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, 2000
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
0-22366
(Commission file number)
CREDENCE SYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)
| Delaware (State or other jurisdiction of incorporation or organization) |
94-2878499 (I.R.S. Employer Identification No.) |
| 215 Fourier Avenue, Fremont, California (Address of principal executive office) |
94539 (Zip Code) |
(510) 657-7400
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class: None |
Name of each exchange on which registered: None |
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
Preferred Stock Purchase Rights
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ]
Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x]
The aggregate market value of voting stock held by non-affiliates of the Registrant, as of January 3, 2001 was approximately $1,438,000,000 (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, 2001, approximately 53,757,413 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 2001 Annual Meeting of Stockholders to be held on March 21, 2001 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, non-volatile memory and radio frequency 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,” “MemBOST,” “Kalos,” “DUO,” “TMT,” “MVNA,”and “Opmaxx” are our tra demarks. This Annual Report on Form 10-K also includes trademarks of other companies. “Matrix Test” is a trademark of Amkor Technology, Inc.
In December 2000, our Chief Financial Officer, Dennis Wolf, resigned from his positions with the Company. In connection with his resignations, the Board of Directors appointed John R. Detwiler, our Vice President, Corporate Controller as the interim Chief Financial Officer and Secretary.
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 the selling price of semiconductor devices declines, 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 condit ioning 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 functionality per chip and requires continuous power. As a result, conventional ATE systems generally are large, expensive and require significant electrical power to operate.
Another process technology commonly used in the manufacture of semiconductors is complementary metal oxide semiconductor, 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 scalability feature enables us to develop and manufacture smaller, higher performance circuits 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:
Products
We currently offer a wide variety of products that test digital logic, analog, mixed-signal, non-volatile memory and radio frequency wireless 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. 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. Non-volatile memory semiconductors retain their data when the power is turned off. RF wireless IC’s are the devices that receive, transmit and convert radio frequency signals typically used in cellular telephones.
Our CMOS-based ATE products—the SC, ValStar, and Quartet series—are designed to test high speed devices used in applications such as networking and personal computing as well as multimedia, digital television, high-definition television and personal communications. Our memory product line, the Kalos Series, tests non-volatile memory, or NVM, devices, including ROM, EPROM, EEPROM and Flash memories, which are used in high volume applications in the consumer, automotive and telecommunications markets.
During fiscal 2000 we acquired TMT, Inc. (“TMT”), Modulations Instruments, Inc. (“MI”), and NewMillennia Solutions, Inc. (‘ NMS”). The TMT product line includes the ASL 1000, targeted at testing analog function ICs, and the RFx, targeted at testing RF wireless ICs. During fiscal 2000 we introduced the ASL 2000 targeted at testing many analog devices in a multisite mode as well as providing significant expansion capability for our customers in the future. MI provides test solutions for the design and manufacturing of RF semiconductor and wireless infrastructure component markets. MI holds proprietary intellectual property for performing S-Parameter measurements using complex modulated signals. Our Modulated Vector Network Analyzer (“MVNA”) Technology allows accurate measurement of devices stimulated with signals matching their end-use operating environment. During 200 0, we introduced the MI 4115A Modulated Vector Network Analyzer, which performs vector network analysis and spectrum analysis functions. The NMS products are targeted at reducing the cost of test by testing complex devices in their native mode of operation .
During fiscal 1999, our wholly-owned subsidiary, Fluence Technology, Inc. acquired Opmaxx, Inc. 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, and 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 introduced the ValStar 2000, a system that enables the testing of very complex devices, with up to 1024 pins with high-speed requirements. Also introduced in fiscal 1997, the Kalos Flash memory test system is a highly integrated parallel system that provides multi-site testing and is designed to lower the overall cost of test.
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 (ps) or nanoseconds (ns), the number and characteristics of the pins and the density, in megabits(Mb), of the device that can be tested:
| Product
|
Series
|
Models
|
Basic Features
|
Typical Devices
|
| Digital | SC | SC312 SC Micro |
50-100 MHz 64-304 Pins + 350-500 ps accuracy |
Microcontrollers, ASSPs, DSPs and FPGAs |
| ValStar | VS2000 | 200 MHZ + 200 ps accuracy 384-1024 Pins |
Microprocessors, RISC circuits, PLDs, FPGAs, ASICs, core logic and graphic chip sets | |
| Mixed- Signal |
Quartet | ONE | 512 digital 200 MHz + 175 ps accuracy Analog, Video, Audio, RF |
Multimedia devices, mass storage, DSPs, ASICs, Datacom and specialty devices, mobile communication devices, complex audio devices |
| Quartet | ONE Plus | 512 digital 200 MHz + 175 ps accuracy Analog, Video, Audio, RF |
Incorporates per pin features including 10 TG’s (timing edges), power supply rails, voltage clamps and programmable loads. | |
| SC | SC Two | 50-100 MHz 64-304 Pins + 350 ps accuracy Analog instruments for focused applications. |
Entertainment IC, such as video game chips and PC support chips such as keyboard controller and 100Base T Ethernet devices. | |
| Memory Products |
KALOS | Kalos Kalos xw Kalos xp Personal Kalos |
50 MHz 256 Mb + 1ns |
Flash memories, EEPROM, EPROM, Microcontrollers and NVM ASICs |
| BOST | MemBOST | “Built-Off Self-Test” Embedded memory test External solution for digital and mixed signal devices |
Processors, graphics engines, network controllers, ASIC’s and other multimedia devices | |
| Analog Test Products | TMT ASL | ASL 1000 |
Up to 19 analog instruments with 32 14MHz digital pins | Analog or Linear IC such as battery power management IC. Traditional linear devices such as Op-Amps, comparators and regulators. |
| TMT ASL | ASL 2000 | Up to 32 analog instruments with expansion for up to 64 pins of digital and DSP instruments. | Personal communications, A/D and D/A converters as well as multi-site test of traditional linear devices. | |
| Radio Frequency (RF) Wireless | TMT RF | RFx | Up to 8 ports of 6GHz RF with Analog and digital instruments. | Wireless communications IC such as Power amplifiers (PA), Low Noise Amplifiers, Mixers and synthesizers and Bluetooth RF front-ends. |
| Quartet | Quartet RF RFIQ |
Up to 384 pins of 200MHz digital and 8 port of 6GHz RF | Highly integrated RF communications devices such as BlueTooth wireless LAN devices. | |
| MI | MI 4115A | Modulated Vector Network Analyzer (MVNA) based Amplifier Characterization System | Characterization of RF devices typically used in wireless devices such as cell phones. | |
| Workcell | Triton | Memory | Kalos tester integrated into 8” wafer prober, without extending outside the prober perimeter | ROM, EEPROM, EPROM, and Flash memories |
| Matrix Test | Memory | Kalos tester integrated with a FICO strip handler for testing NVM devices packaged prior to singulation | EEPROM, EPROM, Flash memories |
| Product
|
Series
|
Models
|
Basic Features
|
Typical Devices
|
| Software | TDS tools | Design to Test | Generates tester specific files from simulation (EDA) files. Verifies timing specification | Tools apply to digital logic circuits |
| TDX tools | Design for Test | Verifies test vector quality Supports design for test strategies |
Tools apply to digital logic devices | |
| HPL | MemBIST | Generates BIST logic, Partitioned solutions using BIST, ATE, and BOST | Tools apply to all memory
devices |
|
| Opmaxx |
Design Maxx |
Design verification and sensitivity analysis evaluation and optimization | Tools apply to analog and mixed-signal devices | |
| Opmaxx |
BISTMaxx | BIST generation for digital, analog and mixed-signal devices | Tools apply to analog, high-speed digital and mixed-signal devices | |
| Native Mode Test | NMS | ATS800 | Native mode testing | Rambus RIMM Modules |
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. In fiscal 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 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. The purchase price of these testers typically ranges from $350,000 to $850,000 depending upon conf iguration.
ValStar. The VS2000 was introduced in fiscal 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 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.
The Quartet One Plus adds features to the Quartet One system including an additional 4 timing edges per pin to support >100MHz testing requirements. Per pin programmability of power supply rails, signal termination loads and clamps offer additional tools to test complex SOC devices especially in the over 100MHz performance range. Quartet One systems can be field upgraded with the powerful new One “Plus” features.
SC Two. The SC Two, introduced in fiscal 2000, is an extension of the successful SC 312 and SC Micro systems. The extension provides more mixed-signal test capability for testing a broader range of entertainment
devices. Devices, such as 100Base T Ethernet LAN block on PC support chips and FPGAs, that incorporate analog functions may be tested on the SC Two. With a greater amount of digital test resources in vector and scan memory and an improved computer system, the SC Two improves the performance and throughput of the SC Series. The purchase price of the SC Two ranges from $300,000 to $900,000 and is dependant 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 fiscal 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.
KALOS xw. Introduced in fiscal 2000, the Kalos xw is based upon the Kalos tester and features twice as many test sites as the Kalos or the Kalos xp, 32 or 16, respectively.
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.
BOST. Built-Off Self-Test, or BOST, this 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, MemBOST, are currently available and pricing is dependent on configuration.
Analog Test Products
The acquisition of TMT in fiscal 2000 has extended the market that we serve to include analog dominant ICs that are made up of traditional analog function blocks such as amplifiers, regulators, switches and converters. TMT’s products test these traditional devices either as individual ICs or as larger function ICs such as battery power management devices in portable electronics devices.
ASL 1000. The ASL 1000 was introduced in fiscal 1996. This system is highly configurable and targeted at testing the traditional analog building block ICs. As the traditional analog or linear device manufactures move to more efficient manufacturing, the multi-site test capability of the ASL 1000 has proven to be very effective at reducing their cost of test. The purchase price of the ASL 1000 ranges from $100,000 to $250,000 and is highly dependant on configuration.
ASL 2000. Introduced in fiscal 2000, the ASL 2000 is an extension of the ASL 1000 featuring an increased number of instruments, expansion to increased digital capability, and DSP based mixed signal test. The ASL 2000 is capable of testing more complex devices and more devices in parallel and targets a wide range of ICs used in personal communications. The purchase price of the ASL 2000 ranges from $150,000 to $350,000 and is highly dependant on configuration.
RF Wireless Test Products
Our RF wireless test products provide tools to IC manufacturers for use in characterization and production test of high performance, cost sensitive RF devices.
RFx. The RFx, a product acquired through the TMT acquisition, was first introduced in fiscal 1998 and provides a significantly better cost of test advantage over its competitors. This system is made up of specialized RF test instruments combined with the analog instrumentation of the ASL product line. The RF instruments are capable of testing up to 6GHz in either the scalar or vector method of testing RF parameters. The RFx is targeted at cost effective testing of RF front-end devices that are typically manufactured in Gallium Arsenide (GaAs), Bi-polar or Bi-CMOS technology. The devices, Power Amplifiers (PA), Low Noise Amplifiers (LNA), Synthesizers, Mixers and Switches and combinations of these (Base band chips), are used in both digital and analog cell phones. The purchase price of the RFx typically ranges from $450,000 to $750,000 depending on configuration.
Quartet RF. The Quartet RF, introduced in fiscal 1998, is built as an extension to a Quartet One mixed signal test system. This system is targeted at testing highly integrated RF devices of multi-die modules that contain significant digital and traditional analog functionality. This is typical of wireless LAN devices such as BlueTooth devices. The purchase price of the Quartet RF typically ranges from $750,000 to $1,500,000 depending on configuration.
Quartet RFIQ. The RFIQ, introduced in fiscal 2000, is an extension of the Quartet RF subsystem that includes the Modulated Vector Network Analyzer MVNA technology, and extends the measurement accuracy and speed of the Quartet RF. This product is also targeted at highly integrated devices and modules. The purchase price of the Quartet RFIQ typically ranges from $1,000,000 to $2,000,000 depending on configuration.
MI4115A. The MI 4115A Modulated Vector Network Analyzer uses MVNA technology to measure S-Parameters of radio frequency devices. S-Parameters are fundamental metrics for characterizing high frequency devices. The MI 4115A’s MVNA technology has the novel ability to measure S-Parameters using complex modulated signal stimulus, signals such as those commonly used in digital cellular communications equipment. Additionally, the MI 4115A incorporates other characterization functions previously performed by separate measurement equipment. MVNA technology allows new insight into device behavior and simplifies test processes.
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 fiscal 1997, we introduced 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™. The Matrix Test was introduced in fiscal 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, device stress testing (“ 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 digital, analog and mixed signal devices, as well as designing them for testability. DesignMaxx provides analog design optimization,
verification, and sensitivity analysis. BISTMaxx generates built-in self-test for analog/mixed signal device functionality both on-chip and off-chip.
Native Mode Test
Rather than using a general purpose test system, Native Mode Test utilizes a device’s or module’s end application environment as the test environment. Native Mode Test technology was acquired as part of the NMS purchase in fiscal 2000. This technology significantly reduces cost of test solutions and improves test quality and coverage by extending Design for Test (DFT) based structural test to native mode testing.
ATS800. The ATS800 product line, acquired through the acquisition of NMS, is an application of native mode test technology for testing Rambus In-line Memory Modules (RIMM). The ATS800 provides a significantly lower cost and higher quality of test compared to the competition. The purchase price of the ATS800 typically ranges from $150,000 to $1,000,000 depending on configuration.
Customers, Markets and Applications
We target digital logic, analog, mixed-signal, non-volatile memory device, RF and SOC manufacturers that serve a broad range of growing end-user market segments. Our customers manufacture semiconductors in high volume for use in applications such as automobiles, appliances, personal computers, personal communications products, networking products, digital televisions and multimedia hardware.
In addition to marketing 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 r etain 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, 2000, our order backlog for systems, exclusive of orders for software, spare parts, service and support, was approximately $309.5 million, as compared with $124.5 million as of October 31, 1999. The Company is currently experiencing customer-requested shipment delays from this backlog and the Company believes it is probable that order cancellations will occur in the future.
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 14 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 18 countries. Sales through distributors represented approximately 54%, 47% and 45% of net sales during fiscal years 2000, 1999, and 1998, 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 our products. 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 assi st 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 fiscal 2000 we purchased the Company’s European distribution companies from their owner-managers. These subsidiaries provide sales, support and services to our customers in Europe and Israel.
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 March 1996, we established a service and support subsidiary 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:
Each of the CMOS stabilization methods we acquired 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/Quartet product line with new capabilities including high performance audio testing , testing of analog circuitry for wireless communication applications and higher performance digital testing. These features enable single insertion SOC testing capability and resulted in the Quartet product line which was introduced in 1999. We will continue to focus research and development efforts on the Quartet product line to ensure ensuring that our 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.
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 $68.2 million in 2000, (excluding $11.8 million charged for acquired in-process research and development or “IPR&D”), $36.9 million in 1999, (excluding a $0.9 million charge for acquired IPR&D), and $47.5 million in fiscal 1998, (excluding a $2 million charge for acquired IPR&D).
Proprietary Rights
We currently hold 91 active United States patents, which expire over time through March 2019. In addition, we currently have 20 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 part y. 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 proprietar y 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 we are in the process of qualifying a second source for some of those components. There ca n 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 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:
In the mixed-signal and analog semiconductor testing market our competitors include:
In the non-volatile memory testing market our competitors include:
In the RF wireless device testing market our competitors include:
Fluence’s principal competitors in the software design to test market are:
The competitors in the software design for test and BIST market place include:
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. See “Risk Factors—The ATE industry is intensely competitive which can adversely affect our revenue growth.”
Employees
As of October 31, 2000, we had a total of 1,213 permanent employees and 234 temporary or contract employees. Of this total, 457 are engaged in manufacturing, 360 are in research and development, 87 in applications, 308 in sales, marketing and service, and 183 in general administration. Fluence has 52 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.
RISK FACTORS
Our operating results may fluctuate significantly which may adversely affect our stock price
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:
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:
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 allowances and price adjustments, 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 ou r significant fixed expenses in a particular period if we do not meet our net sales goals for that period. These other expenditures include:
As a result, we cannot be certain that we will be profitable 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 $2.5 million. This has resulted 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 just 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. Orders in backlog are subject to cancellation, delay, deferral or rescheduling by customers with limited or no penalties. In the first quarter of fiscal 2001, we have experienced customer-requested shipment delays and the Company believes it is probable that orders will be canceled in the future. 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 require, or they will order 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
Revenue growth has slowed in the first fiscal quarter of 2001 in the test and assembly sector of the semiconductor equipment industry during what we now believe is a cyclical downturn in the industry. There is uncertainty as to if and when the next cyclical growth phase will occur. Until such time as we return to a growth period, we expect a continuing decline in orders and therefore expect that the January 31, 2001 fiscal quarter’s revenue will be down at least 40% from those recorded in the fiscal fourth quarter of 2000. In light of that belief, the Company will be taking steps in the near term to reduce our expense structure to match our lower anticipated revenues.
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. In addition, in the current industry environment, sales are expected to be sequentially down in the next fiscal quarter and possibly in the upcoming quarters. We anticipate that a significant portion of new orders may depend upon demand from semiconductor device manufacturers building or expanding fabrication facilities and new device testing requirements that are not addressable by currently installed test equipment, and there can be no assurance that such demand will develop to a significant degree, or at all. In addition, our business, financial condition or results of operations may be adversely affected by any factor adversely affecting the semiconductor industry in general or particular segments within the semiconductor industry. For example, the 1997/1998 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 be materially adversely affected if downturns or slowdowns in the semiconductor industry occur again in the future.
We have experienced over the last several years significant fluctuations in our operating results and an increased scale of operations
In fiscal 2000, we have generated revenue of $101.8 million in the first quarter and $220.2 million in the fourth quarter, an increase of 116%. 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 fiscal 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, acquiring the new facilities in Oregon, further investments in our 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, procedures or controls, including our 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 re sults 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 shipped 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 for 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 p er 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 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.
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, a substantial portion of our net sales are 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 comp etitors 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:
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 unanticip ated decline in demand for our hardware or software products could have a materially adverse effect on our business, financial condition or results of operations.
Significant delays can occur between the time we introduce a system and the time we are able to produce that system in volume
We have in the past experienced significant delays in the introduction, volume production and sales of our new systems and related feature enhancements. 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 th at 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 customer could make it substantially more difficult for us to sell testers to that customer 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 import ance 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 and customers in Taiwan for a significant portion of our revenues and the termination of this distribution relationship would materially adversely affect our business
Spirox Corporation, a distributor in Taiwan that sells to end-user customers in Taiwan and China, accounted for approximately 45%, 39%, and 34% of our net sales in fiscal years 2000, 1999, and 1998, respectively. One end-user customer headquartered in Taiwan accounted for approximately 19% of our net sales in fiscal 2000. Our agreement with Spirox can be terminated for any reason on 90 days prior written notice. 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 end user customers have recently accounted for a substantial portion 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, any termination of the Spirox relationship, or any other significant customer, including 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 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:
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 affect 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, revenue recognition, 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. For example, in the fourth quarter of fiscal 2001, we will be required to implement SAB 101 (see Note 1 of the Notes to Consolidated Financial Statements). 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 tho se 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.
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 attrac t and retain skilled employees. In December 2000, our Chief Financial Officer resigned from his positions with the Company. In connection with his resignations, our Board of Directors appointed John R. Detwiler, Vice President, Corporate Controller, as the interim Chief Financial Officer and Secretary. The Board of Directors also began a search for a new Chief Financial Officer.
Our international business exposes us to additional risks
International sales accounted for approximately 80%, 64%, and 69% of our total net sales for fiscal 2000, 1999 and 1998, 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:
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 69%, 55%, and 60% of our total net sales in fiscal 2000, 1999 and 1998, respectively, 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 continue to adversely affect demand for our products, the availability and supply of our product components, and our consolidated results of operations. The 1997/1998 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. Further, many of our customers in the Asia-Pacific region built up capacity in ATE during fiscal 2000 in anticipation of a steep ramp up in wafer fabrication. However, this steep ramp up in output has not fully materialized leaving some customers with excess capaci ty. Therefore, it is possible that these customers may spend less in the aggregate next year than they did in fiscal 2000.
In addition, one of our major distributors, Spirox Corporation, is a Taiwanese based company. 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 certain of our products are infringing a patent held by inTEST. We have since then engaged in sporadic discussions with inTEST concerning this matter. On December 15, 2000, inTEST filed a complaint in the U.S. District Court for the District of Delaware against us, alleging infringement of inTEST U.S. patent 4,589,815 and seeking damages and injunctive relief. To date we have not been served with the complaint. 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 paten t 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.
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 1999, the price of our common stock ranged from a closing high of $24.94 to a closing low of $7.19. In fiscal 2000, and through December 31, 2000, the price of our common stock ranged from a closing high of $74.59 to a closing low of $16.13. 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:
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 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, 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 four buildings totaling 165,600 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