and sales management positions within the Company prior to his becoming Vice President of Worldwide Sales in June 1995. Prior to joining Megatest, Mr. Moriarty held various sales and marketing positions at Parallel Systems, Inc. MARK L. SIEGEL joined the Company in 1991 as Vice President of Operations. From 1988 to 1991, Mr. Siegel served as President of Semiconductor Systems, a subsidiary of General Signal. Prior to joining Semiconductor Systems, he held Vice President and Division General Manager positions at VLSI Technology, Inc. and Signetics Corporation. (c) There are no family relationships among the Company's directors and executive officers. (d) Section 16(a) of the Exchange Act requires the Company's executive officers and directors, and persons who own more than 10% of a registered class of the Company's equity securities, to file reports of ownership on Form 3 and changes in ownership on Form 4 or 5 with the Securities Exchange Commission. Such executive officers, directors and 10% stockholders are also required by the Securities and Exchange Commission rules to furnish the Company with copies of all Section 16(a) forms they file. Based solely upon its review of copies of 36 38 such forms received by it, or written representations from certain reporting persons that no filings were required for such persons, the Company believes that during the year ended August 31, 1995, all Section 16(a) filing requirements applicable to its executive officers and directors were complied with. ITEM 11. EXECUTIVE COMPENSATION (a) The following table sets forth all compensation received for services rendered to the Company in all capacities by the Chief Executive Officer and the other most highly compensated executive officers (collectively, the "Named Officers"), for the three fiscal years ended August 31, 1995:
Long-Term Compensation Awards ------------ Annual Compensation Number of ----------------------- Shares Underlying All Other Name and Principal Position Year Salary (1) Bonus Options Compensation (2) --------------------------- ---- ---------- -------- ------------ ---------------- John E. Halter . . . . . . . . . . . 1995 $255,769 $120,000 -- -- President and Chief Executive 1994 255,400 167,500 125,000 $5,703 Officer 1993 254,824 150,000 -- 3,383 Mark L. Siegel . . . . . . . . . . . 1995 141,939 37,350 6,214 -- Vice President of Operations 1994 137,169 40,000 8,000 -- 1993 131,169 85,000 -- -- Fred Azad (3) . . . . . . . . . . . . 1995 156,237 34,000 15,235 -- Vice President of Engineering 1994 130,154 50,000 25,000 -- 1993 -- -- -- -- Timothy Moriarty (4) . . . . . . . . 1995 70,654 137,829 25,000 -- Vice President of Worldwide Sales 1994 70,000 105,587 -- -- 1993 65,819 113,080 -- -- Craig Z. Foster . . . . . . . . . . 1995 125,091 33,750 6,188 -- Vice President of Worldwide Sales 1994 116,250 40,000 -- -- 1993 109,843 50,000 -- -- Paul W. Emery, II . . . . . . . . . . 1995 86,154 39,150 40,000 -- Vice President of Finance and 1994 -- -- -- Chief Financial Officer(5) 1993 -- -- -- -- Donald R. May, III (6) . . . . . . . 1995 132,326 78,274 5,175 -- Former Vice President of 1994 73,192 49,178 25,000 -- Worldwide Sales 1993 -- -- -- --
_____________________ (1) Includes amounts deferred at the election of the executive officer pursuant to the Company's 401(k) plan. (2) Consists of premiums paid by the Company on term life insurance. (3) Mr. Azad joined the Company in September 1993. (4) Mr. Moriarty was named Vice President of Worldwide Sales in June 1995. (5) Mr. Emery joined the Company in February 1995. (6) Mr. May resigned from the Company in June 1995. 37 39 (b) The following table sets forth certain information with respect to stock options granted to each of the Named Officers during the fiscal year ended August 31, 1995. In accordance with the rules of the Securities and Exchange Commission, also shown below is the potential realizable value over the term of the option (the period from the grant date to the expiration date) based on assumed rates of stock appreciation of 5% and 10%, compounded annually. These amounts are based on certain assumed rates of appreciation and do not represent the Company's estimate of future stock price. Actual gains, if any, on stock option exercises will be dependent on the future performance of the Common Stock. OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE -------------------------------------------------------- AT ASSUMED ANNUAL RATES NUMBER OF % OF TOTAL OF STOCK PRICE SHARES OPTIONS APPRECIATION FOR OPTION UNDERLYING GRANTED TO EXERCISE TERM OPTIONS EMPLOYEES IN PRICE EXPIRATION -------------------------- NAME GRANTED FISCAL YEAR PER SHARE DATE 5% 10% ---- ---------- ------------ --------- ---------- ----------- --------- John E. Halter . . . 385(1) 0.1% $ 6.25 01/03/00 $665 $1,469 Mark L. Siegel . . . 6,000(2) 1.3 10.75 03/30/05 40,564 102,796 214(1) 0.1 6.25 01/03/00 370 817 Fred Azad . . . . . 15,000(2) 3.2 10.75 03/30/05 101,409 256,991 235(1) 0.1 6.25 01/03/00 406 897 Timothy F. Moriarty 25,000(2) 5.4 14.38 06/22/05 226,088 572,950 Craig Z. Foster . . 6,000(2) 1.3 10.75 03/30/05 40,564 102,796 188(1) 0.0 6.25 01/03/00 325 717 Paul W. Emery, II . 40,000(1) 8.7 8.88 02/16/00 98,080 216,731 Donald R. May, III . 5,000(2) 1.1 10.75 03/30/05 33,803 85,664 175(1) 0.0 6.25 01/03/00 302 668
(1) Option has a five-year term and vests ratably over four years at the rate of 1/16 of the shares subject to the option every three months. (2) Option has a ten-year term and vests ratably over four years at the rate of 1/16 of the shares subject to the option every three months. (c) The following table provides information with respect to option exercises in fiscal 1995 by the Named Officers and the value of such officers' unexercised options at August 31, 1995: AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SHARES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT SHARES FISCAL YEAR-END FISCAL YEAR END (2) ACQUIRED ON VALUE -------------------------- --------------------------- NAME EXERCISE REALIZED (1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---- ----------- ------------ ----------- ------------- ----------- ------------- John E. Halter . . . 111,950 $1,469,903 46,875 78,510 $398,435 $558,597 Mark L. Siegel . . . 4,750 76,240 9,000 14,214 186,750 137,317 Fred Azad . . . . . -- -- 9,375 30,860 79,685 168,643 Timothy F. Moriarty 47 329 -- 25,000 -- 184,250 Craig Z. Foster . . 3,126 57,456 -- 17,751 -- 186,346 Paul W. Emery, II . -- -- 5,000 35,000 64,375 450,625 Donald R. May, III . 7,812 44,294 -- 22,363 -- 173,732
(1) Market value of underlying shares at the exercise date minus the exercise price. (2) Value of unexercised options is based on the price of the last reported sales price of the Company's Common Stock on the Nasdaq National Market of $21.75 per share on August 25, 1995 (the last trading day for fiscal 1995) minus the exercise price. 38 40 (d) The Company currently pays each nonemployee director: $1,000 for each Board of Directors meeting attended in person; $500 for each Board of Directors meeting attended by teleconference; and $500 for each meeting of a committee of the Board of Directors. Nonemployee directors are entitled to participate in the Director Option Plan (the "Director Plan"). The Director Plan was adopted by the Board of Directors in November 1992 and approved by the stockholders in December 1992. A total of 50,000 shares of Common stock have been reserved for issuance under the Director Plan. The Director Plan provides for an automatic grant of an option to purchase 5,000 shares of Common Stock to each new nonemployee director on the date on which the person first becomes such a director. Each such option shall have a term of ten years and vest at a rate of 1/16th of the shares subject to the option at the end of each three months following the date of grant. The exercise price of the option may not be less than 100% of the fair market value of the Common Stock as determined by the closing price as reported on the Nasdaq National Market on the last business day prior to the date of grant. Options granted under the Director Plan must be exercised within 60 days of the end of the optionee's tenure as a director of the Company, or within 12 months after such director's termination by death or disability. The Director Plan was adopted to provide options in compliance with Rule 16b-3 promulgated under the Securities Exchange Act to the nonemployee directors who administer the Company's stock plans. (e) The Company's Compensation Committee currently consists of directors James W. Bagley and Winston H. Chen, Ph.D. The Compensation Committee reviews and approves, subject to approval by the Board of Directors with respect to the Chief Executive Officer, the compensation of the Company's executive officers and administers the Company's stock option and purchase plans. No executive officer of the Company served on the compensation committee of another entity or on any other committee of the board of directors of another entity performing similar functions during the last fiscal year. (f) In March 1994, the Board of Directors approved an amendment to the option agreements held by the Company's executive officers, including each Named Executive Officer, to accelerate the vesting of options held by such officers under certain circumstances following a change-in-control. The amendment provides that if, within twelve months following a change-in-control, an executive officer is terminated other than for cause, or such officer resigns voluntarily for good reason, then any and all options to purchase the Common Stock held by such officer will become fully vested and exercisable regardless of whether such options are then exercisable in accordance with their terms. However, the amendment prohibits such acceleration if it prevents the Company from accounting for a business combination as a "pooling of interests" when such accounting is desired. 39 41 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information known to the Company with respect to beneficial ownership of the Company's Common Stock as of October 17, 1995 by (i) each beneficial owner of more than 5% of the Company's Common Stock, (ii) each Named Officer, (iii) each director of the Company and (iv) all directors and executive officers of the Company as a group. Except as otherwise indicated, each person has sole voting and investment power with respect to all shares shown as beneficially owned, subject to community property laws where applicable.
BENEFICIAL OWNER APPROXIMATE SHARES PERCENTAGE BENEFICIALLY BENEFICIALLY OWNED OWNED FMR Corp.(1) .................................................................. 832,900 11.2 Edward C. Johnson 3d(1) 82 Devonshire Street Boston, MA 02109 John E. Halter(2) ............................................................. 200,834 2.7 Mark L. Siegel(3) ............................................................. 19,340 * Fred Azad(4) .................................................................. 15,027 * Timothy F. Moriarty(5) ........................................................ 1,562 * Craig Z. Foster(6) ............................................................ 39,469 * Paul W. Emery, II(7) .......................................................... 7,500 * Donald R. May, III(8) ......................................................... 4,043 * James W. Bagley(9) ............................................................ 8,124 * Stephen J. Bisset(10) ......................................................... 82,636 1.1 Winston H. Chen, Ph.D.(11) .................................................... 81,562 1.1 David A. Hodges(12) ........................................................... 1,962 * Steven J. Sharp(13) ........................................................... 13,375 * All directors and executive officers as a group (13 persons)(14) .............. 489,556 6.6
* Less than one percent of the outstanding Common Stock. 1. As reported by FMR Corp. ("FMR") on October 18, 1995. Includes 832,900 shares beneficially owned by Fidelity Management & Research Company a wholly-owned subsidiary of FMR. FMR has sole voting power with respect to none of these shares and has sole investment power with respect to 832,900 shares. Edward C. Johnson 3d, Chairman of FMR, together with various trusts for the benefit of Johnson family members, form a controlling group with respect to FMR. Such controlling group has sole dispositive power with respect to 832,900 shares. 2. Consists of 137,950 shares held by the trustee of the Halter Family Trust U/D/T September 30, 1992 and 62,884 shares issuable under stock options exercisable within 60 days of October 17, 1995. 3. Includes 17,964 shares issuable under stock options exercisable within 60 days of October 17, 1995. 4. Includes 15,027 shares issuable under stock options exercisable within 60 days of October 17, 1995. 5. Consists of 1,562 shares issuable under stock options exercisable within 60 days of October 17, 1995. 6. Includes 12,501 shares issuable under stock options exercisable within 60 days of October 17, 1995. 7. Consists of 7,500 shares issuable under stock options exercisable within 60 days of October 17, 1995. 8. Includes 175 shares issuable under stock options exercisable within 60 days of October 17, 1995. 9. Consists of 8,124 shares issuable under stock options exercisable within 60 days of October 17, 1995. 10. Includes 3,125 shares issuable under stock options exercisable within 60 days of October 17, 1995. 11. Includes 1,562 shares issuable under stock options exercisable within 60 days of October 17, 1995. 12. Includes 1,562 shares issuable under stock options exercisable within 60 days of October 17, 1995. 13. Includes 3,125 shares issuable under stock options exercisable within 60 days of October 17, 1995. 14. Includes 152,433 shares issuable under stock options exercisable within 60 days of October 17, 1995. 40 42 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Dr. Chen, a director of the Company, served as a member of the Board of Directors of Solectron during the Company's last fiscal year. The Company subcontracts the procurement and manufacture of a substantial portion of its products through Solectron. Under the terms of the Company's current agreement with Solectron, the Company purchases products at prices determined in accordance with Solectron's current price list. The Company is obligated to purchase products from Solectron only to the extent it places purchase orders. Either party may terminate the agreement upon providing 180 days prior written notice to the other party. During fiscal 1995, the Company's purchases from Solectron totaled approximately $17.1 million. 41 43 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this report: (1) Consolidated Financial Statements. The Company's consolidated financial statements and related notes are included in Item 8 of this Annual Report on Form 10-K. An index to the information provided in Item 8 is provided on page 19 of this Annual Report on Form 10-K. (2) Consolidated Financial Statement Schedules. All consolidated financial statement schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. (3) Exhibits.
EXHIBIT NO. DESCRIPTION OF EXHIBITS --- ----------------------- 2.1(1) Agreement and Plan of Merger between Registrant and Megatest Corporation, a California corporation, effective March 12, 1993. 3.1(4) Restated Certificate of Incorporation of Registrant. 3.2(1) Bylaws of Registrant. 4.1(1) Form of Common Stock certificate. 10.1(1)* 1981 Incentive Stock Option Plan and forms of Incentive Stock Option Agreement and Nonstatutory Stock Option Agreement thereunder. 10.2(1) Form of Indemnification Agreement entered into between the Registrant and its directors and officers. 10.3a(7)* 1990 Stock Option Plan, as amended January 12, 1995. 10.3b(1)* Forms of Incentive Stock Option Agreement and Nonstatutory Stock Option Agreement under the 1990 Stock Option Plan. 10.4(4) Purchase Order Agreement dated as of March 3, 1994 between the Registrant and Solectron Corporation. 10.5(1)* Employee Stock Purchase Plan and form of Subscription Agreement. 10.6(1)* Director Option Plan and form of Option Agreement. 10.7(1)(2) Product Purchase Option Agreement dated February 11, 1993 between the Registrant and Texas Instruments Incorporated. 10.8(3) Purchase and Sale Agreement between the Registrant and Great-West Life & Annuity Insurance Company dated September 15, 1993. 10.9(5) Borrower Agreement between the Registrant and Bank of the West dated February 10, 1995. 10.10(6) Loan and Security Agreement between the Registrant and Bank of the West dated July 6, 1995.
42 44 10.11 Master Lease Agreement between the Registrant and General Electric Capital Corporation dated August 10, 1995. 10.12 Loan and Security Agreement between the Registrant and the CIT Group/Equipment Financing, Inc. dated August 14, 1995. 10.13 Deed of Trust, Financing Statement, Security Agreement and Fixture Filing between the Registrant and the Sun Life Assurance Company of Canada (U.S.) dated August 25, 1995. 10.14 Agreement and Plan of Merger and Reorganization among the Registrant, Teradyne, Inc. and M Merger Corp. dated September 5, 1995. 10.15* Form of Executive Officer Stock Option Agreement under the 1990 Stock Option Plan. 11.1 Statement Re Computation of Per Share Earnings. 21.1 Subsidiaries. 23.1 Consent of Price Waterhouse LLP, Independent Accountants. 23.2 Consent of Deloitte & Touche LLP, Independent Auditors. 24.1 Power of Attorney (see page 44). 27 Financial Data Schedule
____________ * The item listed is a compensatory plan. (1) Previously filed as an Exhibit to the Registrant's Registration Statement on Form S-1 (No. 33-60686). (2) Confidential treatment granted for certain portions. (3) Previously filed as an Exhibit to the Registrant's Registration Statement on Form S-1 (No. 33-69164). (4) Previously filed as an Exhibit to the Registrant's Form 10-K for the year ended August 31, 1994. (5) Previously filed as an Exhibit to the Registrant's Form 10-Q for the quarter ended February 28, 1995. (6) Previously filed as an Exhibit to the Registrant's Form 10-Q for the quarter ended May 31, 1995. (7) Previously filed as an Exhibit to the Registrant's Registration Statement on Form S-8 (No. 33-58809). (b) Reports on Form 8-K: On its current report on Form 8-K dated September 5, 1995, the Company announced that it had entered into an Agreement and Plan of Merger and Reorganization with Teradyne, Inc. and M Merger Corp., a wholly owned subsidiary of Teradyne. (c) Exhibits: Exhibits are listed in Item 14(a)(3) above and are included elsewhere in this Annual Report on Form 10-K. (d) Not applicable. 43 45 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized. MEGATEST CORPORATION By: /s/ JOHN E. HALTER ------------------------------- John E. Halter Chairman, President and Chief Executive Officer October 23, 1995 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints John E. Halter and Paul W. Emery II, and each of them acting individually, as his attorneys-in-fact, each with full power of substitution, for him in any and all capacities, to sign any and all amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report on Form 10-K has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ JOHN E. HALTER Chairman, President and Chief Executive Officer October 23, 1995 -------------------------- (Principal Executive Officer) (John E. Halter) /s/ PAUL W. EMERY II Vice President, Finance and Chief Financial Officer October 23, 1995 --------------------------- (Principal Financial and Accounting Officer) (Paul W. Emery II) /s/ JAMES W. BAGLEY Director October 23, 1995 --------------------------- (James W. Bagley) /s/ STEPHEN J. BISSET Director October 23, 1995 --------------------------- (Stephen J. Bisset) /s/ WINSTON H. CHEN, Ph.D. Director October 23, 1995 --------------------------- (Winston H. Chen, Ph.D.) /s/ DAVID A. HODGES Director October 23, 1995 --------------------------- (David A. Hodges) /s/ STEVEN J. SHARP Director October 23, 1995 --------------------------- (Steven J. Sharp)
44 46 MEGATEST CORPORATION ANNUAL REPORT ON FORM 10-K FOR YEAR ENDED AUGUST 31, 1995 INDEX TO EXHIBITS
Exhibit Number Title to Exhibit ----------------- ------------------------------------------------------------------------------------------- 10.11 Master Lease Agreement between the Registrant and General Electric Capital Corporation dated August 10, 1995. 10.12 Loan and Security Agreement between the Registrant and the CIT Group/Equipment Financing, Inc. dated August 14, 1995. 10.13 Deed of Trust, Financing Statement, Security Agreement and Fixture Filing between the Registrant and the Sun Life Assurance Company of Canada (U.S.) dated August 25, 1995. 10.14 Agreement and Plan of Merger and Reorganization among the Registrant, Teradyne, Inc. and M Merger Corp. dated September 5, 1995. 10.15 Form of Executive Officer Stock Option Agreement under the 1990 Stock Option Plan. 11.1 Statement Re Computation of Per Share Earnings 21.1 Subsidiaries of the Company 23.1 Consent of Independent Accountants 23.2 Independent Auditors' Consent 24.1 Power of Attorney (see page 44) 27 Financial Data Schedule
45 EX-10.11 2 MASTER LEASE AGREEMENT 1 EXHIBIT 10.11 (1)MASTER LEASE AGREEMENT THIS MASTER LEASE AGREEMENT, dated as of 8/10, 1995 ("Agreement"), between General Electric Capital Corporation, with an office at 2200 Powell Street, Suite 600, Emeryville, CA 94608-1809 (hereinafter called, together with its successors and assigns, if any, "Lessor"), and Megatest Corporation, a corporation organized and existing under the laws of the State of Delaware with its mailing address and chief place of business at 1321 Ridder Park Drive, San Jose, CA 95131, (hereinafter called "Lessee"). WITNESSETH: I. LEASING: (a) Subject to the terms and conditions set forth below, Lessor agrees to lease to Lessee, and Lessee agrees to lease from Lessor, the equipment ("Equipment") described in Annex A to any schedule hereto ("Schedule"). Terms defined in a Schedule and not otherwise defined herein shall have the meanings ascribed to them in such Schedule. (b) The obligation of Lessor to purchase Equipment from the manufacturer or supplier thereof ("Supplier") and to lease the same to Lessee under any Schedule shall be subject to receipt by Lessor, prior to the Lease Commencement Date (with respect to such Equipment), of each of the following documents in form and substance satisfactory to Lessor: (i) a Schedule relating to the Equipment then to be leased hereunder, (ii) a Purchase Order Assignment and Consent in the form of Annex B to the applicable Schedule, unless Lessor shall have delivered its purchase order for such Equipment, (iii) evidence of insurance which complies with the requirements of Section IX, and (iv) such other documents as Lessor may reasonably request. As a further condition to such obligations of Lessor, Lessee shall, upon delivery of such Equipment (but not later than the Last Delivery Date specified in the applicable Schedule) execute and deliver to Lessor a Certificate of Acceptance (in the form of Annex C to the applicable Schedule) covering such Equipment, and deliver to Lessor a bill of sale therefor (in form and substance satisfactory to Lessor). Lessor hereby appoints Lessee its agent for inspection and acceptance of the Equipment from the Supplier. Upon execution by Lessee of any Certificate of Acceptance, the Equipment described thereon shall be deemed to have been delivered to, and irrevocably accepted by, Lessee for lease hereunder. II. TERM, RENT AND PAYMENT: (a) The rent payable hereunder and Lessee's right to use the Equipment shall commence on the date of execution by Lessee of the Certificate of Acceptance for such Equipment ("Lease Commencement Date"). The term of this Agreement shall be the period specified in the applicable Schedule. If any term is extended, the word "term" shall be deemed to refer to a extended terms, and all provisions of this Agreement shall apply during any extended terms, except as may be otherwise specifically provided in writing. (b) Rent shall be paid to Lessor at its address stated above, except as otherwise directed by Lessor. Payments of rent shall be in the amount set forth in, and due in accordance with, the provisions of the applicable Schedule. If one or more Advance Rentals are payable, such Advance Rental shall be (i) set forth on the applicable Schedule, (ii) due upon acceptance by Lessor of such Schedule, and (iii) when received by Lessor, applied to the first rent payment and the balance, if any, to the final rental payment(s) under such Schedule. In no event shall any Advance Rental or any other rent payments be refunded to Lessee. If rent is not paid within ten days of its due date, Lessee agrees to pay a late charge of five cents ($0.05) per dollar on, and in addition to, the amount of such rent but not exceeding the lawful maximum, if any. - --------------------------- (1) Non-standard document. -1- 2 III. TAXES: Lessee shall have no liability for taxes imposed by the United States of America or any State or political subdivision thereof or any other jurisdiction which are on or measured by the net income of Lessor. Lessee shall report (to the extent that it is legally permissible) and pay promptly all other taxes, fees and assessments due, imposed, assessed or levied against any Equipment (or the purchase, ownership, delivery, leasing, possession, use or operation thereof), this Agreement (or any rentals or receipts hereunder), any Schedule, Lessor or Lessee by any foreign, federal, state or local government or taxing authority during or related to the term of this Agreement, including, without limitation, all license and registration fees, and all sales, use, personal property, excise, gross receipts, franchise, stamp or other taxes, imposts, duties and charges, together with any penalties, fines or interest thereon (all hereinafter called "Taxes"). Lessee shall (i) reimburse Lessor upon receipt of written request for reimbursement for any Taxes charged to or assessed against Lessor, (ii) on request of Lessor, submit to Lessor written evidence of Lessee's payment of Taxes, (iii) on all reports or returns show the ownership of the Equipment by Lessee, and (iv) send a copy thereof to Lessor. IV. REPORTS: (a) Lessee will notify Lessor in writing, within ten days after any tax or other lien shall attach to any Equipment, of the full particulars thereof and of the location of such Equipment on the date of such notification. (b) Lessee will within 90 days of the close of each fiscal year of Lessee, deliver to Lessor, Lessee's balance sheet and profit and loss statement, certified by a recognized firm of certified public accountants. Upon request Lessee will deliver to Lessor quarterly, within 90 days of the close of each fiscal quarter of Lessee, in reasonable detail, copies of Lessee's quarterly financial report certified by the chief financial officer of Lessee. (c) Lessee will permit Lessor, upon one business day's notice, to inspect any Equipment during normal business hours. (d) Lessee will keep the Equipment at the Equipment Location (specified in the applicable Schedule) and will promptly notify Lessor of any relocation of Equipment. Upon the written request of Lessor, Lessee will notify Lessor forthwith in writing of the location of any Equipment as of the date of such notification. (e) Lessee will promptly and fully report to Lessor in writing if any Equipment is lost or damaged (where the estimated repair costs would exceed 10% of its then fair market value), or is otherwise involved in an accident causing personal injury or property damage. (f) Within 60 days after any request by Lessor, Lessee will furnish a certificate of an authorized officer of Lessee stating that he has reviewed the activities of Lessee and that, to the best of his knowledge, there exists no default (as described in Section XI) or event which with notice or lapse of time (or both) would become such a default. V. DELIVERY, USE AND OPERATION: (a) All Equipment shall be shipped directly from the Supplier to Lessee. (b) Lessee agrees that the Equipment will be used by Lessee solely in the conduct of its business and in a mariner complying with all applicable federal, state, and local laws and regulations. (c) LESSEE SHALL NOT ASSIGN, MORTGAGE, SUBLET OR HYPOTHECATE ANY EQUIPMENT, OR THE INTEREST OF LESSEE HEREUNDER, NOR SHALL LESSEE REMOVE ANY EQUIPMENT FROM THE CONTINENTAL UNITED STATES, WITHOUT THE PRIOR WRITTEN CONSENT OF THE LESSOR. (d) Lessee will keep the Equipment free and clear of all liens and encumbrances other than those which result from acts of Lessor. VI. SERVICE: (a) Lessee will, at its sole expense, maintain each unit of Equipment in good operating order, repair, condition and appearance in accordance with manufacturer's recommendations, normal -2- 3 wear and tear excepted. Lessee shall, if at any time requested by Lessor, affix in a prominent position on each unit of Equipment plates, tags or other identifying labels showing the interest therein of Lessor. (b) Lessee will not, without the prior consent of Lessor, affix or install any accessory, equipment or device on any Equipment if such addition will impair the originally intended function or use of such Equipment. All additions, repairs, parts, supplies, accessories, equipment, and devices furnished, attached or affixed to any Equipment which are not readily removable shall be made only in compliance with applicable law, and shall become the property of Lessor. Lessee will not, without the prior written consent of Lessor and subject to such conditions as Lessor may impose for its protection, affix or install any Equipment to or in any other personal or real property. (c) Any alterations or modifications to the Equipment that may, at any time during the term of this Agreement, be required to comply with any applicable law, rule or regulation shall be made at the expense of Lessee. VII. STIPULATED LOSS VALUE: Lessee shall promptly and fully notify Lessor in writing if any unit of Equipment shall be or become worn out, lost, stolen, destroyed, irreparably damaged in the reasonable determination of Lessee, or permanently rendered unfit for use from any cause whatsoever (such occurrences being hereinafter called "Casualty Occurrences"). On the rental payment date next succeeding a Casualty Occurrence (the "Payment Date"), Lessee shall pay Lessor the sum of (x) the Stipulated Loss Value of such unit calculated as of the rental payment date next preceding such Casualty Occurrence ("Calculation Date",); and (y) all rental and other amounts which are due hereunder as of the Payment Date. Upon payment of all sums due hereunder, the term of this lease as to such unit shall terminate and (except in the case of the loss, theft or complete destruction of such unit) Lessee shall be entitled to retain possession of such unit. VIII. LOSS OR DAMAGE: Lessee hereby assumes and shall bear the entire risk of any loss, theft, damage to, or destruction of, any unit of Equipment from any cause whatsoever from the time the Equipment is shipped to Lessee until it is returned to Lessor. IX. INSURANCE: Lessee agrees, at its own expense, to keep all Equipment insured for such amounts and against such hazards as Lessor may require, including, but not limited to, insurance for damage to or loss of such Equipment and liability coverage for personal injuries, death or property damage, with Lessor named as additional insured and with a loss payable clause in favor of Lessor, as its interest may appear, irrespective of any breach of warranty or other act or omission of Lessee. All such policies shall be with companies, and on terms, satisfactory to Lessor. Lessee agrees to deliver to Lessor evidence of insurance satisfactory to Lessor. No insurance shall be subject to any co-insurance clause. Lessee hereby appoints Lessor as Lessee's attorney-in-fact to make proof of loss and claim for insurance, and to make adjustments with insurers and to receive payment of and execute or endorse all documents, checks or drafts in connection with payments made as a result of such insurance policies. Any expense of Lessor in adjusting or collecting insurance shall be borne by Lessee. Lessee will not make adjustments with insurers except (i) with respect to claims for damage to any unit of Equipment where the repair costs do not exceed 10% of such unit's fair market value, or (ii) with Lessor's written consent. Said policies shall provide that the insurance may not be altered or canceled by the insurer until after thirty (30) days written notice to Lessor. Lessor may, at its option, apply proceeds of insurance, in whole or in part, to (i) repair or replace Equipment or any portion thereof, or (ii) satisfy any obligation of Lessee to Lessor hereunder. -3- 4 X. RETURN OF EQUIPMENT: (a) Upon any expiration or termination of this Agreement or any Schedule, Lessee shall promptly, at its own cost and expense: (i) perform any testing and repairs required to place the affected units of Equipment in the same condition and appearance as when received by Lessee (reasonable wear and tear excepted) and in good working order for their originally intended purpose; (ii) if deinstallation, disassembly or crating is required, cause such units to be deinstalled, disassembled and crated by an authorized manufacturer's representative or such other service person as is satisfactory to Lessor; and (iii) return such units to a location within the continental United States as Lessor shall direct. (b) Until Lessee has fully complied with the requirements of Section X(a) above, Lessee's rent payment obligation and all other obligations under this Agreement shall continue from month to month notwithstanding any expiration or termination of the lease term. Lessor may terminate such continued leasehold interest upon ten (10) days notice to Lessee. XI. DEFAULT: (a) Lessor may in writing declare this Agreement in default if: Lessee breaches its obligation to pay rent or any other sum when due and fails to cure the breach within ten (10) days; Lessee breaches any of its insurance obligations under Section IX; Lessee breaches any of its other obligations and fails to cure that breach within thirty (30) days after written notice thereof; any representation or warranty made by Lessee in connection with this Agreement shall be false or misleading in any material respect; Lessee becomes insolvent or ceases to do business as a going concern; any Equipment is illegally used; or a petition is filed by or against Lessee under any bankruptcy or insolvency laws and is not dismissed within 60 days if such petition is involuntarily filed. Such declaration shall apply to all Schedules except as specifically excepted by Lessor. (b) After default, at the request of Lessor, Lessee shall comply with the provisions of Section X(a). Lessee hereby authorizes Lessor to enter, with or without legal process, any premises where any Equipment is believed to be and take possession thereof. Lessee shall, without further demand, forthwith pay to Lessor (i) as liquidated damages for loss of a bargain and not as a penalty, the Stipulated Loss Value of the Equipment (calculated as of the rental next preceding the declaration of default), and (ii) all rentals and other sums then due hereunder. Lessor may, but shall not be required to, sell Equipment at private or public sale, in bulk or in parcels, with or without notice, and without having the Equipment present at the place of sale; or Lessor may, but shall not be required to, lease, otherwise dispose of or keep idle all or part of the Equipment; and Lessor may use Lessee's premises for any or all of the foregoing without liability for rent, costs, damages or otherwise. The proceeds of sale, lease or other disposition, if any, shall be applied in the following order of priorities: (1) to pay all of Lessor's reasonable costs, charges and expenses incurred in taking, removing, holding, repairing and selling, leasing or otherwise disposing of Equipment; then, (2) to the extent not previously paid by Lessee, to pay Lessor all sums due from Lessee hereunder; then (3) to reimburse to Lessee any sums previously paid by Lessee as liquidated damages; and (4) any surplus shall be paid to Lessee. Lessee shall pay any deficiency in (1) and (2) forthwith. (c) The foregoing remedies are cumulative, and any or all thereof may be exercised in lieu of or in addition to each other or any remedies at law, in equity, or under statute. Lessee waives notice of sale or other disposition (and the time and place thereof), and the manner and place of any advertising. If permitted by law, Lessee shall pay reasonable attorney's fees actually incurred by Lessor in enforcing the provisions of this Lease and any ancillary documents. Waiver of any default shall not be a waiver of any other or subsequent default. (d) Any default under the terms of this or any other agreement between Lessor and Lessee may be declared by Lessor a default under this and any such other agreement. -4- 5 XII. ASSIGNMENT: Lessor may, without the consent of Lessee, assign this Agreement or any Schedule. Lessee agrees that if Lessee receives written notice of an assignment from Lessor, Lessee will pay all rent and other amounts payable under any assigned Equipment Schedule to such assignee or as instructed by Lessor. Lessee further agrees to confirm in writing receipt of a notice of assignment as may be reasonably requested by assignee. Lessee hereby waives and agrees not to assert against any such assignee any defense, set-off, recoupment claim or counterclaim which Lessee has or may at any time have against Lessor for any reason whatsoever. Notwithstanding such assignment or any provision hereof to the contrary, Lessee may assert directly against Lessor any such claims that arise on account of any act, omission, event or occurrence that shall have taken place before such assignment. XIII. NET LEASE; NO SET-OFF, ETC.: This Agreement is a net lease. Lessee's obligation to pay rent and other amounts due hereunder shall be absolute and unconditional. Lessee shall not be entitled to any abatement or reductions of, or set-offs against, said rent or other amounts, including, without limitation, those arising or allegedly arising out of claims (present or future, alleged or actual, and including claims arising out of strict tort or negligence of Lessor) of Lessee against Lessor under this Agreement or otherwise. Nor shall this Agreement terminate or the obligations of Lessee be affected by reason of any defect in or damage to, or loss of possession, use or destruction of, any Equipment from whatsoever cause. It is the intention of the parties that rents and other amounts due hereunder shall continue to be payable in all events in the manner and at the times set forth herein unless the obligation to do so shall have been terminated pursuant to the express terms hereof. XIV. INDEMNIFICATION: (a) Lessee hereby agrees to indemnify, save and keep harmless Lessor, its agents, employees, successors and assigns from and against any and all losses, damages, penalties, injuries, claims, actions and suits, including legal expenses ("Damages"), of whatsoever kind and nature, in contract or tort, whether caused by the active or passive negligence of Lessor or otherwise, and including, but not limited to, Lessor's strict liability in tort, arising out of (i) the selection, manufacture, purchase, acceptance or rejection of Equipment, the ownership of Equipment during the term of this Agreement, and the delivery, lease, possession, maintenance, uses, condition, return or operation of Equipment (including, without limitation, latent and other defects, whether or not discoverable by Lessor or Lessee and any claim for patent, trademark or copyright infringement or environmental damage) or (ii) the condition of Equipment sold or disposed of after use by Lessee, any sublessee or employees of Lessee. Lessee shall, upon request, defend any actions based on, or arising out of, any of the foregoing. (b) All of Lessor's rights, privileges and indemnities contained in this Section XIV shall survive the expiration or other termination of this Agreement and the rights, privileges and indemnities contained herein are expressly made for the benefit of, and shall be enforceable by Lessor, its successors and assigns. Notwithstanding any provision hereof to the contrary, Lessee shall have no obligations to indemnify Lessor against any Damages to the extent they are suffered or incurred on account of Lessor's gross negligence or willful misconduct. XV. DISCLAIMER: LESSEE ACKNOWLEDGES THAT IT HAS SELECTED THE EQUIPMENT WITHOUT ANY ASSISTANCE FROM LESSOR, ITS AGENTS OR EMPLOYEES. LESSOR DOES NOT MAKE, HAS NOT MADE, NOR SHALL BE DEEMED TO MAKE OR HAVE MADE, ANY WARRANTY OR REPRESENTATION, EITHER EXPRESS OR IMPLIED, WRITTEN OR ORAL, -5- 6 WITH RESPECT TO THE EQUIPMENT LEASED HEREUNDER OR ANY COMPONENT THEREOF, INCLUDING, WITHOUT LIMITATION, ANY WARRANTY AS TO DESIGN, COMPLIANCE WITH SPECIFICATIONS, QUALITY OF MATERIALS OR WORKMANSHIP, MERCHANTABILITY, FITNESS FOR ANY PURPOSE, USE OR OPERATION, SAFETY, PATENT, TRADEMARK OR COPYRIGHT INFRINGEMENT, OR TITLE. All such risks, as between Lessor and Lessee, are to be borne by Lessee. Without limiting the foregoing, Lessor shall have no responsibility or liability to Lessee or any other person with respect to any of the following, except to the extent caused by the gross negligence or willful misconduct of Lessor (i) any liability, loss or damage caused or alleged to be caused directly or indirectly by any Equipment, any inadequacy thereof, any deficiency or defect (latent or otherwise) therein, or any other circumstance in connection therewith; (ii) the use, operation or performance of any Equipment or any risks relating thereto; (iii) any interruption of service, loss of business or anticipated profits or consequential damages; or (iv) the delivery, operation, servicing, maintenance, repair, improvement or replacement of any Equipment. If, and so long as, no default exists under this Lease, Lessee shall be, and hereby is, authorized during the term of this Lease to assert and enforce, at Lessee's sole cost and expense, from time to time, in the name of and for the account of Lessor and/or Lessee, as their interests may appear, whatever claims and rights Lessor may have against any Supplier of the Equipment. XVI. REPRESENTATIONS AND WARRANTIES OF LESSEE: Lessee hereby represents and warrants to Lessor that on the date hereof and on the date of execution of each Schedule: (a) Lessee has adequate power and capacity to enter into, and perform under, this Agreement and all related documents (together, the "Documents") and is duly qualified to do business wherever necessary to carry on its present business and operations, including the jurisdiction(s) where the Equipment is or is to be located. (b) The Documents have been duly authorized, executed and delivered by Lessee and constitute valid, legal and binding agreements, enforceable in accordance with their terms, except to the extent that the enforcement of remedies therein provided may be limited under applicable bankruptcy and insolvency laws. (c) No approval, consent or withholding of objections is required from any governmental authority or instrumentality with respect to the entry into or performance by Lessee of the Documents except such as have already been obtained. (d) The entry into and performance by Lessee of the Documents will not: (i) violate any judgment, order, law or regulation applicable to Lessee or any provision of Lessee's Certificate of Incorporation or By-Laws; or (ii) result in any breach of, constitute a default under or result in the creation of any lien, charge, security interest or other encumbrance upon any Equipment pursuant to any indenture, mortgage, deed of trust, bank loan or credit agreement or other instrument (other than this Agreement) to which Lessee is a party. (e) There are no suits or proceedings pending or threatened in court or before any commission, board or other administrative agency against or affecting Lessee, which will have a material adverse effect on the ability of Lessee to fulfill its obligations under this Agreement. (f) The Equipment accepted under any Certificate of Acceptance is and will remain tangible personal property. (g) Each Balance Sheet and Statement of Income delivered to Lessor has been prepared in accordance with generally accepted accounting principles, and since the date of the most recent such Balance Sheet and Statement of Income, there has been no material adverse change in the financial condition of Lessee and its subsidiaries taken as a whole. (h) Lessee is and will be at all times validly existing and in good standing under the laws of the State of its incorporation (specified in the first sentence of this Agreement). (i) The Equipment will at all times be used for commercial or business purposes. XVII. OWNERSHIP FOR TAX PURPOSES, GRANT OF SECURITY INTEREST; USURY SAVINGS: -6- 7 (a) For income tax purposes, Lessor will treat Lessee as the owner of the Equipment. Accordingly, Lessor will not claim any tax benefits available to an owner of the Equipment. (b) Lessee hereby grants to Lessor a first security interest in the Equipment, together with all additions, attachments, accessions, accessories and accessions thereto whether or not furnished by the Supplier of the Equipment and any and all substitutions, replacements or exchanges therefor, and any and all insurance and/or other proceeds of the property in and against which a security interest is granted hereunder. (c) It is the intention of the parties hereto to comply with any applicable usury laws to the extent that any Schedule is determined to be subject to such laws; accordingly, it is agreed that, notwithstanding any provision to the contrary in any Schedule or the Lease, in no event shall any Schedule require the payment or permit the collection of interest in excess of the maximum amount permitted by applicable law. If any such excess interest is contracted for, charged or received under any Schedule or the Lease, or in the event that all of the principal balance shall be prepaid, so that under any of such circumstances the amount of interest contracted for, charged or received under any Schedule or the Lease shall exceed the maximum amount of interest permitted by applicable law, then in such event (a) the provisions of this paragraph shall govern and control, (b) neither Lessee nor any other person or entity now or hereafter liable for the payment hereof shall be obligated to pay the amount of such interest to the extent that it is in excess of the maximum amount of interest permitted by applicable law, (c) any such excess which may have been collected shall be either applied as a credit against the then unpaid principal balance or refunded to Lessee, at the option of the Lessor, and (d) the effective rate of interest shall be automatically reduced to the maximum lawful contract rate allowed under applicable law as now or hereafter construed by the courts having jurisdiction thereof. It is further agreed that without limitation of the foregoing, all calculations of the rate of interest contracted for, charged or received under any Schedule or the Lease which are made for the purpose of determining whether such rate exceeds the maximum lawful contract rate, shall be made, to the extent permitted by applicable law, by amortizing, prorating, allocating and spreading in equal parts during the period of the full stated term of the indebtedness evidenced hereby, all interest at any time contracted for, charged or received from Lessee or otherwise by Lessor in connection with such indebtedness; provided, however, that if any applicable state law is amended or the law of the United States of America preempts any applicable state law, so that it becomes lawful for Lessor to receive a greater interest per annum rate than is presently allowed, the Lessee agrees that, on the effective date of such amendment or preemption, as the case may be, the lawful maximum hereunder shall be increased to the maximum interest per annum rate allowed by the amended state law or the law of the United States of America. XVIII. EARLY TERMINATION: (a) On or after the First Termination Date (specified in the applicable Schedule), Lessee may, so long as no default exists hereunder, terminate this Agreement as to all (but not less than all) of the Equipment on such Schedule as of a rent payment date ("Termination Date") upon at least 90 days prior written notice to Lessor. (b) Lessee shall, and Lessor may, solicit cash bids for the Equipment on an AS IS, WHERE IS BASIS without recourse to or warranty from Lessor, express or implied ("AS IS BASIS"). On or prior to the Termination Date, Lessee shall (i) certify to Lessor any bids received by Lessee and (ii) pay to Lessor (A) the Termination Value (calculated as of the rental due on the Termination Date) for the Equipment, and (B) all rent and other sums due and unpaid as of the Termination Date. (c) Provided that all amounts due hereunder have been paid on the Termination Date, Lessor and Lessee shall (i) sell the Equipment on an AS IS BASIS, for cash to the highest bidder and (ii) the proceeds of such sale (net of any related expenses) shall be refunded to Lessee. If such sale is not consummated, no termination shall occur and Lessor shall refund the Termination Value (less -7- 8 any expenses incurred by Lessor) to Lessee. (d) Notwithstanding the foregoing, Lessor may elect by written notice, at any time prior to the Termination Date, not to sell the Equipment. In that event, on the Termination Date Lessee shall (i) return the Equipment (in accordance with Section X) and (ii) pay to Lessor all amounts required under Section XVIII(b) less the amount of the highest bid certified by Lessee to Lessor. XIX. EARLY PURCHASE OPTION: (a) Provided that the Lease has not been earlier terminated and provided, further that Lessee is not in default under the Lease or any other agreement between Lessor and Lessee, Lessee may, UPON AT LEAST 30 DAYS BUT NOT MORE THAN 270 DAYS PRIOR WRITTEN NOTICE TO LESSOR OF LESSEE'S IRREVOCABLE ELECTION TO EXERCISE SUCH OPTION, purchase all (but not less than all) of the Equipment listed and described in any Schedule on an AS IS BASIS on any Rent Payment Date following the First Termination Date as set forth in such Schedule, and prior to the date which is the scheduled expiration of such Schedule (the "Early Purchase Date"), for a price equal to the sum of (i) the Termination Value (calculated as of the Early Purchase Date) for the Equipment, and (ii) all rent and other sums due and unpaid as of the Early Purchase Date (such sum being the "Early Option Price"), plus all applicable sales taxes. (The purchase option granted by this subsection shall be referred to herein as the "Early Purchase Option".) (b) If Lessee exercises its Early Purchase Option with respect to the Equipment leased under any Schedule, then on the Early Purchase Date Lessee shall pay to Lessor in immediately available funds the Early Option Price, plus all applicable sales taxes. XX. END OF LEASE OPTIONS: So long as Lessee shall not have exercised its option to terminate this Lease pursuant to Section XVIII hereof or exercise its Early Purchase Option pursuant to Section XIX hereof, and provided that Lessee is not in default under this Lease or any other agreement between Lessor and Lessee, Lessee shall have the option, upon the scheduled expiration of the term of any Schedule, to return or to purchase, for the applicable Realized Value (as defined below), all (but not less than all) of the Equipment leased under such Schedule upon the following terms and conditions: (a) Determination of Realized Value. The Realized Value for each item of Equipment on the Schedule shall be determined as follows: (i) If Lessee elects to purchase the Equipment, the Realized Value of each item of Equipment shall be its Estimated Residual Value. (ii) If Lessee elects not to purchase the Equipment, Lessee and Lessor shall arrange for the sale of such Equipment on an AS IS BASIS, provided that Lessee may not bid, directly or indirectly. Each item of Equipment shall be sold by Lessor for its then determined fair market value. If any item of Equipment is not sold within 30 days after Schedule Expiration, then Lessee and Lessor agree, in view of the uncertainties of market conditions and the parties' inability to predict what the actual sale price of such item would be, that the Realized Value of such item shall be deemed to equal zero, for purposes of computing Lessee's liability as provided in paragraph (b) below. Upon the sale of the item at any time after the expiration of such 30 day period, Lessor will apply the Realized Value (i) to refund to Lessee, without interest, any amount which Lessee may have previously paid to Lessor with respect to such item as required under paragraph (b) and (ii) to pay to Lessee the amount by which the Realized Value exceeds the Estimated Residual Value. -8- 9 (b) Lessee Liability. If the Realized Value of the Equipment is less than the Estimated Residual Value thereof, Lessor shall notify Lessee of such fact in writing and Lessee shall, within 10 days after receipt of such notice, pay to Lessor, as an adjustment to the rental payable under the Lease, an amount equal to the difference between the Realized Value and the Estimated Residual Value; provided, however, Lessee's Liability shall be limited to *% of Lessor's Cost of the Equipment as set forth in the Schedule. * REFER TO TABLE I TO SCHEDULE NO. 001 ("LESSEE OBLIGATION") FOR APPLICABLE PERCENTAGES. (c) Lessor Liability. If the Realized Value of the Equipment exceeds the Estimated Residual Value thereof, and provided that Lessee is not then in default under the Lease, Lessor shall pay to Lessee, as an adjustment to the rent payable under the Lease, an amount equal to 100% of such excess, but only to the extent Lessor actually receives the Realized Value in available funds. (d) Definitions of Certain Terms. For purposes of this Section XX: (i) "Equipment" means all but not less than all of the items of Equipment described on the Schedule; (ii) "Estimated Residual Value" means **% of Lessor's Cost of the Equipment as set out on the Schedule; ** REFER TO TABLE I TO SCHEDULE NO. 001 ("LESSOR RESIDUAL RISK AMOUNT") FOR APPLICABLE PERCENTAGES. (iii) "Realized Value" means the net proceeds realized by Lessor from sale of the Equipment after deduction of (x) expenses of such sale, if any, and (y) all sums due under the Lease as of Schedule Expiration that remain unpaid as of the date of the sale; (iv) "Schedule Expiration" means the last day of the Basic Term of the Lease as to the Equipment. XXI. MISCELLANEOUS: (a) EACH OF LESSEE AND LESSOR HEREBY UNCONDITIONALLY WAIVES ITS RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF, DIRECTLY OR INDIRECTLY, THIS LEASE, ANY OF THE RELATED DOCUMENTS, ANY DEALINGS BETWEEN LESSEE AND LESSOR RELATING TO THE SUBJECT MATTER OF THIS TRANSACTION OR ANY RELATED TRANSACTIONS, AND/OR THE RELATIONSHIP THAT IS BEING ESTABLISHED BETWEEN LESSEE AND LESSOR. The scope of this waiver is intended to be all encompassing of any and all disputes that may be filed in any court (including, without limitation, contract claims, tort claims, breach of duty claims, and all other common law and statutory claims). THIS WAIVER IS IRREVOCABLE MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS LEASE, ANY RELATED DOCUMENTS, OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THIS TRANSACTION OR ANY RELATED TRANSACTION. In the event of litigation, this Lease may be filed as a written consent to a trial by the court. PWE Initials --- (b) Any cancellation or termination by Lessor, pursuant to the provisions of this Agreement, any Schedule, supplement or amendment hereto, or the lease of any Equipment hereunder, shall not release Lessee from any then outstanding obligations to Lessor hereunder. All Equipment shall at all times -9- 10 remain personal property of Lessor regardless of the degree of its annexation to any real property and shall not by reason of any installation in, or affixation to, real or personal property become a part thereof (c) Time is of the essence of this Agreement. Lessor's failure at any time to require strict performance by Lessee of any of the provisions hereof shall not waive or diminish Lessor's right thereafter to demand strict compliance therewith. Lessee agrees, upon Lessor's request, to execute any instrument necessary or expedient for filing, recording or perfecting the interest of Lessor. All notices required to be given hereunder shall be deemed adequately given if sent by registered or certified mail to the addressee at its address stated herein, or at such other place as such addressee may have designated in writing. This Agreement and any Schedule and Annexes thereto constitute the entire agreement of the parties with respect to the subject matter hereof. NO VARIATION OR MODIFICATION OF THIS AGREEMENT OR ANY WAIVER OF ANY OF ITS PROVISIONS OR CONDITIONS, SHALL BE VALID UNLESS IN WRITING AND SIGNED BY AN AUTHORIZED REPRESENTATIVE OF THE PARTIES HERETO. PWE Initials --- (d) In case of a failure of Lessee to comply with any provision of this Agreement, Lessor shall have the right, but shall not be obligated to, effect such compliance, in whole or in part; and reasonable expenses and obligations incurred or assumed by Lessor in effecting such compliance shall constitute additional rent due to Lessor within five days after the date Lessor sends notice to Lessee requesting payment. Lessor's effecting such compliance shall not be a waiver of Lessee's default. (e) Any rent or other amount not paid to Lessor when due hereunder shall bear interest, both before and after any judgment or termination hereof, at the lesser of eighteen percent (18%) per annum or the maximum rate allowed by law. Any provisions in this Agreement and any Schedule which are in conflict with any statute, law or applicable rule shall be deemed omitted, modified or altered to conform thereto. IN WITNESS WHEREOF, Lessee and Lessor have caused this Agreement to be executed by their duly authorized representatives as of the date first above written. LESSOR: LESSEE: GENERAL ELECTRIC CAPITAL MEGATEST CORPORATION CORPORATION By: /s/ DENNIS J. BICKERSTAFF By: /s/ PAUL W. EMERY II ------------------------- ------------------------ Name: Dennis J. Bickerstaff Name: Paul W. Emery II ------------------------- ------------------------ Title: Credit Manager Title: CFO/VP ------------------------- ------------------------ -10- 11 AMENDMENT NO. 01 TO MASTER LEASE AGREEMENT DATED AUG 10, 1995 (THE "LEASE") BY AND BETWEEN MEGATEST CORPORATION ("LESSEE") AND GENERAL ELECTRIC CAPITAL CORPORATION ("LESSOR") DATED AUG 10, 1995 WHEREAS, Lessor and Lessee desire to amend a certain provision of the Lease as hereinafter provided; NOW THEREFORE, for good and valuable consideration, receipt and sufficiency of which are hereby acknowledged, Lessor and Lessee hereby agree to amend the Lease by adding the following language to Section XI of the Lease: Any declared event of default, not cured in sixty (60) days by Lessee under any loan, lease, note, contract or other monetary obligation which is now or may hereafter be in effect as to any obligee, which permits that obligee to accelerate payment of the obligation with or without first giving notice to Lessee, shall constitute a material default under this Lease. Lessee hereby agrees to notify the Lessor immediately upon receipt of any declared default by any obligee. Failure to do so shall constitute an immediate material default under this Lease. This Amendment shall be deemed to have been entered into contemporaneously with and integrated into the terms and conditions of the Lease. Except as set out herein, the terms and conditions of the Lease shall remain in full force and effect as entered into by the parties on or prior to the date hereof Dated: August 10, 1995 LESSOR: LESSEE: GENERAL ELECTRIC CAPITAL MEGATEST CORPORATION CORPORATION By: /s/ DENNIS J. BICKERSTAFF By: /s/ PAUL W. EMERY II ------------------------------- ----------------------------- Name: Dennis J. Bickerstaff Name: Paul W. Emery II ------------------------------- ----------------------------- Title: Credit Manager Title: CFO/VP ------------------------------- ----------------------------- 12 (1)EQUIPMENT SCHEDULE SCHEDULE NO. 001 DATED THIS 10TH DAY OF AUG., 1995 TO MASTER LEASE AGREEMENT DATED AS OF AUGUST 10, 1995 LESSOR & MAILING ADDRESS: LESSEE & MAILING ADDRESS: GENERAL ELECTRIC CAPITAL MEGATEST CORPORATION CORPORATION 2200 Powell Street 1321 Ridder Park Drive Suite 600 San Jose, CA 95131 Emeryville, CA 94608 Capitalized terms not defined herein shall have the meanings assigned to them in the Master Lease Agreement identified above ("Agreement;" said Agreement and this Schedule being collectively referred to as "Lease"). A. Equipment, Pursuant to the terms of the Lease, Lessor agrees to acquire and lease to Lessee the Equipment listed on Annex A attached hereto and made a part hereof. B. Financial Terms, 1. Advance Rent (if any): $39,406.00. 2. Lessor's Cost: $1,900,000.00. 3. Basic Term Lease Rate Factor: 2.07400%. 4. Daily Lease Rate Factor: .069133%. 5. Basic Term (No. of Months): 12. 6. Basic Term Commencement Date: 09/01/95. 7. Equipment Location: See Annex A attached hereto and made a part hereof, 8. Lessee Federal Tax ID No.: 94-2422195 9. Supplier: Megatest Corporation 10. Last Delivery Date: 08/08/95 11. First Termination Date: N/A. 12. Option Payment: see attached Table 1. - ------------------------------- (1) Non-standard document. 1 13 13. Interest rate: 8.67%. 14. Lessee agrees and acknowledges that the Lessor's Cost of the Equipment as stated on the Schedule is equal to the fair market value of the Equipment on the date hereof. C. Term and Rent, 1. Interim Rent. For the period from and including the Lease Commencement Date to the Basic Term Commencement Date ("Interim Period"), Lessee shall pay as rent ("Interim Rent") for each unit of Equipment, the product of the Daily Lease Rate Factor times the Lessor's Cost of such unit times the number of days in the Interim Period. Interim Rent shall be due on 08/31/95. 2. Basic Term Rent. Commencing on 09/01/95, and on the same day of each month thereafter (each, a "Rent Payment Date") during the Basic Tenn, Lessee shall pay as rent ("Basic Term Rent") the product of the Basic Term Lease Rate Factor times the Lessor's Cost of all Equipment on this Schedule. D. Insurance, 1. Public Liability: $1,000,000.00, total liability per occurrence. 2. Casualty and Property Damage: An amount equal to the Stipulated Loss Value or higher. E. Modifications and Additions to Agreement, For purposes of this Schedule only, the Agreement is amended as follows: 1. Section I(b) of the Agreement is hereby deleted in its entirety and the following substituted in its stead: (b) The obligation of Lessor to purchase the Equipment from Lessee and to lease the same to Lessee shall be subject to receipt by Lessor, on or prior to the earlier of the Lease Commencement Date or Last Delivery Date therefor, of each of the following documents in form and substance satisfactory to Lessor: (i) a Schedule relating to the Equipment then to be leased hereunder, (ii) a Bill of Sale, in the form of Annex B to the applicable Schedule, in favor of Lessor, (iii) evidence of insurance which complies with the requirements of Section X, and (iv) such other documents as Lessor may reasonably request. Simultaneously with the execution of the Bill of Sale, Lessee shall also execute a Certificate of Acceptance, in the form of Annex C to the applicable Schedule, covering all of the Equipment described in the Bill of Sale. 2. Section VI(a) shall be deleted and the following substituted in its stead: (a) The parties acknowledge that this is a sale/leaseback transaction and the Equipment is in Lessee's possession as of the Lease Commencement Date. 3. Clause (b) of Section XVII is deleted in its entirety and the following substituted in its stead: (b) Lessee grants to Lessor to secure the prompt payment and performance as and when due of all obligations and indebtedness of Lessee now existing or hereafter created pursuant to this Lease: (i) a first priority security interest in the Equipment and all additions, attachments, 2 14 accessories and accessions thereto and any and all substitutions, replacements or exchanges therefor, and all proceeds (cash and non-cash), including insurance proceeds, thereof; and (ii) to the extent the Equipment may constitute or be deemed to be Lessee's inventory, as such term is defined in the Uniform Commercial Code of any applicable jurisdiction (the "Inventory"), a first priority security interest in such Inventory, which shall mean any and all Equipment, offered or furnished under any contract of service or intended for sale or lease, any and all additions, attachments, accessories and accessions thereto, any and all substitutions, replacements or exchanges therefor, any and all leases, subleases, rentals, accounts and contracts with respect to the Equipment which may now exist or hereafter arise, together with all rights thereunder and all rental and other payments and purchase options due and to become due thereunder, any and all sales proceeds payable for such property, all insurance, bonds and/or other proceeds of the property and all returned or repossessed Equipment now or at any time or times hereafter in the possession or under the control of Lessee or Lessor; PROVIDED, HOWEVER, THAT LESSEE IS NOT AUTHORIZED TO SELL THE EQUIPMENT OR THE INVENTORY; and (iii) a first priority security interest in all accounts (as such term is defined in the Uniform Commercial Code of any applicable jurisdiction) now owned by Lessee or hereafter acquired or owned by Lessee that might arise or result from any lease or other disposition of any of the Equipment or the Inventory, including, but not limited to, any right of Lessee to payment for Equipment sold or leased or under any contract for services whether or not evidenced by an instrument or chattel paper, and whether or not such right has been earned by performance. 4. Section XX shall be deleted in its entirety and the following substituted in its stead: XX. END OF BASIC TERM OPTIONS. At the end of the Basic Term, Lessee shall have only the options specified in this Section XX: (a) So long as Lessee shall not have exercised its option to terminate this Lease pursuant to Section XVIII hereof nor exercised its Early Purchase Option pursuant to Section XIX hereof, and provided that Lessee is not then in default under this Lease or any other agreement between Lessor and Lessee, Lessee shall have the option, upon the expiration of the Basic Term of any Schedule, to renew the Lease with respect to all, but not less than all, of the Equipment leased thereunder for an additional term of twelve (12) months (the "Renewal Term") at a lease rate factor of 2.0740%. If Lessee desires to exercise this option, it shall give Lessor written notice of its election to renew not less than 90 days nor more than 180 days before the expiration of the Basic Term of such Schedule. (b) So long as Lessee shall not have exercised its option to terminate this Lease pursuant to Section XVIII hereof nor exercised its Early Purchase Option pursuant to Section XIX hereof, nor exercised its option to renew pursuant to subparagraph (a) of this Section, and provided that Lessee is not then in default under this Lease or any other agreement between Lessor and Lessee, Lessee shall have the option, upon the expiration of the Basic Term of any Schedule, to return or to purchase, for the applicable Realized Value (as defined below), all (but not less than all) of the Equipment leased under such Schedule upon the following terms and conditions: 3 15 (1) Determination of Realized Value. The Realized Value for each item of Equipment on the Schedule shall be determined as follows: (A) If Lessee elects to purchase the Equipment, the Realized Value of each item of Equipment shall be its Estimated Residual Value. (B) If lessee elects not to purchase the Equipment, Lessee and Lessor shall arrange for the sale of such Equipment on an AS IS BASIS, provided that Lessee may not bid, directly or indirectly. Each item of Equipment shall be sold by Lessor for its then determined Fair Market Value. If any item of Equipment is not sold within 90 days after Schedule Expiration, then Lessee and Lessor agree, in view of the uncertainties of market conditions and the parties' inability to predict what the actual sale price of such item would be, that the Realized Value of such item shall be deemed to equal zero, for purposes of computing Lessee's liability as provided in paragraph (b) below. Upon the sale of the item at any time after the expiration of such 90 day period, Lessor will apply the Realized Value (i) to refund to Lessee, without interest, any amount which Lessee may have previously paid to Lessor with respect to such item as required under paragraph (b) and (ii) to pay to Lessee the amount by which the Realized Value exceeds the Estimated Residual Value. (2) Lessee Liability. If the Realized Value of the Equipment is less than the Estimated Residual Value thereof, Lessor shall notify Lessee of such fact in writing and Lessee shall, within 10 days after receipt of such notice, pay to Lessor, as an adjustment to the rental payable under the Lease, an amount equal to the difference between the Realized Value and the Estimated Residual Value; provided, however, Lessee's Liability shall be limited to the applicable percentage of Capitalized Lessor's Cost listed under "Lessee Obligation" in Table 1. (3) Lessor Liability. If the Realized Value of the Equipment exceeds the Estimated Residual Value thereof, and provided that Lessee is not then in default under the Lease, Lessor shall pay to Lessee, as an adjustment to the rent payable under the Lease, an amount equal to 100% of such excess, but only to the extent Lessor actually receives the Realized Value in available funds. (4) Definitions of Certain Terms. For purposes of this Section XX: (A) "Equipment" means all but not less than all of the items of Equipment described on the Schedule; (B) "Estimated Residual Value" means the applicable percentage of Capitalized Lessor's Cost listed under "TRAC Amount" in Table I; (C) "Realized Value" means the net proceeds realized by Lessor from sale of the Equipment after deduction of (x) expenses of such sale, if any, and (y) all sums due under the Lease as of Schedule Expiration that remain unpaid as of the date of the sale; 4 16 (D) "Schedule Expiration" means the last day of the Basic Term or applicable Renewal Term of the Lease as to the Equipment. (5) Notice of Election. Lessee shall give Lessor written notice of its election to purchase the Equipment (or not) not less than 90 days nor more than 180 days before the expiration of the Basic Term of such Schedule. 4. Section XXI shall be added as follows: XXI. END OF RENEWAL TERM OPTIONS. At the end of each Renewal Term, Lessee shall have only the options specified in this Section XXI: (a) So long as Lessee shall not have exercised its option to terminate this Lease pursuant to Section XVIII hereof nor exercised its Early Purchase Option pursuant to Section XX hereof, nor exercised its purchase option pursuant to Section XX hereof, and provided that Lessee is not then in default under this Lease or any other agreement between Lessor and Lessee, Lessee shall have the option, upon the expiration of the first Renewal Term of any Schedule, to renew the Lease with respect to all, but not less than all, of the Equipment leased thereunder for an additional term of twelve (12) months at a lease rate factor of 2.07400%, and upon the expiration of the second Renewal Term to renew the Lease with respect to all, but not less than all, of the Equipment leased thereunder for an additional term of thirteen (13) months (the "Third Renewal Term"). At the end of any Renewal Term, provided that Lessee is not then in default under this Lease or any other agreement between Lessor and Lessee, Lessee may purchase all, and not less than all, of such Equipment for a cash price calculated as set out in paragraph (b) of Section XX, using the appropriate TRAC Amount from Table I for the time the option is exercised. If Lessee desires to exercise this option, it shall give Lessor written notice of its election to renew not less than 90 days nor more than 180 days before the expiration of the Basic Term of such Schedule. (b) So long as Lessee shall not have exercised its option to terminate this Lease pursuant to Section XVIII hereof nor exercised its Early Purchase Option pursuant to Section XIX hereof, nor exercised its option to renew pursuant to subparagraph (a) of this Section, and provided that Lessee is not then in default under this Lease or any other agreement between Lessor and Lessee, Lessee shall have the option, upon the expiration of any Renewal Term of any Schedule, to return or to purchase, for the applicable Realized Value (as defined below), all (but not less than all) of the Equipment leased under such Schedule upon the terms and conditions set out in paragraph XX(b). (c) Notwithstanding any provision hereof to the contrary, Lessee shall have no right to extend or renew the lease at the end of the Third Renewal Term. 5. Section XXII shall be added as follows: XXII. SUBSTITUTION OF EQUIPMENT. (a) So long as no event of default hereunder shall have occurred and be continuing, and upon not less than 90 days prior written notice from Lessee to Lessor of 5 17 Lessee's intent to substitute equipment, Lessee may at its own cost and expense, including all reasonable and documented costs and expenses of Lessor, replace any item of Equipment which may from time to time suffer a Casualty Occurrence or otherwise become worn out, inoperable or technologically obsolete for Lessee's purposes with an item of equivalent value as determined by Lessor in the reasonable exercise of its business judgment, such approval not to be unreasonably withheld. All such replacement Equipment shall be free and clear of all liens and shall be in at least as good operating condition and have a value, utility and remaining useful life at least equal to the Equipment being replaced, assuming such replaced Equipment was in the condition and repair required by the terms of this Lease. (b) Prior to the time of any replacement of an item of Equipment pursuant to Section XVIII (a) hereof, Lessee will at its sole cost and expense, including all reasonable and documented costs and expenses of Lessor: (i) furnish Lessor with a Bill of Sale with respect to such replacement Equipment; (ii) cause an Equipment Schedule amendment covering such replacement Equipment to be duly executed and delivered; (iii) furnish Lessor with such evidence of compliance with the insurance provisions of Section IX hereof with respect to such replacement Equipment as Lessor may request; (iv) At Lessor's request furnish Lessor with a certificate of an equipment appraiser satisfactory to Lessor certifying that such replacement Equipment is new, has a value, utility and useful life at least equal to that of the Equipment replaced, assuming such replaced Equipment was in the condition required by this Lease; (v) take such other action, including the filing of UCC financing statements as Lessor may reasonably request, in order that such replacement Equipment is duly and properly titled in Lessor and leased under this Lease. (c) Upon satisfaction of the conditions specified in Section XXII(a) and (b) above Lessor will transfer to Lessee without recourse or warranty all of Lessor's right, title and interest in and to the replaced Equipment. Lessor shall not be required to make and may specifically disclaim any representation or warranty as to the condition of the replaced Equipment and other matters. Each replacement item of Equipment shall, after such conveyance, be deemed part of the property leased under this Lease. No such replacement shall result in any change in rent, Stipulated Loss Value, Termination Value, Contingent Rental Amount or any Fixed Purchase Price or any other amount payable hereunder. (d) Lessee shall be permitted to replace any number of items of Equipment in accordance with this Section XXII not more than once during any fiscal quarter during the term of this Lease. (e) The notice required by this Section XXII shall specify the item of Equipment that is to be replaced, identify the item with which it is to be replaced setting out 6 18 the name of the manufacturer, the model number, the serial number, if available, and state the date on which the substitution is to take effect. Except as expressly modified hereby, all terms and provisions of the Agreement shall remain in full force and effect as previously agreed by the parties. This Schedule is not binding or effective with respect to the Agreement or Equipment until executed on behalf of Lessor and Lessee by authorized representatives of Lessor and Lessee, respectively. IN WITNESS WHEREOF, Lessee and Lessor have caused this Schedule to be executed by their duly authorized representatives as of the date first above written. MEGATEST CORPORATION GENERAL ELECTRIC CAPITAL CORPORATION By: /s/ PAUL W. EMERY, II By: /s/ DENNIS J. BICKERSTAFF ---------------------------------- ----------------------------- Paul W. Emery, II Dennis J. Bickerstaff - -------------------------------------- --------------------------------- (Typed or printed name) (Typed or printed name) Title: CFO/VP Title: Credit Manager ------------------------------- -------------------------- ATTEST: /s/ MEL FLANIGAN ---------------------- Signature Name: MEL FLANIGAN ------------------------ Title: CORP CONTROLLER ----------------------- 7 19 TABLE NO. I TO EQUIPMENT SCHEDULE NO. 001 TO MASTER LEASE AGREEMENT DATED AUGUST 10, 1995 TABLE 1 (% of Equipment Cost)
LESSOR TRAC LESSEE RESIDUAL RISK END OF MONTH AMOUNT OBLIGATION AMOUNT ------------ ------ ---------- ------------- 12 82.93% 70.94% 11.99% 24 64.32% 54.38% 9.94% 36 44.04% 36.32% 7.72% 49 20.00% 14.68% 5.32%
INITIAL: DJB PWE ---------------------- ------------------------ LESSOR LESSEE 20 ADDENDUM No. 01 TO SCHEDULE NO. 001 TO MASTER LEASE AGREEMENT DATED AS OF AUGUST 10, 1995 RETURN CONDITIONS - ELECTRONICS EQUIPMENT In addition to the provisions provided for in Section X of the Lease, and provided that the Lessee has not elected its option to purchase the Equipment, Lessee shall, at its expense: (A) Upon the request of Lessor, Lessee shall no later than 180 days prior to the expiration or other termination of the Lease provide: 1.- a detailed inventory of the Equipment (including the model and serial number of each major component thereof), including, without limitation, all internal circuit boards, module boards, and software features; 2.- a complete and current set of all manuals, blue prints, process flow diagrams, equipment configuration diagrams, maintenance records and other data reasonable requested by Lessor concerning the configuration and operation of the Equipment; and 3.- a certification of the manufacturer or of a maintenance provider acceptable to Lessor that the equipment (a) has been tested and is operating in accordance with manufacturer's specifications (together with a report detailing the condition of the Equipment), the results of such test(s) and inspection(s) and all repairs that were performed as a result of such test(s) and inspection(s) and (b) that the Equipment qualifies for the manufacturer's used equipment maintenance program. (B) Upon the request of Lessor, Lessee shall, no later than 120 days prior to the expiration or other termination of the Lease make the Equipment available for on-site operational inspection by persons designated by the Lessor who shall be duly qualified to inspect the Equipment in its operational environment. (C) All Equipment shall be cleaned and treated with respect to rust, corrosion and appearance in accordance with manufacturer's recommendations and consistent with the best practices of dealers in used equipment similar to the Equipment; shall have no Lessee installed markings or labels which are not necessary for the operation, maintenance of repair of the Equipment; and shall be in compliance with all applicable governmental laws, rules and regulations. (D) The Equipment shall be deinstalled and packed by or under the supervision of the manufacturer or such other person acceptable to Lessor in accordance with manufacturer's recommendations. Without limitation, all internal fluids will either be drained and disposed of or filled and secured in accordance with manufacturer's recommendations and applicable governmental laws, rules and regulations. (E) The Equipment will be transported in accordance with manufacturer's recommendations and applicable governmental laws, rules and regulations to not more than 1 individual locations within the continental United States selected by Lessor. LESSOR: LESSEE: GE CAPITAL CORPORATION MEGATEST CORPORATION By: /s/ DENNIS J. BICKERSTAFF By: /s/ PAUL W. EMERY II -------------------------- ------------------------- Credit Manager EX-10.12 3 LOAN AND SECURITY AGREEMENT 1 [LOGO] EXHIBIT 10.12 LOAN AND SECURITY AGREEMENT SECTION 1. DEFINITIONS. All capitalized terms which are not defined herein are defined in Rider A attached hereto and made a part hereof ("Rider A"). Accounting terms not specifically defined shall be construed in accordance with generally accepted accounting principles. SECTION 2. AMOUNT AND TERMS OF LOANS; GRANT OF SECURITY INTEREST. Subject to the terms and conditions hereof, CIT agrees to make Loans to Debtor from time to time, in the amount described in paragraph 2 of Rider A. Each Loan shall be evidenced by Debtor's Note, which Note shall set forth the repayment terms and Interest Rate for such Loan. AS security for the prompt and complete payment and performance when due of all the Obligations and in order to induce CIT to enter into this Agreement and make the Loans and to extend other credit from time to time to Debtor, whether under this Agreement or otherwise, Debtor hereby grants to CIT a first priority security interest in all Debtor's right, title and interest in, to and under the Collateral. SECTION 3. CONDITIONS OF BORROWING. CIT shall not be required to make any Loan hereunder unless on the Closing Date thereof all legal matters with respect to, and all legal documents executed in connection with, the contemplated transactions are satisfactory to CIT and all of the following conditions are met to the satisfaction of CIT (except that (a) and (b) are required in connection with the initial Loan only): (a) CIT has received a satisfactory Secretary's Certificate certified by Debtor's Secretary or Assistant Secretary; (b) if requested by CIT, CIT shall have received the written opinion addressed to it of counsel for Debtor satisfactory to CIT as matters contained in Section 4(a)-(e), (g) and (i) hereof, and as to such other matters as CIT may reasonably request; (c) Debtor has executed and delivered to CIT the Note evidencing, and a Supplement describing the Equipment to be financed by, such Loan; (d) the Equipment being financed by such Loan has been delivered to, and accepted by, Debtor and CIT has received satisfactory evidence that the Equipment is insured in accordance with the provisions hereof and that the Cost thereof has been, or concurrently with the making of the Loan shall be, fully paid; (e) Intentionally Left Blank; (f) all filings, recordings and other actions (including the obtaining of landlord and/or mortgagee waivers) deemed necessary or desirable by CIT in order to perfect a first (and only) priority security interest in the Equipment being financed by such Loan have been duly effected, and all fees, taxes and other charges relating to such filings and recordings have been paid by Debtor; (g) the representations and warranties contained in this Agreement are true and correct with the same effect as if made on and as of such date, and no Default or Event of Default is in existence on such date or shall occur as a result of such Loan; (h) in the sole judgment of CIT, there has been no material adverse change in the financial condition, business or operations of Debtor from the date referred to in Section 4(j) hereof; (i) CIT has received from Debtor such other documents and information as CIT has reasonably requested; (j) CIT has inspected and appraised the Equipment and found it satisfactory in value and condition; and (k) CIT has received and found satisfactory Debtor's most recent quarterly financial statement. SECTION 4. REPRESENTATIONS AND WARRANTIES. In order to induce CIT to enter into this Agreement and to make each Loan, Debtor represents and warrants to CIT that: (a) Debtor is a corporation duly organized, validly existing and in good standing under the laws of its State of incorporation, has the necessary authority and power to own the Equipment and its other assets and to transact the business in which it is engaged, is duly qualified to do business in each jurisdiction where the Equipment is located and in each other jurisdiction in which the conduct of its business or the ownership of its assets requires such qualification, and its chief executive office is located at the address set forth in paragraph 5 of Rider A; (b) Debtor has Page 1 of 6 2 full power, authority and legal right to execute and deliver this Agreement and the Notes, to perform its obligations hereunder and thereunder, to borrow hereunder and to grant the security interest created hereby; (c) this Agreement has been (and each Note when executed and delivered shall have been) duly authorized, executed and delivered by Debtor and constitutes (and each Note when executed and delivered shall constitute) a legal, valid and binding obligation of Debtor enforceable in accordance with its terms except as such rights may be limited by bankruptcy, insolvency or other similar laws affecting the enforcement of creditors' rights generally; (d) the execution, delivery and performance by Debtor of this Agreement and the Notes do not and will not violate any provision of any applicable law or regulation or of any judgment or order of any court or governmental instrumentality, and will not violate any provision of, or cause a default under, any loan, other agreement, contract or judgment to which Debtor is a party and do not and will not require the consent, license, approval or authorization of, or registration with, any Person; (e) Debtor is not in default under any material agreement, contract or judgment to which Debtor is a party; (f) Debtor has filed all tax returns that are required to be filed and has paid all taxes as shown on said returns and all assessments received by it to the extent such taxes and assessments have become due other than those which are being contested in good faith by appropriate proceedings and as to which appropriate reserves are being maintained by Debtor in accordance with generally accepted accounting principles and so long as such proceedings operate during the pendency thereof to prevent the sale, forfeiture, or loss of the Collateral, and Debtor does not have any knowledge of any actual or proposed deficiency or additional assessment in connection therewith; (g) there is no action, audit, investigation or proceeding pending or threatened against or affecting Debtor or any of its assets which involves any of the Equipment or any of the contemplated transactions hereunder or which, if adversely determined, could have a material adverse effect on Debtor's business, operations or financial condition; (h) on each Closing Date, Debtor shall have good and marketable title to the Equipment being financed on such date and CIT shall have a perfected first (and only) Lien on such Equipment; and (i) (i) the operations of Debtor comply in all material respects with all applicable Environmental Laws; and (ii) except as disclosed to CIT, (A) none of the operations of Debtor are subject to any judicial or administrative proceeding alleging the violation of any Environmental Laws; (B) none of the operations of Debtor is the subject of an investigation to determine whether any remedial action is needed to respond to a release of any Hazardous Material into the environment; and (C) Debtor has no known material contingent liability in connection with any release of any Hazardous Material into the environment: (j) all financial statements of Debtor which have been delivered to CIT have been prepared in accordance with generally accepted accounting principles consistently applied, and present fairly Debtor's financial position as at, and the results of its operations for, the periods ended on the dates set forth on such financial statements, and there has been no material adverse change in Debtor's financial condition, business or operations since May 31, 1995, as reflected in such financial statements; and (k) Debtor has not changed its name in the last five years or done business under any other name except as previously disclosed in writing to CIT. SECTION 5. COVENANTS. Debtor covenants and agrees that from and after the date hereof and so long as the Commitment or any of the Notes is outstanding: A. It will: (1) promptly give written notice to CIT of the occurrence of any Event of Loss; (2) observe all material requirements of any governmental authorities relating to the conduct of its business, to the performance of its obligations hereunder, to the use, operation or ownership of the Equipment, or to its other properties or assets, maintain its existence as a legal entity and obtain and keep in full force and effect all rights, franchises, licenses and permits which are necessary to the proper conduct of its business, and pay all fees, taxes, assessments and governmental charges or levies imposed upon any of the Equipment; (3) at any reasonable time or times, and upon reasonable notice, permit CIT or its authorized representative to inspect the Equipment and, following the occurrence and during the continuation of an Event of Default, to inspect the books and records of Debtor as they pertain to the Equipment; (4) in accordance with generally accepted accounting principles, keep proper books of record and account in which entries will be made of all dealings or transactions in relation to its business and activities; (5) furnish to CIT the following financial statements, all in reasonable detail, prepared in accordance with generally accepted accounting principles applied on a basis consistently maintained throughout the period involved, (a) not later than 120 days after the end of each fiscal year, its consolidated balance sheet as at the end of such fiscal year, and its consolidated statements of income and consolidated statements of cash flow and all footnotes of such fiscal year together with comparative information for the prior fiscal year, audited by a "Big Six" certified public accounting firm; and (b) not later than 90 days after the end of each of the first three quarterly periods of each fiscal year, its consolidated balance Page 2 of 6 3 sheet as at the end of such quarterly period and its consolidated statements of income and consolidated statements of cash flow for such quarterly period and for the portion of the fiscal year then ended together with comparative information for the prior comparable period, certified by its chief financial officer as fairly presenting the results of operations and financial position of Debtor for the periods then ended and as of the date thereof, respectively; (6) (i) furnish to CIT, together with the financial statements described in clauses 5(a) and 5(b) above, a statement signed by Debtor's chief financial officer certifying that Debtor is in compliance with all financial covenants contained in any documents evidencing a financial obligation to which Debtor is a party, or if Debtor is not in compliance, the nature of such noncompliance or default, and the status thereof (such statement shall set forth the actual calculations of any financial covenants and the details of any amendments or modifications of any financial covenants), and (ii) promptly, such additional financial and other information as CIT may from time to time reasonably request; (7) promptly, at Debtor's expense, execute and deliver to CIT such instruments and documents, and take such action, as CIT may from time to time reasonably request in order to carry out the intent and purpose of this Agreement and to establish and protect the rights, interest and remedies created, or intended to be created, in favor of CIT hereby, including, without limitation, the execution, delivery, recordation and filing of financing statements (hereby authorizing CIT, in such jurisdictions where such action is authorized by law, to effect any such recordation or filing of financing statements without Debtor's signature, and to file as valid financing statements in the applicable financing statement records, photocopies hereof, of the Supplements and of any other financing statement executed in connection herewith); (8) warrant and defend its good and marketable title to the Equipment, and CIT's perfected first (and only) priority security interest in the Collateral, against all claims and demands whatsoever (hereby agreeing that the Equipment shall be and at all times remain separately identifiable personal property, and shall not become part of any real estate), and will, at its expense, take such action as may be necessary to prevent any other Person from acquiring any right or interest in the Equipment; (9) at Debtor's expense, if requested by CIT in writing, attach to the Equipment a notice satisfactory to CIT disclosing CIT's security interest in the Equipment; (10) at Debtor's expense, maintain the Equipment in good condition and working order (and, where applicable, in full configuration as listed on the (i) Appraisal of Fixed Assets and Equipment, dated August 2, 1995, prepared by Asset Reliance, Inc. for Equipment located at 5301 East River Road, Suite 106, Fridley, Minnesota, and (ii) Appraisal of Fixed Assets and Equipment, dated July 28, 1995, prepared by Asset Reliance, Inc. for Equipment located at 1321 Ridder Park Drive, San Jose, California 95131-2306) and furnish all parts, replacements and servicing required therefor so that the value, condition and operating efficiency thereof will at all times be maintained, normal wear and tear excepted, and any repairs, replacements and parts added to the Equipment in connection with any repair or maintenance or with any improvement, change, addition or alteration of a permanent nature shall immediately, without further act, become part of the Equipment and subject to the security interest created by this Agreement; and (11) obtain and maintain at all times on the Collateral, at Debtor's expense, "All-Risk" physical damage and, if required by CIT, liability insurance (including bodily injury and property damage) in such amounts, against such risks, in such form and with such insurers as shall be reasonably satisfactory to CIT; provided, however, that the amount of physical damage insurance shall not be less than the then aggregate outstanding principal amount of the Notes. All physical damage insurance policies shall be made payable to CIT as its interest may appear; if liability insurance is required by CIT, the liability insurance policies shall name CIT as an additional insured. Debtor shall maintain and deliver to CIT the original certificates of insurance or other documents reasonably satisfactory to CIT prior to policy expiration or upon CIT's request, but CIT shall bear no duty or liability to ascertain the existence or adequacy of such insurance. Each insurance policy shall, among other things, require that the insurer give CIT at least 30 days' prior written notice of any alteration in the terms of such policy or the cancellation thereof and that the interests of CIT be continued insured regardless of any breach of or violation by Debtor of any warranties, declarations or conditions contained in such insurance policy. The insurance maintained by the Debtor shall be primary with no other insurance maintained by CIT (if any) contributory. B. Without the prior written consent of CIT, it will not: (1) sell, convey, transfer, exchange, lease or otherwise relinquish possession or dispose of any of the Collateral or attempt or offer to do any of the foregoing; (2) create, assume or suffer to exist any Lien upon the Collateral except for the security interest created hereby; (3) liquidate or dissolve; (4) change the form of organization of its business; or (5) without thirty (30) days prior written notice to CIT, change its name or its chief executive office; (6) move (or in the case of titled vehicles, change the principal base of) any of the Equipment from the location specified on the Supplement relating thereto without the prior written consent of CIT; or (7) make or authorize any improvement, change, addition or alteration to the Equipment which would impair its originally intended function or use or its value. Notwithstanding anything set forth above, CIT hereby agrees that Debtor may substitute as Collateral for items of Equipment that are redundant to Debtor's needs items of equipment of similar type and value which are in as good or better condition as the items of Equipment that are redundant to Page 3 of 6 4 Debtor's needs, which substitute equipment must be acceptable to CIT. SECTION 6. EVENTS OF DEFAULT; REMEDIES. The following events shall each constitute an "Event of Default" hereunder: (a) Debtor shall fail to pay any Obligation within 5 Business Days after Debtor's receipt of notice that timely payment has not been received (whether at the stated maturity, by acceleration or otherwise); (b) any representation or warranty made by Debtor in this Agreement or in any document, certificate or financial or other statement now or hereafter furnished by Debtor in connection with this Agreement or any Loan shall at any time prove to be untrue or misleading in any material respect as of the time when made; (c) Debtor shall fail to observe any covenant, condition or agreement contained in Sections 5.A(11) or 5.B hereof or in paragraph 4(b) of Rider A; (d) Debtor shall fail to observe or perform any other covenant or condition contained in this Agreement, and such failure shall continue unremedied for a period of 30 days after the earlier of the date on which Debtor obtains knowledge of such failure or the date on which notice thereof shall be given by CIT to Debtor; (e) Debtor or any affiliate of Debtor shall default in the payment of, or other performance under, any obligation for payment or lease (whether or not capitalized) or any guarantee (i) to CIT, any affiliate of CIT or to Debtor's main bank, beyond the period of grace, if any, provided with respect thereto, or (ii) to any other Person beyond the period of grace, if any, provided with respect thereto, where such obligation or amount guaranteed is in excess of $1,000,000.00; or (f) a complaint in bankruptcy or for arrangement or reorganization or for relief under any insolvency law is filed by or against Debtor (and when filed against Debtor is in effect for 60 days) or Debtor admits its inability to pay its debts as they mature. If an Event of Default shall occur, CIT may, by notice of default given to Debtor, do any one or more of the following: (a) terminate the Commitment and/or (b) declare the Notes to be due and payable, whereupon the principal amount of the Notes, together with accrued interest thereon and all other amounts owing under this Agreement and the Notes, shall become immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived (and in the case of any Event of Default specified in clause (f) of the above paragraph, such acceleration of the Notes shall be automatic, without any notice by CIT). In addition, if an Event of Default shall occur and be continuing, CIT may exercise all other rights and remedies available to it, whether under this Agreement, under any other instrument or agreement securing, evidencing or relating to the Obligations, under the Code, or otherwise available at law or in equity. Without limiting the generality of the foregoing, Debtor agrees that in any such event, CIT, without demand of performance or other demand, advertisement or notice of any kind (except the notice specified below of time and place of public or private sale) to or upon Debtor or any other Person (all and each of which demands, advertisements and notices are hereby expressly waived), may forthwith do any one or more of the following: collect, receive, appropriate and realize upon the Collateral or any part thereof, and sell, lease, assign, give an option or options to purchase or otherwise dispose of and deliver, the Collateral (or contract to do so), or any part thereof, in one or more parcels at public or private sale or sales at such places and at such prices as it may deem best, for cash or on credit or for future delivery without the assumption of any credit risk. CIT shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption of Debtor, which right or equity is hereby expressly released. Debtor further agrees, at CIT's request, to assemble (at Debtor's expense) the Collateral and make it available to CIT at such places which CIT shall select, whether at Debtor's premises or elsewhere. CIT shall apply the net proceeds of any such collection, recovery, receipt, appropriation, realization or sale (after deducting all reasonable costs and expenses of every kind incurred therein or incidental to the care, safekeeping or otherwise of any or all of the Collateral or in any way relating to the rights of CIT hereunder, including reasonable attorney's fees and legal expenses) to the payment in whole or in part of the Obligations, in such order as CIT may elect. Debtor agrees that CIT need not give more than 10 days' notice of the time and place of any public sale or of the time after which a private sale may take place and that such notice is reasonable notification of such matters. Debtor shall be liable for any deficiency if the proceeds of any sale or disposition of the Collateral are insufficient to pay all amounts to which CIT is entitled. Debtor agrees to pay all costs of CIT, including reasonable attorneys' fees, incurred with respect to collection of any of the Obligations and enforcement of any of CIT's rights hereunder. To the extent permitted by law, Debtor hereby waives presentment, demand, protest or any notice (except as expressly provided in this Section 6) of any kind in connection with this Agreement or any Collateral. Page 4 of 6 5 SECTION 7. MISCELLANEOUS. No failure or delay by CIT in exercising any right, remedy or privilege hereunder or under any Note shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy or privilege hereunder or thereunder preclude any other or further exercise thereof or the exercise of any other right, remedy or privilege. No right or remedy in this Agreement is intended to be exclusive but each shall be cumulative and in addition to any other remedy referred to herein or otherwise available to CIT at law or in equity; and the exercise by CIT of any one or more of such remedies shall not preclude the simultaneous or later exercise by CIT of any or all such other remedies. No express or implied waiver by CIT of an Event of Default shall in any way be, or be construed to be, a waiver of any other or subsequent Event of Default. The acceptance by CIT of any regular installment payment or any other sum owing hereunder shall not (a) constitute a waiver of any Event of Default in existence at the time, regardless of CIT's knowledge or lack of knowledge thereof at the time of such acceptance, or (b) constitute a waiver of any Event of Default unless CIT shall have agreed in writing to waive the Event of Default. All notices, requests and demands to or upon any party hereto shall be deemed duly given or made when sent, if given by telecopier, when delivered, if given by personal delivery or overnight commercial carrier, upon receipt, after deposit in the United States mail, certified mail, return receipt requested, addressed to such party at its address (or telecopier number) set forth in paragraph 5 of Rider A or such other address or telecopier number as may be hereafter designated in writing by such party to the other party hereto. Debtor agrees, whether or not the contemplated transactions are consummated, (A) to pay or reimburse CIT for (i) all expenses of CIT in connection with the documentation thereof; (ii) all fees, taxes and expenses of whatever nature incurred in connection with the creation, preservation and protection of CIT's security interest in the Collateral, including, without limitation, all filing and lien search fees, payment or discharge of any taxes or Liens upon, or in respect to, the Collateral, and all other fees and expenses in connection with protecting or maintaining the Collateral or in connection with defending or prosecuting any actions, suits or proceedings arising out of, or related to, the Collateral; and (iii) all costs and expenses (including reasonable legal fees and disbursements) of CIT in connection with the enforcement of this Agreement and the Notes, and (B) to pay, and to indemnify and hold CIT harmless from and against any and all liabilities, obligations, losses, damages, penalties, claims, actions, judgments, suits, out-of-pocket costs, expenses (including reasonable legal expenses) or disbursements of any kind or nature whatsoever arising out of or with respect to (a) this Agreement, the Collateral or CIT's interest therein, including, without limitation, the execution, delivery, enforcement, performance or administration of this Agreement and the Notes and the manufacture, purchase, ownership, possession, use, selection, operation or condition of the Collateral or any part thereof, or (b) Debtor's violation or alleged violation of any Environmental Laws or any law or regulation relating to Hazardous Materials (the foregoing being referred to as the "indemnified liabilities"), provided, that Debtor shall have no obligation hereunder with respect to indemnified liabilities arising from the gross negligence or willful misconduct of CIT. CIT hereby agrees that the fees, costs and expenses set forth in A(i) and (ii) above shall not exceed $2,500.00 without Debtor's prior written consent. If Debtor fails to perform or comply with any of its agreements contained in this Agreement and CIT shall itself perform, comply or cause performance or compliance, the expenses of CIT so incurred, together with interest thereon at the Late Charge Rate, shall be payable by Debtor to CIT on demand and until such payment is made shall constitute Obligations hereunder. The agreements and indemnities contained in this paragraph shall survive termination of this Agreement and payment of the Notes. This Agreement contains the complete, final and exclusive statement of the terms of the agreement between CIT and Debtor related to the contemplated transactions, and neither this Agreement, nor any terms hereof, may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against which enforcement of a change, waiver, discharge or termination is sought. This Agreement shall be binding upon, and inure to the benefit of, Debtor and CIT and their respective successors and assigns, except that Debtor may not assign or transfer its rights hereunder or any interest herein without the prior written consent of CIT. Headings of sections and paragraphs are for convenience only, are not part of this Agreement and shall not be deemed to affect the meaning or construction of any of the provisions hereof. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such Page 5 of 6 6 prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability shall not invalidate or render unenforceable such provision in any other jurisdiction. Debtor hereby authorizes CIT to correct patent errors and to fill in such blanks as serial numbers and dates herein and in the Notes, Supplements and in any document executed in connection herewith. THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK. DEBTOR HEREBY IRREVOCABLY CONSENTS AND AGREES THAT ANY LEGAL ACTION IN CONNECTION WITH THIS AGREEMENT MAY BE INSTITUTED IN THE COURTS OF THE STATE OF NEW YORK, IN THE COUNTY OF NEW YORK OR THE UNITED STATES COURTS FOR THE SOUTHERN DISTRICT OF NEW YORK, AS CIT MAY ELECT, AND BY EXECUTION AND DELIVERY OF THIS AGREEMENT, DEBTOR HEREBY IRREVOCABLY ACCEPTS AND SUBMITS TO, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, THE NON-EXCLUSIVE JURISDICTION OF ANY SUCH COURT, AND TO ALL PROCEEDINGS IN SUCH COURTS. DEBTOR AND CIT ACKNOWLEDGE THAT JURY TRIALS OFTEN ENTAIL ADDITIONAL EXPENSES AND DELAYS NOT OCCASIONED BY NONJURY TRIALS. DEBTOR AND CIT AGREE AND STIPULATE THAT A FAIR TRIAL MAY BE HAD BEFORE A STATE OR FEDERAL JUDGE BY MEANS OF A BENCH TRIAL WITHOUT A JURY. IN VIEW OF THE FOREGOING, AND AS A SPECIFICALLY NEGOTIATED PROVISION OF THIS AGREEMENT, DEBTOR AND CIT HEREBY EXPRESSLY WAIVE ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION ARISING UNDER THIS AGREEMENT, OR THE TRANSACTIONS RELATED HERETO, WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE; AND DEBTOR AND CIT HEREBY AGREE AND CONSENT THAT DEBTOR OR CIT MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered by their duly authorized officers as of August 14, 1995. CIT: DEBTOR: THE CIT GROUP/EQUIPMENT MEGATEST CORPORATION FINANCING, INC., A DELAWARE CO A NEW YORK CORPORATION By: /s/ WALTER IMPEY By: /s/ PAUL W. EMERY, II --------------------------- --------------------------- Title: Senior Vice President Title: VP Finance & CFO ----------------------- ------------------------ Page 6 of 6 7 [LOGO] RIDER A TO LOAN AND SECURITY AGREEMENT DATED AUGUST 14, 1995 BETWEEN THE CIT GROUP/EQUIPMENT FINANCING, INC. ("CIT") AND MEGATEST CORPORATION ("DEBTOR"). 1. DEFINITIONS. As used in the Loan and Security Agreement, the following terms shall have the following defined meanings (applicable to both singular and plural forms), unless the context otherwise requires: "Agreement": "hereof", "hereto", "hereunder" and words of similar meaning: the Loan and Security Agreement of even date herewith between Debtor and CIT including this Rider A and any other rider, schedule and exhibit executed by Debtor and CIT in connection herewith, as from time to time amended, modified or supplemented. "Business Day": a day other than a Saturday, Sunday or legal holiday under the laws of the State of New York. "Closing Date": each date on which a Loan is made. "Code": the Uniform Commercial Code as from time to time in effect in any applicable jurisdiction. "Collateral": the Equipment and the Proceeds thereof. "Commitment": CIT's obligation to make Loans in the aggregate principal amount stated in paragraph 2 of this Rider A. "Cost": with respect to any item of Equipment, the orderly liquidation value of such Equipment, which orderly liquidation value shall be set forth in the applicable Supplement. "Default": any event which with notice, lapse of time, or both would constitute an Event of Default. "Equipment": any and all items of property which are listed on Supplements, together with all now owned or hereafter acquired accessories, parts, repairs, replacements, substitutions, attachments, modifications, additions, improvements, upgrades and accessions of a permanent nature, to or upon such items of property. "Environmental Laws": the Resource Conservation and Recovery Act, the Comprehensive Environmental Response, Compensation and Liability Act, any so-called "Superfund" or "Superlien" law, the Toxic Substances Control Act, or any other federal, state or local statute, law, ordinance, code, rule, regulation, order or decree regulating, relating to, or imposing liability or standards of conduct concerning, any hazardous, toxic or dangerous waste, substance or material, as now or at any time hereafter in effect. "Event of Default": as set forth in Section 6 of the Agreement. "Event of Loss": with respect to any item of Equipment, (i) the actual or constructive loss or loss of use thereof, due to theft, destruction, damage beyond repair or to an extent which makes repair uneconomical, or (ii) the condemnation, confiscation or seizure thereof, or requisition of title thereto, or use thereof, by any Person. "Hazardous Materials": any pollutant or contaminant defined as such in (or for the purposes of) any Environmental Laws including, but not limited to, petroleum, any radioactive material, and asbestos in any form or condition. "Installment Payment Date": with respect to any Note, each date on which a regular installment of principal is due. "Interest Rate": as set forth in paragraph 3 of this Rider A. "Late Charge Rate": a rate per annum equal to 3% over the applicable Interest Rate, but not to exceed the highest rate permitted by applicable law. "Liens": liens, mortgages, security interests, financing statements or other encumbrances of any kind whatsoever. "Loan": each loan made pursuant to the Agreement. "Note": each promissory note executed and delivered by Debtor pursuant hereto, satisfactory in form and substance to CIT. "Obligations": all indebtedness, obligations, liabilities and performance of Debtor to CIT, now existing or hereafter incurred under, arising out of, or in connection with, the Agreement or any Note; and any and all other present and future indebtedness, obligations, liabilities and performance of any kind whatsoever of Debtor to CIT, whether direct or indirect, joint or several, absolute or contingent, liquidated or unliquidated, secured or unsecured, matured or unmatured and whether originally contracted with CIT or otherwise acquired by CIT. Page 1 of 3 8 "Person": an individual, partnership, corporation, trust, unincorporated association, joint venture, governmental authority or other entity of whatever nature. "Proceeds": the meaning assigned to it in the Code, and in any event, including, without limitation, (i) any and all proceeds of any insurance, indemnity, warranty or guaranty payable to Debtor from time to time with respect to any of the Equipment; (ii) any and all payments made, or due and payable from time to time, in connection with any requisition, confiscation, condemnation, seizure or forfeiture of all or any part of the Equipment by any Person; (iii) any and all accounts arising out of, or chattel paper evidencing a lease of, any of the Equipment; and (iv) any and all other rents or profits or other amounts from time to time paid or payable in connection with any of the Equipment. "Prohibited Transaction": a transaction in which: (i) Debtor enters into any transaction of merger or consolidation where after giving effect to such merger or consolidation its tangible net worth does not equal or exceed that which existed prior to such merger or consolidation; or (ii) Debtor sells, transfers or otherwise disposes of all or any substantial part of its assets; or (iii) any Person, or group of Persons acting together, becomes or agrees to become the beneficial owner (directly or indirectly) of 50% or more of Debtor's shares of voting stock (excluding current shareholders as of the date of this Agreement owning 50% or more of Debtor's shares of voting stock). "Supplement": each supplement executed and delivered by Debtor pursuant hereto, satisfactory in form and substance to CIT. "Treasury Rate": with respect to any Loan made hereunder, the rate per annum equal to the yield to maturity for the U.S. Treasury Security having a remaining term to maturity closest to 4 years as at (and shall be fixed as of) the close of business on the 3rd Business Day prior to the making of such Loan as reported on page 5 ("U.S. Treasury and Money Markets") of the information ordinarily provided by Telerate Systems Incorporated. 2. LOAN AND COMMITMENT. The aggregate principal amount of all Loans shall not exceed $5,000,000.00. Each Loan shall be in a principal amount of not less than $250,000.00. CIT's Commitment shall terminate on September 30, 1995. 3. INTEREST RATE. The interest rate per annum on the unpaid principal amount of each Loan shall be equal to the Treasury Rate plus 3.32%. 4. PREPAYMENT. (a) Should any item of Equipment suffer an Event of Loss, Debtor shall either (i) make a prepayment on the corresponding Note within 30 days thereafter, or (ii) substitute as Collateral for the item of Equipment which was subject to an Event of Loss an item of equipment of similar type and value which is in as good or better condition as the item which suffered an Event of Loss, and is acceptable to CIT. The amount to be prepaid shall be (i) the unpaid principal amount of such Note multiplied by a fraction the numerator of which is the Cost of the item of Equipment which suffered the Event of Loss and the denominator of which is the original Cost of all Equipment less the Cost of each item of Equipment which previously suffered an Event of Loss or for which a prepayment has otherwise previously been made (the "Prepaid Principal Amount"), and (ii) all other amounts then due and owing hereunder and under the Notes. (b) Not less than twenty (20) Business Days prior to the date the proposed Prohibited Transaction is expected to be consummated, Debtor shall give CIT written notice of the proposed Prohibited Transaction. In the event CIT does not consent to the Prohibited Transaction and the Prohibited Transaction is nonetheless to be consummated, Debtor shall, on or prior to the date the Prohibited Transaction is to be consummated, prepay the outstanding principal under all Notes together with (1) all interest accrued thereon, and (2) all other amounts then due and owing hereunder and under the Notes. (c) On any Installment Payment Date occurring on or after the 13th Installment Payment Date with respect to the Note executed hereunder, Debtor may, at its option, on at least 30 days' prior written notice to CIT, prepay all, or any part of, the outstanding principal under all Notes executed hereunder together with (i) interest accrued thereon to the date of prepayment, and (ii) all other amounts then due and owing hereunder or under the Notes. In addition, upon any prepayment pursuant to this paragraph 4(c), Debtor shall pay to CIT a prepayment fee in an amount equal to 3% of the principal being prepaid at month 13 and declining rateably thereafter over the remaining Loan term. (d) Except as provided in (a), (b) or (c) of this paragraph 4, the Notes may not be prepaid in whole or in part. Page 2 of 3 9 5. ADDRESSES FOR NOTICE PURPOSES AND DEBTOR'S CHIEF EXECUTIVE OFFICE. CIT: DEBTOR: THE CIT GROUP/EQUIPMENT FINANCING, INC. MEGATEST CORPORATION Address: Address: 1211 Avenue of the Americas 1321 Ridder Park Drive 21st Floor San Jose, California 95131-2306 New York, New York 10036 Telecopier No. (212) 536-1385 Telecopier No. (408) 451-3202 Attention: Senior Vice President/Credit Attention: Vice President - Finance 6. COMMITMENT FEE. CIT acknowledges receipt from Debtor of a commitment fee in the amount of $10,000.00 (the "Commitment Fee"). CIT agrees to refund to Debtor after the expiration of the commitment period hereunder and completion by CIT of all follow-up matters related to the transactions contemplated hereby, as the refundable portion of the Commitment Fee, the amount determined in accordance with the following formula: Refund = $10,000.00 Aggregate principal amount of all Loans made X hereunder - not to exceed $5,000,000.00 -------------------------------------------- $5,000,000.00 Such refund shall be net, however, of any out-of-pocket fees, costs, disbursements and expenses incurred by CIT (not to exceed $2,500.00) in connection with the transactions contemplated hereby. Debtor agrees that the difference, if any, between the amount of the Commitment Fee and the amount determined in accordance with the foregoing formula shall be retained by CIT. In the event no Loan is made hereunder, CIT shall retain the entire Commitment Fee. THE PROVISIONS SET FORTH IN THIS RIDER A ARE INCORPORATED IN AND MADE A PART OF THE LOAN AND SECURITY AGREEMENT BETWEEN CIT AND DEBTOR DATED AS OF AUGUST 14, 1995. CIT: DEBTOR: THE CIT GROUP/EQUIPMENT MEGATEST CORPORATION, FINANCING, INC., A NEW YORK CORPORATION A DELAWARE CORPORATION By: /s/ WALTER IMPEY By: /s/ PAUL W. EMERY, II ------------------------------ ------------------------- Title: Senior Vice President Title: VP Finance & CFO --------------------------- ---------------------- Page 3 of 3 10 PROMISSORY NOTE $5,000,000.00 August 15, 1995 FOR VALUE RECEIVED, MEGATEST CORPORATION ("Debtor") promises to pay to the order of THE CIT GROUP/EQUIPMENT FINANCING, INC. ("CIT"), at such address as CIT may designate, in lawful money of the United States, the principal sum of FIVE MILLION AND 00/100 DOLLARS ($5,000,000.00) together with interest in like money on the principal sum remaining unpaid from time to time from the date of this Note until due and payable (whether as stated, by acceleration or otherwise) at the rate of nine and .4735/100 percent (9.4735%) per annum, said principal and interest to be paid in forty-eight (48) consecutive monthly installments, commencing on September 15, 1995 with the following installments on the same day of each month thereafter until payment in full of this Note. Each such installment shall be a level payment of principal and interest in the amount of $125,552.42. Each such installment shall be applied first to the payment of any unpaid interest on the principal sum and then to payment of principal. Interest shall be calculated on the basis of a 360-day year consisting of twelve 30-day months. Any amount not paid when due under this Note shall bear late charges thereon, calculated at the Late Charge Rate, from the due date thereof until such amount shall be paid in full. Any payment received after the maturity of any installment of principal shall be applied first to the payment of unpaid late charges, second to the payment of any unpaid interest on said principal, and third to the payment of principal. This Note is one of the Notes referred to in the Loan and Security Agreement dated as of August 14, 1995 between Debtor and CIT (herein, as the same may from time to time be amended, supplemented or otherwise modified, called the "Agreement"), is secured as provided in the Agreement, and is subject to prepayment only as provided therein, and the holder hereof is entitled to the benefits thereof. Terms defined in the Agreement shall have the same meaning when used in this Note, unless the context shall otherwise require. Except as provided in the Agreement, Debtor hereby waives presentment, demand of payment, notice of dishonor, and any and all other notices or demands in connection with the delivery, acceptance, performance, default or enforcement of this Note and hereby consents to any extensions of time, renewals, releases of any party to this Note, waivers or modifications that may be granted or consented to by the holder of this Note. Upon the occurrence of any one or more of the Events of Default specified in the Agreement, the amounts then remaining unpaid on this Note, together with any interest accrued, may be declared to be (or, with respect to certain Events of Default, automatically shall become) immediately due and payable as provided therein. In the event that any holder shall institute any action for the enforcement or the collection of this Note, there shall be immediately due and payable, in addition to the unpaid balance hereof, all late charges and all costs and expenses of such action, including reasonable attorneys' fees. In accordance with the provisions of the Agreement, Debtor and CIT waive trial by jury in any litigation relating to or in connection with this Note in which they shall be adverse parties, and Page 1 of 2 11 Debtor hereby waives the right to interpose any setoff, counterclaim or defense of any nature or description whatsoever. Debtor agrees that its liabilities hereunder are absolute and unconditional without regard to the liability of any other party, and that no delay on the part of the holder hereof in exercising any power or right hereunder shall operate a waiver thereof; nor shall any single or partial exercise of any power or right hereunder preclude other or further exercise thereof or the exercise of any other power or right. If at any time this transaction would be usurious under applicable law, then regardless of any provision contained in the Agreement, in this Note or in any other agreement made in connection with this transaction, it is agreed that (a) the total of all consideration which constitutes interest under applicable law that is contracted for, charged or received upon the Agreement, this Note or any such other agreement shall under no circumstances exceed the maximum rate of interest authorized by applicable law and any excess shall be credited to Debtor and (b) if CIT elects to accelerate the maturity of, or if CIT permits Debtor to prepay the indebtedness described in, this Note, any amounts which because of such action would constitute interest may never include more than the maximum rate of interest authorized by applicable law and any excess interest, if any, shall be credited to Debtor automatically as of the date of acceleration or prepayment. THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK. MEGATEST CORPORATION By: /s/ PAUL W. EMERY II -------------------------- Title: VP Finance & CFO ----------------------- Page 2 of 2 EX-10.13 4 DEED OF TRUST, FINANCING STATEMENT ETC 1 EXHIBIT 10.13 RECORDING REQUESTED BY AND WHEN RECORDED MAIL TO: SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.), a Delaware corporation c/o Landels, Ripley & Diamond 350 Steuart Street San Francisco, CA 94105-1250 Attn: Bruce W. Hyman, Esq. DEED OF TRUST, FINANCING STATEMENT, SECURITY AGREEMENT AND FIXTURE FILING (WITH ASSIGNMENT OF RENTS AND LEASES) BY MEGATEST CORPORATION, a Delaware corporation as Trustor, TO CHICAGO TITLE COMPANY, a corporation, as Trustee, for the benefit of SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.), a Delaware Corporation as Beneficiary August 25, 1995 2 TABLE OF CONTENTS
Page GRANTING CLAUSE ONE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 GRANTING CLAUSE TWO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 GRANTING CLAUSE THREE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 GRANTING CLAUSE FOUR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 GRANTING CLAUSE FIVE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 GRANTING CLAUSE SIX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 GRANTING CLAUSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 GRANTING CLAUSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 GRANTING CLAUSE NINE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 GRANTING CLAUSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 GRANTING CLAUSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 ARTICLE I COVENANTS AND AGREEMENTS 1.1 Performance by Trustor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1.2 Payment of Taxes, Assessments, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 A. Impositions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 B. Installments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 C. Receipts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 D. Evidence of Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 E. Payment by Beneficiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 F. Change in Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 G. Permitted Contest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 H. No Lease Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 I. Joint Assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 1.3 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 A. Extended Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 B. Additional Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 C. Separate Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 D. Insurers; Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 E. Beneficiary's Right to Provide Coverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 F. Damage or Destruction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 G. Trustor's Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 H. Transfer of Interest in Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 1.4 Escrow Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 1.5 Care and Use of Premises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 A. Maintenance and Repairs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 B. Standard of Repairs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 C. Notice to Trustor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 D. Removal of Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 E. Compliance With Laws and Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 F. Permitted Contests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 G. Compliance With Instruments of Record . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 H. Alteration of Secured Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 I. Parking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
-i- 3 J. Entry on Secured Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 K. No Consent to Alterations or Repairs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 L. Mechanics Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 M. Use of Secured Property by Trustor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 N. Use of Secured Property by Public . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 1.6 Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 A. Audit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 B. Right to Inspect Books and Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 1.7 Condemnation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 A. Beneficiary's Right to Participate in Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 B. Application of Condemnation Award . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 C. Reimbursement of Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 D. Existing Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 E. Application of Award . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 1.8 Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 A. Performance of Lessor's Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 B. Notice of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 C. Covenants Regarding Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 D. Application of Rents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 1.9 Assignment of Leases, Rents, Income, and Cash Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . 24 A. Assignment; Discharge of Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 B. Entry Onto Secured Property; Lease of Secured Property . . . . . . . . . . . . . . . . . . . . . . . . 25 C. License to Manage Secured Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 D. Delivery of Assignments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 E. Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 1.10 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 A. General; Appointment of Attorney-in-Fact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 B. Statement Regarding Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 C. Additional Security Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 D. Security Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 E. Preservation of Trustor's Existence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 F. Further Indemnities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 G. Absence of Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 1.11 Further Sales or Encumbrances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 A. Continuing Ownership and Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 B. Transfer or Encumbrance of Secured Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 C. Acceleration of Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 D. Wrap-Around Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 1.12 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 ARTICLE II WARRANTIES AND REPRESENTATIONS 2.1 Warranty of Title . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 2.2 Ownership Of Improvements And Personal Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 2.3 No Pending Material Litigation or Proceeding; No Hazardous Materials . . . . . . . . . . . . . . . . . . . . 35
-ii- 4 A. Proceedings Affecting Trustor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 B. Proceedings Affecting Secured Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 C. No Litigation Regarding Hazardous Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 2.4 Valid Organization, Good Standing and Qualification of Trustor . . . . . . . . . . . . . . . . . . . . . . . 36 2.5 Authorization; No Legal Restrictions on Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 2.6 Compliance With Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 2.7 Tax Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 2.8 Absence of Foreign or Enemy Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 2.9 Federal Reserve Board Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 2.10 Investment Company Act and Public Utility Holding Company Act . . . . . . . . . . . . . . . . . . . . . . . . 38 2.11 Exempt Status of Transactions Under Securities Act and Representations Relating Thereto . . . . . . . . . . . 38 2.12 Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 ARTICLE III DEFAULTS 3.1 Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 ARTICLE IV REMEDIES 4.1 Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 4.2 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 4.3 Rights Pertaining to Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 4.4 Application of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 4.5 Prepayment Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 4.6 Environmental Defaults and Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 ARTICLE V MISCELLANEOUS 5.1 Non-Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 5.2 Sole Discretion of Beneficiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 5.3 Recovery of Sums Required To Be Paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 5.4 Legal Tender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 5.5 No Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 5.6 Discontinuance of Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 5.7 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 5.8 Notice to Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 5.9 Non-Recourse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 5.10 Successors and Assigns Included In Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 5.11 Number and Gender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 5.12 Changes and Modifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 5.13 Applicable Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 5.14 Invalid Provisions to Affect No Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 5.15 Usury Savings Clause . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
-iii- 5 5.16 No Statute of Limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 5.17 Late Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 5.18 Continuing Effectiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
-iv- 6 DEED OF TRUST, FINANCING STATEMENT, SECURITY AGREEMENT AND FIXTURE FILING (WITH ASSIGNMENT OF RENTS AND LEASES) THIS DEED OF TRUST, FINANCING STATEMENT, SECURITY AGREEMENT AND FIXTURE FILING (WITH ASSIGNMENT OF RENTS AND LEASES) (this "Deed of Trust") is made as of the 25th day of August, 1995 by MEGATEST CORPORATION, a Delaware corporation ("Trustor"), having an office at 1321 Ridder Park Drive, San Jose, California 95131-2306 ("Trustor") in favor of CHICAGO TITLE COMPANY, a Delaware corporation ("Trustee") for the benefit of SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.), a Delaware corporation ("Beneficiary") having an office at One Sun Life Executive Park, Wellesley Hills, MA 02181. W I T N E S S E T H : WHEREAS, Trustor has executed and delivered to Beneficiary that certain Promissory Note (the "Note") dated the date hereof made by Trustor and payable to Beneficiary in the original principal amount of FIVE MILLION FOUR HUNDRED FIFTY THOUSAND and No/100 Dollars ($5,450,000.00) lawful money of the United States, which Note is secured by this Deed of Trust and the terms, covenants and conditions of which Note are hereby incorporated herein and made a part hereof (the "Loan"); NOW, THEREFORE, in consideration of the sum of One Dollar ($1.00) this day paid and other good and lawful consideration, the receipt and sufficiency of which is hereby acknowledged, Trustor does hereby irrevocably bargain, sell, transfer, grant, convey, assign and warrant to Trustee, the property described in the Granting Clauses below in order to secure the following obligations (collectively, the "Obligations"): the full and prompt payment and performance of all of the indebtedness, obligations, covenants, agreements and liabilities of Trustor to Beneficiary, together with all interest and other charges thereon, whether direct or indirect, existing, future, contingent or otherwise, due or to become due, under or arising out of or in connection with the Note, this Deed of Trust, the Absolute Assignment of Leases, Rents, Income and Cash Collateral dated the date hereof from Trustor as assignor, to Beneficiary, as assignee, (the "Assignment"), the Environmental Agreement and Indemnity (the "Indemnity"), and any other instrument now or hereafter given to evidence or secure or guaranty Trustor's obligations hereunder (the Note, this Deed of Trust, the Assignment, the Indemnity and such other instruments are herein collectively called the "Loan Documents"); any and all modifications, extensions and renewals of any of the foregoing; and any and all expenses and costs of collection or enforcement, including, without limitation, attorneys' fees incurred by 7 Beneficiary in the collection or enforcement of any of the foregoing, or in the exercise of any of the rights or remedies under the Loan Documents or applicable law. GRANTING CLAUSE ONE All that tract or parcel of land more particularly described in Schedule A hereto and made a part hereof (the "Land"). GRANTING CLAUSE TWO TOGETHER WITH, any and all buildings and real property improvements now or hereafter located or erected on the Land, including, without limitation, any and all machinery, apparatus, equipment and fixtures now or hereafter used or procured for use in connection with the operation of building utilities and/or maintenance of, any building, structure or other real property improvement (including, without limitation, all shades, awnings, venetian blinds, screens, screen doors, storm doors and windows, curtain fixtures, attached floor coverings, or articles used to supply sprinkler protection and office area heating, ventilation and cooling equipment, but excluding trade fixtures and personal property of tenants under Leases (as hereinafter defined) which do not become the property of Trustor upon expiration or termination of the term of such Leases), and all renewals and replacements thereof and articles in substitution therefor used or procured for use in the operation of any and all such buildings, structures and improvements, provided, in all cases, that, whether or not any of the foregoing are attached to said buildings, structures or other improvements in any manner, all such items shall be deemed to be fixtures, part of the real estate and security for the obligations (collectively, the "Improvements", and the Land and Improvements are herein collectively called the "Premises"). Notwithstanding anything to the contrary herein or in any other Loan Document the term "Improvements" shall not include and in no event shall Beneficiary have any lien, interest or other right whatsoever in any item of process heating, ventilating, cooling, plumbing, or electrical equipment, communications equipment, production machinery or equipment, moveable partitions, or any other equipment, machinery, inventory, furniture or fixtures located within the building improvements which may be removed from the Premises without any material permanent damage to the Premises or the building systems thereof. Upon request Beneficiary shall executed such documents as Trustor shall reasonably request to evidence the foregoing to any prospective purchaser or lender of Trustor of such property. To the extent any of the Improvements are not deemed real estate under the laws of the State of California they shall be deemed personal property ("Personal Property") and this Deed of Trust is and shall be deemed to be a -2- 8 Security Agreement for the purposes of creating hereby a security interest under the California Commercial Code in Beneficiary as Secured Party in the Personal Property as hereinafter provided. GRANTING CLAUSE THREE TOGETHER WITH, all easements, rights-of-way, strips and gores of land, streets, ways, alleys, passages, sewer rights, waters, water courses, water rights and powers, and all estates, rights, titles, interests, privileges, liberties, tenements, hereditaments, air rights, development rights and credits and appurtenances of any nature whatsoever, in any way belonging, relating or pertaining to, or above or below the Premises. GRANTING CLAUSE FOUR TOGETHER WITH, all right, title and interest of Trustor, now owned or hereafter acquired, in and to any land lying within the right-of-way of any street, opened or proposed, adjoining the Premises, and any and all sidewalks, alleys and strips and gores of land adjacent to or used in connection with the Premises. GRANTING CLAUSE FIVE TOGETHER WITH, all right, title and interest of Trustor in and to all options to purchase or lease the Premises or any portion thereof or interest therein, and any greater estate in the Premises owned or hereafter acquired by Trustor. GRANTING CLAUSE SIX TOGETHER WITH, all the estate, interest, right, title and other claim or demand which Trustor now has or may hereafter acquire in any and all awards or payments made for the taking by eminent domain, or by any proceeding or purchase in lieu thereof, of the whole or any part of the Premises, including, without limitation, any awards resulting from a change or grade of streets and awards for severance damages to the Secured Property together, in all cases, with any interest thereon. GRANTING CLAUSE SEVEN TOGETHER WITH, all proceeds of and any unearned premiums on any insurance policies covering the Premises, including, without limitation, the right to receive and apply the proceeds of any insurance or judgments, or settlements made in lieu thereof, for damage to the Premises. -3- 9 GRANTING CLAUSE EIGHT TOGETHER WITH, all the estate, interest, right, title and other claim or demand which Trustor now has or may hereafter acquire against anyone with respect to any damage to all or any part of the Premises, including, without limitation, damage arising or resulting from any defect in or with respect to the design or construction of all or any part of the Improvements. GRANTING CLAUSE NINE TOGETHER WITH, all deposits or other security or advance payments, including rental payments, made by or on behalf of Trustor to others in connection with the ownership or operation of all or any part of the Premises including, without limitation, any such deposits or payments made with respect to (i) insurance policies, (ii) utility service, (iii) cleaning, maintenance, repair or similar services supplied for the Premises, (iv) refuse removal or sewer service, (v) rental of equipment, if any, used by or on behalf of Trustor, and (vi) parking or similar services or rights. GRANTING CLAUSE TEN TOGETHER WITH, all remainders, reversions, leasehold estate, other estate, right, title, interest and other claim or demand of Trustor in and to all leases or subleases covering the Premises or any portion thereof now or hereafter existing or entered into, and all right, title and interest of Trustor thereunder, including, without limitation, all cash or security deposits, advance rentals and deposits or payments of similar nature (including, without limitation, termination payments, damages or other payments in lieu thereof). GRANTING CLAUSE ELEVEN TOGETHER WITH, absolutely and presently, all rents, issues, profits, cash collateral, royalties, income and other benefits, including, without limitation, benefits accruing from all present and future oil, gas and mineral leases and agreements derived from the Premises (collectively, the "Rents"), subject to the right, power and authority hereinafter given to Trustor as a licensee to collect and apply such Rents prior to the occurrence of an Event of Default. The foregoing Premises, Personal Property and the real property and personal property rights set forth in Granting Clause Three through Granting Clause Eleven inclusive, hereinabove described or mentioned are hereinafter collectively referred to as the "Secured Property". -4- 10 TO HAVE AND TO HOLD the Secured Property unto Trustee, its successors and assigns, in trust, for the benefit of Beneficiary, its successors and assigns, subject, however, to the terms, covenants and conditions contained herein. PROVIDED, HOWEVER, if Trustor shall pay or cause to be paid to Beneficiary in full the Obligations, at the times and in the manner stipulated in the Loan Documents, and shall keep, perform and observe all and singular the covenants and promises of Trustor in the Loan Documents, then this Deed of Trust and all the properties, interests and rights hereby granted, encumbered, transferred or assigned shall be released by Trustee and/or Beneficiary in accordance with the laws of the State of California. ARTICLE I COVENANTS AND AGREEMENTS Trustor hereby covenants and agrees for the benefit of Beneficiary and Trustee as follows: 1.1 Performance by Trustor. Trustor shall pay the Obligations evidenced by the Note to Beneficiary and shall keep and perform each and every other Obligation. 1.2 Payment of Taxes, Assessments, Etc. A. Impositions. Trustor shall pay when due and payable, before any fine, penalty, interest or cost for the non-payment thereof may be added thereto, all taxes, assessments, water and sewer rents, rates and charges, transit taxes, county taxes, charges for public utilities, excises, levies, vault and all other license and permit fees and other governmental charges, general and special, ordinary and extraordinary, unforeseen and foreseen, of any kind and nature whatsoever which at any time prior to or during the term of this Deed of Trust may be assessed, levied, confirmed, imposed upon or become due and payable out of or in respect to, or become a lien on, the Secured Property or any part thereof or any appurtenance thereto, prior to or on a parity with the obligations or the lien of this Deed of Trust, as the case may be (all such taxes, assessments, water and sewer rents, rates and charges, transit taxes, county taxes, charges for public utilities, excises, levies, vault and all other license and permit fees and other governmental charges including all interest, penalties, costs and charges accrued or accumulated thereon, are herein collectively called "Impositions", and individually, an "Imposition"). -5- 11 B. Installments. Notwithstanding anything to the contrary contained in subsection A of this Section 1.2, if by law any Impositions may at the option of the taxpayer be paid in installments (whether or not interest shall accrue on the unpaid balance of such Impositions), Trustor may exercise the option to pay the same (and any accrued interest on the unpaid balance of such Impositions) in installments and, in such event, shall pay such installments as the same respectively become due and before any fine, penalty, further interest or cost may be added thereto. C. Receipts. Trustor, upon request of Beneficiary, will furnish to Beneficiary within five (5) days after the date when any Imposition would become delinquent, official receipts of the appropriate taxing authority, or other evidence reasonably satisfactory to Beneficiary evidencing the payment thereof. D. Evidence of Payment. The certificate, advice or bill issued by the appropriate official (designated by law either to make or issue the same or to receive payment of any Imposition) of non-payment of an Imposition shall be prima facie evidence that such Imposition is due and unpaid at the time of the making or issuance of such certificate, advice or bill. Trustor agrees to pay Beneficiary, on demand, all charges, costs and expenses of every kind incurred by Beneficiary in connection with obtaining evidence satisfactory to Beneficiary that the payment of all Impositions is current and that there is no Imposition due and owing or which has become or given rise to a lien on the Secured Property or any part thereof or any appurtenance thereto. E. Payment by Beneficiary. Subject to subsection G of this Section 1.2, if Trustor shall fail to pay any Imposition in accordance with the provisions of this Section 1.2, Beneficiary may, at its option (but shall be under no obligation to do so), pay such Imposition and Trustor will repay to Beneficiary on demand any amount so paid by Beneficiary, with interest thereon at the rate of five percent (5%) per annum greater than the interest rate set forth in the Note (the "Increased Rate") to the date of repayment and all such amounts shall be secured by this Deed of Trust. In no event shall the Increased Rate be greater than the highest applicable interest rate permissible by law, if any. F. Change in Law. In the event of the passage after the date of this Deed of Trust of any law of the State of California deducting the Obligations from the value of the Secured Property or any part thereof for the purpose of taxation or resulting in any lien thereon, or changing in any way the laws now in force for the taxation of this Deed of Trust or the Obligations for state or local purposes, or the manner of the -6- 12 operation of any such taxes so as to affect the interest of Beneficiary, then, and in such event, Trustor shall bear and pay the full amount of such taxes, provided that if for any reason payment by Trustor of any such new or additional taxes would be unlawful or if the payment thereof would constitute usury or render the loan or Obligations wholly or partially usurious under any of the terms or provisions of the Note, this Deed of Trust or otherwise, Beneficiary may, at its option, declare the whole sum secured by this Deed of Trust with interest thereon to be immediately due and payable, or Beneficiary may, at its option, pay that amount or portion of such taxes as renders the loan or obligations unlawful or usurious, in which event Trustor shall concurrently therewith pay the remaining lawful and non-usurious portion or balance of said taxes. G. Permitted Contest. Provided that Trustor shall not be in default under any of the Loan Documents, Trustor shall have the right to contest the amount or the validity, in whole or in part, of any Imposition by appropriate proceedings diligently conducted in good faith. Notwithstanding the provisions of this Section 1.2, but subject to the provisions of subsection 1.2H, Trustor may postpone or defer payment of such Imposition if Trustor, on or before the due date thereof, shall (1) deposit or cause to be deposited with Beneficiary a surety bond issued by a surety company of recognized responsibility acceptable to Beneficiary conditioned upon and securing the payment in full of such Imposition, pending the determination of such contest, or (2) deposit or cause to be deposited with Beneficiary an amount equal to one hundred (100%) percent of such Imposition or any balance thereof remaining unpaid, and from time to time, but not more frequently than quarterly, deposit amounts in order to keep in deposit at all such times an amount equal to one hundred (100%) percent of the Imposition remaining unpaid, or (3) furnish or cause to be furnished to Beneficiary other security reasonably satisfactory to Beneficiary. If such deposit is made or such security furnished and Trustor continues in good faith to contest the validity of such Imposition by appropriate legal proceedings which shall operate to prevent the collection of such Imposition so contested and the sale of the Secured Property or any part thereof to satisfy such Imposition, Trustor shall be under no obligation to pay such Imposition until such time as it has been finally determined to be a valid lien on the Secured Property. Upon termination of any such proceedings, Trustor shall pay in full the amount of such Imposition or part thereof as shall have been finally determined in such proceedings together with any liabilities in connection therewith. Beneficiary shall have the full power and authority to apply or require the application of any amounts that may have been deposited pursuant to this subsection 1.2G to payment of any unpaid Imposition without liability, however, for any failure to apply any amount so -7- 13 deposited unless Trustor or the person making such deposit had requested in writing the application of such amount to the payment of the particular Imposition with respect to which it was deposited in which event Beneficiary shall apply such amounts in accordance with such request. Any surplus remaining in the hand of the Beneficiary after the Imposition for which the deposit was made has been paid in full shall be repaid to Trustor or the person making such deposit unless Trustor shall be in default under any of the Loan Documents, and in case of such default such surplus shall be applied to cure such default, and the remainder of such surplus, if any, shall be repaid to Trustor. H. No Lease Default. If contesting the validity or amount of any Imposition shall cause a breach of any of the terms, conditions or covenants required to be performed by Trustor as lessor under any Lease (as hereinafter defined), then Trustor shall not have the right to contest the same as provided in subsection 1.2G, and payment of such Imposition shall be made pursuant to subsection 1.2A of this Section 1.2. I. Joint Assessment. Trustor covenants and agrees not to suffer, permit or initiate the joint assessment of the Premises and Personal Property, or any other procedure whereby the lien of the personal property taxes shall be assessed or levied or charged to the Secured Property together with real property taxes. 1.3 Insurance. A. Extended Coverage. Trustor, at its sole cost and expense, shall keep the Personal Property and the Improvements insured during the term of this Deed of Trust against loss or damage by fire and against loss or damage by other risks now embraced by "Extended Coverage," so called, in amounts, forms and substance satisfactory to Beneficiary, but in no event shall the amounts be less than the greater of (1) 100% of the full replacement cost of the Personal Property and the Improvements, including work performed for tenants, without deduction for depreciation; (2) the amounts required to prevent any insured from becoming a co-insurer; or (3) the amounts required under any Lease. B. Additional Coverage. Trustor, at its sole cost and expense, shall also maintain: (1) Personal injury and property damage liability insurance against claims for bodily injury, death or property damage, occurring on, in or about the Secured Property or in or about the adjoining streets, sidewalks and passageways; such insurance to afford protection, during the term of this Deed of -8- 14 Trust, in amounts and in form and substance reasonably satisfactory to Beneficiary; (2) If there are any Leases, rent or business interruption insurance in an amount equal to one year's aggregate rentals (including, without limitation, minimum rentals, escalation charges, percentage rents, based on sales projections acceptable to Beneficiary, and other additional rentals, and any other amounts payable by tenants or other occupants under Leases or otherwise) payable by all tenants and other occupants at the Premises, which amount shall be increased from time to time upon the leasing of space at the Premises or upon the increase in aggregate rentals (including the other items referred to above); (3) War risk insurance upon the building and other Improvements as and when such insurance is obtainable from the United States of America or any agency or instrumentality thereof for the maximum amount of insurance obtainable; (4) Such other insurance, including, without limitation, all risk in such amounts and in form and substance as may from time to time be reasonably required by Beneficiary against other insurable hazards, including, but not limited to, malicious mischief, vandalism, windstorm, nuclear reaction or radioactive contamination, which at the time are commonly insured against and generally available in the case of premises similarly situated, due regard being or to be given to the height and type of Improvement, its location, construction, use and occupancy; (5) If the Improvements are located in a flood hazard area, flood insurance on the Improvements in an amount equal to the lesser of "full replacement cost" thereof or the maximum amount of insurance obtainable; and (6) Insurance against loss or damage from (a) leakage of sprinkler systems and (b) explosion of steam boilers, air conditioning equipment, pressure vessels or similar apparatus now or hereafter installed in or on the Premises in such amounts as Beneficiary shall from time to time require. (7) Trustor shall pay all premiums and other charges required to maintain or replace Beneficiary's title insurance policy insuring the lien of this Deed of Trust in an amount equal to the Obligations. C. Separate Insurance. Trustor shall not carry separate insurance, concurrent in kind or form, and contributing, in the event of loss, with any insurance required hereunder. Trustor may, however, effect for its own account any insurance not required under the provisions of this Deed of Trust but any -9- 15 such insurance effected by Trustor on the Secured Property whether or not required under this Section 1.3 shall be for the mutual benefit of Trustor and Beneficiary, as their respective interests may appear, and shall be subject to all other provisions of this Section 1.3. D. Insurers; Policies. All insurance provided for in this Section 1.3 shall be effected under valid and enforceable policies issued by financially responsible insurers authorized to do business in the State of California, which are approved in writing by Beneficiary. All such policies shall be deposited with and held by Beneficiary. All casualty insurance policies and rent insurance policies shall be payable to Beneficiary pursuant to a standard non-contributory mortgage endorsement in favor of Beneficiary, and such policies shall contain a waiver of subrogation endorsement, all in form and content satisfactory to Beneficiary. All original policies shall contain a provision that such policies will not be canceled or materially amended, which term shall include any reduction in the scope or limits of coverage, without at least thirty (30) days' prior written notice to Beneficiary. Not less than thirty (30) days prior to the expiration dates of the policies theretofore furnished pursuant to this Deed of Trust, originals of the policies bearing notations evidencing the payment of premiums or accompanied by other evidence satisfactory to Beneficiary of such payment, shall be delivered by Trustor to Beneficiary. In the event of a change in ownership of the Secured Property immediate notice thereof shall be delivered to all insurers by Trustor. E. Beneficiary's Right to Provide Coverage. In the event Trustor fails to provide, maintain, keep in force or deliver and furnish to Beneficiary the original policies of insurance required by this Section 1.3, Beneficiary may, at its sole option, procure such insurance and Trustor will pay all premiums thereon promptly upon demand by Beneficiary with interest thereon at the Increased Rate to the date of repayment and all such amounts shall be secured by this Deed of Trust. F. Damage or Destruction. After the happening of any casualty to the Secured Property or any part thereof, Trustor shall give prompt written notice thereof to Beneficiary and the following shall apply: (1) In the event of any damage or destruction of all or any part of the Secured Property, all proceeds of insurance shall be payable to Beneficiary, and Trustor hereby authorizes and directs any affected insurance company to make payment of such proceeds directly to Beneficiary. Insurance proceeds held by Beneficiary may be commingled with other funds in Beneficiary's possession, shall constitute additional security -10- 16 for the Obligations and Trustor shall not be entitled to the payment of interest thereon. So long as no Event of Default exists, Trustor is hereby authorized and empowered by Beneficiary, subject to the approval of Beneficiary, to settle, adjust or compromise any claims for loss, damage or destruction under any policy or policies of insurance; provided, however, that Trustor shall give notice to and consult with Beneficiary prior to any such action. (2) In the event of any such damage or destruction, subject to subsection 1.3G Beneficiary shall have the option in its sole and absolute discretion and without regard to the adequacy of its security hereunder, of applying all or part of the insurance proceeds (a) to the repayment of principal, whether or not then due, in the inverse order of maturity, or (b) to the repair or restoration of the Secured Property, or (c) to cure any then current default under any of the Loan Documents, or (d) to reimburse the Beneficiary for its costs and expenses in connection with the recovery of such insurance proceeds, or (e) any combination of the foregoing. (3) Nothing herein contained shall be deemed to excuse Trustor from repairing or maintaining the Secured Property as provided in Section 1.5 hereof or restoring all damage or destruction to the Secured Property, regardless of whether there are insurance proceeds available or whether such proceeds are sufficient in amount; provided, however, if Beneficiary elects to apply all of the proceeds to repayment of principal as set forth in subsection (2) above, Trustor shall be excused from such restoration. G. Trustor's Use of Proceeds. (1) Notwithstanding the provisions of Section 1.3(F)(2) above (except for any destruction which occurs during the last six (6) months of the loan term), upon full satisfaction of all of the conditions set forth below, the insurance proceeds shall be made available to Trustor for repair and restoration after deducting and payment to Beneficiary of Beneficiary's costs of collection and disbursement of such proceeds (which costs shall not include Beneficiary's overhead or the compensation of Beneficiary's employees), provided: (a) The proceeds are deposited with Beneficiary; (b) No default shall have occurred and be continuing under the terms of any of the Loan Documents; -11- 17 (c) The insurance carrier does not deny liability to any named insured; (d) If Beneficiary so requests, Beneficiary is furnished with an estimate of the cost of restoration accompanied by a certificate of an architect or registered engineer approved by Beneficiary ("Beneficiary's Architect") as to such costs; (e) The value of the Secured Property so restored or rebuilt shall be at least equal to what was originally erected; (f) Trustor furnishes Beneficiary with evidence reasonably satisfactory to Beneficiary that all Improvements to be restored and/or reconstructed and their use shall fully comply with all (i) applicable easements, covenants, conditions, restrictions or other private agreements affecting the Premises, (ii) zoning and building laws, ordinances and regulations and (iii) all other applicable federal, state and municipal laws, regulations and requirements; (g) If the estimated cost of reconstruction exceeds the proceeds available, at Beneficiary's option, Trustor shall (i) furnish a bond of completion or provide such other evidence satisfactory to Beneficiary of Trustor's ability to meet such excess costs or (ii) deposit with Beneficiary additional funds equal to such excess; (h) If such damage is in excess of $10,000, Beneficiary shall have received notice of destruction caused by such fire or other hazard from the Trustor within ten (10) days from the date thereof, which notice shall state the date of such fire or other hazard and a request to Beneficiary to make the insurance proceeds available to Trustor; and (i) Beneficiary shall have reasonably determined that such damage or destruction is fully reparable prior to the Maturity Date (as defined in the Note). (2) Disbursement of the proceeds during the course of reconstruction shall be conditioned upon the certification of Beneficiary's Architect as to the cost of the -12- 18 work done and the conformity of the work to plans and specifications approved by Beneficiary, and evidence supplied by a title insurance company acceptable to Beneficiary that there are no liens arising out of the reconstruction or otherwise. Notwithstanding the above, a portion of the proceeds may be released prior to the commencement of reconstruction to pay for items approved by Beneficiary in its sole discretion. Disbursements shall be made within ten (10) business days after a request by Trustor. No payment made prior to the final completion of work shall exceed ninety percent (90%) of the value of the work performed from time to time, and at all times the undisbursed balance of said proceeds remaining with the Beneficiary must be at least sufficient to pay for the cost of completion of the work free and clear of liens. Final payment shall be upon a certification of Beneficiary's Architect as to completion in accordance with plans and specifications approved by Beneficiary. (3) At such time as Beneficiary's Architect shall certify to Beneficiary that the damaged or destroyed portion of the Secured Property has been put in a state of repair equivalent to or better than that existing prior to the date of such fire or other casualty, the work shall be deemed completed. With Beneficiary's prior written consent, which may be granted or withheld in Beneficiary's sole discretion, any certification required to be made by an architect or registered engineer may be made by a reputable contractor approved by Beneficiary. The balance of the insurance proceeds so deposited with Beneficiary after full disbursement in accordance with subsection 1.3G, at the sole option of Beneficiary, shall be either (a) returned to Trustor, it being understood that such obligation or reimbursement shall not exceed the amount of insurance proceeds for such restoration and/or repair, or (b) applied to the payment of installments of the Obligations in inverse order of maturity whether or not such installments shall be due and payable. (4) In all cases where any destruction to the Secured Property by fire or other casualty occurs during the last six (6) months of the loan term, or in Beneficiary's reasonable judgment, Trustor is not proceeding with the repair or restoration in a manner that would entitle Trustor to have the proceeds disbursed to it, or for any other reason Beneficiary determines in its reasonable judgment that Trustor shall not be entitled to such proceeds pursuant to the terms of this Deed of Trust, Beneficiary shall have the options set forth in subsection F(2) above. (5) Under no circumstances shall Beneficiary become personally liable for the fulfillment of the terms, -13- 19 covenants and conditions contained in any of the Leases or obligated to take any action to restore the Secured Property. H. Transfer of Interest in Policies. In the event of foreclosure of this Deed of Trust or other transfer of title or assignment of the Secured Property in extinguishment, in whole or in part, of the Obligations, all right, title and interest of Trustor in and to all policies of insurance required by this Section 1.3 shall inure to the benefit of and pass to the successor in interest to Trustor or the purchaser or grantee of the Secured Property. If any claim under any insurance policy shall be paid after the extinguishment of the Obligations, and if such foreclosure of this Deed of Trust, or other transfer of title to or assignment of the Secured Property, shall have resulted in extinguishing the Obligations for an amount less than the total of the amount of the unpaid Obligations, with interest thereon at the Increased Rate, plus counsel fees, costs and other disbursements incurred by Beneficiary at the time of the extinguishment of the Obligations, then the portion of the payment in satisfaction of the claim which is equal to the difference between the total amount above referred to and the amount theretofore paid to Beneficiary shall belong to and be the property of Beneficiary and shall be paid to said Beneficiary, and Trustor hereby assigns, transfers and sets over to Beneficiary all of Trustor's right, title and interest in and to said sum. The balance, if any, shall be paid to Trustor. Notwithstanding the above, Trustor shall retain an interest in the insurance policies above-described during any redemption period. 1.4 Escrow Deposits. To further secure the payment of the Impositions and the premiums for the insurance required by this Deed of Trust, Trustor will deposit with Beneficiary, or its designee, on the due date of each monthly installment of principal and interest under the Note, a sum which shall be equal to one-twelfth (1/12) of the annual total of the Impositions and such insurance premiums required to pay the next installment of Impositions or insurance premiums, as estimated by Beneficiary, one month prior to the date when such Impositions and insurance premiums shall become due and payable. Such deposits shall be held by Beneficiary, or its designee, without obligation for the payment of interest thereon to Trustor, free of any liens or claims on the part of creditors of Trustor and as a part of the security of Beneficiary, and shall be used by Beneficiary, or its designee, to pay current Impositions and insurance premiums as the same shall become payable. Said deposits shall not be, nor be deemed to be, trust funds but may, be commingled with general funds of Beneficiary, or its designee. If at any time and for any reason Beneficiary determines that said deposits are insufficient to pay the Impositions and insurance premiums in -14- 20 full as they become payable, Trustor will deposit with Beneficiary, or its designee, within ten (10) days after demand therefor, such additional sum or sums as may be required in order for Beneficiary, or its designee, to pay such Impositions and insurance premiums in full. It shall be the responsibility of Trustor to furnish bills to Beneficiary in sufficient time for Beneficiary to pay the Impositions and insurance premiums before any penalty attaches and before the policies lapse. Transfer of legal title to the Secured Property shall automatically transfer to the new owner of the beneficial interest in all sums deposited under the provisions of this Section 1.4. This Section 1.4 is intended to provide additional security for the payment of all amounts now and in the future payable for the items set forth above. To that end, Trustor hereby grants, pledges, transfers and assigns to Beneficiary a continuing security interest in and right of set-off against the following, whether now existing or hereafter acquired or arising: all right, title and interest, in, to and under (i) all instruments, securities, documents, accounts, general intangibles, money, and other property and contents therein and thereof, and all rights relating thereto and proceeds therefrom and thereof, including, without limitation, the deposits made into any account from time to time at any time or from time to time in the possession or control of the agent of Beneficiary, (ii) all books and records relating to the types and items of property described in the foregoing clause (i), and (iii) all proceeds (whether cash or non-cash, and including, without limitation, insurance proceeds) and products of the property described in the foregoing clause (i), and all replacements and substitutions therefor and all additions and accessions thereto. In addition to all rights and remedies given to Beneficiary by this Deed of Trust, Beneficiary shall have the rights and remedies of a secured party under the Uniform Commercial Code and any other applicable law. Upon notice from Beneficiary, Trustor will promptly execute such financing statements, continuation statements and other documents as may be necessary or convenient to perfect, continue or otherwise evidence said security interest and pay all expenses and fees for the preparation and filing thereof. Upon occurrence of an Event of Default (as defined herein), all funds held in any such account shall immediately be paid over to Beneficiary. Beneficiary and Trustor agree that Beneficiary shall be entitled to apply such funds to the balance of the Loan in its sole discretion. -15- 21 1.5 Care and Use of Premises. A. Maintenance and Repairs. Trustor, at its sole cost and expense, will take good care of the Secured Property and the sidewalks and curbs adjoining the Secured Property and will keep the same in good order and condition, and make all necessary repairs thereto, interior and exterior, structural and nonstructural, ordinary and extraordinary, unforeseen and foreseen, and will not commit or suffer to be committed any waste of the Secured Property and will not do or suffer to be done anything which will increase the risk of fire or other hazard to the Secured Property or any part thereof. B. Standard of Repairs. The necessity for and adequacy of repairs to the Improvements pursuant to subsection 1.5A shall be measured by the standard which is appropriate for a office, research and development buildings containing 121,071 square feet and related facilities of similar construction and class, provided that Trustor shall in any event make all repairs necessary to avoid any structural damage to the Improvements and to keep the Improvements in a proper condition for their intended use. When used in this Section 1.5, the terms "repair" and "repairs" shall include all necessary renewals and replacements. All repairs made by Trustor shall be made with first-class materials and in a good, substantial and workmanlike manner and shall be equal or better in quality and class to the original work. C. Notice to Trustor. Trustor will notify Beneficiary promptly of any damage to the Secured Property in excess of $10,000.00. D. Removal of Equipment. Trustor shall have the right, at any time and from time to time, to remove and dispose of equipment which is Secured Property and which may have become obsolete or unfit for use or which is no longer useful in the operation of the Secured Property. Trustor will promptly replace any such equipment so disposed of or removed with other equipment of a value and serviceability equal to or greater than the original value and serviceability of the equipment so disposed of or removed, free of superior title, liens and claims; except that, if by reasons of technological or other developments in the operation and maintenance of buildings of the general character of the Improvements, no replacement of the building equipment so removed or disposed of is necessary or desirable in the proper operation or maintenance of said Improvements, Trustor shall not be required to replace same. All such replacements or additional equipment shall be covered by the security interest herein granted. -16- 22 E. Compliance With Laws and Insurance. Trustor shall promptly comply with all present and future laws, ordinances, orders, rules, regulations and requirements of all federal, state and municipal governments, courts, departments, commissions, boards and officers, any national or local Board of Fire Underwriters, including, without limitation, all zoning, building code, environmental protection and equal employment opportunity statutes, ordinances, regulations, orders and restrictions, foreseen or unforeseen, ordinary as well as extraordinary, which may be applicable to the Secured Property and the sidewalks and curbs adjoining the Secured Property or to the use or manner of use of the Secured Property (collectively, "Regulations") whether or not such Regulations shall necessitate structural changes or improvements. Trustor shall not bring or keep any article upon any of the Secured Property or cause or permit any condition to exist thereon which would be prohibited by or could invalidate any insurance coverage maintained, or required hereunder to be maintained, by Trustor on or with respect to any part of the Secured Property, and further shall do all other acts which from the character or use of the Secured Property may be necessary to protect the security hereof, the specific enumerations herein not excluding the general. F. Permitted Contests. Trustor shall have the right, after prior notice to Beneficiary, to contest by appropriate legal proceedings diligently conducted in good faith, without cost or expense to Beneficiary, the validity or application of any Hazardous Materials Law (as defined in the Indemnity) and any other Regulation, and which does not subject Beneficiary to any civil or criminal liability, subject to the following: (1) If by the terms of any such Hazardous Materials Law (as defined in the Indemnity) or any applicable Regulation, compliance therewith pending the prosecution of any such proceeding may legally be delayed without incurring any lien or charge of any kind against the Secured Property, Trustor may delay compliance therewith until the final determination of such proceeding. (2) If any lien or charge against the Secured Property would be incurred by reason of any such delay, Trustor, may contest as aforesaid and delay as aforesaid, provided Trustor (a) furnishes to Beneficiary-security, satisfactory to Beneficiary, against any loss or injury by reason of such contest or delay, and (b) prosecutes the contest with due diligence, Anything in subsection 1.5E or this subsection 1.5F to the contrary notwithstanding, if the contesting of the validity or legality of any such Hazardous Materials Law (as defined in the Indemnity) or any other Regulation shall cause a breach of-any of the terms, conditions or covenants of any Lease on Trustor's -17- 23 part, as lessor therein, to be performed, then Trustor shall not have the right to contest the same as herein provided but compliance therewith must be made pursuant to subsection 1.5E hereof. G. Compliance With Instruments of Record. Trustor will promptly perform and observe, or cause to be performed and observed, all of the terms, covenants and conditions of all instruments of record affecting the Secured Property, non-compliance with which may affect the priority of the lien of this Deed of Trust, or which may impose any duty or obligation upon Trustor or any lessee or other occupant of the Secured Property or any part thereof, and Trustor shall do or cause to be done all things necessary to preserve intact and unimpaired any and all easements, appurtenances and other interests and rights in favor of or constituting any portion of the Secured Property. H. Alteration of Secured Property. Trustor will not demolish, remove, construct, restore, add to or alter any Improvement or any extension thereof, nor consent to or permit any such demolition, removal, construction, restoration, addition or alteration without Beneficiary's prior written consent, except for (1) tenant improvement work and tenant alterations provided for in any Lease approved by Beneficiary in writing, (2) ordinary, non-structural maintenance or other work, and (3) structural repairs and restorations having a cost of less than $100,000. I. Parking. Trustor will grant no parking rights in the Secured Property except with Beneficiary's prior written consent. The Secured Property shall contain at all times not less than 401 on-site parking spaces for standard-size American automobiles, said parking spaces to be located upon the Land. if any part of the automobile parking areas included within said Secured Property is taken by condemnation or said areas are otherwise reduced, Trustor will provide parking facilities in kind, size and location to comply with all Leases, and before making any contract therefor will furnish to Beneficiary satisfactory assurance of completion thereof free of liens and in conformity with all governmental zoning ordinances and regulations. J. Entry on Secured Property. Beneficiary or its representative is hereby authorized to enter upon and inspect the Secured Property at all reasonable times. K. No Consent to Alterations or Repairs. Nothing contained in this Deed of Trust shall be deemed or construed in any way as constituting the consent or request of Beneficiary, express or implied by inference or otherwise to any contractor, -18- 24 subcontractor, laborer or materialman for the performance of any labor or the furnishing of any materials for any specific improvement, alteration to or repair of the Secured Property or any part thereof. L. Mechanics Liens. Trustor will discharge, pay, or bond, or cause to be discharged, paid or bonded, from time to time when the same shall become due, all lawful claims and demands of mechanics, materialmen, laborers and others which, if unpaid, might result in, or permit the creation of, a lien on the Secured Property or any part thereof, or on the revenues, rents, issues, income and profits arising therefrom, and Trustor will do or cause to be done everything necessary so that the lien of this Deed of Trust shall be fully preserved, at the cost of Trustor without expense to Beneficiary. M. Use of Secured Property by Trustor. Trustor will use, or cause to be used, the Secured Property principally and continuously as and for office, research and development and light manufacturing uses. Trustor shall not use, or permit the use of the Secured Property or any part thereof for any other principal use without the prior written consent of Beneficiary. N. Use of Secured Property by Public. Trustor shall not suffer or permit the Secured Property, or any portion thereof, to be used by the public as such, without restriction or in such manner as might impair Trustor's title to the Secured Property or any portion thereof, or in such manner as might make possible a claim or claims of adverse usage or adverse possession by the public, or of implied dedication of the Secured Property or any portion thereof. 1.6 Financial Information. A. Audit. Trustor will keep and maintain complete and accurate books and records of the earnings and expenses of the Secured Property and, without expense to Beneficiary, furnish to Beneficiary, within ninety (90) days after the end of each fiscal year of Trustor, an annual audit prepared and certified by Trustor reasonably satisfactory to Beneficiary, and prepared by an independent certified public accountant in accordance with generally accepted accounting principles relating to real estate consistently applied, which shall include, with respect to the prior fiscal year: (1) a statement of assets and liabilities of Trustor with respect to the Secured Property only, (2) a statement of the source and application of funds by Trustor with respect to the Secured Property, (3) a detailed profit and loss statement relating to the ownership and operation of the Secured Property, including, without limitation, all rents and other income derived therefrom and all expenses paid or incurred in -19- 25 connection therewith, and (4) such interim balance sheets and profit and loss statements and income and expense reports as may be reasonably required by Beneficiary. The audit shall also include annual sales figures for all tenants in the Secured Property who are required by their respective lease to provide same to Trustor. In addition to and simultaneously with the financial statements Trustor shall deliver to Beneficiary a statement reflecting the complete rental status of the Secured Property showing the name of each tenant, the area in square feet occupied, the remaining term of the lease and the rental being paid. B. Right to Inspect Books and Records. Beneficiary or its representative shall have the right to examine and make copies of such books and records and all supporting vouchers and data at the Premises or at Trustor's principal place of business at Trustor's expense. 1.7 Condemnation. A. Beneficiary's Right to Participate in Proceedings. If the Secured Property, or any part thereof, shall be taken in condemnation proceedings or by exercise of any right of eminent domain (collectively, "Condemnation Proceedings"), Beneficiary shall have the right to participate in any such Condemnation Proceedings and the award or payment that may be made in any such Condemnation Proceedings is hereby assigned to Beneficiary and shall be deposited with Beneficiary and disbursed in the manner set forth in this Section 1.7. Trustor will give Beneficiary immediate notice of the actual or threatened commencement of any Condemnation Proceedings affecting all or any part of the Secured Property, including severance and consequential damage and change in grade in streets, and will deliver to Beneficiary copies of any and all papers served in connection with any such proceedings. Notwithstanding the foregoing, Beneficiary is hereby authorized, at its option, to commence, appear in and prosecute in its own or Trustor's name any action or proceeding relating to any such condemnation and to settle or compromise any claim in connection therewith; provided however that Beneficiary shall give notice to and consult with Trustor prior to any action. No settlement for the damages sustained thereby shall be made by Trustor without Beneficiary's prior written approval thereof. Trustor agrees to execute any and all further documents that may be required in order to facilitate the collection of any award or awards and the making of any such deposit. B. Application of Condemnation Award. If at any time title or temporary title to the whole or any part of the Secured Property shall be taken in Condemnation Proceedings or pursuant to any agreement between Trustor, Beneficiary and those -20- 26 authorized to exercise the right to condemnation, Beneficiary, at its option in its sole and absolute discretion and without regard to the adequacy of its security hereunder, shall have the right to apply such award or proceeds which it receives to payment of the Obligations in inverse order of maturity. In the event that all or substantially all of the Secured Property is taken and the amount of the award or proceeds received by Beneficiary shall not be sufficient to pay the then unpaid balance of the Obligations, then the balance of the Obligations shall, at the option of Beneficiary, become immediately due and payable and Trustor shall, within ten (10) days after the application of the award or proceeds as aforesaid, pay such deficiency to Beneficiary. "Substantially all of the Secured Property" shall be deemed to have been taken if the remainder of the Secured Property (1) in the sole opinion of Beneficiary's Architect, cannot be capable of being restored to a self- contained and architecturally complete unit or units or (2) in the sole opinion of Beneficiary, the balance of the Secured Property as restored will not be economically viable and capable of supporting all carrying charges and operation and maintenance expenses. C. Reimbursement of Costs. In the case of any taking covered by the provisions of this Section 1.7, Beneficiary (to the extent that Beneficiary has not been reimbursed therefor by Trustor) shall be entitled, as a first priority, to the reimbursement out of any award or awards for all reasonable costs, fees, reimbursements to Beneficiary and expenses incurred in the determination and collection of any such awards. D. Existing Obligations. Notwithstanding any taking by Condemnation Proceedings, Trustor shall continue to pay the monthly installments due under the Note as well as all other sums secured by this Deed of Trust at the rate provided therein until any such award or payment shall have been actually received by Beneficiary and applied to the Obligations. Any reduction in the Obligations resulting from Beneficiary's application of such award or payment as hereinabove set forth shall be deemed to take effect only on the date of receipt by Beneficiary. If prior to Beneficiary's receipt of such award or payment the Secured Property shall have been sold on foreclosure of this Deed of Trust, Beneficiary shall have the right to receive said award or payment to the extent of any portion of the Obligations still unpaid after application of the proceeds of the foreclosure sale, with interest thereon at the Increased Rate, plus attorneys' fees and other costs and disbursements incurred by Beneficiary in connection with the collection of such award or payment and in establishing the deficiency. The application of condemnation proceeds to the obligations secured by this Deed of Trust, whether or not then due or payable, shall not postpone, abate or reduce any of the periodic installments of principal and/or -21- 27 interest thereafter to become due under this Deed of Trust until the Obligations are paid in full. E. Application of Award. Notwithstanding the provisions of Section 1.7B above (except for a taking which occurs during the last six months of the loan term), upon full satisfaction of all of the following conditions, Beneficiary shall, after deducting Beneficiary's costs in connection with the disbursement of funds, apply the award or payment to the cost to restore, repair or alter the remaining portion of the Secured Property, subject to the provisions of subsection 1.3F (which shall apply in all respects except that any reference therein to insurance proceeds shall be deemed to refer to the award or payment in the taking), and Trustor will promptly restore, repair or alter the remaining Secured Property. The provisions of this subsection 1.7E shall not apply unless (1) the balance of the Improvements shall, in the opinion of Beneficiary's Architect, be capable of being restored to a self-contained and architecturally complete unit or units, (2) the balance of the Improvements after restoration to a self-contained and architecturally complete unit or units shall, in the opinion of Beneficiary, be economically viable and capable of supporting all carrying charges and operating and maintenance expenses of the Secured Property, after reduction, if any, of the Obligations in accordance with the following sentence, and (3) Trustor shall furnish to Beneficiary evidence satisfactory to Beneficiary that the Improvements so restored or reconstructed and their use would fully comply with all zoning and building laws, ordinances and regulations, and with all other applicable federal, state and municipal laws and requirements. The balance of the condemnation award or payment so deposited with Beneficiary, after disbursement in accordance with this subsection 1.7E, shall be applied to the Obligations in inverse order of maturity, whether or not the same shall then be due and payable. All awards and payments and other sums deposited with Beneficiary, until expended or applied as provided in this subsection 1.7E, may be commingled with the general funds of Beneficiary and shall constitute additional security for the Obligations and shall not bear interest. In all cases where a taking occurs during the last six months of the loan term, or in Beneficiary's sole judgment Trustor is not proceeding with the repair or restoration in a manner that would entitle Trustor to have the awards or payments disbursed to it or for any other reason Beneficiary determines in its sole judgment that Trustor shall not be entitled to such awards or payments pursuant to the terms of this Deed of Trust, Beneficiary, at its option in its sole and absolute discretion and without regard to the adequacy of its security hereunder, shall have the right to apply such award or proceeds which it receives to payment of the Obligations in the inverse order of maturity, whether or not the same shall then be due and payable. -22- 28 1.8 Leases. A. Performance of Lessor's Covenants. Trustor, as lessor, may, in accordance with the Assignment, enter into leases with space tenants, as lessees, for parts or all of the Secured Property (all such leases for parts or all of the Secured Property are hereinafter referred to individually as a "Lease" and collectively as "Leases" and the lessees under such Leases are hereinafter referred to individually as a "Lessee" and collectively as "Lessees"). Trustor shall faithfully perform the lessor's covenants under any subsisting and future Leases affecting the Secured Property or any part thereof, and neither do, nor neglect to do, nor permit to be done (other than enforce the terms of such Leases and exercise the lessor's remedies thereunder following a default or event of default on the part of any Lessee in the performance of its prescribed obligations), anything which may cause the modification or termination of any of said Leases, or of the obligations of any Lessee or any other person claiming through such Lessee, or which may diminish or impair the value of any Lease or the rents provided for therein, or the interest of the lessor or of Beneficiary therein or thereunder. B. Notice of Default. Trustor will give Beneficiary immediate notice, by certified mail, of any notice of default, event of default or cancellation given to or received from any Lessee. C. Covenants Regarding Leases. Except as otherwise required under any such Lease, Trustor covenants it will not, without the prior written consent of the Beneficiary obtained in each instance: (1) lease to any person, firm or corporation, except for actual occupancy by such person, firm or corporation all or any part of the space in any of the Improvements; (2) cancel, terminate or accept a surrender or suffer or permit any cancellation, termination or surrender of any Lease, except in accordance with the term of any Lease which as been pre-approved in writing by Beneficiary; (3) modify any Lease so as to reduce the term thereof or the rent payable thereunder, or to change any renewal provision contained therein; (4) commence any summary proceeding or other action to recover possession of any space demised pursuant to any Lease, other than a proceeding brought in good faith by reason of a default of any Lessee; -23- 29 (5) receive or collect or permit the receipt or collection of any rental payments of more than one monthly installment of rent under any Lease in advance of the due dates of such rental payments; (6) take any other action with respect to any Lease which would tend to impair the security of the Beneficiary under this Deed of Trust; (7) extend any present Lease other than in the manner presently provided for therein, or enter into any future Lease with any person, firm or corporation, except on the best terms reasonably obtainable, under Leases which shall in all respects be satisfactory to the Beneficiary as to the form and substance thereof and the credit standing of the respective Lessee thereunder; (8) execute an Agreement or create or permit a lien which may be or become superior to any existing Leases affecting the Secured Property; or (9) sell, assign, transfer, mortgage, pledge or otherwise dispose of or encumber, whether by operation of law or otherwise, any Lease or any rentals under any Lease or any rents, income, profits or cash collateral issuing from the Secured Property. D. Application of Rents. Trustor shall use and apply all rents, income and profits from the Secured Property first to the payment of the Obligations in accordance with the terms of the Loan Documents, and then to the payment of all Impositions and costs and expenses of management, operation, repair, maintenance, preservation, reconstruction and restoration of the Secured Property in accordance with the requirements of this Deed of Trust and the obligations of Trustor as the lessor under any Lease, and shall not use such rents, income or profits for purposes unrelated to the Secured Property unless and until all current payments on the Obligations, Impositions, and such costs and expenses have been paid or provided for and reasonably adequate cash reserves have been set aside to ensure the timely payment of all future payments on such Obligations prior to the maturity thereof, Impositions and such costs and expenses. 1.9 Assignment of Leases, Rents, Income, and Cash Collateral. A. Assignment; Discharge of Obligations. Trustor does hereby absolutely and presently bargain, sell, assign and set over unto Beneficiary, all Leases, rents, income, profits cancellation fees, damages, or similar payments in lieu of rents, -24- 30 and any and all cash collateral which, whether before or after foreclosure or during the full period of redemption, shall be made upon or accrue and be owing for the use or occupation of the Secured Property and of the buildings and fixtures thereon, or any part thereof. For the aforesaid purpose, Trustor does hereby constitute and appoint Beneficiary its attorney-in-fact, irrevocably in its name, to receive, collect and receipt all sums due or owing for such use and occupation, as the same accrue and, out of the amount so collected, Beneficiary, its successors and assigns, are hereby authorized (but not obligated) to pay and discharge all obligations of Trustor hereunder, including, but not being limited to, the obligation to pay the Obligations (and including any accelerated Obligations) in such order as Beneficiary, its successors or assigns, may determine and whether due or not, and to pay the remainder, if any, to Trustor, but neither this assignment nor any such action shall constitute Beneficiary as a "mortgagee in possession". The assignments of Leases, rents, income, profits and any and all cash collateral of the Secured Property in this Section 1.9 is intended to be an absolute and present assignment from Trustor to Beneficiary and not merely the passing of a security interest. Trustor shall, at any time or from time to time, upon request of Beneficiary, execute and deliver any instrument as may be requested by Beneficiary to further evidence the assignment and transfer to Beneficiary of Trustor's interest in any Lease. Nothing herein shall in any way limit Beneficiary's remedies or Trustor's obligations under the Assignment to Beneficiary. B. Entry Onto Secured Property; Lease of Secured Property. Upon the occurrence of an Event of Default (as hereinafter defined); Beneficiary at its sole option shall have the right to enter and take possession of the Secured Property and manage and operate the same as further provided in subsection 4.1C, including, without limitation, the right to enter into Leases and new agreements extending said termination dates beyond the maturity set forth in the Note and take any action which, in Beneficiary's judgment, is necessary or proper to conserve the value of the Secured Property. The expenses (including any receiver's fees, attorneys' fees, costs and agent's compensation) incurred pursuant to the powers herein contained shall be secured hereby. Beneficiary shall not be liable to account to Trustor for any action taken pursuant hereto other than to account for any rents actually received by Beneficiary. C. License to Manage Secured Property. Notwithstanding anything to the contrary contained in subsection A of this Section 1.9, as long as there shall exist no default hereunder, Trustor shall have the license to manage and operate the Secured Property, including without limitation, the -25- 31 right to enter into Leases, and collect, as they accrue, all such rents, income, profits and cash collateral. D. Delivery of Assignments. Trustor will, as requested from time to time by Beneficiary, execute such additional documents to evidence the assignment to Beneficiary or its nominee of any Leases now or hereafter made upon said Secured Property, such assignment documents to be in form and content acceptable to Beneficiary. For the aforesaid purposes, Trustor agrees to deliver to Beneficiary within thirty (30) days after Beneficiary's request, a duplicate original of every Lease which is at the time of such request outstanding upon the said Secured Property and in addition thereto shall supply Beneficiary at its request a complete list of each and every Lease certified by (1) an officer of Trustor, if Trustor is a corporation, or (2) a general partner of Trustor (or an officer of any such general partner which is a corporation) if Trustor is a partnership or (3) a trustee of Trustor (or an officer of any such trustee which is a corporation) if Trustor is a trust, or (4) Trustor if Trustor is an individual or individuals, showing unit number, type, name of each Lessee, monthly rental, date to which rents have been paid, term of Lease, date of occupancy, date of expiration and any and every special provision, concession or inducement granted to Lessee. E. Indemnity. Notwithstanding anything to the contrary set forth in this Section 1.9, Trustor agrees that in the exercise of the rights of Beneficiary contained in this Section 1.9, no liability shall be asserted against Beneficiary, all such liability being expressly waived and released by Trustor. Trustor hereby holds Beneficiary harmless from and against any and all claims, liabilities and expenses of any kind or nature against or incurred by Beneficiary arising out of such management, operation or maintenance of the Secured Property or the collection and disposition of rents, income, profits or cash collateral therefrom, except for any claim, liability or expense arising out of Beneficiary's fraud, bad faith, willful misconduct or gross negligence. 1.10 Further Assurances. A. General; Appointment of Attorney-in-Fact. At any time, and from time to time, upon request by Beneficiary, Trustor will make, execute, and deliver or cause to be made, executed and delivered to Beneficiary, any and all other instruments, certificates and other documents as may, in the opinion of Beneficiary, be reasonably necessary or desirable in order to effectuate, complete, perfect or continue and preserve the obligations of Trustor under the Note and the Loan Documents. Upon any failure by Trustor to do so, Beneficiary may make, -26- 32 execute and record any and all such instruments, certificates and documents for and in the name of Trustor and Trustor hereby irrevocably appoints Beneficiary the agent and attorney-in-fact of Trustor for such purposes. Trustor will reimburse Beneficiary for any sums expended by Beneficiary in making, executing and recording such instruments, certificates and documents and such sums shall be secured by this Deed of Trust. B. Statement Regarding Obligations. Trustor from time to time, within ten (10) days after request by Beneficiary, shall furnish Beneficiary with a written statement, duly acknowledged, setting forth the unpaid principal of, and interest on, the Obligations secured hereby and whether or not any set-offs or defenses exist against such principal and interest, and, if so, the particulars thereof. C. Additional Security Instruments. Trustor shall from time to time, within fifteen (15) days after request by Beneficiary, execute, acknowledge and deliver to Beneficiary such chattel mortgages, security agreements or other similar security instruments, in form and substance satisfactory to Beneficiary, covering all property of any kind whatsoever owned by Trustor or in which Trustor may have any interest which in the sole opinion of Beneficiary, is essential to the operation and maintenance of the Secured Property. Trustor shall further from time to time within fifteen (15) days after request by Beneficiary, execute, acknowledge and deliver any financing statement, renewal, affidavit, certificate, continuation statement or other document as Beneficiary may request in order to perfect, preserve, continue, extend or maintain the security interest under, and the priority of, this Deed of Trust or such chattel Deed of Trust or other security instrument as a first lien. Trustor further agrees to pay to Beneficiary on demand all costs and expenses incurred by Beneficiary in connection with the preparation, execution, recording, filing and refiling of any such instrument or document, including the charges for examining title and the attorneys' fee for rendering an opinion as to the priority of this Deed of Trust and of such chattel Deed of Trust or other security instrument as a valid first and subsisting lien. However, neither a request so made by Beneficiary nor the failure of Beneficiary to make such a request shall be construed as a release of such property, or any part thereof, from the lien of this Deed of Trust, it being understood and agreed that this covenant and any such chattel Deed of Trust, security agreement or other similar security instrument, delivered to Beneficiary, are cumulative and given as additional security. Trustor shall also pay all premiums and related costs in connection with any title insurance policy or policies in full or partial replacement of the title policy now insuring or which will insure the lien of this Deed of Trust. -27- 33 D. Security Agreement. (1) THIS DEED OF TRUST CREATES A LIEN ON THE SECURED PROPERTY, AND TO THE EXTENT THE PROPERTY IS PERSONAL PROPERTY UNDER APPLICABLE LAW, THIS DEED OF TRUST CONSTITUTES A SECURITY AGREEMENT UNDER THE CALIFORNIA UNIFORM COMMERCIAL CODE (THE "U.C.C.") AND ANY OTHER APPLICABLE LAW AND IS FILED AS A FIXTURE FILING. UPON THE OCCURRENCE OF AN EVENT OF DEFAULT, BENEFICIARY MAY, AT ITS OPTION, PURSUE ANY AND ALL RIGHTS AND REMEDIES AVAILABLE TO A SECURED PARTY WITH RESPECT TO ANY PORTION OF THE SECURED PROPERTY, AND/OR BENEFICIARY MAY, AT ITS OPTION, PROCEED AS TO ALL OR ANY PART OF THE SECURED PROPERTY IN ACCORDANCE WITH BENEFICIARY'S RIGHTS AND REMEDIES WITH RESPECT TO THE LIEN CREATED BY THIS DEED OF TRUST. (2) The grant of a security interest to Beneficiary in the granting clauses of this Deed of Trust shall not be construed to derogate from or impair the lien or provisions of or the rights of Beneficiary under this Deed of Trust with respect to any property described therein which is real property or which the parties have agreed to treat as real property. The hereby stated intention of Trustor and Beneficiary is that everything used in connection with the production of income from such real property or adapted for use thereon is, and at all times and for all purposes and in all proceedings, both legal and equitable, shall be regarded as real property, irrespective of whether or not the same is physically attached to the Land and/or Improvements. (3) If reasonably required by Beneficiary, at any time during the term of this Deed of Trust, Trustor will execute and deliver to Beneficiary, in form satisfactory to Beneficiary, additional security agreements, financing statements and/or other instruments covering all Personal Property included in the Secured Property. (4) Trustor hereby irrevocably constitutes and appoints Beneficiary as its attorney-in-fact and such appointment is coupled with an interest, to execute, deliver and file with the appropriate filing officer or office such security agreements, financing statements and/or other instruments as Beneficiary may request or require in order to impose and perfect the lien and security interest created hereby more specifically on such Personal Property. (5) If Trustor enters into a separate security agreement with Beneficiary relating to any of the Personal Property or fixtures, the terms of such security agreement shall govern the rights and remedies of Beneficiary after an Event of Default thereunder. -28- 34 (6) It is understood and agreed that, in order to protect Beneficiary from the effect of U.C.C. Section 9313, as amended from time to time, in the event that Trustor intends to purchase any goods which may become Secured Property, or any part thereof, and such goods will be subject to a purchase money security interest held by a seller or any other party: (a) Trustor shall, before executing any security agreement or other document evidencing or perfecting such security interest, obtain the prior written approval of Beneficiary, and all requests for such written approval shall be in writing and contain the following information: (i) a description of the Secured Property to be replaced, added to, installed or substituted; (ii) the address at which the Secured Property will be replaced, added to, installed or substituted; and (iii) the name and address of the proposed holder and proposed amount of the security interest. (b) Trustor's execution of any such security agreement or other document evidencing or perfecting such security interest without Beneficiary's prior written approval shall constitute an Event of Default. No consent by Beneficiary pursuant to this subparagraph shall be deemed to constitute an agreement to subordinate any right of Beneficiary in property covered by this Deed of Trust. (7) If at any time Trustor fails to make any payment on an obligation secured by a purchase money security interest in the Personal Property, Beneficiary, at its option, may at any time pay the amount secured by such security interest. Any money paid by Beneficiary under this Subparagraph, including any expenses, costs, charges and attorney's fees incurred by Beneficiary, shall be reimbursed to Beneficiary in accordance with Section 1.2E hereof. Beneficiary shall be subrogated to the rights of the holder of any such purchase money security interest in the Personal Property. (8) Beneficiary shall have the right to acquire by assignment from the holder of such security interest any and all contract rights, accounts receivable, negotiable or non-negotiable instruments, or other evidence of Trustor's indebtedness for such Personal Property, and, upon acquiring such interest by assignment, shall have the right to enforce the security interest as assignee thereof, in accordance with the -29- 35 terms and provisions of the U.C.C. and in accordance with any other provisions of law. (9) Whether or not Beneficiary has paid the indebtedness secured by, or taken an assignment of, such security interest, Trustor covenants to pay all sums and perform all obligations secured thereby, and if Trustor at any time shall be in default under such security agreement, it shall constitute an Event of Default. (10) The provisions of this Section 1.10D shall not apply if the goods which may become fixtures are of at least equivalent value and quality as any property being replaced and if the rights of the party holding such security interest have been expressly subordinated, at no cost to Beneficiary, to the lien and security interest of this Deed of Trust in a manner satisfactory to Beneficiary, including without limitation, at the option of Beneficiary, providing to Beneficiary a satisfactory opinion of counsel to the effect that this Deed of Trust constitutes a valid and subsisting first lien on such fixtures which is not subordinate to the lien of such security interest under any applicable law, including without limitation, the provisions of Section 9313 of the U.C.C. (11) Trustor hereby warrants, represents and covenants as follows: (a) To the best of Trustor's knowledge, Trustor is the sole owner of the Personal Property free from any lien, security interest, encumbrance or adverse claim thereon of any kind whatsoever. Trustor will notify Beneficiary of, and will protect, defend and indemnify Beneficiary against, all claims and demands of all persons at any time claiming any rights or interest therein. (b) The Personal Property is not used or bought and shall not be used or bought for personal, family, or household purposes, but shall be bought and used solely for the purpose of the Secured Property. (c) To the best of Trustor's knowledge, the Personal Property is located on the Land and/or Improvements and will be kept on or at the Land or the Improvements and Trustor will not remove the Personal Property therefrom without the prior written consent of Beneficiary, except such portions or items of Personal Property which are consumed or worn out in ordinary usage, all of which shall be promptly replaced by Trustor with other Personal Property of value equal to or greater than the value of the replaced Personal Property when new, and except such portions or items of Personal Property temporarily stored -30- 36 elsewhere to facilitate refurbishing or repair thereof or of the Improvements. (d) Trustor maintains a place of business in the State and Trustor will immediately notify Beneficiary in writing of any change in its principal place of business as set forth in the beginning of this Deed of Trust. E. Preservation of Trustor's Existence. If Trustor is a partnership or a corporation, it shall do all things necessary to preserve and keep in full force and effect its existence, franchise, rights and privileges under the laws of the state of its formation or incorporation and the state in which the Secured Property is located, if required by the laws of such state, and shall comply with all regulations, rules, ordinances, statutes, orders and decrees of any governmental or quasi-governmental authority or court applicable to it. F. Further Indemnities. In addition to any other indemnifies to Beneficiary specifically provided for in this Deed of Trust, Trustor hereby indemnifies and saves Beneficiary harmless from and against any and all losses, liabilities, suits, obligations, fines, damages, penalties, claims, costs, charges, and expenses, including, without limitation, reasonable architects', engineers' and attorneys' fees and all disbursements which may be imposed upon, incurred or asserted against Beneficiary by reason of: (1) the construction of the Improvements, (2) any capital improvements, other work or things, done in, on or about the Secured Property or any part thereof, (3) any use, non-use, misuse, possession, occupation, alteration, repair, condition, operation, maintenance or management of the Secured Property or any part thereof or any street, drive, sidewalk, curb, passageway or space comprising a part thereof or adjacent thereto, (4) any negligence or wilful act or omission on the part of Trustor, any Lessee under a Lease or their agents, contractors, servants, employees, licensees or invitees, (5) any accident, injury (including death) or damage to any person or property occurring in, on or about the Secured Property or any part thereof or in, on or about any street, drive, sidewalk, curb, passageway or space adjacent thereto, (6) any default or Event of Default (as herein defined), (7) any lien or claim which may be alleged to have arisen on or against the Secured Property or any part thereof under the laws of the local or state government or any other governmental or quasi-governmental authority or any liability asserted against Beneficiary with respect thereto, (8) any tax attributable to the execution, delivery, filing or recording of this Deed of Trust, the Note, any Lease, or any other Loan Documents, or (9) any contest permitted pursuant to the provisions of this Deed of Trust. -31- 37 G. Absence of Insurance. The obligations of Trustor under this Section 1.10 shall not in any way be affected by the absence in any case of covering insurance, by the amount of the insurance or by the failure or refusal of any insurance carrier to perform any obligation on its part under insurance policies affecting the Secured Property. If any claim, action or proceeding is made or brought against Beneficiary by reason of any event as to which Trustor is obligated to indemnify Beneficiary, then, upon demand by Beneficiary, Trustor, at its sole cost and expense, shall resist or defend such claim, action or proceeding in Beneficiary's name, if necessary, by the attorneys for Trustor's insurance carrier, if such claim, action or proceeding is covered by insurance, otherwise by such attorneys as Beneficiary shall reasonably approve. Notwithstanding the foregoing, Beneficiary may engage its own attorneys in its reasonable discretion to defend it or to assist in its defense and Trustor shall pay the reasonable fees and disbursements of such attorneys and such amounts shall bear interest at the Increased Rate and shall be secured by this Deed of Trust. 1.11 Further Sales or Encumbrances. A. Continuing Ownership and Management. Trustor acknowledges that the continuous ownership of the Secured Property and the continuous management and/or control of the operation of same by Trustor is of a material nature to the transaction and the making of the loan evidenced by the Note and secured by this Deed of Trust. B. Transfer or Encumbrance of Secured Property. Trustor shall not, without the prior written consent of Beneficiary being first had and obtained (which consent may be granted or denied in Beneficiary's sole discretion), voluntarily or involuntarily, by operation of law or otherwise, transfer or dispose of, or suffer any third party to transfer or dispose of, all or any portion of the Secured Property or any interest therein or the management and/or operation by Trustor of the Secured Property. For purposes of this Section 1.11, a transfer or disposition of the Secured Property or any part thereof or interest therein shall include, without limitation, the sale of the Secured Property or any portion thereof to a residential cooperative corporation, conversion of all or any part of the Secured Property to a condominium form of ownership, execution of a contract to sell or option to purchase all or any portion of the Secured Property or any interest therein, any transfer of or agreement to transfer air rights, any lease for space in any Improvements on the Secured Property for purposes other than occupancy by the tenant, any lease for space in Improvements containing an option to purchase, or any direct or indirect sale, -32- 38 assignment, conveyance, transfer (including a transfer as a result of or in lieu of condemnation), or other alienation of all or any portion of the Secured Property or any interest therein, including, but not limited to, the creation of a lien or other encumbrance on the Secured Property or any part thereof or interest therein, and further including any assignment, pledge, grant of security interest in, conditional sale, or the execution of a title retention agreement with regard to any personalty included in the Secured Property. Any such action described in this subsection 1.11B is herein called a "Transfer." A Transfer shall also include, without limitation, any of the following events, whether made directly or through an intermediary, and whether made in one transaction or effected in more than one transaction: (1) If Trustor is or becomes a corporation, a transfer or disposition of more than 50% of the outstanding voting stock of such corporation or of any other corporation directly or indirectly owning or controlling 50% or more of the voting stock of Trustor; (2) If Trustor is or becomes a partnership, a transfer or disposition of any interest of any general partner in Trustor; or (3) If Trustor is a trust or other entity, a transfer or disposition of more than 50% of the beneficial interests in Trustor. For purposes of the foregoing, a "transfer or disposition" of such stock or interests shall include, without limitation, any direct or indirect sale thereof, any execution of a contract or other agreement to sell or option to purchase such stock or interests, or any assignment of such stock or interests, including any assignment for security purposes. In no event shall the following be deemed a Transfer or disposition of the Secured Property in violation of this Section 1.11(B): (1) The transfer of the Secured Property to any corporation which controls, is controlled by or is under common control with Trustor, so long as Trustor continues to be liable for performance of the Obligations after the transfer, (2) The merger or consolidation of Trustor with any other company, so long as the net worth of the combined company after consummation of the transaction is not less than the net worth of Trustor immediately prior to the merger or consolidation; or -33- 39 (3) The issuance or trading of the stock or debt securities of Trustor or any parent of Trustor through any public exchange, in one transaction or a series of transactions. C. Acceleration of Obligations. In the event of a Transfer without the prior written consent of Beneficiary, Beneficiary may, without limiting any other right or remedy available to Beneficiary at law, in equity or by agreement with Trustor, and in Beneficiary's absolute discretion and without regard to the adequacy of its security, accelerate the maturity of the Note and require the payment of the then existing outstanding principal balance and all other sums due under the Note and under this Deed of Trust, including, but not limited to, the prepayment charge provided in Section 4.6 herein. The giving of consent by Beneficiary to a Transfer in any one or more instances shall not limit or waive the need for such consent in any other or subsequent instances. D. Wrap-Around Financing. Should the Secured Property at any time be or become subject to the lien of any agreement, deed of trust or mortgage or similar instrument in connection with which payments on account of the obligations secured hereby are to be made directly or indirectly by or through a mortgagee, grantee or beneficiary thereunder, regardless of whether or not payment of the obligations secured hereby is assumed by such mortgagee, grantee or beneficiary, the whole of the principal sum and interest and other sums hereby secured, at the option of Beneficiary, shall immediately become due and payable. 1.12 Expenses. Trustor will pay or reimburse Beneficiary for all reasonable attorneys' fees, costs and expenses incurred by Beneficiary in any proceedings affecting the Obligations or the Secured Property, (A) involving the estate of a decedent or an insolvent, or (B) in any action, legal proceeding or dispute of any kind in which Beneficiary is made a party, or appears as party plaintiff or defendant, including, but not limited to, any exercise of the power of sale or judicial foreclosure as set forth in this Deed of Trust, any condemnation action involving the Secured Property or any action to protect the security hereof or upon the reasonable concern of Beneficiary with the condition of the Secured Property, and any such amounts paid by Beneficiary shall be added to the obligations and secured by this Deed of Trust. If the obligations are referred to attorneys for collection, foreclosure or for any cause set forth in Article III hereof, Trustor shall pay all expenses incurred by Beneficiary, including reasonable attorneys' fees, all costs of collection, litigation costs, and costs (which may be estimated as to items -34- 40 to be expended after entry of the decree) of procuring title insurance policies, whether or not obtained, Torrens certificates, and similar assurances with respect to title and value as Beneficiary may deem reasonably necessary together with all statutory costs, with or without the institution of an action or proceeding. All such costs and expenses with interest thereon at the Increased Rate shall be deemed to be secured by this Deed of Trust. ARTICLE II WARRANTIES AND REPRESENTATIONS Trustor makes the following warranties and representations: 2.1 Warranty of Title. Trustor (A) is lawfully seized and possessed of the Secured Property, in fee simple, subject to no mortgage, lien, charge or encumbrance, except as specifically set forth in the title insurance policy issued to Beneficiary upon recordation of this Deed of Trust, (B) has full power and lawful authority to grant, bargain, sell, convey, assign, transfer and mortgage the Secured Property in the manner and form hereby mortgaged and conveyed, (C) is the fee owner of the Improvements, (D) is the owner of the Personal Property, and (E) does warrant and will defend the title to the Secured Property against all claims and demands whatsoever. 2.2 Ownership Of Improvements And Personal Property. All Improvements and Personal Property now or hereafter affixed, placed or used by Trustor are and will hereafter be owned by Trustor free from any prior liens or encumbrances, provided, however, that if any of the foregoing Improvements or Personal Property shall be subject to a conditional bill of sale, chattel mortgage or other agreement creating a security interest, then all of the right, title and interest of Trustor in and to such Improvements and Personal Property together with the benefits of any deposits or payments now or hereafter made thereon shall be covered by and subject to this Deed of Trust. 2.3 No Pending Material-Litigation or Proceeding; No Hazardous Materials. A. Proceedings Affecting Trustor. Except as disclosed in the Affidavit being delivered concurrently herewith, to the best knowledge and belief of Trustor, there are no actions, suits or proceedings pending, and, there are no actions, suits, investigations or proceedings threatened, against or affecting Trustor, or the business, operations, properties or assets of Trustor, or before or by any governmental department, commission, board, regulatory authority, bureau, agency or -35- 41 instrumentality, domestic, foreign, federal, state or municipal (collectively, "Governmental Agency") , or any court, arbitrator or grand jury, which may result in any material adverse change in the business, operations, properties or assets or in the condition, financial or otherwise, of Trustor, or in the ability of Trustor to perform its obligations under the Note or this Deed of Trust. To the best knowledge and belief of Trustor, Trustor is not in default, and there is no other default, with respect to any judgment, order, writ, injunction, decree, demand, rule or regulation of any court, arbitrator, grand jury or of any Governmental Agency, default under which might have consequences which would materially and adversely affect the business, operations, properties or assets or the condition, financial or otherwise, of Trustor or the ability of Trustor to perform its obligations under the Note or this Deed of Trust. B. Proceedings Affecting Secured Property. There are no proceedings of any kind pending, or, to the best of Trustor's knowledge, threatened against or affecting Trustor, the Secured Property (including any attempt or threat by any Governmental Agency to condemn or rezone all or any portion of the Secured Property), any party constituting Trustor in any such party, or involving the validity, enforceability or priority of this Deed of Trust, the Note or any of the other Loan Documents or enjoining or preventing or threatening to enjoin or prevent the use and occupancy of the Secured Property or the performance by Beneficiary of its obligations hereunder, and there are no rent controls, governmental moratoria or environmental controls (other than those generally imposed by federal or state law upon property in the State of California) presently in existence, or to the best knowledge of Trustor, threatened, affecting the Secured Property, except as identified in writing to, and approved by, Beneficiary. C. No Litigation Regarding Hazardous Materials. No litigation, administrative enforcement actions or proceedings have been brought, threatened nor have any settlements been reached by or with any party or parties, public or private, in disputes in which the presence, disposal, release or threatened release of any Hazardous Material (as defined in the Indemnity) on, from, or under any of the Secured Property had been alleged. 2.4 Valid organization, Good Standing and Qualification of Trustor. Trustor is a duly and validly organized and existing Corporation under the laws of the State of Delaware and is entitled to own its properties and assets, and to carry on its business, all as, and in the places where, such properties and assets are now owned or operated or such business is now conducted or proposed to be conducted. -36- 42 2.5 Authorization; No Legal Restrictions on Performance. The execution and delivery by Trustor of this Deed of Trust and the other Loan Documents and its compliance with the terms and conditions hereof and thereof have been duly and validly authorized by all necessary partnership action, including, without limitation, all necessary corporate action of all of Trustor's corporate general partners, if any. The Loan Documents are valid and enforceable obligations of Trustor in accordance with the terms hereof and thereof. Neither the execution and delivery by Trustor of this Deed of Trust or any of the other Loan Documents nor the consummation of the transactions contemplated herein or therein, nor compliance with the terms and conditions hereof and thereof will, to Trustor's current and actual knowledge, (A) conflict with or result in a material breach of, or constitute a default under, any of the terms, obligations, covenants, conditions or provisions of (1) Trustor's articles of incorporation, bylaws or any indenture, mortgage, deed of trust, pledge, bank loan or credit agreement, agreement creating, evidencing or securing any indebtedness of Trustor or any other agreement or instrument to which Trustor is now a party or by which its properties may be bound or affected, or (2) any judgment, order, writ, injunction, decree or demand of any court, arbitrator, grand jury or Governmental Agency, or (B) result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any property or asset of Trustor under the terms or provisions of any of the foregoing. Trustor is not in default in the performance, observance or fulfillment of any of the terms, obligations, covenants, conditions or provisions contained in any indenture or other agreement creating, evidencing or securing indebtedness of Trustor or pursuant to which Trustor is a party or by which Trustor or its properties may be bound or affected, which may result in any material adverse change in the business, operations, properties, or assets or in the condition, financial or otherwise, of Trustor, or in the ability of Trustor to perform its obligations under the Note or this Deed of Trust. 2.6 Compliance With Laws., Trustor has complied, and at all future times shall comply, with all applicable statutes, rules, regulations, orders and restrictions of any domestic or foreign government or any instrumentality or agency thereof, in respect of the conduct of its business and ownership of its properties (including, without limitation, applicable statutes, rules, regulations, orders and restrictions relating to equal employment opportunities or environmental standards or controls). No governmental orders, permissions, consents, approvals or authorizations are required to be obtained and no registrations or declarations are required to be filed in connection with the execution and delivery or performance of this Deed of Trust or any of the other Loan Documents. -37- 43 2.7 Tax Status. Trustor has filed all United States income tax returns and all state and municipal tax returns which are required to be filed, and has paid, or made provision for the payment of, all taxes which have become due pursuant to said returns or pursuant to any assessment received by Trustor, except such filings and taxes, if any, as are being contested in good faith and as to which adequate reserves have been provided. 2.8 Absence of Foreign or Enemy Status. Trustor is not a "national" of a "designated foreign country" (or a person defined as a "designated foreign country") within the definitions in the Foreign or Cuban Assets Control Regulations of the United States Treasury Department, 31 CFR, Subtitle B, Chapter V, as amended, or any regulation or ruling issued thereunder. 2.9 Federal Reserve Board Regulations. Trustor does not own any "margin security" as such term is defined in Regulation G of the Board of Governors of the Federal Reserve System (12 CFR Part 207), as amended, except margin securities owned or which may be acquired by Trustor which do not and would not in the aggregate constitute a substantial part of the assets of Trustor within the meaning of Section 207.2(i) of the aforesaid Regulation G, and Trustor will not use any part of the proceeds from the loans to be made under this Agreement (A) directly or indirectly, to purchase or carry any such security or to reduce or retire any indebtedness originally incurred to purchase any such security within the meaning of such Regulation, (B) so as to involve Trustor in a violation of Regulation T, U or X of such Board (12 CFR Parts 220, 221 and 224), or (C) for any other purpose not permitted by Section 7 of the Securities Exchange Act of 1934, as amended, or any of the rules and regulations respecting the extension of credit promulgated thereunder. 2.10 Investment Company Act and Public Utility Holding Company Act. Trustor is not an "investment company" or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended, and Trustor is not a "holding company" or a "subsidiary company" of a "holding company," or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company," as such terms are defined in the Public Utility Holding Company Act of 1935, as amended. 2.11 Exempt Status of Transactions Under Securities Act and Representations Relating Thereto. Trustor has not, either directly or through any agent, offered all or any part of the loan made or to be made by Beneficiary and secured by this Deed of Trust to, or solicited any offers to make all or any part of such loan from, or otherwise approached or negotiated or communicated in respect of all or any part of such loan with -38- 44 anyone other than Beneficiary. Neither Trustor nor any agent on its behalf will offer to obtain all or any part of such loan from, or solicit any offers to make all or any part of such loan from, or otherwise approach or negotiate or communicate in respect of all or any part of such loan with, any person or persons so as thereby to bring the obtaining of such loan by Trustor and the delivery of the Note within the registration provisions of the Securities Act of 1933, as amended. 2.12 Employee Benefit Plans. A. None of the employee benefit plans maintained at any time by Trustor (herein called "Employee Benefit Plans") or the trusts created thereunder has engaged in a prohibited transaction which could subject any such Employee Benefit Plan or trust to a tax or penalty on prohibited transactions imposed under Internal Revenue Code Section 4975 or the Employee Retirement Income Security Act of 1974 and the regulations thereunder (herein called "ERISA"). B. None of the Employee Benefit Plans which are employee pension benefit plans or the trusts created thereunder has been terminated; nor has any such Employee Benefit Plan incurred any liability to the Pension Benefit Guaranty Corporation established pursuant to ERISA which would be material to Trustor, other than for required insurance premiums which have been paid when due, or incurred any accumulated funding deficiency which would be material to Trustor, whether or not waived; nor has there been any reportable event, or other event or condition, which presents a risk of termination of any such Employee Benefit Plan by such Pension Benefit Guaranty Corporation which termination would be material to Trustor. C. The present value of all benefits vested under the Employee Benefit Plans which are employee pension benefit plans did not, as of the most recent valuation date, exceed the then current value of the assets of such Employee Benefit Plans allocable to such vested benefits by an amount that would materially affect the financial condition of Trustor or the ability of Trustor to perform under the Loan Documents. D. The consummation of the loan from Beneficiary referred to in this Deed of Trust, and the execution and delivery of the Note hereunder and the performance by Trustor of its obligations under the Loan Documents, will not involve any prohibited transaction. E. As used in this Section 2.12, the terms "employee benefit plans," "employee pension benefit plans," "accumulated funding deficiency," "reportable event," "accrued benefits," -39- 45 "separate account" and "multiemployer plan" shall have the respective meanings assigned to them in ERISA, and the term "prohibited transaction" shall have the meaning assigned to it in Internal Revenue Code Section 4975 and ERISA. ARTICLE III DEFAULTS 3.1 Events of Default. Any of the following events shall be deemed an Event of Default or a default hereunder: A. if default shall be made in the payment of any installment of the principal of, or interest on the Obligations or any other sum which is payable hereunder as and when the same shall become due and payable as in the Note or herein provided; or B. if Trustor fails to perform or observe any material term, provision, covenant or agreement in the Note, this Deed of Trust or in any other Loan Documents; provided, however in the event of any default other than a default which can be cured by the payment of money (a "non-monetary default"), the Beneficiary shall be entitled to enforce the remedies therefor provided herein only after giving notice thereof to Trustor and such default shall have continued uncorrected for thirty (30) days, unless such non-monetary default is of such a character as to require more than thirty (30) days to cure and the Trustor shall, prior to the expiration of said thirty (30) days, promptly commence and diligently and continuously proceed with due diligence to cure such default, in which event such period shall be extended for a reasonable time necessary to cure such default, but in no event more than ninety (90) days after such default; provided, however, that the foregoing opportunity to cure shall not apply to (a) any default under any letter of credit agreement made by the Beneficiary and the Trustor, if any, or the Beneficiary's rights under the letter(s) of credit delivered to the Beneficiary in connection therewith; (b) any sale, assignment, transfer, encumbrance, or lien in violation of this Note or the Deed of Trust; or (c) the Beneficiary's right to (i) charge interest at the Default Rate as provided herein, (ii) impose a late charge as provided herein, or (iii) make payments and cure defaults of the Trustor under the Note as provided therein, all of which amounts shall be immediately due and payable without any obligation on the part of the Beneficiary to notify any party and whether or not such default is cured; or C. if any warranty, representation, certification, financial statement or other information made or furnished at any time pursuant to the terms of this Deed of Trust or otherwise, by -40- 46 Trustor, or by any person or entity liable for the Obligations in connection with the loan transaction, shall prove to be materially false and to have been made or furnished with knowledge of the false nature thereof; or D. if Trustor shall: (1) apply for, consent to or acquiesce in the appointment of a receiver, trustee or liquidator of it or of all or a substantial part of its assets, or the Secured Property or any interest in any part thereof (the term "acquiesce" includes, but is not limited to, the failure to file a petition or motion to vacate or discharge any order, judgment or decree providing for such appointment within ten (10) days after the appointment); or (2) commence a voluntary case or other proceeding in bankruptcy, or admit in writing its inability to pay its debts as they come due; or (3) make a general assignment for the benefit of creditors; or (4) file a petition or an answer seeking reorganization, arrangement, composition, readjustment, liquidation, dissolution, or similar relief for itself under the present or any future federal bankruptcy act or any other statute or law relative to bankruptcy, insolvency, or other relief for debtors; or (5) file an answer admitting the material allegations of, or consent to, or default in answering, a petition filed against it in any bankruptcy, reorganization or insolvency case or proceeding; or E. if an order for relief shall be entered against Trustor by a court of competent jurisdiction under any present or future bankruptcy law, which order shall continue unstayed and in effect for any period of forty-five (45) consecutive days; or F. if an order, judgment or decree shall be entered by any court of competent jurisdiction, adjudicating Trustor insolvent, approving a petition seeking reorganization or arrangement of Trustor or appointing a receiver, trustee or liquidator of it or of all or a substantial part of its assets, and such order, judgment or decree shall continue unstayed and in effect for any period of forty-five (45) consecutive days; or G. if Trustor has assigned or purports to assign the whole or any part of the rents, income or profits arising from -41- 47 the Secured Property, without the prior written consent of Beneficiary; or H. if a Transfer not consented to by Beneficiary shall have occurred; or I. if Trustor shall enter into a mortgage or other security instrument with respect to the Secured Property which does not comply with the requirements of Section 1.11; or J. if Trustor shall be in default beyond any applicable grace period under any other mortgage or security instrument affecting all or any part of the Secured Property; or K. if any mechanic's, laborer's or materialman's lien, federal tax lien, broker's lien or other lien not permitted hereunder and affecting the Secured Property or any part thereof is not discharged, by payment, bonding, order of a court of competent jurisdiction or otherwise, within twenty (20) days after Trustor receives notice thereof from the lienor or from Beneficiary. ARTICLE IV REMEDIES 4.1 Remedies. Upon the occurrence of any one or more Events of Default, Trustee and/or Beneficiary may (but shall not be obligated), in addition to any rights or remedies available to them hereunder or under the other Loan Documents, take such action personally or by their agents or attorneys, with or without entry, and without notice, demand, presentment or protest (each and all of which are hereby waived to the extent permitted by law) as they deem necessary or advisable to protect and enforce Beneficiary's rights and remedies against Trustor and Secured Property, including the following actions, each of which may be pursued concurrently or otherwise, at such time and in such order as Trustee and/or Beneficiary may determine, in their sole discretion, without impairing or otherwise affecting its or their other rights or remedies: (a) declare the entire balance of the Obligations (including the entire principal balance thereof, all accrued and unpaid interest and any premium thereon and all other such sums secured hereby) to be immediately due and payable and upon any such declaration the entire unpaid balance of the Obligations shall become and be immediately due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by Trustor anything in the Loan Documents to the contrary notwithstanding; or -42- 48 (b) institute a proceeding or proceedings, judicial or otherwise, for the complete foreclosure of this Deed of Trust under any applicable provision of law; or (c) institute a proceeding or proceedings for the partial foreclosure of this Deed of Trust under any applicable provision of law for the portion of the Obligations then due and payable, subject to the lien of this Deed of Trust continuing unimpaired and without loss of priority so as to secure the balance of the Obligations not then due and payable; or (d) cause any or all of the Secured Property to be sold under the power of sale granted by this Deed of Trust or any of the other Loan Documents in any manner permitted by applicable law. For any sale under the power of sale granted by this Deed of Trust, Trustee or Beneficiary must record and give all notices required by law and then, upon the expiration of such time as is required by law, may sell the Secured Property, and all estate, right, title, interest, claim and demand of Trustor therein, and all rights of redemption thereof, at one or more sales, as an entirety or in parcels, with such elements of real and/or personal property (and, to the extent permitted by applicable law, may elect to deem all of the Secured Property to be real property for purposes thereof), and at such time or place and upon such terms as Trustee and Beneficiary may determine and shall execute and deliver to the purchaser or purchasers thereof a deed or deeds conveying the property sold, but without any covenant or warranty, express or implied, and the recitals in the deed or deeds of any facts affecting the regularity or validity of the sale will be conclusive against all persons. In the event of a sale, by foreclosure or otherwise, of less than all of the Secured Property, this Deed of Trust shall continue as a lien and security interest on the remaining portion of the Secured Property; or (e) institute an action, suit or proceeding in equity for the specific performance of any of the provisions contained in the Loan Documents; or (f) apply for the appointment of a receiver custodian, trustee, liquidator or conservator of the Secured Property, to be vested with the fullest powers permitted under applicable law, as a matter of right and without regard to or the necessity to disprove the adequacy of the security for the Obligations or the solvency of Trustor or any other person liable for the payment of the Obligations, and Trustor and each other person so liable waives or shall be deemed to have waived such necessity and consents or shall be deemed to have consented to such appointment; or -43- 49 (g) subject to the provisions and restrictions of any applicable law, enter upon the Premises, and exclude Trustor and its agents and servants wholly therefrom, without liability for trespass, damages or otherwise, and take possession of all books, records and accounts relating thereto and all other Secured Property, and Trustor agrees to surrender possession of the Secured Property and of such books, records and accounts to Trustor or Beneficiary on demand after the happening of any Event of Default; and having and holding the same may use, operate, manage, preserve, control and otherwise deal therewith and conduct the business thereof, either personally or by its superintendents, managers, agents, servants, attorneys or receivers, without interference from Trustor; and upon each such entry and from time to time thereafter may, at the expense of Trustor and the Secured Property, without interference by Trustor and as Beneficiary may deem advisable, (i) either by purchase, repair or construction, maintain and restore the Premises, (ii) insure or reinsure the same, (iii) make all necessary or proper repairs, renewals, replacements, alterations, additions, betterments and improvements thereto and thereon, (iv) complete the construction of the Improvements and, in the course of such completion, may make such changes in the contemplated or completed Improvements as it may deem advisable, (v) in every such case in connection with the foregoing have the right to exercise all rights and powers of Trustee with respect to the Secured Property, either in Trustor's name or otherwise, including the right to make, terminate, cancel, enforce or modify Leases, obtain and evict Lessees and sublessees on such terms as Beneficiary shall deem advisable and to take any actions described in subsection (i) of this Section 4.1; or (h) subject to the provisions and restrictions of any applicable law, may, with or without the entrance upon the Premises, collect, receive, sue for and recover in its own name all Rents and cash collateral derived from the Premises, and after deducting therefrom all costs, expenses and liabilities of every character incurred by Trustee and/or Beneficiary in collecting the same and in using, operating, managing, preserving and controlling the Premises, and otherwise in exercising Trustee's and/or Beneficiary's rights under subsection (g) of this Section 4.1, including all amounts necessary to pay Impositions, insurance premiums and other charges in connection with the Premises, as well as compensation for the services of Trustee and Beneficiary and their respective attorneys, agents and employees, to apply the remainder as provided in Section 4.5; or (i) release any portion of the Secured Property for such consideration as Beneficiary may require without, as to the remainder of the Secured Property, in any way impairing or -44- 50 affecting the lien or priority of this Deed of Trust, or improving the position of any subordinate lienholder with respect thereto, except to the extent that the Obligations shall have been reduced by the actual monetary consideration, if any, received by Trustee and/or Beneficiary for such release, and may accept by assignment, pledge or otherwise any other property in place thereof as Trustee and/or Beneficiary may require without being accountable for so doing to any other lienholder; or (j) may take all actions permitted under the Uniform Commercial Code of the State of California; or (k) may take any other action, or pursue any other right or remedy, as Trustee and/or Beneficiary may have under applicable law, and Trustor does hereby grant the same to Trustee and Beneficiary. In the event that Trustee and/or Beneficiary shall exercise any of the rights or remedies set forth in subsections (g) and (h) of this Section 4.1, neither Trustee nor Beneficiary shall be deemed to have entered upon or taken possession of the Secured Property except upon the exercise of its option to do so, evidenced by its demand and overt act for such purpose, nor shall it be deemed a beneficiary or mortgagee in possession by reason of such entry or taking possession, unless applicable law requires that it be deemed to be a beneficiary or mortgagee in possession. Neither Trustee nor Beneficiary shall be liable to account for any action taken pursuant to any such exercise other than for rents actually received by such party, nor liable for any loss sustained by Trustor resulting from any failure to let the Premises, or from any other act or omission of Trustee and/or Beneficiary, except to the extent such loss is caused by the willful misconduct or bad faith of such party or such liability may not be waived under applicable law. Trustor hereby consents to, ratifies and confirms the exercise by Trustee and/or Beneficiary of said rights and remedies. 4.2 Expenses. If any action is commenced to foreclose this Deed of Trust, or to enforce any other remedy of Trustee and/or Beneficiary under any of the Loan Documents, whether such action is judicial or pursuant to the power of sale contained herein or otherwise, there shall be added to the Obligations secured by this Deed of Trust all costs and expenses, including attorney's fees, plus interest thereon at the Default Rate (as defined in the Note) until paid, in the commencement and prosecution of such action, whether or not such action results in a foreclosure sale, foreclosure or other judicial decree or judgment. 4.3 Rights Pertaining to Sales. Subject to the provisions or other requirements of law, the following provisions shall -45- 51 apply to any sale or sales of the Secured Property under or by virtue of this Article IV, whether made under the power of sale herein granted or by virtue of judicial proceedings or of a judgment or decree of foreclosure and sale: (a) Trustee, at the request of Beneficiary, may conduct any number of sales from time to time. The power of sale set forth in Section 4.1(d) hereof shall not be exhausted by any one or more such sales as to any part of the Secured Property which shall not have been sold, nor by any sale which is not completed or is defective in Trustee's or Beneficiary's opinion, until the Obligations shall have been paid in full. (b) Any sale may be postponed or adjourned by public announcement at the time and place appointed for such sale or for such postponed or adjourned sale without further notice. (c) After each sale, Trustee, or an officer of any court empowered to do so, shall execute and deliver to the purchaser or purchasers at such sale a good and sufficient instrument or instruments granting, conveying, assigning and transferring all right, title and interest of Trustor in and to the property and rights sold and shall receive the proceeds of said sale or sales and apply the same as herein provided. Trustee is hereby appointed the true and lawful attorney-in-fact of Trustor, which appointment is irrevocable and shall be deemed to be coupled with an interest, in Trustor's name and stead, to make all necessary conveyances, assignments, transfers and deliveries of the property and rights so sold, and for that purpose Trustee may execute all necessary instruments of conveyance, assignment, transfer and delivery, and may substitute one or more persons with like power, Trustor hereby ratifying and confirming all that said attorney or such substitute or substitutes shall lawfully do by virtue thereof. Nevertheless, Trustor, if requested by Trustee or Beneficiary, shall ratify and confirm any such sale or sales by executing and delivering to Trustee or such purchaser or purchasers all such instruments as may be advisable, in Trustee's or Beneficiary's judgment, for the purposes as may be designated in such request. (d) Any and all statements of fact or other recitals made in any of the instruments referred to in subsection (c) of this Section 4.3 given by Trustee and/or Beneficiary as to nonpayment of the Obligations, or as to the occurrence of any Event of Default, or as to Beneficiary having declared all or any of the Obligations to be due and payable, or as to the request to sell, or as to notice of time, place and terms of sale and of the property or rights to be sold having been duly given, or as to the refusal, failure or inability to act of Trustee, or as to the -46- 52 appointment of any substitute or successor Trustee, or as to any other act or thing having been duly done by Trustor, Beneficiary, or by such Trustee, shall be taken as conclusive and binding against all persons as to evidence of the truth of the facts so stated and recited. Trustee and/or Beneficiary may appoint or delegate any one or more persons as agent to perform any act or acts necessary or incident to any sale so held, including the posting of notices and the conduct of sale, but in the name and behalf of Trustee or Beneficiary, as applicable. (e) receipt of Trustee for the purchase money paid at any such sale, or the receipt of any other person authorized to receive the same, shall be sufficient discharge therefor to any purchaser of any property or rights sold as aforesaid, and no such purchaser, or its representatives, grantees or assigns, after paying such purchase price and receiving such receipt, shall be bound to see to the application of such purchase price of any part thereof upon or for any trust or purpose of this Deed of Trust or, in any manner whatsoever, be answerable for any loss, misapplication or non-application of any such purchase money, or part thereof, or be bound to inquire as to the authorization, necessity, expediency or regularity of any such sale. (f) Any such sale or sales shall operate to divest all of the estate, right, title, interest, claim and demand whatsoever, whether at law or in equity, of Trustor in and to the properties and rights so sold, and shall be a perpetual bar both at law and in equity against Trustor and any and all persons claiming or who may claim the same, or any part thereof or any interest therein, by, through or under Trustor to the fullest extent permitted by applicable law. (g) Upon any such sale or sales, Beneficiary may bid for and acquire the Secured Property and, in lieu of paying cash therefor, may make settlement for the purchase price by crediting against the Obligations the amount of the bid made therefor, after deducting therefrom the expenses of the sale, the cost of any enforcement proceeding hereunder and any other sums which Trustee or Beneficiary is authorized to deduct under the terms hereof, to the extent necessary to satisfy such bid. (h) In the event that Trustor, or any person claiming by, through or under Trustor, shall transfer or refuse or fail to surrender possession of the Secured Property after any sale thereof, then Trustor, or such person shall be deemed a tenant at sufferance of the purchaser at such sale, subject to eviction by means of forcible entry and detainer proceedings, or subject to any other right or remedy available hereunder or under applicable law. -47- 53 (i) Upon any such sale, it shall not be necessary for Trustee, Beneficiary or any public officer acting under execution or order of court to have present or constructively in its possession any of the Secured Property. (j) In the event a foreclosure hereunder shall be commenced by Trustee at the request of Beneficiary, Trustee or Beneficiary may at any time before the sale of the Secured Property abandon the sale, and may institute suit for the collection of the Obligations and for the foreclosure of this Deed of Trust, or in the event that Trustee or Beneficiary should institute a suit for collection of the Obligations, and for the foreclosure of this Deed of Trust, Beneficiary may at any time before the entry of final judgment in said suit dismiss the same and sell or require Trustee to sell the Secured Property in accordance with the provisions of this Deed of Trust. 4.4 Application of Proceeds. The purchase money, proceeds or avails of any sale referred to in Section 4.3, together with any other sums which may be held by Trustee or Beneficiary hereunder, whether under the provisions of this Article IV or otherwise, shall, except as herein expressly provided to the contrary, be applied as follows: First: To the payment of the costs and expenses of any such sale, including compensation to Trustee and/or Beneficiary, their agents and counsel, and of any judicial proceeding wherein the same may be made, and of all expenses, liabilities and advances made or incurred by Trustee and/or Beneficiary hereunder, together with interest thereon as provided herein, and all taxes, assessments and other charges, except any taxes, assessments or other charges subject to which the Secured Property shall have been sold. Second: To the payment in full of the Obligations (including principal, interest, premium and fees) in such order as Beneficiary may elect. Third: To the payment of any other sums secured hereunder or required to be paid by Trustor pursuant to any provision of the Loan Documents. Fourth: To the payment of the surplus, if any, to whomsoever may be lawfully entitled to receive the same. 4.5 Prepayment Charge. Trustor hereby agrees to pay the charge provided in the Note for prepayment of the Obligations, if for any reason any of said Obligations shall be paid prior to the stated maturity date thereof, even if and notwithstanding that an -48- 54 Event of Default shall have occurred and Beneficiary, by reason thereof, shall have declared said Obligations due and payable, and whether or not said payment is made prior to or at any sale held under or by virtue of this Article IV. Trustor acknowledges that Beneficiary, in making the loan evidenced by the Note and entering into this Deed of Trust, is relying on Trustor's credit worthiness and its agreement to repay the Obligations in strict accordance with the terms set forth in the Note. Trustor acknowledges that Beneficiary would not make the loan without full and complete assurance by Trustor of its agreement to make regular payments of principal and interest under the Note and its further agreement not to prepay all or any part of the principal of the Note prior to the final maturity date thereof, except on the terms expressly set forth herein and in the Note. Therefore, any prepayment of the Note, whether occurring as a voluntary prepayment by Trustor or occurring upon an acceleration of the principal balance of the Note by Beneficiary on account of any default by Trustor (including, but not limited to, the making or suffering by Trustor, of any transfer or disposition of all or any portion of the Secured Property or any interest therein as prohibited by Section 1.11 of this Deed of Trust) will prejudice Beneficiary's ability to meet its obligations and to earn the return on the funds advanced to Trustor, which Beneficiary intended and expected to earn when it agreed to make the subject loan and will also result in other loss and additional expenses to Beneficiary. Accordingly, in recognition of the foregoing and in consideration of Beneficiary making the loan secured by this Deed of Trust at the interest rate and for the term set forth in the Note, Trustor hereby expressly (A) waives any and all rights it may have under applicable law to prepay without charge or premium all or any part of the Note, either voluntarily or upon an acceleration of the maturity date of the Note on account of any default of Trustor (including, but not limited to, the making or suffering by Trustor of any transfer or disposition prohibited by Section 1.11 of this Deed of Trust) and (B) agrees that if, for any reason, whether due to the voluntary acceptance by Beneficiary of a prepayment tendered by Trustor or the acceleration by Beneficiary of the maturity date of the Note, as aforesaid, on account of any such default by Trustor, a prepayment of all or any part of the principal of the Note is made by or on behalf of Trustor, or is otherwise made or occurs in connection with any reinstatement of the Loan Documents under any foreclosure proceedings, or any right of redemption exercised by Trustor or any other party having the right to redeem or to prevent any foreclosure of this Deed of Trust, or upon the consummation of any foreclosure sale, then Trustor or any other party making any such prepayment shall be obligated to pay, concurrently therewith, the prepayment charge set forth in the Note, and the payment of such premium shall be a condition to the making of such prepayment and shall be secured by this Deed of -49- 55 Trust. Such prepayment charge shall be paid without prejudice to the right of Beneficiary to collect any other amounts provided to be paid or to declare a default hereunder. Nothing herein shall be construed as permitting any partial prepayment except with Beneficiary's prior written consent thereto obtained in each instance. 4.6 Environmental Defaults and Remedies. In the event that any portion of the Secured Property is determined to be "environmentally impaired" (as "environmentally impaired" is defined in California Code of Civil Procedure Section 726.5(e)(3)) or to be an "affected parcel" (as "affected parcel is defined California Code of Civil Procedure Section 726.5(e)(1)), then, without otherwise limiting or in any way affecting Beneficiary's or Trustee's rights and remedies under this Deed of Trust, Beneficiary may elect to exercise its right under California Code of Civil Procedure Section 726.5(a) to (1) waive its lien on such environmentally impaired or affected parcel portion of the Secured Property and (2) exercise (i) the rights and remedies of an unsecured creditor, including reduction of its claim against Trustor to judgment, and (ii) any other rights and remedies permitted by law. All costs and expenses, including, but not limited to, attorneys' fees, incurred by Beneficiary in connection with any action commenced under this Section 4.6, including any action required by California Code of Civil Procedure Section 726.5(b) to determine the degree to which the Secured Property is environmentally impaired, plus interest thereon at the Default Rate (as defined in the Note) until paid, shall be added to the Obligations secured by this Deed of Trust and shall be due and payable to Beneficiary upon its demand made at any time following the conclusion of such action. ARTICLE V MISCELLANEOUS 5.1 Non-Waiver. The failure of Beneficiary to insist upon strict performance of any term of this Deed of Trust shall not be deemed to be a waiver of any term of this Deed of Trust. Trustor shall not be relieved of its obligation to pay the Obligations at any time and in the manner provided for its payment in the Note and this Deed of Trust by reason of (A) a failure by Beneficiary to comply with any request of Trustor to take any action to foreclose this Deed of Trust or otherwise enforce any of the provisions of this Deed of Trust or of the Note or any other Loan Document, (B) the release, regardless of consideration, of the whole or any part of the Secured Property or any other security for the Obligations, or (C) any agreement or stipulation between Beneficiary and any subsequent owner or owners of the Secured -50- 56 Property or other person extending the time of payment or otherwise modifying or supplementing the terms of the Note, this Deed of Trust or any Loan Document securing or guaranteeing the Obligations or any portion thereof, without first having obtained the consent of Trustor and, in the latter event, Trustor shall continue to be obligated to pay the Obligations at the time and in the manner provided in the Note and this Deed of Trust, as so extended, modified and supplemented, unless expressly released and discharged by Beneficiary. Regardless of consideration, and without the necessity for any notice to or consent by the holder of any subordinate lien, encumbrance, right, title or interest in or to the Secured Property, Beneficiary may release any person at any time liable for the payment of the Obligations or any portion thereof or any part of the security held for the Obligations and may extend the time of payment or otherwise modify the terms of any Loan Documents, including, without limitation, a modification of the interest rate payable on the principal balance of the Note, without in any manner impairing or affecting any of the Loan Documents or the lien thereof or the priority of this Deed of Trust, as so extended and modified, as security for the Obligations over any such subordinate lien, encumbrance, right, title or interest. Beneficiary may resort for the payment of the Obligations to any other security held by Beneficiary in such order and manner as Beneficiary, in its discretion, may elect. Beneficiary may take action to recover the Obligations, or any portion thereof, or to enforce any covenant of this Deed of Trust without prejudice to the right of Beneficiary thereafter to foreclose this Deed of Trust. Beneficiary shall not be limited exclusively to the rights and remedies stated in this Deed of Trust but shall be entitled to every additional right and remedy now or hereafter afforded by law. The rights of Beneficiary under this Deed of Trust shall be separate, distinct and cumulative and none shall be given effect to the exclusion of the others. No act of Beneficiary shall be construed as an election to proceed under any one provision of this Deed of Trust to the exclusion of any other provision. 5.2 Sole Discretion of Beneficiary. Wherever, pursuant to this Deed of Trust, Beneficiary's consent or approval is required, the decision as to whether or not to consent or approve shall be in the sole discretion of Beneficiary and Beneficiary's decision shall be final and conclusive, except where this Deed of Trust expressly provides to the contrary. If Trustor shall seek the approval by or consent of Beneficiary under this Deed of Trust and Beneficiary shall fail or refuse to give such consent or approval, Trustor shall not be entitled to any damages for any withholding of such approval or consent by Beneficiary, it being intended that Trustor's sole remedy shall be an action for injunctive or declaratory relief, which remedy shall be available -51- 57 only in those cases where Beneficiary has expressly agreed not to unreasonably withhold its consent or approval. 5.3 Recovery of Sums Required To Be Paid. Beneficiary shall have the right from time to time to take action to recover any sum or sums which constitute a part of the Obligations as such sums shall become due, without regard to whether or not the balance of the Obligations shall be due, and without prejudice to the right of Beneficiary thereafter to bring an action of foreclosure or any other action for a default or defaults by Trustor existing at the time such earlier action was commenced. 5.4 Legal Tender. All payments of principal, interest and any and all other payments required or provided herein shall be paid in lawful money of the United States of America which shall be legal tender in payment of all debts and dues, public and private, at the time of payment, at the office of Beneficiary or at such other place either within or without the State of California as Beneficiary may from time to time designate. 5.5 No Merger. If both the lessor's and lessee's estates under any lease or any portion thereof which constitutes a part of the Secured Property shall at any time become vested in one owner, this Deed of Trust and the lien created hereby shall not be destroyed or terminated by the application of the doctrine of merger and in such event, Beneficiary shall continue to have and enjoy all of the rights and privileges of Beneficiary as to the separate estates. In addition, upon the foreclosure of the lien created by this Deed of Trust on the Secured Property pursuant to the provisions hereof, any leases or subleases then existing and created by Trustor shall not be destroyed or terminated by application of the law of merger or as a matter of law or as a result of such foreclosure unless Beneficiary or any purchaser at any such foreclosure sale shall so elect. No act by or on behalf of Beneficiary or any such purchaser shall constitute a termination of any lease or sublease unless Beneficiary or such purchaser shall give written notice thereof to such lessee or sublessee. 5.6 Discontinuance of Actions. In case Beneficiary shall have proceeded to enforce any right under this Deed of Trust by foreclosure, sale or entry or otherwise, and such proceedings shall have been discontinued or abandoned for any reason or shall have been determined adversely, then, in every such case, Trustor and Beneficiary shall be restored to their former positions and rights hereunder with respect to the Secured Property which shall remain subject to the lien of this Deed of Trust. 5.7 Headings. The headings of the sections, paragraphs and subdivisions of this Deed of Trust are for the convenience of -52- 58 reference only, are not to be considered a part hereof and shall not limit or otherwise affect any of the terms hereof. 5.8 Notice to Parties. All notices and demands hereunder shall be in writing and shall be deemed to have been sufficiently given or served for all purposes when presented personally or sent by certified or registered mail with return receipt requested or generally recognized overnight delivery service, addressed to the parties at the addresses stated below, or at such other address as either party may hereafter notify the other in writing as aforesaid: Trustor: Megatest Corporation 1321 Ridder Park Drive San Jose, California 95131-2306 Attn: Patrick J. Ryan with a copy to: Halgrimson, McNichols, et. al. 40 South Market Street, Suite 700 San Jose, California 95113 Attn: Eric Wong, Esq. Beneficiary: SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.), a Delaware corporation One Sun Life Executive Park Wellesley Hills, MA 02181 Attn: Property Investments with a copy to: Landels, Ripley & Diamond 350 Steuart Street San Francisco, CA 94105 Attn: Bruce W. Hyman, Esq. Service of any such notice or demand so made shall be deemed effective on the day of actual delivery as shown by the addressee's return receipt or the expiration of forty-eight (48) hours after the date sent by generally recognized overnight delivery service or mailed, whichever is the earlier in time, except that service of any notice of default or notice of sale provided or required by law shall, if mailed, be deemed effective on the date of mailing. 5.9 Non-Recourse. If an Event of Default has occurred, Beneficiary shall have all rights reserved in the Note, this Deed of Trust and every other Loan Document and shall have full recourse to the Secured Property and to the other collateral given by Trustor to secure the Note, provided, however, that any judgment obtained by Beneficiary in any proceeding to enforce such rights shall be enforced only against the Secured Property and such other collateral. Notwithstanding the foregoing, -53- 59 Beneficiary shall not in any way be prohibited from naming Trustor or any of its successors or assigns or any person holding under or through them as parties to any actions, suits or other proceedings initiated by Beneficiary to enforce such rights or to foreclose its mortgage lien or otherwise realize upon any other lien or security interest created in any other collateral given to secure the payment of the Obligations. The foregoing restriction shall not apply to, and Trustor shall be personally liable for, any losses, damages, costs and expenses incurred by Beneficiary as a result of (A) any material misstatement of fact (1) made by Trustor or any person or entity constituting Trustor to induce Beneficiary to advance the principal amount evidenced hereby or (2) contained in any Loan Document, (B) fraud committed by Trustor or any person or entity constituting Trustor, (C) misapplication of rents, income, insurance proceeds, condemnation awards or trust funds, (D) any loss, damage, expense or liability on the part of Beneficiary (including, without limitations, attorneys fees and disbursements) not reimbursable to Beneficiary pursuant to the Indemnity executed on even date herewith including, but not limited to the diminution in value of the Secured Property due to the existence of Hazardous Substances (as defined in the Indemnity), or if required in the reasonable judgment of Beneficiary, the preparation of an environmental audit on the Secured Property, whether conducted or authorized by Trustor, Beneficiary or a third party or the implementation of any environmental audit's recommendations, (E) all losses, damages or liability suffered by Beneficiary arising from any acts of commission or omission by Trustor that result in waste upon the Secured Property, (F) failure to pay real property taxes when due, (G) taking of any rents prepaid for more than one month in advance, (H) cost of any property repair as a result of a casualty not reimbursed by insurance to the extent insurance is required pursuant to this Deed of Trust, or (I) failure to fully comply with the provisions of the Americans With Disabilities Act. 5.10 Successors and Assigns Included In Parties. Subject to the provisions of Section 1.11, whenever in this Deed of Trust one of the parties hereto is named or referred to, the heirs, legal representatives, successors and assigns of such party shall be included and all covenants and agreements contained in this Deed of Trust by or on behalf of Trustor or by or on behalf of Beneficiary shall bind and inure to the benefit of their respective heirs, legal representatives, successors and assigns, whether so expressed or not. 5.11 Number and Gender. Whenever the singular or plural number, masculine or feminine or neuter gender is used herein, it shall equally include the other. -54- 60 5.12 Changes and Modifications. This Deed of Trust cannot be changed except by an agreement in writing, signed by the party against whom enforcement of any change or modification is sought. 5.13 Applicable Law. This Deed of Trust shall be construed and enforced according to the laws of the State of California. 5.14 Invalid Provisions to Affect No Others. The unenforceability or invalidity of any provision or provisions of this Deed of Trust as to any persons or circumstances shall not render that provision or those provisions unenforceable or invalid as to any other persons or circumstances, and all provisions hereof, in all other respects, shall remain valid and enforceable. 5.15 Usury Savings Clause. It is the intention of Trustor and Beneficiary to conform strictly to the usury laws now or hereafter in force in the State of California and any interest payable under the Note, this Deed of Trust, or any of the other Loan Documents executed by Trustor, to the extent that any sums secured hereby or the advancing of such sums by Beneficiary shall not be exempt from such laws, shall be subject to reduction to the amount equal to the maximum non-usurious amount allowed under the usury laws of California as now or hereafter construed by the courts having jurisdiction over such matters. In the event the maturity of the Note is accelerated by reason of any provision of this Deed of Trust including, without limitation, an election by Beneficiary resulting from an Event of Default (or an event permitting acceleration) under this Deed of Trust or any other Loan Documents, voluntary prepayment of the Note, or otherwise, then earned interest may never include more than the maximum amount permitted by law, computed from the dates of each advance of the Obligations until payment, and any interest in excess of the maximum amount permitted by law shall be canceled automatically and, if theretofore paid, shall at the option of Beneficiary either be rebated to Trustor or credited on the principal amount of the Note or if all principal has been repaid, then the excess shall be rebated to Trustor. The aggregate of all interest (whether designated as interest, service charges, points or otherwise) contracted for, chargeable, or receivable under the Note, this Deed of Trust, or any other Loan Document shall under no circumstances exceed the maximum legal rates upon the unpaid principal balance of the Note remaining unpaid from time to time. In the event such interest does exceed the maximum legal rate, it shall be deemed a mistake and such excess shall be canceled automatically and if theretofore paid, rebated to Trustor or credited on the principal amount of the Note, or if the Note has been repaid, then such excess shall be rebated to Trustor. -55- 61 5.16 No Statute of Limitations. The pleadings of any statute of limitations as a defense to any and all obligations secured by this Deed of Trust are hereby waived to the full extent permissible by law. 5.17 Late Charges. In the event that any installment of principal, interest or escrow deposit shall become overdue, a "late charge" of four cents ($.04) for each dollar ($1.00), or part thereof so overdue, may be charged to Trustor by Beneficiary for the purpose of defraying Beneficiary's expenses incident to handling such delinquent payment. This charge shall be in addition to, and not in lieu of, any other remedy Beneficiary may have and is in addition to any reasonable fees and charges of any agents or attorneys which Beneficiary is entitled to employ on any default hereunder whether authorized herein or by law. Such "late charges", if not previously paid, shall, at the option of Beneficiary, be added to and become part of the succeeding monthly payment to be made under the Note and secured by this Deed of Trust. 5.18 Continuing Effectiveness. This Deed of Trust shall cover any and all advances made pursuant to the Loan Documents, rearrangements and renewals of the Obligations and all extensions in the time of payment thereof, whether such advances extensions or renewals are evidenced by new promissory notes or other instruments hereafter executed and irrespective of whether filed or recorded. Likewise, the execution of this Deed of Trust shall not impair or affect any other security which may be given to secure the payment of the Obligations, and all such additional security shall be considered as cumulative. The taking of additional security, execution of partial releases of the -56- 62 security, or any extension of time of payment of the Obligations shall not diminish the force, effect or lien of this Deed of Trust and shall not affect or impair the liability of any maker, surety or endorser for the payment of the Obligations. IN WITNESS WHEREOF, Trustor has executed this Deed of Trust as of the date and year first above written. Trustor MEGATEST CORPORATION, a Delaware corporation By: /s/ PAUL W. EMERY, II -------------------------------- Its: VP FIN & CFO By: -------------------------------- Its: --------------------------- [ALL SIGNATURES MUST BE ACKNOWLEDGED] [IMPRINT OF NOTORIAL SEAL AND ACKNOWLEDGEMENT APPEAR HERE] -57- 63 PROMISSORY NOTE $5,450,000.00 San Jose, California August 25, 1995 FOR VALUE RECEIVED, MEGATEST CORPORATION, a Delaware corporation ("Maker"), having an office at 1321 Ridder Park Drive, San Jose, CA 95131-2306 promises to pay to SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.), a Delaware corporation ("Holder") having its principal office address, at One Sun Life Executive Park, Wellesley Hills, MA 02181, or order, at its principal office in Wellesley Hills, MA or at such other place as may be designated in writing by Holder, the principal sum of FIVE MILLION FOUR HUNDRED FIFTY THOUSAND and NO/100 Dollars ($5,450,000.00) (the "Principal Indebtedness"), in lawful money of the United States, together with interest thereon at the rate of eight and one eighth percent (8.125%) per annum, payable in monthly installments of principal and interest in the sum of Forty Nine Thousand Three Hundred Sixty-One and 76/100 Dollars ($49,361.76), commencing October 1, 1995 and payable on the first day (1st) of each month for fifty-nine (59) months with the last installment being due and payable on August 31, 2000 (the "Maturity Date"), at which time the entire unpaid balance together with accrued interest shall be due and payable. Interest accrued from the date Holder initially disburses funds to the first (1st) day of the month following the month during which Holder initially disburses funds, shall be due and payable at the time of closing. This Note is secured by, among other things, (i) a Deed of Trust, Financing Statement, Security Agreement and Fixture Filing (with Assignment of Rents and Leases) (the "Deed of Trust") dated as of the date hereof made by Maker for the benefit of Holder and encumbering certain premises situate in the City of San Jose, County of Santa Clara and the improvements thereon, along with other property more particularly described in the Deed of Trust (collectively, the "Secured Property"), and (ii) an Absolute Assignment of Leases, Rents, Income and Cash Collateral dated as of the date hereof from Maker to Holder. Each of the documents mentioned in this paragraph and all other documents either evidencing or further securing the Principal Indebtedness are collectively referred to herein as the "Loan Documents". Upon the occurrence of an Event of Default (as such term is defined in the Deed of Trust) (including, without limitation, the failure of Maker to pay any sum herein specified when due regardless of whether or not there has been an acceleration), all delinquent payments and all accrued and unpaid interest thereon, 64 and all other delinquent sums evidenced and/or secured by the Loan Documents shall bear interest from the date of delinquency at a rate per annum (the "Default Rate") equal to the lesser of: (i) the highest rate of interest permitted to be contracted for under the laws of the State of California, if any, or (ii) twelve and one eighth percent (12.125%) per annum. The Default Rate shall be in lieu of any other interest rate otherwise applicable and shall commence, without notice, immediately upon and from the occurrence of such Event of Default and shall continue until all defaults are cured and all sums then due and payable under the Loan Documents are paid in full. No privilege is reserved to prepay the Principal Indebtedness either in whole or in part prior to September 1, 1997 (the "Closed Period"). Thereafter, beginning on September 1, 1997, and except as provided hereinafter, the privilege is reserved by Maker to prepay the entire principal balance hereunder together with accrued interest thereon to the date of payment on such date or any subsequent monthly installment date, upon not less than ninety (90) days' prior written notice to Holder of Maker's intention to make such prepayment, provided there is paid, in addition to interest accrued to the date of such prepayment, a prepayment fee which shall be equal to the greater of (a) two percent (2%) of the then outstanding balance of the Principal Indebtedness, or (b) a Discounted Yield Maintenance Prepayment Fee computed as follows: the proceeds of the prepayment will be assumed to be immediately reinvested in a United States Treasury Security having a coupon interest rate and maturity most closely equivalent to that of this Note. If the yield (the "Treasury Yield") on that certain United States Treasury Security, as published in the "Wall Street Journal" on the fifth business day prior to the date of prepayment, is: 1. less than the interest rate of this Note, Maker will pay to Holder a fee equal to the positive difference between the two interest rates, divided by 12 and multiplied by the then outstanding balance of the Principal Indebtedness to arrive at the monthly payment differential. Holder shall then determine the present value of the series of monthly payment differentials for the number of whole and partial months from the prepayment date to the maturity date using the Treasury Yield as the discount rate compounding monthly. The resulting sum of the discounted monthly payment differentials will be the Discounted Yield Maintenance Prepayment Fee, or, 2. greater than or equal to the interest rate on this Note, then the prepayment fee shall be 2% of the then outstanding balance of the Principal Indebtedness. -2- 65 In the event the outstanding balance of the Principal Indebtedness shall become due and payable as a result of (a) an Event of Default (as such term is defined in the Deed of Trust) causing acceleration under this Note, which Event of Default shall be conclusively deemed to be a willful default for purposes of avoiding the prepayment charges to which Holder is entitled; (b) the exercise by Maker of any right of redemption or other action to prevent a foreclosure of the Secured Property; or (c) an acceleration by Holder as a result of the sale or further encumbrance of the Secured Property in violation of the applicable provisions of the Deed of Trust; then, in such event, Maker shall pay the prepayment charge which would otherwise be applicable hereunder; or if at that time there is no such privilege of prepayment (e.g., during the Closed Period), then, to the extent permitted by law, and except as provided hereinafter, such prepayment fee shall be equal to the greater of (a) three percent (3%) of the then outstanding balance of the Principal Indebtedness, or (b) a Discounted Acceleration Premium amount calculated as follows: the proceeds of the prepayment will be assumed to be immediately reinvested in a United States Treasury Security having a coupon interest rate and maturity most closely equivalent to that of this Note. If the yield on that certain United States Treasury Security, as published in the Wall Street Journal on the fifth business day prior to the date of prepayment, is: 1. less than the interest of this Note, Maker will pay to Holder a fee equal to the positive difference between the two interest rates, divided by 12 and multiplied by the then outstanding balance of the Principal Indebtedness to arrive at the monthly payment differential. Holder shall then determine the present value of the series of monthly payment differentials for the number of whole and partial months from the prepayment date to the maturity date using the Treasury Yield as the discount rate compounding monthly. The resulting sum of the discounted monthly payment differential will be the Discounted Acceleration Premium, or, 2. greater than or equal to the interest rate on this Note, then the prepayment fee shall be 3% of the then outstanding balance of the Principal Indebtedness. MAKER HEREBY EXPRESSLY (A) WAIVES ANY RIGHTS IT MAY HAVE UNDER CALIFORNIA CIVIL CODE SECTION 2954.10 TO PREPAY THIS NOTE, IN WHOLE OR IN PART, WITHOUT PENALTY, UPON ACCELERATION OF THE MATURITY DATE OF THE NOTE, AND (B) AGREES THAT IF, FOR ANY REASON, A PREPAYMENT OF ANY OR ALL OF THIS NOTE IS MADE, WHETHER VOLUNTARY OR INVOLUNTARY, OR UPON OR FOLLOWING ANY ACCELERATION -3- 66 OF THE MATURITY DATE OF THE NOTE BY HOLDER ON ACCOUNT OF ANY DEFAULT BY MAKER UNDER ANY LOAN DOCUMENT, INCLUDING BUT NOT LIMITED TO ANY TRANSFER OR DISPOSITION AS PROHIBITED OR RESTRICTED BY SECTION 1.11 OF THE DEED OF TRUST, THEN MAKER SHALL BE OBLIGATED TO PAY, CONCURRENTLY THEREWITH, AS A PREPAYMENT FEE, THE APPLICABLE SUM SPECIFIED IN THE PRECEDING PARAGRAPH. BY SIGNING THIS PROVISION IN THE SPACE PROVIDED BELOW, MAKER AGREES THAT HOLDER'S AGREEMENT TO MAKE THE LOAN EVIDENCED BY THIS NOTE AT THE INTEREST RATE AND FOR THE TERM SET FORTH IN THE NOTE CONSTITUTES ADEQUATE CONSIDERATION, GIVEN INDIVIDUAL WEIGHT BY MAKER FOR THIS WAIVER AND AGREEMENT. MEGATEST CORPORATION, a Delaware corporation By: /s/ PAUL W. EMERY, II ----------------------------- Its: VP, FIN & CFO ------------------------ By: ----------------------------- Its: ------------------------ Notwithstanding the foregoing, no prepayment fee shall be payable in connection with any voluntary or involuntary prepayment made on or after June 1, 2000, or any payment as a result of casualty or condemnation. Upon the occurrence of any other Event of Default, then and in any such events, Holder may, at its option, declare this Note and the entire Principal Indebtedness to be immediately due and payable and collectible then or thereafter as Holder may elect, regardless of the stated Maturity Date. Should the Principal Indebtedness or any part thereof be collected at law or in equity, or in bankruptcy, receivership, or any other court proceeding (whether at the trial or appellate level), or should this Note be placed in the hands of attorneys for collection upon default, Maker agrees to pay, in addition to the principal, prepayment charge, interest and any other outstanding amounts due and payable hereon, all costs of collecting or attempting to collect this Note and enforcing Holder's remedies under the Loan Documents, including reasonable attorneys' fees and expenses, and the same shall constitute additional indebtedness secured by the Deed of Trust. Maker recognizes that any default in the payment of any installment of principal and/or interest due hereunder on the date the same is due will result in loss and additional expense -4- 67 to Holder in servicing the Principal Indebtedness, handling such delinquent payments and meeting its other financial obligations, and that the extent of such loss and additional expenses is extremely difficult and impractical to ascertain. Maker therefore agrees that in the event any installment of principal and/or interest due hereunder is not paid on the date the same is due and payable, without regard to any grace periods, a late charge of four percent (4%) of the overdue installment of principal and/or interest shall be paid by Maker and that such amount is a reasonable estimate of such loss and expense and may be charged by Holder, at its option, for the purpose of defraying such loss and expenses, unless applicable law requires a lesser such charge, in which event the maximum rate permitted by such law may be charged by Holder for said purposes. The failure of Holder to exercise the option for acceleration of maturity, foreclosure or any other remedies provided in the Loan Documents following any default as aforesaid or to exercise any other option granted to it hereunder, under the Deed of Trust or under any of the other Loan Documents, in any one or more instances, or the acceptance by Holder of partial payments or partial performance, shall not constitute a waiver of any such default, but such option shall remain continuously in force. Acceleration of maturity, once claimed hereunder by Holder, may at its option be rescinded by written acknowledgement to such effect, but the tender and acceptance of partial payment or partial performance alone shall not in any way affect or rescind such acceleration of maturity. Maker hereby covenants and agrees that, together with and in addition to the monthly payments of principal and/or interest payable under the terms of this Note, Maker will deposit with Holder of this Note or its agent, as directed by Holder, until this Note is fully paid, installments of insurance premiums and Impositions (as defined and required in the Deed of Trust). Amounts held hereunder shall not be deemed to be trust funds, but may be commingled with the general funds of Holder. It is the intention of Maker and Holder to conform strictly to the usury laws now or hereafter in force in the State of California, and any interest payable under this Note, the Deed of Trust, the other Loan Documents, and/or any of the other documents or instruments executed by Maker in connection with the loan made or to be made hereunder shall be subject to reduction to the amount not in excess of the maximum non-usurious amount allowed under the usury laws of the State of California as now or hereafter construed by the courts having jurisdiction over such matters. If the aggregate of all interest (whether designated as interest, service charges, points or otherwise) contracted for, chargeable or receivable under this Note, the Deed of Trust and -5- 68 any other Loan Document should exceed the maximum legal rate, it shall be deemed a mistake and such excess shall be canceled automatically and, if theretofore paid, shall at the option of Holder either be rebated to Maker or credited on the principal amount of this Note, or, if the Note has been repaid, such excess shall be rebated to Maker. In the event the Maturity Date is accelerated by reason of any provision of this Note or by reason of an election by Holder resulting from an Event of Default under the Loan Documents, voluntary prepayment by Maker, or otherwise, then earned interest may never include more than the maximum amount permitted by law, computed from the dates of each advance of loan proceeds hereunder until payment, and any interest in excess of the maximum amount permitted by law shall be canceled automatically and, if theretofore paid, shall at the option of Holder either be rebated to Maker or credited on the principal amount of this Note or, if the Note has been repaid, the excess shall be rebated to the Maker. This provision shall control every other provision of all agreements between Maker and Holder. Maker hereby waives presentment, protest, notice of protest, notice of dishonor and diligence in collection, and any and all other notices and matters of a like nature, except for those expressly required by the Deed of Trust or this Note. Maker consents to any extension of time (whether one or more) of payment hereof, release of all or any part of the security for the payment of this obligation or release of any person or entity liable for payment of this Note. Any such extension or release may be made without notice to any such party and without discharging said party's liability hereunder. This Note may not be changed orally, but only by an agreement in writing, signed by the party against whom enforcement of any waiver, change, modification or discharge is sought. No failure or delay on the part of Holder in exercising any right, power or privilege under this Note and no course of dealing between Maker and Holder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein expressly provided are cumulative and not exclusive of any rights or remedies which Holder would otherwise have at law or equity. No notice to or demand on Maker in any case shall entitle Maker to any other or further notice or demand in similar or other circumstances or constitute a waiver of the right of Holder to any other or further action in any circumstances without notice or demand. -6- 69 Maker acknowledges that the ownership (and the continuation thereof) of the Secured Property by Maker is of a material nature to the loan and the making of the loan evidenced by this Note. Therefore, Maker agrees that in the event of any transfer that is prohibited by the terms of Section 1.11 of the Deed of Trust or other Loan Document, howsoever evidenced or occasioned, then, at the option of Holder, the entire Principal Indebtedness along with all accrued interest thereon shall immediately become due and payable. Whenever in this Note one of the parties hereto is named or referred to, the heirs, legal representatives, successors and assigns of such party shall be included and all covenants and agreements contained in this Note by or on behalf of Maker or by or on behalf of Holder shall bind and inure to the benefit of such party's heirs, legal representatives, successors and assigns, whether so expressed or not. The obligations of each person and entity comprising Maker (if more than one) shall be joint and several. The unenforceability or invalidity of any provision or provisions of this Note as to any persons or entities or circumstances shall not render that provision or those provisions unenforceable or invalid as to any other persons or entities or circumstances, and all provisions hereof, in all other respects, shall remain valid and enforceable. In the event of any default by Maker under this Note, the Deed of Trust or any other Loan Document, Holder shall have all rights reserved in this Note, the Deed of Trust and every other Loan Document and shall have full recourse to the Secured Property and to the other collateral given by Maker to secure this Note, provided, however, that any judgment obtained by Holder in any proceeding to enforce such rights shall be enforced only against the Secured Property and such other collateral. Notwithstanding the foregoing, Holder shall not in any way be prohibited from naming Maker or any of its successors or assigns or any person holding under or through them as parties to any actions, suits or other proceedings initiated by Holder to enforce such rights or to foreclose its mortgage lien or otherwise realize upon any other lien or security interest created in any other collateral given to secure the payment of this Note. The foregoing restriction shall not apply to, and Maker shall be personally liable for, any losses, damages, costs and expenses incurred by Holder as a result of (i) any material misstatement of fact (A) by Maker or any person or entity constituting Maker to induce Holder to advance the principal amount evidenced hereby or (B) contained in any Loan Document, (ii) fraud committed by Maker or any person or entity -7- 70 constituting Maker, (iii) misapplication of rents, security deposits, income, insurance proceeds, condemnation awards or trust funds, (iv) any loss, damage, expense or liability on the part of Holder (including, without limitation, attorneys' fees and disbursements) not reimbursable to Holder pursuant to the Environmental Agreement and Indemnity (the "Indemnity") executed on even date herewith including, but not limited to the diminution in value of the Secured Property due to the existence of Hazardous Substances (as defined in the Indemnity), or if required in the reasonable judgment of Holder, the preparation of an environmental audit on the Secured Property, whether conducted or authorized by Maker, Holder or a third party or the implementation of any environmental audit's recommendations, (v) all losses, damages or liability suffered by Holder arising from any acts of commission or omission by Maker that result in waste upon the Secured Property, (vi) failure to pay real property taxes when due, (vii) taking of any rents prepaid for more than one (1) month in advance, (viii) cost of any property repair as a result of a casualty not reimbursed by insurance to the extent insurance is required pursuant to the Deed of Trust, or (ix) failure to fully comply with the provisions of the Americans With Disabilities Act. Whenever used, the words "Maker" and "Holder" shall be deemed to include the respective heirs, successors, assigns and legal representatives of Maker and Holder. This Note is to be construed and enforced according to and governed by the laws of the State of California. IN WITNESS WHEREOF, Maker has executed this Note as of the date first above written. MAKER MEGATEST CORPORATION, a Delaware corporation By: /s/ PAUL W. EMERY, II ------------------------------------- Its: VP, FIN & CFO -------------------------------- By: ------------------------------------- Its: -------------------------------- -8- EX-10.14 5 AGREEMENT AND PLAN OF MERGER AND REORGANIZATION 1 EXHIBIT 10.14 AGREEMENT AND PLAN OF MERGER AND REORGANIZATION BY AND AMONG TERADYNE, INC., M MERGER CORP. AND MEGATEST CORPORATION DATED AS OF SEPTEMBER 5, 1995 2 TABLE OF CONTENTS
PAGE ---- ARTICLE I THE MERGER................................................................... 1 SECTION 1.01. The Merger........................................................... 1 SECTION 1.02. Effective Time....................................................... 1 SECTION 1.03. Effect of the Merger................................................. 2 SECTION 1.04. Certificate of Incorporation; By-Laws................................ 2 SECTION 1.05. Directors and Officers............................................... 2 SECTION 1.06. Effect on Capital Stock.............................................. 2 SECTION 1.07. Exchange of Certificates............................................. 3 SECTION 1.08. Stock Transfer Books................................................. 4 SECTION 1.09. Dissenting Shares.................................................... 4 SECTION 1.10. No Further Ownership Rights in Company Common Stock.................. 5 SECTION 1.11. Lost, Stolen or Destroyed Certificates............................... 5 SECTION 1.12. Tax and Accounting Consequences...................................... 5 SECTION 1.13. Taking of Necessary Action; Further Action........................... 5 SECTION 1.14. Material Adverse Effect.............................................. 5 ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY............................... 6 SECTION 2.01. Organization and Qualification; Subsidiaries......................... 6 SECTION 2.02. Certificate of Incorporation and By-Laws............................. 6 SECTION 2.03. Capitalization....................................................... 6 SECTION 2.04. Authority Relative to this Agreement................................. 7 SECTION 2.05. No Conflict, Required Filings and Consents........................... 7 SECTION 2.06. Compliance; Permits.................................................. 8 SECTION 2.07. SEC Filings; Financial Statements.................................... 8 SECTION 2.08. Absence of Certain Changes or Events................................. 9 SECTION 2.09. No Undisclosed Liabilities........................................... 9 SECTION 2.10. Absence of Litigation................................................ 9 SECTION 2.11. Employee Benefit Plans, Employment Agreements........................ 9 SECTION 2.12. Labor Matters........................................................ 11 SECTION 2.13. Registration Statement, Proxy Statement.............................. 11 SECTION 2.14. Restrictions on Business Activities.................................. 11 SECTION 2.15. Title to Property.................................................... 11 SECTION 2.16. Taxes................................................................ 12 SECTION 2.17. Environmental Matters................................................ 13 SECTION 2.18. Brokers.............................................................. 13 SECTION 2.19. Full Disclosure...................................................... 14 SECTION 2.20. Intellectual Property................................................ 14 SECTION 2.21. Interested Party Transactions........................................ 15 SECTION 2.22. Insurance............................................................ 15 SECTION 2.23. Option Plans......................................................... 15 SECTION 2.24. Vote Required........................................................ 15 SECTION 2.25. Pooling Matters...................................................... 15 SECTION 2.26. Opinion of Financial Advisor......................................... 15 ARTICLE III REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB..................................................................... 16 SECTION 3.01. Organization and Qualification....................................... 16 SECTION 3.02. Authority Relative to this Agreement................................. 16 SECTION 3.03. No Conflict; Required Filings and Consents........................... 16 SECTION 3.04. Articles of Organization and By-Laws................................. 17
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PAGE ---- SECTION 3.05. Capitalization....................................................... 17 SECTION 3.06. Compliance, Permits.................................................. 17 SECTION 3.07. SEC Filings, Financial Statements.................................... 17 SECTION 3.08. Absence of Certain Changes or Events................................. 18 SECTION 3.09. Restrictions on Business Activities.................................. 18 SECTION 3.10. Title to Property.................................................... 18 SECTION 3.11. Full Disclosure...................................................... 19 SECTION 3.12. No Undisclosed Liabilities........................................... 19 SECTION 3.13. Absence of Litigation................................................ 19 SECTION 3.14. Insurance............................................................ 19 SECTION 3.15. Registration Statement; Proxy Statement; Prospectus.................. 19 SECTION 3.16. Taxes................................................................ 19 SECTION 3.17. Brokers.............................................................. 20 SECTION 3.18. Opinion of Financial Advisor......................................... 20 SECTION 3.19. Pooling Matters...................................................... 20 SECTION 3.20. No Stockholder Vote.................................................. 20 SECTION 3.21. Employee Benefit Plans, Employment Agreements........................ 20 SECTION 3.22. Labor Matters........................................................ 21 SECTION 3.23. Environmental Matters................................................ 21 SECTION 3.24. Intellectual Property................................................ 21 ARTICLE IV CONDUCT OF BUSINESS PENDING THE MERGER...................................... 22 SECTION 4.01. Conduct of Business by the Company Pending the Merger................ 22 SECTION 4.02. No Solicitation...................................................... 24 SECTION 4.03. Conduct of Business by Parent Pending the Merger..................... 25 ARTICLE V ADDITIONAL AGREEMENTS........................................................ 26 SECTION 5.01. Proxy Statement/Prospectus; Registration Statement................... 26 SECTION 5.02. Stockholders Meeting................................................. 26 SECTION 5.03. Access to Information; Confidentiality............................... 26 SECTION 5.04. Consents; Approvals.................................................. 26 SECTION 5.05. Stock Options........................................................ 27 SECTION 5.06. Company Employee Stock Purchase Plan................................. 27 SECTION 5.07. Agreements of Affiliates............................................. 27 SECTION 5.08. Indemnification and Insurance........................................ 28 SECTION 5.09. Employee Benefit Plans............................................... 28 SECTION 5.10. Notification of Certain Matters...................................... 29 SECTION 5.11. Further Action/Tax Treatment......................................... 29 SECTION 5.12. Public Announcements................................................. 29 SECTION 5.13. Listing of Parent Common Shares...................................... 29 SECTION 5.14. Conveyance Taxes..................................................... 29 SECTION 5.15. Accountants' Letters................................................. 29 SECTION 5.16. Employment Agreements................................................ 29 ARTICLE VI CONDITIONS TO THE MERGER.................................................... 30 SECTION 6.01. Conditions to Obligation of Each Party to Effect the Merger.......... 30 SECTION 6.02. Additional Conditions to Obligations of Parent and Merger Sub........ 30 SECTION 6.03. Additional Conditions to Obligation of the Company................... 31 ARTICLE VII TERMINATION................................................................ 31 SECTION 7.01. Termination.......................................................... 31 SECTION 7.02. Effect of Termination................................................ 32
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PAGE ---- SECTION 7.03. Fees and Expenses Payable By Company................................. 32 SECTION 7.04. Fees and Expenses Payable By Parent.................................. 33 ARTICLE VIII GENERAL PROVISIONS........................................................ 33 SECTION 8.01. Effectiveness of Representations, Warranties and Agreements.......... 33 SECTION 8.02. Notices.............................................................. 34 SECTION 8.03. Certain Definitions.................................................. 34 SECTION 8.04. Amendment............................................................ 35 SECTION 8.05. Waiver............................................................... 35 SECTION 8.06. Headings............................................................. 35 SECTION 8.07. Severability......................................................... 35 SECTION 8.08. Entire Agreement..................................................... 35 SECTION 8.09. Assignment, Merger Sub............................................... 35 SECTION 8.10. Parties in Interest.................................................. 35 SECTION 8.11. Failure or Indulgence Not Waiver; Remedies Cumulative................ 36 SECTION 8.12. Governing Law........................................................ 36 SECTION 8.13. Counterparts......................................................... 36
EXHIBITS: Exhibit A: Form of Affiliate Agreement Exhibit B: Employment Agreement Terms Exhibit 1.06(b): Adjustment of Conversion Ratio iii 5 AGREEMENT AND PLAN OF MERGER AND REORGANIZATION AGREEMENT AND PLAN OF MERGER AND REORGANIZATION, as amended, dated as of September 5, 1995 (this "Agreement"), among TERADYNE, INC., a Massachusetts corporation ("Parent"), M MERGER CORP., a Delaware corporation and a wholly owned subsidiary of Parent ("Merger Sub"), and MEGATEST CORPORATION, a Delaware corporation (the "Company"). W I T N E S S E T H : WHEREAS, the Boards of Directors of Parent, Merger Sub and the Company have each determined that it is advisable and in the best interests of their respective stockholders for Parent to enter into a business combination with the Company upon the terms and subject to the conditions set forth herein; WHEREAS, in furtherance of such combination, the Boards of Directors of Parent, Merger Sub and the Company have each approved the merger (the "Merger") of Merger Sub with and into the Company in accordance with the applicable provisions of the Delaware General Corporation Law ("Delaware Law") upon the terms and subject to the conditions set forth herein; WHEREAS, pursuant to the Merger, each outstanding share (a "Share") of the Company's common stock, $0.001 par value per share (the "Company Common Stock"), shall be converted into the right to receive the Merger Consideration (as defined in Section 1.07(b)), upon the terms and subject to the conditions set forth herein; WHEREAS, Parent, Merger Sub and the Company intend, by approving resolutions authorizing this Agreement, to adopt this Agreement as a plan of reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"), and the regulations thereunder, and to cause the Merger to qualify as a reorganization under the provisions of Section 368(a) of the Code; WHEREAS, for accounting purposes, it is intended that the transactions contemplated hereby shall be accounted for as a pooling of interests under United States generally accepted accounting principles ("GAAP"); NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements herein contained, and intending to be legally bound hereby, Parent, Merger Sub and the Company hereby agree as follows: ARTICLE I THE MERGER SECTION 1.01. THE MERGER. (a) Effective Time. At the Effective Time (as defined in Section 1.02), and subject to and upon the terms and conditions of this Agreement and Delaware Law, Merger Sub shall be merged with and into the Company, the separate corporate existence of Merger Sub shall cease, and the Company shall continue as the surviving corporation. The Company as the surviving corporation after the Merger is hereinafter sometimes referred to as the "Surviving Corporation." (b) Closing. Unless this Agreement shall have been terminated and the transactions herein contemplated shall have been abandoned pursuant to Section 7.01 and subject to the satisfaction or waiver of the conditions set forth in Article VI, the consummation of the Merger will take place as promptly as practicable (and in any event within two business days) after satisfaction or waiver of the conditions set forth in Article VI, at the offices of Testa, Hurwitz & Thibeault, 125 High Street, Boston, Massachusetts, unless another date, time or place is agreed to in writing by the parties hereto. SECTION 1.02. EFFECTIVE TIME. As promptly as practicable after the satisfaction or waiver of the conditions set forth in Article VI, the parties hereto shall cause the Merger to be consummated by filing a certificate of merger as contemplated by Section 251 of Delaware Law (the "Certificate of Merger"), together 1 6 with any required related certificates, with the Secretary of State of the State of Delaware, in such form as required by, and executed in accordance with the relevant provisions of, Delaware Law (the time of such filing being the "Effective Time"). SECTION 1.03. EFFECT OF THE MERGER. At the Effective Time, the effect of the Merger shall be as provided in this Agreement, the Certificate of Merger and the applicable provisions of Delaware Law. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time all the property, rights, privileges, powers and franchises of the Company and Merger Sub shall vest in the Surviving Corporation, and all debts, liabilities and duties of the Company and Merger Sub shall become the debts, liabilities and duties of the Surviving Corporation. SECTION 1.04. CERTIFICATE OF INCORPORATION; BY-LAWS. (a) Certificate of Incorporation. Unless otherwise determined by Parent prior to the Effective Time, at the Effective Time the Certificate of Incorporation of Merger Sub, as in effect immediately prior to the Effective Time, shall be the Certificate of Incorporation of the Surviving Corporation until thereafter amended as provided by Delaware Law and such Certificate of Incorporation; provided, however, that Article I of the Certificate of Incorporation of the Surviving Corporation shall be amended to read as follows: "FIRST: The name of the corporation is MEGATEST Corporation." (b) By-Laws. The By-Laws of Merger Sub, as in effect immediately prior to the Effective Time, shall be the By-Laws of the Surviving Corporation until thereafter amended as provided by Delaware Law, the Certificate of Incorporation of the Surviving Corporation and such By-Laws. SECTION 1.05. DIRECTORS AND OFFICERS. The directors of Merger Sub immediately prior to the Effective Time and the additional persons listed on Schedule 1.05 of the Company Disclosure Schedule shall be the initial directors of the Surviving Corporation, each to hold office in accordance with the Certificate of Incorporation and By-Laws of the Surviving Corporation, and the officers of the Company immediately prior to the Effective Time shall be the initial officers of the Surviving Corporation, in each case until their respective successors are duly elected or appointed and qualified. SECTION 1.06. EFFECT ON CAPITAL STOCK. At the Effective Time, by virtue of the Merger and without any action on the part of Parent, Merger Sub, the Company or the holders of any of the following securities: (a) Conversion of Securities. Each Share issued and outstanding immediately prior to the Effective Time (excluding any Shares to be canceled pursuant to Section 1.06(b) and any Dissenting Shares (as defined in Section 1.09)) shall be converted, subject to Section 1.06(f), into the right to receive .9091 shares (.9091, as adjusted pursuant to Section 1.06(b), the "Exchange Ratio") of validly issued, fully paid and nonassessable shares of common stock of Parent, $.125 par value ("Parent Common Shares"). (b) Adjustment of Conversion Ratio. If the Final Parent Stock Price (as defined below) is equal to or less than $36.00 per share, no adjustment to the Exchange Ratio shall be made. If the Final Parent Stock Price is greater than $36.00 per share, then the Exchange Ratio shall be adjusted in accordance with the formula specified on Exhibit 1.06(b) hereto provided, however, that the Exchange Ratio as adjusted pursuant to this Section 1.06(b) shall in no event be less than .8333. For purposes hereof, "Final Parent Stock Price" shall mean the average of the closing prices of the Parent Common Stock for the twenty consecutive days on which the Parent Common Shares are traded on The New York Stock Exchange (the "NYSE") ending on the fifth calendar day immediately preceding the Company Stockholders Meeting (as defined in Section 2.13). (c) Cancellation. Each Share held in the treasury of the Company and each Share owned by Parent, Merger Sub or any direct or indirect wholly owned subsidiary of the Company or Parent immediately prior to the Effective Time shall, by virtue of the Merger and without any action on the part of the holder thereof, cease to be outstanding, be canceled and retired without payment of any consideration therefor and cease to exist. 2 7 (d) Assumption of Stock Options; Stock Purchase Rights. All options to purchase Company Common Stock then outstanding under the Company Stock Option Plans (as defined in Section 5.05) shall be assumed by Parent in accordance with Section 5.05. Immediately prior to the Effective Time, all rights to purchase Company Common Stock then outstanding under the Company Stock Purchase Plan (as defined in Section 5.06) shall be exercised in accordance with Section 5.06 and the shares so purchased shall be converted into Parent Common Shares at the Effective Time. (e) Capital Stock of Merger Sub. Each share of common stock, $0.001 par value per share, of Merger Sub issued and outstanding immediately prior to the Effective Time shall be converted into and exchanged for one validly issued, fully paid and nonassessable share of common stock, no par value, of the Surviving Corporation. Each stock certificate of Merger Sub evidencing ownership of any such shares shall continue to evidence ownership of such shares of capital stock of the Surviving Corporation. (f) Adjustments to Exchange Ratio. The Exchange Ratio shall be adjusted to reflect fully the effect of any stock split, reverse split, stock dividend (including any dividend or distribution of securities convertible into Parent Common Shares or Company Common Stock), reorganization, recapitalization or other like change with respect to Parent Common Shares or Company Common Stock occurring after the date hereof and prior to the Effective Time. (g) Fractional Shares. No fraction of a share of Parent Common Shares will be issued, but, except as provided in Section 5.05, in lieu thereof each holder of Company Common Stock who would otherwise be entitled to a fraction of a share of Parent Common Shares (after aggregating all fractional shares of Parent Common Shares to be received by such holder) shall receive from Parent an amount of cash (rounded to the nearest whole cent), without interest, equal to the product of (i) such fraction, multiplied by (ii) the average of the closing prices of Teradyne Common Stock for the twenty consecutive days on which Teradyne Common Stock is traded on the NYSE ending on the fifth calendar day immediately preceding the day on which the Special Meeting is held. SECTION 1.07. EXCHANGE OF CERTIFICATES. (a) Exchange Agent. Immediately prior to the Effective Time, Parent shall supply, or shall cause to be supplied, to or for the account of a bank or trust company designated by Parent (the "Exchange Agent"), in trust for the benefit of the holders of Company Common Stock (other than Dissenting Shares), for exchange in accordance with this Section 1.07, through the Exchange Agent, certificates evidencing the Parent Common Shares issuable pursuant to Section 1.06 in exchange for outstanding Shares plus cash in an amount sufficient for payment in lieu of fractional shares as provided in Section 1.06(g). (b) Exchange Procedures. Promptly after the Effective Time, Parent shall cause the Exchange Agent to mail to each holder of record of a certificate or certificates which immediately prior to the Effective Time evidenced outstanding Shares (other than Dissenting Shares) (the "Certificates") (i) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon proper delivery of the Certificates to the Exchange Agent and shall be in such form and have such other provisions as Parent may reasonably specify) and (ii) instructions to effect the surrender of the Certificates in exchange for the certificates evidencing shares of Parent Common Shares and, in lieu of any fractional shares thereof, cash. Upon surrender of a Certificate for cancellation to the Exchange Agent together with such letter of transmittal, duly executed, and such other customary documents as may be required pursuant to such instructions, the holder of such Certificate shall be entitled to receive in exchange therefor (A) certificates evidencing that number of whole Parent Common Shares which such holder has the right to receive in accordance with the Exchange Ratio in respect of the Shares formerly evidenced by such Certificate, (B) any dividends or other distributions to which such holder is entitled pursuant to Section 1.07(c), and (C) cash in lieu of fractional Parent Common Shares to which such holder is entitled pursuant to Section 1.06(g) (the Parent Common Shares, dividends, distributions and cash described in this clause (C) being, collectively, 3 8 the "Merger Consideration"), and the Certificate so surrendered shall forthwith be canceled. In the event of a transfer of ownership of Shares which is not registered in the transfer records of the Company as of the Effective Time, Parent Common Shares and cash may be issued and paid in accordance with this Article I to a transferee if the Certificate evidencing such Shares is presented to the Exchange Agent, accompanied by all documents required to evidence and effect such transfer pursuant to this Section 1.07(b) and by evidence that any applicable stock transfer taxes have been paid. Until so surrendered, each outstanding Certificate that, prior to the Effective Time, represented shares of the Company Common Stock will be deemed from and after the Effective Time, for all corporate purposes, other than the payment of dividends, to evidence the ownership of the number of full shares of Parent Common Shares into which such shares of the Company Common Stock shall have been so converted and the right to receive an amount in cash in lieu of the issuance of any fractional shares in accordance with Section 1.06. (c) Distributions with Respect to Unexchanged Shares. No dividends or other distributions declared or made after the Effective Time, with respect to Parent Common Shares with a record date after the Effective Time, shall be paid to the holder of any unsurrendered Certificate until the holder of such Certificate shall surrender such Certificate. Subject to applicable law, following surrender of any such Certificate, there shall be paid to the record holder of the certificates representing whole shares of Parent Common Shares issued in exchange therefor, without interest, at the time of such surrender, the amount of dividends or other distributions with a record date after the Effective Time theretofore paid with respect to such whole shares of Parent Common Shares. (d) Transfers of Ownership. If any certificate for shares of Parent Common Shares is to be issued in a name other than that in which the Certificate surrendered in exchange therefor is registered, it will be a condition of the issuance thereof that the Certificate so surrendered will be properly endorsed and otherwise in proper form for transfer and that the person requesting such exchange will have paid to Parent or any person designated by it any transfer or other taxes required by reason of the issuance of a certificate for shares of Parent Common Shares in any name other than that of the registered holder of the certificate surrendered, or established to the satisfaction of Parent or any agent designated by it that such tax has been paid or is not payable. (e) No Liability. Neither Parent, Merger Sub nor the Company shall be liable to any holder of Company Common Stock for any Merger Consideration (or dividends or distributions with respect thereto) delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. (f) Withholding Rights. Parent, the Surviving Corporation and the Exchange Agent shall be entitled to deduct and withhold from the Merger Consideration otherwise payable pursuant to this Agreement to any holder of Company Common Stock such amounts as Parent, the Surviving Corporation or the Exchange Agent is required to deduct and withhold with respect to the making of such payment under the Code or any provision of state, local, provincial or foreign tax law. To the extent that amounts are so withheld, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the holder of the Shares in respect of which such deduction and withholding was made by Parent or the Exchange Agent. SECTION 1.08. STOCK TRANSFER BOOKS. At the Effective Time, the stock transfer books of the Company shall be closed, and there shall be no further registration of transfers of the Company Common Stock thereafter on the records of the Company. SECTION 1.09. DISSENTING SHARES. (a) Notwithstanding any provision of this Agreement to the contrary, any shares of capital stock of the Company held by a holder who has exercised dissenters' rights for such shares in accordance with Delaware Law and who, as of the Effective Time, has not effectively withdrawn or lost such dissenters' rights ("Dissenting Shares"), shall not be converted into or represent a right to receive Merger 4 9 Consideration pursuant to Section 1.06, but the holder thereof shall only be entitled to such rights as are granted by Delaware Law. (b) Notwithstanding the provisions of subsection (a), if any holder of Dissenting Shares shall effectively withdraw or lose (through failure to perfect or otherwise) such holder's dissenters' rights, then, as of the later of the Effective Time or the occurrence of such event, such holder's shares shall automatically be converted into and represent only the right to receive the Merger Consideration, without interest thereon, upon surrender of the certificate or certificates representing such Dissenting Shares. (c) The Company shall give Parent (i) prompt notice of any written demands received by the Company for an appraisal of shares of capital stock of the Company pursuant to Section 262 of Delaware Law, withdrawals of such demands, and any other related instruments served pursuant to Delaware Law and received by the Company and (ii) the opportunity to participate in all negotiations and proceedings with respect to such demands. The Company shall not, except with the prior written consent of Parent, voluntarily make any payment with respect to any such demands or offer to settle or settle any such demands. SECTION 1.10. NO FURTHER OWNERSHIP RIGHTS IN COMPANY COMMON STOCK. The Merger Consideration delivered upon the surrender for exchange of Shares in accordance with the terms hereof shall be deemed to have been issued in full satisfaction of all rights pertaining to such Shares, and there shall be no further registration of transfers on the records of the Surviving Corporation of Shares which were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates are presented to the Surviving Corporation for any reason, they shall be canceled and exchanged as provided in this Article I. SECTION 1.11. LOST, STOLEN OR DESTROYED CERTIFICATES. In the event any Certificates shall have been lost, stolen or destroyed, the Exchange Agent shall issue in exchange for such lost, stolen or destroyed Certificates, upon the making of an affidavit of that fact by the holder thereof, such Parent Common Shares as may be required pursuant to Section 1.06; provided, however, that Parent may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed Certificates to deliver a bond in such sum as it may reasonably direct as indemnity against any claim that may be made against Parent or the Exchange Agent with respect to the Certificates alleged to have been lost, stolen or destroyed. SECTION 1.12. TAX AND ACCOUNTING CONSEQUENCES. It is intended by the parties hereto that the Merger shall (i) constitute a reorganization within the meaning of Section 368 of the Code and (ii) qualify for accounting treatment as a pooling of interests under GAAP. The parties hereto hereby adopt this Agreement as a "plan of reorganization" within the meaning of Sections 1.368-2(g) and 1.368-3(a) of the United States Treasury Regulations promulgated under the Code. SECTION 1.13. TAKING OF NECESSARY ACTION; FURTHER ACTION. Subject to the terms and conditions herein, each of Parent, Merger Sub and the Company in good faith will take all such commercially reasonable and lawful action as may be necessary or appropriate in order to effectuate the Merger in accordance with this Agreement as promptly as possible. If, at any time after the Effective Time, any such further action is necessary or desirable to carry out the purposes of this Agreement and to vest the Surviving Corporation with full right, title and possession to all assets, property, rights, privileges, powers and franchises of the Company and Merger Sub, the officers and directors of the Company and Merger Sub are fully authorized in the name of their respective corporations or otherwise to take, and will take, all such lawful and necessary action. SECTION 1.14. MATERIAL ADVERSE EFFECT. When used in this Agreement with respect to the Company or any of its subsidiaries, or Parent or any of its subsidiaries, as the case may be, the term "Material Adverse Effect" means any change or effect that, individually or when taken together with all other such changes or effects that have occurred prior to the date of determination of the occurrence of the Material Adverse Effect, is or is reasonably likely to be materially adverse to the business, assets (including intangible assets), financial condition or results of operations of the Company and its subsidiaries or Parent and its subsidiaries, as the case may be, in each case taken as a whole; provided, however, that a Material Adverse Effect shall not include any change or effect in respect of the Company and its subsidiaries or in respect of Parent and its subsidiaries, as the case may be, resulting from conditions affecting the semiconductor automatic test equipment industry generally or general economic conditions. 5 10 ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company hereby represents and warrants to Parent and Merger Sub that, except as set forth in the written disclosure schedule previously delivered by Company to Parent (the "Company Disclosure Schedule"): SECTION 2.01. ORGANIZATION AND QUALIFICATION; SUBSIDIARIES. Each of the Company and its subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has the requisite corporate power and authority necessary to own, lease and operate the properties it purports to own, operate or lease and to carry on its business as it is now being conducted, except where the failure to be so organized, existing and in good standing or to have such power and authority would not have a Material Adverse Effect. Each of the Company and its subsidiaries is duly qualified or licensed as a foreign corporation to do business, and is in good standing, in each jurisdiction where the character of its properties owned, leased or operated by it or the nature of its activities makes such qualification or licensing necessary, except for such failures to be so duly qualified or licensed and in good standing that would not have a Material Adverse Effect. A true and complete list of all of the Company's subsidiaries, together with the jurisdiction of incorporation of each subsidiary and the percentage of each subsidiary's outstanding capital stock owned by the Company or another subsidiary, is set forth in Section 2.01 of the Company Disclosure Schedule, except as is noted therein. Except as set forth in Section 2.01 of the Company Disclosure Schedule, the Company does not directly or indirectly own any equity or similar interest in, or any interest convertible into or exchangeable or exercisable for, any equity or similar interest in, any corporation, partnership, joint venture or other business association or entity. SECTION 2.02. CERTIFICATE OF INCORPORATION AND BY-LAWS. The Company has heretofore furnished to Parent a complete and correct copy of its Certificate of Incorporation and By-Laws, as amended to date, and, except as is set forth in Section 2.02 of the Company Disclosure Schedule, equivalent organizational documents of each of its subsidiaries (the "Subsidiary Documents"). Such Certificate of Incorporation, By-Laws and equivalent organizational documents of each of its subsidiaries are in full force and effect. Neither the Company nor any of its subsidiaries is in violation of any of the provisions of its Certificate of Incorporation or By-Laws or Subsidiary Documents except, in the case of any subsidiary of the Company, to the extent any such violation would not have a Material Adverse Effect. SECTION 2.03. CAPITALIZATION. The authorized capital stock of the Company consists of 20,000,000 shares of Company Common Stock and 5,000,000 shares of the Company's Preferred Stock $.001 par value per share (the "Company Preferred Stock"). As of August 26, 1995, (i) 7,422,462 shares of Company Common Stock were issued and outstanding, all of which are validly issued, fully paid and nonassessable, (ii) no shares of Company Common Stock were held by subsidiaries of the Company, (iii) 1,546,119 shares of Company Common Stock were reserved for future issuance pursuant to option grants under the Company Stock Option Plans, (iv) 406,834 shares of Company Common Stock were reserved for future issuance under the Company Stock Purchase Plan and (v) no shares of Company Preferred Stock were issued and outstanding. No material change in such capitalization has occurred between August 26, 1995 and the date hereof. For purposes hereof, option exercises by optionholders of Company Common Stock in the ordinary course of business and issuances of Company Common Stock under the 1992 Employee Stock Purchase Plan pursuant to the terms of such plan shall not be deemed a material change in the Company's capitalization. Except as set forth in this Section 2.03 or Section 2.11 hereof or in Section 2.03 or Section 2.11 of the Company Disclosure Schedule, there are no options, warrants or other rights, agreements, arrangements or commitments of any character relating to the issued or unissued capital stock of the Company or any of its subsidiaries or obligating the Company or any of its subsidiaries to issue or sell any shares of capital stock of, or other equity interests in, the Company or any of its subsidiaries. All shares of Company Common Stock subject to issuance as aforesaid, upon issuance on the terms and conditions specified in the instruments pursuant to which they are issuable, shall be duly authorized, validly issued, fully paid and nonassessable. There are no obligations, contingent or otherwise, of the Company or any of its subsidiaries to repurchase, redeem or otherwise acquire any shares of Company capital stock or the capital stock of any subsidiary or to 6 11 provide funds to or make any investment (in the form of a loan, capital contribution or otherwise) in any such subsidiary or any other entity other than guarantees of bank obligations of subsidiaries entered into in the ordinary course of business. All of the outstanding shares of capital stock of each of the Company's subsidiaries are duly authorized, validly issued, fully paid and nonassessable, and, other than directors' qualifying shares, all such shares are owned by the Company or another subsidiary free and clear of all security interests, liens, claims, pledges, agreements, limitations in the Company's voting rights, charges or other encumbrances of any nature whatsoever. SECTION 2.04. AUTHORITY RELATIVE TO THIS AGREEMENT. The Company has all necessary corporate power and authority to execute and deliver this Agreement and to perform its obligations hereunder and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action and no other corporate proceedings on the part of the Company are necessary to authorize this Agreement or to consummate the transactions so contemplated (other than the approval and adoption of the Merger by the holders of at least a majority of the outstanding shares of the Company Common Stock entitled to vote in accordance with Delaware Law and the Company's Certificate of Incorporation and By-Laws). The Board of Directors of the Company has determined that it is advisable and in the best interest of the Company's stockholders for the Company to enter into a business combination with Parent upon the terms and subject to the conditions of this Agreement. This Agreement has been duly and validly executed and delivered by the Company and, assuming the due authorization, execution and delivery by Parent and Merger Sub, as applicable, constitutes the legal, valid and binding obligation of the Company. SECTION 2.05. NO CONFLICT, REQUIRED FILINGS AND CONSENTS. (a) Section 2.05(a) of the Company Disclosure Schedule includes a list of (i) all material contracts of the Company and its subsidiaries and (ii) all agreements which, as of the date hereof, will be required to be filed with the Securities and Exchange Commission (the "SEC") pursuant to the requirements of the Securities Exchange Act of 1934, as amended, and the SEC's rules thereunder (collectively, the "Exchange Act") as "material contracts" ((i) and (ii) being, collectively, the "Material Contracts") of the Company and its subsidiaries. (b) Except as set forth in Section 2.05(b) of the Company Disclosure Schedule, the execution and delivery of this Agreement by the Company do not, and the performance of this Agreement by the Company will not, (i) conflict with or violate the Certificate of Incorporation or By-Laws or equivalent organizational documents of the Company or any of its subsidiaries, (ii) to the Company's knowledge, conflict with or violate any law, rule, regulation, order, judgment or decree applicable to the Company or any of its subsidiaries or by which its or any of their respective properties is bound or affected, or (iii) result in any breach of or constitute a default (or an event that with notice or lapse of time or both would become a default), or impair the Company's or any of its subsidiaries' rights or alter the rights or obligations of any third party under, or give to others any rights of termination, amendment, acceleration or cancellation of, any Material Contract, or result in the creation of a lien or encumbrance on any of the properties or assets of the Company or any of its subsidiaries pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or its or any of their respective properties is bound or affected, except in any such case for any such breaches, defaults or other occurrences that would not individually or in the aggregate, have a Material Adverse Effect. (c) Except as set forth in Section 2.05(c) of the Company Disclosure Schedule, the execution and delivery of this Agreement by the Company does not, and the performance of this Agreement by the Company will not, require any consent, approval, authorization or permit of, or filing with or notification to, any governmental or regulatory authority, domestic or foreign, except (i) for applicable requirements, if any, of the Securities Act of 1933, as amended (the "Securities Act"), the Exchange Act, state securities laws ("Blue Sky Laws") and the pre-merger notification requirements of the Hart-Scott- 7 12 Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), and the filing and recordation of appropriate merger or other documents as required by Delaware Law and (ii) where the failure to obtain such consents, approvals, authorizations or permits, or to make such filings or notifications, would not prevent or delay consummation of the Merger, or otherwise prevent or delay the Company from performing its obligations under this Agreement, or would not otherwise have a Material Adverse Effect. SECTION 2.06. COMPLIANCE; PERMITS. (a) Neither the Company nor any of its subsidiaries is in conflict with, or in default or violation of, (i) to the Company's knowledge, any law, rule, regulation, order, judgment or decree applicable to the Company or any of its subsidiaries or by which its or any of their respective properties is bound or affected or (ii) any note, bond, mortgage, indenture, contract, agreement, lease, license, permit franchise or other instrument or obligation to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or its or any of their respective properties is bound or affected, except for any such conflicts, defaults or violations which, individually or in the aggregate, would in either such case not have a Material Adverse Effect. (b) To the Company's knowledge, the Company and its subsidiaries hold all permits, licenses, easements, variances, exemptions, consents, certificates, orders and approvals from governmental authorities which are material to the operation of the business of the Company and its subsidiaries taken as a whole (collectively, the "Company Permits"). The Company and its subsidiaries are in compliance with the terms of the Company Permits, except where the failure to so comply would not have a Material Adverse Effect. SECTION 2.07. SEC FILINGS; FINANCIAL STATEMENTS. (a) The Company has filed all forms, reports and documents required to be filed with the SEC since March 1, 1993 and has made available to Parent (i) its Quarterly Reports on Form 10-Q for the periods ended November 30, 1994, February 28, 1995 and May 31, 1995 respectively, (ii) all proxy statements relating to the Company's meetings of stockholders (whether annual or special) held since March 1, 1993, (iii) all other reports or registration statements filed by the Company with the SEC (other than Reports on Forms 3, 4 and 5 and Schedule 13G filed on behalf of affiliates of the Company) since March 1, 1993 and (iv) all amendments and supplements to all such reports and registration statements filed by the Company with the SEC (collectively, the "Company SEC Reports"). The Company SEC Reports (i) were prepared in accordance with the requirements of the Securities Act or the Exchange Act, as the case may be, and (ii) did not at the time they were filed (or if amended or superseded by a filing prior to the date of this Agreement, then on the date of such filing) contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. None of the Company's subsidiaries is required to file any forms, reports or other documents with the SEC. (b) Each of the consolidated financial statements (including, in each case, any related notes thereto) contained in the Company SEC Reports was prepared in accordance with GAAP applied on a consistent basis throughout the periods involved (except as may be indicated therein or in the notes thereto) and each fairly presented the consolidated financial position of the Company and its subsidiaries as at the respective dates thereof and the consolidated results of its operations and cash flows for the periods indicated, except that the unaudited interim financial statements were or are subject to normal and recurring year-end adjustments which were not or are not expected to be material in amount. (c) The Company has heretofore furnished to Parent a complete and correct copy of any amendments or modifications, which have not yet been filed with the SEC but which are required to be filed, to agreements, documents or other instruments which previously had been filed by the Company with the SEC pursuant to the Securities Act or the Exchange Act. 8 13 SECTION 2.08. ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as set forth in Section 2.08 of the Company Disclosure Schedule or in any Company SEC Report, since August 31, 1994, the Company has conducted its business in the ordinary course and there has not occurred: (i) any Material Adverse Effect; (ii) any amendments or changes in the Certificate of Incorporation or By-laws of the Company; (iii) any damage to, destruction or loss of any assets of the Company (whether or not covered by insurance) that had or could have a Material Adverse Effect; (iv) any change by the Company in its accounting methods, principles or practices; (v) any revaluation by the Company of any of its material assets, including, without limitation, writing down the value of capitalized software or inventory, or writing off notes or accounts receivable other than in the ordinary course of business; (vi) any sale of a material amount of property of the Company, except for sales in the ordinary course of business; or (vii) any other action or event that would have required the consent of Parent pursuant to Section 4.01 had such action or event occurred after the date of this Agreement. SECTION 2.09. NO UNDISCLOSED LIABILITIES. Except as is disclosed in Section 2.09 of the Company Disclosure Schedule or in any Company SEC Report, neither the Company nor any of its subsidiaries has any liabilities (absolute, accrued, contingent or otherwise) which are, in the aggregate, material to the business, operations or financial condition of the Company and its subsidiaries taken as a whole, except liabilities (a) adequately provided for in the Company's audited balance sheet (including any related notes thereto) for the fiscal year ended August 31, 1994 included in the Company SEC Reports (the "1994 Balance Sheet"), (b) incurred in the ordinary course of business and not required under GAAP to be reflected on the 1994 Balance Sheet or on any balance sheet contained in an SEC Report filed for any subsequent period, or (c) incurred since August 31, 1994 in the ordinary course of business and consistent with past practice, and liabilities incurred in connection with this Agreement. SECTION 2.10. ABSENCE OF LITIGATION. Except as set forth in the Company SEC Reports, there are no claims, actions, suits, proceedings or investigations pending or, to the knowledge of the Company, threatened against the Company or any of its subsidiaries, or any properties or rights of the Company or any of its subsidiaries, before any court, arbitrator or administrative, governmental or regulatory authority or body, domestic or foreign, that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. SECTION 2.11. EMPLOYEE BENEFIT PLANS, EMPLOYMENT AGREEMENTS. (a) Section 2.1 l (a) of the Company Disclosure Schedule lists all employee benefit plans (as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")), regardless of whether ERISA is applicable thereto, all other bonus, stock option, stock purchase, incentive, deferred compensation, supplemental retirement, severance or termination pay, medical or life insurance, supplemental unemployment benefits, profit-sharing, pension or retirement plans, agreements or arrangements and other similar fringe or employee benefit plans, programs or arrangements, and any current or former employment or executive compensation or severance agreements, written or otherwise, for the benefit of, or relating to, any employee of the Company, any trade or business (whether or not incorporated) which is a member of a controlled group including the Company or which is under common control with the Company (an "ERISA Affiliate") within the meaning of Section 414 of the Code, or any subsidiary of the Company, to which the Company, an ERISA Affiliate, or any subsidiary is a party, with respect to which the Company, an ERISA Affiliate, or any subsidiary has or could have any material obligation, as well as each plan with respect to which the Company or an ERISA Affiliate could incur any material liability if such plan has been or were terminated (together, the "Employee Plans"), and a copy of each such written Employee Plan has been made available to Parent. (b) Except as set forth in Section 2.11 (b) of the Company Disclosure Schedule, (i) none of the Employee Plans promises or provides retiree medical or other retiree welfare benefits to any person and none of the Employee Plans is a "multi-employer plan" as such term is defined in Section 3(37) of ERISA; (ii) there has been no transaction or failure to act with respect to any Employee Plan, which could result in any material liability of the Company or any of its subsidiaries; (iii) all Employee Plans are in compliance in all material respects with the requirements prescribed by any and all statutes, orders, or governmental rules and regulations currently in effect with respect thereto, and the Company and each 9 14 of its subsidiaries have performed all material obligations required to be performed by them under, are not in any material respect in default under or violation of, and have no knowledge of any default or violation by any other party to, any of the Employee Plans; (iv) each Employee Plan intended to qualify under Section 401(a) of the Code is the subject of a favorable determination letter from the IRS, and nothing has occurred which may reasonably be expected to impair such determination; (v) all contributions required to be made to any Employee Plan pursuant to Section 412 of the Code, or the terms of the Employee Plan or any collective bargaining agreement, have been made on or before their due dates and a reasonable amount has been accrued for contributions to each Employee Plan for the current plan years; (vi) with respect to each Employee Plan, no "reportable event" within the meaning of Section 4043 of ERISA (excluding any such event for which the thirty (30) day notice requirement has been waived under the regulations to Section 4043 of ERISA) nor any event described in Section 4062, 4063 or 4041 of ERISA has occurred; and (vii) neither the Company nor any ERISA Affiliate has incurred, nor reasonably expects to incur, any liability under Title IV of ERISA (other than liability for premium payments to the Pension Benefit Guaranty Corporation arising in the ordinary course). (c) Each Employee Plan that is required or intended to be qualified under applicable law or registered or approved by a governmental agency or authority, has been so qualified, registered or approved by the appropriate governmental agency or authority, and nothing has occurred since the date of the last qualification, registration or approval to adversely affect, or cause the appropriate governmental agency or authority to revoke, such qualification, registration or approval. (d) All contributions (including premiums) required by law or contract to have been made or approved by the Company under or with respect to Employee Plans have been paid or accrued by the Company. Except as disclosed in Section 2.11(d) of the Company Disclosure Schedule, without limiting the foregoing, there are no material unfunded liabilities under any Employee Plan. (e) There are no pending or, to the knowledge of the Company, threatened investigations, litigation or other enforcement actions against the Company with respect to any of the Employee Plans. (f) There are no actions, suits or claims pending or, to the knowledge of the Company, threatened by former or present employees of the Company (or their beneficiaries) with respect to Employee Plans or the assets or fiduciaries thereof (other than routine claims for benefits). (g) To the Company's knowledge, no condition or event has occurred with respect to the Employee Plans which has or could reasonably be expected to result in a material liability to the Company. (h) Section 2.11(h) of the Company Disclosure Schedule sets forth as of August 26, 1995 a true and complete list of each current or former employee, officer or director of the Company or any of its subsidiaries who holds any option to purchase Company Common Stock as of the date hereof, together with the number of shares of Company Common Stock subject to such option, the date of grant of such option, the extent to which such option is vested (or will become vested within six months of the date hereof, or as a result of the Merger), the option price of such option (to the extent determined as of the date hereof), whether such option is intended to qualify as an incentive stock option within the meaning of Section 422(b) of the Code (an "ISO"), and the expiration date of such option. Section 2.11(h) of the Company Disclosure Schedule also sets forth the total number of such ISOs and such nonqualified options. (i) The Company has made available to Parent (i) copies of all employment agreements with officers of the Company; (ii) copies of all agreements with consultants who are individuals obligating the Company to make annual cash payments in an amount exceeding $100,000; (iii) a schedule listing all officers of the Company who have executed a non-competition agreement with the Company; (iv) copies (or descriptions) of all severance agreements, programs and policies of the Company with or relative to its employees, excluding programs and policies required to be maintained by law; (v) copies of all plans, programs, agreements and other arrangements of the Company with or relating to its employees which contain change in control provisions; and (vi) the form of standard employment agreement, if any, of the Company for its non-executive employees. The Company has provided to Parent a complete list of (i) all 10 15 salary increases for each officer of the Company for the fiscal year 1996 and (ii) all bonus amounts earned by each officer of the Company for fiscal year 1995. SECTION 2.12. LABOR MATTERS. There are no controversies pending or, to the knowledge of the Company or any of its subsidiaries, threatened, between the Company or any of its subsidiaries and any of their respective employees, which controversies have or could reasonably be expected to have a Material Adverse Effect; neither the Company nor any of its subsidiaries is a party to any collective bargaining agreement or other labor union contract applicable to persons employed by the Company or its subsidiaries nor does the Company or any of its subsidiaries know of any activities or proceedings of any labor union to organize any such employees; and neither the Company nor any of its subsidiaries has any knowledge of any strikes, slowdowns, work stoppages, lockouts, or threats thereof, by or with respect to any employees of the Company or any of its subsidiaries. SECTION 2.13. REGISTRATION STATEMENT, PROXY STATEMENT. None of the information supplied or to be supplied by the Company in writing for inclusion or incorporation by reference in (i) the Registration Statement on Form S-4 to be filed with the SEC by Parent in connection with the issuance of Parent Common Shares in the Merger (the "Registration Statement") or (ii) the proxy statement relating to the meeting of the Company's stockholders (the "Company Stockholders Meeting") to be held in connection with the Merger (the "Proxy Statement" and, together with the Registration Statement, the "Proxy Statement/Prospectus") will, at the respective times filed with the SEC or other regulatory agency and, in addition, (a) in the case of the Proxy Statement/Prospectus, at the date it or any amendment or supplement thereto is mailed to stockholders, at the time of the Company Stockholders Meeting and at the Effective Time and (b) in the case of the Registration Statement, when it becomes effective under the Securities Act and at the Effective Time, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. The Proxy Statement will comply as to form in all material respects with the applicable provisions of the Exchange Act and the rules and regulations thereunder. If at any time prior to the Effective Time any event relating to the Company or any of its respective affiliates, officers or directors should be discovered by the Company which is required to be set forth in an amendment to the Registration Statement or a supplement to the Proxy Statement/Prospectus, the Company shall promptly inform Parent and Merger Sub. Notwithstanding the foregoing, the Company makes no representation or warranty with respect to any information supplied by Parent or Merger Sub which is contained in any of the foregoing documents. SECTION 2.14. RESTRICTIONS ON BUSINESS ACTIVITIES. Except for this Agreement, there is no material agreement, judgment, injunction, order or decree binding upon the Company or any of its subsidiaries which has or could reasonably be expected to have the effect of prohibiting or impairing any material business practice of the Company or any of its subsidiaries, acquisition of property by the Company or any of its subsidiaries or the conduct of business by the Company or any of its subsidiaries as currently conducted by the Company. SECTION 2.15. TITLE TO PROPERTY. Section 2.15 of the Company Disclosure Statement sets forth a true and complete list of all real property owned by the Company and all real property leased by the Company or any of its subsidiaries requiring annual lease payments of more than $50,000, and the aggregate monthly rental or other fee payable under such lease. The Company and each of its subsidiaries have good, marketable and defeasible title to all of their properties and assets, free and clear of all liens, charges and encumbrances except liens for taxes not yet due and payable and such liens or other imperfections of title, if any, as do not materially detract from the value of or interfere with the present use of the property affected thereby or which would not, individually or in the aggregate, have a Material Adverse Effect; and all leases pursuant to which the Company or any of its subsidiaries lease from others material amounts of real or personal property are in good standing, valid and effective in accordance with their respective terms, and there is not under any of such leases, any existing material default or event of default on the part of the Company (or event which with notice or lapse of time, or both, would constitute a material default on the part of the Company and in respect of which the Company or such subsidiary has not taken adequate steps to prevent such a default from occurring) except where the lack of such good standing, validity and effectiveness or the existence of such default or event of 11 16 default would not have a Material Adverse Effect. All the facilities of the Company and its subsidiaries, except such as may be under construction, are in good operating condition and repair, except where the failure of such plants, structures and equipment to be in such good operating condition and repair would not, individually or in the aggregate, have a Material Adverse Effect. SECTION 2.16. TAXES. (a) For purposes of this Agreement, "Tax" or "Taxes" shall mean taxes, fees, levies, duties, tariffs, imposts and governmental impositions or charges of any kind in the nature of (or similar to) taxes, payable to any federal, state, provincial, local or foreign taxing authority, including (without limitation) (i) income, franchise, profits, gross receipts, ad valorem, net worth, value added, sales, use, service, real or personal property, special assessments, capital stock, license, payroll, withholding, employment, social security, workers' compensation, unemployment compensation, utility, severance, production, excise, stamp, occupation, premiums, windfall profits, transfer and gains taxes and (ii) interest, penalties, additional taxes and additions to tax imposed with respect thereto; and "Tax Returns" shall mean returns, reports and information statements with respect to Taxes required to be filed with the United States Internal Revenue Service (the "IRS") or any other taxing authority, domestic or foreign, including, without limitation, consolidated, combined and unitary tax returns. (b) Other than as disclosed on Section 2.16(b) of the Company Disclosure Schedule, the Company and each of its subsidiaries, and any consolidated, combined, unitary or aggregate group for Tax purposes of which the Company or any of its subsidiaries is or has been a member, have filed all United States federal income Tax Returns and all other material Tax Returns required to be filed by them or any of them, and have paid and discharged all Taxes shown therein to be due and there are no other Taxes that would be due if asserted by a taxing authority, except such as are being contested in good faith by appropriate proceedings (to the extent that any such proceedings are required) or with respect to which the Company is maintaining reserves in accordance with GAAP in its financial statements to the extent currently required in all material respects adequate for their payment, except, in each instance, to the extent the failure to do so would not have a Material Adverse Effect. Neither the IRS nor any other taxing authority or agency is now asserting or, to the best of the Company's knowledge, threatening to assert against the Company or any of its subsidiaries any deficiency or claim for additional Taxes other than additional Taxes with respect to which the Company is maintaining reserves in accordance with GAAP in its financial statements which are in all material respects adequate for their payment, except, in each instance, to the extent the failure to do so would not have a Material Adverse Effect. No Tax Return of either the Company or any of its subsidiaries is currently being audited by any taxing authority. No material tax claim has become a lien on any assets of the Company or any subsidiary thereof and neither the Company nor any of its subsidiaries has granted any waiver of any statute of limitations with respect to, or any extension of a period for the assessment of, any Tax. (c) The Company on behalf of itself and all its subsidiaries hereby represents that, other than as disclosed on Section 2.16(c) of the Company Disclosure Schedule, and other than with respect to items the inaccuracy of which would not have a Material Adverse Effect: (i) neither the Company nor any of its subsidiaries is a party to any agreement, contract or arrangement that may result, separately or in the aggregate, in the payment of (a) any "excess parachute payment" within the meaning of Section 28OG of the Code, determined without regard to Section 28OG(b)(4) of the Code or (b) any amount that would not be deductible by the Parent or the Company under Section 162(m) of the Code; (ii) neither the Company nor any of its subsidiaries has been subject to any accumulated earning tax or personal holding company tax; (iii) neither the Company nor any of its subsidiaries is now or owns stock in a passive foreign investment company within the meaning of Section 1296 of the Code; (iv) neither the Company nor any of its subsidiaries is obligated under any agreement with respect to industrial development bonds or other obligations with respect to which the excludability from gross income of the holder for United States federal or state income tax purposes could be affected by the transactions contemplated hereunder; (v) neither the Company nor any of its subsidiaries has entered into any deferred intercompany transaction within the meaning of Section 1.1502-13(a)(2) of the United States 12 17 Treasury Regulations promulgated under the Code as to which material items of deferred gain or loss have not been restored; and (vi) no material excess loss account within the meaning of Section 1.1502-32 and -19 of the United States Treasury Regulations promulgated under the Code exists with respect to the stock of any of the Company's subsidiaries; (vi) neither the Company nor any of its Subsidiaries has filed a consent under Section 341(f) concerning collapsible corporations; (vii) neither the Company nor any of its subsidiaries has been a United States real property holding corporation within the meaning of Section 897(c)(2) of the Code; (viii) neither the Company nor any of its subsidiaries has any liability for the Taxes of another person (other than any of the Company and its subsidiaries) under Section 1.1502-6 of the United States Treasury Regulations promulgated under the Code (or any similar provision of state, local or foreign law), as a transferee or successor, by contract, or otherwise. (d) No power of attorney has been granted by the Company or any of its subsidiaries with respect to any matter relating to Taxes which is currently in force. (e) Neither the Company nor any of its subsidiaries is a party to any agreement or arrangement (written or oral) providing for the allocation or sharing of Taxes. (f) The Company and each of its subsidiaries have withheld from each payment made to any of their respective past or present employees, officers or directors the amount of all Taxes and other deductions required to be withheld therefrom and paid the same to the proper tax or other receiving officers within the time required by law, except to the extent that any failure to do so would not have a Material Adverse Effect. (g) The Company has remitted to the appropriate Tax authority when required by law to do so all amounts collected by it on account of all retail sales Tax, except to the extent that any failure to do so would not have a Material Adverse Effect. (h) There has been no material debt to a third party of the Company or any of its subsidiaries which has been forgiven and which has given rise to (or is expected to give rise to) "cancellation of indebtedness income" under the provisions of the Code. SECTION 2.17. ENVIRONMENTAL MATTERS. Except in all cases, in the aggregate, as have not had and could not reasonably be expected to have a Material Adverse Effect, to the Company's knowledge, the Company and each of its subsidiaries (i) have obtained all applicable permits, licenses and other authorizations which are required under federal, state, provincial or local laws relating to pollution or protection of the environment, including laws relating to emissions, discharges, releases or threatened releases of pollutants, contaminants or hazardous or toxic materials or wastes into ambient air, surface water, ground water or land or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants or hazardous or toxic materials or wastes by the Company or its subsidiaries (or their respective agents); (ii) are in compliance with all terms and conditions of such required permits, licenses and authorization, and also are in compliance with all other limitations, restrictions, conditions, standards, prohibitions, requirement, obligations, schedules and timetables contained in such laws or contained in any regulation, code, plan, order, decree, judgment, notice or demand letter issued, entered, promulgated or approved thereunder; (iii) as of the date hereof, are not aware of nor have received notice of any event, condition, circumstance, activity, practice, incident, action or plan which is reasonably likely to interfere with or prevent continued compliance with or which would give rise to any common law or statutory liability, or otherwise form the basis of any claim, action, suit or proceeding, based on or resulting from the Company's or any of its subsidiary's (or any of their respective agent's) manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling, or the emission, discharge or release into the environment, of any pollutant, contaminant or hazardous or toxic material or waste; and (iv) have taken all actions necessary under applicable requirements of federal, state or local laws, rules or regulations to register any products or materials required to be registered by the Company or its subsidiaries (or any of their respective agents) thereunder. SECTION 2.18. BROKERS. No broker, finder or investment banker (other than Montgomery Securities is entitled to any brokerage, finder's or other fee or commission in connection with the transactions 13 18 contemplated by this Agreement based upon arrangements made by or on behalf of the Company. The Company has heretofore furnished to Parent a complete and correct copy of all agreements between the Company and Montgomery Securities pursuant to which such firm would be entitled to any payment relating to the transactions contemplated hereunder. SECTION 2.19. FULL DISCLOSURE. No statement contained in any certificate or schedule furnished or to be furnished by the Company or its subsidiaries to Parent or Merger Sub in, or pursuant to the provisions of, this Agreement contains or shall contain any untrue statement of a material fact or omits or will omit to state any material fact necessary, in the light of the circumstances under which it was made and based upon the facts and circumstances existing at the time it was made, to make the statements herein or therein not misleading. SECTION 2.20. INTELLECTUAL PROPERTY. (a) The Company owns, or is licensed or otherwise possesses legally sufficient rights to use, all patents, trademarks, trade names, service marks, copyrights and any applications therefor, technology, know-how, computer software programs or applications (in both source code and object code form) and tangible or intangible proprietary information or material that are used or proposed to be used in the business of the Company as currently conducted, except where the failure to own or to license or possess such rights would not have a Material Adverse Effect. Section 2.20(a) of the Company Disclosure Schedule lists all current patents, registered and material unregistered trademarks and service marks, registered and material unregistered copyrights, trade names and any applications therefor owned by the Company (the "Company Intellectual Property Rights"), and specifies the jurisdictions in which each such Company Intellectual Property Right has been issued or registered or in which an application for such issuance and registration has been filed, including the respective registration or application numbers and the names of all registered owners, together with a list of all material software products marketed by the Company on a standalone (independent of hardware) basis and an indication as to which, if any, of such software products have been registered for copyright protection with the United States Copyright Office and any foreign offices and by whom such items have been registered. Section 2.20(a) of the Company Disclosure Schedule includes and specifically identifies all material third-party patents, trademarks or copyrights (including software) (the "Third Party Intellectual Property Rights"), to the knowledge of the Company, which are incorporated in, are, or form a part of, any Company product. Section 2.20(a) of the Company Disclosure Schedule lists (i) except for object code license agreements for the Company's products executed in the ordinary course of business and in accordance with the Company's past practices, all material licenses, sublicenses and other agreements as to which the Company is a party and pursuant to which any person is authorized to use any Company Intellectual Property Right, or any trade secret material to the Company; and (ii) except for all software programs available on a general commercial basis, all material licenses, sublicenses and other agreements as to which the Company is a party and pursuant to which the Company is authorized to use any Third-Party Intellectual Property Rights or other trade secret of a third party, in or as any Company product, and includes the identity of all parties thereto, a description of the nature and subject matter thereof, the applicable royalty and the term thereof. (b) Except as set forth in Section 2.20(b) of the Company Disclosure Schedule, the Company is not, nor will it be as a result of the execution and delivery of this Agreement or the performance of its obligations hereunder, in violation of any license, sublicense or agreement described in Section 2.20(a) of the Company Disclosure Schedule, which violation would have a Material Adverse Effect. No claims with respect to the Company Intellectual Property Rights, any trade secret material to the Company, or Third Party Intellectual Property Rights to the extent arising out of any use, reproduction or distribution of such Third Party Intellectual Property Rights by or through the Company, are currently pending or, to the knowledge of the Company, are threatened by any person; nor does the Company know of any valid grounds for any bona fide claims (i) to the effect that the manufacture, sale, licensing or use of any product as so used, sold or licensed or proposed for use, sale or license by the Company infringes on any copyright, patent, trademark, service mark or trade secret of any other person; (ii) against the use by the Company of any trademarks, trade names, trade secrets, copyrights, patents, technology, know-how or 14 19 computer software programs and applications used in the Company's business as currently conducted by the Company; (iii) challenging the ownership, validity or effectiveness of any of the Company Intellectual Property Rights or other trade secret material to the Company; or (iv) challenging the Company's license or legally enforceable right to use of the Third Party Intellectual Rights. To the Company's knowledge, all patents, registered trademarks, registered maskworks and registered copyrights held by the Company are valid and subsisting. Except as set forth in Section 2.20(b) of the Company Disclosure Schedule, to the Company's knowledge, there is no unauthorized use, infringement or misappropriation of any of the Company Intellectual Property Rights by any third party, including any employee or former employee of the Company or any of its subsidiaries, which use, infringement or misappropriation would have a Material Adverse Effect. Neither the Company nor any of its subsidiaries (i) has been sued or charged in writing as a defendant in any claim, suit, action or proceeding which involves a claim or infringement of trade secrets, any patents, trademarks, service marks, maskworks or copyrights and which has not been finally terminated prior to the date hereof, (ii) has been informed or notified by any third party in writing that the Company may be engaged in such infringement or (iii) has knowledge of any infringement liability with respect to, or infringement by, the Company or any of its subsidiaries of any trade secret, patent, trademark, service mark, maskwork or copyright of another, which infringement would have a Material Adverse Effect. (c) Each employee of the Company with access to confidential information concerning the Company has executed a confidentiality and invention agreement in the forms previously delivered to Parent. SECTION 2.21. INTERESTED PARTY TRANSACTIONS. Except as set forth in Section 2.21 of the Company Disclosure Schedule or in the Company SEC Reports since December 9, 1994, no event has occurred that would be required to be reported as a Certain Relationship or Related Transaction, pursuant to Item 404 of Regulation S-K promulgated by the SEC. SECTION 2.22. INSURANCE. Section 2.22 of the Company Disclosure Schedule lists all material insurance policies and fidelity bonds covering the assets, business, equipment, properties, operations, employees, officers and directors of the Company and its subsidiaries. There is no material claim by the Company or any of its subsidiaries pending under any of such policies or bonds as to which coverage has been questioned, denied or disputed by the underwriters of such policies or bonds. All premiums payable under all such policies and bonds have been paid and the Company and its subsidiaries are otherwise in full compliance with the terms of such policies and bonds (or other policies and bonds providing substantially similar insurance coverage in all material respects). The Company does not know of any threatened termination of, or material premium increase with respect to, any of such policies. SECTION 2.23. OPTION PLANS. Except as set forth in Section 2.23 of the Company Disclosure Schedule, the Board of Directors of the Company has taken all necessary action (or refrained from taking action, where appropriate) under the Company Stock Option Plans (as defined in Section 5.05) so that no Stock Options (or any portion thereof) will be accelerated or entitled to receive cash or other property as a result of the consummation of the transactions contemplated hereby, but instead shall be assumed as provided in Section 1.06(c) hereof. SECTION 2.24. VOTE REQUIRED. The affirmative vote of the holders of at least a majority of the outstanding shares of the Company Common Stock is the only vote of the holders of any class or series of the Company's capital stock necessary to approve the Merger. SECTION 2.25. POOLING MATTERS. To the Company's knowledge and based upon consultation with its independent accountants, neither the Company nor any of its affiliates has taken or agreed to take any action that would affect the ability of Parent to account for the business combination to be effected by the Merger as a pooling of interests. The Company has received from Price Waterhouse LLP a written opinion addressed to it and Parent to the effect that the Merger qualifies for a pooling of interests accounting treatment if consummated in accordance with this Agreement. SECTION 2.26. OPINION OF FINANCIAL ADVISOR. The Company has been advised by its financial advisor, Montgomery Securities, that in its opinion, as of the date hereof, the terms of the Merger are fair to the 15 20 stockholders of the Company from a financial point of view, and the Company has delivered a written copy of such opinion to Parent. ARTICLE III REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB Parent and Merger Sub hereby, jointly and severally, represent and warrant to the Company that, except as set forth in the written disclosure schedule previously delivered by Parent to the Company (the "Parent Disclosure Schedule"): SECTION 3.01. ORGANIZATION AND QUALIFICATION. Parent and each of its subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has the requisite corporate power and authority and is in possession of all Approvals necessary to own, lease and operate the properties it purports to own, operate or lease and to carry on its business as it is now being conducted, except where the failure to be so organized, existing and in good standing or to have such power, authority and Approvals would not have a Material Adverse Effect. Parent and each of its subsidiaries is duly qualified or licensed as a foreign corporation to do business, and is in good standing, in each jurisdiction where the character of its properties owned, leased or operated by it or the nature of its activities makes such qualification or licensing necessary, except for such failures to be so duly qualified or licensed and in good standing that would not have a Material Adverse Effect. SECTION 3.02. AUTHORITY RELATIVE TO THIS AGREEMENT. Each of Parent and Merger Sub has all necessary corporate power and authority to execute and deliver this Agreement and to perform its obligations hereunder and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement by Parent and Merger Sub and the consummation by Parent and Merger Sub of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action on the part of Parent and Merger Sub, and no other corporate proceedings on the part of Parent or Merger Sub are necessary to authorize this Agreement or to consummate the transactions so contemplated. The Board of Directors of Parent has determined that it is advisable and in the best interest of Parent's stockholders for Parent to enter into a business combination with the Company upon the terms and subject to the conditions of this Agreement. This Agreement has been duly and validly executed and delivered by Parent and Merger Sub and, assuming the due authorization, execution and delivery by the Company, constitutes a legal, valid and binding obligation of Parent and Merger Sub. SECTION 3.03. NO CONFLICT; REQUIRED FILINGS AND CONSENTS. (a) The execution and delivery of this Agreement by Parent and Merger Sub do not, and the performance of this Agreement by Parent and Merger Sub shall not, (i) conflict with or violate the Articles of Organization or By-Laws of Parent or the Certificate of Incorporation or By-Laws of Merger Sub, (ii) conflict with or violate any law, rule, regulation, order, judgment or decree applicable to Parent or any of it subsidiaries or by which its or their respective properties are bound or affected, or (iii) result in any breach of or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or impair Parent's rights or alter the rights or obligations of any third party under, or give to others any rights of termination, amendment, acceleration or cancellation of, any Material Contract or result in the creation of a lien or encumbrance on any of the properties or assets of Parent or any of its subsidiaries pursuant to, any material note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which Parent or any of its subsidiaries is a party or by which Parent or any of its subsidiaries or its or any of their respective properties are bound or affected, except in any such case for any such breaches, defaults or other occurrences that would not have a Material Adverse Effect. (b) The execution and delivery of this Agreement by Parent and Merger Sub will not require any consent, approval, authorization or permit of, or filing with or notification to, any governmental or regulatory authority, domestic or foreign, except (i) for applicable requirements, if any, of the Securities Act, the Exchange Act, the NYSE, the Blue Sky Laws and the pre-merger notification requirements of the HSR Act and (ii) where the failure to obtain such consents, approvals, authorizations or permits, or 16 21 to make such filings or notifications, would not prevent or delay consummation of the Merger, or otherwise prevent Parent or Merger Sub from performing their respective obligations under this Agreement, and would not have a Material Adverse Effect. SECTION 3.04. ARTICLES OF ORGANIZATION AND BY-LAWS. Parent has heretofore furnished to the Company a complete and correct copy of its Articles of Organization and the By-Laws, as amended to date. Such Articles of Organization and By-Laws are in full force and effect. Neither Parent nor Merger Sub is in violation of any of the provisions of its Certificate of Incorporation or By-Laws. SECTION 3.05. CAPITALIZATION. As of June 30, 1995, the authorized capital stock of Parent consisted of 75,000,000 Parent Common Shares of which: 37,610,648 shares were issued and outstanding, 1,575,008 shares were held in treasury, 5,677,973 shares were reserved for issuance pursuant to outstanding options under Parent's stock option plans, and 560,640 shares were reserved for future issuance under Parent's employee purchase plan. No material change in such capitalization has occurred between June 30, 1995 and the date hereof except that (A) on July 24, 1995, Parent declared a two-for-one stock split in the form of a stock dividend on its issued and outstanding Parent Common Shares payable to holders of record on August 8, 1995 and (B) on July 17, 1995, Parent amended its Articles of Organization to increase its authorized capital stock from 75,000,000 Parent Common Shares to 125,000,000 Parent Common Shares. Except as set forth in this Section 3.05, there are no options, warrants or other rights, agreements, arrangements or commitments of any character relating to the issued or unissued capital stock of Parent or any of its subsidiaries or obligating Parent or any of its subsidiaries to issue or sell any shares of capital stock of, or other equity interests in, Parent or any of its subsidiaries. The authorized capital stock of Merger Sub consists of 1,000 shares of common stock, par value $0.001 per share, 100 shares of which, as of the date hereof, are issued and outstanding. All of the outstanding shares of Parent's and Merger Sub's respective capital stock have been duly authorized and validly existing and are fully paid and nonassessable. Parent owns all of the capital stock of Merger Sub. The Parent is party to a Rights Agreement (the "Rights Agreement") dated as of March 14, 1990, a copy of which has been provided to the Company. Parent represents and warrants that since March 14, 1990 there has not occurred an event which has caused the rights issuable under the Rights Agreement to separate from the Parent Common Shares. SECTION 3.06. COMPLIANCE, PERMITS. (a) Neither Parent nor any of its subsidiaries is in conflict with, in default with respect to or in violation of (i) any law, rule, regulation, order, judgment or decree applicable to Parent or any of its subsidiaries or by which its or any of their respective properties is bound or affected or (ii) any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which Parent or any of its subsidiaries is a party or by which Parent or any of its subsidiaries is or any of their respective properties is bound or affected, except for any such conflicts, defaults or violations which would not have a Material Adverse Effect. (b) Parent and its subsidiaries hold all permits, licenses, easements, variances, exemptions, consents, certificates, orders and approvals from governmental authorities which are material to the operation of the business of the Company and its subsidiaries taken as a whole as it is now being conducted (collectively, the "Parent Permits"). Parent and its subsidiaries are in compliance with the terms of the Parent Permits, except where the failure to so comply would not have a Material Adverse Effect. SECTION 3.07. SEC FILINGS, FINANCIAL STATEMENTS. (a) Parent has filed all forms, reports and documents required to be filed with the SEC since December 31, 1992, and has heretofore delivered to the Company, in the form filed with the SEC, (i) its Annual Reports on Form 10-K for the fiscal years ended December 31, 1993 and 1994 and its quarterly report on Form 10-Q for the fiscal quarters ended March 31, 1995 and June 30, 1995 (ii) all proxy statements relating to Parent's meetings of stockholders (whether annual or special) held since December 31, 1994, (iii) all other reports or registration statements (other than Reports on Form 3, 4 or 5 filed on behalf of affiliates of the Parent) filed by Parent with the SEC since December 31, 1994 and (iv) all amendments and supplements to all such reports and registration statements filed by Parent with the SEC (collectively, the "Parent SEC Reports"). The Parent SEC Reports (i) were prepared in accordance with the requirements of the Securities Act or the Exchange Act, as the case may be, 17 22 and (ii) did not at the time they were filed (or if amended or superseded by a filing prior to the date of this Agreement, then on the date of such filing) contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. None of Parent's subsidiaries is required to file any forms, reports or other documents with the SEC. (b) Each of the consolidated financial statements (including, in each case, any related notes thereto) contained in the Parent SEC Reports has been prepared in accordance with GAAP applied on a consistent basis throughout the periods involved (except as may be indicated in the notes thereto) and each fairly presents the consolidated financial position of Parent and its subsidiaries as at the respective dates thereof and the consolidated results of its operations and cash flows for the periods indicated, except that the unaudited interim financial statements were or are subject to normal and recurring year-end adjustments which were not or are not expected to be material in amount. (c) Parent has heretofore furnished to the Company a complete and correct copy of any amendments or modifications, which have not yet been filed with the SEC but which are required to be filed, to agreements, documents or other instruments which previously had been filed by Parent with the SEC pursuant to the Securities Act or the Exchange Act. (d) The Parent has provided to the Company copies of (x) all of its material contracts and (y) all agreements which, as of the date hereof, are required to be filed with the SEC pursuant to the requirements of the Exchange Act and the SEC's rules thereunder as "material contracts" of the Parent and its subsidiaries. SECTION 3.08. ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as set forth in Section 3.08 of the Parent Disclosure Schedule, since December 31, 1994, Parent has conducted its business in the ordinary course and there has not occurred: (i) any Material Adverse Effect; (ii) any amendments or changes in the Articles of Organization or By-Laws of Parent; (iii) any damage to, destruction or loss of any assets of the Parent (whether or not covered by insurance) that could have a Material Adverse Effect; (iv) any revaluation by Parent of any of its assets, including, without limitation, writing down the value of capitalized software or inventory or writing off notes or accounts receivable other than in the ordinary course of business; or (v) except as disclosed in Section 3.08 of the Parent Disclosure Schedule, any other action or event that would have required the consent of the Company pursuant to Section 4.03 had such action or event occurred after the date of this Agreement. SECTION 3.09. RESTRICTIONS ON BUSINESS ACTIVITIES. Except for this Agreement, there is no material agreement, judgment, injunction, order or decree binding upon Parent or any of its subsidiaries which has or could reasonably be expected to have the effect of prohibiting or materially impairing any business practice of Parent or any of its subsidiaries, any acquisition of property by Parent or any of its subsidiaries or the conduct of business by Parent or any of its subsidiaries as currently conducted or as proposed to be conducted by Parent. SECTION 3.10. TITLE TO PROPERTY. Parent and each of its subsidiaries have good, marketable and defensible title to all of their properties and assets, free and clear of all liens, charges and encumbrances except liens for taxes not yet due and payable and such liens or other imperfections of title, if any, as do not materially detract from the value of or interfere with the present use of the property affected thereby or which would not have a Material Adverse Effect; and, to Parent's knowledge, all leases pursuant to which Parent or any of its subsidiaries lease from others material amounts of real or personal property are in good standing, valid and effective in accordance with their respective terms, and there is not, to the knowledge of Parent, under any of such leases, any existing material default or event of default (or event which, with notice or lapse of time, or both, would constitute a material default and in respect of which Parent or such subsidiary has not taken adequate steps to prevent such a default from occurring) except where the lack of such good standing, validity and effectiveness, or the existence of such default or event of default would not have a Material Adverse Effect. 18 23 SECTION 3.11. FULL DISCLOSURE. No statement contained in any certificate or schedule furnished or to be furnished by Parent or Merger Sub to the Company in, or pursuant to the provisions of, this Agreement contains or will contain any untrue statement of a material fact or omits or shall omit to state any material fact necessary, in the light of the circumstances under which it was made and based upon the facts and circumstances existing at the time it was made, to make the statements herein or therein not misleading. SECTION 3.12. NO UNDISCLOSED LIABILITIES. (a) Except as is disclosed in the Parent SEC Reports, neither Parent nor any of its subsidiaries has any liabilities (absolute, accrued, contingent or otherwise) which are, in the aggregate, material to the business, operations or financial condition of Parent and its subsidiaries taken as a whole, except liabilities (i) adequately provided for in Parent's balance sheet (including any related notes thereto) as of December 31, 1994 included in the Parent SEC Reports (the "December 31 Balance Sheet"), (ii) incurred in the ordinary course of business and not required under GAAP to be reflected on the December 31 Balance Sheet, or (iii) incurred since December 31, 1994 in the ordinary course of business and consistent with past practice, and liabilities incurred in connection with this Agreement. (b) As of the date hereof and the Effective Time, except for obligations or liabilities incurred in connection with its incorporation or organization and the transactions contemplated by this Agreement and except for this Agreement and any other agreements or arrangements contemplated by this Agreement, Merger Sub has not and will not have incurred, directly or indirectly, through any subsidiary or affiliate, any obligations or liabilities or engaged in any business activities of any type or kind whatsoever or entered into any agreements or arrangements with any person. SECTION 3.13. ABSENCE OF LITIGATION. Except as set forth in Section 3.13 of the Parent Disclosure Schedule or as reflected in the Parent SEC Reports, there are no claims, actions, suits, proceedings or investigations pending or, to the knowledge of Parent, threatened against Parent or any of its subsidiaries, or any properties or rights of Parent or any of its subsidiaries, before any court, arbitrator or administrative, governmental or regulatory authority or body, domestic or foreign, that could have a Material Adverse Effect. SECTION 3.14. INSURANCE. Parent and its subsidiaries maintain fire and casualty, general liability, business interruption, product liability and sprinkler and water damage insurance that Parent believes to be reasonably prudent for its business. SECTION 3.15. REGISTRATION STATEMENT; PROXY STATEMENT; PROSPECTUS. Subject to the accuracy of the representations of the Company in Section 2.13, the Registration Statement pursuant to which the Parent Common Shares to be issued in the Merger will be registered with the SEC shall not, at the time the Registration Statement (including any amendments or supplements thereto) is declared effective by the SEC, contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements included therein, in light of the circumstances under which they were made, not misleading. Subject to the accuracy of the representations of the Company in Section 2.13, the information supplied by Parent for inclusion in the Proxy Statement/Prospectus will not, on the date the Proxy Statement/Prospectus is first mailed to stockholders, at the time of the Company Stockholders Meeting and at the Effective Time, contain any statement which, at such time and in light of the circumstances under which it shall be made, is false or misleading with respect to any material fact, or will omit to state any material fact necessary in order to make the statements therein not false or misleading. The Registration Statement will comply as to form in all material respects with the applicable provisions of the Securities Act and the rules and regulations promulgated thereunder. If at any time prior to the Effective Time any event relating to Parent, Merger Sub or any of their respective affiliates, officers or directors should be discovered by Parent or Merger Sub which should be set forth in an amendment to the Registration Statement or a supplement to the Proxy Statement/ Prospectus, Parent or Merger Sub will promptly inform the Company. Notwithstanding the foregoing, Parent makes no representation or warranty with respect to any information supplied, by the Company which is contained in, or furnished in connection with the preparation of, any of the foregoing. SECTION 3.16. TAXES. Parent and each of its subsidiaries, and any consolidated, combined, unitary or aggregate group for Tax purposes of which Parent or any of its subsidiaries is or has been a member, have filed 19 24 all United States federal income Tax Returns and all other material Tax Returns required to be filed by them or any of them, and have paid and discharged all Taxes shown therein to be due and there are no other Taxes that would be due if asserted by a taxing authority, except such as are being contested in good faith by appropriate proceedings (to the extent that any such proceedings are required) or with respect to which Parent is maintaining reserves in accordance with GAAP in its financial statements to the extent currently required in all material respects adequate for their payment, except, in each instance, to the extent the failure to do so would not have a Material Adverse Effect. Neither the IRS nor any other taxing authority or agency is now asserting or, to the best of Parent's knowledge, threatening to assert against Parent or any of its subsidiaries any deficiency or claim for additional Taxes other than additional Taxes with respect to which Parent is maintaining reserves in accordance with GAAP in its financial statements which are in all material respects adequate for their payment, except, in each instance, to the extent that the failure to do so would not have a Material Adverse Effect. No Tax Return of either Parent or any of its subsidiaries is currently being audited by any taxing authority except as would not have a Material Adverse Effect. No material tax claim has become a lien on any assets of Parent or any subsidiary thereof and neither Parent nor any of its subsidiaries has, except as would not have a Material Adverse Effect, granted any waiver of any statute of limitations with respect to, or any extension of a period for the assessment of, any Tax. SECTION 3.17. BROKERS. No broker, finder or investment banker (other than S.G. Warburg & Co. Inc.) is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Parent or Merger Sub. SECTION 3.18. OPINION OF FINANCIAL ADVISOR. Parent has been advised by its financial advisor, S.G. Warburg & Co. Inc., that in its opinion, as of the date hereof, the Exchange Ratio is fair from a financial point of view to Parent, and Parent has delivered a copy of such opinion to the Company. SECTION 3.19. POOLING MATTERS. Neither Parent nor any of its affiliates, to its knowledge and based upon consultation with its independent accountants, is aware of any fact or has taken or agreed to take any action that (without giving effect to any action taken or agreed to be taken by the Company or any of its affiliates) would affect the ability of Parent to account for the business combination to be effected by the Mergers as a pooling of interests. Parent has received from Coopers & Lybrand LLP an opinion addressed to it and the Company to the effect that the Merger qualifies for a pooling of interests accounting treatment consummated in accordance with this agreement. SECTION 3.20. NO STOCKHOLDER VOTE. No vote of the stockholders of Parent is necessary to approve the Merger or the issuance of Parent Common Shares therein. SECTION 3.21. EMPLOYEE BENEFIT PLANS, EMPLOYMENT AGREEMENTS. (a) Each employee benefit plan (as defined in Section 3(d) of ERISA), regardless of whether ERISA is applicable thereto, all other bonus, stock option, stock purchase, incentive, deferred compensation, supplemental retirement, severance or termination pay, medical or life insurance, supplemental unemployment benefits, profit-sharing, pension or retirement plans, agreements or arrangements and other similar fringe or employee benefit plans, programs or arrangements, and any current or former employment or executive compensation or severance agreements, written or otherwise, for the benefit of, or relating to, any employee of the Parent, any trade or business (whether or not incorporated) which is a member of a controlled group including the Parent or which is under common control with the Parent (a "Parent ERISA Affiliate") within the meaning of Section 414 of the Code, or any subsidiary of the Parent, to which the Parent, a Parent ERISA Affiliate, or any subsidiary is a party, with respect to which the Parent, a Parent ERISA Affiliate, or any subsidiary has or could have any obligation, as well as each plan with respect to which the Parent or a Parent ERISA Affiliate could incur liability if such plan has been or were terminated (together, the "Parent Employee Plans") that is required or intended to be qualified under applicable law or registered or approved by a governmental agency or authority, has been so qualified, registered or approved by the appropriate governmental agency or authority, and nothing has occurred since the date of the last qualification, registration or approval to adversely affect, or cause the appropriate governmental agency or authority to revoke, such qualification, registration or approval. 20 25 (b) All contributions (including premiums) required by law or contract to have been made or approved by the Parent under or with respect to the Parent Employee Plans have been paid or accrued by the Parent. (c) There are no pending or, to the knowledge of the Parent, threatened material investigations, litigation or other enforcement actions against the Parent with respect to any of the Parent Employee Plans. (d) There are no material actions, suits or claims pending or, to the knowledge of the Parent, threatened by former or present employees of the Parent (or their beneficiaries) with respect to the Parent Employee Plans or the assets or fiduciaries thereof (other than routine claims for benefits). (e) To the Parent's knowledge, no condition or event has occurred with respect to the Parent Employee Plans which has or could reasonably be expected to result in a Material Adverse Effect to the Parent. SECTION 3.22. LABOR MATTERS. There are no controversies pending or, to the knowledge of the Parent or any of its subsidiaries, threatened, between the Parent or any of its subsidiaries and any of their respective employees, which controversies have or could reasonably be expected to have a Material Adverse Effect; neither the Parent nor any of its subsidiaries is a party to any collective bargaining agreement or other labor union contract applicable to persons employed by the Parent or its subsidiaries nor does the Parent or any of its subsidiaries know of any activities or proceedings of any labor union to organize any such employees; and neither the Parent nor any of its subsidiaries has any knowledge of any strikes, slowdowns, work stoppages, lockouts, or threats thereof, by or with respect to any employees of the Parent or any of its subsidiaries. SECTION 3.23. ENVIRONMENTAL MATTERS. Except in all cases, in the aggregate, as have not had and could not reasonably be expected to have a Material Adverse Effect, to the Parent's knowledge the Parent and each of its subsidiaries (i) have obtained all applicable permits, licenses and other authorizations which are required under federal, state, provincial or local laws relating to pollution or protection of the environment, including laws relating to emissions, discharges, releases or threatened releases of pollutants, contaminants or hazardous or toxic materials or wastes into ambient air, surface water, ground water or land or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants or hazardous or toxic materials or wastes by the Parent or its subsidiaries (or their respective agents); (ii) are in compliance with all terms and conditions of such required permits, licenses and authorization, and also are in compliance with all other limitations, restrictions, conditions, standards, prohibitions, requirement, obligations, schedules and timetables contained in such laws or contained in any regulation, code, plan, order, decree, judgment, notice or demand letter issued, entered, promulgated or approved thereunder; (iii) as of the date hereof, are not aware of nor have received notice of any event, condition, circumstance, activity, practice, incident, action or plan which is reasonably likely to interfere with or prevent continued compliance with or which would give rise to any common law or statutory liability, or otherwise form the basis of any claim, action, suit or proceeding, based on or resulting from the Parent's or any of its subsidiary's (or any of their respective agent's) manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling, or the emission, discharge or release into the environment, of any pollutant, contaminant or hazardous or toxic material or waste; and (iv) have taken all actions necessary under applicable requirements of federal, state or local laws, rules or regulations to register any products or materials required to be registered by the Parent or its subsidiaries (or any of their respective agents) thereunder. SECTION 3.24. INTELLECTUAL PROPERTY. (a) The Parent owns, or is licensed or otherwise possesses legally sufficient rights to use, all patents, trademarks, trade names, service marks, copyrights and any applications therefor, technology, know-how, computer software programs or applications (in both source code and object code form) and tangible or intangible proprietary information or material that are used or proposed to be used in the business of the Parent as currently conducted (the "Parent Intellectual Property Rights"), except where the failure to own or to license or posses such rights would not have a Material Adverse Affect. No claims with respect to the Parent Intellectual Property Rights, any trade secret material to the Parent, or third party patents, 21 26 trademarks, or copyrights (including software) (the "Parent Third Party Intellectual Property Rights") to the extent arising out of any use, reproduction or distribution of such Parent Third Party Intellectual Property Rights by or through the Parent, are currently pending or, to the knowledge of the Parent, are threatened by any person which claims would, if resolved adversely to Parent, have a Material Adverse Affect, nor does the Parent know of any valid grounds for any bona fide claims (i) to the effect that the manufacture, sale, licensing or use of any product as so used, sold or licensed or proposed for use, sale or license by the Parent infringes on any copyright, patent, trademark, service mark or trade secret of any other person; (ii) against the use by the Parent of any trademarks, trade names, trade secrets, copyrights, patents, technology, know-how or computer software programs and applications used in the Parent's business as currently conducted by the Parent; (iii) challenging the ownership, validity or effectiveness of any of the Parent Intellectual Property Rights or other trade secret material to the Parent; or (iv) challenging the Parent's license or legally enforceable right to use of the Parent Third Party Intellectual Rights. To the Parent's knowledge, all patents, registered trademarks, registered maskworks and registered copyrights held by the Parent are valid and subsisting. Neither the Parent nor any of its subsidiaries (i) has been sued or charged in writing as a defendant in any claim, suit, action or proceeding which involves a claim or infringement of trade secrets, any patents, trademarks, service marks, maskworks or copyrights and which has not been finally terminated prior to the date hereof, (ii) has been informed or notified by any third party in writing that the Parent may be engaged in such infringement or (iii) has knowledge of any infringement liability with respect to, or infringement by, the Parent or any of its subsidiaries of any trade secret, patent, trademark, service mark, maskwork or copyright of another, which infringement would have a Material Adverse Effect. (b) Each employee of the Parent with access to confidential information concerning the Parent has executed a confidentiality and invention agreement in the forms previously delivered to the Company. ARTICLE IV CONDUCT OF BUSINESS PENDING THE MERGER SECTION 4.01. CONDUCT OF BUSINESS BY THE COMPANY PENDING THE MERGER. During the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement or the Effective Time, the Company covenants and agrees that, unless Parent shall otherwise agree in writing, the Company shall conduct its business and shall cause the businesses of its subsidiaries to be conducted only in, and the Company and its subsidiaries shall not take any action except in, the ordinary course of business and in a manner consistent with past practice; and the Company shall use reasonable commercial efforts to preserve substantially intact the business organization of the Company and its subsidiaries, to keep available the services of the present officers, employees and consultants of the Company and its subsidiaries, to prevent the loss, cancellation, abandonment, forfeiture or expiration of any Company Intellectual Property, and to preserve the present relationships of the Company and its subsidiaries with customers, suppliers and other persons with which the Company or any of its subsidiaries has significant business relations. By way of amplification and not limitation, except as expressly contemplated by this Agreement, neither the Company nor any of its subsidiaries shall, during the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement or the Effective Time, directly or indirectly do, or propose to do, any of the following without the prior written consent of Parent: (a) amend or otherwise change the Company's Certificate of Incorporation or By-Laws; (b) issue, sell, pledge, dispose of or encumber, or authorize the issuance, sale, pledge, disposition or encumbrance of, any shares of capital stock of any class, or any options, warrants, convertible securities or other rights of any kind to acquire any shares of capital stock, or any other ownership interest (including, without limitation, any phantom interest) of the Company, any of its subsidiaries or affiliates (except for the issuance of shares of the Company Common Stock issuable pursuant to stock options under the Company Stock Option Plans (as defined in Section 5.05) or pursuant to rights to purchase such shares under the Company Stock Purchase Plan (as defined in Section 5.06), which options or rights, as the case may be, are outstanding on the date hereof); provided, however, that the Company may grant stock 22 27 options under the Company Stock Option Plans to employees hired subsequent to August 26, 1995 so long as (i) such options vest ratably over a period of not less than four years and (ii) no person hired to serve as an officer of the Company shall receive option grants for more than 40,000 shares of Company Common Stock and no other person shall receive option grants in excess of the Company's standard policies and practices in effect at the date of this Agreement, copies of which have been provided to Parent; and provided, further, that the Company may continue to offer rights to purchase Company Common Stock pursuant to the Company Stock Purchase Plan as in effect on the date of this Agreement; (c) sell, pledge, dispose of or encumber any material assets of the Company or any of its subsidiaries (except for (i) sales of assets in the ordinary course of business and in a manner consistent with past practice and (ii) dispositions of obsolete or worthless assets); (d) accelerate, amend or change the period (or permit any acceleration, amendment or change) of exercisability of options granted under the Employee Plans (including the Company Stock Option Plans or authorize cash payments in exchange for any options granted under any of such plans; (e) (i) declare, set aside, make or pay any dividend or other distribution (whether in cash, stock or property or any combination thereof) in respect of any of its capital stock, except that a wholly owned subsidiary of the Company may declare and pay a dividend to its parent, (ii) split, combine or reclassify any of its capital stock or issue or authorize or propose the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock or (iii) amend the terms of, repurchase, redeem or otherwise acquire, or permit any subsidiary to repurchase, redeem or otherwise acquire, any of its securities or any securities of its subsidiaries, or propose to do any of the foregoing; (f) sell, transfer, license, sublicense or otherwise dispose of any material Company Intellectual Property, or amend or modify any existing agreements with respect to any material Company Intellectual Property or Third Party Intellectual Property Rights, other than nonexclusive object and source code licenses in the ordinary course of business consistent with past practice; (g) (i) acquire (by merger, consolidation, or acquisition of stock or assets) any corporation, partnership or other business organization or division thereof; (ii) incur any indebtedness for borrowed money or issue any debt securities or assume, guarantee (other than guarantees of bank debt of the Company's subsidiaries entered into in the ordinary course of business) or endorse or otherwise as an accommodation become responsible for, the obligations of any person, or make any loans or advances, except in each case in the ordinary course of business consistent with past practice, except that the Company may incur short-term indebtedness for borrowed money not to exceed in the aggregate $10,000,000 on terms that do not include the payment of any prepayment penalty or premium; (iii) enter into or amend any material contract or agreement other than in the ordinary course of business; (iv) authorize any capital expenditures or purchase of fixed assets other than in the ordinary course of business consistent with the Company's present business plan or (v) enter into or amend any contract, agreement, commitment or arrangement to effect any of the matters prohibited by this Section 4.01(g); (h) increase the compensation payable or to become payable to its officers or employees, except for increases in salary or wages of employees of the Company or its subsidiaries who are not officers of the Company in accordance with past practices, and except for any such increases in salary of officers of the Company approved by the Board of Directors prior to the date of this Agreement and payment of bonuses to Company officers with respect to the fiscal year ended August 26, 1995 in accordance with the Company's incentive bonus plan previously approved by the Board of Directors; or grant any severance or termination pay to, or enter into any employment or severance agreement with any director, officer (except for officers who are terminated on an involuntary basis) or other employee of the Company or any of its subsidiaries; or establish, adopt, enter into or amend any Employee Plan; (i) take any action, other than as required by GAAP, to change accounting policies or procedures (including, without limitation, procedures with respect to revenue recognition, capitalization of software development costs, payments of accounts payable and collection of accounts receivable); 23 28 (j) make any material Tax election inconsistent with past practices or settle or compromise any material federal, state, local or foreign tax liability or agree to an extension of a statute of limitations for any assessment of any Tax, except to the extent the amount of any such settlement has been reserved for on the Company's most recent SEC Report; (k) pay, discharge or satisfy any material claims, liabilities or obligations (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the payment, discharge or satisfaction in the ordinary course of business and consistent with past practice of liabilities reflected or reserved against in the financial statements of the Company or incurred in the ordinary course of business and consistent with past practice; (l) except as may be required by law, take any action to terminate or amend any of its Employee Plans in any material respect other than in connection with the Merger; (m) take or allow to be taken or fail to take any act or omission within the control of the Company which would reasonably be expected to jeopardize the treatment of the Merger as a pooling of interests for accounting purposes under GAAP; or (n) take, or agree in writing or otherwise to take, any of the actions described in Sections 4.01(a) through (m) above, or any action which would make any of the representations or warranties of the Company contained in this Agreement untrue or in any material respect incorrect or prevent the Company from performing in any material respect or cause the Company not to perform in any material respect its covenants hereunder or result in any of the conditions to the Merger set forth herein not being satisfied. SECTION 4.02. NO SOLICITATION. (a) The Company shall not, directly or indirectly, through any officer, director, employee, representative or agent of the Company or any of its subsidiaries, solicit or encourage (including by way of furnishing information) the initiation or submission of any inquiries, proposals or offers regarding any acquisition, merger, take-over bid, sale of all or substantially all of its assets, sale of shares of capital stock (including without limitation by way of a tender offer) representing more than 15% of the voting securities of the Company or similar transactions involving the Company or any subsidiaries of the Company (any of the foregoing inquiries or proposals being referred to herein as an "Acquisition Proposal"); provided, however, that nothing contained in this Agreement shall prevent the Board of Directors of the Company from referring any third party to this Section 4.02(a) or providing a copy of this Agreement to any third party. Nothing contained in this Section 4.02(a) or any other provision of this Agreement shall prevent the Board of Directors of the Company from considering, negotiating, approving and recommending to the stockholders of the Company an unsolicited bona fide written Acquisition Proposal which the Board of Directors of the Company determines in good faith (after consultation with its financial advisors and after consultation with outside counsel as to whether the Board of Directors is required to do so in order to discharge properly its fiduciary duties to stockholders under applicable law) would result in a transaction more favorable to the Company's stockholders from a financial point of view than the transaction contemplated by this Agreement (any such Acquisition Proposal being referred to herein as a "Superior Proposal"). (b) The Company shall immediately notify Parent after receipt of any Acquisition Proposal or any request for nonpublic information relating to the Company or any of its subsidiaries in connection with an Acquisition Proposal or for access to the properties, books or records of the Company or any subsidiary by any person or entity that informs the Board of Directors of the Company or such subsidiary that it is considering making, or has made, an Acquisition Proposal. Such notice to Parent shall be made orally and in writing and shall indicate in reasonable detail the identity of the offeror and the terms and conditions of such proposal, inquiry or contact. (c) If the Board of Directors of the Company receives a request for material nonpublic information by a party who makes, or who states in writing that it intends, subject to satisfactory review of such nonpublic information, to make, a bona fide Acquisition Proposal and the Board of Directors of the Company determines that such proposal, if consummated pursuant to its terms, would be a Superior Proposal, then, and only in such case, the Company may, subject to the execution of a confidentiality and 24 29 standstill agreement substantially similar to that then in effect between the Company and Parent, provide such party with access to information regarding the Company. (d) Subject to the second sentence of Section 4.02(a), the Company shall immediately cease and cause to be terminated any existing discussions or negotiations with any parties (other than Parent and Merger Sub) conducted heretofore with respect to any of the foregoing. The Company agrees not to release any third party from any confidentiality or standstill agreement to which the Company is a party. (e) The Company shall ensure that the officers, directors and employees of the Company and its subsidiaries and any investment banker or other advisor or representative retained by the Company are aware of the restrictions described in this Section, and shall be responsible for any breach of this Section 4.02 by such bankers, advisors and representatives. (f) Nothing contained in this Section 4.02 shall prevent the Company from complying with Rule 14e-2(a) or Rule 14d-9 promulgated under the Exchange Act with regard to an Acquisition Proposal. SECTION 4.03. CONDUCT OF BUSINESS BY PARENT PENDING THE MERGER. During the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement or the Effective Time, Parent covenants and agrees that, unless the Company shall otherwise agree in writing, Parent shall conduct its business, and cause the businesses of its subsidiaries to be conducted, in the ordinary course of business and consistent with past practice, other than actions taken by Parent or its subsidiaries in contemplation of the Merger, and shall not directly or indirectly do, or propose to do, any of the following without the prior written consent of the Company: (a) amend or otherwise change Parent's Articles of Organization, or amend the terms of the Parent Common Shares; (b) acquire or agree to acquire, by merging or consolidating with, by purchasing an equity interest in or a portion of the assets of, or by any other manner, any business or any corporation, partnership, association or other business organization or division thereof, or otherwise acquire or agree to acquire any assets of any other person, which, in each case, would materially delay or prevent the consummation of the transactions contemplated by this Agreement; (c) declare, set aside, make or pay any dividend or other distribution (whether in cash, stock or property or any combination thereof) in respect of any of its capital stock, except that a wholly owned subsidiary of Parent may declare and pay a dividend to its parent; (d) sell, transfer, license, sublicense or otherwise dispose of any material assets; (e) take or allow to be taken or fail to take any act or omission within the control of Parent or Merger Sub which would reasonably be expected to jeopardize the treatment of the Merger as a pooling of interests for accounting purposes under GAAP; or (f) take, or agree in writing or otherwise to take, any of the actions described in Sections 4.03(a) through (e) above, or any action which would make any of the representations or warranties of Parent contained in this Agreement untrue or incorrect in any material respect or prevent Parent from performing in any material respect or cause Parent not to perform in any material respect its covenants hereunder or result in any of the conditions of the Merger not being satisfied. 25 30 ARTICLE V ADDITIONAL AGREEMENTS SECTION 5.01. PROXY STATEMENT/PROSPECTUS; REGISTRATION STATEMENT. As promptly as practicable after the execution of this Agreement, the Company and Parent shall prepare and file with the SEC preliminary proxy materials which shall constitute the Proxy Statement of the Company and the Registration Statement of Parent with respect to the Parent Common Shares to be issued in connection with the Merger. As promptly as practicable after comments are received from the SEC thereon and after the furnishing by the Company and Parent of all information required to be contained therein, the Company and Parent shall file with the SEC a combined proxy and registration statement on Form S-4 (or on such other form as shall be appropriate) relating to the approval of the Merger and the transactions contemplated hereby by the stockholders of the Company and shall use all reasonable efforts to cause the Registration Statement to become effective as soon thereafter as practicable. The Proxy Statement shall include the recommendation of the Board of Directors of the Company in favor of the Merger, subject to the second sentence of Section 4.02. SECTION 5.02. STOCKHOLDERS MEETING. The Company shall in accordance with Delaware Law and the Company's Certificate of Incorporation and Bylaws call and hold the Company Stockholders Meeting as promptly as practicable for the purpose of voting upon the approval of the Merger. Subject to the second sentence of Section 4.02, the Company shall use its reasonable best efforts to hold the Company Stockholders Meeting as soon as practicable after the date on which the Registration Statement becomes effective. Subject to the second sentence of Section 4.02, the Company shall use its reasonable best efforts to solicit from its respective stockholders proxies in favor of the approval of the Merger, and shall take all other action necessary or advisable to secure the vote or consent of stockholders required by Delaware Law to obtain such approvals. SECTION 5.03. ACCESS TO INFORMATION; CONFIDENTIALITY. Upon reasonable notice and subject to restrictions contained in confidentiality agreements to which such party is subject, the Company and Parent shall each (and shall cause each of their subsidiaries to) afford to the officers, employees, accountants, counsel and other representatives of the other, reasonable access, during the period prior to the Effective Time, to all its properties, books, contracts, commitments and records and, during such period, the Company and Parent each shall (and shall cause each of their subsidiaries to) furnish promptly to the other all information concerning its business, properties and personnel as such other party may reasonably request, and each shall make available to the other the appropriate individuals (including attorneys, accountants and other professionals) for discussion of the other's business, properties and personnel as either party may reasonably request. Each party shall keep such information confidential in accordance with the terms of the currently effective confidentiality agreement dated August 16, 1995 (the "Confidentiality Agreement") between Parent and the Company. SECTION 5.04. CONSENTS; APPROVALS. The Company and Parent shall each use their best efforts to obtain all consents, waivers, approvals, authorizations or orders (including, without limitation, all United States and foreign governmental and regulatory rulings and approvals), and the Company and Parent shall make all filings (including, without limitation, all filings with United States and foreign governmental or regulatory agencies) required in connection with the authorization, execution and delivery of this Agreement by the Company and Parent and the consummation by them of the transactions contemplated hereby. The Company and Parent shall furnish all information required to be included in the Proxy Statement and the Registration Statement, or for any application or other filing to be made pursuant to the rules and regulations of any United States, or foreign governmental body in connection with the transactions contemplated by this Agreement. If either party receives a request for additional information or documentary material from any governmental authority with respect to the transactions contemplated hereby, then such party shall take all reasonable efforts to make, or cause to be made, as soon as reasonably practicable and after consultation with the other party, an appropriate response in compliance with such request. The parties will cooperate in connection with reaching any understandings, undertakings or agreements (oral or written) involving the 26 31 Federal Trade Commission, the Department of Justice or any other governmental authority in connection with the transactions contemplated hereby. SECTION 5.05. STOCK OPTIONS. (a) At the Effective Time, the Company's obligations with respect to each outstanding option to purchase shares of Company Common Stock (each, a "Company Option") under the Company's 1990 Stock Option Plan and Director Stock Option Plan (the "Company Stock Option Plans"), whether vested or unvested, will be assumed by Parent. Each Company Option so assumed by Parent under this Agreement shall continue to have, and be subject to, the same terms and conditions set forth in the Company Stock Option Plans and agreement pursuant to which such Company Option was issued as in effect immediately prior to the Effective Time, except that (i) such Company Option will be exercisable for that number of Parent Common Shares equal to the product of the number of shares of Company Common Stock that were purchasable under such Company Option immediately prior to the Effective Time multiplied by the Exchange Ratio, rounded down to the nearest whole number of shares of Parent Common Shares (with any resulting fractional share paid in cash), and (ii) the per share exercise price for the shares of Parent Common Shares issuable upon exercise of such assumed Company Option will be equal to the quotient determined by dividing the exercise price per share of Company Common Stock at which such Company Option was exercisable immediately prior to the Effective Time by the Exchange Ratio, and rounding the resulting exercise price up to the nearest whole cent. (b) It is the intention of the parties that the Company Options assumed by Parent qualify following the Effective Time as incentive stock options as defined in the Code ("ISO's") to the extent the Company Options qualified as ISO's prior to the Effective Time. (c) After the Effective Time, Parent will issue to each holder of an outstanding Company Option a document evidencing the foregoing assumption by Parent. (d) Parent will file a registration statement on Form S-8 with the SEC covering the Company Options assumed by Parent under this Section 5.05 not later than the Effective Time. SECTION 5.06. COMPANY EMPLOYEE STOCK PURCHASE PLAN. (a) The Company shall take such actions as are necessary to establish a "new exercise date" (as such term is used in the Company's 1992 Employee Stock Purchase Plan (the "Company Stock Purchase Plan")) in accordance with the terms of the Company Stock Purchase Plan (the "New Exercise Date") for the then current offering period (as such term is used in the Company Stock Purchase Plan). The New Exercise Date shall be the last trading day on which the Parent Common Shares are traded on the Nasdaq National Market immediately prior to the Effective Time provided, that the New Exercise Date shall be conditioned upon the consummation of the Merger. On the New Exercise Date , the Company shall apply the funds credited as of such date under the Company Stock Purchase Plan within each participant's payroll withholdings account to the purchase of whole shares of Company Common Stock in accordance with the terms of the Company Stock Purchase Plan. (b) Employees of the Company as of the Effective Time shall be permitted to participate in Parent's Employee Stock Purchase Plan commencing on the first enrollment date following the Effective Time, subject to compliance with the eligibility provisions of such plan (with employees receiving credit, for purposes of such eligibility provisions, for service with the Company). SECTION 5.07. AGREEMENTS OF AFFILIATES. The Company shall deliver to Parent, prior to the date the Registration Statement becomes effective under the Securities Act, a letter (the "Affiliate Letter") identifying all persons who are, or may deemed to be, at the time of the Company Stockholders' Meetings, "affiliates" of the Company for purposes of Rule 145 under the Securities Act. The Company shall use its best efforts to cause each person who is identified as an "affiliate" in the Affiliate Letter to deliver to Parent, prior to the Effective Time, a written agreement (an "Affiliate Agreement") in substantially the form of Exhibit A hereto. Parent shall use its best efforts to cause each person who is an affiliate of Parent for purposes of Rule 145 under the Securities Act to deliver to Parent, prior to the Effective Time, an Affiliate Agreement. 27 32 SECTION 5.08. INDEMNIFICATION AND INSURANCE. (a) The Certificate of Incorporation of the Surviving Corporation shall contain the provisions with respect to indemnification set forth in the By-Laws of the Company, which provisions shall not be amended, repealed or otherwise modified after the Effective Time in any manner that would adversely affect the rights thereunder existing at the Effective Time of individuals who at the Effective Time were directors, officers, employees or agents of the Company, unless such modification is required by law. (b) After the Effective Time, the Surviving Corporation and Parent shall, to the fullest extent permitted under applicable law or under the Surviving Corporation's and Parent's, as the case may be, Certificate of Incorporation or By-Laws, indemnify and hold harmless, each present and former director, officer, employee, fiduciary and agent of the Company or any of its subsidiaries (collectively, the "Indemnified Parties") against any costs or expenses (including attorneys' fees), judgments, fines, losses, claims, damages, liabilities and amounts paid in settlement in connection with any claim, action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative, arising out of or pertaining to any action or omission occurring at or prior to the Effective Time (including, without limitation, the transactions contemplated by this Agreement). In the event of any such claim, action, suit, proceeding or investigation (whether arising before or after the Effective Time), (i) any counsel retained by the Indemnified Parties for any period after the Effective Time shall be reasonably satisfactory to the Surviving Corporation and Parent, (ii) after the Effective Time, the Surviving Corporation and Parent shall pay the reasonable fees and expenses of such counsel in a timely manner after statements therefor are received, and (iii) the Surviving Corporation and Parent will cooperate in the defense of any such matter; provided, however, that neither the Surviving Corporation nor Parent shall be liable for any settlement effected without its written consent (which consent shall not be unreasonably withheld). The Indemnified Parties as a group may retain only one law firm to represent them with respect to any single action unless there is, under applicable standards of professional conduct, a conflict on any significant issue between the positions of any two or more Indemnified Parties. (c) From and after the Effective Time, Parent and the Surviving Corporation shall honor all of the indemnity agreements entered into prior to the date hereof by Company with its respective officers and directors, whether or not such persons continue in their positions with Parent or the Surviving Corporation following the Effective Time. (d) From and after the Effective Time until at least six years after the Effective Time, Parent shall, or shall cause the Surviving Corporation to use its best efforts to maintain in effect directors' and officers' liability insurance covering those persons who are currently covered by the Company's directors' and officers' liability insurance policy (a copy of which has been heretofore delivered to Parent) of at least the same coverage and amounts, containing terms that are no less advantageous with respect to claims arising at or before the Effective Time than the Company's policies in effect immediately prior to the Effective Time provided, however, that in no event shall Parent or the Surviving Corporation, be required to expend in excess of 150% of the annual premium currently paid by Company for such coverage in which event the Parent shall purchase such coverage as is available for such 150% of such annual premium. SECTION 5.09. EMPLOYEE BENEFIT PLANS. (a) Parent intends to include Company employees in Parent's welfare plans (within the meaning of Section 3(1) of ERISA) and fringe benefit plans on the same basis and terms as Parent employees not later than two years following the Effective Time and, in any event, with respect to particular welfare plans of Parent, upon the termination of the equivalent Company welfare plans; and until such time of inclusion, Parent intends to cause the Surviving Corporation to maintain in effect, on terms not materially less favorable to employees of the Company as were in effect at the Effective Time, all Employee Plans of the Company. In addition, Parent intends that Company employees be eligible to participate in Parent's stock option and stock purchase plans on the same basis and terms as Parent employees from and after the Effective Time. Notwithstanding the foregoing, Parent may at any time terminate or modify the terms of any such Employee Plans if the cost of maintaining any such Employee Plan has increased by a material amount or if, in the good faith judgment of Parent, continuing to maintain any such Employee Plan conflicts in any material respect with Parent's overall compensation policies then in effect. 28 33 (b) Parent shall cause each of the persons listed on Section 1.05 of the Company Disclosure Schedule to be elected and remain in office as directors of the Surviving Corporation until such time as all of such person's Company Options outstanding at the Effective Time have vested in full in accordance with their respective terms. SECTION 5.10. NOTIFICATION OF CERTAIN MATTERS. The Company shall give prompt notice to Parent, and Parent shall give prompt notice to the Company, of (i) any event known to the Company the occurrence, or non-occurrence, of which would be likely to cause any representation or warranty contained in this Agreement to be untrue or inaccurate in any material respect, and (ii) any failure of the Company, Parent or Merger Sub, as the case may be, materially to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder provided, however, that the delivery of any notice pursuant to this Section shall not limit or otherwise affect the remedies available hereunder to the party receiving such notice; and provided, further, that failure to give such notice shall not be treated as a breach of covenant for the purposes of Sections 6.02(a) and 6.03(a) unless the failure to give such notice is willful by the party required to give notice and results in material prejudice to the other party. SECTION 5.11. FURTHER ACTION/TAX TREATMENT. Upon the terms and subject to the conditions hereof, each of the parties hereto in good faith shall use all commercially reasonable efforts to take, or cause to be taken, all actions and to do, or cause to be done, all other things necessary, proper or advisable to consummate and make effective as promptly as practicable the transactions contemplated by this Agreement, to obtain in a timely manner all necessary waivers, consents and approvals and to effect all necessary registrations and filings, and to otherwise satisfy or cause to be satisfied all conditions precedent to its obligations under this Agreement. Each of Parent, Merger Sub and the Company shall use its best efforts to cause the Merger to qualify, and will not (both before and after consummation of the Merger) take any actions which could prevent the Merger from qualifying, as a reorganization under the provisions of Section 368 of the Code. SECTION 5.12. PUBLIC ANNOUNCEMENTS. Parent and the Company shall consult with each other before issuing any press release or otherwise making any public statements with respect to the Merger or this Agreement and shall not issue any such press release or make any such public statement without the prior consent of the other party, which shall not be unreasonably withheld; provided, however, that a party may, without the prior consent of the other party, issue such press release or make such public statement as may upon the advice of counsel be required by law, the National Association of Securities Dealers or the NYSE if it has used all reasonable efforts to consult with the other party. SECTION 5.13. LISTING OF PARENT COMMON SHARES. Parent shall cause the shares of Parent Common Shares to be issued in the Merger to be approved for listing on the NYSE (or the principal exchange on which Parent's Common Shares are then trading) on or before the Effective Time. SECTION 5.14. CONVEYANCE TAXES. Parent and the Company shall cooperate in the preparation, execution and filing of all returns, questionnaires, applications or other documents regarding any real property transfer or gains, sales, use, transfer, value added, stock transfer and stamp taxes, any transfer, recording, registration and other fees, and any similar taxes which become payable in connection with the transactions contemplated hereby that are required or permitted to be filed on or before the Effective Time. SECTION 5.15. ACCOUNTANTS' LETTERS. Each party, upon reasonable notice from the other party, shall use its best efforts to cause its independent public accountants (Price Waterhouse LLP in the case of the Company, and Coopers & Lybrand LLP in the case of Parent) to deliver to the other party a letter covering such matters as are customarily addressed in accountant's "comfort" letters in transactions similar to those contemplated by this Agreement. SECTION 5.16. EMPLOYMENT AGREEMENTS. Prior to the Effective Time, Parent shall offer to each of the persons listed on Exhibit B hereto a form of employment agreement substantially upon the terms and conditions specified on Exhibit B hereto. 29 34 ARTICLE VI CONDITIONS TO THE MERGER SECTION 6.01. CONDITIONS TO OBLIGATION OF EACH PARTY TO EFFECT THE MERGER. The respective obligations of each party to effect the Merger shall be subject to the satisfaction at or prior to the Effective Time of the following conditions: (a) Effectiveness of the Registration Statement. The Registration Statement shall have been declared effective by the SEC under the Securities Act. No stop order suspending the effectiveness of the Registration Statement shall have been issued by the SEC and no proceedings for that purpose and no similar proceeding in respect of the Proxy Statement shall have been initiated or, to the knowledge of Parent or the Company, threatened by the SEC; (b) Stockholder Approval. This Agreement and the Merger shall have been approved and adopted by the requisite vote of the stockholders of the Company; (c) HSR Act. The waiting period applicable to the consummation of the Merger under the HSR Act shall have expired or been terminated; (d) No Injunctions or Restraints; Illegality. No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal restraint or prohibition (an "Injunction") preventing the consummation of the Merger shall be in effect, nor shall any proceeding brought by any administrative agency or commission or other governmental authority or instrumentality, domestic or foreign, seeking any of the foregoing be pending; and there shall not be any action taken, or any statute, rule, regulation or order enacted, entered, enforced or deemed applicable to the Merger, which makes the consummation of the Merger illegal; (e) Tax Opinions. Parent and the Company shall have received substantially identical written opinions of Testa, Hurwitz & Thibeault and Wilson, Sonsini, Goodrich & Rosati respectively, in form and substance reasonably satisfactory to them to the effect that the Mergers will constitute a reorganization within the meaning of Section 368 of the Code; and (f) Accountants' Pooling Letters. The Company and Parent shall have received a letter from each of Price Waterhouse LLP and Coopers & Lybrand LLP confirming their respective opinions dated at the Effective Time, to the effect that the Merger qualifies for a pooling of interests accounting treatment if consummated in accordance with this Agreement. SECTION 6.02. ADDITIONAL CONDITIONS TO OBLIGATIONS OF PARENT AND MERGER SUB. The obligations of Parent and Merger Sub to effect the Merger are also subject to the following conditions: (a) Representations and Warranties. The representations and warranties of the Company contained in this Agreement (together with the Company Disclosure Schedule) shall be true and correct in all material respects on and as of the Effective Time, with the same force and effect as if made on and as of the Effective Time, except for (i) changes contemplated by this Agreement, (ii) those representations and warranties which address matters only as of a particular date (which shall remain true and correct as of such date) and (iii) where the failure to be true and correct would not have a Material Adverse Effect on the Company; and Parent and Merger Sub shall have received a certificate to such effect signed by the President and Chief Financial Officer of the Company; (b) Agreements and Covenants. The Company shall have performed or complied in all material respects with all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Effective Time, and Parent and Merger Sub shall have received a certificate to such effect signed by the President and Chief Financial Officer of the Company; (c) Consents Obtained. All material consents, waivers, approvals, authorizations or orders required to be obtained, and all filings required to be made, by the Company for the authorization, execution and delivery of this Agreement and the consummation by it of the transactions contemplated hereby shall have been obtained and made by the Company; 30 35 (d) Governmental Actions. There shall not have been instituted or threatened any action or proceeding (or any investigation or other inquiry that could reasonably be expected to result in such an action or proceeding) by any governmental authority or administrative agency before any governmental authority, administrative agency or court of competent jurisdiction, nor shall there be in effect any judgment, decree or order of any governmental authority, administrative agency or court of competent jurisdiction, in either case, seeking to prohibit or limit Parent from exercising all rights and privileges pertaining to its ownership of the Surviving Corporation or the ownership or operation by Parent or any of its subsidiaries of all or a portion of the business or assets of Parent or any of its subsidiaries, or seeking to compel Parent or any of its subsidiaries to dispose of or hold separate all or any material portion of the business or assets of Parent or any of its subsidiaries, as a result of the Merger or the transactions contemplated by this Agreement if any of the foregoing shall have a Material Adverse Effect on Parent; (e) Affiliate Agreements. Parent shall have received from each person who is identified in the Affiliate Letter as an "affiliate" of the Company an Affiliate Agreement, and each such Affiliate Agreement shall be in full force and effect; and (f) Opinion of Counsel. Parent shall have received an opinion of Wilson, Sonsini, Goodrich & Rosati, counsel to the Company, as to matters that are customary for transactions of this type. SECTION 6.03. ADDITIONAL CONDITIONS TO OBLIGATION OF THE COMPANY. The obligation of the Company to effect the Merger is also subject to the following conditions: (a) Representations and Warranties. The representations and warranties of Parent and Merger Sub contained in this Agreement (together with the Parent Disclosure Schedule) shall be true and correct in all material respects on and as of the Effective Time, with the same force and effect as if made on and as of the Effective Time, except for (i) changes contemplated by this Agreement, (ii) those representations and warranties which address matters only as of a particular date (which shall remain true and correct as of such date) and (iii) failures to be true and correct that would not have a Material Adverse Effect on Parent and Merger Sub, and the Company shall have received a certificate to such effect signed by the President and Chief Financial Officer of Parent; (b) Agreements and Covenants. Parent and Merger Sub shall have performed or complied in all material respects with all agreements and covenants required by this Agreement to be performed or complied with by them on or prior to the Effective Time, and the Company shall have received a certificate to such effect signed by the President and Chief Financial Officer of Parent; (c) Consents Obtained. All material consents, waivers, approvals, authorizations or orders required to be obtained, and all filings required to be made, by Parent and Merger Sub for the authorization, execution and delivery of this Agreement and the consummation by them of the transactions contemplated hereby shall have been obtained and made by Parent and Merger Sub; and (d) Opinion of Counsel. The Company shall have received an opinion of Testa, Hurwitz & Thibeault, counsel to the Parent and the Merger Sub, as to matters that are customary for transactions of this type. ARTICLE VII TERMINATION SECTION 7.01. TERMINATION. This Agreement may be terminated at any time prior to the Effective Time, notwithstanding approval thereof by the stockholders of the Company: (a) by mutual written consent duly authorized by the Boards of Directors of Parent and the Company; or (b) by either Parent or the Company if the Merger shall not have been consummated by January 31, 1996 (provided that the right to terminate this Agreement under this Section 7.01(b) shall 31 36 not be available to any party whose failure to fulfill any obligation under this Agreement has been the cause of or resulted in the failure of the Merger to occur on or before such date); or (c) by either Parent or the Company if a court of competent jurisdiction or governmental, regulatory or administrative agency or commission shall have issued a non-appealable final order, decree or ruling or taken any other action, in each case having the effect of permanently restraining, enjoining or otherwise prohibiting the Merger; or (d) by Parent or the Company, if, at the Company Stockholders' Meeting (including any adjournment or postponement thereof), the requisite vote of the stockholders of the Company shall not have been obtained; or (e) by Parent, if (i) the Board of Directors of the Company shall withdraw, modify or change its recommendation of this Agreement or the Merger in a manner adverse to Parent or shall have resolved to do so; or (ii) the Board of Directors of the Company shall have taken a "neutral" position with respect to (or shall have failed to reject as inadequate or failed to have reaffirmed its recommendation of this Agreement and the Merger within 10 business days after the public announcement or commencement of an Alternative Transaction (as defined in Section 7.03(c)); or (f) by Parent or the Company, upon a breach of any representation, warranty, covenant or agreement on the part of the Company or Parent and Merger Sub, respectively, set forth in this Agreement or if any representation or warranty of the Company or Parent and Merger Sub, respectively, shall have become untrue, in either case, such that the conditions set forth in Section 6.02(a) or 6.02(b), or Section 6.03(a) or 6.03(b), would not be satisfied (a "Terminating Breach"), provided that, if such Terminating Breach is curable prior to the expiration of 30 days from its occurrence (but in no event later than January 31, 1996) by Parent or the Company, as the case may be, through the exercise of its reasonable best efforts and for so long as Parent or the Company, as the case may be, continues to exercise such reasonable best efforts, neither the Company nor Parent, respectively, may terminate this Agreement under this Section 7.01(f) unless such 30-day period expires without such Terminating Breach having been cured; or (g) by the Company or Parent, if the Board of Directors of the Company shall have resolved to accept, or accepted, a Superior Proposal. SECTION 7.02. EFFECT OF TERMINATION. In the event of the termination of this Agreement pursuant to Section 7.01, this Agreement shall forthwith become void and there shall be no liability on the part of any party hereto or any of its affiliates, directors, officers or stockholders except (i) as set forth in Section 7.03 and Section 7.04 and Section 8.01 hereof, and (ii) nothing herein shall relieve any party from liability for any willful breach hereof. SECTION 7.03. FEES AND EXPENSES PAYABLE BY COMPANY. (a) Except as set forth in this Section 7.03, all fees and expenses incurred by the Company in connection with this Agreement and the transactions contemplated hereby shall be paid by the Company, whether or not the Merger is consummated. (b) The Company shall pay Parent a fee of $9,000,000, plus actual, documented and reasonable out-of-pocket expenses of Parent relative to the transactions contemplated by this Agreement (including but not limited to, fees and expenses of Parent's counsel, accountants and financial advisors) in an aggregate amount not to exceed $1.0 million upon the earliest to occur of the following events: (i) the termination of this Agreement by Parent pursuant to Section 7.01(e) or 7.01(f); or (ii) the termination of this Agreement by Parent or the Company pursuant to Section 7.01(g); or (iii) the termination of this Agreement by the Company or Parent pursuant to Section 7.01(d) as a result of the failure to receive the requisite vote for approval and adoption by the stockholders of 32 37 the Company at the Company Stockholders Meeting if at the time of the Company Stockholders Meeting there shall exist an Alternative Transaction; provided, however, that the Company shall not be obligated to pay a fee pursuant to this Section 7.03(b)(iii) unless such Alternative Transaction is consummated not later than nine months following the Company Stockholders Meeting. (c) As used herein, "Alternative Transaction" means (i) a transaction pursuant to which any person (or group of persons) other than Parent or its affiliates (a "Third Party") acquires (or publicly proposes to acquire) more than 30 percent of the outstanding Shares, whether from the Company or pursuant to a tender offer or exchange offer or otherwise, (ii) a merger or other business combination involving the Company pursuant to which any Third Party acquires (or publicly proposes to acquire) more than 30 percent of the outstanding equity securities of the Company or the entity surviving such merger or business combination or (iii) any other transaction pursuant to which any Third Party acquires (or publicly proposes to acquire) control of assets (including for this purpose the outstanding equity securities of subsidiaries of the Company, and the entity surviving any merger or business combination including any of them) of the Company and its subsidiaries having a fair market value equal to more than 30 percent of the fair market value (as determined by the Board of Directors in good faith) of all the assets of the Company and its subsidiaries, taken as a whole, immediately prior to such transaction (or proposal). (d) The fee payable pursuant to Section 7.03(b) shall be paid within ten days following consummation of an Alternative Transaction in the case of 7.03(b)(iii) and with respect to the first to occur of the events described in Section 7.03(b)(i) and (b)(ii) following written notice from Parent to the Company (A) with respect to 20% of the fee, within ten business days and (B) with respect to the balance of the fee (including all expenses owing to Parent pursuant to this Section 7.03), within thirty business days. SECTION 7.04. FEES AND EXPENSES PAYABLE BY PARENT. (a) Except as set forth in this Section 7.04, all fees and expenses incurred by Parent or Merger Sub in connection with this Agreement and the transactions contemplated hereby shall be paid by Parent, whether or not the Merger is consummated. (b) Parent shall pay the Company a fee of $9,000,000, plus actual, documented and reasonable out-of-pocket expenses of the Company relative to the transactions contemplated by this Agreement (including but not limited to, fees and expenses of the Company's counsel, accountants and financial advisors) in an aggregate amount not to exceed $1.0 million upon the termination of this Agreement by the Company pursuant to Section 7.01(f). (c) Parent shall reimburse the Company for up to $1,000,000 of its actual, documented and reasonable out-of-pocket expenses (the "Reimbursable Expenses") incurred by the Company (including but not limited to, fees and expenses of the Company's counsel, accountants and financial advisors) in connection with matters relating to the Company's filings under the HSR Act if either party terminates this Agreement pursuant to Section 7.01(b) or (c) because the conditions specified in Section 6.01(c), 6.01(d) or 6.02(d) (in each case as a result of an order, decree or ruling arising in connection with matters relating specifically to the HSR Act) have not been satisfied; provided however, that Parent shall reimburse the Company for up to an additional $2.0 million of Reimbursable Expenses if such Reimbursable Expenses were reviewed by Parent in advance of their being incurred. ARTICLE VIII GENERAL PROVISIONS SECTION 8.01. EFFECTIVENESS OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Except as otherwise provided in this Section 8.01, the representations, warranties and agreements of each party hereto shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any other party hereto, any person controlling any such party or any of their officers or directors, whether prior to or after the execution of this Agreement. Any disclosure made with reference to one or more sections of the Company 33 38 Disclosure Schedule or the Parent Disclosure Schedule shall be deemed disclosed with respect to each other section therein as to which such disclosure is relevant provided such relevance is reasonably apparent. The representations, warranties and agreements in this Agreement shall terminate at the Effective Time or upon the termination of this Agreement pursuant to Section 7.01, as the case may be, except that the agreements set forth in Sections 5.05, 5.06, 5.08 and 5.09 shall survive the Effective Time indefinitely and those set forth in Sections 5.03 and 7.03 shall survive termination indefinitely. The Confidentiality Agreement shall survive termination of this Agreement as provided therein. SECTION 8.02. NOTICES. All notices and other communications given or made pursuant hereto shall be in writing and shall be deemed to have been duly given or made as of the date delivered if delivered personally, three days after being sent by registered or certified mail (postage prepaid, return receipt requested), one day after dispatch by recognized overnight courier (provided delivery is confirmed by the carrier) and upon transmission by telecopy, confirmed received, to the parties at the following addresses (or at such other address for a party as shall be specified by like changes of address): (a) If to Parent or Merger Sub: TERADYNE, INC. 321 Harrison Avenue Boston, MA 02118 Attn: Owen W. Robbins Executive Vice President Tel: (617) 422-2233 Fax: (617) 422-2910 With a copy to: Testa, Hurwitz & Thibeault High Street Tower 125 High Street Boston, MA 02110 Attn: William B. Asher, Jr., Esq. Tel: (617) 248-7518 Fax: (617) 248-7100 (b) If to the Company: MEGATEST CORPORATION 1321 Ridder Park Drive San Jose, CA 95131 Attn: Jack Halter Chairman and CEO Tel: (408) 441-3185 Fax: (408) 451-3202 With a copy to: Wilson Sonsini Goodrich & Rosati 650 Page Mill Road Palo Alto, CA 94304 Attn: Harry Plant, Esq. Tel: (415) 493-9300 Fax: (415) 493-6811 SECTION 8.03. CERTAIN DEFINITIONS. For purposes of this Agreement, the term: (a) "affiliates" means a person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, the first mentioned person, including, without 34 39 limitation, any partnership or joint venture in which the Company (either alone, or through or together with any other subsidiary) has, directly or indirectly, an interest of 10 percent or more; (b) "business day" means any day other than a day on which banks in Boston, Massachusetts, or San Francisco, California, are required or authorized to be closed; (e) "person" means an individual, corporation, partnership, association, trust, unincorporated organization, other entity or group (as defined in Section 13(d)(3) of the Exchange Act); and (d) "subsidiary" or "subsidiaries" of the Company, the Surviving Corporation, Parent or any other person means any corporation, partnership, joint venture or other legal entity of which the Company, the Surviving Corporation, Parent or such other person, as the case may be (either alone or through or together with any other subsidiary), owns, directly or indirectly, more than 50% of the stock or other equity interests the holders of which are generally entitled to vote for the election of the board of directors or other governing body of such corporation or other legal entity. SECTION 8.04. AMENDMENT. This Agreement may be amended by the parties hereto by action taken by or on behalf of their respective Boards of Directors at any time prior to the Effective Time; provided, however, that, after approval of the Merger by the stockholders of the Company, no amendment may be made which by law requires further approval by such stockholders without such further approval. This Agreement may not be amended except by an instrument in writing signed by the parties hereto. SECTION 8.05. WAIVER. At any time prior to the Effective Time, any party hereto may, with respect to any other party hereto, (a) extend the time for the performance of any of the obligations or other acts, (b) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto and (c) waive compliance with any of the agreements or conditions contained herein. Any such extension or waiver shall be valid if set forth in an instrument in writing signed by the party or parties to be bound thereby. SECTION 8.06. HEADINGS. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. SECTION 8.07. SEVERABILITY. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law, or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the extent possible. SECTION 8.08. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement and supersedes all prior agreements and undertakings (other than the Confidentiality Agreement), both written and oral, among the parties, or any of them, with respect to the subject matter hereof and, except as otherwise expressly provided herein, are not intended to confer upon any other person any rights or remedies hereunder. SECTION 8.09. ASSIGNMENT, MERGER SUB. This Agreement shall not be assigned by operation of law or otherwise, except that Parent and Merger Sub may assign all or any of their rights hereunder to any affiliate provided that no such assignment shall relieve the assigning party of its obligations hereunder. Parent guarantees the full and punctual performance by Merger Sub and the Surviving Corporation of all of their respective obligations hereunder. SECTION 8.10. PARTIES IN INTEREST. This Agreement shall be binding upon and inure solely to the benefit of each party hereto, and nothing in this Agreement, expressed or implied, is intended to or shall confer upon any other person any right, benefit or remedy of any nature whatsoever under or by reason of this Agreement, other than Section 5.08 (which is intended to be for the benefit of the Indemnified Parties and may be enforced by such Indemnified Parties). 35 40 SECTION 8.11. FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE. No failure or delay on the part of any party hereto in the exercise of any right hereunder shall impair such right or be construed to be a waiver of, or acquiescence in, any breach of any representation, warranty or agreement herein, nor shall any single or partial exercise of any such right preclude other or further exercise thereof or of any other right. All rights and remedies existing under this Agreement are cumulative to, and not exclusive of, any rights or remedies otherwise available. SECTION 8.12. GOVERNING LAW. This agreement shall be governed by, and construed in accordance with, the internal laws of the State of Delaware applicable to contracts executed and fully performed within the State of Delaware. SECTION 8.13. COUNTERPARTS. This Agreement may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original but all of which taken together shall constitute one and the same agreement. IN WITNESS WHEREOF, Parent, Merger Sub and the Company have caused this Agreement to be executed as of the date first written above by their respective officers thereunto duly authorized. TERADYNE, INC. By: /s/ ALEXANDER V. d.'ARBELOFF --------------------------------- Name: Alexander V. d'Arbeloff Title: President M MERGER CORP. By: /s/ OWEN W. ROBBINS --------------------------------- Name: Owen W. Robbins Title: Vice President MEGATEST CORPORATION By: /s/ JOHN E. HALTER --------------------------------- Name: John E. Halter Title: President and Chief Executive Officer 36 41 EXHIBIT A FORM OF AFFILIATE AGREEMENT , 1995 TERADYNE, INC. 321 Harrison Avenue Boston, MA 02118 Ladies and Gentlemen: Pursuant to the terms of the Agreement and Plan of Merger dated as of September 5, 1995 (the "Agreement"), among TERADYNE, INC., a Massachusetts corporation ("Parent"), M Acquisition Corporation, a Delaware corporation and wholly-owned subsidiary of Parent ("Merger Sub"), and MEGATEST CORPORATION, a Delaware corporation (the "Company"), Parent will acquire the Company through the merger of Merger Sub with and into the Company (the "Merger"). Subject to the terms and conditions of the Agreement, at the Effective Time (as defined in the Agreement), outstanding shares of the common stock, $.001 value per share, of the Company (the "Company Common Stock") will be converted into the right to receive shares of the common stock, $.125 par value per share, of Parent (the "Parent Common Stock"), on the basis described in the Agreement. The undersigned has been advised that as of the date hereof it may be deemed to be an "affiliate" of the Company, as the term "affiliate" is (i) defined for purposes of paragraphs (c) and (d) of Rule 145 of the Rules and Regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended (the "Act"), and/or (ii) used in and for purposes of Accounting Series Releases 130 and 135, as amended, and Staff Accounting Bulletins 65 and 76 of the Commission. The undersigned understands that the representations, warranties and covenants set forth herein will be relied upon by Parent, stockholders of Parent, the Company, other shareholders of the Company and their respective counsel and accountants. The undersigned represents and warrants to and agrees with Parent that: 1. The undersigned has full power to execute and deliver this Affiliate Agreement and to make the representations and warranties herein and to perform its obligations hereunder; 2. The undersigned has carefully read this letter and the Agreement and discussed its requirements and other applicable limitations upon its ability to sell, transfer or otherwise dispose of Parent Common Stock to the extent the undersigned felt necessary, with its counsel or counsel for the Company. 3. The undersigned shall not make any sale, transfer or other disposition of Parent Common Stock in violation of the Act or the Rules and Regulations. 4. The undersigned has been advised that the issuance of shares of Parent Common Stock to the undersigned in connection with the Merger has been or will be registered with the Commission under the Act on a Registration Statement on Form S-4. However, the undersigned has also been advised that, since at the time the Merger was submitted for a vote of the shareholders of the Company the undersigned may be deemed to have been an affiliate of the Company and the distribution by the undersigned of any Parent Common Stock has not been registered, and is not exempt, under the Act, the undersigned may not sell, transfer or otherwise dispose of Parent Common Stock issued to the undersigned in the Merger unless (i) such sale, transfer or other disposition has been registered under the Act, (ii) such sale, transfer or other disposition is made in conformity with the requirements of Rule 145 promulgated by the Commission under the Act, or (iii) in the opinion of counsel reasonably acceptable to Parent, such sale, transfer or other disposition is otherwise exempt from registration under the Act. 5. Parent is under no obligation to register the sale, transfer or other disposition of Parent Common Stock by the undersigned or on its behalf under the Act or to take any other action necessary in order to make 42 \ compliance with an exemption from such registration available, provided, however, that Parent shall use best efforts to file on a timely basis with the SEC all reports required to be filed by it pursuant to Section 13 or 15(d) of the Exchange Act. 6. Stop transfer instructions will be given to Parent's transfer agent with respect to the Parent Common Stock and Parent may cause there to be placed on the certificates for the Parent Common Stock issued to the undersigned, or any substitutions therefor, a legend stating in substance: "THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A TRANSACTION TO WHICH RULE 145 PROMULGATED UNDER THE SECURITIES ACT OF 1933 APPLIES. THE SHARES REPRESENTED BY THIS CERTIFICATE MAY ONLY BE TRANSFERRED IN ACCORDANCE WITH THE TERMS OF AN AGREEMENT DATED [ ] 1995 BETWEEN THE REGISTERED HOLDER HEREOF AND [PARENT], A COPY OF WHICH AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICES OF PARENT". 7. Unless the transfer by the undersigned of its Parent Common Stock has been registered under the Act or is a sale made in conformity with the provisions of Rule 145, Parent reserves the right to put the following legend on the certificates issued any transferee of the undersigned: "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND WERE ACQUIRED FROM A PERSON WHO RECEIVED SUCH SHARES IN A TRANSACTION TO WHICH RULE 145 PROMULGATED UNDER THE SECURITIES ACT OF 1933 APPLIES. THE SHARES HAVE BEEN ACQUIRED BY THE HOLDER NOT WITH A VIEW TO, OR FOR RESALE IN CONNECTION WITH, ANY DISTRIBUTION THEREOF WITHIN THE MEANING OF THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT IN ACCORDANCE WITH AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF 1933." 8. The legends set forth in paragraphs 6 and 7 above shall be removed by delivery of substitute certificates without such legend if the undersigned shall have delivered to Parent a copy of a letter from the staff of the Commission, or an opinion of counsel in form and substance reasonably satisfactory to Parent, to the effect that such legend is not required for purposes of the Act. 9. The undersigned is the beneficial owner of (i.e. has sole or shared voting or investment power with respect to) all the shares of Company Common Stock and options to purchase Company Common Stock indicated on the last page hereof (the "Company Securities"). Except for the Company Securities, the undersigned does not beneficially own any shares of Company Common Stock or any other equity securities of the Company or any options, warrants or other rights to acquire any equity securities of the Company. 10. Notwithstanding any other provision hereof to the contrary, the undersigned has not at any time since August 21, 1995 or in contemplation of the Merger engaged, and will not, after the Effective Time (as defined in the Agreement) and until such time as results covering at least 30 days of combined operations of the Company and Parent have been published by Parent, in the form of a quarterly or annual earnings report, an effective registration statement filed with the Commission, a report to the Commission on Form 10-K, 10-Q or 8-K, or any other public filing or announcement which includes the combined results of operations, engage, in any sale, exchange, transfer, pledge, disposition of or grant of any option, the establishment of any "short" or put-equivalent position with respect to or the entry into any similar transaction intended to reduce the risk of the undersigned's risk of ownership of or investment in, any of the following: (a) any shares of Parent Common Stock which the undersigned may acquire in connection with the Merger, or any securities which may be paid as a dividend or otherwise distributed thereon or with respect thereto or issued or delivered in exchange or substitution therefor (all such shares and other securities 43 being referred to herein, collectively, as "Restricted Securities"), or any option, right or other interest with respect to any Restricted Securities; (b) any Company Securities; or (c) any shares of Company Common Stock or other Company equity securities which the undersigned purchases or otherwise acquires after the execution of this Affiliate Agreement. 11. As promptly as practicable following the Merger, Parent shall publish results covering at least 30 days of combined operations of the Company and Parent in the form of a quarterly or annual earnings report, an effective registration statement filed with the Commission, a report to the Commission on Form 10-K, 10-Q or 8-K, or any other public filing or announcement which includes the combined results of operations; provided, however, that Parent shall be under no obligation to publish any such financial information other than with respect to a fiscal quarter of Parent. 12. The undersigned has no present plan or intention to engage in a sale, exchange, transfer, distribution, (including a distribution by a partnership to its partners or by a corporation to its stockholders), redemption or reduction in any way of the undersigned's risk of ownership by short sale or otherwise, or other disposition, directly or indirectly (such actions being collectively referred to herein as a "Sale") of any of the shares of Parent Common Stock to be received by the undersigned in the Merger. The undersigned is not aware of, or participating in, any plan on the part of the stockholders of the Company to engage in a Sale or Sales of the Parent Common Stock to be received in the Merger such that the aggregate fair market value, as of the Effective Date of the Merger, of the shares subject to such Sales would exceed 50% of the aggregate fair market value of all shares of outstanding Company Common Stock immediately prior to the Merger. Except to the extent written notification to the contrary is received by Parent from the undersigned prior to the Merger, the representations and warranties contained herein shall be true and correct at all times from the date hereof through the date on which the Merger occurs. 13. The undersigned intends to vote all Company Common Stock held by him in favor of the Merger. [REMAINDER OF PAGE LEFT INTENTIONALLY BLANK.] 44 14. The undersigned will not exercise dissenters' rights in connection with the Merger. NUMBER OF SHARES OF COMPANY COMMON STOCK BENEFICIALLY OWNED BY THE UNDERSIGNED: ------------------------ NUMBER OF SHARES OF COMPANY COMMON STOCK SUBJECT TO OPTIONS BENEFICIALLY OWNED BY THE UNDERSIGNED: ------------------------ Very truly yours, ------------------------------------ (print name of shareholder above) By: -------------------------------- Name: Title: (if applicable) Accepted this day of , 1995, by TERADYNE, INC. By: -------------------------------- Name: Title: 45 EXHIBIT B PERSONS COVERED BY EMPLOYMENT AGREEMENTS: John Halter Fred Azad Richard Carmichael Vicki Eckert Craig Foster Tim Moriarty Mark Siegel Paul Emery MATERIAL TERMS TO BE PROVIDED: -- Two year term -- Salary to be not less than amount in existence at time of execution of Agreement at least through August 31, 1997 -- Bonus for fiscal years 1996 and 1997 to be structured substantially in accordance with terms of bonus plan in effect at time of execution of Agreement to be approved by the Board of Directors of the Surviving Corporation -- Severance to be provided if terminated other than for cause; severance to be provided upon voluntary termination for good reason; base salary to be provided through August 31, 1997 (no bonus payments as part of severance package) -- Teradyne standard confidentiality, non-solicitation and non-compete agreements to be part of employment agreements 46 EXHIBIT 1.06(B) ADJUSTMENT TO CONVERSION RATIO The Exchange Ratio shall be adjusted by applying the following formula: 1 Exchange Ratio = --------------------------------------- (Final Parent Stock Price x .02) + .38
In no event will the Exchange Ratio be greater than .9091 or less than .8333. By way of example only, Attachment 1.06(b) illustrates the calculation of the Exchange Ratio as determined in accordance with various Final Parent Stock Prices. ATTACHMENT 1.06(B) EXCHANGE RATIO CALCULATOR
FINAL PARENT STOCK EXCHANGE PRICE RATIO NOTES ----- -------- --------------------------------------------- Less than or equal to $36 0.9091 - Exchange Ratio calculated as: 36 1/8 0.9070 36 1/4 0.9050 36 3/8 0.9029 1 36 1/2 0.9009 ------------------------------------- 36 5/8 0.8989 (Final Parent Stock Price X .02) +.38 36 3/4 0.8969 36 7/8 0.8949 37 0.8929 - Max Exchange Ratio = .9091 37 1/8 0.8909 37 1/4 0.8889 - Min Exchange Ratio = 0.8333 37 3/8 0.8869 37 1/2 0.8850 - Table is illustrative. Actual Final 37 5/8 0.8830 Parent Stock Price shall be rounded to four 37 3/4 0.8811 decimal places as shall the Exchange Ratio. 37 7/8 0.8791 38 0.8772 38 1/8 0.8753 38 1/4 0.8734 38 3/8 0.8715 38 1/2 0.8696 38 5/8 0.8677 38 3/4 0.8658 38 7/8 0.8639 39 0.8621 39 1/8 0.8602 39 1/4 0.8584 39 3/8 0.8565 39 1/2 0.8547 39 5/8 0.8529 39 3/4 0.8511 39 7/8 0.8493 40 0.8475 40 1/8 0.8457 40 1/4 0.8439 40 3/8 0.8421 40 1/2 0.8403 40 5/8 0.8386 40 3/4 0.8368 40 7/8 0.8351 Greater than or equal to 41 0.8333
EX-10.15 6 FORM OF EXECUTIVE OFFICER STOCK OPTION AGREEMENT 1 EXHIBIT 10.15 STOCK OPTION GRANT #:_________ GRANT DATE:_________ MEGATEST CORPORATION EXECUTIVE OFFICER STOCK OPTION AGREEMENT Megatest Corporation, a Delaware Corporation (the "Company"), has granted to: _______________________________ (the "Optionee"), an option (the "Option") to purchase a total of ________________(_______) shares of Common Stock (the "Shares"), at the price determined as provided herein, and in all respects subject to the terms, definitions and provisions of the 1990 Stock Option Plan (the "Plan") adopted by the Company, which is incorporated herein by reference. Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings herein. 1. Nature of the Option. This Option is intended to qualify as an Incentive Stock Option as defined in Section 422 of the Code. 2. Exercise Price. The exercise price is _______ for each share of Common Stock, which price is not less than the fair market value per share of the Common Stock on the date of grant. 3. Exercise of Option. This Option shall be exercisable during its term in accordance with the provisions of Section 9 of the Plan as follows: (i) Right to Exercise. (a) Subject to subsections 3(i)(b), (c) and (d) and Section 3(ii) below, this Option shall be exercisable according to the attached schedule of "INDIVIDUAL RECORD OF STOCK OPTIONS." (b) This Option may not be exercised for a fraction of a share. -1- 2 (c) In the event of the Optionee's death, disability or other termination of employment or consulting relationship, the exercisability of the Option is governed by Section 7, 8, and 9 below. (d) In no event may this Option be exercised after the date of expiration of the term of this Option as set forth in Section 11 below. (ii) Accelerated Vesting Upon Change of Control. (a) Notwithstanding any provision of the Plan or Section 3(i) or Section 7 of this Agreement to the contrary, if within 12 months following a Change of Control the Optionee is terminated other than for Just Cause, or the Optionee resigns voluntarily for Good Reason, this Option shall upon such termination or resignation become fully vested and exercisable as to all of the Shares, unless, in connection with such Change of Control, the Board determines, based upon its receipt of a written opinion of the Company's independent public accountants, that the provisions of this Section 3(ii) would preclude accounting for any proposed Business Combination of the Company as a "pooling of interests" and a condition to the closing of such Business Combination is that it be so accounted for as a pooling of interests, in which case this Section 3(ii) shall be of no force or effect. (b) For purposes of this Section 3(ii), the following definitions shall apply: (1) "Business Combination" means a consolidation or merger as a result of which the holders of the Company's voting stock prior thereto hold less than 50% of the voting stock of the surviving or successor corporation (including any parent corporation) or entity (the "Successor"), or a sale of all or substantially all of the Company's assets. (2) "Change of Control" of the Company means and includes any of the following occurrences: (A) A Business Combination which has been approved by the requisite vote of the Company's stockholders; or (B) Any "person" (as such term is used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) becomes the "beneficial owner" as defined in Rule 13(d)-3 of the general rules and regulations under said Act, directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the total voting power represented by the Company's then outstanding voting securities; or (C) A change in the composition of the Board of Directors of the Company over a two-year period, as a result of which fewer than a majority of -2- 3 the Directors are Incumbent Directors. "Incumbent Directors" shall mean Directors who either (i) are Directors of the Company as of the date hereof, or (ii) are elected, or nominated for election, to the Board of Directors of the Company with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but not including an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of Directors to the Company). For purposes hereof, the Board of Directors may, by resolution, clarify the date as of which a Change of Control shall be deemed to have occurred. (3) "Compensation" of the Optionee means and includes all wages, salary, bonus, and incentive compensation paid by the Company or the Successor as consideration for the Optionee's service that are includable in the gross income of the Optionee receiving the same for federal income tax purposes, but excluding income arising from the exercise of stock options. (4) "Just Cause" means the termination of employment of the Optionee shall have taken place as a result of (A) an act or acts of dishonesty undertaken by the Optionee and intended to result in substantial gain or personal enrichment of the Optionee at the expense of the Company or the Successor; (B) persistent failure by the Optionee to perform the duties and obligations of the Optionee's employment, which are demonstrably willful and deliberate on the Optionee's part and which are not remedied in a reasonable period of time after receipt of written notice from the Company or the Successor; or (C) the conviction of the Optionee of a felony or the entry by the Optionee of a plea of no contest. (5) "Good Reason" means and includes any of the following occurrences: (A) The Successor reduces the Optionee's Compensation as in effect immediately prior to the Change of Control, unless such reduction amounts to less than ten percent (10%) of such Compensation and is pursuant to a proportionate reduction of the Compensation of all executive officers of the Successor. (B) Without the Optionee's express written consent, the Successor requires the Optionee to change the location of the Optionee's job or office, so that the Optionee will be based at a location more than 35 miles from the location of the Optionee's job or office immediately prior to the Change of Control. (C) The cost of benefits provided by the Successor, under plans, arrangements, policies and procedures, taken as a whole, decreases by 25% or more of the cost provided by the Company immediately prior to the Change of Control, or the cost of such benefits to the Optionee increases by 25% or more of the Optionee's cost immediately prior -3- 4 to the Change of Control; provided, however, that if such decrease or increase results from the good faith exercise of business judgment by the Successor or in response to changes in federal or state law, and is applicable to all executive officers of the Successor, such decrease or increase shall not constitute a Good Reason for resignation. (D) Without the Optionee's express written consent, the Optionee incurs a significant reduction in the Optionee's responsibilities or duties. (E) The Successor fails or refuses to assume the Company's obligations hereunder. (iii) Method of Exercise. This Option shall be exercisable by written notice which shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised, and such other representations and agreements as to the holder's investment intent with respect to such shares of Common Stock as may be required by the Company pursuant to the provisions of the Plan. Such written notice shall be signed by the Optionee and shall be delivered in person or by certified mail to the Secretary of the Company. The written notice shall be accompanied by payment of the exercise price. This Option shall be deemed exercised upon receipt by the Company of such written notice accompanied by the exercise price. No shares will be issued pursuant to the exercise of an Option unless such issuance and such exercise shall comply with all relevant provisions of law and the requirements of any stock exchange upon which the shares may then be listed. Assuming such compliance, for income tax purposes the Shares shall be considered transferred to the Optionee on the date on which the Option is exercised with respect to such Shares." 4. Optionee's Representations. In the event the Shares purchasable pursuant to the exercise of this Option have not been registered under the Securities Act of 1933, as amended, at the time this Option is exercised, Optionee shall, concurrently with the exercise of all or any portion of this Option, deliver to the Company his Investment Representation Statement in the form attached hereto as Exhibit B, and shall read the applicable rules of the Commissioner of Corporations attached to such Investment Representation Statement. 5. Method of Payment. Payment of the exercise price shall be by: (i) cash; (ii) check; or -4- 5 (iii) surrender of other shares of Common Stock of the Company which (A) either have been owned by the Optionee for more than six (6) months on the date of surrender or were not acquired, directly or indirectly, from the Company and (B) have a fair market value on the date of surrender equal to the exercise price of the Shares as to which the Option is being exercised; or any combination thereof, at the election of the Board. 6. Restrictions on Exercise. This Option may not be exercised until such time as the Plan has been approved by the shareholders of the Company, or if the issuance of such Shares upon such exercise or the method of payment of consideration for such shares would constitute a violation of any applicable federal or state securities or other law or regulation, including any rule under Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G") as promulgated by the Federal Reserve Board. As a condition to the exercise of this Option, the Company may require Optionee to make any representation and warranty to the Company as may be required by any applicable law or regulation. 7. Termination of Status as an Employee. In the event of termination of Optionee's Continuous Status as an Employee, he may, but only within thirty days after the date of such termination (but in no event later than the date of expiration of the term of this Option as set forth in Section 11 below), exercise this Option to the extent that he was entitled to exercise it at the date of such termination. To the extent that he was not entitled to exercise this Option at the date of such termination, or if he does not exercise this Option within the time specified herein, the Option shall terminate. 8. Disability of Optionee. Notwithstanding the provisions of Section 7 above, in the event of termination of Optionee's Continuous Status as an Employee as a result of his total and permanent disability (as defined in Section 22(e)(3) of the Code), he may, but only within six months from the date of termination of employment (but in no event later than the date of expiration of the term of this Option as set forth in Section 11 below), exercise his Option to the extent he was entitled to exercise it at the date of such termination. To the extent that he was not entitled to exercise the Option at the date of termination, or if he does not exercise such Option (which he was entitled to exercise) within the time specified herein, the Option shall terminate. 9. Death of Optionee. In the event of the death of Optionee: (i) during the term of this Option and while an Employee of the Company and having been in Continuous Status as an Employee since the date of grant of the Option, the Option may be exercised, at any time within one year following the date of death (but in no event later than the date of expiration of the term of this Option as set forth in Section 11 below), by Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that would have accrued had the -5- 6 Optionee continued living and remained in Continuous Status as an Employee one year after the date of death; or (ii) within thirty days after the termination of Optionee's Continuous Status as an Employee, the Option may be exercised, at any time within one year following the date of death (but in no event later than the date of expiration of the term of this Option as set forth in Section 11 below), by Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that had accrued at the date of termination. 10. Non-Transferability of Option. This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by him. The terms of this Option shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee. 11. Term of Option. This Option may not be exercised more than ten (10) years (five years if Optionee owns, immediately before this Option is granted, stock representing more than 10 percent of the total combined voting power of all classes of stock of the Company or of any Parent or Subsidiary) from the date of grant of this Option, and may be exercised during such term only in accordance with the Plan and the terms of this Option. 12. Early Disposition of Stock. Optionee understands that if he disposes of any Shares received under this Option within two (2) years after the date of this Agreement or within one (1) year after such Shares were transferred to him, he will be treated for federal income tax purposes as having received ordinary income at the time of such disposition in an amount generally measured by the difference between the price paid for the Shares and the lower of the fair market value of the Shares at the date of the exercise or the fair market value of the Shares at the date of disposition. The amount of such ordinary income may be measured differently if Optionee is an officer, director or 10% shareholder of the Company, or if the Shares were subject to a substantial risk of forfeiture at the time they were transferred to Optionee. Optionee hereby agrees to notify the Company in writing within 30 days after the date of any such disposition. Optionee understands that if he disposes of such Shares at any time after the expiration of such two-year and one-year holding periods, any gain on such sale will be taxed as long-term capital gain. MEGATEST CORPORATION a Delaware Corporation By: Title: -6- 7 OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO SECTION 3 HEREOF IS EARNED ONLY BY CONTINUING EMPLOYMENT AT THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS AGREEMENT, NOR IN THE COMPANY'S STOCK OPTION PLAN WHICH IS INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH RESPECT TO CONTINUATION OF EMPLOYMENT BY THE COMPANY, NOR SHALL IT INTERFERE IN ANY WAY WITH HIS RIGHT OR THE COMPANY'S RIGHT TO TERMINATE HIS EMPLOYMENT AT ANY TIME, WITH OR WITHOUT CAUSE. Optionee acknowledges receipt of a copy of the Plan and certain information related thereto and represents that he is familiar with the terms and provisions thereof, and hereby accepts this Option subject to all of the terms and provisions thereof. Optionee has reviewed the Plan and this Option in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option and fully understands all provisions of the Option. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board upon any questions arising under the Plan. Optionee further agrees to notify the Company upon any change in the residence address indicated below. Dated: _________________ ______________________________ Optionee Residence Address: ______________________________ ______________________________ -7- EX-11.1 7 STATEMENT RE COMPUTATION OF PER SHARE EARNINGS 1 EXHIBIT 11.1 MEGATEST CORPORATION STATEMENT RE COMPUTATION OF PER SHARE EARNINGS (AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
YEAR ENDED AUGUST 31, ------------------------------------------- 1995 1994 1993 ---- ---- ---- Weighted average number of common shares outstanding . . . . . . 7,230 7,008 3,579 Common share equivalents: Convertible preferred stock, assuming conversion . . . . . . . -- -- 868 Dilutive effect of stock options . . . . . . . . . . . . . . . -- 196 305 --------- --------- --------- Total average common and common equivalent shares . . . . . . . . 7,230 7,204 4,752 ========= ========= ========= Income (loss) before cumulative effect of accounting change . . . $ (12,190) $ 9,099 $ 5,279 Cumulative effect of change in accounting for income taxes . . . -- 1,700 -- --------- --------- --------- Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . $ (12,190) $ 10,799 $ 5,279 ========= ========= ========= Income (loss) per common and common equivalent share before accounting change . . . . . . . . . . . . . . . $ (1.69) $ 1.26 $ 1.11 Cumulative effect of change in accounting for income taxes per common and common equivalent share . . . . . . . . -- 0.24 -- --------- --------- --------- Net income (loss) per common and common equivalent share . . . $ (1.69) $ 1.50 $ 1.11 ========= ========= =========
EX-21.1 8 SUBSIDIARIES OF THE COMPANY 1 EXHIBIT 21.1 SUBSIDIARIES OF THE COMPANY
Jurisdiction Company of Organization ----------- ------------------- Megatest S.A.R.L. . . . . . . . . . . . . . . . . . . . . France Megatest H.K. Ltd. . . . . . . . . . . . . . . . . . . . . Hong Kong Megatest International . . . . . . . . . . . . . . . . . . California Megatest International Sales . . . . . . . . . . . . . . Barbados Megatest Asia Pte. Ltd. . . . . . . . . . . . . . . . . . Singapore
EX-23.1 9 CONSENT OF INDEPENDENT ACCOUNTANTS 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 33-39912 and 33-58809) of Megatest Corporation of our report dated September 20, 1995 appearing on page 19 of this Annual Report on Form 10-K. PRICE WATERHOUSE LLP San Jose, California October 23, 1995 EX-23.2 10 INDEPENDENT AUDITOR'S CONSENT 1 EXHIBIT 23.2 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 33-39912 and 33-58809 of Megatest Corporation on Form S-8 of our report dated September 21, 1993, appearing on page 20 of this Annual Report on Form 10-K of Megatest Corporation for the year ended August 31, 1995. DELOITTE & TOUCHE LLP San Jose, California October 23, 1995 EX-27 11 FINANCIAL DATA SCHEDULE
5 1,000 YEAR AUG-31-1995 SEP-01-1994 AUG-31-1995 11,609 0 31,386 (261) 38,116 86,581 28,882 (10,823) 118,858 41,722 11,728 0 0 7 65,401 118,858 97,459 97,459 59,537 59,537 50,359 (1) (167) (12,604) (414) (12,190) 0 0 0 (12,190) (1.69) (1.69) PP&E is shown net of accumulated depreciation.
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