Back to GetFilings.com
===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999
OR
[__] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-22366
CREDENCE SYSTEMS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-2878499
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
215 FOURIER AVENUE, FREMONT, CALIFORNIA 94539
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (510) 657-7400
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS: NAME OF EACH EXCHANGE ON WHICH REGISTERED:
------------------- -----------------------------------------
NONE NONE
SECURITIES REGISTERED PURSUANT
TO SECTION 12(B) OF THE ACT: COMMON STOCK, $0.001 PAR VALUE
PREFERRED STOCK PURCHASE RIGHTS
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [_]
Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of voting stock held by non-affiliates of
the Registrant, as of January 3, 2000 was approximately $1,903,000,000 (based
upon the closing price for shares of the Registrant's common stock as reported
by the Nasdaq National Market for the last trading date prior to that date).
Shares of common stock held by each officer, director and holder of 5% or more
of the outstanding common stock have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
On January 3, 2000, approximately 22,517,384 shares of the Registrant's
common stock, $0.001 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 2000 Annual
Meeting of Stockholders to be held on March 22, 2000 are incorporated by
reference into Part III.
===============================================================================
PART I
ITEM 1. BUSINESS
Credence Systems Corporation designs, manufactures, sells and services
automatic test equipment, or ATE, used for testing semiconductor integrated
circuits, or ICs. We also develop, license and distribute related software
products. We serve a broad spectrum of the semiconductor industry's testing
needs through a wide range of products that test digital logic, mixed-signal and
non-volatile memory semiconductors. We utilize our proprietary technologies to
design products which are intended to provide a lower total cost of ownership
than many competing products currently available while meeting, the increasingly
demanding performance requirements of today's ATE market. Our products are
primarily designed to test semiconductors that are produced in high volume. Our
customers include major semiconductor manufacturers as well as assembly and test
services companies.
We were incorporated in California in March 1982 to succeed to the
business of a sole proprietorship and were reincorporated in Delaware in October
1993. "Credence" or the "Company", "we," us" and "our" refers to Credence
Systems Corporation, and our subsidiaries. Our principal executive offices are
located at 215 Fourier Avenue, Fremont, CA 94539, and our telephone number is
(510) 657-7400. Our worldwide website address is www.credence.com.
"Credence Systems Corporation," "Credence," "Fluence," "SC," "ValStar,"
"Quartet," "Quartet One," "Wavebridge," "MemBIST," "TDS," "TDX," "Triton,"
"EPRO," "BOST," "Kalos," "DUO," and "Opmaxx" are our trademarks. This Annual
Report on Form 10-K also includes trademarks of other companies. "Matrix Test"
is a trademark of Amkor Technology, Inc.
BACKGROUND
Dramatic advances in semiconductor process technology have improved the
performance and lowered the average selling prices of semiconductors to levels
that now support their use in a wide range of office, consumer, automotive,
communications, industrial and other products. In order to maintain or improve
gross margins as semiconductor devices decline, semiconductor manufacturers are
constantly seeking ways to reduce manufacturing costs.
Testing is a principal element in the cost structure of high volume
production of semiconductors. As a result of improved efficiencies in wafer
fabrication, test costs have become a higher percentage of the total cost of
manufacturing. This shift in cost structure has changed the traditional criteria
for selection of ATE. Although performance was the dominant factor in the
selection of ATE in the past, we believe that economic considerations
have assumed much greater importance to semiconductor manufacturers. Purchasers
of ATE now examine more carefully the total cost of ownership of ATE. Total cost
of ownership includes the initial purchase price of the tester, as well as the
tester's reliability, flexibility, size, power and air conditioning
requirements, upgradeability and maintenance costs, including spare parts.
Traditionally, semiconductor die were minimally tested at wafer probe
and underwent rigorous performance testing to full specification only at the
completion of final packaging. Today, assembly and packaging have become
increasingly expensive compared with the cost of the die, such that their costs
may exceed the cost of the die itself. This trend has influenced semiconductor
manufacturers to shift performance testing increasingly toward wafer probe. By
subjecting devices to performance testing earlier in the manufacturing process,
defective die are detected and eliminated before assembly and packaging costs
are incurred.
Increased facility costs and the trend toward performance testing at
wafer probe have led to the increased importance of smaller testers in the
semiconductor manufacturing process. Performance testing at wafer probe requires
that the device under test be located in close physical proximity to the
measuring circuits of the tester in order to minimize potential signal
distortions that can negatively impact testing yields. Smaller testers can more
easily be placed in close physical proximity to the circuits. In addition, wafer
probe test typically occurs in a clean room where potential contaminants must be
continually removed and temperatures kept constant. These special maintenance
requirements make clean rooms expensive to operate. Smaller testers occupy less
floor space and therefore assist in reducing clean room costs. In addition,
smaller testers that consume less power generally have reduced air conditioning
requirements.
For over 20 years, emitter-coupled logic, ECL, has been the
conventional process technology used by us and others for the ICs used in ATE
due to its speed, repeatability and precision. ECL technology, however, results
in low
1
functionality per chip and requires continuous power. As a result,
conventional ATE systems generally are larger, expensive and require significant
electrical power to operate.
Another process technology commonly used in the manufacture of
semiconductors is complementary metal oxide semiconductor, or CMOS. As compared
to ECL, CMOS technology allows higher functionality for a given chip size and
requires less power to operate. Some ATE manufacturers use a combination of ECL
and CMOS to lower the cost of ATE by reducing the use of ECL.
The production of ATE based exclusively on CMOS technology, however,
had been limited by the inability of CMOS to meet the timing and measurement
demands of semiconductor testing. Although the speed of CMOS was acceptable, its
timing stability was not. This problem results from the tendency of CMOS
circuits to experience timing drift as a function of temperature and voltage
variation during tests. To fully benefit from the economic and other advantages
of CMOS technology, the challenge has been to control this drift characteristic
in order to produce semiconductors for ATE that meet the performance
requirements of semiconductor testing.
THE CREDENCE SOLUTION AND STRATEGY
We have developed proprietary CMOS stabilization methods that
minimize the drift characteristic of CMOS and enable us to produce testers that
are smaller and require less power than those based upon ECL technology. These
testers are intended to provide a lower total cost of ownership than many
competing products currently available while meeting the performance demands of
today's ATE market. CMOS technology allows the circuits used in our testers to
be reduced, or scaled down in size as IC process technology improves. This
should result in higher performance and free space on the die for additional
functionality. This scalability feature enables us to develop and manufacture
smaller, higher performance ICs for use in our testers at what we believe to be
a lower cost, and with a potentially shorter development cycle, than traditional
process technologies.
Our objective is to be the leading supplier of cost-effective ATE for
production testing of ICs used in high volume applications. Our business
strategy incorporates the following key elements:
- TECHNOLOGY LEADERSHIP. We believe that our proprietary CMOS
stabilization technology enables the development of ATE that is
designed to meet the performance and cost of ownership requirements of
semiconductor manufacturers and assembly and test services companies.
In addition, we believe the scalability of this technology will allow
us to offer new products and enhancements in a potentially shorter
time and at a lower cost than many of our competitors that base our
products on traditional less-scalable architecture.
- LOWER TOTAL COST OF OWNERSHIP. We seek to provide ATE to our customers
at a lower total cost of ownership than many competing products
currently available while meeting the performance requirements of our
customers. We believe that the system price, reliability, flexibility,
size, power and air conditioning requirements, upgradeability and
maintenance costs, including spare parts, of our testers enable our
customers to more cost effectively test ICs.
- DIVERSE, HIGH-VOLUME MARKETS. Our products target the testing of
digital logic, mixed-signal and nonvolatile memory devices that are
used in a broad range of growing end-user market segments. Our
products are designed to test semiconductors that are manufactured in
high volume and are used in a variety of applications such as
automobiles, appliances, personal computers, personal communications
products, networking products, digital televisions and multimedia
hardware.
- WORLDWIDE TECHNICAL SUPPORT AND CUSTOMER SERVICE. As semiconductor
manufacturers expand their operations worldwide, they require that
their ATE suppliers have the capability to provide global support and
service and training. To meet this requirement, we utilize a
combination of direct sales, service and support personnel and a broad
network of independent distributors located in close proximity to
major customer sites. We and our distributors currently maintain
locations throughout the world to service and support our customers.
2
- REDUCE TIME-TO-MARKET. We believe that our customers require
increasing levels of sophisticated software tools to assist in the
utilization of ATE that minimizes time-to-market. We are focusing our
software efforts on internal development of and acquisition of
companies or businesses that develop such tools. Through Fluence, we
have acquired the test development series, or TDS, and TDX product
lines from Summit Design, Inc. and Zycad, respectively, and acquired
the Analog Test and Analog BIST products of Opmaxx. In addition,
through the acquisition of certain assets of Heuristics, we obtained
memory BIST and related in-process software products. These
acquisitions are expected to add market opportunities for growth in
the future. We believe we are positioned to capitalize on the
Design-to-Test and the Design-for-Test markets with our new software
product lines that integrate design and test.
PRODUCTS
We currently offer a wide variety of products that test digital logic,
mixed-signal and non-volatile memory ICs. Digital logic semiconductors produce
discrete on and off logical sequences that control functions, store data,
retrieve data and move and manipulate data at high rates of speed. An example of
digital logic semiconductors include logic devices such as microcontrollers.
Some digital devices which store and retrieve data are memory semiconductors.
Non-volatile memory semiconductors retain their data when the power is turned
off. Mixed-signal semiconductors combine both digital and analog functions.
Analog semiconductors control external functions such as sound, graphics, and
motor controls by producing continuous varying voltage or current. When these
analog functions are combined onto a digital integrated circuit, the resulting
device is considered a mixed-signal device.
Our CMOS-based ATE products--the SC, Valstar, DUO and Quartet
series--are designed to test high speed devices used in applications such as
networking and personal computing as well as multimedia, digital television,
high-definitions television and personal communications. Our memory
products, Kalos Series, Delphi, EPRO 142 and BTMA test non-volatile memory, or
NVM, devices, including ROM, EPROM, EEPROM and Flash memories, are used in high
volume applications in the consumer, automotive and telecommunications markets.
During 1997, we introduced the ValStar 2000, a system which enables the testing
of very complex devices, with up to 1024 pins with high-speed requirements. Also
introduced in 1997 was the Kalos Flash memory test system, a highly integrated
parallel system that provides multi-site testing and is designed to lower the
overall cost of test.
During fiscal 1999, we acquired Opmaxx. The Opmaxx products are
targeted at analog and mixed signal design and test applications.
During fiscal 1998, we introduced the Quartet series. The Quartet
system is compatible with DUO, provides the enhanced capabilities required to
test consumer mixed signal products with 200 MHz I/O 20 bit analog, video, and
radio frequency, or RF, input and output. Quartet directly addresses the cost
sensitive needs of consumer related system-on-a-chip, or SOC, devices.
The MemBIST products, acquired from Heuristics in fiscal 1998, generate
built-in self-test logic for embedded memories.
During fiscal 1997, we acquired two software products lines: the Test
Development Series product line in the Summit acquisition and the Test Design
expert product line in the Zycad acquisition. TDS converts simulation waveform
data and modifies it under user control to generate test programs for use on
ATE. TDX grades test vector coverage, and provides other tools that enhance
design testability.
3
The following table sets forth our current product offerings, their
features and examples of typical devices tested by each product. Included in
some of the basic features are the anticipated cycle speed in megahertz, timing
accuracy in either picoseconds, or ps, or nanoseconds, or ns, the number and
characteristics of the pins and the density in megabits, or Mb, of the device
that can be tested:
- --------- ------------ --------------- --------------------------------------- ----------------------------------------------------
PRODUCT SERIES MODELS BASIC FEATURES TYPICAL DEVICES
- --------- ------------ --------------- --------------------------------------- -----------------------------------------------------
DIGITAL SC SC312 50-100 MHz Microcontrollers, ASSPs, DSPs and FPGAs
SC Micr- 64-304 Pins
+ 350-500 ps accuracy
-
- --------- ------------ --------------- --------------------------------------- -----------------------------------------------------
ValStar VS2000 200 MHZ Microprocessors, RISC circuits, PLDs, FPGAs,
+ 200 ps accuracy ASICs, core logic and graphic chip sets
384-1024 Pins
- --------- ------------ --------------- --------------------------------------- -----------------------------------------------------
MIXED- DUO DUO DUO-100 MHz Multimedia devices, mass storage, DSPs, ASICs,
SIGNAL DUO-SE DUO-SE-50 MHz Datacom and specialty devices, mobile
DUO-SX DUO-SX-200 MHz communication devices, complex audio devices
DUO-RF DUO-RF-50-100 MHz
- --------- ------------ --------------- --------------------------------------- -----------------------------------------------------
Quartet ONE 512 digital Multimedia devices, mass storage, DSPs, ASICs,
200 MHz Datacom and specialty devices, mobile communication
+ 175 ps accuracy devices, complex audio devices
Analog, Video, Audio, RF
- --------- ------------ --------------- --------------------------------------- -----------------------------------------------------
MEMORY KALOS Kalos 50 MHz Flash memories, EEPROM, EPROM, Microcontrollers and
PRODUCTS 256 Mb NVM ASICs
Kalos xp + 1ns
Personal Kalos
- --------- ------------ --------------- --------------------------------------- -----------------------------------------------------
BTMA 2001 Benchtop Memory Analysis and ROM, EEPROM, EPROM, Flash and SRAM
2555 Verification Testers
2555A
Delphi
- --------- ------------ --------------- --------------------------------------- -----------------------------------------------------
EPRO 142/AX 10 MHz
256 Mb
- --------- ------------ --------------- --------------------------------------- -----------------------------------------------------
BOST MemBOST "Built-Off Self-Test" Processors, graphics engines, network controllers,
Embedded memory test ASIC's and other multimedia devices
External solution for digital
and mixed signal devices
- --------- ------------ --------------- --------------------------------------- -----------------------------------------------------
WORKCELL Triton Memory Kalos tester integrated into 8" wafer ROM, EEPROM, EPROM, and Flash memories
prober, without extending outside the
prober perimeter
- --------- ------------ --------------- --------------------------------------- -----------------------------------------------------
Matrix Test Memory Kalos tester integrated with a FICO EEPROM, EPROM, Flash memories
strip handler for testing NVM devices
packaged prior to singulation
- --------- ------------ --------------- --------------------------------------- -----------------------------------------------------
SOFTWARE TDS tools Design to Test Generates tester specific programs Tools apply to digital logic devices
Verifies timing specification
- --------- ------------ --------------- --------------------------------------- -----------------------------------------------------
TDX tools Design to Test Verifies test vector quality Tools apply to digital logic devices
Supports design for test strategies
- --------- ------------ --------------- --------------------------------------- -----------------------------------------------------
HPL MemBIST Generates BIST logic, Partitioned Tools apply to all memory devices
solutions using BIST, ATE and BOST
- --------- ------------ --------------- --------------------------------------- -----------------------------------------------------
Opmaxx Design Maxx Design verification and sensitivity Tools apply to analog and mixed-signal devices
Design FaultMaxx analysis, design fault coverage, test
Test TestMaxx evaluation and optimization
- --------- ------------ --------------- --------------------------------------- -----------------------------------------------------
Opmaxx BISTMaxx BIST generation for analog and Tools apply to analog and mixed-signal devices
Analog mixed-signal devices
BIST
- --------- ------------ --------------- --------------------------------------- -----------------------------------------------------
4
DIGITAL PRODUCTS
SC. The model SC 212 was first shipped in 1992 and incorporates one of
our proprietary CMOS stabilization methods. This product requires approximately
30 square feet of floor space and 4 kilowatts of power for 304 pins. The SC
Micro is a cost-reduced version of the SC 312. This system offers our customers
a full capability test system at a price currently below $2,000 per digital pin
channel. This per channel price has previously been available only in test
systems with reduced functionality-requiring users to compromise the quality of
their device testing. The SC Micro retains the customer's test quality while
lowering its test costs. In 1997, we expanded the SC series by
introducing and shipping the SC 312, which runs at a higher speed (100 MHz) and
has improved accuracy over the SC 212. The purchase price of these testers
typically ranges from $350,000 to $850,000 depending upon configuration.
VALSTAR. The VS2000 was introduced in 1997, and we believe it is one of
the first systems designed specifically with the desired performance cost
structure for volume production of high pin count VLSI devices. This product
offers up to 1,024 input/output, or I/O, pins at 200 MHz data rates, and
requires less than four square meters of floor space, A fully loaded system
consumes only 16 kilowatts of power, which is generally less than many
competitive systems, thus lowering operating costs. The purchase price of the VS
2000 typically ranges from $1,000,000 to $3,600,000 depending on configuration.
MIXED-SIGNAL PRODUCTS
QUARTET. Quartet is our new high performance mixed-signal
product series. The Quartet One was introduced in 1998 and started shipping in
early fiscal 1999. Quartet builds on the Duo series by addressing the needs of
device manufacturers serving the consumer mixed-signal, or CMS, marketplace. CMS
devices combine the power of digital processors with CD quality audio, broadcast
video and wireless communications onto a single, cost sensitive SOC. The Quartet
One, the first of the Quartet series, addresses all four of these requirements
in an integrated, ready for volume production package. With 200 MHz digital, 20
bit audio, 300 MHz video and 6GHz RF, Quartet One is designed to meet the
demands of the most complex SOC devices. With typical system prices between
$750,000 and $2,000,000 depending on configuration, the Quartet provides a low
cost of test required by the CMS market.
DUO. The Duo series is our solution for high volume mixed-signal
testing. With over 450 systems in the field, Duo has become an important
component of the testing solution for both integrated device manufacturers and
the semiconductor manufacturing service companies. The typical purchase price of
the Duo ranges from $600,000 to $1,500,000 depending on configuration.
MEMORY PRODUCTS
KALOS. Introduced in November 1997, the Kalos is a highly integrated,
parallel system designed to test flash memory. Running at 50 MHz, it provides
multi-site testing and is designed to lower the customer's cost of test. The
Kalos features a unique tester-on-a-card architecture, which places all test
functions for each site on a single card and thus reduces floor space and power
consumption while increasing performance. The typical purchase price of the
Kalos ranges from $400,000 to $800,000 depending on configuration.
KALOS XP. Introduced in 1999, the Kalos xp is based upon the Kalos
tester. The Kalos xp features a wider, 96 pin test site enabling testing of high
pin count NVM and flash memory core microcontroller devices. Kalos xp provides
up to eight site-in-parallel test capabilities in a small footprint tester
package.
PERSONAL KALOS. Personal Kalos is a desktop engineering version of the
high-throughput Kalos tester. The typical price for a Personal Kalos ranges
from $100,000 to $120,000 depending on configuration.
BTMA. The 2001, 2555 and 2555A are NVM engineering testers focused on
the lab environment. Acquired from Heuristics in 1998, the BTMA line is designed
to be usable by design engineers and other non-test specialists to debug and
characterize NVM designs and yield problems. The BTMA software user interface
makes it a platform for this function. The purchase price for these testers
typically ranges from $50,000 to $250,000 depending on configuration.
DELPHI. Introduced in 1999, the Delphi is an updated version of the
BTMA 2001 platform that uses a Windows NT-based work station. The purchase price
of this tester is typically $50,000 to $70,000 depending on configuration.
5
EPRO. Our EPRO memory product line includes the model 142/AX. The model
142/AX was first shipped by EPRO in 1982. The purchase price of these
non-volatile memory testers typically ranges from $30,000 to $80,000, depending
upon configuration.
BOST. Built-Off Self-Test, or BOST, technology is a new process in
transforming the role of test from an expensive and passive device validation
procedure into a series of solutions that can shrink development cycles, reduce
costs, meet time-to-market demands and improve die yields. BOST integrates a
device specific BIST engine directly into a custom circuit on the load board.
Consulting services for BOST memory testing are currently available and pricing
is dependent on configuration.
WORKCELL PRODUCTS
In 1996, we established the Workcell product group. A Workcell enhances
manufacturing productivity by integrating previously distinct equipment into a
single, highly efficient tool. In 1997, we debuted our sophisticated Triton
series of wafer test systems. Triton Memory--the industry's first suite of
Workcell wafer test solutions--features a production worthy wafer prober
integrated with a robust NVM ATE test system.
TRITON MEMORY. Leveraging our tester-on-a-card architecture, Triton
Memory tests as many as 16 sites in parallel at speeds of 50 MHz. All functions
required to test a Flash memory device appear on one card. An inherently
parallel, high-performance system that improves throughput rates, the Triton
Memory tests each device asynchronously from one another--while embedded within
an 8" wafer prober. The tester is an integral part of the prober's structure,
minimizing independent vibrations associated with current interface concepts.
The typical price of a Triton memory ranges from $450,000 to $1,300,000
depending on configuration.
MATRIX TEST(TM). The Matrix Test was introduced in 1999 in conjunction
with Amkor Technology and FICO BV. The Matrix Test process is a zero-footprint
in-line flash memory test system and it integrates a Kalos non-volatile memory
test system with a Fico strip-based test handler to improve the test process.
This integrated solution is able to test a strip of flash memory devices without
singulating the parts, or separating them from the strip.
SOFTWARE PRODUCTS
Our software products provide tools to IC manufacturers to
help create detailed tests to ensure product quality and shorten time-to-market.
TDS. The TDS product line consists primarily of Converter, Conditioner,
and WaveBridge products. Converters take waveform data from simulator-specific
representations into an industry-standard representation. Conditioners modify
waveform data to enable it to fit specific tester environments. WaveBridge
modules generate the actual test programs. Converters are available to support
most commonly used simulators, and WaveBridge modules are available for a
variety of ATE models. Other programs that analyze waveform data and provide
other design-to-test functions are also included in the TDS product line.
TDX. The TDX product line allows the design engineer to verify complex
designs with full timing accuracy, Iddq, pattern generation, scan Generation and
testability analysis.
MEMBIST. MemBIST software generates built-in self-test logic for
designs that use embedded memories. The software minimizes the test time and
chip area required for self-test logic of embedded memories. Users can also
designate varying levels of detail for the diagnostic information to be produced
by the BIST logic, from simple pass/fail to topologically correct bitmaps that
can be used in failure analysis.
OPMAXX. The Opmaxx product line provides a set of software tools for
testing analog and mixed signal devices, as well as designing them for
testability. DesignMaxx provides analog design optimization, verification, and
sensitivity analysis. TestMaxx evaluates analog/mixed-signal fault coverage and
fault grades test stimulus. TestMaxx evaluates and optimizes analog/mixed-signal
tests. BISTMaxx generates built-in self-test for analog/mixed signal device
functionality both on-chip and off-chip.
CUSTOMERS, MARKETS AND APPLICATION
We target digital logic, mixed-signal, non-volatile memory
device and system-on-a-chip manufacturers that serve a broad range of growing
end-user market segments. Our customers manufacture semiconductors in high
6
volume for use in applications such as automobiles, appliances, personal
computers, personal communications products, networking products, digital
televisions and multimedia hardware.
In addition to marketing our products to major semiconductor
manufacturers, we have developed relationships with numerous assembly and test
services companies. Semiconductor manufacturers and fabless semiconductor
companies utilize these subcontractors as a means of lowering their fixed
production costs, thus minimizing the effects of cyclicality inherent in the
semiconductor industry. As a result, these assembly and test services companies
have become an increasingly important segment of the ATE market.
We believe that our success depends in large part upon the success of
our major customers. The loss of or any reduction in orders by a significant
customer (including the potential for reductions in orders by assembly and test
services companies which that customer may utilize), including reductions due to
market, economic or competitive condition in the semiconductor industry or in
other industries that manufacture products utilizing semiconductors has
materially adversely affected, and may continue to materially adversely affect
our business, financial condition or results of operations. Our ability to
increase sales in the future will depend in part upon our ability to obtain
orders from new customers as well as upon the financial condition and success of
our customers and the general global economy. There can be no assurance that our
sales will not decrease in the future or that we will be able to retain existing
customers or to attract new ones.
For information on our geographic data and major customers, see Note 4
to the Consolidated Financial Statements included elsewhere herein. Our
international sales are primarily denominated in United States dollars. We
anticipate that our international business will continue to account for a
significant portion of net sales in the foreseeable future.
We schedule production of our systems based upon order backlog and
order forecast. We include in our backlog only those customer orders for systems
(including upgrades) for which we have accepted purchase orders and assigned
shipment dates in approximately the following six months. Substantially all of
our orders are subject to cancellation or rescheduling by the customer with
limited or no penalties. Our backlog at any particular date may not necessarily
be representative of actual sales for any succeeding period due to orders
received for systems to be shipped in the same quarter, possible changes in
system delivery schedules, cancellation of orders and potential delays in system
shipments. As of October 31, 1999, our order backlog for systems, exclusive of
orders for spare parts and service and support, was approximately $124.5
million, as compared with $32.3 million as of October 31, 1998.
SALES, SERVICE AND SUPPORT
We currently market and sell our products in the United States
principally through our direct sales organization, with direct sales employees
and representatives in over 16 locations. Outside the United States, we utilize
both direct sales employees and a broad network of distributors, with direct
sales employees and distributors in over 20 countries. Sales through
distributors represented approximately 47%, 45% and 36% of net sales during
fiscal years 1999, 1998 and 1997, respectively.
We and our distributors have sales and support centers located in
the United States, Europe, Israel, and throughout Asia from which both direct
Credence personnel and independent sales and service representatives sell and
support the equipment. We believe that field support is critical to our
customers. Support encompasses many of the components of the total cost of
ownership for ATE. We seek to develop long-term relationships with major
ATE customers through extensive support consisting of teams of professional
sales, applications, training and service personnel. These personnel are located
in close physical proximity to key customer sites in order to provide the
required support in a timely fashion. The sales process includes consultations
with customers to help them purchase the most cost-effective equipment for their
needs, to help develop custom test programs to optimize production throughput,
to assist in long-term self-sufficiency through training of customer test
engineering personnel and to provide the service capacity and preventive
maintenance to reduce downtime for customers' systems. Customer support includes
field personnel and in-house applications personnel who work closely with design
engineering groups to modify existing equipment to meet the latest performance
requirements.
In Japan a wholly-owned subsidiary provides sales and service to our
customers. In addition, we have a relationship with Innotech Corporation, a
distributor of our products in Japan. In 1997, we formed a joint venture with
Innotech to engage in the customization and manufacture of ATE products for sale
by both companies. In
7
March 1996, we established a service and support in Korea. We also have a
relationship with Itek, Inc., a distributor of our products in Korea.
Our standard policy is to warrant our new systems against defects in
design, materials and workmanship for one year for parts and labor. We offer
customers additional support after the warranty period in the form of
maintenance contracts for specified time periods. Such contracts include various
options such as board replacement, priority response, planned preventive
maintenance, scheduled one-on-one training, daily on-site support and monthly
system and performance analysis.
RESEARCH AND DEVELOPMENT
The ATE market is subject to rapid technological change and new product
introductions. Our ability to be competitive in this market will depend in
significant part upon our ability to successfully develop and introduce new
products, enhancements and related software tools on a timely and cost-effective
basis. This will enable customers to integrate such products into their
operations as they begin volume manufacturing of the next generation of
semiconductors.
We have pursued a technology acquisition strategy to complement our
internal research and development efforts, including:
- in 1988, we completed the acquisition of Axiom Technology
Corporation, which added mixed-signal testing capability;
- in 1989, we completed the acquisition of ASIX Systems Corporation,
which added one of our proprietary CMOS stabilization methods;
- in 1990, we acquired the STS Division of Tektronix Inc., which added
a second proprietary CMOS stabilization method;
- in 1993, we acquired various patents from Tektronix;
- in March 1995, we acquired EPRO, which added non-volatile memory
testing capability;
- in July 1997, we acquired specified assets and assumed specified
liabilities of Test Systems Strategies, Inc., a wholly owned
subsidiary of Summit Design, Inc.;
- in August 1997, we acquired through Test Systems Strategies fault
simulation and test program development products of Zycad;
- in June 1998, we purchased specified assets from Heuristics which
added memory BIST design and test applications capability; and
- in September 1999, we acquired Opmax through Fluence, which added
analog and mixed signal BIST design and test applications
capability.
Each of the stabilization methods acquired by Credence provides a
different solution to the tendency of CMOS to experience timing drift as a
function of temperature and voltage variation. The first proprietary solution
uses a timing phase detection circuit combined with a voltage control mechanism
to compensate for thermal, voltage and process drift. The second uses a unique
combination of counters and heating circuits to provide stability through
thermal means. These methods allow our CMOS-based ICs to achieve the timing
repeatability necessary to meet the performance requirements of ATE and to
realize the economic and other advantages of CMOS technology over ECL
technology. CMOS circuits use less space than those based on ECL as the circuits
require less power and can be more closely packed together. In addition to these
acquired stabilization methods, we have also developed and continue to develop
new and/or improved stabilization techniques for our tester products.
During 1998, we enhanced our Duo product line with new capabilities
including high performance audio testing, testing of analog circuitry for
wireless communication applications and embedded memory test capability. These
features enable single insertion system-on-a-chip testing capability. These
capabilities resulted in the Quartet product line which was introduced in 1999.
We will continue to focus research and development efforts on ensuring that its
products have the ability to efficiently test state-off-the-art customer devices
which combine analog, high speed digital logic, and memory on a single circuit.
8
Our ongoing research and development efforts also include focusing on
increased cycle speed, accuracy and pin counts of our testers. In addition, we
are working on a software development program that is intended to provide for
upward compatibility through our products. We will also continue to focus
efforts on providing software solutions which allow more rapid, cost-effective
development of ATE test programs which reduce time-to-market of customer
integrated circuit designs. We currently intend to continue to invest
significant resources in the development of new products and enhancements for
the foreseeable future.
Research and development expenses were $38.9 million in 1999, excluding
a $0.9 million charge for acquired IPR&D, $47.5 million in fiscal 1998,
excluding a $2 million charge for acquired IPR&D, and $37.4 million in fiscal
1997, excluding a $6 million charge for acquired IPR&D.
PROPRIETARY RIGHTS
We currently hold 52 active United States patents, which expire over
time through April 2018. In addition, we currently have 16 foreign patents,
which expire over time through September 2011. The two United States patents,
acquired from ASIX and Tektronix underlying our proprietary CMOS stabilization
methods expire in February 2007 and December 2007, respectively.
In 1993, we granted a license to Tektronix with respect to patents
obtained in the acquisition of the STS Division of Textronix, and certain other
intellectual property rights, the Tektronix Rights, including a patent covering
one of our proprietary CMOS stabilization technologies, that were assigned to us
by Tektronix in 1993. Tektronix has a worldwide, perpetual, irrevocable,
non-exclusive, royalty free, fully-paid, sublicensable and transferable license
to the Tektronix Rights. Tektronix may not grant rights under the Tektronix
Rights to make, use, sell or otherwise distribute ATE for testing ICs to any
entity other than a Tektronix joint venture affiliate and to a
successor-in-interest to Tektronix. Tektronix may not grant or assign such
rights to any other party that is a Credence competitor. In addition, Tektronix
may not knowingly sell components incorporating the Tektronix Rights to any
other party. We and Tektronix have granted to each other a worldwide, perpetual,
irrevocable, non-exclusive, royalty free, fully-paid, sublicensable and
transferable license to all improvements, enhancements, modifications or
derivative works created before August 1996, or the Improvements, of
intellectual property that was licensed or assigned pursuant to a Technology
Agreement dated December 31, 1990, as amended on August 12, 1993, including the
Tektronix Rights, to make, use and sell ATE for testing ICs. Tektronix's license
to the Improvements is subject to the same restrictions as its license to the
Tektronix Rights.
We attempt to protect our intellectual property rights through patents,
copyrights, trademarks and maintenance of trade secrets and other measures.
There can be no assurance that others will not independently develop equivalent
intellectual property or that we can meaningfully protect our intellectual
property. There can be no assurance that any patent we own will not be
invalidated, circumvented or challenged, that the rights granted thereunder will
provide competitive advantages to us or that any of our pending patent
applications will be issued. Furthermore, there can be no assurance that others
will not develop similar products, duplicate our products or design around the
patents owned by us. In addition, litigation has been and may continue to be
necessary to enforce our patents and other intellectual property rights, to
protect our trade secrets, to determine the validity and scope of the
proprietary rights of others, or to defend against claims of infringement or
invalidity. For additional information with respect to our intellectual
property, review the information set forth under "Risk Factors--If the
protection of proprietary rights is inadequate, our business could be harmed"
and "--Our business may be harmed if we are found to infringe proprietary rights
of others."
MANUFACTURING AND SUPPLIERS
Our manufacturing objective is to produce ATE that conforms to our
customers' requirements at the lowest commercially practical manufacturing cost.
We rely on outside vendors to manufacture certain components and subassemblies
including several custom integrated circuits. We seek to manage our inventory
levels through agreements with both suppliers and subcontractors that provide
just-in-time delivery of these components and subassemblies. We assemble these
components and subassemblies to create finished testers in the configuration
specified by our customers. In general, we use standard components and
prefabricated parts available from numerous suppliers. However, some components
and subassemblies necessary for the manufacture of our testers are obtained from
a sole supplier or a limited group of suppliers and that we are in the process
of qualifying a second source for some of those components. There can be no
assurance that such alternative source will be qualified or available. Our
reliance on a sole or a limited group of suppliers and on outside subcontractors
involves certain risks, including a potential inability to obtain an adequate
supply of required components, and reduced control over pricing
9
and timely delivery of components. See "Risk Factors--There are
limitations on our ability to find the supplies and services necessary to
run our business."
COMPETITION
The ATE industry is intensely competitive. We face substantial
competition throughout the world, primarily from ATE manufacturers located in
the United States, Europe and Japan, as well as from some of our customers.
Our competitors in the digital semiconductor testing market include:
- Advantest Corporation;
- Ando Electric Co. Ltd.;
- LTX Corporation;
- Schlumberger Ltd.;
- Agilent Technologies, Inc. (formerly a division of Hewlett-Packard
Company); and
- Teradyne, Inc.
In the mixed-signal semiconductor testing market our competitors include:
- Teradyne;
- LTX;
- Agilent;
- Schlumberger; and
- Advantest.
In the non-volatile memory testing market our competitors include:
- Teradyne;
- Agilent; and
- Advantest.
Fluence's principal competitors in the software design to test market are:
- Simutest, Inc.;
- Integrated Measurement Systems, Inc.; and
- in-house applications developed by companies in the semiconductor
industry.
The competitors in the software design for test and BIST market place include:
- Mentor Graphics, Inc.; and
- LogicVision, Inc. See "Risk Factors--The ATE industry is intensely
competitive which can adversely affect our revenue growth."
The principal elements of competition in our markets and the basis upon
which ATE customers select testers include throughput, tools for reducing
customer product time-to-market, product performance and total cost of
ownership. We believe that we compete favorably with respect to these factors.
EMPLOYEES
As of October 31, 1999, we had a total of 713 permanent employees and
112 temporary or contract employees. Of this total, 230 are engaged in
manufacturing, 197 are in research and development, 60 in applications, 175 in
sales, marketing and service, and 101 in general administration. Fluence has 62
employees primarily engaged in the development, sales and marketing of software
products. Our employees are highly skilled, and we believe our future results of
operations will depend in large part on our ability to attract and retain such
employees. None of our employees are represented by a labor union, and we have
not experienced any work stoppages. We consider our employee relations to be
good.
10
RISK FACTORS
OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY WHICH MAY ADVERSELY AFFECT
OUR STOCK PRICE
[GRAPH APPEARS HERE]
1997 1998 1999
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Net Sales 40 43 51 69 82 75 37 22 26 38 53 80
Net Income (loss) 1 3 (1) 7 9 9 (34) (11) (7) (9) 3 8
A variety of factors affect our results of operations. The above graph
illustrates that our quarterly net sales and operating results have fluctuated
significantly. We believe they will continue to fluctuate for a number of
reasons, including:
- economic conditions in the semiconductor industry in general and
capital equipment industry specifically;
- manufacturing capacity and ability to volume produce systems,
including our newest systems, and meet customer requirements;
- timing of new product announcements and new product releases by us
or our competitors;
- market acceptance of our new products and enhanced versions of
existing products;
- manufacturing inefficiencies associated with the start-up of our new
products, changes in our pricing or payment terms and cycles, and
those of our competitors, customers and suppliers;
- write-offs of excess and obsolete inventories and accounts
receivable that are not collectible; o supply constraints;
- integration into our new facilities in Oregon;
- the implementation of our new ERP system;
- patterns of capital spending by our customers, delays, cancellations
or reschedulings of customer orders due to customer financial
difficulties or otherwise;
- changes in overhead absorption levels due to changes in the number
of systems manufactured, the timing and shipment of orders,
availability of components including customs ICs, subassemblies and
services, customization and reconfiguration of our systems and
product reliability;
- expenses associated with acquisitions and alliances;
- operating expense reductions associated with cyclical industry
downturns, including costs relating to facilities consolidations and
related expenses;
- the proportion of our direct sales and sales through third parties,
including distributors and OEMS, the mix of products sold, the
length of manufacturing and sales cycles, product discounts;
- natural disasters, political and economic instability, regulatory
changes and outbreaks of hostilities; and
- ability to hire and retain employees in a competitive market.
11
We presently intend to introduce new products and product enhancements
in the future, the timing and success of which will affect our business,
financial condition and results of operations. Our gross margins on system sales
have varied significantly and will continue to vary significantly based on a
variety of factors including:
- manufacturing inefficiencies; o pricing concessions by us and our
competitors and pricing by our suppliers;
- hardware and software product sales mix;
- inventory write-downs;
- production volumes;
- new product introductions;
- product reliability;
- absorption levels and the rate of capacity utilization;
- customization and reconfiguration of systems;
- international and domestic sales mix and field service margins; and
- facility relocations and consolidations.
New and enhanced products typically have lower gross margins in the
early stages of commercial introduction and production. Although we have
recorded and continue to record provisions for estimated sales returns, accounts
receivable that might not be collectible, and product warranty costs, we cannot
be certain that our estimates will be adequate.
We cannot forecast with any certainty the impact of these and other
factors on our sales and operating results in any future period. Results of
operations in any period, therefore, should not be considered indicative of the
results to be expected for any future period. Because of this difficulty in
predicting future performance, our operating results may fall below the
expectations of securities analysts or investors in some future quarter or
quarters. Our failure to meet these expectations would likely adversely affect
the market price of our common stock. In addition, our need for continued
significant expenditures for research and development, marketing and other
expenses for new products, capital equipment purchases and worldwide training
and customer service and support will impact our sales and operations results in
the future. Other significant expenditures may make it difficult for us to
reduce our significant fixed expenses in a particular period if we do not meet
our net sales goals for that period. These other expenditures include:
- research and development;
- distribution channels;
- marketing and other expenses for new products;
- capital equipment purchases and world-wide training; and
- customer support and service.
As a result, we cannot be certain that we will be profitable or that we
will not again sustain losses in the future.
WE HAVE A LIMITED BACKLOG AND OBTAIN MOST OF OUR NET SALES FROM A RELATIVELY FEW
NUMBER OF SYSTEM SALES TRANSACTIONS WHICH CAN RESULT IN FLUCTUATIONS OF
QUARTERLY RESULTS
Other than some memory products and software products, for which the
price range is typically below $50,000, we obtain most of our net sales from the
sale of a relatively few number of systems that typically range in price from
$350,000 to $3.6 million. This has and could continue to result in our net sales
and operating results for a particular period being significantly impacted by
the timing of recognition of revenue from a single transaction. Our net sales
and operating results for a particular period could also be materially adversely
affected if an anticipated order from even one customer is not received in time
to permit shipment during that period. Backlog at the beginning of a quarter
typically does not include all orders necessary to achieve our sales objectives
for that quarter. In addition, orders in backlog are subject to cancellation,
delay, deferral or rescheduling by customers with limited
12
or no penalties. Consequently, our quarterly net sales and operating results
have in the past and will in the future depend upon our obtaining orders for
systems to be shipped in the same quarter that the order is received.
We believe that some of our customers may from time to time, place
orders with us for more systems than they will ultimately accept or for a more
rapid delivery than they will ultimately require. For this reason, our backlog
may include customer orders in excess of those actually delivered to them or
other customers.
Furthermore, we generally ship products generating most of our net
sales near the end of each quarter. Accordingly, our failure to receive an
anticipated order or a delay or rescheduling in a shipment near the end of a
particular period may cause net sales in a particular period to fall
significantly below expectations, which could have a material adverse effect on
our business, financial condition or results of operations. The relatively long
manufacturing cycle of many of our testers has caused and could continue to
cause future shipments of testers to be delayed from one quarter to the next.
Furthermore, as we and our competitors announce new products and technologies,
customers may defer or cancel purchases of our existing systems. We cannot
forecast the impact of these and other factors on our sales and operating
results.
THE SEMICONDUCTOR INDUSTRY HAS BEEN CYCLICAL
Our business and results of operations depend largely upon the capital
expenditures of manufacturers of semiconductors and companies that specialize in
contract packaging and/or testing of semiconductors. This includes manufacturers
and contractors that are opening new or expanding existing fabrication
facilities or upgrading existing equipment, which in turn depend upon the
current and anticipated market demand for semiconductors and products
incorporating semiconductors. The semiconductor industry has been highly
cyclical with recurring periods of oversupply, which often have had a severe
effect on the semiconductor industry's demand for test equipment, including the
systems we manufacture and market. We believe that the markets for newer
generations of semiconductors will also be subject to similar fluctuations.
We have experienced shipment delays, delays in commitments and
restructured purchase orders by customers and we expect this activity to
continue. Accordingly, we cannot be certain that we will be able to achieve or
maintain our current or prior level of sales or rate of growth. We anticipate
that a significant portion of new orders may depend upon demand from
semiconductor device manufacturers building or expanding fabrication facilities
and new device testing requirements that are not addressable by currently
installed test equipment, and there can be no assurance that such demand will
develop to significant degree, or at all. In addition, our business, financial
condition or results of operations may be adversely affected by any factor
adversely affecting the semiconductor industry in general or particular segments
within the semiconductor industry. For example, the Asian financial crisis
contributed to widespread uncertainty and, in part, a slowdown in the
semiconductor industry. This slowdown in the semiconductor industry resulted in
reduced spending for semiconductor capital equipment, including ATE which we
sell. This industry slowdown had and may in the future have a material adverse
effect on our product backlog, balance sheet, financial condition and results of
operations. Therefore, there can be no assurance that our operating results will
not continue to be materially adversely affected if downturns or slowdowns in
the semiconductor industry occur again in the future.
WE HAVE OVER THE LAST SEVERAL YEARS EXPERIENCED SIGNIFICANT FLUCTUATIONS IN OUR
OPERATING RESULTS AND INCREASED THE SCALE OF OPERATIONS
In fiscal 1999, we generated revenue of $26.5 million in the first
quarter and $80.2 million in the fourth quarter, an increase of 203%. In fiscal
1998, we generated revenue of $82.4 million for the first quarter and $22.4
million for the fourth quarter, a decrease of 73%. Since 1993, except for
cost-cutting efforts during fiscal 1998 and most of 1999, we have overall
significantly increased the scale of our operations in general to support
periods of generally increased sales levels and expanded product offerings and
have expanded operations to address critical infrastructure and other
requirements, including the hiring of additional personnel, significant
investments in research and development to support product development, the new
facilities in Oregon, a new ERP system and numerous acquisitions. These
fluctuations in our sales and operations have placed and are placing a
considerable strain on our management, financial, manufacturing and other
resources. In order to effectively deal with the changes brought on by the
cyclical nature of the industry, we have been required to implement and improve
a variety of highly flexible operating, financial and other systems, procedures
and controls capable of expanding, or contracting consistent with our business.
However, we cannot be certain that any existing or new systems,
13
procedures or controls, including our new ERP system, will be adequate to
support fluctuations in our operations or that our systems, procedures and
controls will be cost-effective or timely. Any failure to implement, improve and
expand or contract such systems, procedures and controls efficiently and at a
pace consistent with our business could have a material adverse effect on our
business, financial condition or results of operations.
WE ARE EXPANDING AND INTEND TO CONTINUE THE EXPANSION OF OUR PRODUCT LINES
We are currently devoting and intend to continue to devote significant
resources to the development, production and commercialization of new products
and technologies. During fiscal 1999, we launched three major new products. We
invested and continue to invest significant resources in plant and equipment,
leased facilities, inventory, personnel and other costs, to begin or prepare to
increase production of these products. A significant portion of these
investments will provide the marketing, administration and after-sales service
and support required to service and support these new hardware and software
products. Accordingly, we cannot be certain that gross profit margin and
inventory levels will not be adversely impacted by delays in new product
introductions or start-up costs associated with the initial production and
installation of these new product lines. We also cannot be certain that we can
manufacture these systems per the time and quantity required by our customers.
The start-up costs include additional manufacturing overhead, additional
inventory and warranty reserve requirements and the enhancement of after-sales
service and support organizations. In addition, the increases in inventory on
hand for new hardware and software product development and customer support
requirements have increased and will continue to increase the risk of inventory
write-offs. We cannot be certain that our net sales will increase or remain at
recent levels or that any new products will be successfully commercialized or
contribute to revenue growth or that any of our additional costs will be
covered.
THERE ARE LIMITATIONS ON OUR ABILITY TO FIND THE SUPPLIES AND SERVICES
NECESSARY TO RUN OUR BUSINESS
We obtain certain components, subassemblies and services necessary for
the manufacture of our testers from a limited group of suppliers. We do not
maintain long-term supply agreements with most of our vendors and we purchase
most of our components and subassemblies through individual purchase orders. The
manufacture of certain of our components and subassemblies is an extremely
complex process. We also rely on outside vendors to manufacture certain
components and subassemblies and to provide certain services. We have recently
experienced and continue to experience significant reliability, quality and
timeliness problems with several critical components including certain custom
integrated circuits. In addition, we and certain of our subcontractors are
experiencing significant shortages and delays in delivery of various components
and subassemblies. We cannot be certain that these or other problems will not
continue to occur in the future with our suppliers or outside subcontractors.
Our reliance on a limited group of suppliers and on outside subcontractors
involves several risks, including an inability to obtain an adequate supply of
required components, subassemblies and services and reduced control over the
price, timely delivery, reliability and quality of components, subassemblies and
services. Shortages, delays, disruptions or terminations of the sources for
these components and subassemblies have delayed and could continue to delay
shipments of our systems and new products and could continue to have a material
adverse effect on our business. Our continuing inability to obtain adequate
yields or timely deliveries or any other circumstance that would require us to
seek alternative sources of supply or to manufacture such components internally
could also have a material adverse effect on our business, financial condition
or results of operations. Such delays, shortages and disruptions would also
damage relationships with current and prospective customers and have and could
continue to allow competitors to penetrate our customer accounts. We cannot be
certain that our internal manufacturing capacity or that of our suppliers and
subcontractors will be sufficient to meet customer requirements.
THE ATE INDUSTRY IS INTENSELY COMPETITIVE WHICH CAN ADVERSELY AFFECT OUR REVENUE
GROWTH
With the substantial investment required to develop test application
software and interfaces, we believe that once a semiconductor manufacturer has
selected a particular ATE vendor's tester, the manufacturer is likely to use
that tester for a majority of its testing requirements for the market life of
that semiconductor and, to the extent possible, subsequent generations of
similar products. As a result, once an ATE customer chooses a system for the
testing of a particular device, it is difficult for competing vendors to achieve
significant ATE sales to such customer for similar use. Our inability to
penetrate any large ATE customer or achieve significant sales to any ATE
customer could have a material adverse effect on our business, financial
condition or results of operations.
14
We face substantial competition from ATE manufacturers throughout the
world, as well as several of our customers. We do not currently compete in the
testing of microprocessors, linear ICs or DRAMs. Moreover, approximately
two-thirds of our net sales in fiscal 1998 and 1999 were derived from sales of
mixed-signal testers. Many competitors have substantially greater financial and
other resources with which to pursue engineering, manufacturing, marketing and
distribution of their products. Certain competitors have recently introduced or
announced new products with certain performance or price characteristics equal
or superior to products we currently offer. These competitors have recently
introduced products that compete directly against our products. We believe that
if the ATE industry continues to consolidate through strategic alliances or
acquisitions, we will continue to face significant additional competition from
larger competitors that may offer product lines and services more complete than
ours. Our competitors are continuing to improve the performance of their current
products and to introduce new products, enhancements and new technologies that
provide improved cost of ownership and performance characteristics. New product
introductions by our competitors could cause a decline in our sales or loss of
market acceptance of our existing products.
Moreover, our business, financial condition or results of operations
could continue to be materially adversely affected by increased competitive
pressure and continued intense price-based competition. We have experienced and
continue to experience significant price competition in the sale of our testers.
In addition, pricing pressures typically become more intense at the end of a
product's life cycle and as competitors introduce more technologically advanced
products. We believe that, to be competitive, we must continue to expend
significant financial resources in order to, among other things, invest in new
product development and enhancements and to maintain customer service and
support centers worldwide. We cannot be certain that we will be able to compete
successfully in the future.
THE ATE MARKET IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE
Our ability to compete in this market depends upon our ability to
successfully develop and introduce new hardware and software products and
enhancements and related software tools with greater features on a timely and
cost-effective basis, including products under development internally as well as
products obtained in acquisitions. Our customers require testers and software
products with additional features and higher performance and other capabilities.
We are therefore required to enhance the performance and other capabilities of
our existing systems and software products and related software tools. Any
success we may have in developing new and enhanced systems and software products
and new features to our existing systems and software products will depend upon
a variety of factors, including:
- product selection;
- timely and efficient completion of product design;
- implementation of manufacturing and assembly processes;
- successful coding and debugging of software;
- product performance;
- reliability in the field; and
- effective sales and marketing.
Because we must make new product development commitments well in
advance of sales, new product decisions must anticipate both future demand and
the availability of technology to satisfy that demand. We cannot be certain that
we will be successful in selecting, developing, manufacturing and marketing new
hardware and software products or enhancements and related software tools. Our
inability to introduce new products and related software tools that contribute
significantly to net sales, gross margins and net income would have a material
adverse effect on our business, financial condition and results of operations.
New product or technology introductions by our competitors could cause a decline
in sales or loss of market acceptance of our existing products. In addition, if
we introduce new products, existing customers may curtail purchases of the older
products and delay new product purchases. Any unanticipated decline in demand
for our hardware or software products could have a materially adverse effect on
our business, financial condition or results of operations.
15
SIGNIFICANT DELAYS CAN OCCUR BETWEEN THE TIME WE INTRODUCE A SYSTEM AND THE TIME
WE ARE ABLE TO PRODUCE THAT SYSTEM IN VOLUME
We have in the past experienced significant delays in the
introduction, volume production and sales of our new systems and related feature
enhancements. We have experienced significant delays in the introduction
of our VS2000 and Kalos series testers as well as certain enhancements to our
existing testers. These delays have been primarily related to our inability to
successfully complete product hardware and software engineering within the time
frame originally anticipated, including design errors and redesigns of ICs. As a
result, some customers have experienced significant delays in receiving and
using our testers in production. We cannot be certain that these or additional
difficulties will not continue to arise or that delays will not continue to
materially adversely affect customer relationships and future sales. Moreover,
we cannot be certain that we will not encounter these or other difficulties that
could delay future introductions or volume production or sales of our systems or
enhancements and related software tools. We have incurred and may continue to
incur substantial unanticipated costs to ensure the functionality and
reliability of our testers and to increase feature sets. If our systems continue
to have reliability, quality or other problems, or the market perceives our
products to be feature deficient, we may suffer reduced orders, higher
manufacturing costs, delays in collecting accounts receivable and higher
service, support and warranty expenses, or inventory write-offs, among other
effects. Our failure to have a competitive tester and related software tools
available when required by a semiconductor manufacturer could make it
substantially more difficult for us to sell testers to that manufacturer for a
number of years. We believe that the continued acceptance, volume production,
timely delivery and customer satisfaction of our newer digital, mixed signal and
non-volatile memory testers are of critical importance to our future financial
results. As a result, our inability to correct any technical, reliability, parts
shortages or other difficulties associated with our systems or to manufacture
and ship the systems on a timely basis to meet customer requirements could
damage our relationships with current and prospective customers and would
continue to materially adversely affect our business, financial condition and
results of operations.
WE MAY NOT BE ABLE TO DELIVER CUSTOM HARDWARE OPTIONS AND SOFTWARE APPLICATIONS
TO SATISFY SPECIFIC CUSTOMER NEEDS IN A TIMELY MANNER
We must develop and deliver customized hardware and software to meet
our customers' specific test requirements. We must be able to manufacture these
systems on a timely basis. Our test equipment may fail to meet our customers'
technical or cost requirements and may be replaced by competitive equipment or
an alternative technology solution. Our inability to meet such hardware and
software requirements could impact our ability to recognize revenue on the
related equipment. Our inability to provide a test system that meets requested
performance criteria when required by a device manufacturer would severely
damage our reputation with that customer. This loss of reputation may make it
substantially more difficult for us to sell test systems to that manufacturer
for a number of years.
WE RELY ON SPIROX CORPORATION FOR A SIGNIFICANT PORTION OF OUR REVENUES AND THE
TERMINATION OF THIS DISTRIBUTION RELATIONSHIP WOULD ADVERSELY AFFECT OUR
BUSINESS
One distributor, Spirox Corporation, a distributor in Taiwan that sells
to end-user customers in Taiwan and China, accounted for 39%, 34% and
30% of our net sales in fiscal 1999, 1998, and 1997, respectively. The
semiconductor industry is highly concentrated, and a small number of
semiconductor device manufacturers and contract assemblers account for a
substantial portion of the purchases of semiconductor test equipment generally,
including our test equipment. Our top ten customers have recently accounted for
at least a majority of our net sales. Consequently, our business, financial
condition and results of operations could be materially adversely affected by
the loss of or any reduction in orders by Spirox or any other significant
customer, including losses, the potential for reductions in orders by assembly
and tester service companies which that customer may utilize or reductions due
to continuing or other technical, manufacturing or reliability problems with our
products or continued slow-downs in the semiconductor industry or in other
industries that manufacture products utilizing semiconductors. Our ability to
maintain or increase sales levels will depend upon:
- our ability to obtain orders from existing and new customers;
- our ability to manufacture systems on a timely and cost-effective
basis;
- our ability to complete the development of our new hardware and
software products;
16
- our customers' financial condition and success;
- general economic conditions; and
- our ability to meet increasingly stringent customer performance and
other requirements and shipment delivery dates.
OUR LONG AND VARIABLE SALES CYCLE DEPENDS UPON FACTORS OUTSIDE OF OUR CONTROL
AND COULD CAUSE US TO EXPEND SIGNIFICANT TIME AND RESOURCES PRIOR TO EARNING
ASSOCIATED REVENUES
Sales of our systems depend in part upon the decision of semiconductor
manufacturers to develop and manufacture new semiconductor devices or to
increase manufacturing capacity. As a result, sales of our testers are subject
to a variety of factors we cannot control. The decision to purchase a tester
generally involves a significant commitment of capital, with the attendant
delays frequently associated with significant capital expenditures. For these
and other reasons, our systems have lengthy sales cycles during which we may
expend substantial funds and management effort to secure a sale, subjecting us
to a number of significant risks. We cannot be certain that we will be able to
maintain or increase net sales in the future or that we will be able to retain
existing customers or attract new ones.
IF WE ENGAGE IN ACQUISITIONS, WE WILL INCUR A VARIETY OF COSTS, AND THE
ANTICIPATED BENEFITS OF THE ACQUISITIONS MAY NEVER BE REALIZED
We have developed in significant part through mergers and acquisitions
of other companies and businesses. We intend in the future to pursue additional
acquisitions of complementary product lines, technologies and businesses. We may
have to issue debt or equity securities to pay for future acquisitions, which
could be dilutive. We have also incurred and may continue to incur certain
liabilities or other expenses in connection with acquisitions, which have and
could continue to materially adversely affect our business, financial condition
and results of operations.
In addition, acquisitions involve numerous other risks, including:
- difficulties assimilating the operations, personnel, technologies
and products of the acquired companies;
- diversion of our management's attention from other business
concerns;
- risks of entering markets in which we have no or limited experience;
and
- the potential loss of key employees of the acquired companies.
For these reasons, we cannot be certain what effect future acquisitions may have
on our business, financial condition and results of operations.
CHANGES TO FINANCIAL ACCOUNTING STANDARDS MAY EFFECT OUR REPORTED RESULTS
OF OPERATIONS
We prepare our financial statements to conform with generally accepted
accounting principles, or GAAP. GAAP are subject to interpretation by the
American Institute of Certified Public Accountants, the SEC and various bodies
formed to interpret and create appropriate accounting policies. A change in
those policies can have a significant effect on our reported results and may
even affect our reporting of transactions completed before a change is
announced. Accounting policies affecting many other aspects of our business,
including rules relating to purchase and pooling-of-interests accounting for
business combinations, in-process research and development charges, employee
stock purchase plans and stock option grants have recently been revised or are
under review. Changes to those rules or the questioning of current practices may
have a material adverse effect on our reported financial results or on the way
we conduct our business. In addition, our preparation of financial statements in
accordance with GAAP requires that we make estimates and assumptions that affect
the recorded amounts of assets and liabilities, disclosure of those assets and
liabilities at the date of the financial statements and the recorded amounts of
expenses during the reporting period. A change in the facts and circumstances
surrounding those estimates could result in a change to our estimates and could
impact our future operating results.
17
OUR EXECUTIVE OFFICERS AND CERTAIN KEY PERSONNEL ARE CRITICAL TO OUR BUSINESS
Our future operating results depend substantially upon the continued
service of our executive officers and key personnel, none of whom are bound by
an employment or non-competition agreement. Our future operating results also
depend in significant part upon our ability to attract and retain qualified
management, manufacturing, technical, engineering, marketing, sales and support
personnel. Competition for personnel is intense, and we cannot ensure success in
attracting or retaining personnel. There may be only a limited number of persons
with the requisite skills to serve in these positions and it may be increasingly
difficult for us to hire personnel over time. Our business, financial condition
and results of operations could be materially adversely affected by the loss of
any of our key employees, by the failure of any key employee to perform in his
or her current position, or by our inability to attract and retain skilled
employees.
WE HAVE A NEW EXECUTIVE MANAGEMENT TEAM AND IF THEY ARE UNABLE TO WORK TOGETHER
EFFECTIVELY, OUR BUSINESS MAY BE HARMED
In July 1999, we announced the appointment of Dr. Graham J. Siddall as
our new President and Chief Executive Officer. Dr. Siddall joined Credence from
KLA-Tencor where he was Executive Vice President of the Wafer Inspection Group.
We have experienced several other transitions in executive management in recent
years. In conjunction with the departure in December 1998 of our former Chairman
and Chief Executive Officer, our Board of Directors appointed David A. Ranhoff,
Executive Vice President, and Dennis P. Wolf, Executive Vice President, Chief
Financial Officer and Secretary, jointly to the office of the President. The
Board also named a new Chairman, Dr. William Howard, Jr., and began a search for
a new chief executive officer which culminated in the appointment of Dr.
Siddall. These transitions have placed significant demands on our operational,
administrative and financial staff and we anticipate that these demands will not
decline in the near term. We cannot be certain that such transitions will not
have a material adverse effect on our business, financial condition and results
of operations, or the way we are perceived by the market or on the price of our
common stock.
OUR INTERNATIONAL BUSINESS EXPOSES US TO ADDITIONAL RISKS
International sales accounted for approximately 64%, 69% and 70% of our
total net sales for the fiscal years 1999, 1998 and 1997, respectively. As a
result, we anticipate that international sales will continue to account for a
significant portion of our total net sales in the foreseeable future. These
international sales will continue to be subject to certain risks, including:
- changes in regulatory requirements;
- tariffs and other barriers;
- political and economic instability;
- an outbreak of hostilities;
- integration of foreign operations of acquired businesses;
- foreign currency exchange rate fluctuations;
- difficulties with distributors, joint venture partners, original
equipment manufacturers, foreign subsidiaries and branch operations;
- potentially adverse tax consequences; and
- the possibility of difficulty in accounts receivable collection.
We are also subject to the risks associated with the imposition of
domestic and foreign legislation and regulations relating to the import or
export of semiconductor equipment. We cannot predict whether the import and
export of our products will be subject to quotas, duties, taxes or other charges
or restrictions imposed by the United States or any other country in the future.
Any of these factors or the adoption of restrictive policies could have a
material adverse effect on our business, financial condition or results of
operations. Net sales to the Asia Pacific region accounted for approximately
55%, 60% and 66% of our total net sales in the fiscal years 1999, 1998 and 1997,
and thus, demand for our products is subject to the risk of economic instability
in that region and could continue to be materially adversely affected. Countries
in the Asia Pacific region, including Korea and Japan, have experienced
weaknesses in their currency, banking and equity markets in the recent past.
These weaknesses could
18
continue to adversely affect demand for our products, the availability and
supply of our product components, and our consolidated results of operations.
The recent Asian financial crisis contributed to a widespread uncertainty and a
slowdown in the semiconductor industry. This slowdown resulted in reduced
spending on semiconductor capital equipment, including ATE, and has had, and may
in the future have, a material adverse effect on our product backlog, balance
sheet and results of operations.
In addition, one of our major customers, Spirox Corporation, is a
Taiwanese distributor. This subjects a significant portion of our receivables
and future revenues to the risks associated with doing business in a foreign
country, including political and economic instability, currency exchange rate
fluctuations and regulatory changes. Disruption of business in Asia caused by
the previously mentioned factors could continue to have a material impact on the
Company's business, financial condition or results of operations.
IF THE PROTECTION OF PROPRIETARY RIGHTS IS INADEQUATE, OUR BUSINESS COULD BE
HARMED
We attempt to protect our intellectual property rights through patents,
copyrights, trademarks, maintenance of trade secrets and other measures,
including entering into confidentiality agreements. However, we cannot be
certain that others will not independently develop substantially equivalent
intellectual property or that we can meaningfully protect our intellectual
property. Nor can we be certain that our patents will not be invalidated, deemed
unenforceable, circumvented or challenged, or that the rights granted thereunder
will provide us with competitive advantages, or that any of our pending or
future patent applications will be issued with claims of the scope we seek, if
at all. Furthermore, we cannot be certain that others will not develop similar
products, duplicate our products or design around our patents, or that foreign
intellectual property laws, or agreements into which we have entered will
protect our intellectual property rights. Inability or failure to protect our
intellectual property rights could have a material adverse effect upon our
business, financial condition and results of operations. We have been involved
in extensive, expensive and time-consuming reviews of, and litigation
concerning, patent infringement claims.
OUR BUSINESS MAY BE HARMED IF WE ARE FOUND TO INFRINGE PROPRIETARY RIGHTS OF
OTHERS
We have at times been notified that we may be infringing intellectual
property rights of third parties and we have litigated patent infringement
claims in the past. We expect to continue to receive notice of such claims in
the future. In July 1998, inTEST IP Corporation, or inTEST, alleged in writing
that one of our products is infringing a patent held by inTEST. We may also be
obligated to other third parties relating to this allegation. We believe we have
meritorious defenses to the claims. However, we cannot be certain of success in
defending this patent infringement claim or claims for indemnification resulting
from infringement claims.
Some of our customers have received notices from Mr. Jerome Lemelson
alleging that the manufacture of semiconductor products and/or the equipment
used to manufacture semiconductor products infringes certain patents issued to
Mr. Lemelson. We have been notified by customers that we may be obligated to
defend or settle claims that our products infringe Mr. Lemelson's patents, and
that if it is determined that the customers infringe Mr. Lemelson's patents,
that customer intends to seek indemnification from us for damages and other
related expenses.
We cannot be certain of success in defending current or future patent
infringement claims or claims for indemnification resulting from infringement
claims. Our business, financial condition and results of operations could be
materially adversely affected if we must pay damages to a third party or suffer
an injunction or if we expend significant amounts in defending any such action,
regardless of the outcome. With respect to any claims, we may seek to obtain a
license under the third party's intellectual property rights. We cannot be
certain, however, that the third party will grant us a license on reasonable
terms or at all. We could decide, in the alternative, to continue litigating
such claims. Litigation has been and could continue to be extremely expensive
and time consuming, and could materially adversely affect our business,
financial condition or results of operations, regardless of the outcome.
19
OUR HIGH CAPITAL EXPENDITURES MAY REQUIRE US TO OBTAIN ADDITIONAL FINANCING
WHICH MAY NOT BE AVAILABLE ON TERMS SATISFACTORY TO US
Developing and manufacturing new ATE systems and enhancements is highly
capital intensive. In order to be competitive, we must make significant
investments in, among other things:
- capital equipment;
- expansion of operations;
- systems;
- procedures and controls;
- research and development and worldwide training; and
- customer service and support.
We may be unable to obtain additional financing in the future on
acceptable terms, or at all. In connection with our issuance in September 1997
of convertible promissory notes, we currently have outstanding $96.6 million of
these notes which resulted in a ratio of long-term debt to total capitalization
at October 31, 1999 of approximately 35%. As a result, our principal and
interest obligations are substantial. The degree to which we are leveraged could
materially adversely affect our ability to obtain financing for working capital,
acquisitions or other purposes and could make our business more vulnerable to
industry downturns and competitive pressures. Our ability to meet debt service
obligations will be dependent upon our future performance, which will be subject
to financial, business and other factors affecting our operations, many of which
are beyond our control. If we raise additional funds by issuing equity
securities, our stockholders could be significantly diluted. We may exchange
notes for shares of our common stock or may refinance, exchange or redeem the
notes, which may also dilute stockholders and may make it difficult for us to
obtain additional future financing, if needed.
If we are unable to obtain adequate funds, we may be required to
restructure or refinance our debt or to delay, scale back or eliminate certain
of our research and development, acquisition or manufacturing programs. We may
also need to obtain funds through arrangements with partners or others and we
may be required to relinquish rights to certain of our technologies or potential
products or other assets.
A VARIETY OF FACTORS MAY CAUSE THE PRICE OF OUR STOCK TO BE VOLATILE
In recent years, the stock market in general, and the market for shares
of high-tech companies in particular, including ours, have
experienced extreme price fluctuations, which have often been unrelated to the
operating performance of affected companies. For example, in fiscal 1998, the
price of our common stock ranged from a high of $35.25 to a low of $9.31. In
fiscal 1999, the price of our common stock ranged from a high of $49.88 to a low
of $14.38. The market price of our common stock is likely to continue to
fluctuate significantly in the future, including fluctuations unrelated to our
performance.
We believe that fluctuations of our stock price may be caused by a
variety of factors, including:
- announcements of developments related to our business;
- fluctuations in our financial results;
- general conditions or developments in the semiconductor and capital
equipment industry and the general economy;
- sales or purchases of our common stock in the marketplace;
- announcements of our technological innovations or new products or
enhancements or those of our competitors;
- developments in patents or other intellectual property rights;
- developments in our relationships with customers and suppliers; or
- a shortfall or changes in revenue, gross margins or earnings or
other financial results from analysts' expectations or an outbreak
of hostilities or natural disasters.
20
WE ARE SUBJECT TO ANTI-TAKEOVER PROVISIONS THAT COULD DELAY OR PREVENT AN
ACQUISITION OF OUR COMPANY
Provisions of our amended and restated certificate of incorporation,
shareholders rights plan, equity incentive plans, bylaws and of Delaware law may
discourage transactions involving a change in corporate control. In addition to
the foregoing, our classified board of directors, the stockholdings of our
officers, directors and persons or entities that may be deemed affiliates, the
adoption of our shareholder rights plan and the ability of our board of
directors to issue preferred stock without further stockholder approval could
have the effect of delaying, deferring or preventing a third party to acquire us
and may adversely affect the voting and other rights of holders of our common
stock.
ITEM 2. PROPERTIES
We maintain our corporate headquarters in Fremont, California. This
leased facility, comprised of three buildings totalling 142,000 square feet,
contains corporate administration, sales, marketing, applications, engineering,
local customer support and memory products manufacturing. Approximately 26,000
square feet of one of the buildings has been subleased until February 2005 when
the lease on this facility expires. Our digital and mixed signal manufacturing
facilities, as well as additional marketing, applications, engineering and
customer support functions, are located in a 180,000 square foot facility,
comprised of two buildings in Hillsboro, Oregon. The lease covering this
facility expires in March 2014. Our software business is primarily located in a
22,000 square foot facility in Beaverton, Oregon. The lease on this building
expires in August 2002. We maintain various remote sales and service offices in
the United States.
ITEM 3. LEGAL PROCEEDINGS
In July 1998, we received a written allegation from in TEST Corporation
that we were infringing on a patent held by in TEST. In addition to direct costs
and diversion of resources which may result, we may be obligated to indemnify
third parties for costs related to this allegation. We are involved in various
other claims arising in the ordinary course of business, none of which, in the
opinion of management, if determined adversely against the us, will have a
material adverse effect on our business, financial condition or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
None
21
EXECUTIVE OFFICERS AND KEY EMPLOYEES
The executive officers and key employees of the Company and their ages
and positions as of January 15, 2000, are as follows:
NAME AGE POSITION
Dr. William Howard, Jr.. 58 Chairman
Dr. Graham J. Siddall... 53 President and Chief Executive Officer*
David A. Ranhoff........ 44 Executive Vice President, Chief Operating
Officer*
Dennis P. Wolf.......... 47 Executive Vice President, Chief Financial Officer
and Secretary*
George W. DeGeer........ 53 Senior Vice President, Consumer Mixed Signal
Business Line
Gary Smith.............. 53 Vice President, Low Cost Performance Business
Line
Paul Sakamoto........... 45 Vice President, Memory Products Business Line
John DiGirolamo......... 58 CEO and President of Fluence Technology, Inc.
Debbie Moberly.......... 45 Vice President, Operations
Bart Freedman........... 42 Vice President, Worldwide Field Operations
Robert E. Huston........ 58 Vice President, Test Technology
Dave O'Brien............ 43 Senior Vice President, Chief Information Officer
John R. Detwiler........ 39 Vice President, Corporate Controller
- ---------------
* Executive Officer
DR. WILLIAM HOWARD, JR., has served as a Director of the Company
since February 1995 and as Chairman since December 1998. His current term
as Director ends in 2001. Dr. Howard has been a self-employed consultant for
various semiconductor and microelectronics companies since December 1990.
From October 1987 to December 1990, Dr. Howard was a senior fellow at the
National Academy of Engineering conducting studies of technology management.
Dr. Howard held various management positions at Motorola, Inc. between 1969 and
1987, most recently as Senior Vice President and Director of Research and
Development. Dr. Howard serves on the boards of directors of BEI Electronics,
Inc., Ramtron International, Inc. and Xilinx, Inc., as well as several private
companies.
DR. GRAHAM J. SIDDALL has served as the President, Chief Executive
Officer and as a Director of the Company since July 1999. His current term as a
Director ends in 2002. Dr. Siddall joined Credence from KLA-Tencor where he had
been Executive Vice President of the Wafer Inspection Group from May 1997 to May
1999. From December 1995 until May 1997, he served as Executive Vice President
and chief operating officer of Tencor Instruments, Inc. Previously Dr. Siddall
served as Senior Vice President for the Tencor Wafer Inspection Division from
November 1994 to December 1995. He joined Tencor as a vice president in 1988.
Prior to joining Tencor, Dr. Siddall served in a number of key roles at GCA
Corporation, Hewlett Packard Laboratories and Rank Taylor Hobson.
DAVID A. RANHOFF has served as Executive Vice President and Chief
Operating Officer since November 1999. Mr. Ranhoff was Executive Vice President,
Sales and Marketing from January 1997 to November 1999, and along with Mr. Wolf,
was named to the Office of the President from December 1998 until July 1999. Mr.
Ranhoff served as Senior Vice President Sales and Marketing from July 1996 to
January 1997, as Senior Vice President, Sales, Marketing and Service from July
1995 to June 1996, as Senior Vice President, Sales and Service from August 1993
to July 1995 and as Vice President, Sales from January 1993 to August 1993. He
served as Vice President, European Operations from July 1990 to December 1992.
From March 1988 to June 1990, Mr. Ranhoff served as Managing Director of
European Operations of the Company and as National Sales Manager from July 1985
to March 1988. Prior to joining the Company, Mr. Ranhoff served for eight years
in various sales and management positions for GenRad, Inc.
22
DENNIS P. WOLF has served as Executive Vice President, Chief Financial
Officer and Secretary, since he joined Credence in March of 1998 and, along with
Mr. Ranhoff, was named to the Office of the President from December 1998 until
July 1999. Prior to joining Credence, Mr. Wolf was the acting Co-Chief Executive
Officer from April 1997 to September 1997 and the Senior Vice President and
Chief Financial Officer from January 1997 to March 1998 at Centigram
Communications Corporation. Prior to joining Centigram, from October 1995 to
January 1997 Mr. Wolf was Vice President and Chief Financial Officer of Pyramid
Technology and served as Vice President and Chief Financial Officer of
Dynacraft, a National Semiconductor Company, from October 1993 to October 1995.
Additionally, he had held various executive and managerial positions at Apple
Computer from 1989 to 1993.
GEORGE W. DEGEER has served as Senior Vice President, of the Consumer
Mixed Signal Business Line since December 1998. Prior to that Mr. DeGeer was
Senior Vice President, Operations since August, 1996, as Senior Vice President,
Manufacturing, from January 1995 to August, 1996, as Vice President,
Manufacturing from October 1993 to January 1995, as Director of Manufacturing,
from July 1992 to October 1993, and as Vista Manufacturing Manager from January
1991 to July 1992. Prior to joining the Company, Mr. DeGeer held various
manufacturing management positions at Tektronix for more than twenty years.
GARY SMITH has served as Vice President, of the Low Cost Performance
Business Line since December 1998. Prior to that Mr. Smith was Marketing
Director for the ValStar and SC Series products from February 1996 to December
1998. Prior to joining Credence, from September 1985 to February 1996 Mr. Smith
has held various senior management positions in sales, marketing, and operations
at Schlumberger Technologies, Inc. Mr. Smith possesses over 30 years of
experience in engineering, and management in high technology industries.
PAUL SAKAMOTO has served as Vice President, of the Memory Products
Business Line since November 1998. Prior to this position, Mr. Sakamoto served
as the Vice President of the North American Sales organization from February
1997 to November 1998. He was Vice President of the Customer Marketing function
and Vice President of Digital Product Marketing between February 1995 and
February 1997. Prior to joining Credence, Mr. Sakamoto held various sales and
engineering positions including Vice President of Sales at Micro Component
Technology, Director of Sales Development at Megatest Corporation and six years
of experience at Intel Corporation. Mr. Sakamoto has over 22 years of experience
in the semi-conductor and semiconductor equipment industry.
JOHN DIGIROLAMO has served as Chief Executive Officer and President of
Fluence Technology, Inc. since October 1997. From July 1997 to October 1997, Mr.
DiGirolamo served as Vice President of Worldwide Sales and Marketing for
Fluence. Mr. DiGirolamo served as Director of Sales at Summit Design, Inc., from
May 1996 to July 1997. Mr. DiGirolamo served at the Company as Vice President,
Worldwide Sales from June 1995 to April 1996. Prior to joining the Company in
1995, Mr. DiGirolamo held a variety of senior level positions within the
industry, including a tenure at GenRad, Inc. as General Manager and Director of
Sales & Marketing for Western operations. Mr. DiGirolamo possesses over 33 years
of experience in the semiconductor equipment and test industry.
DEBRA MOBERLY has served as Vice President, Operations since December
1998. Prior to that Ms. Moberly was Vice President, Manufacturing from February
1996 to December 1998, as Director, Marketing Operations from December 1994 to
February 1996, and Director, Materials from May 1993 to December 1994. Ms.
Moberly joined the Company in January 1991 as Manufacturing Manager, joining the
Company from Tektronix where she held various positions of increasing
responsibility in the manufacturing function for more than seventeen years.
ROBERT E. HUSTON has served as Vice President, Test Technology since
August 1992. From February 1983 to August 1992 Mr. Huston was a co-founder and
fellow of Trilium Corporation and was the architect of the Micromaster series of
test systems. Mr. Huston was a fellow at LTX from August 1988 to August 1992,
developing high frequency test strategies. He served in various senior
engineering positions beginning in 1967 at Fairchild working with a team to
develop the LSI test system.
BART FREEDMAN has served as our Vice President, Worldwide Field
Operations since January 2000. From October 1996 to January 2000, he was our
Vice President of Asian Operations. From 1994 to 1996, Mr. Freedman served as
Vice President of North American Sales for Schlumberger. From 1985 to 1994, Mr.
Freedman held a variety of senior level positions at Tektronix, Inc., including
U.S. Regional Sales Manager for the Semiconductor Test Systems Division that we
bought in December 1990. From 1980 through 1985, Mr. Freedman was a design
engineer and applications manager for Teradyne, Inc.
23
DAVID O'BRIEN has served as Senior Vice President, Chief Information
Officer since February 1999. Prior to that Mr. O'Brien was Senior Vice
President, Information Technology from February 1999 to July 1995. Mr. O'Brien
served as Senior Vice President, Marketing, from May 1994 to July 1995, as
Senior Vice President, Engineering from August 1993 to May 1994 and as Vice
President, Engineering from July 1992 to August 1993. Mr. O'Brien served as Vice
President, Beaverton Business Unit from October 1991 to July 1992; Vice
President, Marketing-Vista from August 1991 to September 1991; Vice President
Software Products from October 1990 to July 1991; Vice President, Engineering
from July 1987 to September 1990; Director of Engineering, from October 1986 to
June 1987; and Software Engineering Manager of the Company from January 1983 to
September 1986.
JOHN R. DETWILER has served as Vice President, Corporate Controller
since April 1999. Mr. Detwiler joined Credence from Silicon Wireless, Ltd., a
start-up in the wireless infrastructure products business, where he was the Vice
President of Finance from April 1998 to March 1999. From August 1992 to March
1998, Mr. Detwiler was at Madge Networks N.V., a developer and manufacturer of
LAN and WAN equipment, where he was the Senior Director of Finance. Prior to
Madge, Mr. Detwiler held positions of increasing responsibility in the audit and
consulting practices of Price Waterhouse LLP in Denver, Saudi Arabia and London.
Mr. Detwiler serves on the board of directors of Credence Capital Remarketing
Corporation.
Officers serve at the discretion of the Board of Directors, until their
successors are appointed. There are no family relationships among executive
officers or directors of the Company.
24
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on the Nasdaq National Market
under the symbol CMOS. High and low stock prices for the last two fiscal years
were:
1999 1998
---------------------------------------- ----------------------------------------------
QUARTER ENDED HIGH LOW HIGH LOW
- ------------------- --------------- ---------------------- ---------------------- ---------------------
January 31.............. $29.88 $14.38 $35.25 $18.13
April 30................ 30.88 17.88 34.00 24.87
July 31................. 41.50 24.13 28.50 16.87
October 31.............. 49.88 36.88 20.56 9.31
There were approximately 216 stockholders of record at December 10,
1999. To date, the Company has not declared or paid any cash dividends on its
common stock. The Company does not anticipate paying any dividends on its common
stock in the foreseeable future and, under its current credit agreements, such
payment would require prior bank approval.
ITEM 6. SELECTED FINANCIAL DATA
The comparability of the following selected financial data is affected
by a variety of factors, and this data is qualified by reference to and should
be read in conjunction with the consolidated financial statements and notes
thereto elsewhere in this Annual Report on Form 10-K and the Management's
Discussion and Analysis of Financial Condition and Results of Operations.
YEAR ENDED OCTOBER 31,
--------------------------------------------------------------------------------
(in thousands, except per share amounts) 1999 1998 1997 1996 1995
--------------- -------------- -------------- --------------- --------------
Consolidated Statement of Operations Data:
Net sales....................................... $197,183 $216,803 $204,092 $238,788 $176,805
Operating income (loss)......................... (4,013) (42,572) 15,063 54,334 43,817
Income (loss) before taxes...................... (3,752) (41,270) 18,230 58,267 46,649
Net income (loss) before extraordinary items.... (2,455) (26,282) 10,693 37,703 30,354
Net income (loss)............................... (809) (26,282) 10,693 37,703 30,354
Net income (loss) per basic share............... $ (0.04) $ (1.22) $ 0.49 $ 1.75 $ 1.50
Net income (loss) per diluted share............. $ (0.04) $ (1.22) $ 0.47 $ 1.72 $ 1.45
Consolidated Balance Sheet Data:
Working capital................................. $166,727 $184,606 $250,336 $144,623 $126,395
Total assets.................................... 340,420 306,189 358,141 233,042 186,593
Long-term debt.................................. 96,610 115,000 115,000 -- --
Retained earnings............................... 57,348 58,157 94,722 84,029 46,326
Stockholders' equity............................ 181,408 150,017 204,911 189,782 150,286
25
QUARTERLY 1999
1999 Quarter Ended
---------------------------------------------------------------
(in thousands, except per share amounts) January 31, April 30, July 31, October 31,
---------------- ------------ ------------- ----------------
(UNAUDITED)
Net sales.......................................................... $ 26,490 $38,100 $52,378 $80,215
Gross margin....................................................... 11,214 19,099 27,552 44,113
Operating income (loss)............................................ (10,020) (10,150) 3,737 12,420
Income (loss) before taxes......................................... (10,321) (9,910) 3,731 12,748
Net income (loss) before extraordinary items....................... (6,554) (6,331) 2,364 8,066
Net income (loss).................................................. (6,554) (5,173) 2,852 8,066
Net income (loss) per basic share before extraordinary items....... $ (0.32) $(0.30) $ 0.11 $ 0.37
Net income (loss) per basic share ................................. $ (0.32) $(0.25) $ 0.13 $ 0.37
Net income (loss) per diluted share before extraordinary items..... $ (0.32) $(0.30) $ 0.11 $ 0.35
Net income (loss) per diluted share................................ $ (0.32) $(0.25) $ 0.13 $ 0.35
QUARTERLY 1998
1998 Quarter Ended
--------------------------------------------------------------
(in thousands, except per share amounts) January 31, April 30, July 31, October 31,
--------------- ------------ --------------- --------------
(UNAUDITED)
Net sales.......................................................... $82,375 $ 74,660 $ 37,322 $22,446
Gross margin....................................................... 46,937 42,996 (531) 2,045
Operating income (loss)............................................ 13,138 12,832 (49,311) (19,231)
Income before taxes................................................ 14,096 13,032 (49,318) (19,080)
Net income (loss).................................................. 9,191 8,787 (33,586) (10,674)
Net income (loss) per basic share.................................. $ 0.42 $ 0.41 $ (1.55) $ (0.51)
Net income (loss) per diluted share................................ $ 0.41 $ 0.40 $ (1.55) $ (0.51)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
In addition to the historical information contained in this document,
the discussion in this Annual Report on Form 10-K contains forward-looking
statements, within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
that involve risks and uncertainties, such as statements of the Company's plans,
objectives, expectations and intentions. The cautionary statements made in this
Annual Report on Form 10-K should be read as being applicable to all related
forward-looking statements whenever they appear in this Annual Report on Form
10-K. The Company's actual results could differ materially from those discussed
herein. Factors that could cause or contribute to such differences include those
discussed below as well as those cautionary statements and other factors set
forth in "Risk Factors" and elsewhere herein.
Our sales, gross margins and operating results have in the past
fluctuated significantly and will, in the future, fluctuate significantly
depending upon a variety of factors. The factors that have caused and will
continue to cause our results to fluctuate include cyclicality or downturns in
the semiconductor market and the markets served by our customers, the timing of
new product announcements and releases by us or our competitors, market
acceptance of new products and enhanced versions of our products, manufacturing
inefficiencies associated with the start up of new products, changes in pricing
by us, our competitors, customers or suppliers, the ability to volume produce
systems and meet customer requirements, inventory obsolescence, patterns of
capital spending by customers, delays, cancellations or reschedulings of orders
due to customer financial difficulties or otherwise, expenses associated with
acquisitions and alliances, product discounts, product reliability, the
proportion of direct sales and sales through third parties, including
distributors and original equipment manufacturers, the mix of products sold, the
length of manufacturing and sales cycles, natural disasters, political and
economic instability, regulatory changes and outbreaks of hostilities. Due to
these and additional factors, historical results and percentage relationships
discussed in this Annual Report on Form 10-K will not necessarily be indicative
of the results of operations for any future
26
period. For a further discussion of our business, and risk factors affecting
our results of operations, please refer to the section entitled "Risk Factors"
included elsewhere herein.
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage
of net sales for the fiscal years indicated:
FISCAL YEARS ENDED OCTOBER 31,
----------------------------------------