UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

x                                QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2006

OR

o                                   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to                     

Commission File No. 000-51072

CASCADE MICROTECH, INC.
(Exact name of registrant as specified in its charter)

Oregon

 

93-0856709

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

 

2430 N.W. 206th Avenue

 

 

Beaverton, Oregon

 

97006

(Address of principal executive offices)

 

(Zip Code)

 

 

 

 

Registrant’s telephone number, including area code:  (503) 601-1000

 

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  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. Large accelerated filer  o    Accelerated filer  x    Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o   No  x

The number of shares of common stock outstanding as of November 6, 2006 was 11,665,229.

 

 




CASCADE MICROTECH, INC.
INDEX TO FORM 10-Q

PART I - FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements

 

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets (unaudited) — September 30, 2006 and December 31, 2005

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations (unaudited) - Three and Nine Months Ended September 30, 2006 and 2005

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows (unaudited) - Nine Months Ended September 30, 2006 and 2005

 

 

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

 

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

 

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

 

 

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

 

 

 

Item 1A.

 

Risk Factors

 

 

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

 

 

 

 

 

 

Item 5.

 

Other Information

 

 

 

 

 

 

 

Item 6.

 

Exhibits

 

 

 

 

 

 

 

Signatures

 

 

 

 

 

 

 

 

 

 

1




PART I - FINANCIAL INFORMATION

ITEM 1. Financial Statements

Cascade Microtech, Inc.
Condensed Consolidated Balance Sheets
(Unaudited, in thousands)

 

 

September 30,

 

December 31,

 

 

 

2006

 

2005

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

2,806

 

$

2,224

 

Short-term marketable securities

 

44,179

 

48,122

 

Accounts receivable, net of allowances of $118 and $97

 

18,729

 

16,182

 

Inventories, net

 

13,940

 

10,889

 

Prepaid expenses and other

 

1,901

 

3,000

 

Deferred income taxes

 

1,832

 

1,699

 

Total Current Assets

 

83,387

 

82,116

 

 

 

 

 

 

 

Long-term marketable securities

 

7,933

 

1,549

 

Fixed assets, net of accumulated depreciation of $13,151 and $12,093

 

6,351

 

4,422

 

Deferred income taxes

 

343

 

336

 

Other assets, net

 

2,062

 

1,697

 

Total Assets

 

$

100,076

 

$

90,120

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Current portion of capital leases

 

$

1

 

$

8

 

Accounts payable

 

5,696

 

3,904

 

Deferred revenue

 

558

 

516

 

Accrued liabilities

 

5,047

 

3,087

 

Total Current Liabilities

 

11,302

 

7,515

 

 

 

 

 

 

 

Deferred revenue

 

265

 

255

 

Other long-term liabilities

 

934

 

845

 

Total Liabilities

 

12,501

 

8,615

 

 

 

 

 

 

 

Shareholders’ Equity:

 

 

 

 

 

Common stock, $0.01 par value. Authorized 100,000 shares; issued and outstanding: 11,576 and 11,328

 

116

 

113

 

Additional paid-in capital

 

61,445

 

58,287

 

Deferred stock-based compensation

 

 

(142

)

Accumulated other comprehensive loss - unrealized holding gains (losses) on investments

 

7

 

(76

)

Retained earnings

 

26,007

 

23,323

 

Total Shareholders’ Equity

 

87,575

 

81,505

 

Total Liabilities and Shareholders’ Equity

 

$

100,076

 

$

90,120

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

2




Cascade Microtech, Inc.
Condensed Consolidated Statements of Operations
(Unaudited, in thousands, except per share amounts)

 

 

For the Three Months Ended
September 30,

 

For the Nine Months Ended
September 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

Revenue

 

$

22,950

 

$

18,987

 

$

62,247

 

$

55,959

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

12,929

 

10,110

 

34,688

 

29,251

 

Stock-based compensation

 

107

 

11

 

332

 

33

 

Gross profit

 

9,914

 

8,866

 

27,227

 

26,675

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development (includes $77, $6, $230 and $14, respectively, of stock-based compensation)

 

2,231

 

1,758

 

6,379

 

5,070

 

Selling, general and administrative (includes $332, $24, $854 and $60, respectively, of stock-based compensation)

 

6,222

 

4,939

 

18,039

 

14,735

 

 

 

8,453

 

6,697

 

24,418

 

19,805

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

1,461

 

2,169

 

2,809

 

6,870

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest income

 

428

 

276

 

1,195

 

746

 

Interest expense

 

 

 

 

(16

)

Other, net

 

272

 

(18

)

319

 

772

 

 

 

700

 

258

 

1,514

 

1,502

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

2,161

 

2,427

 

4,323

 

8,372

 

Provision for income taxes

 

929

 

279

 

1,639

 

1,498

 

Net income

 

$

1,232

 

$

2,148

 

$

2,684

 

$

6,874

 

 

 

 

 

 

 

 

 

 

 

Basic net income per share

 

$

0.11

 

$

0.19

 

$

0.24

 

$

0.63

 

 

 

 

 

 

 

 

 

 

 

Diluted net income per share

 

$

0.10

 

$

0.18

 

$

0.23

 

$

0.58

 

 

 

 

 

 

 

 

 

 

 

Shares used in per share calculations:

 

 

 

 

 

 

 

 

 

Basic

 

11,475

 

11,154

 

11,420

 

10,979

 

Diluted

 

11,930

 

11,933

 

11,845

 

11,783

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

3




 

Cascade Microtech, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited, in thousands)

 

 

For the Nine Months Ended September 30,

 

 

 

2006

 

2005

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

2,684

 

$

6,874

 

Adjustments to reconcile net income to net cash flows provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

1,404

 

1,438

 

Stock-based compensation

 

1,416

 

107

 

(Gain) loss on disposal of fixed assets

 

(6

)

47

 

Deferred income taxes

 

(140

)

(275

)

Excess tax benefits related to stock option exercises

 

(407

)

683

 

(Increase) decrease in:

 

 

 

 

 

Accounts receivable, net

 

(2,547

)

(3,375

)

Inventories, net

 

(3,051

)

(291

)

Prepaid expenses and other

 

1,099

 

(1,228

)

Increase (decrease) in:

 

 

 

 

 

Accounts payable

 

1,792

 

562

 

Deferred revenue

 

52

 

(50

)

Accrued and other long-term liabilities

 

2,456

 

125

 

Net cash provided by operating activities

 

4,752

 

4,617

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchase of marketable securities

 

(41,060

)

(31,184

)

Proceeds from sale of marketable securities

 

38,702

 

26,842

 

Purchase of fixed assets

 

(3,065

)

(1,216

)

Proceeds from disposal of fixed assets

 

7

 

 

Investment in patents and other assets

 

(634

)

(402

)

Net cash used in investing activities

 

(6,050

)

(5,960

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Principal payments on capital lease obligations

 

(7

)

(25

)

Excess tax benefits related to stock option exercises

 

407

 

 

Additional offering costs

 

 

(99

)

Proceeds from issuances of common stock

 

1,480

 

1,702

 

Net cash provided by financing activities

 

1,880

 

1,578

 

 

 

 

 

 

 

Increase in cash and cash equivalents

 

582

 

235

 

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

Beginning of period

 

2,224

 

2,033

 

End of period

 

$

2,806

 

$

2,268

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid for interest

 

$

 

$

2

 

Cash paid for income taxes, net

 

80

 

2,127

 

 

 

 

 

 

 

Non-cash financing activities:

 

 

 

 

 

Reversal of stock-based compensation

 

$

 

$

33

 

 Unrealized gain (loss) on investment activities

 

83

 

(33

)

 

See accompanying Notes to Condensed Consolidated Financial Statements.

4




 

CASCADE MICROTECH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1.  Basis of Presentation

The condensed consolidated financial information included herein has been prepared by Cascade Microtech, Inc. without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). However, such information reflects all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. The financial information as of December 31, 2005 is derived from our 2005 Annual Report on Form 10-K. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our 2005 Annual Report on Form 10-K. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year.

Note 2.  Inventories

Inventories are stated at the lower of standard cost, which approximates cost computed on a first-in, first-out basis, or market, and include materials, labor and manufacturing overhead. Demonstration goods, which are included as a component of finished goods, represent inventory that is used for customer demonstration purposes. This inventory is typically sold after 12 to 18 months. We analyze the carrying value of our inventory quarterly, considering a combination of factors including, but not limited to, the following: forecasted sales or usage, historical usage rates, estimated service period, product end-of-life dates, estimated current and future market values, service inventory requirements and new product introductions. We estimate market value based on factors including, but not limited to, replacement cost and estimated resale value.

Inventories consisted of the following (in thousands):

 

 

September 30,

 

December 31,

 

 

 

2006

 

2005

 

Raw materials

 

$

5,788

 

$

4,747

 

Work-in-process

 

2,168

 

1,138

 

Finished goods

 

5,984

 

5,004

 

 

 

$

13,940

 

$

10,889

 

 

Note 3.  Stock-Based Compensation 

Adoption of SFAS No. 123R

Effective January 1, 2006, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share-Based Payment.” We elected to use the modified prospective transition method as provided by SFAS No. 123R and, accordingly, financial statement amounts for the prior periods presented in this Form 10-Q have not been restated to reflect the fair value method of expensing stock-based compensation. Under this method, the provisions of SFAS No. 123R apply to all awards granted or modified after the date of adoption. Our deferred compensation balance of $142,000 as of December 31, 2005, which was accounted for under Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” was reclassified into additional paid in capital upon the adoption of SFAS No. 123R. In addition, the unrecognized expense of awards not yet vested at the date of adoption is recognized in the net income in the periods after the date of adoption using the Black-Scholes valuation method over the remainder of the requisite service period. The cumulative effect of the change in accounting principle from APB 25 to SFAS No. 123R was not material.

 

5




Prior to January 1, 2006, we accounted for stock options using the intrinsic value method as prescribed by APB 25. We provided disclosures of net income and earnings per share as if the method prescribed by SFAS No. 123, “Accounting for Stock-Based Compensation,” had been applied in measuring compensation expense as follows (in thousands, except per share amounts):

 

 

Three Months
Ended
September 30,
2005

 

Nine Months
Ended
September 30,
2005

 

Net income, as reported

 

$

2,148

 

$

6,874

 

Add—stock-based compensation included in reported net income , net of tax

 

34

 

87

 

Fair value of stock-based employee compensation, net of tax

 

(306

)

(982

)

Net income, as adjusted

 

$

1,876

 

$

5,979

 

Basic net income per share:

 

 

 

 

 

As reported

 

$

0.19

 

$

0.63

 

As adjusted

 

$

0.17

 

$

0.54

 

Diluted net income per share:

 

 

 

 

 

As reported

 

$

0.18

 

$

0.58

 

As adjusted

 

$

0.16

 

$

0.51

 

 

To determine stock-based compensation included in reported net income, net of tax, we used a tax rate approximating our effective tax rate of 11.5% and 17.9%, respectively, for the three and nine-month periods ended September 30, 2005.

Certain information regarding our stock-based compensation was as follows (in thousands, except per share amounts):

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

Weighted average grant-date fair value of share options granted

 

$

253

 

$

223

 

$

1,056

 

$

478

 

Total intrinsic value of share options exercised

 

893

 

1,386

 

1,233

 

3,179

 

Stock-based compensation recognized in results of operations

 

516

 

41

 

1,416

 

107

 

Cash received from options exercised and shares purchased under all share-based arrangements

 

841

 

968

 

1,480

 

1,702

 

Tax benefit realized related to stock options exercised

 

308

 

440

 

407

 

683

 

 

No stock-based compensation was capitalized as a part of an asset during the three or nine-month periods ended September 30, 2006 or 2005.

Our stock-based compensation was included in our statements of operations as follows (in thousands):

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

Cost of sales

 

$

107

 

$

11

 

$

332

 

$

33

 

Research and development

 

77

 

6

 

230

 

14

 

Selling, general and administrative

 

332

 

24

 

854

 

60

 

 

 

$

516

 

$

41

 

$

1,416

 

$

107

 

 

6




To determine the fair value of stock-based awards granted, we used the Black-Scholes option pricing model and the following weighted average assumptions:

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

Stock Option Plan

 

 

 

 

 

 

 

 

 

Risk-free interest rate

 

4.67%

 

4.01%

 

4.67% - 5.07%

 

3.77% - 4.17%

 

Expected dividend yield

 

0.0%

 

0.0%

 

0.0%

 

0.0%

 

Expected term

 

4 years to 6.5 years

 

6 years

 

4 years - 6.5 years

 

6 years

 

Expected volatility

 

44.8% - 59.4%

 

68.4%

 

44.8% - 61.4%

 

67.4% - 68.9%

 

 

 

 

 

 

 

 

 

 

 

Employee Stock Purchase Plan

 

 

 

 

 

 

 

 

 

Risk-free interest rate

 

4.77% - 5.08%

 

3.79%

 

4.73% - 5.08%

 

2.85% - 3.79%

 

Expected dividend yield

 

0.0%

 

0.0%

 

0.0%

 

0.0%

 

Expected term

 

6 months - 2 years

 

6 months

 

6 months - 2 years

 

6 months

 

Expected volatility

 

24.8% - 39.9%

 

43.7%

 

24.8% to 45.7%

 

43.7% - 56.0%

 

 

The risk-free rate used is based on the U.S. Treasury yield over the estimated term of the options granted. Our option pricing model utilizes the simplified method accepted under Staff Accounting Bulletin No. 107 to estimate the expected term. The expected volatility for options granted pursuant to our stock incentive plans is calculated based on a weighted average actual volatility of a peer group of companies over the prior 6.5 year period. The expected volatility for our employee stock purchase plan is calculated based on our historical volatility and consideration of peer group data. We have not paid dividends in the past and we do not expect to pay dividends in the future and, therefore, the expected dividend rate is 0%.

We amortize stock-based compensation on a straight-line basis over the vesting period of the individual award, which is the requisite service period, with estimated forfeitures considered. Shares to be issued upon the exercise of stock options will come from newly issued shares.

The following table presents the impact of our adoption of SFAS No. 123R on selected line items from the condensed consolidated financial statements for the three and nine-month periods ended September 30, 2006 (in thousands, except per share amounts):

 

 

Three Months Ended
September 30, 2006

 

Nine Months Ended
September 30, 2006

 

 

 

As reported
following
SFAS No.
123R

 

If reported
following
APB 25

 

As reported
following
SFAS No.
123R

 

If reported
following
APB 25

 

Income before income taxes

 

$

2,161

 

$

2,654

 

$

4,323

 

$

5,672

 

Net income

 

1,232

 

1,725

 

2,684

 

4,033

 

Cash flow from operating activities

 

1,404

 

1,712

 

4,752

 

5,159

 

Cash flow from financing activities

 

1,146

 

838

 

1,880

 

1,473

 

Basic earnings per share

 

0.11

 

0.15

 

0.24

 

0.35

 

Diluted earnings per share

 

0.10

 

0.14

 

0.23

 

0.34

 

 

Stock Incentive Plans

Our stock incentive plans include our 1993 Stock Incentive Plan (the “1993 Plan”) and our 2000 Stock Incentive Plan (the “2000 Plan”) (together, the “Plans”) and provide for the granting to employees of either incentive stock options or nonqualified stock options. Incentive stock options must be granted at an exercise price not less than 100% of the fair market value per share at the grant date. Nonqualified stock options granted or shares sold under the Plans cannot be granted or sold at a price less than 85% of the fair market value per share at the date of grant or sale. The contractual term of options granted under the Plans is 10 years, and the right to exercise options granted generally vests as to 20% at the end of the first year and then as to 1.67% per month thereafter with full vesting occurring on the fifth anniversary. The 1993 Plan expired during 2003 and any remaining unissued options were canceled. The 2000 Plan expires October 15, 2010. In addition, options currently outstanding under the 1993 Plan will not be available for reissuance upon cancellation. We have authorized a total of 2.4 million shares of common stock for issuance under the 2000 Plan.

7




At September 30, 2006, 872,103 shares were available for future grants, and we had 2,551,153 shares of our common stock reserved for future issuance under the Plans. Stock option activity for the nine-month period ended September 30, 2006 was as follows:

 

Options
Outstanding

 

Weighted
Average
Exercise Price

 

Outstanding at December 31, 2005

 

1,721,438

 

$

8.37

 

Granted

 

137,200

 

12.70

 

Exercised

 

(156,785

)

4.08

 

Forfeited

 

(22,803

)

11.85

 

Outstanding at September 30, 2006

 

1,679,050

 

9.07

 

 

Certain information regarding options outstanding as of September 30, 2006 was as follows:

 

Options
Outstanding

 

Options 
Exercisable

 

Number

 

1,679,050

 

1,037,781

 

Weighted average exercise price

 

$

9.07

 

$

7.72

 

Aggregate intrinsic value

 

$

6.5 million

 

$

5.2 million

 

Weighted average remaining contractual term

 

6.1 years

 

4.8 years

 

 

The aggregate intrinsic value in the table above is based on our closing stock price of $12.45 on September 30, 2006, which would have been received by the optionees had all of the options with exercise prices less than $12.45 been exercised on that date. As of September 30, 2006, total unrecognized stock-based compensation related to outstanding, but unvested options was $4.6 million, which will be recognized over the weighted average remaining vesting period of 1.6 years.

Employee Stock Purchase Plan

In February 2004, our board of directors approved the 2004 Employee Share Purchase Plan (the “2004 ESPP”) and the reservation of 400,000 shares of our common stock thereunder. The 2004 ESPP consists of two-year offering periods with four consecutive, overlapping six-month purchase periods commencing on the first trading day on or after February 1 and August 1 each year (the “Enrollment Date”). Any eligible employee may participate in the 2004 ESPP by completing a subscription agreement which allows participants to purchase up to 5,000 shares per six-month purchase period, at a purchase price of 85% of the fair market value of a share of common stock on the Enrollment Date or on the exercise date, whichever is lower. The exercise date is the last trading day of each offering period.  If the purchase price is lower on the exercise date than on the Enrollment Date, the two-year offering period will terminate and a new two-year offering period will begin. Participating employees are automatically enrolled in the new offering period. During the nine-month period ended September 30, 2006, we issued 90,836 shares pursuant to the 2004 ESPP at a weighted average price of $9.25 per share, which represented a weighted average discount of $3.50 per share from the fair market value on the dates of purchase, and 277,900 shares remained available for purchase as of September 30, 2006.

Note 4.  Amendment to 2000 Stock Incentive Plan

At our annual meeting of shareholders, which was held on May 19, 2006, our shareholders approved an increase in the number of shares reserved for issuance under the Cascade Microtech, Inc. 2000 Stock Incentive Plan to 2.4 million shares from 1.8 million shares.

8




Note 5.  Earnings Per Share

We compute net income per share in accordance with SFAS No. 128, “Earnings Per Share.” Under the provisions of SFAS No. 128, basic net income per share is computed by dividing the net income attributed to common shareholders for the period by the weighted average number of shares of common stock outstanding during the period. Diluted net income per share incorporates the incremental shares issuable upon the assumed exercise of stock options and warrants using the treasury stock method.

The following table reconciles the shares used in calculating basic earnings per share to the shares used in calculating diluted earnings per share (in thousands):

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

Shares used to calculate basic earnings per share

 

11,475

 

11,154

 

11,420

 

10,979

 

Dilutive effect of outstanding stock options

 

455

 

779

 

425

 

804

 

Shares used to calculate diluted earnings per share

 

11,930

 

11,933

 

11,845

 

11,783

 

 

 

 

 

 

 

 

 

 

 

Shares issuable pursuant to stock options not considered as they would have been antidilutive

 

723

 

 

812

 

272

 

 

Note 6.  Comprehensive Income

Comprehensive income includes unrealized holding gains and losses on our available-for-sale marketable securities, which are included as a separate component of shareholders’ equity until realized. Unrealized holding gains (losses) were as follows (in thousands):

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

Unrealized holding gains (losses)

 

$

66

 

$

(2

)

$

83

 

$

(33

)

 

Total unrealized holding gains (losses) were $7,000 and $(76,000), respectively, at September 30, 2006 and December 31, 2005.

Note 7.  Product Warranty

We estimate a liability for costs to repair or replace products under warranties for a period of approximately six months and technical support costs when the related product revenue is recognized. The products are sold without a right of return or price protection rights. The liability for product warranties is calculated as a percentage of sales. The percentage is based on historical actual product repair costs. The liability for product warranties is included in accrued liabilities on our consolidated balance sheet.

Product warranty activity was as follows (in thousands):

 

Nine Months Ended
September 30,

 

 

 

2006

 

2005

 

Warranty accrual, beginning of period

 

$

488

 

$

365

 

Reductions for warranty charges

 

(348

)

(407

)

Additions to warranty reserve

 

463

 

437

 

Warranty accrual, end of period

 

$

603

 

$

395

 

 

9




Note 8. Other Assets

Included in other long-term assets on our balance sheet are patents. The gross amount of patents and the related accumulated amortization were as follows (in thousands):

 

September 30,
2006

 

December 31,
2005

 

Patents

 

$

4,524

 

$

3,945

 

Accumulated amortization

 

(2,774

)

(2,527

)

 

 

$

1,750

 

$

1,418

 

 

Amortization expense totaled $70,000 and $247,000, respectively, in the three and nine-month periods ended September 30, 2006 and $61,000 and $180,000, respectively, in the three and nine-month periods ended September 30, 2005.

Note 9. Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

 

September 30,
2006

 

December 31,
2005

 

Accrued compensation and benefits

 

$

2,201

 

$

1,775

 

Income taxes payable

 

1,292

 

2

 

Accrued warranty

 

603

 

488

 

Other

 

951

 

822

 

 

 

$

5,047

 

$

3,087

 

 

Note 10. Segment Reporting

The segment data below is presented in the same manner that management organizes the segments for assessing certain performance trends. Our Chief Operating Decision Maker monitors the revenue streams of the engineering products division (“EPD”) and the pyramid products division (“PPD”).

The following table summarizes revenue for each of our business segments. We do not track our assets on a segment level, and, accordingly, that information is not provided (in thousands):

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

External revenue from EPD

 

$

18,116

 

$

16,445

 

$

50,373

 

$

49,158

 

External revenue from PPD

 

4,834

 

2,542

 

11,874

 

6,801

 

 

 

$

22,950

 

$

18,987

 

$

62,247

 

$

55,959

 

 

One customer accounted for 10% of our total revenue in the nine-month period ended September 30, 2006.  Except as stated for the nine-month period ended September 30, 2006, no customer accounted for 10% or more of our total revenue in the three -month periods ended September 30, 2006 or 2005 and the nine-month period ended September 30, 2005.

Note 11. Related Party Transaction

During the third quarter of 2006, we purchased certain equipment for $219,000 from FEI Company.  One of the members of our Board of Directors, Mr. Raymond A. Link, is the Executive Vice President and Chief Financial Officer of FEI Company.

Note 12. New Accounting Pronouncements

SFAS No. 157

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which establishes a single authoritative definition of fair value, sets out a framework for measuring fair value and requires additional disclosures about fair-value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007.  We are in the process of analyzing the impact of applying SFAS No. 157 on our financial

10




position and results of operations.

Staff Accounting Bulletin No. 108

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” which addresses how the effects of prior-year uncorrected misstatements should be considered when quantifying misstatements in current-year financial statements. SAB No. 108 requires companies to quantify misstatements using both the balance sheet and income statement approaches and to evaluate whether either approach results in quantifying an error that is material in light of relevant quantitative and qualitative factors. SAB No. 108 is effective for annual financial statements covering the first fiscal year ending after November 15, 2006. We believe that the implementation of SAB No. 108 will not have a material effect on our financial position or results of operations.

FASB Staff Position No. AUG AIR-1

In September 2006, the FASB issued Staff Position No. AUG AIR-1, “Accounting for Planned Major Maintenance Activities,” which prohibits accruing for the future cost of periodic major overhauls and planned maintenance of plant and equipment in annual and interim periods. This Staff Position is effective for fiscal years beginning after December 15, 2006 and must be retrospectively applied. We do not accrue for such costs in annual or interim periods and, accordingly, the adoption of this Staff Position is not expected to have any effect on our financial position or results of operations.

FASB Interpretation No. 48

In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” which defines the threshold for recognizing the benefits of tax return positions in the financial statements as “more-likely-than-not” to be sustained by the taxing authority. Interpretation No. 48 applies to all tax positions accounted for under SFAS No. 109, “Accounting for Income Taxes.” Interpretation No. 48 is effective as of the beginning of the first fiscal year beginning after December 15, 2006. Upon adoption, we will adjust our financial statements to reflect only those tax positions that are more-likely-than-not to be sustained as of the adoption date. Any adjustment will be recorded directly to our beginning retained earnings balance in the period of adoption and reported as a change in accounting principle. We are currently analyzing the effects of adopting Interpretation No. 48.

Note 13. Reclassifications

Certain reclassifications have been made to the prior period financial statements to conform with the current period presentation, and include the reclassification of stock-based compensation to research and development expense and selling, general and administrative expense.

Note 14. Subsequent Event

In October 2006, we acquired the assets, technology and manufacturing process for the eVue product line, a digital microscope. The purchase price for these assets was less than 5% of our total assets as of the purchase date.  We are using an independent valuation specialist to allocate the purchase price to the acquired assets and this valuation has not yet been completed.

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements and Risk Factors

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  All statements other than statements of historical fact made in this Quarterly Report on Form 10-Q are forward-looking, including, but not limited to, statements regarding industry prospects; future results of operations or financial position; our expectations and beliefs regarding future revenue growth; the future capabilities and functionality of our products and services, our strategies and intentions regarding acquisitions; the outcome of any litigation to which we are a party; our accounting and tax policies; our future strategies regarding investments, product offerings, research and development, market share, and strategic relationships and collaboration; our dividend policies; and our future capital requirements. These statements relate to future events or our future financial performance.  In some cases, you can identify

11




forward-looking statements by terminology, including “intend,” “could,” “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate” “predict,” “potential,” “future,” or “continue,” the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially from those expressed or implied in such forward-looking statements. In evaluating these statements, you should specifically consider various factors, including the risks included in Item 1A to our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 16, 2006. These risk factors have not significantly changed since they were filed with our Form 10-K and included the following:

·                   Our operating results have fluctuated in the past and are likely to fluctuate in the future, which could cause us to miss analyst expectations about these results and cause the trading price of our common stock to decline.

·                   The cyclicality of the semiconductor industry affects our financial results, and, as a result, we may experience reduced sales or operating losses in a semiconductor industry downturn.

·                   As is the case with other companies in our industry, many of our customers defer purchasing decisions until late each quarter. As a result, we are significantly dependent upon the sale of our products in the third month of each quarter, and, if we do not generate enough revenue in the third month of each quarter to meet the earnings expectations of analysts or investors, the price of our common stock could decline.

·                   Because we generally do not have a sufficient backlog of unfilled orders to meet our quarterly revenue targets, revenue in any quarter is substantially dependent upon customer orders received and fulfilled in that quarter.

·                   We continue to devote significant effort and resources to the growth and development of our Pyramid Probe products, which has had, and could continue to have, an adverse effect on our operating margins.

·                   If we do not keep pace with technological developments in the semiconductor industry, especially the trend toward faster, smaller and lower cost chips, our revenue and operating results could suffer as potential customers decide to adopt our competitors’ products.

·                   There is no assurance that products recently introduced for micro-fluidics research for the life sciences industry will generate revenues and profits.

·                   Intense competition in the semiconductor wafer probing business may reduce demand for our products and reduce our sales.

·                   We obtain some of the materials, components and subassemblies used in our products from a single source or a limited group of suppliers. If these suppliers are unable to provide us with these materials, components or subassemblies in adequate quantities and on a timely basis, we may be unable to manufacture our products or meet our customers’ needs.

·                   We depend upon the sale of our engineering probe stations for a significant portion of our revenue, and a decline in demand for our engineering probe stations would have a more significant impact on our revenue than a downturn in demand for our analytical probes or production probe cards.

·                   We have recently purchased a product line and may make future acquisitions, which may be costly, difficult to integrate with our operations, divert management resources and dilute shareholder value.  In October 2006, we purchased the assets, technology and manufacturing process for the eVue product line, a digital microscope normally sold with our probe stations.  The purchase price was less than 5% of our total assets.

·                   We face economic, political and other risks associated with our international sales and operations, which could materially harm our operating results. During the first quarter of 2006, we began the process of establishing direct sales office in China and Taiwan. This increased our operating expenses in the first three quarters of 2006 and will increase our operating expenses going forward.  There can be no assurance that the establishment of these offices will result in an increase in sales or a reduction in selling costs as a percentage of sales in these countries in the future.

·                   We rely on independent manufacturers’ representatives and distributors for a significant portion of our revenue, and a disruption in our relationship with our manufacturers’ representatives or distributors would have a material adverse effect on our revenue.

·                   If semiconductor manufacturers do not convert to 300mm wafers, or do not convert at the rate we anticipate, our growth and profitability could be harmed.

12




·                   Failure to retain key managerial, technical, and sales and marketing personnel or to attract new key personnel could harm our business.

·                   Our customers’ evaluation processes can lead to lengthy sales cycles, during which we may incur significant costs that may not result in sales.

·                   If our products contain defects, our reputation would be damaged, and we could lose customers and revenue and incur warranty expenses.

·                   If we fail to protect our proprietary technology and rights, competitors may be able to use our technologies, which would weaken our competitive position and could reduce our sales.

·                   Intellectual property infringement claims by or against us may result in litigation, the cost of which could be substantial and could prevent us from selling our products. During the first quarter of 2006, we began legal proceedings against two separate parties to protect against the infringement of our patents. These proceedings increased our legal expenses during the first nine-months of 2006. In October 2006 we settled one of these cases in our favor for minimal monetary compensation.  In the future, any such litigation, whether or not determined in our favor or settled, might be costly, could harm our reputation and could divert the efforts and attention of management and technical personnel from our normal business operations.

·                   Our growth could strain our personnel and infrastructure resources, and, if we are unable to implement appropriate controls and procedures to manage our growth, we may not be able to successfully implement our business plan.

·                   Our success depends on our continued investment in research and development, the level and effectiveness of which could reduce our profitability.

·                   We manufacture nearly all of our products at our Oregon facilities, and any disruption in the operations of these facilities could harm our business.

·                   A disruption in our strategic relationship with Agilent Technologies could have a negative effect on our ability to market our products and could result in a decline in the price of our common stock. As our business has grown, this strategic relationship has become less significant and the impact of any disruption in this relationship is now considered minimal.

·                   We may fail to comply with environmental regulations, which could result in significant costs and harm our business.

·                   Product liability claims may be asserted against us, resulting in costly litigation for which we may not have sufficient liability insurance.

·                   We rely on a small number of customers for a significant portion of our revenue, and the termination of any of these relationships would adversely affect our business.

·                   Our employment costs in the short-term are, to a large extent, fixed, and therefore, any shortfall in sales would harm our operating results.

·                   The additional costs that we incur as a result of being a public company will affect our operating results.

·                   Unanticipated changes in our tax rates or exposure to additional income tax liabilities could affect our profitability.

·                   Our officers and directors and their affiliates will control the outcome of matters requiring shareholder approval.

·                   The anti-takeover provisions of our charter documents and Oregon law may inhibit a takeover or change in our control that shareholders may consider beneficial.

·                   If our stock price is volatile, securities class action litigation may be brought against us, which could result in substantial costs.

Overview

We design, develop and manufacture advanced wafer probing solutions for the electrical measurement of high performance chips. We design, manufacture and assemble our products in Beaverton, Oregon, with global sales, service and support centers in North America, Europe, Japan, Singapore, Taiwan and China. We were incorporated and introduced our first commercial products in 1984.

Our products include engineering probe stations, analytical probes, production probe cards, application software and services. Engineering probe stations address the need for precise and accurate measurement of semiconductor electrical characteristics during chip design or when optimizing the chip fabrication process.

13




Our engineering probe stations are highly configurable and are typically sold with various accessories, including our analytical probes and application software, as well as accessories from third parties. In addition, we design and build custom engineering probe stations to address the specific requirements of our customers. Analytical probes are sold to serve as components of our engineering probe stations, or less often, to serve as components of test equipment manufactured by third parties and in production test. Our production probe cards are designed and sold for production test applications, ranging from very low current parametric testing to sophisticated, high speed radio frequency testing. We refer to analytical probes and production probe cards as consumables, as they are routinely replaced during the testing process. We also generate revenue through the sale of service contracts to our customers.

Our engineering probe stations, analytical probes, probing accessories and application software are sold through our Engineering Products Division (“EPD”). Our production probe cards are sold through our Pyramid Probe Division (“PPD”). To date, we have derived the majority of our revenue from the sale of our engineering probe stations, and we expect to continue to do so for the next few years.  Our production probe card revenue, however, increased as a percentage of total revenues in 2005 and in the first three quarters of 2006 and we expect that trend to continue in the remainder of 2006 and beyond.

Our engineering products business and operating results depend in significant part on the level of capital expenditures related to semiconductor research and development, which, in turn, depends upon current and anticipated market demand for chips. Historically, the semiconductor industry has been highly cyclical with recurring periods of over-supply, which has often resulted in a reduction in demand for our products. While our financial results are impacted by cycles within the semiconductor industry, we believe our business cycles are typically less pronounced than those of other semiconductor equipment companies. We believe this is due to our greater reliance on our customers’ research and development capital spending and usage of test consumables rather than on our customers’ spending to increase production capacity. Capital spending aimed at increasing production capacity is one of the first areas in which most semiconductor manufacturers reduce spending in an industry downturn.

While the conversion to 300mm technology continues, high conversion costs combined with continued process developments on 200mm wafers continue to make sales of our sub-300mm probing systems an important component of our revenue stream for the foreseeable future.  300mm technology more than doubles the available area on a wafer, significantly increasing the number of chips per wafer and reducing per unit manufacturing costs. Revenue from our 300mm engineering probe stations, including all probes, accessories and other items sold therewith, represented 37.0% and 33.8% of our total EPD revenue in the first nine months of 2006 and 2005, respectively.

We sell our solutions to most segments of the semiconductor industry, including manufacturers of communications, wireless, microprocessors and other logic and memory chips.  A substantial portion of our revenue is generated from sales of our engineering probe stations and analytical probes to research and development laboratories of semiconductor manufacturers as well as to fabless semiconductor companies and academic institutions. As a result, we sell to a geographically diversified customer base, with more than 50% of our revenue in the first nine months of 2006 and 2005 generated outside of North America, primarily in Japan, other Asian countries and, to a lesser extent, Europe.

Critical Accounting Policies and the Use of Estimates

Management’s discussion and analysis of financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, bad debts, investments, income taxes, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.

14




Except for the addition of the Stock-Based Compensation information below, we reaffirm the critical accounting policies and estimates as reported in our Annual Report on Form 10-K for the year ended December 31, 2005, which was filed with the Securities and Exchange Commission on March 16, 2006.

Stock-Based Compensation

On January 1, 2006, we adopted SFAS No. 123R which requires the measurement and recognition of compensation expense for all share based payment awards granted to our employees and directors, including employee stock options, non-vested stock and stock purchases related to our employee stock purchase plan based on the estimated fair value of the award on the grant date.  Upon the adoption of SFAS No. 123R, we maintained our method of valuation for stock option awards using the Black-Scholes valuation model, which has historically been used for the purpose of providing pro-forma financial disclosures in accordance with SFAS No. 123.

The use of the Black-Scholes valuation model to estimate the fair value of stock option awards requires us to make judgments on assumptions regarding the risk-free interest rate, expected dividend yield, expected term and expected volatility over the expected term of the award. The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of expense could be materially different in the future.

Compensation expense is only recognized on awards that ultimately vest. Therefore, we have reduced the compensation expense to be recognized over the vesting period for anticipated future forfeitures. Forfeiture estimates are based on historical forfeiture patterns. We update our forfeiture estimates quarterly and recognize any changes to accumulated compensation expense in the period of change. If actual forfeitures differ significantly from our estimates, our results of operations could be materially impacted.

Results of Operations

The following table sets forth our consolidated statement of operations data for the periods indicated as a percentage of revenue. (1)  

 

 

For the Three Months
Ended September 30,

 

For the Nine Months
Ended September 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

Revenue

 

100.0

%

100.0

%

100.0

%

100.0

%

Cost of sales and stock-based compensation

 

56.8

 

53.3

 

56.3

 

52.3

 

Gross profit

 

43.2

 

46.7

 

43.7

 

47.7

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

9.7

 

9.3

 

10.2

 

9.1

 

Selling, general and administrative

 

27.1

 

26.0

 

29.0

 

26.3

 

Total operating expenses

 

36.8

 

35.3

 

39.2

 

35.4

 

Income from operations

 

6.4

 

11.4

 

4.5

 

12.3

 

Other income, net

 

3.1

 

1.4

 

2.4

 

2.7

 

Income before income taxes

 

9.4

 

12.8

 

6.9

 

15.0

 

Provision for income taxes

 

4.0

 

1.5

 

2.6

 

2.7

 

Net income

 

5.4

%

11.3

%

4.3

%

12.3

%


(1)  Percentages may not add due to rounding.

Revenue increased $4.0 million, or 20.9%, to $23.0 million in the three months ended September 30, 2006 compared to $19.0 million in the three months ended September 30, 2005 and increased $6.2 million, or 11.2%, to $62.2 million in the nine months ended September 30, 2006 compared to $56.0 million in the nine months ended September 30, 2005.

Revenue in the Engineering Products Division increased $1.7 million, or 10.2%, to $18.1 million in the three months ended September 30, 2006 compared to $16.4 million in the three months ended September 30, 2005 and increased $1.2 million, or 2.5%, to $50.4 million in the nine months ended September 30, 2006 compared

 

15




 

to $49.2 million in the nine months ended September 30, 2005.

Certain financial information which contributed to the EPD revenue results was as follows:

 

 

 

Three Months Ended
September 30, 2006
Compared to Three
Months Ended
September 30, 2005

 

Nine Months Ended
September 30, 2006
Compared to Nine
Months Ended
September 30, 2005

 

Percentage increase (decrease) in unit sales

 

6.8

%

(1.6

)%

Percentage increase in average order total

 

3.4

%

1.9

%

 

Average order total includes the sales price of all analytical probes, probe cards and other accessories purchased with an engineering probe station.

The increases in average order total in the three and nine-month periods ended September 30, 2006 compared to the same period of 2005 were due to an increase in unit sales of our 300mm systems, which have a higher average sales price than our 200mm systems, which had declining unit sales in the nine-month period. In addition, the mix of 300mm systems and 200mm systems as a percentage of the total systems revenue contributed to the increase in the nine-month period of 2006 compared to the same period of 2005. The purchase of our higher-end eVue microscopes with many of the 300mm systems also contributed to the increases in average order total. These increases were partially offset by sales of our new line of lower-priced, entry-level 150mm systems, more low-end options selected on our 300mm systems and more competitive pricing provided on multiple system orders.

Revenue in the Pyramid Probe Division increased $2.3 million, or 90.2%, to $4.8 million in the three months ended September 30, 2006 compared to $2.5 million in the three months ended September 30, 2005 and increased $5.1 million, or 74.6%, to $11.9 million in the nine months ended September 30, 2006 compared to $6.8 million in the nine months ended September 30, 2005. These increases were due to increases in the number of production probe cards that we sold, partially offset by a shift in mix to lower priced probe cards.

While our Pyramid probes still represent a small portion of our customers’ total probe card purchases, many of our large customers are now ordering our Pyramid probes for numerous, mainstream, high-volume logic test applications, displacing their historical purchases of cantilever and vertical probe cards. We continue to have a significant share of the market in probe cards for wireless devices. We also expect to continue to increase our non-wireless production probe card applications for a variety of wirebonded chip types. We have been adding headcount and equipment over the past several quarters. However, the strong demand has caused our lead times to increase. We expect to continue to add headcount and equipment in the coming quarters in order to shorten the lead times.

We have the ability to expand the capacity of our probe card microfabrication facility through additional equipment and headcount to about $40 million annually based on our current product mix and facility. We are currently using less than half of the facility’s potential capacity. Our growth rate, therefore, relies on our ability to recruit and train enough top-quality people for product fulfillment and field support.

Cost of Sales and Gross Profit

Cost of sales includes purchased materials, fabrication, assembly, test and installation labor and overhead, customer-specific engineering costs, warranty costs, royalties and provision for inventory valuation reserves.

Fluctuations in gross profit as a percentage of revenue, or gross margin, primarily result from changes in geographic mix, product mix, general pricing dynamics and yields in some of our production lines. Sales in Europe typically have a lower margin than sales in North America and Japan due to our use of third-party distributors in Europe. We typically achieve higher margins on our consumables than on our engineering probe stations.

16




 

Cost of sales increased $2.8 million, or 27.9%, to $12.9 million in the three months ended September 30, 2006 compared to $10.1 million in the three months ended September 30, 2005 and increased $5.4 million, or 18.6%, to $34.7 million in the nine months ended September 30, 2006 compared to $29.3 million in the nine months ended September 30, 2005.

These increases were primarily due to the following:

 

 

 

Three Months Ended
September 30, 2006
Compared to Three
Months Ended
September 30, 2005

 

Nine Months Ended
September 30, 2006
Compared to Nine
Months Ended
September 30, 2005

 

Increased direct costs for higher revenue and changes in geographic and product mix

 

$

1,398,000

 

$

3,300,000

 

Increased indirect costs related to labor, overhead, scrapping, discrepancies, obsolescence, revisions, returns and freight

 

1,403,000

 

2,100,000

 

 

 

$

2,801,000

 

$

5,400,000

 

 

Gross profit as a percentage of revenue (“gross margin”) decreased to 43.2% in the three months ended September 30, 2006 compared to 46.7% in the three months ended September 30, 2005 and decreased to 43.7% in the nine months ended September 30, 2006 compared to 47.7% in the nine months ended September 30, 2005. These decreases in our gross margin were primarily attributable to additional costs incurred related to ramping our production run rate and reducing lead times within our PPD Division. In addition, stock-based compensation increased $0.1 million and $0.3 million, respectively, in the three and nine-month periods ended September 30, 2006 compared to the same periods of 2005. These increases resulted in an approximately 0.5 percentage point decrease in gross margin in both the three and nine-month periods ended September 30, 2006.

Research and Development

Research and development costs are expensed as incurred and include compensation and related expenses for personnel, materials, consultants and overhead. From time to time, we enter into arrangements that provide for the reimbursement of research and development expenses. Such reimbursements are netted against gross research and development expenses.

Research and development expenses increased $0.4 million, or 26.9%, to $2.2 million in the three months ended September 30, 2006 compared to $1.8 million in the three months ended September 30, 2005 and increased $1.3 million, or 25.8%, to $6.4 million in the nine months ended September 30, 2006 compared to $5.1 million in the nine months ended September 30, 2005. The increases were primarily due to the following:

 

 

 

Three Months Ended
September 30, 2006
Compared to Three
Months Ended
September 30, 2005

 

Nine Months Ended
September 30, 2006
Compared to Nine
Months Ended
September 30, 2005

 

Increase in salaries and benefits primarily due to increases in headcount

 

$

294,000

 

$

893,000

 

Increase in stock-based compensation due to the adoption of SFAS No. 123R in the first quarter of 2006

 

71,000

 

216,000

 

Increase in project supplies due to increased activity

 

90,000

 

307,000

 

Decrease in fab costs used for PPD

 

(2,000

)

(186,000

)

 

 

$

453,000

 

$

1,230,000

 

 

Selling, General and Administrative

Selling, general and administrative, or SG&A, expense includes compensation and related expenses for personnel, travel, outside services, manufacturers’ representative commissions, patent and trademark amortization and overhead incurred in our sales, marketing, customer support, management, legal and other professional and administrative support functions, as well as costs to operate as a public company.

17




 

SG&A expense increased $1.3 million, or 26.0%, to $6.2 million in the three months ended September 30, 2006 compared to $4.9 million in the three months ended September 30, 2005 and increased $3.3 million, or 22.4%, to $18.0 million in the nine months ended September 30, 2006 compared to $14.7 million in the nine months ended September 30, 2005. The increases were primarily due to the following:

 

 

 

Three Months Ended
September 30, 2006
Compared to Three
Months Ended
September 30, 2005

 

Nine Months Ended
September 30, 2006
Compared to Nine
Months Ended
September 30, 2005

 

Increase in costs related to expansion and setting up direct sales offices in China, Taiwan and Singapore, including costs for labor and recruiting, offset by a decrease in representative commissions in these regions

 

$

280,000

 

$

302,000

 

Increase in stock-based compensation due to the adoption of SFAS No. 123R in the first quarter of 2006

 

308,000

 

794,000

 

Increase in legal costs primarily related to initiating litigation against third parties to protect against the infringement of our patents and corporate projects

 

122,000

 

431,000

 

Increase in IT services, labor and software requirements for the network and expansion

 

111,000

 

312,000

 

Increase in representative commissions in regions other than China, Taiwan and Singapore and other sales expenses, primarily related to increased revenue

 

35,000

 

278,000

 

Increase in product marketing and marketing communications expense due to increased activity

 

74,000

 

206,000

 

Increase in sales expense — Europe due to increased activity

 

112,000

 

269,000

 

Increase in sales expense — North America due to increased activity

 

101,000

 

305,000

 

Other miscellaneous

 

157,000

 

403,000

 

 

 

$

1,300,000

 

$

3,300,000

 

 

During 2006, we accelerated our timetable for establishing our direct sales offices in China and Taiwan with the belief that there will be opportunity to increase business and lower our selling costs as a percentage of sales in the future. These activities increased our operating expenses in the first three quarters of 2006 and will increase our operating expenses going forward.

Other Income (Expense)

Other income (expense) typically includes interest income, interest expense, gains and losses on sales of investments and transaction and remeasurement related foreign currency gains and losses. Other income (expense) can also include other miscellaneous non-operating gains and losses. Transaction related foreign currency gains and losses result from gains and losses recognized on foreign exchange forward contracts and on certain of our accounts receivable that are denominated in Japanese yen. Remeasurement related foreign currency gains result from the remeasurement of foreign currency denominated accounting records into U.S. dollars.

Interest income represents interest earned on cash and cash equivalents and investments in marketable securities and totaled $428,000 and $1.2 million, respectively, in the three and nine-month periods ended September 30, 2006 compared to $276,000 and $746,000, respectively, in the comparable periods of 2005. The increases were primarily due to higher average cash balances in the first nine months of 2006 compared to the first nine months of 2005, as well as higher interest rates in the 2006 periods compared to the 2005 periods.

18




 

Interest expense of $16,000 in the nine-month period ended September 30, 2005 related to interest on our $7.0 million note payable for the portion of the 30-day prepayment notice period that occurred in January 2005.

Other income (loss), net totaled $272,000 and $319,000, respectively, in the three and nine-month periods ended September 30, 2006 compared to $(18,000) and $772,000, respectively, in the comparable periods of 2005. Other income was comprised of the following (in thousands):

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

Foreign currency translation gain (loss)

 

$

117

 

$

(46

)

$

108

 

$

(55

)

Foreign currency transaction gain

 

155

 

54

 

207

 

165

 

Settlement income from a service provider

 

 

 

 

700

 

Other

 

 

(26

)

4

 

(38

)

 

 

$

272

 

$

(18

)

$

319

 

$

772

 

 

The settlement income from a service provider was fully recognized in the quarter ended June 30, 2005 and we do not anticipate any additional settlement income in future periods.

Income Taxes

Our provision for income taxes totaled $1.6 million, or 38% of income before income taxes, and $1.5 million, or 18% of income before income taxes, in the first nine months of 2006 and 2005, respectively.  The effective tax rate in the first nine months of 2006 included a provision to cover certain contingencies.  However, it did not include any benefit for U.S. research and experimentation tax credits since current legislation related to such credits has expired and has not yet been reinstated. The effective tax rate in the first nine months of 2005 included the release of $209,000 of valuation allowance related to the future realization of foreign tax credits.

Deferred tax assets arise from the tax benefit of amounts expensed for financial reporting purposes but not yet realized for tax purposes and from unutilized tax credits and net operating loss carry forwards. We evaluate our deferred tax assets on a regular basis to determine if a valuation allowance is required. To the extent it is determined that it is more likely than not that we will not realize the benefit of our deferred tax assets, we record a valuation allowance against deferred tax assets.

At September 30, 2006, we had a net deferred tax asset on our balance sheet totaling $2.2 million, primarily related to timing differences in the recognition of certain reserves and accruals.

Liquidity and Capital Resources

We anticipate meeting our cash requirements for the next 12 months and for the foreseeable future from existing cash and short and long-term marketable securities, which totaled $54.9 million at September 30, 2006, as well as from cash expected to be generated from operations.

Net cash provided by operating activities in the first nine months of 2006 was $4.8 million and consisted of net income of $2.7 million, depreciation, amortization and stock-based compensation combined of $2.8 million and net changes in our operating assets and liabilities as described below.

Accounts receivable, net increased $2.5 million to $18.7 million at September 30, 2006 compared to $16.2 million at December 31, 2005, due primarily to higher revenue during the third quarter of 2006 compared to the fourth quarter of 2005, partially offset by more linearity in shipments during the third quarter of 2006 compared to the fourth quarter of 2005. Our days sales outstanding was approximately 74 days at September 30, 2006 compared to 83 days at December 31, 2005.

Inventories increased $3.1 million to $13.9 million at September 30, 2006 compared to $10.9 million at December 31, 2005, due to increased raw materials, work-in-process and finished goods balances required to meet the projected demand for the fourth quarter of 2006. We believe that our inventory levels at September 30, 2006 are adequate given our revenue projections for the fourth quarter of 2006.

19




 

Prepaid expenses and other current assets decreased $1.1 million to $1.9 million at September 30, 2006 compared to $3.0 million at December 31, 2005 primarily due to a $1.3 million decrease in income taxes receivable as a result of receiving refunds.

Accounts payable increased $1.8 million to $5.7 million at September 30, 2006 compared to $3.9 million at December 31, 2005, primarily due to the increase in inventory discussed above and the timing of payments.

Accrued liabilities increased $1.9 million to $5.0 million at September 30, 2006 compared to $3.1 million at December 31, 2005, primarily due to a $0.5 million increase in accrued wages due to the timing of bi-weekly payroll dates, the number of days required to be accrued and increased headcount, a $1.3 million increase in income taxes payable and a $163,000 increase in our sales return reserve.

Net cash used in investing activities of $6.1 million in the first nine months of 2006 resulted from $2.4 million used for the net purchase of marketable securities, $3.1 million used for the purchase of fixed assets and $0.6 million used for investment in patents and other assets. Purchases of fixed assets primarily were for equipment related to our production probe division in the first nine months of 2006. We anticipate spending approximately $5.0 million in all of 2006 for fixed assets.

Net cash provided by financing activities of $1.9 million in the first nine months of 2006 resulted primarily from $1.5 million of proceeds from the exercise of employee stock options and the sale of stock pursuant to our employee stock purchase plan.

At September 30, 2006, we had $250,000 in lines for letters of credit, of which, $119,000 was in use for certain guarantees. These lines expire March 31, 2007.

Seasonality

Typically, our revenue is lower in our fiscal first quarter than in our fiscal fourth quarter preceding it. However, revenue in the first quarter of 2006 was greater than the revenue in the fourth quarter of 2005 due to delays in closing certain orders in the fourth quarter of 2005. In addition, as is typical in our industry, we recognize a large percentage of our quarterly revenue in the last month of the quarter.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in our reported market risks or risk management policies since the filing of our 2005 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 16, 2006.

Item 4.  Controls and Procedures

Changes in Internal Controls

There has been no change in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Disclosure Controls and Procedures

Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have

20




 

concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Limitation on Effectiveness of Controls

Our management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all occurrences of fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control systems are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of all controls must be considered relative to their costs. Control systems can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. In addition, over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that the control systems will detect all control issues, including instances of fraud, if any.

PART II — OTHER INFORMATION

Item 1A.  Risk Factors

Our Annual Report on Form 10-K for the year ended December 31, 2005 includes a detailed discussion of our risk factors. There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K. Accordingly, the information in this Form 10-Q should be read in conjunction with the risk factors and information disclosed in our Annual Report on Form 10-K for the year ended December 31, 2005, which was filed with the Securities and Exchange Commission on March 16, 2006.  See also Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations in this report under the heading “Forward Looking Statements and Risk Factors.”

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

Use of Proceeds

We filed a registration statement on Form S-1, File No. 333-113256 for an initial public offering of common stock, which was declared effective by the Securities and Exchange Commission on December 15, 2004.  In that offering, we sold an aggregate of 3.3 million shares of our common stock with net offering proceeds of $41.6 million. As of September 30, 2006, we had used approximately $5.5 million of those proceeds for the repayment of indebtedness. No payments were made to our directors or officers or their associates, holders of 10% or more of any class of our equity securities or to any affiliates.

Item 5.  Other Information

Incentive Compensation Plan

On August 11, 2006, our Board of Directors approved the incentive compensation plan for the six-month period ending December 31, 2006 (the “Bonus Plan”). The Bonus Plan establishes target bonus levels for each participant and will be paid based on the achievement of certain goals. A copy of incentive compensation plan is filed as Exhibit 10.1 to this report and incorporated herein by reference.

Amendment to Director Compensation Arrangements

On August 11, 2006, our Board of Directors approved an amendment to our compensation arrangements for non-employee directors.  Pursuant to the amendment, each year, each non-employee director will be granted 5,000 shares of our common stock that will vest over a three-year period.  The annual stock grant will replace the annual award of options to purchase 15,000 shares of our common stock previously provided to our non-employee directors.

21




 

Amendments to Leases

Effective as of August 11, 2006, we entered into amendments to certain lease agreements relating to the buildings housing our headquarters.  Pursuant to these amendments, the term of the leases on two buildings with a combined total of 79,396 square feet was extended by six years, expiring on October 31, 2015. The amendments also provide for certain tenant improvement allowances and adjustments in base rents. The foregoing description of the lease amendments is not complete and is qualified in its entirety by reference to the lease amendments, which are filed as Exhibits 10.2, 10.3 and 10.4 to this report and incorporated herein by reference.

Item 6.  Exhibits

The following exhibits are filed herewith or incorporated by reference hereto and this list is intended to constitute the exhibit index:

10.1

 

Cascade Microtech, Inc. 2006 Executive Compensation Plan for the Six-Month Period Ending December 31, 2006.

10.2

 

Third Amendment dated August 11, 2006 to Lease Agreement I dated August 20, 1997 between Amberjack, LTD. and Cascade Microtech, Inc.

10.3

 

Third Amendment dated August 11, 2006 to Lease Agreement II dated August 20, 1997 between Amberjack, LTD. and Cascade Microtech, Inc.

10.4

 

Second Amendment dated August 11, 2006 to Lease Agreement II dated July 31, 2000 between Amberjack, LTD. and Cascade Microtech, Inc.

31.1

 

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.

31.2

 

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.

32.1

 

Certification of Chief Executive Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.

32.2

 

Certification of Chief Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.

 

22




 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: November 8, 2006

CASCADE MICROTECH, INC.

 

(Registrant)

 

 

 

 

By:

/s/ ERIC W. STRID

 

 

Eric W. Strid

 

 

Chairman of the Board, President

 

 

and Chief Executive Officer

 

 

(Principal Executive Officer)

 

 

 

 

By:

/s/ STEVEN SIPOWICZ

 

 

Steven Sipowicz

 

 

Chief Financial Officer and Treasurer

 

 

(Principal Financial and Accounting Officer)

 

23



Exhibit 10.1

Cascade Microtech, Inc.
2006 Executive Compensation Plan
for the Six-Month Period Ending December 31, 2006

Participants

Eric Strid

 

Chief Executive Officer and President

 

Steven Sipowicz

 

Chief Financial Officer, Vice President of Finance, Treasurer and Corporate Secretary

 

John Pence

 

Vice President and General Manager, Engineering Products Division

 

Bruce McFadden

 

Vice President and General Manager, Production Probe Division

 

 

Performance Criteria

Bonuses for these participants are calculated on a percentage of their base salary based on attainment of planned levels of net income, operating income and divisional revenue.  Determinations as to whether the performance targets have been met are made quarterly, with respect to 20% of the bonus, and semi-annually, with respect 80% of the bonus.

This table lists the portion of the total bonus payout that is based on the different performance measures, for each executive:

 

 

 

Semi-annual 80%

 

Quarterly
20%

 

 

 

Operating
income

 

Engineering
products
revenue

 

Production
probes revenue

 

Quarterly
Objectives

 

Chief Executive Officer

 

60

%

10

%

10

%

20

%

Chief Financial Officer

 

60

%

10

%

10

%

20

%

VP Engineering Products

 

60

%

20

%

 

 

20

%

VP Production Probe

 

60

%

 

 

20

%

20

%

 

In the cases of operating income, and product line revenues, the period of the performance measures will be for the second half of 2006 (last two quarters).

The payout for the operating income portion will be:

·                   100% payout for achievement of 100% of the planned consolidated operating income (“target”)

·                   Linear from 50% payout for operating income at 50% of target to 100% payout at 100% of target and higher

·                   Zero for operating income below 50% of target

The payout for the product line revenue portion will be:

·                   100% payout for achievement of 100% of the planned respective consolidated product line revenue (“target”)

·                   Linear from 0% payout for product line revenues at 50% of target to 200% payout at 150% of target

·                   200% payout for product line revenues above 150% of target

·                   Zero for product line revenues below 50% of target

The payout for quarterly objectives will be proportional to the fraction of quarterly objectives completed. The CEO is the final arbiter of such completion status. A set of quarterly objectives is formulated by a consensus of the management team for each executive at the beginning of each quarter.



EXHIBIT 10.2

THIRD AMENDMENT TO LEASE

This THIRD AMENDMENT TO LEASE (this “ Agreement”) is made as of the 11 th  day of August, 2006, by and between AMBERGLEN ASSOCIATES LLC, a Delaware limited liability company (“Landlord”), and CASCADE MICROTECH, INC., an Oregon corporation (“Tenant”).

Recitals .

A.            Tenant occupies certain premises in the AmberGlen Business Center located at 2430 N. W. 206th Avenue, first and second floors, under a Lease Agreement dated August 20, 1997, between Amberjack, LTD. (“ Amberjack”), predecessor in interest to Landlord, and Tenant, as amended by that certain Amendment No.1 to Lease dated February 23, 1998, between Amberjack and Tenant, and by that certain Amendment No.2 to Lease dated April 12, 1999, between Amberjack and Tenant (as amended, the “Lease”). Terms with initial capitals used in this Agreement, unless otherwise defined herein, shall have the meanings given them in the Lease.

B.            Landlord currently holds Two Hundred Thousand and no/l00 Dollars ($200,000.00) as a security deposit (the “Existing Security Deposit”) in connection with the Lease and that certain Office/Flex Lease dated August 20, 1997, between Amberjack and Tenant for Suite 200 at 2345 NW Amberbrook Drive.

C.            Tenant and Landlord desire to amend the Lease subject to the terms and conditions set forth in this Agreement.

Agreement .

NOW THEREFORE, in consideration of the premises and of the mutual covenants set forth herein, the parties agree:

1.             Term .  The Lease Term set forth in Section 2(f) and Section 2(g) of the Lease is hereby extended for an additional eighty-nine (89) months (the “Extended Term”) commencing on August 1, 2008 (the “Extended Term Commencement Date”), and ending on December 31, 2015. From and after the Extended Term Commencement Date, references in the Lease to the “Term,” the “Lease Term” or variations thereof shall include the Extended Term.

2.             Rent .  Effective on the Extended Term Commencement Date, the Monthly Base Rent set forth in Section 2(h) of the Lease is hereby amended to add the following table for the Extended Term:

Period

 

Per Sq. Ft.
per month

 

Monthly

 

Annually

 

8/1/08-7/31/09

 

$

1.16

 

$

73,966.24

 

$

887,594.88

 

8/1/09- 7/31/10

 

$

1.19

 

$

75,879.16

 

$

910,549.92

 

8/1/10-7/31/11

 

$

1.23

 

$

78,429.72

 

$

941,156.64

 

8/1/11-7/31/12

 

$

1.27

 

$

80,980.28

 

$

971,763.36

 

8/1/12- 7/31/13

 

$

1.31

 

$

83,530.84

 

$

1,002,370.08

 

8/1/13- 7/31/13

 

$

1.35

 

$

86,081.40

 

$

1,032,976.80

 

8/1/14- 7/31/15

 

$

1.39

 

$

88,631.96

 

$

1,063,583.52

 

8/1/15- 12/31/15

 

$

1.43

 

$

91,182.52

 

$

1,094,190.24

 

 

1




3              Rent Abatement .  In consideration of Tenant entering into this Agreement, Tenant shall pay no Monthly Base Rent under the Lease for the months of September through December, 2006, and the months of January through May, 2007.

4.             Tenant Improvements .  In connection with the extension of the Term as herein provided, upon execution of this Agreement, (a) Landlord shall, at its cost on a non passthrough basis, ensure that all electrical, plumbing, fire sprinkler, lighting and mechanical (HVAC) systems are fully operational and (b) Landlord shall provide a $13.00 per rentable square foot allowance ($828,932.00 total) to Tenant for “Green Building” energy savings measures and for tenant improvements to be installed by Landlord, as more particularly provided in Exhibit A.

5.             Extension of Lease Term .  Section 27 of the Lease regarding rights and obligations to extend the Lease is hereby deleted in its entirety.

6.             Right of First Offer .

6.1           Tenant shall have the right to lease additional space located in 20475 NW Amberwood Drive, 2345 NW Amberwood Drive and 2430 NW 206th Avenue on the terms and conditions of this Section 5 (“First Offer”).

6.2           Tenant’s right of First Offer shall only apply during periods when the named Tenant (but not any assignee or subtenant) are in occupancy of the Premises.

6.3           Subject to the terms of this Section 5, should any of the space specified in Section 6.1 become Available for Lease (the “Offer Space”), Landlord shall not, during the term of this Lease, lease such Offer Space to another tenant without first offering Tenant the right to lease that Offer Space as provided below; provided, that Tenant’s right of First Offer shall expire and terminate December 31, 2012, and Landlord shall be entitled to lease space that first becomes Available for Lease after such date free of any obligation under this Section 6. Office space shall be deemed “Available for Lease” when the space is vacant and unleased, provided that space shall not be deemed Available for Lease under any of the following circumstances:

(a) space that is re-leased by the current tenant of the space by renewal or new lease; (b) space that is leased pursuant to an expansion right of another tenant, or

 (b) space that becomes vacant after Landlord terminates the lease for the space pursuant to a recapture clause, if Landlord then enters into a direct lease with that tenant’s prospective assignee or subtenant, or

(c) Space that is not leased to a tenant as of the date of this Lease (until that space is leased, and then subsequently becomes available).

2




6.4           To the extent required under this Section 5, Landlord shall not enter into a lease for any Offer Space unless and until Landlord has first notified Tenant in writing of the specific terms upon which Tenant may lease the Offer Space (the “Offer”), including Base Rent (the “Offered Rent”) and the other terms covered in the summary of Basic Lease Terms. The Basic Lease Terms shall stipulate a coterminous lease term for the Offer Space, unless otherwise agreed to by Tenant. Except as provided in the Offer, Landlord shall have no obligation to improve or provide an improvement allowance for the Offer Space, and Tenant shall accept the same in its then “As Is” condition. In no event shall the Offered Rent exceed the then fair market rental value of the Offer Space as determined by Landlord in Landlord’s reasonable discretion, taking into account tenant improvements and concession provided, if any.

6.5           Tenant shall have seven (7) days after its receipt of Landlord’s notice to exercise its right to lease on terms acceptable to Landlord and Tenant. If Tenant elects to lease the Offer Space, Landlord and Tenant shall execute an amendment to this Lease, adding the Offer Space to the Premises and otherwise incorporating the Offer Space terms, within seven (7) days after acceptance of the proposal by Tenant, or as soon thereafter as reasonably possible. If Tenant does not elect to accept such offer within said initial seven (7) day period, or fails to enter into a Lease amendment within said subsequent seven (7) day period, then Landlord may thereafter offer and/or lease the Offer Space to a third party, free of any rights of Tenant therein.

6.6           At Landlord’s request, Tenant shall, from time to time, based on Tenant’s reasonable projected space planning needs, reasonably cooperate with Landlord to identify particular classes of leases (for example, leases not exceeding a stated term or of not less than a stated amount of space) which shall be exempt from the First Offer .

6.7           The First Offer granted herein may only be exercised if Tenant is not in default hereunder. In the event this Lease is terminated for any reason, the rights granted to Tenant in this Section shall also terminate at the same time. In the event Tenant exercises the First Offer as provided herein and subsequently becomes in default prior to taking occupancy of the First Offer Space, Landlord may elect, by written notice to Tenant, to terminate Tenant’s prior exercise of its First Offer, in which event Tenant shall have no rights with respect to the First Offer Space. This First Offer is personal to the Tenant named herein and may only be exercised in the event the Tenant named herein are in actual occupancy of the entire Premises at the time the expansion notice is given.

7.             Energy Savings .  In connection with Tenant’s installation of solar or other energy efficient improvements to the Premises in accordance with Exhibit A, Tenant shall be solely entitled to any cost savings, including tax credits or other incentives, benefiting the Premises.

8.             Hazardous Substances .  Section 5.5 of the Lease is hereby amended to add the following provision:  Tenant shall immediately notify Landlord should Tenant (a) become aware of the existence of any Hazardous Substance on the Premises or the Project which is prohibited by the Lease or by Environmental Law, (b) receive any notice of, or become aware of, any actual or alleged violation with respect to the Premises or Project of any Environmental Law, or (c) become aware of any lien or action with respect to any of the foregoing. Tenant shall deliver to Landlord, promptly upon receipt, (i) copies of any documents received from the United States Environmental Protection Agency (‘EPA’ ) and/or any state, county, or municipal environmental or health agency concerning Tenant’s ownership, use, or operations upon or in connection with the Premises; and (ii) copies of any documents submitted by Tenant to the EPA and/or any state, county, or municipal environmental or health agency concerning the Premises.

3




9.             Mailing Addresses .  The mailing addresses for Landlord and Tenant set forth in Section 2 of the Lease are hereby amended to be as follows:

Landlord:

 

The Praedium Group LLC

 

 

 

825 Third Avenue, 36th Floor

 

 

 

New York, NY 10022

 

 

 

Attn: Asset Manager

 

 

 

 

 

With a copy to:

 

ScanlanKemperBard Companies, LLC

 

 

 

2600 Pacwest Center

 

 

 

1211 SW Fifth Avenue

 

 

 

Portland, OR 97204

 

 

 

Attn: Asset Manager

 

 

 

 

 

With a copy to:

 

Parisi & Parisi, P.C.

 

 

 

Suite 400, North Pacific Plaza

 

 

 

1675 SW Marlow Avenue

 

 

 

Portland, OR 97225

 

 

 

Attn: Robin B. Parisi, Esq.

 

 

 

 

 

Tenant:

 

Steve Sipowicz

 

 

 

CFO/VP Finance

 

 

 

Cascade Microtech Inc.

 

 

 

2430 NW 206th

 

 

 

Beaverton, OR 97006

 

 

10.           ERISA and UBTI Restrictions .  Notwithstanding anything to the contrary contained in the Lease, including, without limitation, Section 16 thereof, no assignment or subletting by Tenant, nor any other transfer or vesting of Tenant’s interest thereunder (whether by merger, operation of law or otherwise), shall be permitted if anyone or more of the following conditions are satisfied:

(i)            Landlord, or any person designated by Landlord as having an interest therein, directly or indirectly, controls, is controlled by, or is under common control with (i) the proposed assignee, sub-lessee or successor in interest of Tenant or (ii) any person which, directly or indirectly, controls, is controlled by or is under common control with, the proposed assignee, sublessee or successor-in-interest of Tenant;

(ii)           The proposed assignment or sublease provides for or results in a rental or other payment for the leasing, use, occupancy or utilization of all or any portion of the Leased Premises based, in whole or in part, on the income or profits derived by any person from the property so leased, used, occupied or utilized other than an amount based on a fixed percentage or percentages of gross receipts or sales; or

(iii)          In the opinion of Landlord or Landlord’s legal counsel, such proposed assignment, subletting or other transfer or vesting of Tenant’s interest hereunder (whether by merger, operation at law or otherwise) will (i) cause a violation of the Employee Retirement Income Security Act of 1974 by Landlord, or by any person which, directly or indirectly, controls, is controlled by, or is under common control with, Landlord or any person who controls Landlord, or (ii) result or may in the future result in Landlord, or any person which,

4




directly or indirectly, has an interest in Landlord, receiving “unrelated business taxable income” (as defined in the Internal Revenue Code).

11.           Security Deposit .  Section 6.2 of the Lease is hereby amended to provide that contemporaneously with Tenant’s execution and delivery of this Agreement, One Hundred Twenty-four Thousand and no/100 Dollars ($124,000.00) of the Existing Security Deposit shall be allocated as the deposit for the Premises only, such amount to be held by Landlord during the Lease Term in accordance with the terms of Section 6.2 of the Lease.

12.           Ratification .  Except as amended hereby, the Lease is ratified and confirmed in all respects and this document supersedes prior written or oral agreements including those described in the Letter of Intent executed by Tenant and Landlord.

IN WITNESS WHEREOF, the parties have executed this Agreement on the date first set forth above.

 

AMBERGLEN ASSOCIATES LLC

 

a Delaware limited liability company

 

 

 

 

 

By:

SCANLANKEMPERBARD COMPANIES, LLC,

 

 

an Oregon limited liability company,

 

 

its manager

 

 

 

 

 

 

By:

/s/ N. Thomson Bard, Jr.

 

 

 

 

Name: N. Thomson Bard, Jr.

 

 

 

Title: Principal, Executive Vice President Asset Management and Chief Compliance Officer

 

 

 

 

 

 

 

“Landlord”

 

 

 

 

 

 

CASCADE MICROTECH INC., an Oregon corporation

 

 

 

 

 

 

By:

/s/ Steven Sipowicz

 

 

 

 

Name: Steven Sipowicz

 

 

 

Title: Chief Financial Officer

 

 

 

 

 

 

 

“Tenant”

 

 

5



EXHIBIT 10.3

THIRD AMENDMENT TO LEASE

This THIRD AMENDMENT TO LEASE (this “Agreement”) is made as of the 11 th  day of August, 2006, by and between AMBERGLEN ASSOCIATES LLC, a Delaware limited liability company (“Landlord”), and CASCADE MICROTECH, INC., an Oregon corporation (“Tenant”).

Recitals .

A.            Tenant occupies certain premises in the AmberGlen Business Center located at 2345 N .W .Amberbrook Drive, Suite 200, under an Office/Flex Lease dated August 20, 1997, between Amberjack, LTD. (“Amberjack”), predecessor in interest to Landlord, and Tenant, as amended by that certain Amendment No.1 to Lease dated February 23, 1998, between Amberjack and Tenant, and by that certain Amendment No.2 to Lease dated July 23, 1998, between Amberjack and Tenant (as amended, the “Lease”). Terms with initial capitals used in this Agreement, unless otherwise defined herein, shall have the meanings given them in the Lease.

B.            Landlord currently holds Two Hundred Thousand and no/l00 Dollars ($200,000.00) as a security deposit (the “Existing Security Deposit”) in connection with the Lease and that certain Lease Agreement dated August 20, 1997, between Amberjack and Tenant for the first and second floors of 2430 N.W. 206th Avenue.

C.            Tenant and Landlord desire to amend the Lease subject to the terms and conditions set forth in this Agreement.

Agreement .

NOW THEREFORE, in consideration of the premises and of the mutual covenants set forth herein, the parties agree:

1.             Security Deposit . Section 6.2 of the Lease is hereby amended to provide that, contemporaneously with Tenant’s execution and delivery of this Agreement, Forty-Six Thousand and no/100 Dollars ($46,000.00) of the Existing Security Deposit shall be allocated as a security deposit for the Premises only, such amount to be held by Landlord during the Lease Term in accordance with the terms of Section 6.2 of the Lease.

2.             Hazardous Substances .  Section 5.5 of the Lease is hereby amended to add the following provision: Tenant shall immediately notify Landlord should Tenant (a) become aware of the existence of any Hazardous Substance on the Premises or the Project which is prohibited by the Lease or by Environmental Law, (b) receive any notice of, or become aware of, any actual or alleged violation with respect to the Premises or Project of any Environmental Law, or (c) become aware of any lien or action with respect to any of the foregoing. Tenant shall deliver to Landlord, promptly upon receipt, (i) copies of any documents received from the United States Environmental Protection Agency (‘EPA’) and/ or any state, county, or municipal environmental or health agency concerning Tenant’s ownership, use, or operations upon or in connection with the Premises; and (ii) copies of any documents submitted by Tenant to the EPA and/or any state, county, or municipal environmental or health agency concerning the Premises.

1

 




 

3.             Mailing Addresses .             The mailing addresses for Landlord and Tenant set forth in Section 2 of the Lease are hereby amended to be as follows:

Landlord:

 

The Praedium Group LLC

 

 

825 Third Avenue, 36th Floor

 

 

New York, NY 10022

 

 

Attn: Asset Manager

 

 

 

With a copy to:

 

ScanlanKemperBard Companies, LLC

 

 

2600 Pacwest Center

 

 

1211 SW Fifth Avenue

 

 

Portland, OR 97204

 

 

Attn: Asset Manager

 

 

 

With a copy to:

 

Parisi & Parisi, P .C.

 

 

Suite 400, North Pacific Plaza

 

 

1675 SW Marlow Avenue

 

 

Portland, OR 97225

 

 

Attn: Robin B. Parisi, Esq.

 

 

 

Tenant:

 

Steve Sipowicz

 

 

CFO/ VP Finance

 

 

Cascade Microtech Inc. 2430 NW 206th

 

 

Beaverton, OR 97006

 

4.             ERISA and UBTI Restrictions . Notwithstanding anything to the contrary contained in the Lease, including, without limitation, Section 16 thereof, no assignment or subletting by Tenant, nor any other transfer or vesting of Tenant’s interest thereunder (whether by merger, operation of law or otherwise), shall be permitted if anyone or more of the following conditions are satisfied:

(i)            Landlord, or any person designated by Landlord as having an interest therein, directly or indirectly, controls, is controlled by, or is under common control with (i) the proposed assignee, sub-lessee or successor in interest of Tenant or (ii) any person which, directly or indirectly, controls, is controlled by or is under common control with, the proposed assignee, sublessee or successor-in-interest of Tenant;

 (ii)          The proposed assignment or sublease provides for or results in a rental or other payment for the leasing, use, occupancy or utilization of all or any portion of the Leased Premises based, in whole or in part, on the income or profits derived by any person from the property so leased, used, occupied or utilized other than an amount based on a fixed percentage or percentages of gross receipts or sales; or

(iii)          In the opinion of Landlord or Landlord’s legal counsel, such proposed assignment, subletting or other transfer or vesting of Tenant’s interest hereunder (whether by merger, operation at law or otherwise) will (i) cause a violation of the Employee Retirement Income Security Act of 1974 by Landlord, or by any person which, directly or indirectly, controls, is controlled by, or is under common control with, Landlord or any person who controls Landlord, or (ii) result or may in the future result in Landlord, or any person which,

2

 




 

directly or indirectly, has an interest in Landlord, receiving “unrelated business taxable income” (as defined in the Internal Revenue Code).

5.             Ratification .  Except as amended hereby, the Lease is ratified and confirmed in all respects and this document supersedes prior written or oral agreements including those described in the Letter of Intent executed by Tenant and Landlord.

IN WITNESS WHEREOF, the parties have executed this Agreement on the date first set forth above.

 

AMBERGLEN ASSOCIATES LLC

 

a Delaware limited liability company

 

 

 

 

By:

SCANLANKEMPERBARD COMPANIES, LLC,

 

 

an Oregon limited liability company,

 

 

its manager

 

 

 

 

By:

/s/ N. Thomson Bard, Jr.

 

Name:

N. Thomson Bard, Jr.

 

Title:

Principal, Executive Vice President Asset Management and Chief Compliance Officer

 

 

 

 

 

“Landlord”

 

 

 

 

CASCADE MICROTECH INC., an Oregon corporation

 

 

 

 

By:

/s/ Steven Sipowicz

 

Name:

Steven Sipowicz

 

Title:

Chief Financial Officer

 

 

 

 

 

“Tenant”

 

3

 



EXHIBIT 10.4

SECOND AMENDMENT TO LEASE

This SECOND AMENDMENT TO LEASE (this “Agreement”) is made as of the 11 th  day of August, 2006, by and between AMBERGLEN ASSOCIATES LLC, a Delaware limited liability company (“Landlord”), and CASCADE MICROTECH, INC., an Oregon corporation (“Tenant”).

Recitals .

A.            Tenant occupies certain premises in the AmberGlen Business Center located at 20475 N.W. Amberwood Drive, Suite 100, under a Lease Agreement dated July 31, 2000, between Amberjack, LTD. (“Amberjack”), predecessor in interest to Landlord, and Tenant, as amended by that certain Amendment No.1 to Lease (“Amendment No.1”) dated January 8, 2001, between Amberjack and Tenant (as amended, the “Lease”). Terms with initial capitals used in this Agreement, unless otherwise defined herein, shall have the meanings given them in the Lease.

B.            Landlord currently holds Two Hundred Thousand and no/l00 Dollars ($200,000.00) as a security deposit (the “Existing Security Deposit”) in connection with that certain Lease Agreement dated August 20, 1997, between Amberjack and Tenant for the first and second floors of 2430 N.W. 206th Avenue (as amended, the “2430 Lease”), and that certain Office/Flex Lease dated August 20, 1997, between Amberjack and Tenant for Suite 200 at 2345 NW Amberbrook Drive (as amended, the “2435 Lease”).

C.            Tenant and Landlord desire to amend the Lease subject to the terms and conditions set forth in this Agreement.

Agreement .

NOW THEREFORE, in consideration of the premises and of the mutual covenants set forth herein, the parties agree:

1.             Term .  The Lease Term set forth in Section 1.13 and Section 1.14 of the Lease is hereby extended for an additional one hundred seven (107) months (the “Extended Term”) commencing on February 1, 2007 (the “Extended Term Commencement Date”), and ending on December 31, 2015. From and after the Extended Term Commencement Date, references in the Lease to the “Term”, the “Lease Term” or variations thereof shall include the Extended Term.

2.             Rent .  Effective June 1, 2006, until the expiration of the current Lease Term, which is January 31, 2007, the Monthly Base Rent set forth in Section 4 of Amendment No. 1 shall be amended to equal $17,195.20. Effective on the Extended Term Commencement Date, the Monthly Base Rent set forth in Section 1.15 of the Lease is hereby amended to add the following table for the Extended Term:

1




 

Period

 

Per Sq. Ft.
per month

 

Monthly

 

Annually

 

2/1/07-7/31/08

 

$

1.10

 

$

17,195.20

 

$

206,342.40

 

8/1/08-7/31/09

 

$

1.16

 

$

18,133.12

 

$

217,597.44

 

8/1/09- 7/31/10

 

$

1.19

 

$

18,602.08

 

$

223,224.96

 

8/1/10- 7/31/11

 

$

1.23

 

$

19,227.36

 

$

230,728.32

 

8/1/11- 7/31/12

 

$

1.27

 

$

19,852.64

 

$

238,231.68

 

8/1/12-7/31/13

 

$

1.31

 

$

20,477.92

 

$

245,735.04

 

8/1/13- 7/31/14

 

$

1.35

 

$

21,103.20

 

$

253,238.40

 

8/1/14-7/31/15

 

$

1.39

 

$

21,728.48

 

$

260,741.76

 

8/1/15- 12/31/15

 

$

1.43

 

$

22,353.76

 

$

268,245.12

 

 

3.             Rent Abatement . In consideration of Tenant entering into this Agreement, Tenant shall pay no Monthly Base Rent under the Lease for the months of September through December, 2006, and the months of January through May, 2007.

4.             Premises Improvements . In connection with the extension of the Term as herein provided, upon execution of this Agreement, Landlord shall construct the Tenant Improvements described in and in accordance with the provisions of the Work Letter attached as Exhibit A (the “Tenant Improvements”). Landlord shall afford Tenant an allowance for the Tenant Improvements in the amount of $203,216, as more particularly provided in Exhibit A.

5.             Right of First Offer .

5.1           Tenant shall have the right to lease additional space located in 20475 NW Amberwood Drive, 2345 NW Amberwood Drive and 2430 NW 206th Avenue on the terms and conditions of this Section 5 (“First Offer”).

5.2           Tenant’s right of First Offer shall only apply during periods when the named Tenant (but not any assignee or subtenant) is in occupancy of the Premises.

5.3           Subject to the terms of this Section 5, should any of the space specified in Section 5.1 become Available for Lease (the “Offer Space”), Landlord shall not, during the term of this Lease, lease such Offer Space to another tenant without first offering Tenant the right to lease that Offer Space as provided below; provided, that Tenant’s right of First Offer shall expire and terminate December 31, 2012, and Landlord shall be entitled to lease space that first becomes Available for Lease after such date free of any obligation under this Section 6.  Office space shall be deemed “Available for Lease” when the space is vacant and unleased, provided that space shall not be deemed Available for Lease under any of the following circumstances:

(a) space that is re-leased by the current tenant of the space by renewal or new lease; (b) space that is leased pursuant to an expansion right of another tenant, or

2




(b) space that becomes vacant after Landlord terminates the lease for the space pursuant to a recapture clause, if Landlord then enters into a direct lease with that tenant’s prospective assignee or subtenant, or

(c) Space that is not leased to a tenant as of the date of this Lease (until that space is leased, and then subsequently becomes available).

5.4           To the extent required under this Section 5, Landlord shall not enter into a lease for any Offer Space unless and until Landlord has first notified Tenant in writing of the specific terms upon which Tenant may lease the Offer Space (the “Offer”), including Base Rent (the “Offered Rent”) and the other terms covered in the summary of Basic Lease Terms. The Basic Lease Terms shall stipulate a coterminous lease term for the Offer Space, unless other wise agreed to by Tenant. Except as provided in the Offer, Landlord shall have no obligation to improve or provide an improvement allowance for the Offer Space, and Tenant shall accept the same in its then “As Is” condition. In no event shall the Offered Rent exceed the then fair market rental value of the Offer Space as determined by Landlord in Landlord’s reasonable discretion taking into account tenant improvements and concession provided, if any.

5.5           Tenant shall have seven (7) days after its receipt of Landlord’s notice to exercise its right to lease on terms acceptable to Landlord and Tenant. If Tenant elects to lease the Offer Space, Landlord and Tenant shall execute an amendment to this Lease, adding the Offer Space to the Premises and otherwise incorporating the Offer Space terms, within seven (7) days after acceptance of the proposal by Tenant, or as soon thereafter as reasonably possible. If Tenant does not elect to accept such offer within said initial seven (7) day period, or fails to enter into a Lease amendment within said subsequent seven (7) day period, then Landlord may thereafter offer and/or lease the Offer Space to a third party, free of any rights of Tenant therein.

5.6           At Landlord’s request, Tenant shall, from time to time, based on Tenant’s reasonable projected space planning needs, reasonably cooperate with Landlord to identify particular classes of leases (for example, leases not exceeding a stated term or of not less than a stated amount of space) which shall be exempt from the First Offer.

5.7           The First Offer granted herein may only be exercised if Tenant is not in default hereunder. In the event this Lease is terminated for any reason, the rights granted to Tenant in this Section shall also terminate at the same time. In the event Tenant exercises the First Offer as provided herein and subsequently becomes in default prior to taking occupancy of the First Offer Space, Landlord may elect, by written notice to Tenant, to terminate Tenant’s prior exercise of its First Offer, in which event Tenant shall have no rights with respect to the First Offer Space. This First Offer is personal to the Tenant named herein and may only be exercised in the event the Tenant named herein are in actual occupancy of the entire Premises at the time the expansion notice is given.

6.             Energy Savings .  In connection with Tenant’s installation of solar or other energy efficient improvements to the Premises in accordance with Exhibit A, Tenant shall be solely entitled to any cost savings, including tax credits or other incentives, benefiting the Premises.

7.             Hazardous Substances .  Section 3.2 of the Lease is hereby amended to add the following provision thereto: Tenant shall immediately notify Landlord should Tenant (a) become aware of the existence of

3




any Hazardous Substance on the Premises or the Project which is prohibited by the Lease or by Environmental Law, (b) receive any notice of, or become aware of, any actual or alleged violation with respect to the Premises or Project of any Environmental Law, or (c) become aware of any lien or action with respect to any of the foregoing. Tenant shall deliver to Landlord, promptly upon receipt, (i) copies of any documents received from the United States Environmental Protection Agency (‘EPA’) and/or any state, county, or municipal environmental or health agency concerning Tenant’s ownership, use, or operations upon or in connection with the Premises; and (ii) copies of any documents submitted by Tenant to the EPA and/or any state, county, or municipal environmental or health agency concerning the Premises.

8.             Mailing Addresses .             The mailing addresses for Landlord and Tenant set forth in Section 1.3 and 1.4 of the Lease are hereby amended to be as follows:

 

Landlord:

The Praedium Group LLC

 

 

825 Third Avenue, 36th Floor

 

 

New York, NY 10022

 

 

Attn: Asset Manager

 

 

 

 

With a copy to:

ScanlanKemperBard Companies, LLC

 

 

2600 Pacwest Center

 

 

1211 SW Fifth Avenue

 

 

Portland, OR 97204

 

 

Attn: Asset Manager

 

 

 

 

With a copy to:

Parisi & Parisi, P .C.

 

 

Suite 400, North Pacific Plaza

 

 

1675 SW Marlow Avenue

 

 

Portland, OR 97225

 

 

Attn: Robin B. Parisi, Esq.

 

 

 

 

Tenant:

Steve Sipowicz

 

 

CFO/ VP Finance

 

 

Cascade Microtech Inc.

 

 

2430 NW 206th

 

 

Beaverton, OR 97006

 

9.             ERISA and UBTI Restrictions .          Notwithstanding anything to the contrary contained in the Lease, including, without limitation, Article 10 thereof, no assignment or subletting by Tenant, nor any other transfer or vesting of Tenant’s interest thereunder (whether by merger, operation of law or otherwise), shall be permitted if anyone or more of the following conditions are satisfied:

(i)            Landlord, or any person designated by Landlord as having an interest therein, directly or indirectly, controls, is controlled by, or is under common control with (i) the proposed assignee, sub-lessee or successor in interest of Tenant or (ii) any person which, directly or indirectly, controls, is controlled by or is under common control with, the proposed assignee, sublessee or successor-in-interest of Tenant:

4




(ii)           The proposed assignment or sublease provides for or results in a rental or other payment for the leasing, use, occupancy or utilization of all or any portion of the Leased Premises based, in whole or in part, on the income or profits derived by any person from the property so leased, used, occupied or utilized other than an amount based on a fixed percentage or percentages of gross receipts or sales; or

(iii)          In the opinion of Landlord or Landlord’s legal counsel, such proposed assignment, subletting or other transfer or vesting of Tenant’s interest hereunder (whether by merger, operation at law or otherwise) will (i) cause a violation of the Employee Retirement Income Security Act of 1974 by Landlord, or by any person which, directly or indirectly, controls, is controlled by, or is under common control with, Landlord or any person who controls Landlord, or (ii) result or may in the future result in Landlord, or any person which, directly or indirectly, has an interest in Landlord, receiving “unrelated business taxable income” (as defined in the Internal Revenue Code).

10.           Security Deposit .  Contemporaneously with Tenant’s execution and delivery of this Agreement, Thirty Thousand and no/l00 Dollars ($30,000.00) of the Existing Security Deposit shall be allocated as the deposit for the Premises only, such amount to be held by Landlord during the Lease Term as security for Tenant’s performance of its obligations under the Lease. If Tenant fails to make any payment when due under the Lease, or otherwise defaults with respect to any provision of the Lease, Landlord may use, apply or retain all or any portion of said deposit for the payment of such obligation or default, or for the payment of any other sum to which Landlord may be become obligated by reason of Tenant’s default, or to compensate Landlord for any loss or damage that Landlord may suffer thereby. If Landlord so uses or applies all or any portion of said deposit, Tenant shall, within ten (10) days after written demand therefore from Landlord, deposit cash with Landlord in an amount sufficient to restore said deposit to the full amount stated in this Section 10, and Tenant’s failure to do so shall constitute an Event of Default under the Lease. If Tenant performs all of Tenant’s obligations hereunder, Landlord shall return said deposit (or so much thereof as has not theretofore been applied by Landlord as permitted under this Section 10) within sixty (60) days following the date of expiration of the Lease Tern or the date on which Tenant has vacated the Premises. Landlord shall not be required to keep said security deposit separate from its general funds, and Tenant shall not be entitled to interest on said deposit. Landlord shall be entitled to deliver the funds constituting the deposit hereunder to any purchaser of Landlord’s interest in the Premises, whether by sale, foreclosure, deed in lieu of foreclosure, or otherwise, and upon such delivery, Landlord shall be discharged from any further liability with respect to said deposit.

11.           Ratification .           Except as amended hereby, the Lease is ratified and confirmed in all respects and this document supersedes prior written or oral agreements including those described in the Letter of Intent executed by Tenant and Landlord

[Signatures on following page]

5




IN WITNESS WHEREOF, the parties have executed this Agreement on the date first set forth above.

 

AMBERGLEN ASSOCIATES LLC

 

a Delaware limited liability company

 

 

 

By:

SCANLANKEMPERBARD COMPANIES, LLC,

 

an Oregon limited liability company, its manager

 

 

 

 

By:

/s/ N. Thomson Bard, Jr.

 

Name:

N. Thomson Bard, Jr.

 

Title:

Principal, Executive Vice President Asset Management and Chief Compliance Officer

 

 

 

 

 

 

“Landlord”

 

 

 

 

CASCADE MICROTECH INC., an Oregon corporation

 

 

 

 

By:

/s/ Steven Sipowicz

 

Name:

Steven Sipowicz

 

Title:

Chief Financial Officer

 

 

 

 

 

 

“Tenant”

 

6



EXHIBIT 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO RULE 13a-14(a) OR RULE 15d-14(a)
OF THE
SECURITIES EXCHANGE ACT OF 1934

I, Eric W. Strid, certify that:

1.                I have reviewed this quarterly report on Form 10-Q of Cascade Microtech, Inc.;

2.                Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.                Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.                The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)           Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)          Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)           Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)          Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.                The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)           All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)          Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 8, 2006

/s/ Eric W. Strid

 

Eric W. Strid

 

Chairman, Chief Executive Officer and President

 

Cascade Microtech, Inc.

 

 



EXHIBIT 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO RULE 13a-14(a) OR RULE 15d-14(a)
OF THE
SECURITIES EXCHANGE ACT OF 1934

I, Steven Sipowicz, certify that:

1.                I have reviewed this quarterly report on Form 10-Q of Cascade Microtech, Inc.;

2.                Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.                Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.                The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)           Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)          Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)           Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)          Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.                The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)           All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)          Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 8, 2006

/s/ Steven Sipowicz

 

Steven Sipowicz

 

Chief Financial Officer and Treasurer

 

Cascade Microtech, Inc.

 

 



EXHIBIT 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO RULE 13a-14(b) OR RULE 15d-14(b)
OF THE SECURITIES EXCHANGE ACT OF 1934 AND 18 U.S.C. SECTION 1350

In connection with the Quarterly Report of Cascade Microtech, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Eric W. Strid, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge,:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/ Eric W. Strid

 

Eric W. Strid

Chief Executive Officer

Cascade Microtech, Inc.

November 8, 2006

 

This certification is made solely for the purpose of 18 U.S.C. Section 1350, and not for any other purpose.  A signed original of this written statement required by Section 906 has been provided to Cascade Microtech, Inc. and will be retained by Cascade Microtech, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.



EXHIBIT 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO RULE 13a-14(b) OR RULE 15d-14(b)
OF THE SECURITIES EXCHANGE ACT OF 1934 AND 18 U.S.C. SECTION 1350

In connection with the Quarterly Report of Cascade Microtech, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Steven Sipowicz, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge,:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/ Steven Sipowicz

 

Steven Sipowicz

Chief Financial Officer

Cascade Microtech, Inc.