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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended October 31, 1998
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number 0-22366
CREDENCE SYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-2878499
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
215 Fourier Avenue, Fremont, California 94539
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (510) 657-7400
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which registered
-------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
Preferred Stock Purchase Rights
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value of voting stock held by non-affiliates of
the Registrant, as of January 20, 1999 was approximately $250,141,176 (based
upon the closing price for shares of the Registrant's common stock as reported
by the Nasdaq National Market for the last trading date prior to that date).
Shares of common stock held by each officer, director and holder of 5% or more
of the outstanding common stock have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
On January 20, 1999, approximately 20,446,311 shares of the Registrant's
common stock, $0.001 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 1999 Annual Meeting of
Stockholders to be held on March 24, 1999 are incorporated by reference into
Part III.
1
PART I
ITEM 1. BUSINESS
Credence Systems Corporation designs, manufactures, sells and services
automatic test equipment ("ATE") used for testing semiconductor integrated
circuits ("ICs"). The Company also develops, licenses and distributes related
software products. The Company serves a broad spectrum of the semiconductor
industry's testing needs through a wide range of products that test digital
logic, mixed-signal and non-volatile memory semiconductors. Credence utilizes
its proprietary technologies to design products intended to provide a lower
total cost of ownership than competing products while meeting the increasingly
demanding performance requirements of today's ATE market. The Company's products
are primarily designed to test semiconductors that are produced in high volume.
The Company's customers include major semiconductor manufacturers as well as
assembly and test services companies.
Credence was incorporated in California in March 1982 to succeed to the
business of a sole proprietorship and was reincorporated in Delaware in October
1993. The term "Credence" or the "Company" includes, when the context so
requires, Credence Systems Corporation, and its subsidiaries, including Fluence
Technology, Inc. ("Fluence"), formerly named Test Systems Strategies, Inc. (a
Delaware corporation), which the Company formed to acquire certain assets from
Test Systems Strategies, Inc. and its parent, Summit Design Inc., (the "Summit
Acquisition") in July 1997. It also includes certain fault simulation and test
program development products of Zycad Corporation ("Zycad"), which the Company
acquired in August 1997 (the "Zycad Acquisition"), and the memory test business
assets acquired from Heuristics Physics Laboratories, Inc. ("HPL") on June 1,
1998. 1
Background
- ----------
Dramatic advances in semiconductor process technology have improved the
performance and lowered the average selling prices ("ASPs") of semiconductor
devices (semiconductors) to levels that now support their use in a wide range of
office, consumer, automotive, communications, industrial and other products. In
order to maintain or improve gross margins as semiconductor ASPs decline,
semiconductor manufacturers are constantly seeking ways to reduce manufacturing
costs.
Testing is a principal element in the cost structure of high volume
production of semiconductors. As a result of improved efficiencies in wafer
fabrication, test costs have become a higher percentage of the total cost of
manufacturing. This shift in cost structure has changed the traditional criteria
for selection of ATE. Although performance was the dominant factor in the
selection of ATE in the past, the Company believes that economic considerations
have assumed much greater importance to semiconductor manufacturers. Purchasers
of ATE now examine more carefully the total cost of ownership of ATE. Total cost
of ownership includes the initial purchase price of the tester, as well as the
tester's reliability, flexibility, size, power and air conditioning
requirements, upgrade-ability and maintenance costs, including spare parts.
Traditionally, semiconductor die were minimally tested at wafer probe and
underwent rigorous performance testing to full specification only at the
completion of final packaging. Today, assembly and packaging have become
increasingly expensive compared with the cost of the die, such that their costs
may exceed the cost of the die itself. This trend has influenced semiconductor
manufacturers to shift performance testing increasingly toward wafer probe. By
subjecting devices to performance testing earlier in the manufacturing process,
defective die are detected and eliminated before assembly and packaging costs
are incurred.
Increased facility costs and the trend toward performance testing at
wafer probe have led to the increased importance of smaller testers in the
semiconductor manufacturing process. Performance testing at wafer probe requires
that the device under test be located in close physical proximity to the
measuring circuits of the tester in order to minimize potential signal
distortions that can negatively impact testing yields. Smaller testers can more
easily be placed in close physical proximity to such circuits. In addition,
- ----------
1 "Credence Systems Corporation," "Credence", "SC212," "ValStar," "Quartet,"
"Quartet One," "MemBIST," "Triton," "EPRO," "BOST," "Kalos," and "DUO" are
trademarks of the Company. This Annual Report on Form 10-K also includes
trademarks of other companies.
2
wafer probe test typically occurs in a clean room where potential contaminants
must be continually removed and temperatures kept constant. These special
maintenance requirements make clean rooms expensive to operate. Smaller testers
occupy less floor space and therefore assist in reducing clean room costs. In
addition, smaller testers that consume less power generally have reduced air
conditioning requirements.
For over 20 years, emitter-coupled logic ("ECL") has been the
conventional process technology used by the Company and others for the ICs used
in ATE due to its speed, repeatability and precision. ECL technology, however,
results in low functionality per chip and requires continuous power. As a
result, conventional ATE systems generally are large, expensive and require
significant electrical power to operate.
Another process technology commonly used in the manufacture of
semiconductors is complementary metal oxide semiconductor ("CMOS"). As compared
to ECL, CMOS technology allows higher functionality for a given chip size and
requires less power to operate. Some ATE manufacturers use a combination of ECL
and CMOS to lower the cost of ATE by reducing the use of ECL.
The production of ATE based exclusively on CMOS technology, however, had
been limited by the inability of CMOS to meet the timing and measurement demands
of semiconductor testing. Although the speed of CMOS was acceptable, its timing
stability was not. This problem results from the tendency of CMOS circuits to
experience timing drift as a function of temperature and voltage variation
during tests. To fully benefit from the economic and other advantages of CMOS
technology, the challenge has been to control this drift characteristic in order
to produce semiconductors for ATE that meet the performance requirements of
semiconductor testing.
The Credence Solution and Strategy
- ----------------------------------
Credence has developed proprietary CMOS stabilization methods that
minimize the drift characteristic of CMOS and enable the Company to produce
testers that are smaller and require less power than those based upon ECL
technology and that are intended to provide a lower total cost of ownership than
many competing products currently available while meeting the performance
demands of today's ATE market. CMOS technology allows the circuits used in
Credence's testers to be reduced, or "scaled" down in size as IC process
technology improves, resulting in higher performance and freeing space on the
die for additional functionality. This scalability feature enables the Company
to develop and manufacture smaller, higher performance ICs for use in its
testers at what Credence believes to be a lower cost, and with a potentially
shorter development cycle, than traditional process technologies.
Credence's objective is to be the leading supplier of cost-effective ATE
for production testing of ICs used in high volume applications. The Company's
business strategy incorporates the following key elements:
o Technology Leadership. The Company believes that its proprietary CMOS
stabilization technology enables the development of ATE that is
designed to meet the performance and cost of ownership requirements
of semiconductor manufacturers and assembly and test services
companies. In addition, the Company believes the scalability of this
technology will allow it to offer new products and enhancements in a
potentially shorter time and at a lower cost than many of its
competitors that base their products on traditional less-scalable
architecture.
o Lower Total Cost of Ownership. The Company seeks to provide ATE to
its customers at a lower total cost of ownership than many competing
products currently available while meeting the performance
requirements of its customers. The Company believes that the system
price, reliability, flexibility, size, power and air conditioning
requirements, upgradeability and maintenance costs, including spare
parts, of its testers enable its customers to more cost effectively
test ICs. Credence's proprietary CMOS stabilization technology is
integral to the successful implementation of this strategy.
o Diverse, High-Volume Markets. Credence's products target the testing
of digital logic, mixed-signal and non-volatile memory devices that
are used in a broad range of growing end-user market segments. The
Company's products are designed to test semiconductors that are
manufactured in high volume and are used in a variety of
applications such as automobiles, appliances, personal computers,
personal communications products, networking products, digital
televisions and multimedia hardware.
3
o Worldwide Technical Support and Customer Service. As semiconductor
manufacturers expand their operations worldwide, they require that
their ATE suppliers have the capability to provide global support and
service and training. To meet this requirement, Credence utilizes a
combination of direct sales, service and support personnel and a
broad network of independent distributors located in close proximity
to major customer sites. Credence and its distributors currently
maintain locations throughout the world to service and support
Credence's customers.
o Reduce Time-to-Market. The Company believes that its customers
require increasing levels of sophisticated software tools to assist
in the utilization of ATE that minimizes time-to-market. The Company
is focusing its software efforts on internal development of, and
acquisition of companies or businesses, that develop such tools.
Through its Fluence subsidiary, the Company has acquired the test
development series ("TDS") and TDX products lines, from Summit
Design, Inc. and Zycad, respectively, and has non-exclusive worldwide
distribution rights for the Analog Test and Analog BIST (built-in
self-test) products of Opmaxx, Inc. ("Opmaxx"). In addition, through
the acquisition of certain assets of HPL, th Company obtained an
array of memory BIST and related in-process software products. This
is expected to add significant market opportunities in the next two
years. The Company believes it is ideally positioned to capitalize
on the "Design-to-Test" and the "Design-for-Test" markets with its
new broad-based software product lines that integrate design and
test.
Products
- --------
Credence currently offers a wide variety of products that test digital
logic, mixed-signal and non-volatile memory ICs. Digital logic semiconductors
produce discrete "on" and "off" logical sequences that control functions, store
data, retrieve data and move and manipulate data at high rates of speed. An
example of digital logic semiconductors include logic devices such as
microcontrollers. Certain digital devices which store and retrieve data are
memory semiconductors. Non-volatile memory semiconductors retain their data when
the power is turned off. Mixed-signal semiconductors combine both digital and
analog functions. Analog semiconductors control external functions such as
sound, graphics, and motor controls by producing continuous varying voltage or
current. When these analog functions are combined onto a digital integrated
circuit, the resulting device is considered a mixed-signal device.
The Company's CMOS-based ATE products - the SC,Valstar, DUO and Quartet
series - are designed to test high speed devices used in applications such as
networking and personal computing as well as multimedia, digital television,
high-definition television and personal communications. The Company's memory
products Kalos, EPRO 142 and BTMA test non-volatile memory ("NVM") devices,
including ROM, EPROM, EEPROM and Flash memories used in high volume applications
in the consumer, automotive and telecommunications markets. During 1997, the
Company introduced the ValStar 2000, a system which enables the testing of very
complex devices, up to 1024 pins with high speed requirements. Also introduced
was the Kalos Flash memory test system, a highly integrated parallel system that
provides multi-site testing and is designed to lower the overall cost of test.
During fiscal 1998, the Company introduced the Quartet series. The
Quartet, a new system which is compatible with DUO, provides the enhanced
capabilities required to test consumer mixed signal products with 200 MHz I/O,
20 bit analog, video, and radio frequency ("RF") input and output. Quartet
directly addresses the cost sensitive needs of consumer related system-on-a-chip
("SOC") devices.
During fiscal 1997, the Company acquired two software products lines: the
Test Development Series ("TDS") product line in the Summit Acquisition and the
Test Design eXpert ("TDX") product line in the Zycad Acquisition. TDS converts
simulation waveform data and modifies it under user control to generate test
programs for use on ATE. TDX grades and generates test vector sets, and provides
other tools that enhance design testability.
During fiscal 1998, the Company acquired the MemBIST products from HPL.
The MemBIST products generate built-in self-test logic for embedded memories. In
addition, a sales representative agreement was signed between Opmaxx and
Fluence. The Opmaxx products are targeted at analog and mixed signal design and
test applications.
The following table sets forth the Company's current product offerings,
their features and examples of typical devices tested by each product. Included
in certain of the basic features are the anticipated cycle speed in megahertz
("MHz"), timing accuracy in either picoseconds ("ps") or nanoseconds ("ns"), the
number and characteristics of the pins and the density in megabits ("Mb") of the
device that can be tested:
4
- -------------- --------------- -------------- -------------------------------- ------------------------------------
Product Series Models Basic Features Typical Devices
- -------------- --------------- -------------- -------------------------------- ------------------------------------
SC SC 312 50 - 100 MHz Microcontrollers, ASSPs, DSPs and
SC Micro 64 - 304 Pins FPGAs
+ 350-500 ps accuracy
--------------- -------------- -------------------------------- ------------------------------------
ValStar VS2000 200 MHz Microprocessors, RISC circuits,
Digital + 200 ps accuracy PLDs, FPGAs, ASICs and ASSPs
512-1024 Pins
-------------- -------------------------------- ------------------------------------
VS2000e 200 MHz Microprocessors, RISC circuits,
+ 200 ps accuracy PLDs, FPGAs, ASICs and ASSPs
512-1024 Pins
- -------------- --------------- -------------- -------------------------------- ------------------------------------
DUO DUO DUO-SE - 50 MHz Multimedia devices, mass storage,
DUO-SE DUO - 100 MHz DSPs, ASICs, Datacom and specialty
DUO-SX DUO-SX- 200 MHz devices, mobile communication
DUO-RF DUO-RF-50-100 MHz devices, complex audio devices
Mixed- --------------- -------------- -------------------------------- ------------------------------------
Signal Quartet ONE 512 digital Multimedia devices, mass storage,
200 MHz DSPs, ASICs, Datacom and specialty
+ 175 ps accuracy devices, mobile communication
Analog, Video, Audio, RF devices, complex audio devices
- -------------- --------------- -------------- -------------------------------- -------------------------------------
EPRO 142/AX 10-50 MHz ROM, EEPROM, EPROM, and Flash
KALOS 256Mb memories
Personal Kalos + 1ns
--------------- -------------- -------------------------------- ------------------------------------
Memory BTMA 2001 Benchtop Memory Analysis and ROM, EEPROM, EPROM, Flash and SRAM
Products 2555 Verification Testers
2555A
--------------- -------------- -------------------------------- ------------------------------------
BOST "Built-Off Self-Test" Processors, graphics engines,
Embedded memory test ASIC's and other multimedia devices
External solution for digital
and mixed signal devices
- -------------- --------------- -------------- -------------------------------- ------------------------------------
Logic SC Series tester integrated Microcontrollers, ASSPs and FPGAs
into 8" wafer prober, without
Workcell Triton extending outside the prober
perimeter
-------------- -------------------------------- ------------------------------------
Memory Kalos tester integrated into 8" ROM, EEPROM, EPROM, and Flash
wafer prober, without extending memories
outside the prober perimeter
- -------------- --------------- -------------- -------------------------------- ------------------------------------
TDS Tools Design Test Generates tester specific Tools apply to digital logic devices
programs
Verifies timing specifications
--------------- -------------- -------------------------------- ------------------------------------
TDX Tools Design Test Verifies test vector quality Tools apply to digital logic devices
Supports design for test
strategies
--------------- -------------- -------------------------------- ------------------------------------
Software HPL Memory BIST Generates built-in self-test Tools apply to all memory devices
(BIST) logic. Partitioned
solutions using BIST, ATE, and
built-off self-test (BOST)
--------------- -------------- -------------------------------- ------------------------------------
Opmaxx* DesignMaxx Design verification and Tools apply to analog and
Design, Test FaultMaxx sensitivity analysis, design mixed-signal devices
TestMaxx fault coverage, test evaluation
and optimization
--------------- -------------- -------------------------------- ------------------------------------
Opmaxx* BISTMaxx Built-in self-test (BIST) Tools apply to analog and
Analog BIST generation for analog and mixed-signal devices
mixed-signal devices
- -------------- --------------- -------------- -------------------------------- ------------------------------------
* The Opmaxx products are not owned by the Company, but are licensed pursuant to
a sales representative agreement.
5
Digital Products
----------------
SC. The model SC 212 was first shipped in 1992 and incorporates one of
the Company's proprietary CMOS stabilization methods. This product requires
approximately 30 square feet of floor space and 4 kilowatts of power for 304
pins. The SC Micro is a cost-reduced version of the SC 212. This system offers
the Company's customers a full capability test system at a price as low as
$2,000 per digital pin channel. This per channel price has previously been
available only in test systems with reduced functionality - requiring users to
compromise the quality of their device testing. The SC Micro retains the
customer's test quality while continuing to lower its test costs. In 1997 the
Company expanded the SC series by introducing and shipping the SC 312, which
runs at a higher speed (100 MHz) and has improved accuracy over the SC 212. The
purchase price of these testers typically ranges from $350,000 to $850,000
depending upon configuration.
ValStar. The VS2000 was introduced in 1997 and the Company believes it is
the first system designed specifically with the desired performance cost
structure for volume production of high pin count VLSI devices. This product
offers up to 1,024 input/output ("I/O") pins at 200 MHz data rates, and requires
less than four square meters of floor space. A fully loaded system consumes only
16 kilowatts of power, which is generally less than many competitive systems,
thus lowering operating costs. The purchase price of the VS 2000 typically
ranges from $1,000,000 to $3,600,000 depending on configuration The latest
system in the ValStar line up was introduced in 1998. Unlike the VS2000, the
VS2000e uses a customer specific external testhead positioner. The purchase
price of the VS2000e typically ranges from $1,000,000 to $3,600,000 depending on
configuration.
Mixed-Signal Products
---------------------
Quartet. Quartet is the Company's new high performance mixed-signal
product series. First introduced in 1998, Quartet builds on the Duo series by
addressing the needs of device manufacturers serving the Consumer-Mixed-Signal
("CMS") marketplace. CMS devices combine the power of digital processors with CD
quality audio, broadcast video and wireless communications onto a single, cost
sensitive system-on-a-chip ("SOC"). The Quartet One, the first of the Quartet
Series, addresses all four of these requirements in an integrated, ready for
volume production package. With 200 MHz digital, 20 bit audio, 300 MHz video and
6GHz RF, Quartet One is designed to meet the needs of the most complex SOC
devices. With typical system prices between $750,000 and $2,000,000, the Quartet
provides the low cost of test required by the CMS market.
Duo. The Duo Series is the Company's proven solution for high volume
mixed-signal testing. With over 200 systems in the field, Duo has become a
mainstream solution for both Integrated Device Manufacturers and the
Semiconductor Manufacturing Service companies. The typical purchase price of the
Duo ranges from $600,000 to $1,500,000.
Memory Products
---------------
EPRO. The Company's EPRO memory product line includes the model 142/AX.
The model 142/AX was first shipped by EPRO in 1982. The purchase price of these
non-volatile memory testers typically ranges from $30,000 to $80,000, depending
upon configuration.
KALOS. Introduced in November 1997, the Kalos is a highly integrated,
parallel system designed to test flash memory. Running at 50 MHz, it provides
multi-site testing and is designed to lower the customer's cost of test. The
Kalos features a unique tester-on-a-card architecture, which places all test
functions for each site on a single card and thus reduces floor space and power
consumption while increasing performance. The typical purchase price of the
Kalos ranges from $400,000 to $800,000.
Personal Kalos. Personal Kalos is a desktop engineering version of the
high-throughput Kalos tester. The typical price for a Personal Kalos ranges from
$100,000 to $120,000.
BTMA. The 2001, 2555 and 2555A are NVM engineering testers focused on the
lab environment. Acquired from HPL in 1998, the BTMA line is designed to be
usable by design engineers and other non-test specialists to debug and
characterize NVM designs and yield problems. The BTMA software user interface
makes it the premier platform for this function. The purchase price for these
testers typically ranges from $50,000 to $250,000.
6
BOST. Built-Off Self-Test ("BOST") technology is a new element in
transforming the role of test from an expensive and passive device validation
procedure into a series of solutions that can shrink development cycles, reduce
costs, meet time-to-market demands and improve die yields. BOST integrates a
device specific Built-In Self-Test ("BIST") engine directly into a custom
circuit on the load board. Consulting services for BOST memory testing are
available today and pricing is dependent on configuration.
Workcell Products
-----------------
In 1996, the Company established the Workcell product group. A Workcell
enhances manufacturing productivity by integrating previously distinct equipment
into a single, highly efficient tool. In 1997, the Company debuted its
sophisticated Triton series of wafer test systems. Triton Logic and Triton
Memory - the industry's first suite of Workcell wafer test solutions - feature a
production worthy wafer prober integrated with a robust ATE test system.
Triton Logic. This is a complete wafer probing Workcell in one of the
industry's smallest packages for use in volume production environments for
microcontrollers and other embedded controller devices with heavy logic demands.
The Triton Logic centralizes all operator functions and eliminates the
unnecessary duplication of manipulators, monitors and keypads previously
associated with separate testers and probers. A 100 MHz Final Test at Probe test
system, the Triton is capable of matching the performance of package test at the
wafer level.
Triton Memory. Leveraging Credence's tester-on-a-card architecture,
Triton Memory tests as many as 16 sites in parallel at speeds of 50 MHz. All
functions required to test a Flash memory device appear on one card. An
inherently parallel, high-performance system that improves throughput rates, the
Triton Memory tests each device asynchronously from one another - while embedded
within an 8" wafer prober. The tester is an integral part of the prober's
structure, eliminating independent vibrations associated with current interface
concepts. The typical price of a Triton memory ranges from $450,000 to
$1,300,000.
Software Products
-----------------
Software products provide tools to IC manufacturers to help create
detailed tests that ensure product quality and shorten time-to-market.
TDS. The TDS product line consists primarily of Converter, Conditioner,
and WaveBridge products. Converters take waveform data from simulator-specific
representations into an industry-standard representation. Conditioners modify
waveform data to enable it to fit specific tester environments. WaveBridge
modules generate the actual test programs. Converters are available to support
most commonly used simulators, and WaveBridge modules are available for a
variety of ATE models. Other programs that analyze waveform data and provide
other design-to-test functions are also included in the TDS product line.
TDX. The TDX product line allows the design engineer to verify complex
designs with full timing accuracy, Iddq, pattern generation, scan generation and
testability analysis.
MemBIST. MemBIST software generates built-in self-test logic for designs
that use embedded memories. The software minimizes the test time and chip area
required for self-test logic of embedded memories. Users can also designate
varying levels of detail for the diagnostic information to be produced by the
BIST logic, from simple "pass/fail" to topologically correct bitmaps that can be
used in failure analysis.
Opmaxx. The Opmaxx product line provides a full set of software tools for
testing analog and mixed signal devices, as well as designing them for
testability. DesignMaxx provides analog design optimization, verification, and
sensitivity analysis. FaultMaxx evaluates analog/mixed-signal fault coverage and
fault-grades test stimulus. TestMaxx evaluates and optimizes analog/mixed-signal
tests. BISTMaxx generates built-in self-test for analog/mixed signal device
functionality, both on-chip and off-chip.
7
Customers, Markets and Applications
- -----------------------------------
Credence targets digital logic, mixed-signal, non-volatile memory device
and system-on-a-chip manufacturers that serve a broad range of growing end-user
market segments. These customers manufacture semiconductors in high volume for
use in applications such as automobiles, appliances, personal computers,
personal communications products, networking products, digital televisions and
multimedia hardware.
In addition to marketing its products to major semiconductor
manufacturers, the Company has developed relationships with numerous assembly
and test services companies. Semiconductor manufacturers and fabless
semiconductor companies increasingly utilize these subcontractors as a means of
lowering their fixed production costs, thus minimizing the effects of
cyclicality inherent in the semiconductor industry. As a result, these assembly
and test services companies have become an increasingly important segment of the
ATE market.
The Company believes that its success depends in large part upon the
success of its major customers. The loss of or any reduction in orders by a
significant customer (including the potential for reductions in orders by
assembly and test services companies which that customer may utilize), including
reductions due to market, economic or competitive conditions in the
semiconductor industry or in other industries that manufacture products
utilizing semiconductors has adversely affected, and may continue to adversely
affect, the Company's business, financial condition or results of operations.
The Company's ability to increase its sales in the future will depend in part
upon its ability to obtain orders from new customers as well as upon the
financial condition and success of its customers and the general global economy.
There can be no assurance that the Company's sales will not decrease in the
future or that the Company will be able to retain existing customers or to
attract new ones.
For information on the Company's geographic data and major customers, see
Note 4 to the consolidated financial statements included elsewhere herein. The
Company's international sales are primarily denominated in United States
dollars. The Company anticipates that its international business will continue
to account for a significant portion of net sales in the foreseeable future.
The Company schedules production of its systems based upon order backlog
and order forecast. The Company includes in its backlog only those customer
orders for systems (including upgrades) for which it has accepted purchase
orders and assigned shipment dates within the following twelve months. The
majority of the Company's orders are subject to cancellation or rescheduling by
the customer with limited or no penalties. The Company's backlog at any
particular date may not necessarily be representative of actual sales for any
succeeding period due to orders received for systems to be shipped in the same
quarter, possible changes in system delivery schedules, cancellation of orders
and potential delays in system shipments. As of October 31, 1998, the Company's
order backlog for systems (exclusive of orders for spare parts and service and
support) was approximately $ 32.3 million, as compared with $97.5 million as of
October 31, 1997.
Sales, Service and Support
- --------------------------
The Company currently markets and sells its products in the United States
principally through its direct sales organization, with direct sales employees
and representatives in over 16 locations. Outside the United States, the Company
utilizes both direct sales employees and a broad network of distributors, with
direct sales employees and distributors in over 15 countries. Sales through
distributors represented approximately 45%, 36% and 36% of net sales during
fiscal years 1998, 1997 and 1996, respectively.
The Company and its distributors have sales and support centers located
in the United States, Europe, Israel, and throughout Asia from which both direct
Credence personnel and independent sales and service representatives sell and
support the equipment. The Company believes that field support is critical to
its customers. Support encompasses many of the components of the total cost of
ownership for ATE. Credence seeks to develop long-term relationships with major
ATE customers through extensive support consisting of teams of professional
sales, applications, training and service personnel. These personnel are located
in close physical proximity to key customer sites in order to provide the
required support in a timely fashion. The sales process includes consultations
with customers to help them purchase the most cost-effective equipment for their
needs, to help develop custom test programs to optimize production throughput,
to assist in long-term self-sufficiency through training of customer test
engineering personnel and to provide the service capacity and preventive
8
maintenance to reduce downtime for customers' systems. Customer support includes
field personnel and in-house applications personnel who work closely with design
engineering groups to modify existing equipment to meet the latest performance
requirements.
In Japan, a wholly-owned subsidiary of the Company provides sales and
service to its customers. In addition, the Company has a relationship with
Innotech, Corporation ("Innotech"), a distributor of the Company's products in
Japan. In 1997 the Company formed a joint venture with Innotech to engage in the
customization and manufacture of ATE products for sale by both companies. In
March 1996, the Company established a service and support subsidiary in Korea.
The Company also has a relationship with Itek, Inc., a distributor of the
Company's products in Korea.
The Company's standard policy is to warrant its new systems against
defects in design, materials and workmanship for one year for parts and labor.
The Company offers its customers additional support after the warranty period in
the form of maintenance contracts for specified time periods. Such contracts
include various options such as board replacement, priority response, planned
preventive maintenance, scheduled one-on-one training, daily on-site support and
monthly system and performance analysis.
Research and Development
- ------------------------
The ATE market is subject to rapid technological change and new product
introductions. The Company's ability to be competitive in this market will
depend in significant part upon its ability to successfully develop and
introduce new products, enhancements and related software tools on a timely and
cost-effective basis. This will enable customers to integrate such products into
their operations as they begin volume manufacturing of the next generation of
semiconductors.
Credence has pursued a technology acquisition strategy to complement its
internal research and development efforts. In 1988, the Company completed its
acquisition of Axiom Technology Corporation, which added mixed-signal testing
capability. In 1989, the Company completed its acquisition of ASIX Systems
Corporation ("Asix"), which added one of its proprietary CMOS stabilization
methods. In 1990, the Company acquired the STS Division of Tektronix
Inc.("Tektronix"), which added a second proprietary CMOS stabilization method.
In 1993, the Company acquired various patents from Tektronix. In March 1995, the
Company acquired EPRO, which added non-volatile memory testing capability. In
July 1997, the Company acquired the test development software assets through the
Summit Acquisition. In August 1997, the Company acquired the fault simulation
and test program development products of Zycad, and in June 1998, the Company
purchased certain assets and assumed certain liabilities relating to the memory
test business of HPL.
Each of the stabilization methods acquired by Credence provides a
different solution to the tendency of CMOS to experience timing drift as a
function of temperature and voltage variation. The first proprietary solution
uses a timing phase detection circuit combined with a voltage control mechanism
to compensate for thermal, voltage and process drift. The second uses a unique
combination of counters and heating circuits to provide stability through
thermal means. These methods allow the Company's CMOS-based ICs to achieve the
timing repeatability necessary to meet the performance requirements of ATE and
to realize the economic and other advantages of CMOS technology over ECL
technology. CMOS circuits use less space than those based on ECL as the circuits
require less power and can be more closely packed together.
During 1998, the Company enhanced its Duo product line with new
capabilities including high performance audio testing, testing of analog
circuitry for wireless communication applications and embedded memory test
capability. These features enable single insertion system-on-a-chip testing
capability. The Company will continue to focus research and development efforts
on ensuring that its products have the ability to efficiently test
state-of-the-art customer devices which combine analog, high speed digital
logic, and memory on a single circuit.
Credence's ongoing research and development efforts also include focusing
on increased cycle speed, accuracy and pin counts of its testers. In addition,
the Company is working on a software development program that is intended to
provide for upward compatibility through the Company's products. Credence will
also continue to focus efforts on providing software solutions which allow more
rapid, cost-effective development of ATE test programs which reduce
time-to-market of customer integrated circuit designs. The Company currently
intends to continue to invest significant resources in the development of new
products and enhancements for the foreseeable future.
9
Research and development ("R&D") expenses were $47.5 million (excluding a
$2 million charge for acquired in-process R&D), $37.4 million (excluding a $6
million charge for acquired in-process R&D), and $35.4 million in fiscal 1998,
1997 and 1996, respectively.
Proprietary Rights
- ------------------
The Company currently holds 34 United States patents, which expire over
time through April 2017. In addition, the Company currently has 12 foreign
patents, which expire over time through September 2011. The two United States
patents acquired from Asix and Tektronix underlying the Company's proprietary
CMOS stabilization methods expire in February 2007 and December 2007,
respectively.
The Company has granted a license to Tektronix with respect to patents
obtained in the acquisition of the STS Division of Textronix, and certain other
intellectual property rights (collectively, the "Tektronix Rights"), including a
patent covering one of the Company's proprietary CMOS stabilization
technologies, that were assigned to the Company by Tektronix in 1993. Tektronix
has a worldwide, perpetual, irrevocable, non-exclusive, royalty free,
fully-paid, sublicensable and transferable license to the Tektronix Rights.
Tektronix may not grant rights under the Tektronix Rights to make, use, sell or
otherwise distribute ATE for testing ICs to any entity other than
Sony-Tektronix, a Tektronix joint venture affiliate that does not currently
offer production ATE, and to a successor-in-interest to Tektronix. Tektronix may
not grant or assign such rights to any other party that is a Credence
competitor. In addition, Tektronix may not knowingly sell components
incorporating the Tektronix Rights to any other party. The Company and Tektronix
have granted to each other a worldwide, perpetual, irrevocable, non-exclusive,
royalty free, fully-paid, sublicensable and transferable license to all
improvements, enhancements, modifications or derivative works created before
August 1996 ("Improvements") of intellectual property that was licensed or
assigned pursuant to a Technology Agreement dated December 31, 1990, as amended
on August 12, 1993, including the Tektronix Rights, to make, use and sell ATE
for testing ICs. Tektronix's license to the Improvements is subject to the same
restrictions as its license to the Tektronix Rights.
The Company attempts to protect its intellectual property rights through
patents, copyrights, trademarks and maintenance of trade secrets and other
measures. There can be no assurance that others will not independently develop
equivalent intellectual property or that the Company can meaningfully protect
its intellectual property. There can be no assurance that any patent owned by
the Company will not be invalidated, circumvented or challenged, that the rights
granted thereunder will provide competitive advantages to the Company or that
any of the Company's pending patent applications will be issued. Furthermore,
there can be no assurance that others will not develop similar products,
duplicate the Company's products or design around the patents owned by the
Company. In addition, litigation has been and may continue to be necessary to
enforce the Company's patents and other intellectual property rights, to protect
the Company's trade secrets, to determine the validity and scope of the
proprietary rights of others, or to defend against claims of infringement or
invalidity. For additional information with respect to the Company's
intellectual property, review the information set forth under "Risk
Factors-Proprietary Rights."
Manufacturing and Suppliers
- ---------------------------
The Company's manufacturing objective is to produce ATE that conforms to
its customers' requirements at the lowest commercially practical manufacturing
cost. Credence relies on outside vendors to manufacture certain components and
subassemblies including several custom integrated circuits. The Company seeks to
manage its inventory levels through agreements with both suppliers and
subcontractors that provide just-in-time delivery of these components and
subassemblies. The Company assembles these components and subassemblies to
create finished testers in the configuration specified by its customers. In
general, Credence uses standard components and prefabricated parts available
from numerous suppliers. However, certain components and subassemblies necessary
for the manufacture of the Company's testers are obtained from a sole supplier
or a limited group of suppliers and the Company is in the process of qualifying
a second source for some of those components. There can be no assurance that
such alternative source will be qualified or available to the Company. The
Company's reliance on a sole or a limited group of suppliers and on outside
subcontractors involves certain risks, including a potential inability to obtain
an adequate supply of required components, and reduced control over pricing and
timely delivery of components. See "Risk Factors - Limited Sources of Supply;
Reliance on Sub-contractor."
10
Competition
- -----------
The ATE industry is intensely competitive. Credence faces substantial
competition throughout the world, primarily from ATE manufacturers located in
the United States, Europe and Japan, as well as from certain of its customers.
The Company's competitors in the digital semiconductor testing market include
Advantest Corporation ("Advantest"), Ando Electric Co., Ltd., LTX Corporation
("LTX"), Schlumberger Ltd. ("Schlumberger"), Hewlett-Packard Company ("HP") and
Teradyne, Inc. ("Teradyne"). In the mixed-signal semiconductor testing market,
the Company's competitors include Teradyne, LTX, HP, Schlumberger, and
Advantest. In the non-volatile memory testing market the Company's competitors
include Teradyne, HP and Advantest. See "Risk Factors - Highly Competitive
Industry."
The principal elements of competition in the Company's markets and the
basis upon which ATE customers select testers include throughput, tools for
reducing customer product time-to-market, product performance and total cost of
ownership. The Company believes that it competes favorably with respect to these
factors.
Employees
- ---------
As of October 31, 1998, the Company had a total of 646 employees,
including 160 engaged in manufacturing, 167 in research and development, 60 in
applications, 175 in sales, marketing and service, and 84 in general
administration. Many of the Company's employees are highly skilled, and the
Company believes its future results of operations will depend in large part on
its ability to attract and retain such employees. None of the Company's
employees are represented by a labor union, and the Company has not experienced
any work stoppages. The Company considers its employee relations to be good.
RISK FACTORS
Fluctuations in Our Quarterly Net Sales and Operating Results
- -------------------------------------------------------------
[ GRAPH SHOWING THE COMPANY'S NET SALES AND QUARTERLY NET INCOME (LOSS) ]
[ FOR THE THREE FISCAL YEARS ENDED OCTOBER 31, 1998, IN $ MILLIONS. ]
A variety of factors affect our results of operations. The above graph
illustrates that our quarterly net sales and operating results have fluctuated
significantly. We believe they will continue to fluctuate for a number of
reasons, including:
o economic conditions in the semiconductor industry in general
capital equipment industry specifically;
o timing of new product announcements and new product releases by us
or our competitors;
11
o market acceptance of our new products and enhanced version of existing
products;
o manufacturing inefficiencies associated with the start-up of our new
products, changes in our pricing or payment terms and cycles, and
those of our competitors, customers and suppliers;
o manufacturing capacity and ability to volume produce systems and meet
customer requirements;
o write-offs of excess and obsolete inventories, and uncollectible
receivables;
o patterns of capital spending by our customers, delays, cancellations
or rescheduling of customer orders due to customer financial
difficulties or otherwise;
o changes in overhead absorption levels due to changes in the number of
systems manufactured, the timing and shipment of orders, availability
of components including customs ICs, subassemblies and services,
customization and reconfiguration of systems and product reliability;
o expenses associated with acquisitions and alliances;
o operating expense reductions, including costs relating to facilities
consolidations and related expenses;
o the proportion of our direct sales and sales through third parties,
including distributors and OEMs, the mix of products sold, the length
of manufacturing and sales cycles, product discounts; and
o natural disasters, political and economic instability regulatory
changes and outbreaks of hostilities.
We presently intend to introduce many new products and product
enhancements in the future, the timing and success of which will affect our
business, financial condition and results of operations. Our gross margins on
system sales have varied significantly, and will continue to vary significantly
based on a variety of factors, including:
o manufacturing inefficiencies;
o pricing concessions by us and our competitors and pricing by our
suppliers;
o hardware and software product sales mix;
o inventory write-downs;
o production volume;
o new product introductions;
o product reliability;
o absorption levels and the rate of capacity utilization;
o customization and reconfiguration of systems; and
o international and domestic sales mix and field service margins.
New and enhanced products typically have lower gross margins in the early
stages of commercial introduction and production. Although we have recorded and
continue to record provisions for estimated sales returns, uncollectible
accounts, and product warranty costs, we cannot be certain that our estimates
will be adequate. We may be required to record charges in future quarters to
reflect, in part, the cost of additional facilities consolidation, as it occurs.
We cannot forecast with any certainty the impact of these and other
factors on our sales and operating results in any future period. In addition,
our need for continued significant expenditures for research and development,
marketing and other expenses for new products, capital equipment purchases and
worldwide training and customer service and support, among other factors, will
make it difficult for us to reduce our significant fixed expenses in a
particular period if we don't meet our net sales goals for that period. As a
result, we cannot be certain that we will become profitable again or that we
will not continue to sustain losses in the future. We believe that we will incur
a net loss in the next several quarters of fiscal 1999. Due to all of these
things, our operating results are likely to continue to be below the initial
expectations of public market analysts and investors, as they were frequently
during the last several quarters. If so, the price of our Common Stock may
continue to be materially adversely affected.
Limited Systems Sales; Backlog
- ------------------------------
We derive a substantial portion of our net sales from the sale of a
relatively small number of systems that typically range in price from $350,000
to $3.6 million, other than certain memory products and software products, for
12
which the price range is typically below $50,000. As a result, our net sales and
operating results for a particular period could be significantly impacted by the
timing of recognition of revenue from a single transaction. Our net sales and
operating results for a particular period could also be materially adversely
affected if an anticipated order from even one customer is not received in time
to permit shipment during that period. Backlog at the beginning of a quarter
typically does not include all orders necessary to achieve our sales objectives
for that quarter. In addition, orders in backlog are subject to cancellation,
delay, deferral or rescheduling by customers with limited or no penalties.
Consequently, our quarterly net sales and operating results have in the past and
will in the future depend upon our obtaining orders for systems to be shipped in
the same quarter that the order is received. Our backlog as of October 31, 1998,
has decreased by approximately 67% since October 31, 1997.
Furthermore, we ship certain products generating most of our net sales
near the end of each quarter. Accordingly, our failure to receive an anticipated
order or a delay or rescheduling in a shipment near the end of a particular
period may cause net sales in a particular period to fall significantly below
expectations, which could have a material adverse effect on our business,
financial condition or results of operations. The relatively long manufacturing
cycle of many testers has caused and could continue to cause future shipments of
testers to be delayed from one quarter to the next, which could materially
adversely affect our business, financial condition or results of operations.
Furthermore, as we and our competitors announce new products and technologies,
customers may defer or cancel purchases of our existing systems, which could
have a material adverse effect on our business, financial condition or results
of operations. We cannot forecast the impact of these and other factors on sales
and operating results.
Cyclicality of Semiconductor Industry
- -------------------------------------
Our business and results of operations depend largely upon the capital
expenditures of manufacturers of semiconductors and companies that specialize in
contract packaging and/or testing of semiconductors, including manufacturers and
contractors that are opening new or expanding existing fabrication facilities or
upgrading existing equipment, which in turn depend upon the current and
anticipated market demand for semiconductors and products incorporating
semiconductors. The semiconductor industry has been highly cyclical with
recurring periods of oversupply, which often have had a severe effect on the
semiconductor industry's demand for test equipment, including the systems we
manufacture and market. We believe that the markets for newer generations of
semiconductors will also be subject to similar fluctuations.
We have experienced shipment delays, delays in commitments and purchase
order restructurings by several customers and we expect delays and
restructurings may continue. Accordingly, we cannot be certain that we will be
able to achieve or maintain our current or prior level of sales or rate of
growth. We anticipate that a significant portion of new orders may depend upon
demand from semiconductor device manufacturers building or expanding fabrication
facilities and new device testing requirements that are not addressable by
currently installed test equipment, and there can be no assurance that such
demand will develop to a significant degree, or at all. In addition, our
business, financial condition or results of operations may be adversely affected
by any factor adversely affecting the semiconductor industry in general or
particular segments within the semiconductor industry. The recent Asian
financial crisis has contributed to a widespread uncertainty and a slowdown in
the semiconductor industry. This slowdown in the semiconductor industry has
resulted in reduced spending for semiconductor capital equipment, including ATE
which the Company sells. This industry slowdown has had and may continue to have
a material adverse effect on the Company's product backlog, balance sheet and
results of operations. Therefore, there can be no assurance that the Company's
operating results will not continue to be materially adversely affected if
downturns or slowdowns in the semiconductor industry continue or occur again in
the future.
Management of Fluctuations in Our Operating Results
- ---------------------------------------------------
We have over the last several years experienced significant fluctuations
in our operating results. In fiscal 1998, we generated revenue of $82.4 million
for the first quarter and $22.4 million for the fourth quarter, a decrease of
73%. Since 1993, except for cost-cutting efforts during the past two years, we
have overall significantly increased the scale of our operations in general to
support periods of increased sales levels and expanded product offerings and
have expanded operations to address critical infrastructure and other
requirements, including the hiring of additional personnel, significant
investments in R&D to support product development, our establishment of a joint
venture with Innotech and numerous acquisitions. However, in the past and
including the three quarters ended October 31, 1998, as discussed above, we have
experienced significant revenue declines and reductions in our operations. These
fluctuations in our sales and operations have placed a considerable strain on
our management, financial, manufacturing and other resources. In order to
effectively deal with the changes brought on by the cyclical nature of the
13
industry, we have been required to implement and improve a variety of highly
flexible operating, financial and other systems, procedures and controls capable
of expanding or contracting consistent with our business. However, we cannot be
certain that any existing or new systems, procedures or controls will be
adequate to support fluctuations in our operations or that our systems,
procedures and controls will be cost-effective or timely. Any failure to
implement, improve and expand or contract such systems, procedures and controls
efficiently and at a pace consistent with our business could have a material
adverse effect on our business, financial condition or results of operations.
Expansion of Our Product Lines
- ------------------------------
We are currently devoting and intend to continue to devote significant
resources to the development of new products and technologies. During fiscal
1999, we intend to evaluate these new products and to invest significant
resources in plant and equipment, leased facilities, inventory, personnel and
other costs, to begin or prepare to increase production of these products and to
provide the marketing, administration and after-sales service and support, if
any, required to service and support these new hardware and software products.
Accordingly, we cannot be certain that gross profit margin and inventory levels
will not continue to be adversely impacted by continued delays in new product
introductions or start-up costs associated with the initial production and
installation of these new product lines. These start-up costs include additional
manufacturing overhead, additional inventory and warranty reserve requirements
and the enhancement of after-sales service and support organizations. In
addition, the increases in inventory on hand for new hardware and software
product development and customer support requirements have increased and will
continue to increase the risk of inventory write-offs. We cannot be certain that
operating expenses will not increase, relative to sales, as a result of adding
additional marketing and administrative personnel, among other costs, to support
our additional products. If we are unable to achieve significantly increased net
sales or if sales fall below expectations, our operating results will continue
to be materially adversely affected. We cannot be certain that our net sales
will increase or remain at recent levels or that any new products will be
successfully commercialized or contribute to revenue growth.
Limited Sources of Supply; Reliance on Our Subcontractors
- ---------------------------------------------------------
We obtain certain components, subassemblies and services necessary for
the manufacture of our testers from a limited group of suppliers. We do not
maintain long-term supply agreements with most of our vendors and we purchase
most of our components and subassemblies through individual purchase orders. The
manufacture of certain of our components and subassemblies is an extremely
complex process. We also rely on outside vendors to manufacture certain
components and subassemblies and to provide certain services. We have recently
experienced and continue to experience significant reliability, quality and
timeliness problems with several critical components including certain custom
integrated circuits. In addition, we and certain of our subcontractors
periodically experience significant shortages and delays in delivery of various
components and subassemblies. We cannot be certain that these or other problems
will not continue to occur in the future with our suppliers or outside
subcontractors. Our reliance on a limited group of suppliers and on outside
subcontractors involves several risks, including an inability to obtain an
adequate supply of required components, subassemblies and services and reduced
control over the price, timely delivery, reliability and quality of components,
subassemblies and services. Shortages, delays, disruptions or terminations of
the sources for these components and subassemblies have delayed and could
continue to delay shipments of our systems and new products and could continue
to have a material adverse effect on our business, financial condition or
results of operations. Our continuing inability to obtain adequate yields or
timely deliveries or any other circumstance that would require us to seek
alternative sources of supply or to manufacture such components internally could
also have a material adverse effect on our business, financial condition or
results of operations. Such delays, shortages and disruptions would also damage
relationships with current and prospective customers and have and could continue
to allow competitors to penetrate such customer accounts. We cannot be certain
that our internal manufacturing capacity or that of our suppliers and
subcontractors will be sufficient to meet customer requirements.
Highly Competitive Industry
- ---------------------------
The ATE industry is intensely competitive. Because of the substantial
investment required to develop test application software and interfaces, we
believe that once a semiconductor manufacturer has selected a particular ATE
vendor's tester, the manufacturer is likely to use that tester for a majority of
its testing requirements for the market life of that semiconductor and, to the
extent possible, subsequent generations of similar products. As a result, once
an ATE customer chooses a system for the testing of a particular device, it is
difficult for competing vendors to achieve significant ATE sales to such
customer for similar use. Our inability to penetrate any large ATE customer or
achieve significant sales to any ATE customer could have a material adverse
effect on our business, financial condition or results of operations.
14
We face substantial competition throughout the world, primarily from ATE
manufacturers located in the United States, Europe and Japan, as well as several
of our customers. Many competitors have substantially greater financial and
other resources with which to pursue engineering, manufacturing, marketing and
distribution of their products. Certain competitors have recently introduced or
announced new products with certain performance or price characteristics equal
or superior to certain products we currently offer. These competitors have
recently introduced products that compete directly against our products. We
believe that if the ATE industry continues to consolidate through strategic
alliances or acquisitions, we will continue to face significant additional
competition from larger competitors that may offer product lines and services
more complete than ours. Our competitors are continuing to improve the
performance of their current products and to introduce new products,
enhancements and new technologies that provide improved cost of ownership and
performance characteristics. New product introductions by our competitors could
continue to cause a decline in our sales or loss of market acceptance of our
existing products.
Moreover, our business, financial condition or results of operations
could continue to be materially adversely affected by increased competitive
pressure and continued intense price-based competition. We have experienced and
continue to experience significant price competition in the sale of our testers.
In addition, pricing pressures typically become more intense at the end of a
product's life cycle and as competitors introduce more technologically advanced
products. We believe that to be competitive, we must continue to expend
significant financial resources in order to, among other things, invest in new
product development and enhancements and to maintain customer service and
support centers worldwide. We cannot be certain that we will be able to compete
successfully in the future.
Rapid Technological Change; Importance of Timely Product Introduction
- ---------------------------------------------------------------------
The ATE market is subject to rapid technological change. Our ability to
compete in this market depends upon our ability to successfully develop and
introduce new hardware and software products and enhancements and related
software tools with greater features on a timely and cost-effective basis,
including the products under development that we acquired in the EPRO merger and
the Summit, Zycad and HPL product line acquisitions. Our customers require
testers and software products with additional features and higher performance
and other capabilities. We are therefore required to enhance the performance and
other capabilities of our existing systems and software products and related
software tools. Any success we may have in developing new and enhanced systems
and software products and new features to our existing systems and software
products will depend upon a variety of factors, including:
o product selection;
o timely and efficient completion of product design;
o implementation of manufacturing and assembly processes;
o successful coding and debugging of software;
o product performance;
o reliability in the field; and
o effective sales and marketing.
Because we must make new product development commitments well in advance
of sales, new product decisions must anticipate both future demand and the
availability of technology to satisfy that demand. We cannot be certain that we
will be successful in selecting, developing, manufacturing and marketing new
hardware and software products or enhancements and related software tools. Our
inability to introduce new products and related software tools that contribute
significantly to net sales, gross margins and net income would have a material
adverse effect on our business, financial condition and results of operations.
New product or technology introductions by our competitors could cause a decline
in sales or loss of market acceptance of our existing products. In addition, if
we introduce new products, existing customers may curtail purchases of the older
products and delay new product purchases. Any unanticipated decline in demand
for our hardware or software products could have a materially adverse affect on
our business, financial condition or results of operations.
Significant delays can occur between the time we introduce a system and
the time we are able to produce that system in volume. We have in the past
experienced significant delays in the introduction, volume production and sales
of our new systems and related feature enhancements and are currently
15
experiencing significant delays in the introduction of our Valstar, Quartet and
Kalos series testers as well as certain enhancements to our existing SC and DUO
series testers. These delays have been primarily related to our inability to
successfully complete product hardware and software engineering within the time
frame originally anticipated, including design errors and redesigns of ICs. As a
result, certain customers have experienced significant delays in receiving and
using certain of our testers in production. We cannot be certain that these or
additional difficulties will not continue to arise or that such delays will not
continue to materially adversely affect customer relationships and future sales.
Moreover, we cannot be certain that we will not encounter these or other
difficulties that could delay future introductions or volume production or sales
of our systems or enhancements and related software tools. We have incurred and
may continue to incur substantial unanticipated costs to ensure the
functionality and reliability of our testers and to increase feature sets. If
our systems continue to have reliability, quality or other problems, or the
market perceives certain of our products to be feature deficient, we may suffer
reduced orders, higher manufacturing costs, delays in collecting accounts
receivable and higher service, support and warranty expenses, or inventory
write-offs, among other effects. Our failure to have a competitive tester and
related software tools available when required by a semiconductor manufacturer
could make it substantially more difficult for us to sell testers to that
manufacturer for a number of years. We believe that the continued acceptance,
volume production, timely delivery and customer satisfaction of our newer
digital, mixed signal and non-volatile memory testers are of critical importance
to our future financial results. As a result, our inability to correct any
technical, reliability, parts shortages or other difficulties associated with
our systems or to manufacture and ship the systems on a timely basis to meet
customer requirements could damage our relationships with current and
prospective customers and would continue to materially adversely affect our
business, financial condition and results of operations.
Customer Concentration; Lengthy Sales Cycle
- -------------------------------------------
One customer, Spirox Corporation, (a distributor in Taiwan) accounted for
34%, 30% and 25% of our net sales in fiscal 1998, 1997, and 1996, respectively.
Consequently, our business, financial condition and results of operations could
be materially adversely affected by the loss of or any reduction in orders by
this or any other significant customer, including losses or reductions due to
continuing or other technical, manufacturing or reliability problems with our
products or continued slow-downs in the semiconductor industry or in other
industries that manufacture products utilizing semiconductors. Our ability to
maintain or increase sales levels will depend upon:
o our ability to obtain orders from existing and new customers;
o our ability to manufacture systems on a timely and cost-effective
basis;
o our ability to complete the development of our new hardware and
software products;
o our customers' financial condition and success;
o general economic conditions; and
o our ability to meet increasingly stringent customer performance and
other requirements and shipment delivery dates.
Sales of our systems depend in part upon the decision of semiconductor
manufacturers to develop and manufacture new semiconductor devices or to
increase manufacturing capacity. As a result, sales of our testers are subject
to a variety of factors we cannot control. In addition, the decision to purchase
a tester generally involves a significant commitment of capital, with the
attendant delays frequently associated with significant capital expenditures.
For these and other reasons, our systems have lengthy sales cycles during which
we may expend substantial funds and management effort to secure a sale,
subjecting us to a number of significant risks. We cannot be certain that we
will be able to maintain or increase net sales in the future or that we will be
able to retain existing customers or attract new ones.
Risks Associated with Acquisitions
- ----------------------------------
We have developed in significant part through mergers and acquisitions of
other companies and businesses. We intend in the future to pursue additional
acquisitions of complementary product lines, technologies and businesses. We may
have to issue debt or equity securities to pay for future acquisitions, which
could be dilutive. We have also incurred and may continue to incur certain
liabilities or other expenses in connection with acquisitions, which have and
could continue to materially adversely affect our business, financial condition
and results of operations. Although we believe we have accounted for our
16
acquisitions properly, the U.S. Securities and Exchange Commission (the "SEC")
has recently been reviewing more closely the accounting for acquisitions by
companies, particularly in the area of "in-process" research and development
costs. If we are required by the SEC to restate any charge that we recognized in
an acquisition so far, that could result in a lesser charge to income and
increased amortization expense, which could also have a material adverse effect
on our business, financial condition and results of operations.
In addition, acquisitions involve numerous other risks, including:
o difficulties assimilating the operations, personnel, technologies
and products of the acquired companies;
o diversion of our management's attention from other business concerns;
o risks of entering markets in which we have no or limited experience;
and
o the potential loss of key employees of the acquired companies.
For these reasons, we cannot be certain what effect future acquisitions
may have on our business, financial condition and results of operations.
Changes in Financial Accounting Standards and Accounting Estimates
- ------------------------------------------------------------------
We prepare our financial statements to conform with generally accepted
accounting principles ("GAAP"). GAAP are subject to interpretation by the
American Institute of Certified Public Accountants, the SEC and various bodies
formed to interpret and create appropriate accounting policies. A change in
those policies can have a significant effect on our reported results, and may
even affect our reporting of transactions completed before a change is
announced. Accounting policies affecting many other aspects of our business,
including rules relating to purchase and pooling-of-interests accounting for
business combinations, employee stock purchase plans and stock options grants,
have recently been revised or are under review. Changes to those rules or the
questioning of current practices may have a material adverse effect on our
reported financial results or on the way we conduct our business.
In addition, our preparation of financial statements in accordance with
GAAP requires that we make estimates and assumptions that affect the recorded
amounts of assets and liabilities, disclosure of those assets and liabilities at
the date of the financial statements and the recorded amounts of expenses during
the reporting period. A change in the facts and circumstances surrounding those
estimates could result in a change to our estimates and could impact our future
operating results.
Dependence on Key Personnel
- ---------------------------
Our future operating results depend substantially upon the continued
service of our executive officers and key personnel, none of whom are bound by
an employment or non-competition agreement. Our future operating results also
depend in significant part upon our ability to attract and retain qualified
management, manufacturing, technical, engineering, marketing, sales and support
personnel. Competition for such personnel is intense, and we cannot ensure
success in attracting or retaining such personnel. There may be only a limited
number of persons with the requisite skills to serve in these positions and it
may be increasingly difficult for us to hire such personnel over time. Our
business, financial condition and results of operations could be materially
adversely affected by the loss of any of our key employees, by the failure of
any key employee to perform in his or her current position, or by our inability
to attract and retain skilled employees.
Transition in Our Executive Management
- --------------------------------------
We have experienced several transitions in executive management in recent
years. In conjunction with the departure in December 1998 of our former chairman
and chief executive officer, our Board of Directors appointed David A. Ranhoff,
executive vice president, and Dennis P. Wolf, executive vice president, chief
financial officer and secretary, jointly to the office of the president. The
Board also named a new chairman, Dr. William Howard, Jr., and began a search for
a new chief executive officer. Mr. Wolf joined us as senior vice president and
chief financial officer in March 1998 after the December 1997 departure of the
Company's previous chief financial officer. These transitions have placed
significant demands on our operational, administrative and financial staff and
we anticipate that these demands will increase in the near term. We cannot be
certain that such transitions will not have a material adverse effect on our
business, financial condition and results of operations, on the way we are
perceived by the market or on the price of our Common Stock.
17
International Sales
- -------------------
International sales accounted for approximately 69%, 70% and 67% of our
total net sales for the fiscal years 1998, 1997 and 1996, respectively. As a
result, we anticipate that international sales will continue to account for a
significant portion of our total net sales in the foreseeable future. These
international sales will continue to be subject to certain risks, including: o
changes in regulatory requirements;
o tariffs and other barriers;
o political and economic instability;
o an outbreak of hostilities;
o integration of foreign operations of acquired businesses;
o foreign currency exchange rate fluctuations;
o difficulties with distributors, joint venture partners, original
equipment manufacturers, foreign subsidiaries and branch operations;
o potentially adverse tax consequences; and
o the possibility of difficulty in accounts receivable collection.
We are also subject to the risks associated with the imposition of
domestic and foreign legislation and regulations relating to the import or
export of semiconductor equipment. We cannot predict whether the import and
export of our products will be subject to quotas, duties, taxes or other charges
or restrictions imposed by the United States or any other country in the future.
Any of these factors or the adoption of restrictive policies could have a
material adverse effect on our business, financial condition or results of
operations. Net sales to the Asia Pacific region accounted for approximately
60%, 66% and 58% of our total net sales in the fiscal years 1998, 1997 and 1996,
and thus demand for our products is subject to the risk of economic instability
in that region and could continue to be materially adversely affected. Countries
in the Asia Pacific region, including Korea and Japan, have recently experienced
weaknesses in their currency, banking and equity markets. These weaknesses could
continue to adversely affect demand for our products, the availability and
supply of our product components, and our consolidated results of operations.
The current Asian financial crisis has contributed to a widespread uncertainty
and a slowdown in the semiconductor industry. This slowdown has resulted in
reduced spending on semiconductor capital equipment, including ATE, and has had,
and may continue to have, a material adverse effect on our product backlog,
balance sheet and results of operations.
We are currently in the process of assessing the issues raised by the
introduction of a single European currency ("Euro") introduced on January 1,
1999. While still in the assessment phase, we do not expect that the
introduction and the use of the Euro will have a material adverse effect on our
business, financial condition or results of operations.
Proprietary Rights
- ------------------
We attempt to protect our intellectual property rights through patents,
copyrights, trademarks, maintenance of trade secrets and other measures,
including entering into confidentiality agreements. However, we cannot be
certain that others will not independently develop substantially equivalent
intellectual property or that we can meaningfully protect our intellectual
property. Nor can we be certain that our patents will not be invalidated, deemed
unenforceable, circumvented or challenged, or that the rights granted thereunder
will provide us with competitive advantages, or that any of our pending or
future patent applications will be issued with claims of the scope we seek, if
at all. Furthermore, we cannot be certain that others will not develop similar
products, duplicate our products or design around our patents, or that foreign
intellectual property laws or agreements into which we've entered will protect
our intellectual property rights. Inability or failure to protect our
intellectual property rights could have a material adverse effect upon our
business, financial condition and results of operations. We have been involved
in extensive, expensive and time-consuming reviews of, and litigation
concerning, patent infringement claims. In addition, we have at times been
notified that we may be infringing intellectual property rights of third parties
and we expect to continue to receive notice of such claims in the future.
18
The prior owner of a European patent application relating to one of our
proprietary CMOS stabilization methods abandoned the application after the
European patent examiner cited prior art embodying allegedly similar claims.
This prior art was not referenced in the corresponding United States patent
application. Based upon our review to date of the cited prior art and the
European examiner's objections, and in part upon the advice of our outside
patent counsel, we believe that such prior art is unlikely to affect the
validity or scope of the claims of the United States issued patent. Such prior
art, however, is relevant to the scope of certain claims set forth in the United
States patent covering another of our proprietary CMOS stabilization methods.
The European examiner referred to this prior art in the corresponding European
patent application. The European application was approved, but with narrower
claims than the United States patent. This prior art was not referenced in the
corresponding United States patent. Based in part upon the advice of outside
patent counsel, and on our review of current products, we believe that this
patent will continue to be valuable in preventing imitation of our products
covered by this patent. Additionally, in mid-1992, a third party suggested that
certain claims set forth in this patent might be invalid as a result of other
alleged prior art. On November 13, 1997, we requested that the United States
Patent and Trademark Office ("USPTO") re-examine the subject United States
patent in light of the two prior art references. On January 7, 1998, the USPTO
responded by granting our request for re-examination. On May 21, 1998, the USPTO
notified us of its intent to issue a re-examination certificate with claims
comparable in scope to the European patent. The USPTO issued the re-examination
certificate on September 1, 1998.
In July, 1998, inTEST IP Corporation ("inTEST") alleged in writing that
one of our products is purportedly infringing a patent held by inTEST. We may
also be obligated to other third parties relating to this allegation. We are
currently investigating the allegation. Based in part on the opinion of outside
counsel, we believe we have meritorious defenses to the claims. However, we
cannot be certain of success in defending this patent infringement claim or
claims for indemnification resulting from infringement claims.
Certain of our customers have received notices from Mr. Jerome Lemelson
alleging that the manufacture of semiconductor products and/or the equipment
used to manufacture semiconductor products infringes certain patents issued to
Mr. Lemelson. We were notified by a customer in 1990 and by a different customer
in late 1994 that we may be obligated to defend or settle claims that our
products infringe Mr. Lemelson's patents, and that if it is determined that the
customer infringes Mr. Lemelson's patents, such customer intends to seek
indemnification from us for damages and other related expenses. We have not
received further communications from such customers regarding these matters.
We cannot be certain of success in defending current or future patent
infringement claims or claims for indemnification resulting from infringement
claims. Our business, financial condition and results of operations could be
materially adversely affected if we must pay damages to a third party or suffer
injunction or if we expend significant amounts in defending any such action,
regardless of the outcome. With respect to any claims, we may seek to obtain a
license under the third party's intellectual property rights. We cannot be
certain, however, that the third party will grant us a license on reasonable
terms or at all. We could decide, in the alternative, to continue litigating
such claims. Litigation has been and could continue to be extremely expensive
and time consuming, and could materially adversely affect our business,
financial condition or results of operations, regardless of the outcome.
Future Capital Needs; Leverage
- ------------------------------
Developing and manufacturing new ATE systems and enhancements is highly
capital intensive. In order to be competitive, we must make significant
investments in capital equipment, expansion of operations, systems, procedures
and controls, research and development and worldwide training, customer service
and support, among many other items. We may be unable to obtain additional
financing in the future on acceptable terms, or at all. In connection with our
issuance in September 1997 of convertible promissory notes ("the Notes"), we
incurred $115 million of indebtedness which resulted in a ratio of long-term
debt to total capitalization at October 31, 1998 of approximately 43%. As a
result, our principal and interest obligations have increased substantially. The
degree to which we are leveraged could materially adversely affect our ability
to obtain financing for working capital, acquisitions or other purposes and
could make our business more vulnerable to industry downturns and competitive
pressures. Our ability to meet debt service obligations will be dependent upon
our future performance, which will be subject to financial, business and other
factors affecting our operations, many of which are beyond our control. If we
raise additional funds by issuing equity securities, our stockholders could be
significantly diluted. We may exchange Notes for shares of our common stock or
may refinance or exchange the Notes, which may also dilute our stockholders and
may make it difficult for us to obtain additional future financing, if needed.
19
If we are unable to obtain adequate funds, we may be required to
restructure or refinance our debt or to delay, scale back or eliminate certain
of our research and development, acquisition or manufacturing programs. We may
also need to obtain funds through arrangements with partners or others and we
may be required to relinquish rights to certain of our technologies or potential
products or other assets.
Year 2000 Readiness
- -------------------
The "Year 2000" issue results from the use in computer hardware and
software of two digits rather than four digits to define the applicable year.
When computer systems must process dates both before and after January 1, 2000,
two-digit year "fields" may create processing ambiguities that can cause errors
and system failures. The results of these errors may range from minor undetected
errors to complete shutdown of an affected system. These errors or failures may
have limited effects, or the effects may be widespread, depending on the
computer chip, system or software, and its location and function. The effects of
the Year 2000 problem are exacerbated because of the interdependence of computer
and telecommunications systems in the United States and throughout the world.
Because of this interdependence, the failure of one system may lead to the
failure of many other systems even though the other systems are themselves "Year
2000 compliant."
Our Board of Directors has reviewed the Year 2000 issue generally and as
it may affect our business activity specifically. We are implementing a Year
2000 plan (the "Plan") which is designed to cover all of our activities and
which is monitored by the Board of Directors. We will modify the Plan as
circumstances change. Under the Plan, we are using a five-phase methodology for
addressing the issue. The phases are Awareness, Assessment, Renovation,
Validation and Implementation.
The Awareness phase consisted of defining the Year 2000 problem and
gaining executive level support and sponsorship for addressing it. We
established a Year 2000 program team and created an overall strategy. During the
Assessment phase, we inventoried all internal systems, products and supply chain
partners and prioritized each for renovation. We believe we have completed a
majority of the Awareness and Assessment phases; however, we will continue to
work in these areas as we complete our assessment of existing supply chain
partners and enter into new supply chain relationships in the ordinary course of
business. Renovation consists of converting, replacing, upgrading or eliminating
systems that have Year 2000 problems. We have begun Renovation on
mission-critical systems and have targeted completion by March 31, 1999.
Validation involves ensuring that hardware and software fixes will work properly
in 1999 and beyond and can occur both before and after implementation. We began
the Validation phase in late 1998 and will continue through June 1999 to allow
for thorough testing before the Year 2000. Implementation is the installation of
Year 2000 ready hardware and software components in a live environment. We are
in the early stages of the Implementation phase.
The impact of Year 2000 issues on our business will depend not only on
corrective actions that we take, but also on the way Year 2000 issues are
addressed by governmental agencies, businesses and other third parties that
provide us with services or data or receive services or data from us, or whose
financial condition or operational capability is important to us. To reduce this
exposure, we have an ongoing process of identifying and contacting
mission-critical third party vendors and other significant third parties to
determine their Year 2000 plans and target dates. Risks associated with any such
third parties located outside the United States may be higher insofar as it is
generally believed that non-U.S. businesses may not be addressing their Year
2000 issues on as timely a basis as U.S. businesses. Notwithstanding our
efforts, we cannot be certain that we, mission-critical third party vendors or
other significant third parties will adequately address their Year 2000 issues.
We are developing contingency plans in the event that we,
mission-critical third party vendors or other significant third parties fail to
adequately address Year 2000 issues. Such plans principally involve identifying
alternative vendors or internal remediation. We cannot ensure that any such
plans will fully mitigate any such failures or problems. Furthermore, there may
be certain mission-critical third parties, such as utilities, telecommunication
companies, or material vendors for which alternative arrangements or sources are
limited or unavailable.
Although it is difficult for us to estimate the total costs of
implementing the Plan, our preliminary estimate is that such costs will be
approximately $2.5 million through June 1999 and beyond. However, although we
believe that our estimates are reasonable, we cannot be certain, for the reasons
stated in the next paragraph, that the actual costs of implementing the Plan
will not differ materially from the estimated costs. We have incurred costs of
approximately $500,000 through October 31, 1998 in connection with the Plan. A
significant portion of total Year 2000 project expenses is represented by
20
existing staff that have been redeployed to this project. We do not believe that
the redeployment of existing staff will have a material adverse effect on our
business, results of operations or financial position. Nor do we expect
incremental expenses related to the Year 2000 project to materially impact
operating results in any one period.
For a number of reasons, we cannot predict or quantify the extent and
magnitude of the Year 2000 problem as it will affect our business, either before
or for some period after January 1, 2000. Among the most important reasons are:
o lack of control over systems used by third parties critical to our
operation;
o dependence on third party software vendors to deliver Year 2000
upgrades in a timely manner;
o complexity of testing inter-connected networks and applications that
depend on third party networks; and
o the uncertainty surrounding how others will deal with liability issues
raised by Year 2000 related failures.
For example, we cannot be certain that systems used by third parties will
be Year 2000 ready by January 1, 2000, or by some earlier date, so as not to
create a material disruption to our business. Moreover, the estimated costs of
implementing the Plan do not take into account the costs, if any, that might be
incurred as a result of Year 2000-related failures that occur despite our
implementation of the Plan.
Although we are not aware of any material operational issues associated
with preparing our internal systems for the Year 2000 or of material issues with
respect to the adequacy of mission-critical third party systems, we cannot
ensure that we will not experience material unanticipated negative consequences
and/or material costs caused by undetected errors or defects in such systems or
by our failure to adequately prepare for the results of such errors or defects,
including the costs of related litigation, if any. The impact of such
consequences could have a material adverse effect on our business, financial
condition or results of operations.
Volatility of Our Stock Price
- -----------------------------
We believe that factors such as announcements of developments related to
our business, fluctuations in our financial results, general conditions or
developments in the semiconductor and capital equipment industry and the general
economy, sales or purchases of our Common Stock in the marketplace,
announcements of our technological innovations or new products or enhancements
or those of our competitors, developments in patents or other intellectual
property rights, developments in our relationships with customers and suppliers,
or a shortfall or changes in revenue, gross margins or earnings or other
financial results from analysts' expectations or an outbreak of hostilities or
natural disasters, could continue to cause the price of our Common Stock to
fluctuate, perhaps substantially. In recent years the stock market in general,
and the market for shares of small capitalization companies in particular,
including ours, have experienced extreme price fluctuations, which have often
been unrelated to the operating performance of affected companies. For example,
in fiscal 1997, the price of our Common Stock ranged from a high of $55.00 to a
low of $13.75. In fiscal 1998, the price of our Common Stock ranged from a high
of $35.25 to a low of $9.31. The market price of our Common Stock is likely to
continue to fluctuate significantly in the future, including fluctuations
unrelated to our performance.
Effects of Certain Anti-Takeover Provisions
- -------------------------------------------
Certain provisions of our Amended and Restated Certificate of
Incorporation, shareholders rights plan, equity incentive plans, Bylaws and of
Delaware law may discourage certain transactions involving a change in corporate
control. In addition to the foregoing, our classified board of directors, the
shareholdings of our officers, directors and persons or entities that may be
deemed affiliates, the adoption of a shareholder rights plan and the ability of
our Board of Directors to issue "blank check" preferred stock without further
stockholder approval could have the effect of delaying, deferring or preventing
a third party to acquire us and may adversely affect the voting and other rights
of holders of our Common Stock.
ITEM 2. PROPERTIES
The Company maintains its corporate headquarters in Fremont,
California. This leased facility, totaling 104,400 square feet, contains
corporate administration, sales, marketing, applications, engineering, local
customer support and memory products manufacturing. The lease on this facility
expires in June 2004. The Company's digital and mixed signal manufacturing
facilities, as well as additional marketing, applications, engineering and
customer support functions, are located in a 90,000 square foot facility in
Beaverton, Oregon. The lease covering this 90,000 square foot facility expires
in November 2002. An additional 42,000 square foot building houses Beaverton,
Oregon sales, administration and customer service groups under a lease expiring
21
in February 2001. The Company's software business is primarily located in a
22,000 square foot building in Beaverton, Oregon. The lease on this building
expires in August 2002. The Company maintains various remote sales and service
offices in the United States.
During the first half of fiscal 1998 the Company entered into an
agreement to lease an additional 35,000 square feet of space in Fremont,
California which was intended to be used primarily for sales and service.
Additionally, the Company entered into an agreement covering 175,000 square feet
of space in Hillsboro, Oregon which is intended to become the new location for
all of the Company's Oregon operations except for its software business and is
scheduled for occupancy by the Company during the third fiscal quarter of 1999.
The Company has, however, during the last three quarters of fiscal 1998,
experienced a significant decrease in its net sales as compared to the preceding
quarters and as compared to its expectations at the beginning of fiscal 1998 and
a corresponding reduction in its anticipated headcount. Consequently, the
Company's current facilities exceed its current and anticipated short term
needs. At October 31, 1998, the Company was in the process of finding qualified
new or sub- tenants for its vacant 35,000 square foot facility in Fremont, for
its currently occupied 42,000 square foot and 90,000 square foot Beaverton
facilities and for a portion of its to be occupied 175,000 square foot facility
in Hillsboro. The Company also maintains a 14,000 square foot facility in
Fremont that was subleased in September, 1998. The lease and sublease on this
14,000 square foot facility both expire in November, 1999. There is no assurance
that the Company will be able to sublease any or all of its excess facilities
for an amount that would equal or exceed its total committed costs for such
facilities and the related leasehold improvements.
In January 1999, the Company negotiated the termination of the lease for
its 42,000 square foot Beaverton facility whereby the landlord agreed to
terminate the lease effective March, 1999. As a result of this lease
termination, the Company will be required to expense approximately $750,000,
related primarily to lease termination fees and write-off of unamortized
leaseholds. The Company believes there is a reasonable likelihood that similar
expenses will be required as the Company finds new or sub- tenants for its other
excess facilities, or if it is unable to find any such new or sub- tenants. Due
to the significant uncertainties surrounding the timing and amount of such
potential write-offs, no accrual for such future expenses had been made as of
October 31, 1998.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various claims arising in the ordinary course
of business, none of which, in the opinion of management, if determined
adversely against the Company, will have a material adverse effect on the
Company's business, financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None
22
EXECUTIVE OFFICERS AND KEY EMPLOYEES
The executive officers and key employees of the Company, and their ages
and positions as of December 15, 1998, are as follows:
Name Age Position
Dr. William Howard, Jr. 56 Chairman
David A. Ranhoff 43 Executive Vice President, Sales and Marketing *
Dennis P. Wolf 45 Executive Vice President, Chief Financial Officer and Secretary *
Clyde Armstrong 54 Vice President, Worldwide Sales
Jerry Bruce 42 Vice President, Treasurer and Corporate Controller *
Rick Carmichael 50 Senior Vice President, Corporate Marketing
David K. Cheung 45 Senior Vice President, Engineering
George W. DeGeer 52 Senior Vice President, Operations
John DiGirolamo 57 CEO and President of Fluence Technology, Inc.
Robert E. Huston 57 Vice President, Test Technology
Dave O'Brien 42 Senior Vice President, Information Technology
*Executive officer
Dr. William Howard, Jr., has served as a Director of the Company since
February 1995 and as Chairman since December 1998. His current term as Director
ends in 2001. Dr. Howard has been a self-employed consultant for various
semiconductor and microelectronics companies since December 1990. From October
1987 to December 1990, Dr. Howard was a senior fellow at the National Academy of
Engineering conducting studies of technology management. Dr. Howard held various
management positions at Motorola, Inc. between 1969 and 1987, most recently as
Senior Vice President and Director of Research and Development. Dr. Howard
serves on the boards of directors of VLSI Technology, Inc., BEI Electronics,
Inc., Ramtron International, Inc., and Xilinx, Inc., as well as several private
companies.
David A. Ranhoff, along with Mr. Wolf, was named to the Office of the
President in December 1998. Mr. Ranhoff became Executive Vice President in
January 1997 and had served as Senior Vice President, Sales and Marketing from
July 1996 to January 1997 and as Senior Vice President, Sales, Marketing and
Service from July 1995 to June 1996. Mr. Ranhoff served as Senior Vice
President, Sales and Service from August 1993 to July 1995 and as Vice
President, Sales from January 1993 to August 1993. He served as Vice President,
European Operations from July 1990 to December 1992. From March 1988 to June
1990, Mr. Ranhoff served as Managing Director of European Operations of the
Company and as National Sales Manager from July 1985 to March 1988. Prior to
joining the Company, Mr. Ranhoff served for eight years in various sales and
management positions for GenRad, Inc.
Dennis P. Wolf, Executive Vice President, Chief Financial Officer and
Secretary, joined Credence Systems Corporation in March of 1998 and, along with
Mr. Ranhoff, was named to the Office of the President in December 1998. Mr. Wolf
joined Credence from Centigram Communications Corporation where he began his
tenure as Senior Vice President and Chief Financial Officer and then became
acting Chief Executive Officer. Prior to joining Centigram, Mr. Wolf was Vice
President and Chief Financial Officer of Pyramid Technology after serving as
Vice President and Chief Financial Officer of Dynacraft, a National
Semiconductor Company. Additionally, he had held various executive and
managerial positions at Apple Computer and Sun Microsystems.
Clyde Armstrong joined Credence as Vice President, Worldwide Sales in
October 1996. Prior to joining Credence, Mr. Armstrong was at LTX/Trillium from
1994 to 1996 as Vice President and General Manager of Digital Business Unit,
responsible for engineering, marketing and support operations. From 1981 to
1984, Mr. Armstrong was at Eaton Corporation as Vice President of Board Test
Product Group. From 1967 to 1981, Mr. Armstrong worked in International Sales at
Fairchild Test Systems. Mr. Armstrong has extensive experience working in Asia,
Brazil and Europe during the past twenty years and managed direct sales and
support organizations as well as distributors and sales representatives world
wide. Mr. Armstrong possesses over 30 years of experience in the semiconductor
industry.
23
Jerry Bruce joined Credence in May 1993 and has served as Vice President,
Treasurer and Corporate Controller since August 1998, as Vice President and
Corporate Controller from March 1998 to August 1998, as Vice President,
Controller, Acting Chief Financial Officer and Secretary from December 1997 to
March 1998, as Vice President, Controller from July 1997 to December 1997, as
Vice President, Treasurer from January 1995 to July 1997 and as Vice President,
Controller from May 1993 to January 1995. From June 1988 to May 1993, Mr. Bruce
held various financial management positions at Silicon Valley Group, Inc. a
semiconductor equipment manufacturer. From July 1986 to June 1988, Mr. Bruce
served as Chief Financial Officer of CXR Telcom, Inc. a telecommunications test
equipment manufacturer. From June 1980 to July 1986, Mr. Bruce held positions of
increasing responsibility in the audit practice of Ernst & Young LLP.
Richard C. Carmichael rejoined the Company in September 1996 and has served
as Senior Vice President, Corporate Marketing since that time. From September
1995 to December 1995 Mr. Carmichael served as Vice President of Marketing at
Megatest Corporation and then, after the acquisition of Megatest Corporation by
Teradyne, Inc., Mr. Carmichael held the position of Marketing Manager, Megatest
Division for Teradyne, Inc. until September 1996. Mr. Carmichael served as
Senior Vice President, Marketing for the Company from August 1993 until August
1995 and Vice President, Marketing from July 1992 to August 1993. Mr. Carmichael
first joined the Company in January 1991 and served as Western Area Sales
Manager from January 1991 to July 1992. From January 1989 to December 1990, Mr.
Carmichael was the Regional Sales Manager for the STS Division of Tektronix.
Prior to joining the Company, Mr. Carmichael served for nine years in various
sales and marketing positions, most recently as Vice President of Sales for
Megatest Corporation, a semiconductor test manufacturer
David K. Cheung has served as Senior Vice President, Engineering since
January 1995, as Vice President, Engineering from May 1994 to January 1995 and
as Director of Engineering from October 1993 to May 1994. From September 1992 to
October 1993, Mr. Cheung served as Director of Engineering at Schlumberger
Technologies, Inc., where he led the development of advanced digital IC testers.
Mr. Cheung held various management positions at Schlumberger from 1982 to
September 1992.
George W. DeGeer has served as Senior Vice President, Operations since
August, 1996, as Senior Vice President, Manufacturing from January 1995 to
August, 1996, as Vice President, Manufacturing from October 1993 to January
1995, as Director of Manufacturing from July 1992 to October 1993, and as Vista
Manufacturing Manager from January 1991 to July 1992. Prior to joining the
Company, Mr. DeGeer held various manufacturing management positions at Tektronix
for more than twenty years.
John DiGirolamo has served as Chief Executive Officer and President of
Fluence Technology, Inc. ("Fluence" formerly TSSI) since October 1997. From July
1997 to October 1997, Mr. DiGirolamo served as Vice President of Worldwide Sales
and Marketing for Fluence. Mr. DiGirolamo served as Director of Sales at Summit
Design, Inc., from May 1996 to July 1997. Mr. DiGirolamo served at the Company
as Vice President, Worldwide Sales from June 1995 to April 1996. Prior to
joining the Company in 1995, Mr. DiGirolamo held a variety of senior level
positions within the industry, including a tenure at GenRad, Inc. as General
Manager and Director of Sales & Marketing for Western operations. Mr. DiGirolamo
possesses over 33 years of experience in the semiconductor equipment and test
industry.
Robert E. Huston has served as Vice President, Test Technology since August
1992. From February 1983 to August 1992, Mr. Huston was a co-founder and fellow
of Trilium Corporation and was the architect of the Micromaster series of test
systems. Mr. Huston was a fellow at LTX from August 1988 to August 1992,
developing high frequency test strategies. He served in various senior
engineering positions beginning in 1967 at Fairchild working with a team to
develop the LSI test system.
David O'Brien has served as Senior Vice President, Information Technology
since July 1995. Mr. O'Brien served as Senior Vice President, Marketing from May
1994 to July 1995, as Senior Vice President, Engineering from August 1993 to May
1994 and as Vice President, Engineering from July 1992 to August 1993. Mr.
O'Brien served as Vice Pr