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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended January 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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) (IRS Employer
of incorporation or organization) Identification No.)
215 FOURIER AVE., FREMONT, CALIFORNIA 94539
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (510) 657-7400
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FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 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 [_]
APPLICABLE ONLY TO CORPORATE ISSUERS:
At January 31, 1997, there were 21,791,493 shares of the Registrant's common
stock, $0.001 par value per share outstanding.
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1
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CREDENCE SYSTEMS CORPORATION
<TABLE>
<CAPTION>
INDEX PAGE NO.
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements...................................................... 3
Condensed Consolidated Balance Sheets..................................... 3
Condensed Consolidated Income Statements.................................. 4
Condensed Consolidated Statements of Cash Flows........................... 5
Notes to Condensed Consolidated Financial Statements...................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................ 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................................... 17
Item 2. Changes in Securities..................................................... 17
Item 3. Defaults Upon Senior Securities........................................... 17
Item 4. Submission of Matters to a Vote of Securityholders........................ 17
Item 5. Other Information......................................................... 17
Item 6. Exhibits and Reports on Form 8-K.......................................... 19
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
CREDENCE SYSTEMS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
JANUARY 31, OCTOBER 31,
1997 1996
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................... $ 49,672 $ 48,649
Short-term investments......................... 27,769 37,643
Accounts receivable, net....................... 50,546 49,025
Inventories.................................... 34,976 35,721
Other current assets........................... 7,067 6,845
-------- --------
Total current assets......................... 170,030 177,883
Long-term investments............................ 986 4,284
Property and equipment, net...................... 37,433 32,764
Other assets..................................... 9,695 8,111
-------- --------
Total assets................................. $218,144 $223,042
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................... $ 8,919 $ 13,842
Accrued liabilities............................ 16,073 17,829
Income taxes payable........................... 1,351 1,589
-------- --------
Total current liabilities.................... 26,343 33,260
Commitments
Stockholders' equity............................. 191,801 189,782
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Total liabilities and stockholders' equity... $218,144 $223,042
======== ========
</TABLE>
See accompanying notes.
3
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CREDENCE SYSTEMS CORPORATION
CONDENSED CONSOLIDATED INCOME STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JANUARY 31,
------------------------
1997 1996
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<S> <C> <C>
Net sales.............................................. $40,261 $60,911
Cost of goods sold..................................... 19,439 24,373
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Gross margin........................................... 20,822 36,538
Operating expenses:
Research and development............................ 8,806 8,317
Selling, general and administrative................. 11,431 12,802
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Total operating expenses........................ 20,237 21,119
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Operating income....................................... 585 15,419
Interest income, net................................... 1,027 1,055
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Income before income taxes............................. 1,612 16,474
Income taxes........................................... 558 5,930
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Net income............................................. $ 1,054 $10,544
======= =======
Net income per share................................... $ 0.05 $ 0.48
======= =======
Number of shares used in computing per share amount.... 22,215 21,951
======= =======
</TABLE>
See accompanying notes.
4
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CREDENCE SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JANUARY 31,
-------------------
1997 1996
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................... $ 1,054 $10,544
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization....................................... 2,821 2,393
(Gain) loss on disposal of property and equipment................... (26) -
Changes in operating assets and liabilities:
Accounts receivable, inventories and other current assets.......... (5,196) (7,768)
Accounts payable, accrued liabilities and income taxes payable..... (6,768) 5,960
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Net cash provided (used) by operating activities..................... (8,115) 11,129
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale securities........................... (13,360) (25,264)
Maturities of available-for-sale short-term investments.............. 19,135 9,392
Sales of available-for-sale securities............................... 7,397 -
Maturities of held-to-maturity securities............................ - 7,516
Acquisition of property and equipment................................ (3,355) (5,164)
Other assets......................................................... (1,738) (36)
Proceeds from sale of property and equipment......................... 243 -
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Net cash provided (used) in investing activities.................... 8,322 (13,556)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital lease obligations................... (242)
Issuance of common stock............................................. 816 593
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Net cash provided by financing activities............................ 816 351
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Net increase (decrease) in cash and cash equivalents...................... 1,023 (2,076)
Cash and cash equivalents at beginning of period.......................... 48,649 54,534
------- -------
Cash and cash equivalents at end of period................................ $49,672 $52,458
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid........................................................ $ -- $ 10
Income taxes paid.................................................... $ 648 $ 1,964
NONCASH INVESTING ACTIVITIES:
Net transfers of inventory to property and equipment................. $ 4,198 $ 105
NONCASH FINANCING ACTIVITIES:
Income tax benefit from stock option exercises....................... $ 149 $ 45
</TABLE>
See accompanying notes.
5
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. QUARTERLY FINANCIAL STATEMENTS
The condensed consolidated financial statements and related notes for the
three months ended January 31, 1997 and 1996 are unaudited but include all
adjustments (consisting solely of normal recurring adjustments) which are, in
the opinion of management, necessary for a fair presentation of financial
position and results of operations of the Company for the interim periods. The
results of operations for the three months ended January 31, 1997 and 1996 were
not necessarily indicative of the operating results to be expected for the full
fiscal year. The information included in this report should be read in
conjunction with the Company's audited consolidated financial statements and
notes thereto for the fiscal year ended October 31, 1996 included in the Annual
Report on Form 10-K and the additional risk factors, including, without
limitation, risks relating to fluctuations in operating results, rapid
technological change, importance of timely product introduction, risks of
delays, limited system sales, backlog, cyclicality of semiconductor industry,
expansion of operations, management of growth, sole or limited sources of
supply, reliance on subcontractors, highly competitive industry, dependence on
key customers, lengthy sales cycle, dependence on key personnel, management
changes, international sales, proprietary rights, acquisitions, future capital
needs and volatility of stock price, as set forth in this Report. Any party
interested in reviewing these publicly available documents should write to the
SEC or the Chief Financial Officer of the Company.
USE OF ESTIMATES - The preparation of the accompanying unaudited
consolidated condensed financial statements requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements. Actual results could differ from those estimates.
2. INVENTORIES
Inventories are stated at the lower of standard cost (which approximates
first-in, first-out cost) or market. Inventories consist of the following (in
thousands):
<TABLE>
<CAPTION>
JANUARY 31, OCTOBER 31,
1997 1996
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<S> <C> <C>
Raw materials......... $21,189 $20,482
Work-in-process....... 10,054 10,222
Finished goods........ 3,733 5,017
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$34,976 $35,721
======= =======
</TABLE>
3. NET INCOME PER SHARE
Net income per share is based upon the weighted average number of common
and common equivalent shares (stock options) outstanding during the period.
4. CONTINGENCIES
The Company filed suit against Micro Component Technology, Inc. ("MCT") in
the United States District Court for the Northern District of California on July
6, 1994. The complaint alleged that MCT was infringing United States Letters
Patent No. 4,724,378 owned by the Company for a "Calibrated Automatic Test
System" (the "'378 Patent"). The Company sought both injunctive relief and
monetary damages. On January 4, 1995, MCT answered the complaint, denying
infringement and alleging as a defense that the '378 Patent is invalid and
unenforceable. MCT further alleged that it had sold all of its rights to the
allegedly infringing product to Megatest Corporation ("Megatest"). Accordingly,
on January 30, 1995, the Company filed a motion to amend its complaint to add
Megatest as a defendant, seeking injunctive relief and monetary damages. On
March 22, 1995, the Court
6
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granted the Company's motion to amend its complaint. Megatest answered the
amended complaint on April 24, 1995, denying the claim of infringement and
asserting a counterclaim for declaratory judgment, declaring that it has not
infringed the '378 Patent and that the '378 Patent is invalid and unenforceable.
On May 25, 1995, Credence and MCT executed a settlement agreement pursuant to
which MCT paid a royalty for past sales and agreed to the entry of an injunction
against it regarding the '378 Patent. Credence and Megatest subsequently
negotiated a settlement, and settlement documents were transmitted for execution
in November 1995. In December 1995, Megatest rejected the settlement and refused
to execute the settlement documents. On February 21, 1996, the Company filed a
motion to enforce the terms of the negotiated settlement between the Company and
Megatest, which motion was denied by the Court after a hearing on April 12,
1996. The Company thereafter amended its complaint with leave of Court to assert
a claim against Megatest for breach of the settlement agreement to which the
Company contends the parties agreed. Accordingly, Credence is now pursuing its
breach of settlement agreement claim and its patent infringement claim against
Megatest. Trial on Credence's settlement agreement claims and patent related
claims has been bifurcated, such that the former will be tried first. Trial on
the settlement claims is currently scheduled to commence in June 1997.
On June 11, 1996, a lawsuit was commenced against the Company by Megatest
in the United States District Court for the Northern District of California, in
an action styled Megatest Corporation v. Credence Systems Corporation, Civil
Action No. C-96-20472. The complaint alleges that the Company has, in
connection with its sales of the Vista and Duo Series Testers, infringed United
States Letters Patent Number 4,806,852 (the "'852 Patent"), issued on February
21, 1989, which patent is directed to an "Automatic Test System With Enhanced
Performance Of Timing Generators." The complaint includes a claim for injunctive
relief, as well as claims for an accounting, lost profits and damages, an
assessment of interest and costs, and an award of attorneys' fees pursuant to 35
U.S.C. (S)285. The Company answered the complaint on July 3, 1996, denying the
claim of infringement, and asserting a counterclaim for a declaratory judgment
that it has not infringed the '852 Patent and that the '852 Patent is invalid
and unenforceable. The parties have recently commenced fact discovery, which is
not expected to end until January 5, 1998. Trial is scheduled for June 1, 1998.
Based upon information known at this time, the Company believes that it has
meritorious defenses to Megatest's claims.
On June 11, 1996, a lawsuit was commenced against the Company by Teradyne,
Inc. ("Teradyne") in the United States District Court for the Central District
of California, in an action styled Teradyne, Inc. v. Credence Systems
Corporation, Civil Action No. C-96-4121(Ex). The complaint alleges that the
Company has, in connection with its sales of the Vista and Duo Series Testers,
infringed United States Letters Patent Number 4,231,104 (the "'104 Patent"),
issued on October 28, 1980, which patent is directed to "Generating Timing
Signals." The complaint includes a claim for injunctive relief, as well as
claims for an accounting, lost profits and damages, an assessment of interest
and costs, and an award of attorneys' fees pursuant to 35 U.S.C. (S)285. The
Company answered the complaint on July 9, 1996, denying the claim of
infringement, and asserting a counterclaim for a declaratory judgment that it
has not infringed the '104 Patent and that the '104 Patent is invalid and
unenforceable. Discovery is ongoing. The discovery deadline is June 9, 1997.
A pre-trial conference is set for June 30, 1997, and a trial date has been set
for July 15, 1997. Based on information known at this time, the Company
believes that it has meritorious defenses to Teradyne's claims.
On November 8, 1996, Credence filed a complaint against Teradyne in the
United States District Court for the Northern District of California, in an
action styled Credence Systems Corporation v. Teradyne, Inc., Civil Action No.
C96-4061 (SBA). The complaint alleges that Teradyne is infringing United States
Letters Patent No. 4,902,986 (the "'986 patent") owned by the Company and
directed toward a "Phased Locked Loop to Provide Precise Frequency and Phase
Tracking of Two Signals." The Company's complaint seeks injunctive relief, as
well as an accounting, lost profits and damages, an assessment of interest and
costs, and an award of attorneys' fees pursuant to 35 U.S.C. (S)285. In
response, Teradyne served a motion to dismiss or for more definite statement,
which is scheduled for hearing on April 1, 1997. Teradyne also brought its
defenses in the form of a separate complaint seeking a declaration of invalidity
of the '986 Patent. This lawsuit, styled Teradyne, Inc. v. Credence Systems
Corporation, Civil Action No. 97-00149, was brought in the United States
District Court for the Northern District of California, and will likely be
consolidated with the prior pending action.
7
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The Company is involved in various claims arising in the ordinary course of
business, none of which, including the above Megatest and Teradyne litigation
matters, in the opinion of management, if determined adversely against the
Company, will have a material adverse effect on the Company's business,
financial condition or results of operations.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion may contain predictions, estimates and other
forward-looking statements that involve a number of risks and uncertainties.
While this discussion represents the Company's current judgment on the future
direction of the business, such risks and uncertainties could cause actual
results to differ materially from any future performance suggested herein.
Factors that could cause actual results to differ are identified throughout the
discussion below, as well as the section entitled "Future Operating Results" and
"Additional Risk Factors" below. The Company undertakes no obligation to
publicly release the result of any revisions to these forward-looking statements
which may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
The following table sets forth items from the Condensed Consolidated Income
Statements as a percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JANUARY 31,
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1997 1996
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<S> <C> <C>
Net sales.................................................... 100.0% 100.0%
Cost of goods sold........................................... 48.3 40.0
----- -----
Gross margin................................................. 51.7 60.0
Operating expenses
Research and development.................................. 21.9 13.7
Selling, general, and administrative...................... 28.4 21.0
----- -----
Operating expenses..................................... 50.3 34.7
----- -----
Operating income............................................. 1.4 25.3
Interest income, net......................................... 2.6 1.7
----- -----
Income before income taxes................................... 4.0 27.0
Income taxes................................................. 1.4 9.7
----- -----
Net income...................................................... 2.6% 17.3%
===== =====
</TABLE>
RESULTS OF OPERATIONS
NET SALES
Net sales consist of revenues from systems sales, spare parts sales and
maintenance contracts. Net sales were $40.3 million for the first quarter of
fiscal 1997, representing a decrease of 33.9% over the comparable period of
fiscal 1996. This decrease was due primarily to the continued depressed market
conditions in the semiconductor industry and associated delays in commitments to
new test capacity by customers. International net sales accounted for
approximately 75.3% of the total net sales for the first quarter of fiscal 1997,
compared to approximately 67.6% for the comparable period a year ago. The
Company's international sales of its products and spare parts and its service
revenues are denominated primarily in United States dollars.
GROSS MARGIN
The Company's gross margin has been and will continue to be affected by a
variety of factors, including manufacturing efficiencies, pricing by competitors
or suppliers, new product introductions, product sales mix, production volume,
customization and reconfiguration of systems, international and domestic sales
mix and field
8
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service margins. Gross margin was 51.7% for the first quarter of fiscal 1997,
compared with 60.0% for the first quarter of fiscal 1996. The reduction in gross
margin as a percent of sales was due primarily to an increase in reserves
associated with inventories resulting from write-downs of slower moving parts of
older products.
RESEARCH AND DEVELOPMENT
Research and development expenses were $8.8 million in the first quarter of
fiscal 1997, an increase of $0.5 million or 5.9% over the same period of fiscal
1996. This increase, in absolute dollars, reflected the Company's continued
development work on new options for the DUO, the next generation NVM tester, the
next generation Logic tester as well as research work for future software and
hardware technologies. As a percentage of net sales, these expenses were 21.9%
for the first quarter of fiscal 1997, a substantial increase from the first
quarter of fiscal 1996. The increase of these expenses as a percentage of net
sales is attributable primarily to the significant decrease in net sales in the
first quarter of fiscal 1997 as compared with the comparable period of fiscal
1996. The Company currently intends to continue to invest significant resources
in the development of new products and enhancements for the foreseeable future.
Accordingly, the Company expects these expenses to remain relatively flat in
absolute dollars for the remainder of fiscal 1997 as compared to fiscal 1996.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were $11.4 million in the
first quarter of fiscal 1997, representing a $1.4 million decrease from the
comparable period of fiscal 1996. As a percentage of net sales, these expenses
were 28.4% for the first quarter of fiscal 1997, compared with 21.0% for the
corresponding period in fiscal 1996. The increase of these expenses as a
percentage of net sales is attributable primarily to the significant decrease in
net sales in the first quarter of fiscal 1997 as compared with the comparable
period of fiscal 1996. The Company expects selling, general and administrative
expenses for the rest of fiscal 1997 to decrease in absolute dollars as compared
to fiscal 1996.
INTEREST INCOME, NET
The Company generated net interest income of $1.0 million for the first
quarter of fiscal 1997, compared to $1.1 million for the first quarter of fiscal
1996. The slight decrease was due primarily to interest earned on lower average
cash and cash equivalents and short-term investments balances during the period.
The lower cash and cash equivalents and short-term investments balances
reflected decreased cash provided by operations.
INCOME TAXES
The Company's provision for income taxes for the first quarter of fiscal
1997 is computed based on the projected annualized effective tax rate of 34.6%
applied to fiscal year-to-date book income. The projected effective tax rate for
fiscal 1997 is expected to be less than the combined federal and state statutory
rate primarily to the projected benefit of the Company's foreign sales
corporation.
LIQUIDITY AND CAPITAL RESOURCES
Net cash (used) provided by operating activities was ($8.1) million and
$11.1 million for the three months ended January 31, 1997 and 1996,
respectively. Net cash flows used by operating activities were primarily
attributable to an increase in inventory, some of which was transfered to
property and equipment ($4.2 million), and reductions in accounts payable,
accrued liabilities and income taxes payable. Investing activities provided
(used) net cash of $8.3 million and ($13.6) million for the three months ended
January 31, 1997 and 1996, respectively. In the first three months of fiscal
1997, the Company experienced a net reduction of $13.2 million in short-term
investments while also purchasing $3.4 million of property and equipment. Net
cash provided by financing activities was $816,000 and $351,000 for the three
months ended January 31, 1997 and 1996, respectively.
As of January 31, 1997, the Company had working capital of approximately
$143.7 million, including cash and short-term investments of $77.4 million,
$50.5 million of accounts receivable and $35.0 million of inventories.
9
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The Company expects accounts receivable to continue to represent a significant
portion of working capital. The Company believes that because of the relatively
long manufacturing cycles of many of its testers, investments in inventories
will also continue to represent a significant portion of working capital.
Significant investments in accounts receivable and inventories may subject the
Company to increased risks which could materially adversely affect the Company's
business, financial condition and results of operations. Total liabilities of
$33.3 million as of October 31, 1996 decreased to $26.3 million as of January
31, 1997. The $7.0 million decrease was due primarily to decreases in accounts
payable by $4.9 million, accrued liabilities by $1.8 million and income taxes
payable by $0.3 million.
The Company's principal sources of liquidity as of January 31, 1997
consisted of approximately $49.7 million of cash and cash equivalents, short-
term investments of $27.8 million and $20.0 million available under the
Company's unsecured working capital line of credit expiring on July 25, 1997. As
of January 31, 1997, no amounts were outstanding under the secured line of
credit. Additionally, as of January 31, 1997, the Company has operating leases
for test and other equipment totalling approximately $7.5 million.
FUTURE OPERATING RESULTS
The Company's operating results have in the past fluctuated significantly
and may in the future fluctuate significantly depending upon a variety of
factors, including the timing of new product announcements and releases by the
Company or its competitors; market acceptance of new products and enhanced
versions of the Company's products; manufacturing inefficiencies associated with
the start up of new products; changes in pricing by the Company, its
competitors, customers or suppliers; manufacturing capacity; the ability to
produce systems in volume 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;
changes in overhead absorption levels due to changes in the number of systems
manufactured; the timing and shipment of orders; availability of components,
subassemblies and services; expenses associated with acquisitions and alliances;
product discounts; customization and reconfiguration of systems; 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; cyclicality or downturns in the semiconductor
market and the markets served by the Company's customers; natural disasters;
political and economic instability; regulatory changes; and outbreaks of
hostilities. The Company presently intends to introduce many new products and
product enhancements in this current fiscal year. The Company's gross margin on
system sales has varied and will continue to vary based on a variety of factors,
including manufacturing efficiencies, pricing by competitors or suppliers,
product sales mix, production volume, new product introductions, customization
and reconfiguration of systems, international and domestic sales mix and field
service margins. In addition, new and enhanced products typically have lower
gross margin in the early stages of commercial introduction and production.
While the Company has recorded and continues to record allowances for estimated
sales returns and uncollectible accounts, there can be no assurance that such
estimates regarding allowances will be adequate.
ADDITIONAL RISK FACTORS
Limited System Sales; Backlog
The Company derives a substantial portion of its net sales from the sale of
a relatively small number of systems that typically range in price from $350,000
to $2.0 million, excluding the EPRO products which price range is typically
below $100,000. As a result, the timing of recognition of revenue from a single
transaction could have a significant impact on the Company's net sales and
operating results for a particular period. The Company's net sales and operating
results for a particular period could be materially adversely affected if an
anticipated order for even one system is not received in time to permit shipment
during that period. The Company's backlog at the beginning of a quarter
typically does not include all tester orders needed to achieve the Company's
sales objectives for that quarter. In addition, orders in backlog are subject to
cancellation, delay, deferral or rescheduling by a customer with limited or no
penalties. Consequently, the Company's net sales and operating results for a
quarter have in the past and will in the future depend upon the Company
obtaining orders for systems to be shipped in the same quarter that the order is
received. Furthermore, products generating most of the Company's net sales
continue to be shipped near
10
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the end of each quarter. Accordingly, as experienced in the first quarter of
1997, the failure to receive an anticipated order or a delay or rescheduling in
a shipment near the end of a particular period due, for example, to an order
cancellation, a delay by a customer, manufacturing, technical, reliability or
other difficulties, including difficulties relating to customization and
reconfiguration of systems, a delay in the supply of components, subassemblies
or services or a delay due to competitive or economic factors, may cause net
sales in a particular period to fall significantly below the Company's
expectations, which would have a material adverse effect upon the Company's
business, financial condition or results of operations. The relatively long
manufacturing cycle of many of its testers has caused and could continue to
cause future shipments of such products to be delayed from one quarter to the
next, which could materially adversely affect the Company's business, financial
condition or results of operations. Furthermore, announcements by the Company or
its competitors of new products and technologies could cause customers to defer
or cancel purchases of the Company's existing systems, which could also have a
material adverse effect on the Company's business, financial condition or
results of operations. The impact of these and other factors on the Company's
sales and operating results in any future period cannot be forecasted with
certainty. In addition, the need for continued significant expenditures for
research and development, marketing expenses for new products, capital equipment
purchases and worldwide training and customer service and support, among other
factors, will make it difficult for the Company to reduce significantly its
fixed expenses in a particular period if the Company's net sales goals for such
period are not met. The Company has significantly increased its expense levels
to support its recent growth, and the Company does not believe it will maintain
or exceed its current level of net sales or rate of growth for any period in the
future. Accordingly, there can be no assurance that the Company will be able to
remain profitable or that it will not sustain losses in future periods. Due to
all of the foregoing factors, it is likely that in some future quarter the
Company's operating results will be below the expectations of public market
analysts and investors, as they were in the first quarter of 1997. In such
event, the price of the Company's common stock may be materially adversely
affected.
Cyclicality of Semiconductor Industry
The Company's business and results of operations depend in significant part
upon the capital expenditures of manufacturers of semiconductors, including
manufacturers that are opening new or expanding existing fabrication facilities,
which in turn depend upon the current and anticipated market demand for
semiconductors and products incorporating semiconductors. Historically, 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 manufactured and marketed by
the Company. The Company believes that the markets for newer generations of
semiconductors will also be subject to similar fluctuations. Although the most
recent monthly book-to-bill ratios have exceeded parity, bookings levels for the
semiconductor industry remain significantly below levels from the comparable
period one year ago. Additionally, the semiconductor equipment industry's book-
to bill ratio, as published by Semiconductor Equipment and Materials
International (an industry association), continues to show significant market
weakness. Additional evidence of an existing industry downturn is exhibited by
recent announcements by several semiconductor manufacturers of delays or
cancellations of previously planned capacity additions and continued weakness in
pricing. The Company has recently experienced shipment delays and purchase
order restructurings by several of its customers and anticipates that this trend
will continue for some time. Accordingly, the Company can give no assurance
that it will be able to achieve or maintain its current or prior level of sales,
or rate of growth. Additionally, based on present market conditions, the
Company presently expects that future quarterly comparisons, through at least
the third quarter of 1997, will indicate a period-over-comparable period decline
in the Company's net sales. Prior to the recent downturn, the semiconductor
industry had experienced significant growth which, in turn, had caused
significant growth in the capital equipment industry in the past three years.
There can be no assurance that such growth will resume. The Company anticipates
that a significant portion of new orders may depend upon demand from
semiconductor device manufacturers building or expanding large fabrication
facilities and there can be no assurance that such demand will exist. In
addition, any factor adversely affecting the semiconductor industry or
particular segments within the semiconductor industry may adversely affect the
Company's business, financial condition or results of operations. Therefore,
there can be no assurance that the Company's operating results will not be
materially adversely affected if downturns or slowdowns in the semiconductor
industry occur again in the future.
11
<PAGE>
The Company has over the last three years experienced a period of annual
growth. Since 1993, the Company has significantly increased the scale of its
operations to support increased sales levels and has expanded its 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 March 1995 acquisition of EPRO and the
Company's establishment of relationships in Asia. In this regard, the Company
relocated its principal office in Fremont, California and EPRO's operations in
Santa Clara, California to a larger facility in Fremont, California in July
1996. Due to the recent slowdown in the semiconductor industry, the Company has
experienced contractions which have placed considerable strain on its
management, financial, manufacturing and other resources. In order to
effectively deal with the changes brought on by the cyclical nature of the
industry, the Company has been required to implement and improve a variety of
operating, financial and other systems, procedures and controls. There can be no
assurance that any existing or new systems, procedures or controls will be
adequate to support the Company's operations or that its systems, procedures and
controls will be designed, implemented or improved in a cost effective and
timely manner. Any failure to implement, improve and expand or contract such
systems, procedures and controls in an efficient manner at a pace consistent
with the Company's business could have a material adverse effect on the
Company's business, financial condition or results of operations.
Limited Sources of Supply; Reliance on Subcontractors
Certain components, subassemblies and services necessary for the
manufacture of the Company's testers are obtained from a limited group of
suppliers. The Company does not maintain any long-term supply agreements with
any of its vendors and purchases its components and subassemblies through
individual purchase orders. The manufacture of certain of the Company's
components and subassemblies is an extremely complex process. The Company also
relies increasingly on outside vendors to manufacture certain components and
subassemblies and to provide certain services. In addition, the Company and
certain of its subcontractors are currently experiencing significant shortages
and delays in delivery of various components and subassemblies. There can be no
assurance that these or other problems will not continue to occur in the future
with these or the Company's other suppliers or outside subcontractors. The
Company's reliance on a limited group of suppliers, and the Company's reliance
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 has delayed
and could continue to delay shipments of the Company's systems and could have a
material adverse effect on the Company's business, financial condition or
results of operations. Any continuing inability to obtain adequate yields or
timely deliveries or any other circumstance that would require the Company to
seek alternative sources of supply or to manufacture such components internally,
could have a material adverse effect on the Company's business, financial
condition or results of operations. Such delays, shortages and disruptions would
also damage relationships with current and prospective customers and could allow
competitors to penetrate such customer accounts. There can be no assurance that
the Company's internal manufacturing capacity and that of its suppliers and
subcontractors will be sufficient to meet customer requirements.
Highly Competitive Industry
The ATE industry is intensely competitive. Because of the substantial
investment required to develop test application software and interfaces, the
Company believes that once a semiconductor manufacturer has selected a
particular ATE vendor's tester, the semiconductor 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. The inability of the
Company to achieve significant sales to each ATE customer could have a material
adverse effect on the Company's business, financial condition or results of
operations.
The Company faces substantial competition throughout the world, primarily
from ATE manufacturers located in the United States, Europe and Japan, as well
as several of the Company's customers. Many of the Company's competitors have
substantially greater financial and other resources with which to pursue
engineering, manufacturing, marketing and distribution of their products.
Certain of the Company's competitors have introduced
12
<PAGE>
or announced new products with certain performance or price characteristics
equal or superior to certain products currently offered by the Company. The
Company believes that if the ATE industry continues to consolidate through
strategic alliances or acquisitions, as evidenced by acquisitions of a tester
product line of Micro Component Technology, Inc. by Megatest Corporation
("Megatest") and of Megatest by Teradyne, the Company will face significant
additional competition from larger competitors that may offer more complete
product lines and services than the Company. The Company also expects its
competitors to continue 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 the Company's competitors could cause a decline in sales or
loss of market acceptance of the Company's existing products. Moreover,
increased competitive pressure could lead to intensified price-based
competition, which could materially adversely affect the Company's business,
financial condition or results of operations. The Company has experienced and
continues to experience significant price competition in the sale of all of its
testers. In addition, at the end of a product life cycle and as competitors
introduce more technologically advanced products, pricing pressures typically
become more intense. The Company believes that to be competitive, it will
continue to require significant financial resources in order to, among other
items, invest in new product development and enhancements and to maintain
customer service and support centers worldwide. There can be no assurance that
the Company will be able to compete successfully in the future.
Rapid Technological Change; Importance of Timely Product Introduction
The ATE market is subject to rapid technological change and new product
introductions and enhancements and related software tools. The Company's ability
to be competitive in this market will depend in significant part upon its
ability to successfully develop and introduce new products and enhancements and
related software tools with greater features on a timely and cost-effective
basis, including the products under development acquired in the EPRO merger. The
Company's customers require testers with additional features and higher
performance and other capabilities. The Company is therefore required to enhance
the performance and other capabilities of its existing systems and related
software tools. Any success by the Company in developing new and enhanced
systems and related software tools and new features to its existing systems
depends upon a variety of factors, including product selection, timely and
efficient completion of product design, timely and efficient implementation of
manufacturing and assembly processes, product performance in the field and
effective sales and marketing. Because new product development commitments must
be made well in advance of sales, new product decisions must anticipate both
future demand and the availability of technology to satisfy that demand. There
can be no assurance that the Company will be successful in selecting,
developing, manufacturing and marketing new products or enhancements and related
software tools. The inability of the Company 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 the Company's business,
financial condition or results of operations. In addition, new product or
technology introductions by the Company's competitors could cause a decline in
sales or loss of market acceptance of the Company's existing products.
Significant delays can occur between a system's introduction and the
commencement by the Company of volume production of such system. The Company has
been and is experiencing significant delays in the introduction, volume
production and sales of its systems and related feature enhancements, including
new models within the digital, mixed-signal and non-volatile memory product
lines, due to technical, manufacturing, parts shortages, component reliability
and other difficulties and may continue to experience similar delays in the
future. As a result, certain of the Company's significant customers have
experienced significant delays in receiving and using certain of the Company's
testers in production. There can be no assurance that these or additional
difficulties will not continue to arise in the future with respect to the
Company's systems and that such delays will not materially adversely affect
customer relationships and future sales. Moreover, there can be no assurance
that the Company will not encounter these or other difficulties that could delay
future introductions or volume production or sales of its systems or
enhancements and related software tools. The Company has incurred and may
continue to incur substantial unanticipated costs to ensure the functionality
and reliability of its testers and to increase feature sets. If the Company's
systems continue to have reliability, quality or other problems, or the market
perceives certain of the Company's products to be feature deficient, reduced
orders, higher manufacturing costs, delays in collecting accounts receivable and
higher service, support and warranty expenses, or inventory write-offs, among
other items,
13
<PAGE>
could result. The Company's failure to have a competitive tester and related
software tools available when required by a semiconductor manufacturer could
make it substantially more difficult for the Company to sell testers to that
manufacturer for a number of years. The Company believes that the continued
acceptance, volume production, timely delivery and customer satisfaction of its
newer digital, mixed signal and non-volatile memory testers are of critical
importance to its future financial results. As a result, an inability to correct
any technical, reliability, parts shortages or other difficulties associated
with the Company's systems or to manufacture and ship the Company's systems on a
timely basis to meet customer requirements could damage relationships with
current and prospective customers and would materially adversely affect the
Company's business, financial condition or results of operations.
Customer Concentration; Lengthy Sales Cycle
One customer accounted for 16% of the Company's net sales for the first
quarter of fiscal 1997. Another customer (a distributor) accounted for 25%, 17%
and 13% of the Company's net sales in fiscal 1996, 1995 and 1994, respectively.
The loss of or any reduction in orders by a significant customer, including
losses or reductions due to continuing or other technical, manufacturing,
reliability or other difficulties associated with the Company's products or
market, economic or competitive conditions in the semiconductor industry or in
other industries that manufacture products utilizing semiconductors could
materially adversely affect the Company's business, financial condition or
results of operations. The Company's ability to maintain or increase its sales
levels in the future will depend in significant part upon its ability to obtain
orders from existing and new customers and to manufacture systems on a timely
and cost-effective basis, the financial condition and success of its customers,
general economic conditions, and the Company's ability to meet increasingly
stringent customer performance and other requirements and shipment delivery
dates. There can be no assurance that the Company will be able to maintain or
increase the level of its net sales in the future or that the Company will be
able to retain existing customers or attract new ones.
Sales of the Company's systems depend in significant part upon the decision
of a semiconductor manufacturer to develop and manufacture new semiconductor
devices or to increase manufacturing capacity. As a result, sales of the
Company's testers are subject to a variety of factors outside of the Company's
control. In addition, the decision to purchase a tester generally involves a
significant commitment of capital, with the attendant delays frequently
associated with significant capital expenditures. For these and other reasons,
the Company's systems have lengthy sales cycles during which the Company may
expend substantial funds and management effort to secure a sale and subject the
Company to a number of significant risks.
Dependence on Key Personnel; Management Changes
The Company's future operating results depend in significant part upon the
continued service of its key personnel, none of whom are bound by an employment
or non-competition agreement. The Company's future operating results also depend
in significant part upon its ability to attract and retain qualified management,
manufacturing, technical, engineering and marketing and sales and support
personnel. Competition for such personnel is intense, and there can be no
assurance that the Company will be successful in attracting or retaining such
personnel. There may be only a limited number of persons with the requisite
skills to serve in these positions and it may be increasingly difficult for the
Company to hire such personnel over time. The loss of any key employee, the
failure of any key employee to perform in his or her current position, or the
Company's inability to attract and retain skilled employees, as needed, could
materially adversely affect the Company's business, financial condition or
results of operations.
International Sales
International sales accounted for approximately 75.3% of total net sales
for the first quarter of fiscal 1997 and 67%, 55% and 52% of total net sales in
fiscal years 1996, 1995 and 1994, respectively. The Company anticipates that
international sales will continue to account for a significant portion of total
net sales in the foreseeable future. As a result, these 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,
14
<PAGE>
original equipment manufacturers, foreign subsidiaries and branch operations,
potentially adverse tax consequences and the possibility of difficulty in
accounts receivable collection. The Company is also subject to the risks
associated with the imposition of legislation and regulations relating to the
import or export of semiconductor equipment. The Company cannot predict whether
quotas, duties, taxes or other charges or restrictions will be implemented by
the United States or any other country upon the importation or exportation of
the Company's products in the future. Any of these factors or the adoption of
restrictive policies could have a material adverse effect on the Company's
business, financial condition or results of operations.
Proprietary Rights
The Company attempts to protect its intellectual property rights through
patents, trade secrets and other measures, including confidentiality agreements.
There can be no assurance that others will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to the Company's trade secrets and other intellectual property
rights or disclose such technology or that the Company can meaningfully protect
its trade secrets or other intellectual property rights. In connection with the
Company's patent infringement litigation against Megatest and Teradyne, Megatest
and Teradyne challenged the validity and enforceability of two of the Company's
patents. There can be no assurance that this or any other patent owned by the
Company will not be invalidated, deemed unenforceable, circumvented or
challenged, that the rights granted thereunder will provide competitive
advantages to the Company or that any of the Company's pending or future patent
applications will be issued with claims of the scope sought by the Company, if
at all. Furthermore, there can be no assurance that others will not develop
similar products, duplicate the Company's products or design around the patents
owned by the Company. In addition, there can be no assurance that foreign
intellectual property laws or the Company's agreements will protect the
Company's intellectual property rights. Failure to protect the Company's
intellectual property rights could have a material adverse effect upon the
Company's business, financial condition or results of operations. In addition
to those patent infringement suits discussed in Item 4 hereof, the Company has
been involved in extensive, expensive and time consuming review of patent
infringement claims. In addition, the Company has at times been notified of
other claims that it may be infringing intellectual property rights possessed by
third parties.
The European patent application relating to one of the proprietary CMOS
stabilization methods owned by the Company was abandoned by the prior owner
after the European patent examiner cited prior art. This prior art was not
referenced in the corresponding United States patent application. Based upon its
review to date of the cited prior art and the European examiner's objections,
and in part upon the advice of Smith-Hill and Bedell, P.C., general patent
counsel to the Company ("SHB"), the Company believes that such prior art is
unlikely to affect the validity or scope of the claims of the United States
issued patent.
This prior art may, however, render invalid or significantly narrow the
scope of certain claims set forth in the United States patent covering the
Company's other proprietary CMOS stabilization method. The European examiner
referred to this prior art in the corresponding European patent application. The
European application was approved, but with significantly narrower claims than
the United States patent. This prior art was not referenced in the corresponding
United States patent. Based in part upon the advice of SHB, and on the Company's
review of its current products, the Company believes that this patent will
continue to be valuable to the Company in preventing imitation of the Company's
products covered by this patent. Additionally, in mid-1992, a third party
suggested that certain claims set forth in this patent might be invalid as a
result of other alleged prior art. The Company believes, based in part upon the
advice of SHB, that the prior art alleged by the third party is less relevant
than the prior art referenced by the European examiner. The corresponding
Japanese application has been rejected by the examiner and the Company has
appealed to reverse the examiner's rejection. However, there can be no assurance
that any of the aforementioned prior art or other prior art will not be
successfully asserted and used to invalidate or narrow the scope of any claim of
the United States patents or the corresponding Japanese patent applications or
any other patents or other patent applications of the Company.
Certain of the Company's customers have received notices of infringement
from Jerome Lemelson alleging that the manufacture of semiconductor products
and/or the equipment used to manufacture semiconductor products
15
<PAGE>
infringes certain patents issued to such person. The Company was notified by a
customer in 1990 and a different customer in late 1994 that the Company may be
obligated to defend or settle claims that the Company's products infringe such
person's patents, and, in the event it is subsequently determined that the
customer infringes such person's patents, such customer intends to seek
reimbursement from the Company for damages and other related expenses. There can
be no assurance that the Company will be successful in defending current or
future patent infringement claims or claims for indemnification resulting from
infringement claims. An award of damages, injunctive relief or expenditures by
the Company of significant amounts in defending any such action could materially
adversely affect the Company's business, financial condition or results of
operations, regardless of the outcome of any litigation. With respect to any
claims, the Company may seek to obtain a license under the third party's
intellectual property rights. There can be no assurance, however, that a license
will be available on reasonable terms or at all. The Company could decide, in
the alternative, to continue to resort to litigation to challenge such claims.
Such challenges have been and could continue to be extremely expensive and time
consuming, and could materially adversely affect the Company's business,
financial condition or results of operations, regardless of the outcome of any
litigation.
Acquisitions
The Company has developed in significant part through mergers and
acquisitions. The Company may in the future pursue acquisitions of complementary
product lines, technologies or businesses. Any future acquisitions by the
Company, if any, could result in potentially dilutive issuances of equity
securities, the incurrence of debt and contingent liabilities, expenditures and
reserves, and amortization expenses related to goodwill and other intangible
assets, which could materially adversely affect the Company's business,
financial condition or results of operations. In addition, acquisitions involve
numerous risks, including difficulties in the assimilation of the operations,
technologies and products of the acquired companies, the diversion of
management's attention from other business concerns, risks of entering markets
in which the Company has no or limited direct prior experience, and the
potential loss of key employees of the acquired company. From time to time, the
Company has engaged in and may continue to engage in discussions with third
parties concerning potential acquisitions of product lines, technologies and
businesses; however, there are currently no commitments or agreements with
respect to any such acquisition. In the event that such an acquisition does
occur, however, there can be no assurance as to the effect thereof on the
Company's business, financial condition or results of operations.
Future Capital Needs
The development and manufacture of new ATE systems and enhancements are
highly capital intensive. In order to be competitive, the Company must make
significant investments in capital equipment, expansion of operations, systems,
procedures and controls, research and development and worldwide training,
customer service and support, among many items. The Company expects that cash on
hand, short-term investments, its bank line of credit, anticipated cash flow
from operations and equipment lease arrangements will satisfy its financing
requirements for at least the next 12 months.
Volatility of Stock Price
The Company believes that factors such as announcements of developments
related to the Company's business, fluctuations in the Company's financial
results, general conditions or developments in the semiconductor and capital
equipment industry and the general economy, sales of the Company's common stock
into the marketplace, an outbreak of hostilities, natural disasters,
announcements of technological innovations or new products or enhancements by
the Company or its competitors, developments in patents or other intellectual
property rights, developments in the Company's relationships with its customers
and suppliers, or a shortfall or changes in revenue, gross margins or earnings
or other financial results from analysts' expectations could cause the price of
the Company's common stock to fluctuate, perhaps substantially. In recent years
the stock market in general, and the market for shares of small capitalization
stocks in particular, including the Company, have experienced extreme price
fluctuations, which have often been unrelated to the operating performance of
affected companies. There can be no assurance that the market price of the
Company's common stock will not continue to experience significant fluctuations
in the future, including fluctuations that are unrelated to the Company's
performance.
16
<PAGE>
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Note 4 of notes to condensed consolidated financial
statements.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See Exhibit Index on page 19.
(b) No reports on Form 8-K have been filed during the quarter ended
January 31, 1997.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, as
amended, the registrant duly caused this Report to be signed on its behalf by
the undersigned thereunto duly authorized.
CREDENCE SYSTEMS CORPORATION
----------------------------------------------
(Registrant)
March 12, 1997 RICHARD Y. OKUMOTO
---------------------- ----------------------------------------------
Date Richard Y. Okumoto
Executive Vice President, Chief Financial
Officer and Secretary
18
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
EXHIBIT
NUMBER PAGE
------- ----
<S> <C> <C>
11.1 Computation of Net Income Per Share.... 20
27.1 EDGAR Financial Data Schedule.......... 21
</TABLE>
<PAGE>
EXHIBIT 11.1
COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JANUARY 31,
------------------
1997 1996
------- -------
<S> <C> <C>
Weighted average shares outstanding.................... 21,773 21,447
Common equivalent shares from stock options............ 482 504
------- -------
Number of shares used in computing per share amounts... 22,215 21,951
======= =======
Net income............................................. $ 1,054 $10,544
======= =======
Net income per share................................... $ 0.05 $ 0.48
======= =======
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> JAN-31-1997
<CASH> 49,672
<SECURITIES> 27,769
<RECEIVABLES> 52,910
<ALLOWANCES> 2,364
<INVENTORY> 34,976
<CURRENT-ASSETS> 170,030
<PP&E> 69,070
<DEPRECIATION> 31,637
<TOTAL-ASSETS> 218,144
<CURRENT-LIABILITIES> 26,343
<BONDS> 0
0
0
<COMMON> 22
<OTHER-SE> 191,779
<TOTAL-LIABILITY-AND-EQUITY> 218,144
<SALES> 40,261
<TOTAL-REVENUES> 40,261
<CGS> 19,439
<TOTAL-COSTS> 19,439
<OTHER-EXPENSES> 20,237
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,612
<INCOME-TAX> 558
<INCOME-CONTINUING> 1,054
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,054
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.05
</TABLE>
