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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 July 31, 1998
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 No
APPLICABLE ONLY TO CORPORATE ISSUERS:
At August 25, 1998, there were 21,721,264 shares of the Registrant's common
stock, $0.001 par value per share outstanding.
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1
<PAGE>
CREDENCE SYSTEMS CORPORATION
INDEX PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements......................................... 3
Condensed Consolidated Balance Sheets........................ 3
Condensed Consolidated Statements of Operations.............. 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............................................ 23
Item 2. Changes in Securities........................................ 23
Item 3. Defaults Upon Senior Securities.............................. 23
Item 4. Submission of Matters to a Vote of Securityholders........... 23
Item 5. Other Information............................................ 23
Item 6. Exhibits and Reports on Form 8-K............................. 23
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item I - Financial Statements
CREDENCE SYSTEMS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
July 31, 1998 October 31,
1997
------------- -----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ...................... $ 55,621 $132,761
Restricted cash ................................ 4,600 10,002
Short-term investments ......................... 75,826 35,013
Accounts receivable, net ....................... 53,059 55,246
Inventories .................................... 36,311 42,125
Deferred income taxes .......................... 17,365 5,853
Prepaid and other current assets ............... 12,490 7,148
-------- --------
Total current assets ......................... 255,272 288,148
Long-term investments ............................ 27,207 8,561
Property and equipment, net ...................... 40,428 43,050
Other assets ..................................... 17,066 18,382
======== ========
Total assets ................................. $339,973 $358,141
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................... $ 13,225 $ 13,182
Accrued liabilities ............................ 28,613 20,346
Income taxes payable ........................... 2,317 4,284
Total current liabilities .................... 44,155 37,812
Convertible subordinated notes ................... 115,000 115,000
Minority interest ................................ 231 418
Stockholders' equity ............................. 180,587 204,911
======== ========
Total liabilities and stockholders' equity ... $339,973 $358,141
======== ========
</TABLE>
See accompanying notes.
3
<PAGE>
CREDENCE SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31, July 31,
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales .............................................$ 37,322 $ 51,082 $194,357 $134,698
Cost of goods sold - on net sales ..................... 16,901 21,638 84,003 59,451
Cost of goods sold - restructure and other ............ 20,952 -- 20,952 --
-------- -------- -------- --------
Gross margin .......................................... (531) 29,444 89,402 75,247
Operating expenses:
Research and development ........................... 11,569 9,257 37,293 27,016
Selling, general and administrative ................ 13,987 14,529 52,226 37,949
In-process research and development ................ 4,838 6,022 4,838 6,022
Restructure and other .............................. 18,386 -- 18,386 --
-------- -------- -------- --------
Total operating expenses .......................... 48,780 29,808 112,743 70,987
-------- -------- -------- --------
Operating income (loss) ............................... (49,311) (364) (23,341) 4,260
Interest income and (other expenses), net ............. (7) 1,011 1,151 2,912
-------- -------- -------- --------
Income (loss) before income tax provision (benefit) ... (49,318) 647 (22,190) 7,172
Income tax provision (benefit) ........................ (15,682) 1,542 (6,458) 3,727
Minority interest ..................................... (50) 2 (124) 2
======== ======== ======== ========
Net income (loss) .....................................$(33,586) $ (897) $(15,608) $ 3,443
======== ======== ======== ========
Net income (loss) per share
Basic .............................................$ (1.55) $ (0.04) $ (0.72) $ 0.16
======== ======== ======== ========
Diluted ...........................................$ (1.55) $ (0.04) $ (0.72) $ 0.15
======== ======== ======== ========
Number of shares used in computing per share amount
Basic ............................................. 21,674 21,873 21,726 21,813
======== ======== ======== ========
Diluted ........................................... 21,674 21,873 21,726 22,323
======== ======== ======== ========
</TABLE>
See accompanying notes.
4
<PAGE>
CREDENCE SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (decrease) in cash and cash equivalents
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
July 31,
----------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ....................................................... $ (15,608) $ 3,443
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization ........................................ 12,838 8,760
Acquired in-process research and development ......................... 4,838 --
Loss related to restructure and other
Accounts receivable ............................................ 1,390 --
Inventory ...................................................... 19,791 --
Prepaids and other current assets .............................. 2,956 --
Impairment of fixed assets ..................................... 7,928 --
Impairment of purchased technology & investments ............... 4,118 --
Excess facility cost ........................................... 2,656 --
Other accruals ................................................. 500 --
Loss (gain) on disposal of property and equipment .................... 149 (26)
Deferred income taxes ................................................ (11,512) --
Minority interest .................................................... 124 --
Changes in operating assets and liabilities:
Restricted cash, accounts receivable, inventories
and other current assets .......................................... (23,503) (12,336)
Accounts payable, accrued liabilities and
income taxes payable .............................................. 4,157 (3,272)
-------- --------
Net cash provided by (used in) operating activities ............ 10,822 (3,431)
Cash flows from investing activities:
Purchases of short-term investments (135,080) (29,398)
Maturities of available-for-sale short-term investments ................. 63,644 44,722
Sales of short-term investments ......................................... 11,977 3,112
Acquisition of property and equipment ................................... (8,319) (7,823)
Other assets ............................................................ (10,498) (3,639)
Proceeds from sale of property and equipment ............................ -- 1,736
-------- --------
Net cash (used in) provided by investing activities ............... (78,276) 8,710
Cash flows from financing activities:
Issuance of common stock ................................................ 3,109 1,998
Repurchase of common stock .............................................. (12,795) --
-------- --------
Net cash (used in) provided by financing activities ............... (9,686) 1,998
-------- --------
Net increase (decrease) in cash and cash equivalents ....................... (77,140) 7,277
Cash and cash equivalents at beginning of period ........................... 132,761 48,649
======== ========
Cash and cash equivalents at end of period ................................. $ 55,621 $ 55,926
======== ========
Supplemental disclosures of cash flow information:
Interest paid ........................................................... $ 3,103 $ 1
Income taxes paid ....................................................... $ 12,492 $ 2,533
Noncash investing activities:
Net transfers of inventory to property and equipment .................... $ 7,427 $ 11,684
Noncash financing activities:
Income tax benefit from stock option exercises .......................... $ 970 $ 149
See accompanying notes.
</TABLE>
5
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Quarterly Financial Statements
The condensed consolidated financial statements and related notes for
the nine months ended July 31, 1998 and 1997 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 the financial
position and results of operations of the Company for the interim periods. The
results of operations for the three and nine months ended July 31, 1998 are 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, 1997 included in its most
recent 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, limited system
sales, backlog, cyclicality of semiconductor industry, expansion of operations,
management of fluctuations in operating results, sole or limited sources of
supply, reliance on subcontractors, highly competitive industry, dependence on
key customers, lengthy sales cycle, dependence on key personnel, international
sales, proprietary rights, acquisitions, importance of Japanese market, Year
2000 compliance, ability to reduce operating expenses, leverage, 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
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. Restructure and Other
In the third quarter of fiscal 1998, the Company recorded restructure
and other costs totaling $39,338,000. These charges are the result of the
Company's reaction to a major downturn in the current and forecasted business
outlook for the Automatic Test Equipment ("ATE") and related semiconductor and
semiconductor equipment industries which took place during the period. As a
result of this industry downturn, the company has downsized its own operations
including reducing headcount, reducing the volume of products being produced and
the cancellation or delay of various projects, including facilities expansions,
certain research and development projects and various infrastructure enhancement
projects. The impact of this downsizing and these decisions, is that significant
amounts of the Company's inventories, receivables, fixed assets, prepaid
expenses, investments and purchased technologies have been impaired and certain
liabilities have been incurred. As a result, and in accordance with Financial
Accounting Standards No. 121, the Company has written down the related assets to
their net realizable values and made provision for the estimated liabilities.
Of the $39.3 million total charge, approximately $21.0 million was
charged as cost of goods sold, of which approximately $19.8 million was related
to write down of excess or obsolete inventories. The elements of the total
charge as of July 31, 1998 are as follows (in thousands):
<TABLE>
<S> <C>
Write down of inventories to net realizable value
(including expected losses on supplier commitments) $ 19,791
Write down of excess fixed assets to fair value 7,928
Write down purchased technology and investments to fair value 4,118
Write-off of prepaid and other current assets 2,956
Excess facility costs 2,656
Write down of receivables to net realizable value 1,390
Employee termination benefits and accrued liabilities 500
-------
$ 39,339
========
</TABLE>
6
<PAGE>
Cash expenditures associated with the restructuring plan were
approximately $170,000 in the third quarter of fiscal 1998. It is expected that
approximately $1.8 million and $1.5 million of cash expenditures, primarily
related to losses on supplier commitments and lease payments on excess
facilities, will occur during the fourth quarter of fiscal 1998 and the first
quarter of fiscal 1999, respectively. Subsequent cash expenditures, related
primarily to lease payments on excess facilities, will be approximately $1.5
million over an 18 month period.
3. 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>
July 31, October 31,
1998 1997
-------- -----------
<S> <C> <C>
Raw materials ..................... $ 9,969 $ 24,862
Work-in-process ................... 22,791 14,173
Finished goods .................... 3,551 3,090
-------- --------
$ 36,311 $ 42,125
======== ========
</TABLE>
4. Net Income (Loss) Per Share
The Company has adopted Statement of Financial Accounting Standards
No.128 "Earnings Per Share" (SFAS 128) beginning in the first quarter of fiscal
1998. Accordingly, net income (loss) per share (basic) is based upon the
weighted average number of common shares outstanding during the period. Net
income (loss) per share (diluted) is based upon the weighted average number of
common shares and dilutive potential common shares outstanding during the
period. The Company's convertible subordinated notes are not dilutive potential
common shares and, accordingly, were excluded from the calculation of net income
(loss) per share (diluted). Options to purchase 1,023,195 shares at an average
price of $28.26 per share were outstanding at July 31, 1998 but were not
included in the computation of diluted earnings (loss) per share because the
options' exercise price was greater than the average market price of the common
shares and the Company incurred a net loss. Therefore, the effect of including
the options would be antidilutive. All earnings (loss) per share amounts for all
periods have been presented to conform to SFAS 128 requirements. The following
table sets forth the computation of basic and dilutive net income (loss) per
share (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31, July 31,
-------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic and diluted
earnings per share - net income (loss) ........... $(33,586) $ (897) $(15,608) $ 3,443
-------- -------- -------- --------
Denominator:
Denominator for basic earnings per
share-weighted-average shares ................... 21,674 21,873 21,726 21,813
Effect of dilutive securities-
employee stock options .......................... -- -- -- 510
-------- -------- -------- --------
Denominator for diluted earnings per
share-adjusted weighted-average shares
and assumed conversions ......................... 21,674 21,873 21,726 22,323
-------- -------- -------- --------
Basic earnings (loss) per share .................... $ (1.55) $ (0.04) $ (0.72) $ 0.16
======== ======== ======== ========
Diluted earnings (loss) per share .................. $ (1.55) $ (0.04) $ (0.72) $ 0.15
======== ======== ======== ========
</TABLE>
7
<PAGE>
5. Contingencies
The Company is involved in various claims arising in the ordinary
course of business, none of which, in the opinion of management, if determined
adversely against the Company, will have a material adverse effect on the
Company's business, financial condition or results of operations.
On July 21, 1998, the Company received a letter from inTEST IP
Corporation alleging that the Company is infringing its U.S. Pat. No 4,589,815.
The Company is investigating the allegation, and has nothing to report at this
time with respect to the merits of the allegation or its financial impact on the
Company, if any.
6. Commitments
The Company currently has an agreement with Summit Design, Inc. to
purchase product licenses through 1999. The remaining commitment under this
agreement as of July 31, 1998 is approximately $4.6 million. Restricted cash
represents cash in escrow related to the remaining purchase commitments under
this agreement.
7. Acquired In-Process Technology
On June 1, 1998, the Company purchased from Heuristic Physics
Laboratories, Inc. ("HPL") certain assets and assumed certain liabilities
relating to their memory test business for approximately $8.0 million in cash.
The assumed liabilities amounted to approximately $0.2 million. In connection
with this transaction, the Company recognized approximately $4.8 million of
acquired in-process research and development expense. The remaining $3.2 million
has been capitalized, of which $2.6 million is purchased technology which will
be amortized ratably over five years. As of July 31, 1998, the Company had paid
$6.0 million of the purchase price. The remaining purchase price will be paid
when all the closing conditions have been met, which is anticipated to be in the
fourth quarter of fiscal 1998.
8. Line of Credit
During the third quarter of fiscal 1998, the Company re-negotiated its
unsecured working capital line of credit to increase the amount available for
borrowings from $20.0 million to $40.0 million.
9. Common Stock Repurchase
During the nine months ended July 31, 1998, the Company has repurchased
a total of 500,000 shares of its common stock at a cost of $12.8 million.
10. Subsequent Events
In August , 1998, the Board of Directors authorized the repurchase of up to
$20.0 million in value of the Company's common stock.
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 "Risk Factors" below, and
elsewhere in this report. 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.
8
<PAGE>
The following table sets forth items from the Condensed Consolidated
Statements of Operations as a percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31, July 31,
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold - on net sales 45.3 42.4 43.2 44.1
Cost of goods sold - restructure and other 56.1 -- 10.8 --
----- ----- ----- -----
Gross margin (1.4) 57.6 46.0 55.9
Operating expenses:
Research and development 31.0 18.1 19.2 20.0
Selling, general and administrative 37.5 28.4 26.9 28.2
In process research & development 13.0 11.8 2.5 4.5
Restructure and other 49.3 -- 9.4 --
----- ----- ----- -----
Operating expenses 130.8 58.3 58.0 52.7
----- ----- ----- -----
Operating income (loss) (132.2) (0.7) (12.0) 3.2
Interest income and (other expenses), net 0.0 2.0 0.6 2.2
----- ----- ----- -----
Income (loss) before income tax provision (benefit) (132.2) 1.3 (11.4) 5.4
Income tax provision (benefit) (42.2) 3.1 (3.4) 2.8
----- ----- ----- -----
Net income (loss) (90.0)% ( 1.8)% ( 8.0)% 2.6%
===== ===== ===== =====
</TABLE>
RESULTS OF OPERATIONS
NET SALES
Net sales consist of revenues from the sale of systems, spare parts,
maintenance contracts and software. Net sales were $37.3 million for the third
quarter and $194.4 million for the first nine months of fiscal 1998,
representing a decrease of 27.0% and an increase of 44.3% respectively, over the
comparable periods of fiscal 1997. The decrease in third quarter net sales over
the comparable period in fiscal 1997 was primarily due to significant weakness
in the Automatic Test Equipment ("ATE") market in the third quarter of fiscal
1998 which materially adversely affected the company's business, financial
condition and results of operations and several other companies in the
semiconductor capital equipment market. The increase in the first nine months of
fiscal 1998 over the comparable period of fiscal 1997 was due primarily to
higher demands for ATE in the first and second quarters of fiscal 1998 over the
comparable periods in fiscal 1997. International net sales accounted for
approximately 61.0% and 72.0%, respectively, of the total net sales for the
third quarter and nine months of fiscal 1998, compared to approximately 71.3%
and 70.0%, respectively, for the comparable periods a year ago. The Company's
international sales are denominated primarily in United States dollars. The
decrease in international net sales in the third quarter of fiscal 1998 over the
comparable period of fiscal 1997 was due to lower demand primarily in Asia.
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 service margins. Gross margin percentages for
the third quarter and the first nine months of fiscal 1998 were impacted by
restructure and other charges. During the third quarter of fiscal 1998, the
Company recognized approximately $21.0 million of restructure and other charges,
of which $19.8 million was related to write down of inventory due to lower
demands (See Note 2). Gross margin (excluding restructure and other) was 54.7%
9
<PAGE>
for the third quarter and 56.8% for the first nine months of fiscal 1998,
compared with 57.6% for the third quarter and 55.9% for the first nine months of
fiscal 1997. The gross margin decline (excluding restructure and other) in the
third quarter of fiscal 1998 is primarily due to declining ASP's on older
products and product mix change to newer products with higher cost due primarily
to lower volume.
RESEARCH AND DEVELOPMENT
Research and development expenses were $11.6 million in the third
quarter of fiscal 1998, an increase of $2.3 million or 25.0% over the same
period of fiscal 1997. Research and development expenses were $37.3 million in
the first nine months of fiscal 1998, an increase of $10.3 million or 38.0% over
the same period in fiscal 1997. This increase, in absolute dollars, in the third
quarter and the first nine months of fiscal 1998 over the comparable periods in
fiscal 1997, reflected primarily the Company's continued development work on new
products and product enhancements. As a percentage of net sales, research and
development expenses were 31.0% for the third quarter and 19.2% for the first
nine months of fiscal 1998, compared to 18.1% in the third quarter and 20.0% for
the first nine months of fiscal 1997. The increase in R&D expenses as a
percentage of net sales in the third quarter of fiscal 1998 over the comparable
period of fiscal 1997 is attributable primarily to the significant decrease in
net sales. The Company currently intends to continue to invest resources in the
development of new products and enhancements of existing products for the
foreseeable future. Currently the Company expects these expenses to decrease
from current levels in absolute dollars for the remainder of fiscal 1998.
IN-PROCESS RESEARCH AND DEVELOPMENT
On June 1, 1998, the Company purchased from Heuristic Physics
Laboratories, Inc. ("HPL") certain assets and assumed certain liabilities
relating to their memory test business for approximately $8.0 million in cash.
In connection with this transaction, the Company recognized approximately $4.8
million of acquired in-process research and development expense. The remaining
$3.2 million has been capitalized, of which $2.6 million is purchased technology
which will be amortized ratably over five years.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were $14.0 million in the
third quarter of fiscal 1998, representing a $0.5 million or 3.7% decrease from
the comparable period of fiscal 1997. Selling, general and administrative
expenses were $52.2 million in the first nine months of fiscal 1998, an increase
of $14.3 million or 37.6% over the same period in fiscal 1997. As a percentage
of net sales, selling, general and administrative expenses were 37.5% for the
third quarter and 26.9% for the first nine months of fiscal 1998, compared with
28.4% and 28.2%, respectively, for the corresponding periods in fiscal 1997. The
increase in SG&A expenses as a percentage of net sales in the third quarter of
fiscal 1998, over the comparable period of fiscal 1997, is attributable
primarily to the significant decrease in net sales. Currently the Company
expects selling, general and administrative expenses for the remainder of fiscal
1998 to decrease from current levels in absolute dollars.
RESTRUCTURE AND OTHER CHARGE
In the third quarter of fiscal 1998, the Company recorded restructure
and other costs totaling $39,338,000. These charges are the result of the
Company's reaction to a major downturn in the current and forecasted business
outlook for the Automatic Test Equipment ("ATE") and related semiconductor and
semiconductor equipment industries which took place during the period. As a
result of this industry downturn, the company has downsized its own operations
including reducing headcount, reducing the volume of products being produced and
the cancellation or delay of various projects, including facilities expansions,
certain research and development projects and various infrastructure enhancement
projects. The impact of this downsizing and these decisions, is that significant
amounts of the Company's inventories, receivables, fixed assets, prepaid
expenses, investments and purchased technologies have been impaired and certain
liabilities have been incurred. As a result, and in accordance with Financial
Accounting Standards No. 121, the Company has written down the related assets to
their net realizable values and made provision for the estimated liabilities.
10
<PAGE>
Of the $39.3 million total charge, approximately $21.0 million was
charged as cost of goods sold, of which approximately $19.8 million was related
to write down of excess or obsolete inventories. The elements of the total
charge as of July 31, 1998 are as follows (in thousands):
<TABLE>
<S> <C>
Write down of inventories to net realizable value
(including expected losses on supplier commitments) $ 19,791
Write down of excess fixed assets to fair value 7,928
Write down purchased technology and investments to fair value 4,118
Write-off of prepaid and other current assets 2,956
Excess facility costs 2,656
Write down of receivables to net realizable value 1,390
Employee termination benefits and accrued liabilities 500
-------
$ 39,339
========
</TABLE>
Cash expenditures associated with the restructuring plan were
approximately $170,000 in the third quarter of fiscal 1998. It is expected that
approximately $1.8 million and $1.5 million of cash expenditures, primarily
related to losses on supplier commitments and lease payments on excess
facilities, will occur during the fourth quarter of fiscal 1998 and the first
quarter of fiscal 1999, respectively. Subsequent cash expenditures, related
primarily to lease payments on excess facilities, will be approximately $1.5
million over an 18 month period.
INTEREST INCOME AND OTHER EXPENSES, NET
The Company generated nominal net interest and other expenses for the
third quarter and $1.2 million for the first nine months of fiscal 1998,
compared to $1.0 million and $2.9 million, respectively, for the corresponding
periods of fiscal 1997. The decreases in net interest income and other expenses
over prior periods were primarily due to lower interest rates earned on the
purchases of additional tax exempt securities, lower average investment
balances, and losses on disposal of fixed assets.
INCOME TAXES
Excluding the impact of in-process research and development, the
Company's effective tax rate for the third quarter and the first nine months of
fiscal 1998 and 1997 is 34% and 33.5%, respectively. Excluding the impact of the
in-process research and development, the effective tax rates are less than the
combined federal and state statutory tax rate primarily due to the benefit of
the Company's foreign sales corporation.
The tax provision (benefit) for the third quarter and first nine months
of both 1998 and 1997 consist of two items: a tax provision (benefit) on pre-tax
book income (loss) excluding the in-process research and development, and a tax
benefit on the in-process research and development.
A valuation allowance has been established in the third quarter of
fiscal 1998 and 1997 to offset a portion of the deferred tax assets attributable
to the in-process research and development. Due to the period over which these
tax benefits will be recognized, sufficient uncertainty exists regarding the
realizability of a portion of these assets to warrant a valuation allowance.
LIQUIDITY AND CAPITAL RESOURCES
Net cash from operating activities provided was $10.8 million and used $3.4
million for the nine months ended July 31, 1998 and 1997, respectively. Net cash
flows provided by operating activities for the nine months ended July 31, 1998
were primarily from depreciation and amortization of $12.8 million, acquired
in-process research and development expense of $4.8 million, restructure and
other charge of $39.3 million, and a net increase in accounts payable, accrued
liabilities, and income taxes payable of $4.2 million, partially offset by a
loss of $15.6 million, deferred income taxes of $11.5 million, and a net
decrease in restricted cash, accounts receivable, inventories and other current
assets of $23.5 million. Investing activities used $78.3 million and provided
$8.7 million for the nine months ended July 31, 1998 and 1997, respectively. In
the first nine months of fiscal 1998, the Company experienced a net increase of
$59.5 million in short-term and long-term investments while also purchasing $8.3
11
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million of property and equipment. Net cash from financing activities used $9.7
million and provided $2.0 million for the nine months ended July 31, 1998 and
1997, respectively. The use of cash in the first nine months of fiscal 1998 was
primarily due to the Company repurchasing 500,000 of its shares of common stock
at a cost of approximately $12.8 million. The purpose of the repurchase was to
offset potential future dilution resulting from increases of available stock
under the Company's stock option plan and employee stock purchase plan.
As of July 31, 1998, the Company had working capital of approximately
$211.1 million, including cash and short-term investments of $136.0 million,
$53.1 million of accounts receivable and $36.3 million of inventories. 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 and the new products it has and
plans to continue to introduce, investments in inventories will also continue to
represent a significant portion of working capital. Significant investments in
accounts receivable and inventories subject the Company to increased risks,
including uncollectability of receivables and write-offs of both hardware and
software inventories, which has and could continue to materially adversely
affect the Company's business, financial condition and results of operations.
Total current liabilities of $37.8 million as of October 31, 1997 increased to
$44.2 million as of July 31, 1998. The $6.4 million increase was due primarily
to increases in accrued liabilities by $8.3 million, offset by a decrease in
income taxes payable of $1.9 million.
The Company's principal sources of liquidity as of July 31, 1998 consisted
of approximately $55.6 million of cash and cash equivalents, short-term
investments of $75.8 million, a $10.0 million accounts receivable purchase
agreement expiring in April 30, 1999 (through which no receivables have been
sold as of July 31, 1998) and $40.0 million available under the Company's
unsecured working capital line of credit expiring on July 23, 1999. In addition,
the Company has $27.2 million of available-for-sale investments, classified as
long-term. As of July 31, 1998, no amounts were outstanding under the unsecured
line of credit. Additionally, as of July 31, 1998, the Company has operating
leases for facilities and test and other equipment totaling approximately $45.0
million.
RISK FACTORS
The Company's results of operations are affected by a variety of
factors, including the following:
Fluctuations in Operating Results
- ---------------------------------
The Company's operating results have in the past fluctuated
significantly and will in the future fluctuate significantly, due to a variety
of factors. The Company's operating performance from the first quarter of fiscal
1993 through the third quarter of fiscal 1996 produced sequential
quarter-to-quarter growth in both net sales and net income, culminating in net
sales of $67.2 million and net income of $11.5 million for the third fiscal
quarter of 1996. The Company then reported two consecutive quarters of
decreasing net sales and decreasing net income, with fourth quarter of fiscal
1996 net sales of $44.2 million and net income of $4.3 million, and first
quarter of fiscal 1997 sales of $40.2 million and net income of $1.0 million.
During the subsequent four consecutive fiscal quarters, from the second quarter
of fiscal 1997 through the first quarter of fiscal 1998, the Company's net sales
and net income increased sequentially, excluding the net loss reported in the
third fiscal quarter of 1997 due to a pre-tax charge for in process research and
development related to an acquisition. With the charge, results for the third
quarter of fiscal 1997 reflected a net loss of $0.9 million. Without the charge,
third quarter fiscal 1997 net income would have been $4.4 million. At the peak
of this four quarter period ending in the first quarter of 1998, net sales for
the first quarter reached $82.4 million and net income reached $9.2 million. In
the third quarter of fiscal 1998, net sales and net income decreased from the
second quarter of 1998. The decreases prior to the fourth quarter of fiscal 1997
were due primarily to a continued weakness in the ATE market which materially
adversely affected the Company's business, financial condition and results of
operations and several other companies in the semiconductor equipment industry.
The ATE industry returned to a capacity expansion mode in fiscal 1997, resulting
in sequential increases in revenues during the second, third, and fourth
quarters of fiscal 1997 and the first quarter of fiscal 1998. However in the
second and third quarters of fiscal 1998, the Company reported consecutive
decreasing net sales and net income due to an industry slowdown and the Company
believes that in the short term its net sales and net income, if any, may be
lower sequentially than in recent prior periods. There can be no assurance they
will not continue to decrease in subsequent quarters. This trend may continue to
12
<PAGE>
cause the Company to generate net losses in the next several quarters. Other
factors that have caused and will continue to cause the Company's results to
fluctuate include 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 or payment terms and cycles by
the Company, its competitors, customers or suppliers, manufacturing capacity,
the ability to volume produce systems and meet customer requirements, inventory
obsolescence and writeoffs, 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,
product reliability, the proportion of direct sales and sales through third
parties, including distributors and original equipment manufacturers, the mix of
products sold, the length of manufacturing and sales cycles, 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 the future, which will affect its
operating results, financial condition and business. The Company's gross margins
on system sales have varied significantly, and will continue to vary
significantly based on a variety of factors, including manufacturing
efficiencies, pricing by competitors or suppliers, product sales mix, reserves,
production volume, new product introductions, product reliability, the rate of
capacity utilization, customization and reconfiguration of systems,
international and domestic sales mix and field service margins. In addition, new
and enhanced products typically have lower gross margins 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.
Limited Systems 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 $3.6 million, excluding the EPRO memory products, for which the
price range is typically below $50,000. 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 orders necessary 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 the end of each quarter.
Accordingly, 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 could 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 and other expenses for new products, capital
equipment purchases and worldwide training and customer service and support,
among other factors, will make it difficult for the Company to reduce its
significant fixed expenses in a particular period if the Company's net sales
goals for such period are not met. Accordingly, there can be no assurance that
the Company will be 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. In such event, the price of the Company's Common
Stock has and may continue to be materially adversely affected.
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<PAGE>
Cyclicality of Semiconductor Industry
- -------------------------------------
The Company's business and results of operations depend in significant
part upon the capital expenditures of manufacturers of semiconductors and
companies which specialize in contract packaging and/or testing of
semiconductors, including manufacturers and contractors that are opening new or
expanding existing fabrication facilities, or upgrading existing equipment,
which in turn depend upon the current and anticipated market demand for
semiconductors and products incorporating semiconductors. Historically and
recently, 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. The
Company has in the past experienced shipment delays, delays in commitments and
purchase order restructuring by several of its customers and anticipates that
this may continue to occur in the future. 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. Through the first three quarters of 1997, the
Company's net sales, gross margins and net income were significantly below the
net sales, gross margins and net income, respectively, of the comparable prior
year's quarterly results. In the fourth quarter of 1997 and the first quarter of
1998, the Company's net sales and net income were significantly above the net
sales and net income of the fourth quarter of 1996 and the first quarter of
1997, respectively. However, in the second and third quarters of fiscal 1998,
net sales and net income decreased over the first quarter of fiscal 1998, the
Company believes they may decrease further in the short term, and there can be
no assurance that they will not decrease from prior quarter or prior year
amounts in future quarters. The Company anticipates 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, 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 continue
to be materially adversely affected if downturns or slowdowns in the
semiconductor industry continue or occur again in the future. The current Asian
financial crisis has contributed to a widespread uncertainty and a slowdown in
the semiconductor industry. This slowdown in the semiconductor industry has
resulted in reduced spending for semiconductor capital equipment, including ATE
which the Company sells. This industry slowdown has had and may continue to have
an adverse impact on the Company's product backlog, balance sheet and results of
operations.
Management of Fluctuations in Operating Results
- -----------------------------------------------
The Company has over the last several years experienced significant
fluctuations in its operating results. Since 1993, the Company has overall
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, the Company's establishment of a joint venture
with Innotech, Inc., the Company's acquisition in July 1997 of the assets and
certain liabilities of Test Systems Strategies, Inc. ("TSSI"), the Company's
acquisition in August 1997 of a software product line from Zycad Corporation
("Zycad") and the June 1998 acquisition of assets and assumption of certain
liabilities from Heuristics Physics Laboratories, Inc. ("HPL"). However, the
Company has during certain historical periods, as discussed above, experienced
revenue declines and reductions in its operations. These fluctuations in the
Company's sales and operations have placed a 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
highly flexible operating, financial and other systems, procedures and controls
capable of expanding or contracting consistent with the Company's business.
There can be no assurance that any existing or new systems, procedures or
controls will be adequate to support fluctuations in 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.
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<PAGE>
Expansion of Product Lines
- --------------------------
Currently, the Company is devoting and will continue to devote
significant resources to the development of new products and technologies.
During 1998, the Company is conducting evaluations of these new products and may
continue to invest significant additional resources in plant and equipment,
leased facilities, inventory, personnel and other costs, to begin or prepare to
begin production of these products and to provide the marketing, administration
and after-sales service and support, if any, required to service and support
these new hardware and software products. Accordingly, there can be no assurance
that gross profit margin and inventory levels will not continue to be adversely
impacted by start-up costs associated with the initial production and
installation of these new product lines. These start-up costs include, but are
not limited to, additional manufacturing overhead, additional inventory and
warranty reserve requirements and the enhancement of after-sales service and
support organizations. In addition, the increases in inventory on hand for new
hardware and software product development and customer support requirements
increase the risk of inventory write-offs. Additionally, there can be no
assurance that operating expenses will not increase, relative to sales, as a
result of adding additional marketing and administrative personnel, among other
costs, to support the Company's additional products. If the Company is unable to
achieve significantly increased net sales or its sales fall below expectations,
the Company's operating results will be materially adversely affected. There can
be no assurance that net sales will increase or remain at recent levels or that
any new products will be successfully commercialized.
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 long-term supply agreements with most
of its vendors and purchases most of 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 on outside vendors to manufacture certain components and subassemblies
and to provide certain services. The Company has recently experienced and
continues to experience significant reliability, quality and timeliness problems
with several critical components. In addition, the Company and certain of its
subcontractors periodically experience 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 involve several risks, including a potential 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 automatic test equipment ("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 penetrate any large
ATE customer or achieve significant sales to any ATE customer could have a
material adverse effect on the Company's business, financial condition or
results of operations.
15
<PAGE>
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 recently introduced 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, the Company will continue to face significant additional
competition from larger competitors that may offer more complete product lines
and services than the Company. The Company's 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 the Company's
competitors could continue to cause a decline in sales or loss of market
acceptance of the Company's existing products. Moreover, increased competitive
pressure could continue to lead to intensified price-based competition, which
has and could continue to 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 as the Company has experienced with sales of its older
products. The Company believes that to be competitive, it must continue to
expend 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 hardware and software products
and enhancements and related software tools with greater features on a timely
and cost-effective basis, including the products under development acquired in
the EPRO merger and the TSSI, Zycad and HPL product line acquisitions. The
Company's customers require testers and software products 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 software products and related software tools. Any success by the
Company in developing new and enhanced systems and software products and new
features to its existing systems and software products depends upon a variety of
factors, including product selection, timely and efficient completion of product
design, implementation of manufacturing and assembly processes and coding and
debugging of software, product performance and reliability 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 hardware and software 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. 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. In addition, new product introductions by the Company may cause the
Company's customers to curtail purchases of the older products and delay new
product purchases. Any decline in demand for the Company's hardware or software
products, compared to the demand anticipated by the Company, could have a
materially adverse affect on the Company's business, financial condition or
results of operations.
Significant delays can occur between a system's introduction and the
commencement by the Company of volume production of such system. The Company has
in the past experienced and continues to experience 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 or 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
16
<PAGE>
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, 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 (a distributor in the Asia Pacific Region) accounted for
30%, 33%, 30%, 25% and 17% of the Company's net sales in the third quarter of
fiscal 1998 and in the first nine months of fiscal 1998 and fiscal years 1997,
1996 and 1995, respectively. Another customer accounted for 11% of net sales in
fiscal 1995. The loss of or any reduction in orders by this or any other
significant customer, including losses or reductions due to continuing or other
technical, manufacturing or reliability problems with the Company's products,
continued slowdowns 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.
Acquisitions
- ------------
The Company has developed in significant part through mergers and
acquisitions of other companies and businesses. Prior to its initial public
offering in 1993, the Company acquired two companies and the semiconductor test
division of Tektronix, Inc. In 1995, the Company acquired EPRO, a memory tester
company. In July 1997, the Company acquired the assets and assumed certain
liabilities of TSSI and, in August 1997, acquired certain fault simulation and
test program development products from Zycad. In June 1998, the Company acquired
certain assets and assumed certain liabilities of HPL. The Company intends in
the future to pursue additional acquisitions of complementary product lines,
technologies and businesses. Any future acquisitions by the Company could result
in potentially dilutive issuance's of equity securities, the incurrence of debt
and contingent liabilities, expenditures and reserves, and amortization expenses
related to goodwill and other intangible assets (which may exceed the benefits
actually derived from the acquisitions), which could materially adversely affect
the Company's business, financial condition or results of operations. In
addition, acquisitions involve numerous other risks, including difficulties in
the assimilation of the operations, personnel, 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
17
<PAGE>
company. From time to time, the Company has engaged in and will continue to
engage in discussions with third parties concerning potential acquisitions of
product lines, technologies and businesses. 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.
Dependence on Key Personnel
- ---------------------------
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 61%, 72%, 70%, 67% and
55% of total net sales for the third quarter and first nine months of fiscal
1998 and fiscal years 1997, 1996 and 1995, respectively. As a result, the
Company anticipates that international sales will continue to account for a
significant portion of total net sales in the foreseeable future. These
international sales will continue to be subject to certain risks, including
changes in regulatory requirements, tariffs and other barriers, political and
economic instability, an outbreak of hostilities, integration of foreign
operations of acquired businesses, foreign currency exchange rate fluctuations,
difficulties with distributors, joint venture partners, original equipment
manufacturers, foreign subsidiaries and branch operations, potentially adverse
tax consequences and the possibility of difficulty in accounts receivable
collection. 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. Company net sales to the Asia
Pacific region accounted for approximately 52%, 64%, 66%, 58% and 45% of total
net sales in the third quarter and first nine months of fiscal 1998 and fiscal
years 1997, 1996, and 1995, and thus are subject to the risk of economic
instability in that region that might materially adversely affect the demand for
the Company's products. Countries in the Asia Pacific region, including Japan,
have recently experienced weaknesses in their currency, banking and equity
markets. These weaknesses could adversely affect demand for the Company's
products, the availability and supply of product components to the Company, and
ultimately the Company's consolidated results of operations. The current Asian
financial crisis has contributed to a widespread uncertainty and a slowdown in
the semiconductor industry. This slowdown in the semiconductor industry has
resulted in reduced spending for semiconductor capital equipment, including ATE
which the Company sells. This industry slowdown has had and may continue to have
an adverse impact on the company's product backlog, balance sheet and results of
operations.
The Company is currently in the process of assessing the issue raised
by the introduction of a Single European Currency (Euro) scheduled to be
introduced on January 1, 1999. While still in the assessment phase, the Company
does not expect that the introduction and the use of the Euro will have a
material effect on the Company's financial condition or results of operations.
Importance of Japanese Market
- -----------------------------
To date, the Company has made limited sales of its systems to Japanese
semiconductor manufacturers. The Japanese semiconductor market is large,
represents a substantial percentage of the worldwide semiconductor manufacturing
capacity, and is difficult for foreign companies to penetrate. The Company may
be at a competitive disadvantage with respect to Japanese semiconductor capital
equipment suppliers that have been engaged for some time in collaborative
efforts with Japanese semiconductor manufacturers. The Company believes that the
Japanese companies with which it competes have a competitive advantage because
18
<PAGE>
of their dominance of the Japanese market segment. The Company believes that
increased penetration of the Japanese market is important to its financial
results and intends to continue to invest significant resources in Japan in
order to meet this objective. As part of its strategy to penetrate the Japanese
market, the Company entered into a joint venture agreement with Innotech
Corporation, a local distributor of its products, and set up a local subsidiary
in Japan. The Company believes that Innotech is an important element of its
strategy to increase its presence in Japan. If Innotech is not successful in
selling such systems or such agreement is terminated, the Company's strategy to
increase product sales into the Japanese market would be adversely affected. In
addition, in recent years, Japanese semiconductor manufacturers substantially
reduced their level of capital spending on new fabrication facilities and
equipment, thereby increasing competitive pressures in the Japanese market
segment. There can be no assurance, however, that the Company will be able to
achieve significant sales to, or will be able to compete successfully in, the
Japanese semiconductor market segment.
Proprietary Rights
- ------------------
The Company attempts to protect its intellectual property rights
through patents, copyrights, trademarks, 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.
There can be no assurance that patents owned by the Company will not be
invalidated, deemed unenforceable, circumvented or challenged, or 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. The Company has been involved in extensive, expensive and
time-consuming reviews of, and litigation concerning, 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 and
expects to continue to receive notice of such claims in the future.
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 outside patent counsel to the Company, 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, however, is relevant to the scope of certain claims set
forth in the United States patent covering another of the Company's proprietary
CMOS stabilization methods. The European examiner referred to this prior art in
the corresponding European patent application. The European application was
approved, but with narrower claims than the United States patent. This prior art
was not referenced in the corresponding United States patent. Based in part upon
the advice of outside patent counsel, and on 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. On November 13, 1997, the Company requested the United States Patent and
Trademark Office (USPTO) to re-examine the subject United States patent in light
of the two prior art references. On January 7, 1998, USPTO responded by granting
the Company's request for re-examination. On May 21, 1998, the USPTO notified
the Company of its intent to issue a re-examination certificate with claims
comparable in scope to the European patent. The re-examination certificate is
scheduled to issue on September 1, 1998.
In July, 1998, inTEST IP Corporation ("inTEST") alleged in writing that
one of the Company's products is purportedly infringing a patent held by inTEST.
The Company may also be obligated to other third parties relating to this
allegation. The Company is currently investigating the allegation. There can be
19
<PAGE>
no assurance that the Company will be successful in defending this patent
infringement claim or claims for indemnification resulting from infringement
claims.
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
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.
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 other items. The Company expects that
cash on hand and cash equivalents, including restricted cash, short-term
investments, funds available under 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.
Year 2000 Compliance
- --------------------
The "Year 2000" issue results from the use in computer hardware and
software of two digits rather than four digits to define the applicable year.
When computer systems must process dates both before and after January 1, 2000,
two-digit year "fields" may create processing ambiguities that can cause errors
and system failures. The results of these errors may range from minor undetected
errors to complete shutdown of an affected system. These errors or failures may
have limited effects, or the effects may be widespread, depending on the
computer chip, system or software, and its location and function. The effects of
the Year 2000 problem are exacerbated because of the interdependence of computer
and telecommunications systems in the United States and throughout the world.
Because of this interdependence, the failure of one system may lead to the
failure of many other systems even though the other systems are themselves "Year
2000 compliant."
The Company's Board of Directors has reviewed the Year 2000 issue
generally and as it may affect the Company's business activity. The Company is
implementing a Year 2000 plan (the "Plan") which is designed to cover all of the
Company's activities, which will be modified as circumstances change and is
monitored by a sub-committee of the Company's Board of Directors. Under the
Plan, the Company is using a five phase methodology for addressing the issue.
The phases are Awareness, Assessment, Renovation, Validation and Implementation.
Awareness consists of defining the Year 2000 problem and gaining
executive level support and sponsorship. A Year 2000 program team was
established and an overall strategy created. During Assessment, all internal
systems, products and supply chain partners are inventoried and prioritized for
renovation. The Company believes it has completed a majority of the Awareness
and Assessment phases, however, ongoing work will be required in these areas as
the Company completes its assessment of existing supply chain partners and
enters into new supply chain relationships in the ordinary course of business.
20
<PAGE>
Renovation consists of converting, replacing, upgrading or eliminating systems
that have Year 2000 problems. Renovation has begun on mission-critical systems
and is targeted for completion by December 31, 1998. Validation involves
ensuring that hardware and software fixes will work properly in 1999 and beyond
and can occur both before and after implementation. Validation will start in
late 1998 and continue through June 1999 to allow for thorough testing before
the Year 2000. Implementation is the installation of hardware and software
components in a live environment. The Company is in the early stages of the
Implementation phase.
The impact of Year 2000 issues on the Company will depend not only on
corrective actions that the Company takes, but also on the way in which Year
2000 issues are addressed by governmental agencies, business and other third
parties that provide services or data to, or receive services or data from, the
Company, or whose financial condition or operational capability is important to
the Company. To reduce this exposure, the Company has an ongoing process of
identifying and contacting mission-critical third party vendors and other
significant third parties to determine their Year 2000 plans and target dates.
Risks associated with any such third parties located outside the United States
may be higher insofar as it is generally believed that non-U.S. businesses may
not be addressing their Year 2000 issues on as timely a basis as U.S.
businesses. Notwithstanding the Company's efforts, there can be no assurance
that the Company, mission-critical third party vendors or other significant
third parties will adequately address their Year 2000 issues.
The Company is developing contingency plans for implementation in the
event that the Company, mission-critical third party vendors or other
significant third parties fail to adequately address Year 2000 issues. Such
plans principally involve identifying alternative vendors or internal
remediation. There can be no assurance that any such plans will fully mitigate
any such failures or problems. Furthermore, there may be certain
mission-critical third parties, such as utilities, telecommunication companies,
or material vendors where alternative arrangements or sources are limited or
unavailable.
Although it is difficult to estimate the total costs of implementing
the Plan, through June 1999 and beyond, the Company's preliminary estimate is
that such costs will be approximately $2.5 million. However, although management
believes its estimates are reasonable, there can be no assurance, for the
reasons stated in the next paragraph, that the actual costs of implementing the
Plan will not differ materially from the estimated costs. The Company has
incurred approximately $500,000 through July 31, 1998. A significant portion of
total Year 2000 project expenses is represented by existing staff that has been
redeployed to this project. The Company does not believe that the redeployment
of existing staff will have a material adverse effect on its business, results
of operations or financial position. Incremental expenses related to the Year
2000 project are not expected to materially impact operating results in any one
period.
The extent and magnitude of the Year 2000 Problem as it will affect the
Company, both before and for some period after January 1, 2000, are difficult to
predict or quantify for a number of reasons. Among the most important are lack
of control over systems that are used by third parties who are critical to the
Company's operation, dependence on third party software vendors to deliver Year
2000 upgrades in a timely manner, complexity of testing inter-connected networks
and applications that depend on third party networks and the uncertainty
surrounding how others will deal with liability issues raised by Year 2000
related failures. There can be no assurance for example, that systems used by
third parties will be adequately remediated so that they are Year 2000 ready by
January 1, 2000, or by some earlier date, so as not to create a material
disruption to the Company's business. Moreover, the estimated costs of
implementing the Plan do not take into account the costs, if any, that might be
incurred as a result of Year 2000 related failures that occur despite the
Company's implementation of the Plan.
Although the Company is not aware of any material operational issues
associated with preparing its internal systems for the Year 2000, or material
issues with respect to the adequacy of mission-critical third party systems,
there can be no assurance that the Company will not experience material
unanticipated negative consequences and/or material costs caused by undetected
errors or defects in such systems or by the Company's failure to adequately
prepare for the results of such errors or defects, including the costs of
related litigation, if any. The impact of such consequences could have a
material adverse effect on the Company's business, financial condition or
results of operations.
21
<PAGE>
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 or purchases of the Company's
Common Stock in the marketplace, 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 or an outbreak of hostilities or natural disasters, 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. For example, in fiscal 1997, the price of the
Company's Common Stock ranged from a high of $55.00 to a low of $13.75. In the
first nine months of fiscal 1998, the price of the Company's Common Stock has
ranged from a high of $33.88 to a low of $17.06. 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.
Leverage
- --------
In connection with the sale in September 1997 of Convertible
Subordinated Notes due 2002, the Company incurred $115 million of indebtedness
which resulted in a ratio of long-term debt to total capitalization at October
31, 1997 of approximately 36%. As a result of this indebtedness, the Company's
principal and interest obligations has increased substantially. The degree to
which the Company is leveraged could materially adversely affect the Company's
ability to obtain financing for working capital, acquisitions or other purposes
and could make it more vulnerable to industry downturns and competitive
pressures. The Company's ability to meet its debt service obligations will be
dependent upon the Company's future performance, which will be subject to
financial, business and other factors affecting the operations of the Company,
many of which are beyond its control.
Effects of Certain Anti-Takeover Provisions
- -------------------------------------------
Certain provisions of the Company's Certificate of Incorporation,
shareholders rights plan, equity incentive plans, Bylaws and Delaware law may
discourage certain transactions involving a change in control of the Company. In
addition to the foregoing, the Company's classified board of directors, the
shareholdings of the Company's officers, directors and persons or entities that
may be deemed affiliates, the recent adoption of a shareholder rights plan and
the ability of the Board of Directors to issue "blank check" preferred stock
without further stockholder approval could have the effect of delaying,
deferring or preventing a change in control of the Company and may adversely
affect the voting and other rights of holders of Common Stock.
22
<PAGE>
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings
None
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 22.
(b) A current report on Form 8-K was filed on July 10, 1998,
disclosing the effect of the Company's adoption of FAS 128,
"Earnings per Share," on the Company's Financial Statements
for the fiscal year ended October 31, 1997 and related
Financial Data Schedules for the applicable periods.
(c) A report on From 8-K was filed on June 3, 1998, disclosing the
Shareholders Rights Plan.
(d) A report on Form 8-K was filed on May 20, 1998, disclosing the
Registrant's financial results for the second quarter ended
April 30, 1998.
23
<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)
September 11, 1998 /s/ DENNIS P. WOLF
------------------ ------------------------------------
Date Dennis P. Wolf
Senior Vice President and
Chief Financial Officer
24
<PAGE>
EXHIBIT INDEX
Exhibit
Number Page
4.1 Shareholder Rights Plan - Incorporated by reference to an
exhibit to the Company's current report on Form 8-K as filed
with the Commission on June 3, 1998.
10.1 Amendment to Loan Agreement dated July 24, 1998 between Silicon
Valley Bank, Bank of Hawaii and Credence Systems Corporation. 26
10.2 Non-Recourse Receivables Purchase Agreement dated May 1, 1998
between Silicon Valley Financial Services and Credence Systems
Corporation. 30
27.1 EDGAR Financial Data Schedule 36
25
<PAGE>
AMENDMENT
TO
LOAN AGREEMENT
This Amendment to Loan Agreement is entered into as of July 24, 1998 (the
"Amendment") by and between SILICON VALLEY BANK ("Agent") as Servicing Agent and
a Bank and BANK OF HAWAII ("BoH"); SVB and BofH are referred to individually
herein as "Bank", and collectively as the "Banks") and CREDENCE SYSTEMS
CORPORATION, a Delaware corporation ("Credence"), Credence Korea, a Korean
corporation, and Credence Systems K.K., a Japanese corporation (individually a
"Borrower" and collectively, the "Borrowers").
RECITALS
Borrower and Bank are parties to that certain Loan Agreement dated as
of July 26, 1996, and amended by that certain Amendment to Loan Agreement dated
as of July 25, 1997 (the "Agreement"). The parties desire to amend the Agreement
in accordance with the terms of this Amendment.
NOW, THEREFORE, the parties agree as follows:
1. The following definitions in Section 1. 1 are amended to read
as follows:
"Committed Line" means Forty Million Dollars ($40,000,000).
"Maturity Date" means July 23, 1999.
2. The reference in the definition of Permitted Indebtedness item (c)
in Section 1. 1 to "Ten Million Dollars ($10,000,000)" is hereby amended to read
"Twenty Million Dollars ($20,000,000)".
3. The reference in the definition of Permitted Investments item (c) in
Section 1. 1 is hereby deleted in its entirety and replaced by the following:
"(c) Any investments, including but not limited to investments
made in connection with acquisitions, or the repurchase of stock, where the
consideration paid by Borrower or any Subsidiary consists of Borrower's equity
securities and cash, and the aggregate amount of cash paid after the date hereof
does not exceed Forty Million Dollars ($40,000,000)."
4. The following new definitions are added to Section 1. 1:
"Borrowing Base" means an amount equal to eighty percent (80%)
of Eligible Accounts, as determined by Bank with reference to the most recent
Borrowing Base Certificate delivered by Borrower.
"Eligible Accounts" means those Accounts that arise in the
ordinary course of Borrower's business that comply with all of Borrower's
representations and warranties to Bank set forth in Section 5.4; provided, that
standards of eligibility may be fixed and revised from time to time by Bank in
Bank's reasonable judgment and upon notification thereof to Borrower in
accordance with the provisions hereof. Unless otherwise agreed to by Bank,
Eligible Accounts shall not include the following:
(a) Accounts that the account debtor has failed to pay within
ninety (90) days of invoice date;
(b) Accounts with respect to an account debtor, twenty-five
percent (25%) of whose Accounts the account debtor has failed to pay within
ninety (90) days of invoice date;
(c) Accounts with respect to which the account debtor is an
officer, employee, or agent of Borrower;
1
<PAGE>
(d) Accounts with respect to which goods are placed on
consignment, guaranteed sale, sale or return, sale on approval, bill and hold,
or other terms by reason of which the payment by the account debtor may be
conditional;
(e) Accounts with respect to which the account debtor is an
Affiliate of Borrower;
(f) Accounts with respect to which the account debtor does not
have its principal place of business in the United States, except for Eligible
Foreign Accounts;
(g) Accounts with respect to which the account debtor is the
United States or any department, agency, or instrumentality of the United
States;
(h) Accounts with respect to which Borrower is liable to the
account debtor for goods sold or services rendered by the account debtor to
Borrower, but only to the extent of fifty percent (50%) of any amounts owing to
the account debtor against amounts owed to Borrower;
(i) Accounts with respect to an account debtor, including
Subsidiaries and Affiliates, whose total obligations to Borrower exceed
twenty-five percent (25%) of all Accounts, to the extent such obligations exceed
the aforementioned percentage;
(j) Accounts with respect to which the account debtor disputes
liability or makes any claim with respect thereto as to which Bank believes, in
its sole discretion, that there may be a basis for dispute (but only to the
extent of the amount subject to such dispute or claim), or is subject to any
Insolvency Proceeding, or becomes insolvent, or goes out of business; and
(k) Accounts the collection of which Bank reasonably
determines to be doubtful.
"Eligible Foreign Accounts" means Accounts with respect to
which the account debtor does not have its principal place of business in the
United States and that (i) are supported by one or more letters of credit in an
amount and of a tenor, and issued by a financial institution, acceptable to
Bank, or (ii) that Bank approves on a case-by-case basis.
5. Section 2. 1 (a) is hereby deleted in its entirety and replaced with
the following:
"(a) Advances. Subject to and upon the terms and conditions of
this Agreement, each Bank severally will make Advances to Borrowers as set forth
herein. BofH shall make all of the Advances requested by Borrower made in an
Optional Currency; provided that the aggregate outstanding Advances in an
Optional Currency shall not exceed Five Million Dollars ($5,000,000). Upon
BofH's funding of such Optional Currency Advances, SVB shall fund all subsequent
requests for Advances by Borrower up to an amount equal to the total outstanding
Optional Currency Advances. Thereafter, or in the event that there are no
requests for Optional Currency Advances, each Bank severally will make its
Percentage Share of Advances in United States Dollars such that the aggregate
amount of each Bank's Advances under this Agreement shall not exceed such Bank's
Percentage Share of the Committed Line minus the face amount of all outstanding
Letters of Credit (including undrawn and drawn but unreimbursed Letters of
Credit) and minus the reserve, if any, taken under Section 2. 1. 1 (d).
Notwithstanding the preceding sentence, if the aggregate amount of outstanding
Advances made by each Bank plus Letters of Credit plus the reserve, if any,
taken under Section 2. 1. 1 (d) exceed $20,000,000, then Banks will make
Advances to Borrower in an aggregate amount not to exceed (i) the lesser of the
Committed Line or the Borrowing Base plus one hundred percent (100%) of Accounts
that are supported by one or more letters of credit in an amount and of a tenor,
and issued by a financial institution, acceptable to Bank. Subject to the terms
and conditions of this Agreement, amounts borrowed pursuant to this Section 2.1
may be repaid and reborrowed at any time during the term of this Agreement."
2
<PAGE>
6. The references in Sections 2. 1 (c) and 2. 1 (d) to "200 basis
points" are hereby amended to read "150 basis points".
7. The first sentence in Section 2. 1. 1 (c) is hereby deleted and
replaced with the following:
"The maximum aggregate obligation at any one time for undrawn and
drawn but unreimbursed Letters of Credit shall be Twenty Million Dollars
($20,000,000)."
8. Section 2.2 is hereby deleted in its entirety and replaced with the
following:
"2.2 Overadvances. If, at any time or for any reason that a
Borrowing Base Certificate is required under Section 5.3, the sum of (i)
Advances owed by Borrower to Banks pursuant to Section 2. 1 (a) of this
Agreement plus (ii) the face amount of Letters of Credit issued under Section 2.
1.1 (including undrawn and drawn but unreimbursed Letters of Credit) plus (iii)
the reserve, if any, taken under Section 2.1.1(d), is greater than the lesser of
the Committed Line or the Borrowing Base, Borrower shall immediately pay to
Servicing Agent, in cash, the amount of such excess, for payment to the Banks
according to their respective Percentage Shares. If at any time or for any
reason, the Equivalent Amount of Outstanding Optional Currency Advances exceeds
Five Million Dollars ($5,000,000), Borrowers shall immediately pay to BofH the
amount of such excess."
9. The following new paragraph is hereby added at the end of Section
5.3:
"In the event that outstanding Advances under the Committed Line
exceed Twenty Million Dollar ($20,000,000), then within twenty (20)days after
the last day of each month, Borrower shall deliver to Bank a Borrowing Base
Certificate signed by a Responsible Officer in substantially the form of Exhibit
D hereto, together with aged listings of accounts receivable and accounts
payable."
10. The attached Exhibit D hereby added and incorporated by reference
into the Agreement.
11. Section 5.9 is hereby deleted in its entirety and replaced with the
following:
"5.9 Tangible Net Worth. Maintain, on a consolidated basis, as
of the last day of each fiscal quarter, a Tangible Net Worth of not less than
One Hundred Seventy-Five Million Dollars ($175,000,000)."
12. The following new Section 5.12 shall be added:
"5.12 Bona Fide Eligible Accounts. The Eligible Accounts are bona
fide existing obligations. The property giving rise to such Eligible Accounts
has been delivered to the account debtor or to the account debtor's agent for
immediate shipment to and unconditional acceptance by the account debtor.
Borrower has not received notice of actual or imminent Insolvency Proceeding of
any account debtor that is included in any Borrowing Base Certificate as an
Eligible Account."
13. Section 6.6 is hereby deleted in its entirety and replaced with the
following:
"6.6 Distributions. Pay any dividends or make any other
distribution or payment on account of or in redemption, or retirement of any
capital stock, except for so long as an Event of Default has not occurred and is
not continuing (and would not exist immediately after such payment)."
3
<PAGE>
14. On the signature page of the Agreement the reference to Silicon
Valley Bank's Maximum Commitment Amount: $10,000,000 (50%) is hereby amended to
read $15,000,000 (37.5%).
15. On the signature page of the Agreement the reference to Bank of
Hawaii's Maximum Commitment Amount: $10,000,000 (50%) is hereby amended to read
$25,000,000 (62.5%).
16. As a condition to the effectiveness of this Amendment, Banks shall
receive a fee of Seventy-Five Thousand Dollars ($75,000), payable upon the date
hereof, plus all Bank Expenses incurred in connection with the preparation of
this Amendment.
17. As a condition to the effectiveness of this Amendment, Bank shall
have received, in substance satisfactory to Bank, the following:
(a) resolutions by the Borrowers authorizing the execution
and delivery of this Amendment;
(b) Negative Pledge on Borrower's assets; and
(c) such other documents, and completion of such other
matters, as Bank may reasonably deem necessary or appropriate.
18. Unless otherwise defined, all capitalized terms in this Amendment
shall be as defined in the Agreement. Except as amended, the Agreement remains
in full force and effect.
19. Borrower represents and warrants that the Representations and
Warranties contained in the Agreement are true and correct as of the date of
this Amendment, and that no Event of Default has occurred and is continuing.
4
<PAGE>
20. This Amendment may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one instrument.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of
the first date above written.
CREDENCE SYSTEMS CORPORATION
By: /s/ DENNIS P. WOLF
---------------------------
Title: Chief Financial Officer
CREDENCE KOREA
By: /s/ WILMER R. BOTTOMS
---------------------------
Title: Chairman
CREDENCE SYSTEMS K.K.
By: /s/ WILMER R. BOTTOMS
---------------------------
Title: Chairman
SILICON VALLEY BANK
By: /s/ DIANE THOMPSON
---------------------------
Title: Vice President, Officer
BANK OF HAWAII
By: /s/ DAVID WARD
---------------------------
Title: Corporate Banking Officer
5
Silicon Valley Financial Services
A Division of Silicon Valley Bank
3003 Tasman Drive
Santa Clara, CA 95054
(408) 654-1000 Fax (408) 980-6410
This NON-RECOURSE RECEIVABLES PURCHASE AGREEMENT (the
"Agreement"), dated as of May 1, 1998 is between Silicon Valley Financial
Services, a division of Silicon Valley Bank, ("Buyer") and Credence Systems
Corporation, a California corporation, ("Seller'), with its chief executive
office at:
Street Address: 215 Fourier Avenue
City: Fremont
County: Alameda
State: California
Zip code: 94539
Fax: 510/623-2522
1. Definitions. In this Agreement:
1.1 "Payment" is when Buyer has received payments equal to the Total
Purchased Receivables.
1.2 "Purchased Receivables" is all accounts, receivables, chattel
paper, instruments, contract rights, documents, general intangibles, letters of
credit, drafts, bankers acceptances other rights to payment and all proceeds
arising from the invoices and other agreements on the Schedule.
1.3 "Schedule" is the attached schedule showing the: Purchase Date, Due
Date, Total Purchased Receivables, Discount Rate, Purchase Price, Administrative
Fee and Interest Reserve amount.
2. Purchase and Sale of Receivables.
2.1 Sale and Purchase. On the Purchase Date, Seller sells and Buyer
buys Seller's right, title, and interest (but none of Sellers obligations) to
payment from any person liable on a Purchased Receivable, ("Account Debtors").
Each purchase and sale is at Buyer's and Seller's discretion. Buyer
will not (1) pay Seller an aggregate outstanding amount exceeding Ten Million
and no/1 00*** Dollars ($10,000,000.00) or (ii) buy any Purchased Receivable
after April 30,1999. Each purchase and sale will be on an assignment form
acceptable to Buyer.
2.2 Purchase Price and Related Matters. For each Purchased Receivable:
(a) Payment of Purchase Price. Buyer will pay Seller, on the
Purchase Date, the Purchase Price, less the Administrative Fee and legal fees
(if any).
(b) Late Payment. If one or more payments are made after the
Due Date, Seller shall also pay Buyer, for each such payment, an amount equal to
the Discount Rate divided by 360 days, multiplied by the number of days such
payment is made after the Due Date, not to exceed 90 days, and multiplied by the
amount of such late payment.
1
<PAGE>
3. Collections, Payments and Remittances.
3.1 Application of Payments. All payments for any Purchased Receivable,
received by Seller or Buyer, are Buyer's property.
3.2 Collection by Seller.
a. Buyer appoints Seller its attorney-in-fact to receive
payments and enforce its rights and designates Seller it's assignee for
collection. Seller will use diligence and commercially reasonable means to
collect Purchased Receivables. Buyer may revoke these appointments if an Event
of Default occurs and continues.
b. Seller will begin legal proceedings about Purchased
Receivables in its name (as Buyer's assignee for collection or enforcement) or,
with Buyer's prior written consent, in Buyer's name. Seller will not make Buyer
party to any litigation or arbitration without Buyer's written consent.
c. Seller will hold in trust for and give Buyer (i) all
payments made by Account Debtors, and (ii) all instruments, chattel paper and
other proceeds of the Purchased Receivables.
d. Unless an Event of Default occurs and continues Seller will
remit payments to Buyer on the last business day of each week ("Settlement
Date") starting the week after the Purchase Date. On each Settlement Date Seller
will deliver a report acceptable to Buyer of account activity (including dates
and amounts of payments) and changes for each Purchased Receivable.
3.3 Collection by Buyer. If an Event of Default occurs and continues
Buyer is appointed Sellers attorney-in-fact and Buyer may:
(a) demand, sue for and receive all payments for the Purchased
Receivables;and
(b) enforce payment of each Purchased Receivable in Seller's
name; and
(c) endorse Seller's name on checks or other instruments; and
(d) notify Account Debtors of the purchase and sale and
require all payments be made directly to Buyer.
(e) compromise, prosecute or defend any action or claim
involving a Purchased Receivable including filing or voting a claim in a
bankruptcy case.
(f) require Seller, at its expense, to notify the Account
Debtors to pay Buyer directly; and
(g) require Seller to assist collecting and enforcing claims
and execute any documents that Buyer reasonably requests.
3.4 No Obligation to Take Action. Buyer has no obligation to perform
Sellers obligations or to take action on any Purchased Receivable (including on
defaulted Purchased Receivables).
2
<PAGE>
4. Non-Recourse; Repurchase Obligations.
4.1 Non-Recourse and Seller's Agreement to Repurchase. Buyer acquires
Purchased Receivables without recourse, except Seller will pay Buyer on demand
any unpaid portion of any Purchased Receivable if.
(a) For which there has been any breach of warranty,
representation or covenant in this Agreement; or
(b) For which the Account Debtor asserts any discount,
allowance, return, dispute, defense, right of recoupment, right of return,
warranty claim, or short payment;
together with Buyers reasonable attorneys' and professional fees and expenses
and all court costs for collecting Purchased Receivables and/or enforcing its
rights under this Agreement.
4.2 Payment to Buyer. Seller will pay Buyer in immediately available
funds.
5. Representations, Warranties and Covenants.
5.1 Purchased Receivables- Warranties, Representations and Covenants.
Seller represents, warrants and covenants for each Purchased Receivable:
(a) It is the owner with legal right to sell, transfer
and assign it;
(b) The correct amount is on the Schedule and is not
disputed;
(c) No payment is contingent on any obligation or
contract, and it has fulfilled all its obligations
as of the Purchase Date;
(d) It is based on actual sale and delivery of goods
and/or services rendered, due no later than its Due
Date and owing to Seller, it is not past due or in
default, has not been previously sold, assigned,
transferred, or pledged, and is free of any liens,
security interests and encumbrances;
(e) There are no defenses, offsets, counterclaims or
agreements in which the Account Debtor may claim any
deduction or discount.
(f) It reasonably believes no Account Debtor is insolvent
as defined in the United States Bankruptcy Code ("US
Code") or the California Uniform Commercial Code
("UCC") and no Account Debtor has filed or had filed
against it a voluntary or involuntary petition for
relief under the US CODE.; and
(g) No Account Debtor has objected to payment for or the
quality or quantity of the subject of the Purchased
Receivable,
(h) It will not assign, transfer, sell, or grant, or
permit any lien or security interest without Buyer's
prior written consent
5.2 Additional Warranties, Representations and Covenants. Seller
represents, warrants and covenants:
(a) Its name, form of organization, chief executive
office, and the place where the records about all
Purchased Receivables are kept is shown at the
beginning of this Agreement and it will give Buyer at
least 10 days prior written notice of changes to its
name, organization, chief executive office or
location of records.
(b) It will pay all its taxes including gross payroll,
withholding and sales taxes when due and will deliver
satisfactory evidence of payment if requested.
3
<PAGE>
(c) It has not filed a voluntary petition or had filed
against it an involuntary petition under the US CODE
and does not anticipate any filing;
(d) If Payment of any Purchased Receivable does not occur
by its Due Date then Seller will provide a written
report, within 30 days, of the reasons for the delay.
(e) While any Purchased Receivable is outstanding, Seller
will give Buyer copies of all Forms 1 0-K, 1 0-Q and
8-K (or equivalents) within 5 days of its filing with
the Securities and Exchange Commission.
6. Adjustments. If any Account Debtor asserts a discount, allowance,
return, offset, defense, warranty claim, or the like (an "Adjustment") Seller
will promptly advise Buyer and, with Buyer's approval, resolve the dispute.
Seller will resell any rejected, returned, or recovered personal property for
Buyer, at Sellers expense, with the proceeds payable to Buyer. While Seller has
returned goods that are Buyers property, Seller will segregate and mark them
"property of Silicon Valley Financial Services." Buyer owns the Purchased
Receivables and until Payment has the right to take possession of any rejected,
returned, or recovered personal property.
7. Indemnification.
(a) If any Account Debtor is released from any payment
obligation for any Purchased Receivable because of: (i) Seller's act or
omission; or (ii) any of the documentation about the Purchased Receivables which
results in termination of any part of the Account Debtors obligation for the
Purchased Receivables, then Seller will pay Buyer the lesser of the amount of
the Purchased Receivable not payable or the unpaid portion of the Purchased
Receivable.
(b) Seller indemnifies and holds Buyer harmless from any
taxes from this transaction (except Buyer's income taxes) and costs, expenses
and reasonable attorney fees if Buyer promptly notifies it of any taxes of which
Buyer has notice.
8. Additional Rights. Seller grants Buyer a continuing lien on and
security interest in all of Seller's rights existing now or later and interest
in:
(a) Returned or rejected goods connected with the Purchased
Receivables
(b) Books and records about the Purchased Receivables or
returned or rejected goods;
(c) Proceeds from voluntary or involuntary dispositions,
including insurance proceeds.
(all the "Related Property")
Seller may not sell or convey any interest in Related Property without Buyer's
prior written consent. Seller will sign UCC financing statements and any other
instruments or documents to evidence, perfect or protect Buyers interests in the
Purchased Receivables and Related Property. Seller will deliver to Buyer all
original instruments, chattel paper and documents about Purchased Receivables
and Related Property.
9. Default. Any of the following is an Event of Default:
(a) Seller fails to pay Buyer any amount when due under
Section 2.2(b), 3.2(c) & (d), 4.1, 7 or 12;
(b) There is a voluntary or involuntary case against
Seller under the US CODE, or an assignment for the
benefit of creditors, or appointment of a receiver or
custodian for its assets;
(c) Seller's debts are greater than the fair value of its
assets or Seller is not paying its debts as they
become due or has unreasonably small capital;
(d) An involuntary lien, garnishment, attachment or the
like is issued against or attaches to the Purchased
Receivables or Related Property;
4
<PAGE>
(e) Seller breaches a covenant, agreement, warranty, or
representation in this Agreement and the breach is
not cured to Buyer's satisfaction within 10 days
after Buyer gives Seller oral or written notice. A
breach that cannot be cured is an immediate default.
(f) Seller defaults under any debt or liability to Buyer.
10. Remedies on Default. When an Event of Default occurs Buyer has all
rights and remedies under this Agreement and the law, including those of a
secured party under the UCC, and the right to collect, dispose of, sell, lease
or use all Purchased Receivables and Related Property.
11. Default Rate. Amounts not paid by Seller when due under Section
2.2(b), 3.2(c) & (d), 4.1, 7 or 12; will accrue interest until paid at the
Discount Rate plus 5%.
12. Fees, Costs and Expenses. Immediately on demand Seller will pay all
reasonable fees, costs and expenses (including attorney and professional fees)
that Buyer incurs from (a) preparing, negotiating, administering and enforcing
this Agreement or any other agreement, including amendments, waivers or
consents, (b) litigation or disputes relating to the Purchased Receivables, the
Related Property, this Agreement or any other agreement, (c) enforcing rights
against Seller, (d) protecting or enforcing its title to the Purchased
Receivables or its security interest in the Related Property, (e) collecting any
amounts due from Seller or for a Purchased Receivable under a breach of Sellers
representation, warranty or covenant and (f) any bankruptcy case or insolvency
proceeding involving Seller. Reimbursement for fees, costs, and expenses through
the initial Purchase Date will be limited to $2,500.00.
13. Choice of Law, Venue and Jury Trial Waiver. California law governs
this Agreement. Seller and Buyer each submit to the exclusive jurisdiction of
the State and Federal courts in Santa Clara County, California.
SELLER AND BUYER EACH WAIVE ITS RIGHT TO A JURY TRIAL FROM ANY CAUSE OF ACTION
RELATED TO AGREEMENT, INCLUDING CONTRACT, TORT, 13REACH OF DUTY OR OTHER CLAIM.
THIS WAIVER IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER THIS AGREEMENT.
EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL.
14. Notices. Notices or demands by either party about this Agreement must be in
writing and personally delivered or sent by an overnight delivery service, by
certified mail postage prepaid return receipt requested, or by FAX to the
addresses below:
Seller: Credence Systems Corporation
215 Fourier Avenue
Fremont, CA 94539
Attn: Suguna Vepa
FAX: (510) 623-2522
Buyer Silicon Valley Financial Services, A Division of
Silicon Valley Bank
3003 Tasman Drive
Santa Clara, CA 95054
Attn: Michael Field
FAX: (408) 980-6410
A party may change notice address by written notice to the other party.
5
<PAGE>
15. General Provisions.
15.1 Successors and Assigns. This Agreement binds and is for the
benefit of successors and permitted assigns of each party. Seller may not assign
this Agreement or any rights under it without Buyers prior written consent which
may be granted or withheld in Buyers discretion. Buyer may, without the consent
of or notice to Seller, sell, transfer, or grant participation in any part of
Buyers obligations, rights or benefits under this Agreement.
15.2 Indemnification. Seller will indemnify, defend and hold harmless
Buyer and its officers, employees, and agents against: (a) obligations, demands,
claims, and liabilities asserted by any other party in connection with the
transactions contemplated by this Agreement; and (b) losses or expenses
incurred, or paid by Borrower from or consequential to transactions between
Buyer and Seller (including reasonable attorneys fees and expenses), except for
losses caused by Buyer's gross negligence or willful misconduct.
15.3 Time of Essence. Time is of the essence for performance of all
obligations in this Agreement.
15.4 Severability of Provision. Each provision of this Agreement is
severable from every other provision in determining the enforceability of any
provision.
15.5 Amendments in Writing, Integration. All amendments to this
Agreement must be in writing. This Agreement is the entire agreement about this
subject matter and supersedes prior negotiations or agreements.
15.6 Counterparts. This Agreement may be executed in any number of
counterparts and by different parties on separate counterparts and when executed
and delivered are one Agreement.
15.7 Survival. All covenants, representations and warranties made in
this Agreement continue in full force while any Purchased Receivable amount
remains outstanding. Sellers indemnification obligations survive until all
statutes of limitations for actions that may be brought against Buyer have run.
15.8 Buyer will use the same degree of care in handling Seller's
confidential information that it uses for its own proprietary information, but
may disclose information; (I) to its subsidiaries or affiliates in connection
with their business with Seller, (ii) to prospective transferees or purchasers
of any interest in the Agreement, (iii) as required by law, regulation,
subpoena, or other order, (iv) as required in connection with an examination or
audit and (v) as it considers appropriate exercising the remedies under this
Agreement. Confidential information does not include information that is either
(a) in the public domain or in Buyer's possession when disclosed, or becomes
part of the public domain after disclosure to Buyer, or (b) disclosed to Buyer
by a third party, if Buyer does not know that the third party is prohibited from
disclosing the information.
SELLER: Credence Systems Corporation,
a California corporation
/s/ DENNIS P. WOLF
-------------------------------------------------------
By: Dennis P. Wolf
Title Chief Financial Officer
BUYER: SILICON VALLEY FINANCIAL SERVICES
A division of Silicon Valley Bank
-------------------------------------------------------
By
Title Senior Vice President
6
<PAGE>
CORPORATE RESOLUTION TO SELL
I, the Secretary or Assistant Secretary of Credence Systems Corporation (the
"Seller"), certify that:
The Seller is a California corporation, and
Attachments 1 and 2 are copies of Seller's Articles of Incorporation and
Bylaws which are currently effective, and
At a duly held meeting of Seller's directors at which a quorum was present
(or by other authorized corporate action) the following resolutions were
adopted:
"Resolved that any ( ) of the following officers of Seller, whose
signatures are below:
<TABLE>
<S> <C> <C>
Name Title Signature
Jerry Bruce VP, Controller /s/ JERRY BRUCE
-------------------- ---------------- --------------------
Suguna Vepa Treasurer /s/ SUGUNA VEPA
-------------------- ---------------- --------------------
-------------------- ---------------- --------------------
-------------------- ---------------- --------------------
</TABLE>
acting for Seller are authorized to:
Execute Purchase Agreement. To enter a Purchase Agreement with Silicon
Valley Bank ("Buyer") on terms agreed by them and Buyer for the sale of
certain of Seller's accounts receivable and to execute renewals,
extensions, modifications, refinancings, consolidations or
substitutions of any accounts receivable and to do other acts and
things and execute and deliver other documents that they consider
necessary to carry out the effect of these Resolutions.
Further Acts. To designate other individuals as authorized to request
that Buyer purchase additional accounts receivable under the Purchase
Agreement.
Further Resolved that:
any acts authorized by these Resolutions but performed before their
passage are ratified, and
these Resolutions remain effective and Buyer may rely on them until it
receives written notice of their revocation, but that notice will not
affect any of Seller's agreements or commitments then effective."
I also certify that the officers or agents above are duly elected or appointed
by Seller and hold the positions opposite their names and that the their
signatures are true and that the Resolutions are effective and have not been
modified or revoked.
/s/ DENNIS P. WOLF 5/29/98
- -------------------------------------------- -------------------
(signature) Assistant Secretary or Secretary Date
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF OPERATIONS, THE CONSOLIDATED BALANCE SHEETS, AND THE
ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> JUL-31-1998
<EXCHANGE-RATE> 1.00
<CASH> 60,221
<SECURITIES> 75,826
<RECEIVABLES> 56,549
<ALLOWANCES> 3,490
<INVENTORY> 36,311
<CURRENT-ASSETS> 255,272
<PP&E> 91,331
<DEPRECIATION> 50,903
<TOTAL-ASSETS> 339,973
<CURRENT-LIABILITIES> 44,155
<BONDS> 115,000
<COMMON> 22
0
0
<OTHER-SE> 180,565
<TOTAL-LIABILITY-AND-EQUITY> 339,973
<SALES> 194,357
<TOTAL-REVENUES> 194,357
<CGS> 104,955
<TOTAL-COSTS> 104,955
<OTHER-EXPENSES> 112,743
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,950
<INCOME-PRETAX> (22,190)
<INCOME-TAX> (6,458)
<INCOME-CONTINUING> (15,608)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,608)
<EPS-PRIMARY> (0.72)
<EPS-DILUTED> (0.72)
</TABLE>
