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 April 30, 1999
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
---------------------------------------------------------
Former name, former address and former fiscal year,
if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
APPLICABLE ONLY TO CORPORATE ISSUERS:
At June 8, 1999, there were 21,402,527 shares of the Registrant's common
stock, $0.001 par value per share, outstanding.
<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........................................ 26
Item 2. Changes in Securities.................................... 26
Item 3. Defaults Upon Senior Securities.......................... 26
Item 4. Submission of Matters to a Vote of Securityholders....... 26
Item 5. Other Information........................................ 26
Item 6. Exhibits and Reports on Form 8-K......................... 26
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
CREDENCE SYSTEMS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
April 30, October 31,
1999 1998a
----------- -----------
<S> <C> <C>
ASSETS (unaudited)
Current assets:
Cash and cash equivalents ........................ $ 56,694 $ 48,391
Restricted cash .................................. - 2,400
Short-term investments ........................... 47,236 62,777
Accounts receivable, net ......................... 34,398 33,901
Inventories ...................................... 32,277 37,406
Other current assets ............................. 30,617 40,676
---------- -----------
Total current assets ........................... 201,222 225,551
Long-term investments .............................. 38,989 20,357
Property and equipment, net ........................ 41,549 41,764
Other assets ....................................... 17,430 18,517
=========== ===========
Total assets ................................... $299,190 $306,189
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................. $ 12,700 $ 8,090
Accrued liabilities .............................. 23,629 26,978
Income taxes payable ............................. 5,846 5,877
Total current liabilities ...................... 42,175 40,945
Convertible Subordinated Notes ..................... 105,960 115,000
Minority interest .................................. 160 227
Stockholders' equity ............................... 150,895 150,017
============ ===========
Total liabilities and stockholders' equity ..... $299,190 $306,189
============ ===========
</TABLE>
See accompanying notes.
a) Derived from the audited consolidated balance sheet included in the
Company's Form 10-K for the year ended October 31, 1998.
3
<PAGE>
CREDENCE SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
April 30, April 30,
------------------------------- -------------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales ................................................... $ 38,100 $ 74,660 $ 64,590 $ 157,035
Cost of goods sold .......................................... 19,001 31,664 34,277 67,102
------------- ------------- ------------- -------------
Gross margin ................................................ 19,099 42,996 30,313 89,933
Operating expenses:
Research and development ................................. 9,146 12,233 18,149 25,724
Selling, general and administrative ...................... 13,872 17,931 26,103 38,239
Special Charges .......................................... 6,231 - 6,231 -
------------- ------------- ------------- -------------
Total operating expenses ............................. 29,249 30,164 50,483 63,963
------------- ------------- ------------- -------------
Operating income (loss) ..................................... (10,150) 12,832 (20,170) 25,970
Interest and other income (expenses), net ................... 240 200 (61) 1,158
------------- ------------- ------------- -------------
Income (loss) before income tax provision (benefit) ......... (9,910) 13,032 (20,231) 27,128
Income tax provision (benefit) .............................. (3,571) 4,290 (7,300) 9,224
Minority interest ........................................... (8) (45) (46) (74)
------------- ------------- ------------- -------------
Net income (loss) before extraordinary items ................ (6,331) 8,787 (12,885) 17,978
Gain on extinguishment of debt (net of taxes of $652) ....... 1,158 - 1,158 -
------------- ------------- ------------- -------------
Net income (loss) ........................................... $ (5,173) $ 8,787 $ (11,727) $ 17,978
============= ============= ============= =============
Net income (loss) per share
Basic (before extraordinary items) ..................... $ (0.30) - $ (0.63) -
Basic (extraordinary items) ............................ $ 0.05 - $ 0.05 -
------------- ------------- ------------- -------------
Basic ................................................... $ (0.25) $ 0.41 $ (0.57) $ 0.83
============= ============= ============= =============
Diluted (before extraordinary items) ................... $ (0.30) - $ (0.63) -
Diluted (extraordinary items) .......................... $ 0.05 - $ 0.05 -
------------- ------------- ------------- -------------
Diluted ................................................. $ (0.25) $ 0.40 $ (0.57) $ 0.81
============= ============= ============= =============
Number of shares used in computing per share amount
Basic ................................................... 20,811 21,634 20,610 21,731
============= ============= ============= =============
Diluted ................................................. 20,811 22,146 20,610 22,257
============= ============= ============= =============
</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>
Six Months Ended April 30,
---------------------------
1999 1998
------------ ------------
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) ................................................................. $(11,727) $17,978
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization .................................................. 10,445 8,405
Special charges ................................................................ 6,231 -
Loss on disposal of property and equipment ..................................... 700 (7)
Gain on extinguishment of debt ................................................. (1,810) -
Minority interest .............................................................. (46) 74
Changes in operating assets and liabilities:
Restricted cash, accounts receivable, inventories and other current assets .. 14,570 (15,955)
Accounts payable, accrued liabilities and income taxes payable .............. (234) 4,566
------------ ------------
Net cash provided by operating activities ................................ 18,129 15,061
Cash flows from investing activities:
Purchases of available-for-sale securities ........................................ (50,336) (103,387)
Maturities of available-for-sale short-term securities ............................ 29,757 34,668
Sales of available-for-sale securities ............................................ 17,488 6,000
Acquisition of property and equipment ............................................. (10,068) (5,390)
Other assets ...................................................................... (1,635) (3,048)
------------ ------------
Net cash (used in) investing activities ..................................... (14,794) (71,157)
Cash flows from financing activities:
Issuance of common stock .......................................................... 3,937 1,971
Other ............................................................................. (21) -
Issuance (purchase) of treasury stock ............................................ 1,052 (12,795)
------------ ------------
Net cash provided by (used in) financing activities ......................... 4,968 (10,824)
Net increase (decrease) in cash and cash equivalents ................................. 8,303 (66,920)
Cash and cash equivalents at beginning of period ..................................... 48,391 132,761
============ ============
Cash and cash equivalents at end of period ........................................... $ 56,694 $ 65,841
============ ============
Supplemental disclosures of cash flow information:
Interest (paid) received .......................................................... $ (3,108) $ 3,103
Income taxes refunded ............................................................. $ 17,227 $ -
Income taxes paid ................................................................. $ $ 8,187
-
Non-cash investing activities:
Net transfers of inventory to property and equipment .............................. $ 2,521 $ 3,924
Non-cash financing activities:
Income tax benefit from stock option exercises .................................... $ 576 $ 949
Issuance of treasury stock for convertible subordinated notes ..................... $ 7,040 $ -
Exchange of convertible subordinated notes for common stock plus issuance costs ... $ (8,850) -
</TABLE>
See accompanying notes.
5
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Quarterly Financial Statements
------------------------------
The condensed consolidated financial statements and related notes for the
periods ended April 30, 1999 and 1998 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 periods ended April 30, 1999 and 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, 1998 included in the Company's most recent Annual
Report on Form 10-K and the additional risk factors contained herein and
therein, including, without limitation, risks relating to fluctuations in our
quarterly net sales and operating results, limited systems sales; backlog,
cyclicality of semiconductor industry, management of fluctuations in our
operating results, expansion of our product lines, limited sources of supply,
reliance on our subcontractors, highly competitive industry, rapid technological
change, importance of timely product introduction, customer concentration,
lengthy sales cycle, risks associated with acquisitions, changes in financial
accounting standards and accounting estimates, dependence on key personnel,
transition in our executive management, international sales, proprietary rights,
future capital needs; leverage, year 2000 readiness disclosure, volatility of
our stock price and effects of certain anti-takeover provisions, as set forth in
this Report. Any party interested in reviewing a free copy of the Form 10-K or
the Company's other 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. 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):
April 30, October 31,
1999 1998
-------------- --------------
(unaudited)
Raw materials $ 6,021 $ 9,860
Work-in-process 19,106 21,609
Finished goods 7,150 5,937
============= =============
$32,277 $37,406
============= =============
3. Net Income (Loss) Per Share
---------------------------
Net income (loss) per basic share is based upon the weighted average
number of common shares outstanding during the period. Net income (loss) per
diluted share is based upon the weighted average number of common 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 diluted share.
Options to purchase approximately 2,012,000 shares at an average price of $16.79
per share were outstanding at April 30, 1999, but were not included in the
computation of diluted net loss per share because options are antidilutive in
periods when the Company incurs a net loss.
6
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
April 30, April 30,
---------------------------- ----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic and diluted net income (loss)
per share-net income (loss) $ (5,173) $ 8,787 $ (11,727) $ 17,978
------------ ------------ ------------ ------------
Denominator:
Denominator for basic net income (loss)
per share-weighted-average shares 20,811 21,634 20,610 21,731
Effect of dilutive securities-employee stock options 512 526
Denominator for diluted earnings per share-adjusted
weighted-average shares and assumed conversions 20,811 22,146 20,610 22,257
------------ ------------ ------------- ------------
Basic net income (loss) per share $ (0.25) $ 0.41 $ (0.57) $ 0.83
============ ============ ============ ============
Diluted net income (loss) per share $ (0.25) $ 0.40 $ (0.57) $ 0.81
============ ============ ============ ============
</TABLE>
4. Changes in Accounting Standards
-------------------------------
As of November 1, 1998 the Company adopted Statement of Financial
Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS 130"). SFAS
130 established new rules for the reporting and display of comprehensive income
(loss) and its components including unrealized gains or losses on the Company's
available-for-sale securities and foreign currency translation adjustments,
which prior to adoption were immaterial and were therefore excluded from net
income (loss). For the fiscal quarters ended April 30, 1999 and 1998, total
comprehensive income (loss) amounted to $ (5.1 million) and $ 8.7 million,
respectively. For the six month periods ended April 30, 1999 and 1998, total
comprehensive income (loss) amounted to $ (11.5 million) and $ 17.7 million,
respectively.
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.
6. Special Charges and Extraordinary Item
--------------------------------------
In the second quarter of fiscal 1999, the Company recorded special
charges of $6.2 million. These charges were primarily from costs relating to the
disposal of excess facilities and severance. Cash expenditures associated with
these special charges during the quarter were approximately $290,000. It is
expected that approximately $1.8 million of cash expenditures related to excess
facilities will be paid out in the second half of fiscal year 1999. The
remaining $4.1 million relates to non-cash asset disposals.
As of April 30, 1999, approximately $1.7 million in accrued liabilities
related to special charges recorded in 1998 remained on the Company's balance
sheet, primarily representing rent on excess facilities. These amounts will be
paid out over the next six months.
During the second quarter, the Company recorded an extraordinary gain of
$1.2 million, net of tax of $652,000 on the exchange of 328,000 shares of the
Company's common stock held in treasury for an aggregate of $9,040,000 of its 5
1/4% Convertible Subordinated Notes due 2002. The Company may engage in similar
transactions in the future.
7
<PAGE>
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 in the section entitled "Risk Factors" below, and
elsewhere in this report. The Company undertakes no obligation to publicly
revise any forward-looking statements to reflect events or circumstances after
the date hereof or to reflect the occurrence of unanticipated events.
The following table sets forth items from the Condensed Consolidated
Statements of Operations as a percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
April 30, April 30,
-------------------- ------------------
1999 1998 1999 1998
--------- -------- --------- -------
Unaudited Unaudited
<S> <C> <C> <C> <C>
Net sales ...................................... 100.0% 100.0% 100.0% 100.0%
Cost of goods sold ............................. 49.9% 42.4% 53.1% 42.7%
---------------------- ---------------------
Gross margin ................................... 50.1% 57.6% 46.9% 57.3%
Operating expenses
Research and development .................... 24.0% 16.4% 28.1% 16.4%
Selling, general, and administrative ........ 36.4% 24.0% 40.4% 24.4%
Special charges ............................. 16.4% - 9.6% -
---------------------- ---------------------
Total operating expenses ................. 76.8% 40.4% 78.1% 40.7%
Operating income (loss) ........................ (26.7%) 17.2% (31.2%) 16.5%
Interest and other income (expenses), net ...... 0.6% 0.3% (0.1%) 0.7%
---------------------- ---------------------
Income (loss) before income taxes .............. (26.0%) 17.5% (31.3%) 17.3%
Income taxes provision (benefit) ............... (9.4%) 5.7% (11.3%) 5.9%
Minority interest .............................. 0.0% (0.1%) (0.1%) 0.0%
---------------------- ---------------------
Net income (loss) before extraordinary items ... (16.6%) 11.8% (19.9%) 11.4%
====================== =====================
Gain on extinguishment of debt ................. 3.0% - 1.8% -
Net income (loss) .............................. (13.6%) 11.8% (18.1%) 11.4%
====================== =====================
</TABLE>
8
<PAGE>
RESULTS OF OPERATIONS
NET SALES
Net sales consist of revenues from systems sales, spare part sales,
maintenance contracts and software sales. Net sales were $38.1 million for the
second quarter of fiscal 1999, representing a decrease of 49.0% from the net
sales of $74.7 million in the comparable period of fiscal 1998. This decrease
was due primarily to a significant decline in worldwide demand for semiconductor
automatic test equipment, particularly in the Asia Pacific region and to delays
in revenue shipments of new products. International net sales accounted for
approximately72.4% of the total net sales for the second quarter of fiscal 1999,
compared to approximately 80% for the comparable period a year ago. The
Company's international sales of its products and spare parts and its service
revenues are denominated primarily in United States dollars.
GROSS MARGIN
The Company's gross margin has been and will continue to be affected by a
variety of factors, including manufacturing efficiencies, pricing by competitors
and 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 was 50.1% for the second quarter of
fiscal 1999, compared with 57.6% for the second quarter of fiscal 1998. The
decrease in gross margin as a percent of sales was due to significantly lower
average selling prices, to higher costs caused by under-absorption of
manufacturing expenses, and to product development delays which the Company
believes will continue to adversely affect gross margins through at least the
end of the current fiscal year.
RESEARCH AND DEVELOPMENT
Research and development ("R&D") expenses were $9.1 million in the second
quarter of fiscal 1999, a decrease of $3.1 million or 25.2% over the same period
of fiscal 1998. The decrease was primarily due to reduced payroll and travel
related expenses from lower headcount as well as cutbacks in project, software
and other miscellaneous expenses. As a percentage of net sales, R&D expenses
were 24.0% for the second quarter of fiscal 1999, an increase from 16.4% in the
second quarter of fiscal 1998. The increase in these expenses as a percentage of
net sales is attributable primarily to the significant decrease in net sales in
the second quarter of fiscal 1999 as compared with the comparable period of
fiscal 1998. The Company currently intends to continue to invest significant
resources in the development of new products and enhancements for the
foreseeable future. Accordingly, the Company expects these expenses to increase
in absolute dollars for the remainder of fiscal 1999.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses ("SG&A") were $13.9 million
in the second quarter of fiscal 1999, representing a $4.1 million or 22.6%
decrease from the comparable period of fiscal 1998. The spending decline from
the prior quarter is primarily due to reduced sales commissions on lower sales
volume, reduced payroll and travel related expenses from lower headcount and to
reductions in corporate and other project related expenses. As a percentage of
net sales, SG&A expenses were 36.4% for the second quarter of fiscal 1999,
compared with 24.0% for the corresponding period in fiscal 1998. This increase
as a percentage of net sales is primarily due to the decrease in net sales. The
Company expects SG&A expenses for the remainder of fiscal 1999 to increase in
absolute dollars. Increases expected in the remainder of fiscal 1999 include,
but are not necessarily limited to, the costs of installing a new MIS system,
increases in salaries of existing employees and the costs of moving the
Company's primary Oregon operations into a new facility.
9
<PAGE>
SPECIAL CHARGES AND EXTRAORDINARY ITEM
In the second quarter of fiscal 1999, the Company recorded special
charges of $6.2 million. These charges were primarily from costs relating to the
disposal of excess facilities and severance. Cash expenditures associated with
these special charges during the quarter were approximately $290,000. It is
expected that approximately $1.8 million of cash expenditures related to excess
facilities will be paid out in the second half of fiscal year 1999, the
remaining $4.1 million relates to non-cash asset disposals.
As of April 30, 1999, approximately $1.7 million in accrued liabilities
related to special charges recorded in 1998 remained on the Company's balance
sheet, primarily representing rent on excess facilities.
These amounts will be paid out over the next six months.
During the second quarter, the Company recorded an extraordinary gain of
$1.2 million, net of tax of $652,000 onthe exchange of 328,000 shares of the
Company's common stock held in treasury for an aggregate of $9,040,000 of its 5
1/4% Convertible Subordinated Notes due 2002. The Company may engage in similar
transactions in the future.
INTEREST AND OTHER INCOME EXPENSES, NET
Net interest and other expenses for the second fiscal quarter of 1999
stood at $240,000, up $40,000 from the second fiscal quarter of 1998 largely due
to the reduction of bond interest expense.
INCOME TAXES
The Company's estimated effective tax rate for the first half of fiscal
1999 was 36%, compared to 34% in the first six months of 1998. The tax rate is
computed based on projected fiscal year to date book income or loss. Realization
of a portion of the net deferred tax assets at April 30, 1999 is dependent on
the Company's ability to generate approximately $34,000,000 of future taxable
income. Management believes that it is more likely than not that the assets will
be realized based on forecasted income. However, there can be no assurance that
the Company will meet its expectations of future income. Management will
evaluate the realizability of the deferred tax assets quarterly and assess the
need for additional valuation allowances.
YEAR 2000 READINESS DISCLOSURE
The "Year 2000" issue results from the use in computer hardware and
software of two digits rather than four digits to define the applicable year.
When computer systems must process dates both before and after January 1, 2000,
two-digit year "fields" may create processing ambiguities that can cause errors
and system failures. The results of these errors may range from minor undetected
errors to complete shutdown of an affected system. These errors or failures may
have limited effects, or the effects may be widespread, depending on the
computer chip, system or software, and its location and function. The effects of
the Year 2000 problem are exacerbated because of the interdependence of computer
and telecommunications systems in the United States and throughout the world.
Because of this interdependence, the failure of one system may lead to the
failure of many other systems even though the other systems are themselves "Year
2000 compliant."
Our Board of Directors has reviewed the Year 2000 issue generally and as
it may affect our business activity specifically. We are implementing a Year
2000 plan (the "Plan") which is designed to cover all of our activities and
which is monitored by the Board of Directors. We will modify the Plan as
circumstances change. Under the Plan, we are using a five-phase methodology for
addressing the issue. The phases are Awareness, Assessment, Renovation,
Validation and Implementation.
The Awareness phase consisted of defining the Year 2000 problem and
gaining executive level support and sponsorship for addressing it. We
established a Year 2000 program team and created an overall strategy. During the
Assessment phase, we inventoried all internal systems, products and supply chain
10
<PAGE>
partners and prioritized each for renovation. We believe we have completed a
majority of the Awareness and Assessment phases; however, we will continue to
work in these areas as we complete our assessment of existing supply chain
partners and enter into new supply chain relationships in the ordinary course of
business. Renovation consists of converting, replacing, upgrading or eliminating
systems that have Year 2000 problems. We have begun Renovation on
mission-critical systems and have completed all but two systems as of April 30,
1999. The remaining two mission-critical systems are now scheduled for
completion of renovation by October 1999. Validation involves ensuring that
hardware and software fixes will work properly in 1999 and beyond and can occur
both before and after implementation. We began the Validation phase in late 1998
and will continue through October, 1999 to allow for thorough testing before the
Year 2000. Implementation is the installation of Year 2000 ready hardware and
software components in a live environment.
The impact of Year 2000 issues on our business will depend not only on
corrective actions that we take, but also on the way Year 2000 issues are
addressed by governmental agencies, businesses and other third parties that
provide us with services or data or receive services or data from us, or whose
financial condition or operational capability is important to us. To reduce this
exposure, we have an ongoing process of identifying and contacting
mission-critical third party vendors and other significant third parties to
determine their Year 2000 plans and target dates. Risks associated with any such
third parties located outside the United States may be higher insofar as it is
generally believed that non-U.S. businesses may not be addressing their Year
2000 issues on as timely a basis as U.S. businesses. Notwithstanding our
efforts, we cannot be certain that we, mission-critical third party vendors or
other significant third parties will adequately address their Year 2000 issues.
We are developing contingency plans in the event that we,
mission-critical third party vendors or other significant third parties fail to
adequately address Year 2000 issues. Such plans principally involve identifying
alternative vendors or internal remediation. We cannot ensure that any such
plans will fully mitigate any such failures or problems. Furthermore, there may
be certain mission-critical third parties, such as utilities, telecommunication
companies, or material vendors for which alternative arrangements or sources are
limited or unavailable.
Although it is difficult for us to estimate the total costs of
implementing the Plan, our current estimate is that such costs will be
approximately $2.5 million through October 1999 and beyond. However, although we
believe that our estimates are reasonable, we cannot be certain, for the reasons
stated in the next paragraph, that the actual costs of implementing the Plan
will not differ materially from the estimated costs. We have incurred costs of
approximately $1.5 million through April 30, 1999 in connection with the Plan. A
significant portion of total Year 2000 project expenses is represented by
existing staff that have been redeployed to this project. We do not believe that
the redeployment of existing staff will have a material adverse effect on our
business, results of operations or financial position. Nor do we expect
incremental expenses related to the Year 2000 project to materially impact
operating results in any one period.
For a number of reasons, we cannot predict or quantify the extent and
magnitude of the Year 2000 problem as it will affect our business, either before
or for some period after January 1, 2000. Among the most important reasons are:
o lack of control over systems used by third parties critical to our
operation;
o dependence on third party software vendors to deliver Year 2000
upgrades in a timely manner;
o complexity of testing inter-connected networks and applications that
depend on third party networks; and
o the uncertainty surrounding how others will deal with liability issues
raised by Year 2000 related failures.
For example, we cannot be certain that systems used by third parties will
be Year 2000 ready by January 1, 2000, or by some earlier date, so as not to
create a material disruption to our business. Moreover, the estimated costs of
implementing the Plan do not take into account the costs, if any, that might be
incurred as a result of Year 2000-related failures that occur despite our
implementation of the Plan.
11
<PAGE>
Although we are not aware of any material operational issues associated
with preparing our internal systems for the Year 2000 or of material issues with
respect to the adequacy of mission-critical third party systems, we cannot
ensure that we will not experience material unanticipated negative consequences
and/or material costs caused by undetected errors or defects in such systems or
by our failure to adequately prepare for the results of such errors or defects,
including the costs of related litigation, if any. The impact of such
consequences could have a material adverse effect on our business, financial
condition or results of operations.
INTRODUCTION OF THE EURO
To date the introduction and the use of the Euro has not had nor does the
Company expect it to have a material adverse effect on our business, financial
condition or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $18.1 million for the six
months ended April 30, 1999. This cash flow from operating activities was
primarily attributable to net income before depreciation and amortization and
special charges of approximately $5 million, income tax receipts of $17.2
million, offset by cash used for net changes in the remaining operating assets
and liabilities.
Net cash used for investing activities was $14.8 million for the six
months ended April 30, 1999. Cash flow used in investing activities was
primarily attributable to acquisitions of property and equipment of
approximately $10.1 million, and net purchases of available-for-sale securities
of approximately $3.1 million.
Net cash provided by financing activities was $5.0 million for the six
months ended April 30, 1999. This cash flow from financing activities was
primarily attributable to treasury stock and common stock issued in accordance
with the Company's employee equity compensation plans.
The Company recorded a non-cash transaction during the quarter for the
exchange of 328,000 shares of the Company's common Stock held in treasury for an
aggregate of $9,040,000 of its 5 1/4% Convertible Subordinated Notes due 2002.
This transaction resulted in an extraordinary gain of $1.2 million, net of tax
of $652,000 as well as an increase in additional paid-in capital of $2.1
million.
As of April 30, 1999, the Company had working capital of approximately
$159 million including cash and short-term investments of $104 million, $34.4
million of accounts receivable and $32.3 million of inventories. The Company
expects its 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 may subject the Company to increased risks
which could materially adversely affect the Company's business, financial
condition and results of operations. Total current liabilities of $40.9 million
as of October 31, 1998 increased to $42.2 million for the six months ending
April 30, 1999.
The Company's principal sources of liquidity as of April 30, 1999
consisted of approximately $56.7 million of cash and cash equivalents,
short-term investments of $47.2 million and $40 million available under the
Company's unsecured working capital line of credit expiring July 23, 1999. In
addition, the Company has $38.9 million of available for sale securities
classified as long-term. As of April 30, 1999, no amounts were outstanding under
the unsecured line of credit. Additionally, as of April 30, 1999, the Company
had operating lease commitments for facilities and test and other equipment
totaling approximately $45.8 million.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk for changes in interest rates
relates primarily to the Company's investment portfolio and long-term debt
obligations. The Company maintains a strict investment policy which ensures the
safety and preservation of its invested funds by limiting default risk, market
12
<PAGE>
risk, and reinvestment risk. The Company's investments consists primarily of
commercial paper, medium term notes, asset backed securities, US. Treasury notes
and obligations of U.S. Government agencies, bank certificates of deposit,
auction rate preferred securities, corporate bonds and municipal bonds. The
table below presents notional amounts and related weighted-average interest
rates by year of maturity for the Company's investment portfolio and long-term
debt obligations (in thousands, expect percent amounts):
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 Thereafter
-------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Cash Equivalents
Fixed rate $ 56,694 - - - - -
Average rate 4.72% - - - - -
Short term investments
Fixed rate $ 47,236 - - - - -
Average rate 5.41% - - - - -
Long term investments
Fixed rate $ - $ 38,989 - - - -
Average rate - 5.46% - - - -
-------- --------- -------- -------- -------- ----------
Total investment securities $103,930 $ 38,989 - - - -
Average rate 5.05% 5.46% - - - -
Long term debt
Fixed rate - - - $105,960 - -
Average rate - - - 5.25% - -
</TABLE>
The Company mitigates default risk by attempting to invest in high credit
quality securities and by constantly positioning its portfolio to respond
appropriately to a significant reduction in a credit rating of any investment
issuer or guarantor. The portfolio includes only marketable securities with
active secondary or resale markets to ensure portfolio liquidity and maintains a
prudent amount of diversification.
The Company has no current cash flow exposure due to rate changes for its
$106 million Convertible Subordinated Notes. The Company has a $40 million line
of credit under which it can borrow either at the bank's prime rate or the LIBOR
rate. As of April 30, 1999, the Company had no borrowings under its line of
credit.
13
<PAGE>
RISK FACTORS
Fluctuations in Our Quarterly Net Sales and Operating Results
<TABLE>
<CAPTION>
1996 1997 1998 1999
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales 61.00 66.40 67.20 44.20 40.30 43.40 51.08 69.39 82.40 74.60 37.30 22.40 26.5 38.1
Net Income (loss) 10.50 11.50 11.60 4.30 1.05 3.28 -0.90 7.25 9.20 8.80 -33.60 -10.70 -6.6 -5.2
</TABLE>
A variety of factors affect our net sales and results of operations. The
above graph illustrates that our quarterly net sales and operating results have
fluctuated significantly. We believe they will continue to fluctuate for a
number of reasons, including:
o economic conditions in the semiconductor industry in general and
capital equipment industry specifically;
o timing of new product announcements and new product releases by us or
our competitors;
o market acceptance of our new products and enhanced versions of
existing products;
o manufacturing inefficiencies associated with the start-up of our new
products, changes in our pricing or payment terms and cycles, and
those of our competitors, customers and suppliers;
o manufacturing capacity and ability to volume produce systems and meet
customer requirements;
o write-offs of excess and obsolete inventories, and uncollectible
receivables;
o patterns of capital spending by our customers, delays, cancellations
or rescheduling of customer orders due to customer financial
difficulties or otherwise;
o changes in overhead absorption levels due to changes in the number of
systems manufactured, the timing and shipment of orders, availability
of components including custom integrated circuits ("IC's"),
subassemblies and services, customization and reconfiguration of
systems and product reliability;
o expenses associated with acquisitions and alliance
o operating expense reductions, including costs relating to facilities
consolidations, excess facilities and related expenses;
o the proportion of our direct sales and sales through third parties,
including distributors and original equipment manufacturers ("OEM"),
the mix of products sold, the length of manufacturing and sales
cycles, product discounts; and
o natural disasters, political and economic instability, regulatory
changes and outbreaks of hostilities.
We presently are introducing and will continue to introduce many new
products and product enhancements in the future, the timing and success of which
will affect our business, financial condition and results of operations. Our
14
<PAGE>
gross margins on system sales have varied significantly, and will continue to
vary significantly based on a variety of factors, including:
o manufacturing inefficiencies;
o pricing concessions by us and our competitors and pricing by our
suppliers;
o hardware and software product sales mix;
o inventory write-downs;
o production volume;
o new product introductions;
o product reliability;
o absorption levels and the rate of capacity utilization;
o customization and reconfiguration of systems;
o international and domesti sales mix and field service margins; and
o facility relocations and consolidations.
New and enhanced products typically have lower gross margins in the early
stages of commercial introduction and production. Although we have recorded and
continue to record provisions for estimated sales returns, uncollectible
accounts, and product warranty costs, we cannot be certain that our estimates
will be adequate. We may be required to record charges in future quarters to
reflect, in part, the cost of additional facilities consolidation, as it occurs.
We cannot forecast with any certainty the impact of these and other
factors on our sales and operating results in any future period. In addition,
our need for continued significant expenditures for research and development,
marketing and other expenses for new products, capital equipment purchases and
worldwide training and customer service and support, among other factors, will
make it difficult for us to reduce our significant fixed expenses in a
particular period if we don't meet our net sales goals for that period. As a
result, we cannot be certain that we will become profitable again or that we
will not continue to sustain losses in the future. We believe that we may
continue to incur quarterly net losses through the fourth quarter of fiscal
1999. As a result, the price of our common stock may continue to be materially
adversely affected.
Limited Systems Sales; Backlog
- ------------------------------
We derive a substantial portion of our net sales from the sale of a
relatively small number of systems that typically range in price from $350,000
to $3.6 million, other than certain memory products and software products, for
which the price range is typically below $50,000. As a result, our net sales and
operating results for a particular period could be significantly impacted by the
timing of recognition of revenue from a single transaction. Our net sales and
operating results for a particular period could also be materially adversely
affected if an anticipated order from even one customer is not received in time
to permit shipment during that period. Backlog at the beginning of a quarter
typically does not include all orders necessary to achieve our sales objectives
for that quarter. In addition, orders in backlog are subject to cancellation,
delay, deferral or rescheduling by customers with limited or no penalties.
Consequently, our quarterly net sales and operating results have in the past and
will in the future depend upon our obtaining orders for systems to be shipped in
the same quarter that the order is received.
Furthermore, we ship certain products generating most of our net sales
near the end of each quarter. Accordingly, our failure to receive an anticipated
order or a delay or rescheduling in a shipment near the end of a particular
period may cause net sales in a particular period to fall significantly below
expectations, which could have a material adverse effect on our business,
financial condition or results of operations. The relatively long manufacturing
cycle of many testers has caused and could continue to cause future shipments of
testers to be delayed from one quarter to the next, which could materially
adversely affect our business, financial condition or results of operations.
15
<PAGE>
Furthermore, as we and our competitors announce new products and technologies,
customers may defer or cancel purchases of our existing systems, which could
have a material adverse effect on our business, financial condition or results
of operations. We cannot forecast the impact of these and other factors on sales
and operating results.
Cyclicality of Semiconductor Industry
- -------------------------------------
Our business and results of operations depend largely upon the capital
expenditures of manufacturers of semiconductors and companies that specialize in
contract packaging and/or testing of semiconductors, including manufacturers and
contractors that are opening new or expanding existing fabrication facilities or
upgrading existing equipment, which in turn depend upon the current and
anticipated market demand for semiconductors and products incorporating
semiconductors. The semiconductor industry has been highly cyclical with
recurring periods of oversupply, which often have had a severe effect on the
semiconductor industry's demand for test equipment, including the systems we
manufacture and market. We believe that the markets for newer generations of
semiconductors will also be subject to similar fluctuations.
We have experienced shipment delays, delays in commitments and purchase
order restructurings by several customers and we expect delays and
restructurings may continue. Accordingly, we cannot be certain that we will be
able to achieve or maintain our current or prior level of sales or rate of
growth. We anticipate that a significant portion of new orders may depend upon
demand from semiconductor device manufacturers building or expanding fabrication
facilities and new device testing requirements that are not addressable by
currently installed test equipment, and there can be no assurance that such
demand will develop to a significant degree, or at all. In addition, our
business, financial condition or results of operations may be adversely affected
by any factor adversely affecting the semiconductor industry in general or
particular segments within the semiconductor industry. The recent Asian
financial crisis has contributed to a widespread uncertainty and a slowdown in
the semiconductor industry. This slowdown in the semiconductor industry has
resulted in reduced spending for semiconductor capital equipment, including
automatic test equipment ("ATE") which the Company sells. This industry slowdown
has had and may continue to have a material adverse effect on product backlog,
balance sheet and results of operations. Therefore, there can be no assurance
that the operating results will not continue to be materially adversely affected
if downturns or slowdowns in the semiconductor industry continue or occur again
in the future.
Management of Fluctuations in Our Operating Results
- ---------------------------------------------------
We have over the last several years experienced significant fluctuations
in our operating results. In fiscal 1998, we generated net sales of $82.4
million for the first quarter and $22.4 million for the fourth quarter, a
decrease of 73% in our net sales within one fiscal year. For the second quarter
of fiscal 1999, the net sales were $38.1 million. Since 1993, except for
cost-cutting efforts during the past two years, we have overall significantly
increased the scale of our operations in general to support periods of increased
sales levels and expanded product offerings and have expanded operations to
address critical infrastructure and other requirements, including the hiring of
additional personnel, significant investments in R&D to support product
development, our establishment of a joint venture with Innotech Corporation and
numerous acquisitions. However, in the past, and particularly in the three
quarters ended October 31, 1998 and to some extent this fiscal year as discussed
above, we have experienced significant revenue declines and reductions in our
operations. These fluctuations in our sales and operations have placed a
considerable strain on our management, financial, manufacturing and other
resources. In order to effectively deal with the changes brought on by the
cyclical nature of the industry, we have been required to implement and improve
a variety of highly flexible operating, financial and other systems, procedures
and controls capable of expanding or contracting consistent with our business.
However, we cannot be certain that any existing or new systems, procedures or
controls will be adequate to support fluctuations in our operations or that our
systems, procedures and controls will be cost-effective or timely. Any failure
to implement, improve and expand or contract such systems, procedures and
controls efficiently and at a pace consistent with our business could have a
material adverse effect on our business, financial condition and our results of
operations.
16
<PAGE>
Expansion of Our Product Lines
- ------------------------------
We are currently devoting and intend to continue to devote significant
resources to the development of new products and technologies. During fiscal
1999, we intend to evaluate these new products and to invest significant
resources in plant and equipment, leased facilities, inventory, personnel and
other costs, to begin or prepare to increase production of these products and to
provide the marketing, administration and after-sales service and support, if
any, required to service and support these new hardware and software products.
Accordingly, we cannot be certain that gross profit margin and inventory levels
will not continue to be adversely impacted by continued delays in new product
introductions or start-up costs associated with the initial production and
installation of these new product lines. These start-up costs include additional
manufacturing overhead, additional inventory and warranty reserve requirements
and the enhancement of after-sales service and support organizations. In
addition, the increases in inventory on hand for new hardware and software
product development and customer support requirements have increased and will
continue to increase the risk of inventory write-offs. We cannot be certain that
operating expenses will not increase, relative to sales, as a result of adding
additional marketing and administrative personnel, among other costs, to support
our additional products. If we are unable to achieve significantly increased net
sales or if sales fall below expectations, our operating results will continue
to be materially adversely affected. We cannot be certain that our net sales
will increase or remain at recent levels or that any new products will be
successfully commercialized or contribute to revenue growth.
Limited Sources of Supply; Reliance on Our Subcontractors
- ---------------------------------------------------------
We obtain certain components, subassemblies and services necessary for
the manufacture of our testers from a limited group of suppliers. We do not
maintain long-term supply agreements with most of our vendors and we purchase
most of our components and subassemblies through individual purchase orders. The
manufacture of certain of our components and subassemblies is an extremely
complex process. We also rely on outside vendors to manufacture certain
components and subassemblies and to provide certain services. We have recently
experienced and continue to experience significant reliability, quality and
timeliness problems with several critical components including certain custom
integrated circuits. In addition, we and certain of our subcontractors
periodically experience significant shortages and delays in delivery of various
components and subassemblies. We cannot be certain that these or other problems
will not continue to occur in the future with our suppliers or outside
subcontractors. Our reliance on a limited group of suppliers and on outside
subcontractors involves several risks, including an inability to obtain an
adequate supply of required components, subassemblies and services and reduced
control over the price, timely delivery, reliability and quality of components,
subassemblies and services. Shortages, delays, disruptions or terminations of
the sources for these components and subassemblies have delayed and could
continue to delay shipments of our systems and new products and could continue
to have a material adverse effect on our business, financial condition or
results of operations. Our continuing inability to obtain adequate yields or
timely deliveries or any other circumstance that would require us to seek
alternative sources of supply or to manufacture such components internally could
also have a material adverse effect on our business, financial condition or
results of operations. Such delays, shortages and disruptions would also damage
relationships with current and prospective customers and have and could continue
to allow competitors to penetrate such customer accounts. We cannot be certain
that our internal manufacturing capacity or that of our suppliers and
subcontractors will be sufficient to meet customer requirements.
Highly Competitive Industry
- ---------------------------
The ATE industry is intensely competitive. Because of the substantial
investment required to develop test application software and interfaces, we
believe that once a semiconductor manufacturer has selected a particular ATE
vendor's tester, the manufacturer is likely to use that tester for a majority of
its testing requirements for the market life of that semiconductor and, to the
extent possible, subsequent generations of similar products. As a result, once
an ATE customer chooses a system for the testing of a particular device, it is
difficult for competing vendors to achieve significant ATE sales to such
customer for similar use. Our inability to penetrate any large ATE customer or
achieve significant sales to any ATE customer could have a material adverse
effect on our business, financial condition or results of operations.
17
<PAGE>
We face substantial competition throughout the world, primarily from ATE
manufacturers located in the United States, Europe and Japan, as well as several
of our customers. Many competitors have substantially greater financial and
other resources with which to pursue engineering, manufacturing, marketing and
distribution of their products. Certain competitors have recently introduced or
announced new products with certain performance or price characteristics equal
or superior to certain products we currently offer. These competitors have
recently introduced products that compete directly against our products. We
believe that if the ATE industry continues to consolidate through strategic
alliances or acquisitions, we will continue to face significant additional
competition from larger competitors that may offer product lines and services
more complete than ours. Our competitors are continuing to improve the
performance of their current products and to introduce new products,
enhancements and new technologies that provide improved cost of ownership and
performance characteristics. New product introductions by our competitors could
cause a decline in our sales or loss of market acceptance of our existing
products.
Moreover, our business, financial condition or results of operations
could continue to be materially adversely affected by increased competitive
pressure and continued intense price-based competition. We have experienced and
continue to experience significant price competition in the sale of our testers.
In addition, pricing pressures typically become more intense at the end of a
product's life cycle and as competitors introduce more technologically advanced
products. We believe that to be competitive, we must continue to expend
significant financial resources in order to, among other things, invest in new
product development and enhancements and to maintain customer service and
support centers worldwide. We cannot be certain that we will be able to compete
successfully in the future.
Rapid Technological Change; Importance of Timely Product Introduction
- ---------------------------------------------------------------------
The ATE market is subject to rapid technological change. Our ability to
compete in this market depends upon our ability to successfully develop and
introduce new hardware and software products and enhancements and related
software tools with greater features on a timely and cost-effective basis,
including the products under development that we acquired in the EPRO merger and
the acquisition of certain product lines from Summit Design, Inc., Zycad
Corporation and Heuristic Physics Laboratories, Inc. Our customers require
testers and software products with additional features and higher performance
and other capabilities. We are therefore required to enhance the performance and
other capabilities of our existing systems and software products and related
software tools. Any success we may have in developing new and enhanced systems
and software products and new features to our existing systems and software
products will depend upon a variety of factors, including:
o product selection;
o timely and efficient completion of product design;
o implementation of manufacturing and assembly processes;
o successful coding and debugging of software;
o product performance;
o reliability in the field; and
o effective sales and marketing.
Because we must make new product development commitments well in advance
of sales, new product decisions must anticipate both future demand and the
availability of technology to satisfy that demand. We cannot be certain that we
will be successful in selecting, developing, manufacturing and marketing new
hardware and software products or enhancements and related software tools. Our
inability to introduce new products and related software tools that contribute
significantly to net sales, gross margins and net income would have a material
adverse effect on our business, financial condition and results of operations.
New product or technology introductions by our competitors could cause a decline
in sales or loss of market acceptance of our existing products. In addition, if
we introduce new products, existing customers may curtail purchases of the older
products and delay new product purchases. Any unanticipated decline in demand
for our hardware or software products could have a materially adverse affect on
our business, financial condition or results of operations.
18
<PAGE>
Significant delays can occur between the time we introduce a system and
the time we are able to produce that system in volume. We have in the past
experienced significant delays in the introduction, volume production and sales
of our new systems and related feature enhancements and are currently
experiencing significant delays in the introduction of our VS2000, Quartet and
Kalos series testers as well as certain enhancements to our existing SC and DUO
series testers. These delays have been primarily related to our inability to
successfully complete product hardware and software engineering within the time
frame originally anticipated, including design errors and redesigns of ICs. As a
result, certain customers have experienced significant delays in receiving and
using certain of our testers in production. We cannot be certain that these or
additional difficulties will not continue to arise or that such delays will not
continue to materially adversely affect customer relationships and future sales.
Moreover, we cannot be certain that we will not encounter these or other
difficulties that could delay future introductions or volume production or sales
of our systems or enhancements and related software tools. We have incurred and
may continue to incur substantial unanticipated costs to ensure the
functionality and reliability of our testers and to increase feature sets. If
our systems continue to have reliability, quality or other problems, or the
market perceives certain of our products to be feature deficient, we may suffer
reduced orders, higher manufacturing costs, delays in collecting accounts
receivable and higher service, support and warranty expenses, or inventory
write-offs, among other effects. Our failure to have a competitive tester and
related software tools available when required by a semiconductor manufacturer
could make it substantially more difficult for us to sell testers to that
manufacturer for a number of years. We believe that the continued acceptance,
volume production, timely delivery and customer satisfaction of our newer
digital, mixed signal and non-volatile memory testers are of critical importance
to our future financial results. As a result, our inability to correct any
technical, reliability, parts shortages or other difficulties associated with
our systems or to manufacture and ship the systems on a timely basis to meet
customer requirements could damage our relationships with current and
prospective customers and would continue to materially adversely affect our
business, financial condition and results of operations.
Customer Concentration; Lengthy Sales Cycle
- -------------------------------------------
One customer, Spirox Corporation (a distributor in Taiwan), accounted for
43%, 34%, 30% and 25% of our net sales in the first half of fiscal 1999 and
fiscal years 1998, 1997, and 1996, respectively. Consequently, our business,
financial condition and results of operations could be materially adversely
affected by the loss of or any reduction in orders by this or any other
significant customer, including losses or reductions due to continuing or other
technical, manufacturing or reliability problems with our products or continued
slow-downs in the semiconductor industry or in other industries that manufacture
products utilizing semiconductors. Our ability to maintain or increase sales
levels will depend upon:
o our ability to obtain orders from existing and new customers;
o our ability to manufacture system on a timely and cost-effective
basis;
o our ability to complete the development of our new hardware and
software products;
o our customers' financial condition and success;
o general economic conditions; and
o our ability to meet increasingly stringent customer performance and
other requirements and shipment delivery dates.
Sales of our systems depend in part upon the decision of semiconductor
manufacturers to develop and manufacture new semiconductor devices or to
increase manufacturing capacity. As a result, sales of our testers are subject
to a variety of factors we cannot control. In addition, the decision to purchase
a tester generally involves a significant commitment of capital, with the
attendant delays frequently associated with significant capital expenditures.
For these and other reasons, our systems have lengthy sales cycles during which
we may expend substantial funds and management effort to secure a sale,
subjecting us to a number of significant risks. We cannot be certain that we
will be able to maintain or increase net sales in the future or that we will be
able to retain existing customers or attract new ones.
19
<PAGE>
Risks Associated with Acquisitions
- ----------------------------------
We have developed in significant part through mergers and acquisitions of
other companies and businesses. We intend in the future to pursue additional
acquisitions of complementary product lines, technologies and businesses. We may
have to issue debt or equity securities to pay for future acquisitions, which
could be dilutive. We have also incurred and may continue to incur certain
liabilities or other expenses in connection with acquisitions, which have and
could continue to materially adversely affect our business, financial condition
and results of operations. Although we believe we have accounted for our
acquisitions properly, the U.S. Securities and Exchange Commission (the "SEC")
has recently been reviewing more closely the accounting for acquisitions by
companies, particularly in the area of "in-process" research and development
costs. If we are required by the SEC to restate any charge that we recognized in
an acquisition so far, that could result in a lesser charge to income and
increased amortization expense, which could also have a material adverse effect
on our business, financial condition and results of operations.
In addition, acquisitions involve numerous other risks, including:
o difficulties assimilating the operations, personnel, technologies and
products of the acquired companies;
o diversion of our management's attention from other business concerns;
o risks of entering markets in which we have no or limited experience;
and
o the potential loss of key employees of the acquired companies.
For these reasons, we cannot be certain what effect future acquisitions
may have on our business, financial condition and results of operations.
Changes in Financial Accounting Standards and Accounting Estimates
- ------------------------------------------------------------------
We prepare our financial statements to conform with generally accepted
accounting principles ("GAAP"). GAAP are subject to interpretation by the
American Institute of Certified Public Accountants, the SEC and various bodies
formed to interpret and create appropriate accounting policies. A change in
those policies can have a significant effect on our reported results, and may
even affect our reporting of transactions completed before a change is
announced. Accounting policies affecting many other aspects of our business,
including rules relating to purchase and pooling-of-interests accounting for
business combinations, employee stock purchase plans and stock options grants,
have recently been revised or are under review. Changes to those rules or the
questioning of current practices may have a material adverse effect on our
reported financial results or on the way we conduct our business.
In addition, our preparation of financial statements in accordance with
GAAP requires that we make estimates and assumptions that affect the recorded
amounts of assets and liabilities, disclosure of those assets and liabilities at
the date of the financial statements and the recorded amounts of expenses during
the reporting period. A change in the facts and circumstances surrounding those
estimates could result in a change to our estimates and could impact our future
operating results.
Dependence on Key Personnel
- ---------------------------
Our future operating results depend substantially upon the continued
service of our executive officers and key personnel, none of whom are bound by
an employment or non-competition agreement. Our future operating results also
depend in significant part upon our ability to attract and retain qualified
management, manufacturing, technical, engineering, marketing, sales and support
personnel. Competition for such personnel is intense, and we cannot ensure
success in attracting or retaining such personnel. There may be only a limited
number of persons with the requisite skills to serve in these positions and it
may be increasingly difficult for us to hire such personnel over time. Our
business, financial condition and results of operations could be materially
adversely affected by the loss of any of our key employees, by the failure of
any key employee to perform in his or her current position, or by our inability
to attract and retain skilled employees.
20
<PAGE>
Transition in Our Executive Management
- --------------------------------------
We have experienced several transitions in executive management in recent
years. In conjunction with the departure in December 1998 of our former chairman
and chief executive officer, our Board of Directors appointed David A. Ranhoff,
executive vice president, and Dennis P. Wolf, executive vice president, chief
financial officer and secretary, jointly to the office of the president. The
Board also named a new chairman, Dr. William Howard, Jr., and began a search for
a new chief executive officer. Mr. Wolf joined us as senior vice president and
chief financial officer in March 1998 after the December 1997 departure of the
Company's previous chief financial officer. These transitions have placed
significant demands on our operational, administrative and financial staff and
we anticipate that these demands will increase in the near term. We cannot be
certain that such transitions will not have a material adverse effect on our
business, financial condition and results of operations, on the way we are
perceived by the market or on the price of our common stock.
International Sales
- -------------------
International sales accounted for approximately 74%, 69%, 70% and 67% of
our total net sales for the first half of fiscal 1999 and fiscal years 1998,
1997 and 1996, respectively. As a result, we anticipate that international sales
will continue to account for a significant portion of our total net sales in the
foreseeable future. These international sales will continue to be subject to
certain risks, including:
o changes in regulatory requirements;
o tariffs and other barriers;
o political and economic instability;
o an outbreak of hostilities;
o integration of foreign operations of acquired businesses;
o foreign currency exchange rate fluctuations;
o difficulties with distributors, joint venture partners, original
equipment manufacturers, foreign subsidiaries and branch operations;
o potentially adverse tax consequences; and
o the possibility of difficulty in accounts receivable collection.
We are also subject to the risks associated with the imposition of
domestic and foreign legislation and regulations relating to the import or
export of semiconductor equipment. We cannot predict whether the import and
export of our products will be subject to quotas, duties, taxes or other charges
or restrictions imposed by the United States or any other country in the future.
Any of these factors or the adoption of restrictive policies could have a
material adverse effect on our business, financial condition or results of
operations. Net sales to the Asia Pacific region accounted for approximately
66%, 60%, 66% and 58% of our total net sales for the first half of fiscal 1999
and for the fiscal years 1998, 1997 and 1996, and thus demand for our products
is subject to the risk of economic instability in that region and could continue
to be materially adversely affected. Countries in the Asia Pacific region,
including Korea and Japan, have recently experienced weaknesses in their
currency, banking and equity markets. These weaknesses could continue to
adversely affect demand for our products, the availability and supply of our
product components, and our consolidated results of operations. The current
Asian financial crisis has contributed to a widespread uncertainty and a
slowdown in the semiconductor industry. This slowdown has resulted in reduced
spending on semiconductor capital equipment, including ATE, and has had, and may
continue to have, a material adverse effect on our product backlog, balance
sheet and results of operations.
We do not expect that the introduction and the use of the Euro will have
a material adverse effect on our business, financial condition or results of
operations.
21
<PAGE>
Proprietary Rights
- ------------------
We attempt to protect our intellectual property rights through patents,
copyrights, trademarks, maintenance of trade secrets and other measures,
including entering into confidentiality agreements. However, we cannot be
certain that others will not independently develop substantially equivalent
intellectual property or that we can meaningfully protect our intellectual
property. Nor can we be certain that our patents will not be invalidated, deemed
unenforceable, circumvented or challenged, or that the rights granted thereunder
will provide us with competitive advantages, or that any of our pending or
future patent applications will be issued with claims of the scope we seek, if
at all. Furthermore, we cannot be certain that others will not develop similar
products, duplicate our products or design around our patents, or that foreign
intellectual property laws or agreements into which we've entered will protect
our intellectual property rights. Inability or failure to protect our
intellectual property rights could have a material adverse effect upon our
business, financial condition and results of operations. We have been involved
in extensive, expensive and time-consuming reviews of, and litigation
concerning, patent infringement claims. In addition, we have at times been
notified that we may be infringing intellectual property rights of third parties
and we expect to continue to receive notice of such claims in the future.
In July, 1998, inTEST IP Corporation ("inTEST") alleged in writing that
one of our products is purportedly infringing a patent held by inTEST. We may
also be obligated to other third parties relating to this allegation. We have
completed initial investigation into the allegation. Based in part on the
opinion of outside counsel, we believe we have meritorious defenses to the
claims. However, we cannot be certain of success in defending this patent
infringement claim or claims for indemnification resulting from infringement
claims.
Certain of our customers have received notices from Mr. Jerome Lemelson
alleging that the manufacture of semiconductor products and/or the equipment
used to manufacture semiconductor products infringes certain patents issued to
Mr. Lemelson. We were notified by a customer in 1990 and by a different customer
in late 1994 that we may be obligated to defend or settle claims that our
products infringe Mr. Lemelson's patents, and that if it is determined that the
customer infringes Mr. Lemelson's patents, such customer intends to seek
indemnification from us for damages and other related expenses. We have not
received further communications from such customers regarding these matters.
We cannot be certain of success in defending current or future patent
infringement claims or claims for indemnification resulting from infringement
claims. Our business, financial condition and results of operations could be
materially adversely affected if we must pay damages to a third party or suffer
injunction or if we expend significant amounts in defending any such action,
regardless of the outcome. With respect to any claims, we may seek to obtain a
license under the third party's intellectual property rights. We cannot be
certain, however, that the third party will grant us a license on reasonable
terms or at all. We could decide, in the alternative, to litigate such claims.
Litigation on such matters may be extremely expensive and time consuming, and
could materially adversely affect our business, financial condition or results
of operations, regardless of the outcome.
Future Capital Needs; Leverage
- ------------------------------
Developing and manufacturing new ATE systems and enhancements is highly
capital intensive. In order to be competitive, we must make significant
investments in capital equipment, expansion of operations, systems, procedures
and controls, research and development and worldwide training, customer service
and support, among many other items. We may be unable to obtain additional
financing in the future on acceptable terms, or at all. In connection with our
issuance in September 1997 of convertible promissory notes (the "Notes"), we
currently have $106 million of indebtedness which resulted in a ratio of
long-term debt to total long-term capitalization at April 30, 1999 of
approximately 41%. As a result, our principal and interest obligations have
increased substantially. The degree to which we are leveraged could materially
adversely affect our ability to obtain financing for working capital,
acquisitions or other purposes and could make our business more vulnerable to
industry downturns and competitive pressures. Our ability to meet debt service
obligations will be dependent upon our future performance, which will be subject
to financial, business and other factors affecting our operations, many of which
are beyond our control. If we raise additional funds by issuing equity
securities, our stockholders could be significantly diluted.
22
<PAGE>
We may exchange Notes for shares of our common stock or may refinance or
exchange the Notes, which may also dilute our stockholders and may make it
difficult for us to obtain additional future financing, if needed.
If we are unable to obtain adequate funds, we may be required to
restructure or refinance our debt or to delay, scale back or eliminate certain
of our research and development, acquisition or manufacturing programs. We may
also need to obtain funds through arrangements with partners or others and we
may be required to relinquish rights to certain of our technologies or potential
products or other assets.
Year 2000 Readiness Disclosure
- ------------------------------
The "Year 2000" issue results from the use in computer hardware and
software of two digits rather than four digits to define the applicable year.
When computer systems must process dates both before and after January 1, 2000,
two-digit year "fields" may create processing ambiguities that can cause errors
and system failures. The results of these errors may range from minor undetected
errors to complete shutdown of an affected system. These errors or failures may
have limited effects, or the effects may be widespread, depending on the
computer chip, system or software, and its location and function. The effects of
the Year 2000 problem are exacerbated because of the interdependence of computer
and telecommunications systems in the United States and throughout the world.
Because of this interdependence, the failure of one system may lead to the
failure of many other systems even though the other systems are themselves "Year
2000 compliant."
Our Board of Directors has reviewed the Year 2000 issue generally and as
it may affect our business activity specifically. We are implementing a Year
2000 plan (the "Plan") which is designed to cover all of our activities and
which is monitored by the Board of Directors. We will modify the Plan as
circumstances change. Under the Plan, we are using a five-phase methodology for
addressing the issue. The phases are Awareness, Assessment, Renovation,
Validation and Implementation.
The Awareness phase consisted of defining the Year 2000 problem and
gaining executive level support and sponsorship for addressing it. We
established a Year 2000 program team and created an overall strategy. During the
Assessment phase, we inventoried all internal systems, products and supply chain
partners and prioritized each for renovation. We believe we have completed a
majority of the Awareness and Assessment phases; however, we will continue to
work in these areas as we complete our assessment of existing supply chain
partners and enter into new supply chain relationships in the ordinary course of
business. Renovation consists of converting, replacing, upgrading or eliminating
systems that have Year 2000 problems. We have begun renovation on
mission-critical systems and have completed for all but two systems by April 30,
1999. The remaining two mission-critical systems are now scheduled for
completion of renovation by October 1999. Validation involves ensuring that
hardware and software fixes will work properly in 1999 and beyond and can occur
both before and after implementation. We began the Validation phase in late 1998
and will continue through June 1999 to allow for thorough testing before the
Year 2000. Implementation is the installation of Year 2000 ready hardware and
software components in a live environment.
The impact of Year 2000 issues on our business will depend not only on
corrective actions that we take, but also on the way Year 2000 issues are
addressed by governmental agencies, businesses and other third parties that
provide us with services or data or receive services or data from us, or whose
financial condition or operational capability is important to us. To reduce this
exposure, we have an ongoing process of identifying and contacting
mission-critical third party vendors and other significant third parties to
determine their Year 2000 plans and target dates. Risks associated with any such
third parties located outside the United States may be higher insofar as it is
generally believed that non-U.S. businesses may not be addressing their Year
2000 issues on as timely a basis as U.S. businesses. Notwithstanding our
efforts, we cannot be certain that we, mission-critical third party vendors or
other significant third parties will adequately address their Year 2000 issues.
We are developing contingency plans in the event that we,
mission-critical third party vendors or other significant third parties fail to
adequately address Year 2000 issues. Such plans principally involve identifying
alternative vendors or internal remediation. We cannot ensure that any such
plans will fully mitigate any such failures or problems. Furthermore, there may
be certain mission-critical third parties, such as utilities, telecommunication
23
<PAGE>
companies, or material vendors for which alternative arrangements or sources are
limited or unavailable.
Although it is difficult for us to estimate the total costs of
implementing the Plan, our current estimate is that such costs will be
approximately $2.5 million through October 1999 and beyond. However, although we
believe that our estimates are reasonable, we cannot be certain, for the reasons
stated in the next paragraph, that the actual costs of implementing the Plan
will not differ materially from the estimated costs. We have incurred costs of
approximately $1.5 million through April 30, 1999 in connection with the Plan. A
significant portion of total Year 2000 project expenses is represented by
existing staff that have been redeployed to this project. We do not believe that
the redeployment of existing staff will have a material adverse effect on our
business, results of operations or financial position. Nor do we expect
incremental expenses related to the Year 2000 project to materially impact
operating results in any one period.
For a number of reasons, we cannot predict or quantify the extent and
magnitude of the Year 2000 problem as it will affect our business, either before
or for some period after January 1, 2000. Among the most important reasons are:
o lack of control over systems used by third parties critical to our
operation;
o dependence on third party software vendors to deliver Year 2000
upgrades in a timely manner;
o complexity of testing inter-connected networks and applications that
depend on third party networks; and
o the uncertainty surrounding how others will deal with liability issues
raised by Year 2000 related failures.
For example, we cannot be certain that systems used by third parties will
be Year 2000 ready by January 1, 2000, or by some earlier date, so as not to
create a material disruption to our business. Moreover, the estimated costs of
implementing the Plan do not take into account the costs, if any, that might be
incurred as a result of Year 2000-related failures that occur despite our
implementation of the Plan.
Although we are not aware of any material operational issues associated
with preparing our internal systems for the Year 2000 or of material issues with
respect to the adequacy of mission-critical third party systems, we cannot
ensure that we will not experience material unanticipated negative consequences
and/or material costs caused by undetected errors or defects in such systems or
by our failure to adequately prepare for the results of such errors or defects,
including the costs of related litigation, if any. The impact of such
consequences could have a material adverse effect on our business, financial
condition or results of operations.
Volatility of Our Stock Price
- -----------------------------
We believe that factors such as announcements of developments related to
our business, fluctuations in our financial results, general conditions or
developments in the semiconductor and capital equipment industry and the general
economy, sales or purchases of our common stock in the marketplace,
announcements of our technological innovations or new products or enhancements
or those of our competitors, developments in patents or other intellectual
property rights, developments in our relationships with customers and suppliers,
or a shortfall or changes in revenue, gross margins or earnings or other
financial results from analysts' expectations or an outbreak of hostilities or
natural disasters, could continue to cause the price of our common stock to
fluctuate, perhaps substantially. In recent years the stock market in general,
and the market for shares of small capitalization companies in particular,
including ours, have experienced extreme price fluctuations, which have often
been unrelated to the operating performance of affected companies. For example,
in fiscal 1997, the price of our common stock ranged from a high of $55.00 to a
low of $13.75. In fiscal 1998, the price of our common stock ranged from a high
of $35.25 to a low of $9.31 and during the first six months of fiscal 1999, the
price of our common stock ranged from a high of $22.41 to a low of $20.85. The
market price of our common stock is likely to continue to fluctuate
significantly in the future, including fluctuations unrelated to our
performance.
24
<PAGE>
Effects of Certain Anti-Takeover Provisions
- -------------------------------------------
Certain provisions of our Amended and Restated Certificate of
Incorporation, shareholders rights plan, equity incentive plans, Bylaws and of
Delaware law may discourage certain transactions involving a change in corporate
control. In addition to the foregoing, our classified board of directors, the
shareholdings of our officers, directors and persons or entities that may be
deemed affiliates, the adoption of a shareholder rights plan and the ability of
our Board of Directors to issue "blank check" preferred stock without further
stockholder approval could have the effect of delaying, deferring or preventing
a third party to acquire us and may adversely affect the voting and other rights
of holders of our common stock.
25
<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
--------------------------------------------------
The following proposals were voted upon by the Company's stockholders
at the Annual Meeting of Stockholders held on March 24, 1999:
1. A proposal to amend the Company's 1993 Stock Option Plan (the "1993 Plan")
to (i) increase the number of shares of common stock authorized for
issuance over the term of the 1993 Plan by an additional 1,000,000 shares,
(ii) increase the maximum number of shares of common stock for which any
one individual may be granted stock options and separately exercisable
stock appreciation rights over the term of the 1993 Plan from 750,000
shares to 1,000,000 shares and (iii) increase the number of shares of
common stock for which continuing non-employee Board members are to be
granted stock options at each Annual Stockholders Meeting, beginning with
the 1999 Annual Meeting, from 3,500 shares to 5,000 shares per non-employee
Board member, was approved as follows.
In Favor Opposed Abstain Non-Vote
11,431,068 4,191,615 67,027 2,727,934
2. A proposal to amend the Company's Employee Stock Purchase Plan that will
increase the number of shares of common stock reserved for issuance
thereunder by an additional 300,000 shares was approved as follows:
In Favor Opposed Abstain Non-Vote
15,122,486 514,541 52,683 2,727,934
3. A proposal to ratify the election of Ernst & Young LLP as independent
auditors of the Company for the fiscal year ending October 31, 1999 was
approved as follows:
In Favor Opposed Abstain Non-Vote
18,284,117 78,665 13,262 41,600
4. A proposal to transact such other business as may properly come before the
meeting or any adjournment or postponement thereof was approved as follows:
In Favor Opposed Abstain Non-Vote
12,703,389 5,209,922 462,733 41,600
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) See Exhibit Index on page 28.
(b) The Company filed a report on Form 8-K on February 16, 1999 and May
18, 1999 reporting its financial results for the first and second
quarters respectively of fiscal year 1999.
(c) The Company filed a report on Form 8-K on March 15, March 18 and May
24, 1999 in reporting exchange of Treasury stock for 5 1/4%
Convertible Subordinated Notes due 2002.
26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities 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)
April 11, 1999 /S/ DENNIS P. WOLF
------------------------- -----------------------------------
Date Dennis P. Wolf
Dennis P. Wolf, Executive Vice President,
Chief Financial Officer and Secretary
27
<PAGE>
EXHIBIT INDEX
Exhibit
Number
10.3 Amendment to Loan Agreement dated February 5, 1999 between
Silicon Valley Bank, Bank of Hawaii and Credence Systems
Corporation. 29
27.1 EDGAR Financial Data Schedule 31
99.18 Employment Agreement by and between the Company and
David A. Ranhoff 33
99.19 Employment Agreement by and between the Company and
Dennis P. Wolf. 41
99.20 Employment Agreement by and between the Company and
William G. Howard, Jr. 49
28
<PAGE>
Exhibit 10.3
AMENDMENT
TO
LOAN AGREEMENT
This Amendment to Loan Agreement is entered into as of February 5, 1999
(the "Amendment") by and between SILICON VALLEY BANK ("Agent") as Servicing
Agent and a Bank and BANK OF HAWAII ("BofH"; 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 and that certain Amendment to Loan Agreement dated as of
July 24, 1998 (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 and replaced in
their entirety to read as follows:
"Total Liabilities" means at any date as of which the amount
thereof shall be determined, all obligations that should, in accordance with
GAAP be classified as liabilities on the consolidated balance sheet of
Borrowers, including in any event all Indebtedness.
"Tangible Net Worth" means, at any date as of which the amount
thereof shall be determined, the consolidated total assets of Borrowers minus,
without duplication, (i) the sum of any amounts attributable to (a) goodwill,
(b) intangible items such as unamortized debt discount and expense, patents,
trade and service marks and names, copyrights and research and development
expenses except prepaid expenses, and (c) all reserves not already deducted from
assets, and (ii) Total Liabilities."
2. The references in Sections 2.1(c) and 2.1(d) to "150 basis points" are
hereby amended to read "200 basis points".
3. Section 5.8 is hereby deleted in its entirety and replaced with the
following:
"5.8 Debt-Tangible Net Worth Ratio. Maintain, on a consolidated basis, as
of the last day of each fiscal quarter, a ratio of Total Liabilities, excluding
Subordinated Debt, to Tangible Net Worth, of not more tha 1.0 to 1.0."
4. 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 plus Subordinated Debt of not
less than Two Hundred Twenty Million Dollars ($220,000,000)."
5. Section 5.10 is hereby deleted in its entirety and replaced with the
following:
"5. 10 Profitability. On a consolidated basis, sustain from continuous
operations excluding noncash events, a loss of no more than Thirteen Million
Dollars ($13,000,000) for each of the fiscal quarters ending on April 30, 1999
and July 31, 1999, provided that Borrower may not sustain from continuous
operations, excluding noncash events, a loss of more than Twenty Million Dollars
($20,000,000) in the aggregate for both quarters combined. Thereafter, on a
consolidated basis, have a minimum continuous operations net profit of at least
One Dollar ($1.00) for each fiscal year."
1
29
<PAGE>
6. Bank waives Borrower's obligations to comply with Section 5.10 for both
the quarter and the year ending on October 31, 1998. Bank does not waive such
obligations for any other dates or any other failure by Borrower to perform its
obligations under the Loan Documents. This waiver is not a continuing waiver
with respect to any failure to perform any obligation after the date of this
Amendment.
7. On the signature page of the Agreement the reference to Silicon Valley
Bank's Maximum Commitment Amount: $15,000,000 (37.5%) is hereby amended to read
$20,000,000 (50.0%).
8. On the signature page of the Agreement the reference to Bank of Hawaii's
Maximum Commitment Amount: $25,000,000 (62.5%) is hereby amended to read
$20,000,000 (50.0%).
9. The attached Exhibit C is hereby added and incorporated by reference
into the Agreement.
10. As a condition to the effectiveness of this Amendment, Banks shall
receive a fee of Twenty-Five Thousand Dollars ($25,000), payable upon the date
hereof, plus all Bank Expenses incurred in connection with the preparation of
this Amendment.
11. As a condition to the effectiveness of this Amendment, Bank shall have
received, in form and substance satisfactory to Bank, the following:
(a) resolutions by the Borrowers authorizing the execution and
delivery of this Amendment; and
(b) such other documents, and completion of such other matters, as
Bank may reasonably deem necessary or appropriate.
12. 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.
13. 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.
14. 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.
2
30
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the first
date above written.
CREDENCE SYSTEMS CORPORATION
By: /s/ JERRY BRUCE
Title: V.P., TREASURER & CONTROLLER
CREDENCE KOREA
By: /s/ DENNIS WOLF
Title: DIRECTOR
CREDENCE SYSTEMS K.K.
By: /s/ CLYDE ARMSTRONG
Title: DIRECTOR
SILICON VALLEY BANK
By: /s/ DIANNE THOMPSON
Title: SVP
BANK OF HAWAII
By: /s/ DAVID L. WARD, IV
Title: ASSISTANT VICE PRESIDENT
3
31
<PAGE>
EXHIBIT C
COMPLIANCE CERTIFICATE
TO: SILICON VALLEY BANK
BANK OF HAWAII
FROM: CREDENCE SYSTEMS CORPORATION
The undersigned authorized officer of CREDENCE SYSTEMS CORPORATION
hereby certifies that in accordance with the terms and conditions of the Loan
and Security Agreement between Borrower and Bank (the "Agreement"), (i) Borrower
is in complete compliance for the period ending with all required covenants
except as noted below and (ii) all representations and warranties of Borrower
stated in the Agreement are true and correct in all material respects as of the
date hereof. Attached herewith are the required documents supporting the above
certification. The Officer further certifies that these are prepared in
accordance with Generally Accepted Accounting Principles (GAAP) and are
consistently applied from one period to the next except as explained in an
accompanying letter or footnotes.
Please indicate compliance status by circling Yes/No under "Complies" column.
<TABLE>
<CAPTION>
Reporting Covenant Required Complies
<S> <C> <C> <C>
Form 10-K Annually within 5 days Yes No
Form 10-Q Quarterly within 5 days Yes No
A/R & A/P Agings Monthly within 20 days if Yes No
outstanding Advances exceed
$20,000,000
</TABLE>
<TABLE>
<CAPTION>
Financial Covenant Required Actual Complies
<S> <C> <C> <C> <C>
Maintain on a Quarterly Basis:
Minimum Quick Ratio 2.0:1.0 :1.0 Yes No
Tangible Net Worth $220,000,000 $ - Yes No
Debt/ Tangible Net Worth 1.0:1.0 :1.0 Yes No
Profitability 1 $ - Yes No
</TABLE>
1 . Borrower shall not, on a consolidated basis, sustain from continuous
operations, excluding noncash events, a loss of no more than $13,000,000 for
each of the fiscal quarters ending on 3/31/99 and 6/30/99, provided that
Borrower may not sustain from continuous operations, excluding noncash events, a
loss of more than $20,000,000 in the aggregate for both quarters combined.
Thereafter, on a consolidated basis, have a minimum continuous operations net
profit of at least $1.00 for each fiscal year.
Comments Regarding Exceptions: See Attached.
Sincerely,
SIGNATURE
TITLE
DATE
4
32
<PAGE>
<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 FINACIAL
STATEMENTS.
</LEGEND>
<CIK> 0000893162
<NAME> q#ygjp9a
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> APR-30-1999
<EXCHANGE-RATE> 1
<CASH> 56,694
<SECURITIES> 86,225
<RECEIVABLES> 39,374
<ALLOWANCES> 4,976
<INVENTORY> 32,277
<CURRENT-ASSETS> 201,222
<PP&E> 92,643
<DEPRECIATION> 51,094
<TOTAL-ASSETS> 299,190
<CURRENT-LIABILITIES> 42,175
<BONDS> 105,960
0
0
<COMMON> 22
<OTHER-SE> 105,873
<TOTAL-LIABILITY-AND-EQUITY> 299,190
<SALES> 64,590
<TOTAL-REVENUES> 64,590
<CGS> 34,277
<TOTAL-COSTS> 34,277
<OTHER-EXPENSES> 50,483
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,258
<INCOME-PRETAX> (20,231)
<INCOME-TAX> (7,300)
<INCOME-CONTINUING> (12,885)
<DISCONTINUED> 0
<EXTRAORDINARY> 1,158
<CHANGES> 0
<NET-INCOME> (11,727)
<EPS-BASIC> (0.57)
<EPS-DILUTED> (0.57)
</TABLE>
Exhibit 99.18
CREDENCE SYSTEMS CORPORATION
215 Fourier Avenue
Fremont, CA 94539
March 31, 1999
Mr. David A. Ranhoff
Dear David:
We are pleased to inform you that the Company's Board of Directors has approved
a special severance benefit program for you. The purpose of this letter
agreement is to set forth the terms and conditions of your severance benefits
and to explain the limitations that will govern their overall value.
Your severance package will become payable should the Company terminate your
employment, or should you otherwise resign from the Company, under certain
circumstances following a substantial change in ownership or control of the
Company or upon the appointment of a new permanent Chief Executive Officer. To
understand the full scope of your benefits, you should familiarize yourself with
the definitional provisions of Part One of this letter agreement. The benefits
comprising your severance package are detailed in Part Two, and certain
restrictions applicable to your benefits are specified in Part Three. Part Four
sets forth the dollar limitation which will govern your total severance package
in the event your termination occurs in connection with a change in control or
ownership of the Company. Part Five deals with ancillary matters affecting your
severance arrangement.
Part One - DEFINITIONS
----------------------
For purposes of this letter agreement, the following definitions will be in
effect:
Average Compensation means the average of your W-2 wages from the Company for
the five (5) calendar years (or such fewer number of calendar years of
employment with the Company) completed immediately prior to the calendar year in
which a Change in Control is effected. Any W-2 wages for a partial year of
employment will be annualized, in accordance with the frequency which such wages
are paid during such partial year, before inclusion in your Average
Compensation.
Base Salary means the monthly rate of base salary in effect for you immediately
prior to the Change in Control or Change in Management (as applicable) or (if
greater) the monthly rate of base salary in effect at the time of your
Involuntary Termination.
Board means the Company's Board of Directors.
33
<PAGE>
2
Change in Control means a change in the ownership or control of the Company
effected through any of the following transactions:
(i) a merger or consolidation approved by the
Company's stockholders in which securities possessing more
than fifty percent (50%) of the total combined voting power of
the Company's outstanding securities are transferred to a
person or persons different from the persons holding those
securities immediately prior to such transaction;
(ii) any stockholder-approved sale, transfer or other
disposition of all or substantially all of the Company's
assets in complete liquidation or dissolution of the Company;
(iii) the acquisition, directly or indirectly, by any
person or related group of persons (other than the Company or
a person that directly or indirectly controls, is controlled
by or is under common control with, the Company) of beneficial
ownership (within the meaning of Rule 13d-3 of the Securities
Exchange Act of 1934, as amended) of securities possessing
more than fifty percent (50%) of the total combined voting
power of the Company's outstanding securities pursuant to a
tender or exchange offer made directly to the Company's
stockholders; or
(iv) a change in the composition of the Board over a
period of thirty-six (36) consecutive months or less such that
a majority of the Board members ceases, by reason of one or
more contested elections for Board membership, to be comprised
of individuals who either (A) have been Board members
continuously since the beginning of such period or (B) have
been elected or nominated for election as Board members during
such period by at least a majority of the Board members
described in clause (A) who were still in office at the time
the Board approved such election or nomination.
Change in Management means the appointment by the Board of a new permanent Chief
Executive Officer.
Code means the Internal Revenue Code of 1986, as amended.
Common Stock means the Company's common stock.
Company means Credence Systems Corporation, a Delaware corporation, or any
successor corporation, whether or not resulting from a Change in Control.
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3
Disability means your inability to perform the normal and usual duties of your
position with the Company by reason of any physical or medical impairment which
is expected to result in death or continue for a period of twelve (12)
consecutive months or more.
Fair Market Value means, with respect to the shares of Common Stock subject to
any of your Options, the closing selling price per share of Common Stock on the
date in question, as such price is reported by the National Association of
Securities Dealers on the Nasdaq National Market. If there is no closing selling
price reported for the Common Stock on the date in question, then the Fair
Market Value will be the closing selling price on the last preceding date for
which such report exists.
Health Care Coverage means the continued health care coverage to which you and
your eligible dependents may be entitled during any Salary Continuation Period
in effect for you under this letter agreement.
Involuntary Termination means (i) the involuntary termination of your employment
with the Company other than a Termination for Cause or (ii) your voluntary
resignation within ninety (90) days following (A) a material reduction in your
duties and responsibilities as an Executive Vice President of the Company or (B)
a material reduction in your level of cash compensation (rate of Base Salary
plus target bonus under any corporate-performance based bonus or incentive
programs).
In no event shall any of the following constitute grounds for a resignation
qualifying as an Involuntary Termination under this letter agreement:
- a change or other alteration in your duties which occurs by reason of
the Company's conversion from a public company into a subsidiary or division of
the acquiring entity in a Change in Control transaction but which does not
otherwise materially affect your day-to-day functions; or
- a general reduction in the level of base salary or target bonuses
payable to the executive officers of the Company which is applied to all or
substantially all of the Company's executive officers in connection with a cost
reduction program.
In addition, an Involuntary Termination will not be deemed to occur in the event
your employment terminates by reason of your death or Disability or a
Termination for Cause or in the event the acquiring entity in a Change in
Control transaction offers you a position comparable to your position with the
Company immediately prior to the Change in Control and at substantially the same
level of cash compensation.
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4
Life Insurance Coverage means the continued coverage to which you may be
entitled under the Company's group-term and executive life insurance plans
during any Salary Continuation Period in effect for you under this letter
agreement.
Option means any option granted to you under the Plan which is outstanding at
the time of the Change in Control or Change in Management (as applicable) or
upon your subsequent Involuntary Termination. In connection with a Change in
Control, your Options will be divided into two (2) separate categories as
follows:
Acquisition-Accelerated Options: any outstanding Option (or
installment thereof) which automatically accelerates, pursuant to the
acceleration provisions of the agreement evidencing that Option, upon a
Change in Control.
Severance-Accelerated Options: any outstanding Option (or installment
thereof) which, pursuant to Part Two of this letter agreement, accelerates
upon your Involuntary Termination following the Change in Control.
Option Parachute Payment means, with respect to any Acquisition-Accelerated
Option or any Severance-Accelerated Option, the portion of that Option deemed to
be a parachute payment under Code Section 280G and the Treasury Regulations
issued thereunder. The portion of such Option which is categorized as an Option
Parachute Payment will be calculated in accordance with the valuation provisions
established under Code Section 280G and the applicable Treasury Regulations and
will include an appropriate dollar adjustment to reflect the lapse of your
obligation to remain in the Company's employ as a condition to the vesting of
the accelerated installment. In no event, however, will the Option Parachute
Payment attributable to any Acquisition-Accelerated Option or
Severance-Accelerated Option (or accelerated installment) exceed the spread (the
excess of the Fair Market Value of the accelerated option shares over the option
exercise price payable for those shares) existing at the time of acceleration.
Other Parachute Payment means any payment in the nature of compensation (other
than the benefits to which you become entitled under Part Two of this letter
agreement) which are made to you in connection with the Change in Control and
which accordingly qualify as parachute payments within the meaning of Code
Section 280G(b)(2) and the Treasury Regulations issued thereunder. Your Other
Parachute Payment will include (without limitation) the Present Value, measured
as of the Change in Control, of the aggregate Option Parachute Payment
attributable to your Acquisition-Accelerated Options (if any).
Parachute Payment means any payment or benefit provided you under Part Two of
this letter agreement in connection with a Change in Control (other than the
Option Parachute Payment attributable to your Severance-Accelerated Options)
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5
which is deemed to constitute a parachute payment within the meaning of Code
Section 280G(b)(2) and the Treasury Regulations issued thereunder.
Plan means (i) the Company's 1993 Stock Option Plan, as amended or restated from
time to time, and (ii) any successor stock incentive plan subsequently
implemented by the Company.
Present Value means the value, determined as of the date of the Change in
Control, of any payment in the nature of compensation to which you become
entitled in connection with the Change in Control or your subsequent Involuntary
Termination, including (without limitation) the Option Parachute Payment
attributable to your Severance-Acceleration Options, the additional benefits to
which you become entitled under Part Two of this letter agreement and the Option
Parachute Payment attributable to your Acquisition-Accelerated Options. The
Present Value of each such payment will be determined in accordance with the
provisions of Code Section 280G(d)(4), utilizing a discount rate equal to one
hundred twenty percent (120%) of the applicable federal rate in effect at the
time of such determination, compounded semi-annually to the effective date of
the Change in Control.
Salary Continuation Period means the period for which the payment of your Base
Salary may, pursuant to Part Two of this letter agreement, be continued
following an Involuntary Termination of your employment within a specified
period following a Change in Control or Change in Management (as applicable).
Termination for Cause means the Company's termination of your employment for any
of the following reasons: (i) your commission of any act of fraud, embezzlement
or dishonesty, (ii) your unauthorized use or disclosure of any confidential or
proprietary information of the Company, (iii) any intentional misconduct by you
which has a materially adverse effect upon the Company's business or reputation
or (iv) your continued failure to perform the major duties, functions and
responsibilities of your position after you have received written notice from
the Company identifying the deficiencies in your performance and have been given
a reasonable opportunity to cure those deficiencies, if curable.
Part Two - SEVERANCE BENEFITS
-----------------------------
Should your employment with the Company terminate by reason of an Involuntary
Termination within twelve (12) months after a Change in Control or Change in
Management, then you will become entitled to receive the severance benefits
provided under this Part Two. However, those benefits will be subject to the
restrictive covenants of Part Three of this letter agreement and will be in lieu
of all other severance benefits to which you might otherwise be entitled upon
such termination of your employment. In addition, any severance benefits paid to
you in connection with an Involuntary Termination following a Change in Control
will be subject to the dollar limitation of Part Four.
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6
1. Accelerated Vesting.
A portion of each outstanding Option which you hold at the time of your
Involuntary Termination, to the extent not otherwise exercisable for all the
shares of Common Stock subject to that Option, will immediately become
exercisable on an accelerated basis and may be exercised for any or all of the
shares subject to that accelerated portion until the earlier of (i) the
expiration of the option term or (ii) the end of the three (3)-month period
following the date of your Involuntary Termination. The number of option shares
which shall vest and become exercisable upon such an accelerated basis in
connection with the Involuntary Termination shall be equal to the number of
shares for which the Option would have become exercisable under the Exercise
Schedule in effect for that Option had you remained in the Company's employ for
an additional twelve (12) month period after the Involuntary Termination.
However, to the extent any Option is not exercisable for one or more shares at
the time of your Involuntary Termination, after taking into account the
acceleration provided under this paragraph, the Option will immediately
terminate with respect to those shares.
2. Severance Payment.
You will be entitled to salary continuation payments at your applicable rate of
Base Salary for a Salary Continuation Period of twelve (12) months. These salary
continuation payments will be made to you in accordance with the Company's
normal payroll practices and will be subject to the Company's collection of all
applicable federal and state income and employment withholding taxes.
3. Health Care Coverage.
Should you elect continued health care coverage under the Company's medical plan
pursuant to your rights under Code Section 4980B ("COBRA"), the Company will
provide such COBRA coverage, without charge, to you and your eligible
dependents. Such Company-paid coverage will continue until the earlier of (i)
the expiration of your Salary Continuation Period or (ii) the first date on
which you are covered under another employer's health benefit program without
exclusion for any pre-existing medical condition. Any additional health care
coverage to which you and your dependents may be entitled under COBRA following
the period of such Company-paid coverage will be at your sole cost and expense.
4. Life Insurance Coverage.
You will be entitled to Life Insurance Coverage through your continued
participation in the Company's group term and executive life insurance plans
following your Involuntary Termination, and the Company will pay the entire
premium charged for such continued Life Insurance Coverage. Such Company-paid
coverage will continue until the earlier of (i) the expiration of your Salary
Continuation Period or (ii) the first date on which you are provided with
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7
comparable coverage under another employer's life insurance plan. However, you
will be responsible for the satisfaction of any income and employment tax
liability attributable to your Company-paid Life Insurance Coverage.
Your payments and benefits under Paragraphs 2, 3 and 4 of this Part Two will
immediately terminate in the event you fail to abide by the restrictive
covenants set forth in Part Three of this letter agreement. In addition, those
payments and benefits will be subject to the dollar limitation of Part Four of
this letter agreement in the event of your Involuntary Termination following a
Change in Control.
Part THREE -- CONSULTING SERVICES
AND SPECIAL RESTRICTIVE COVENANTS
---------------------------------
1. Consulting Services.
In consideration for the salary continuation payments to which you become
entitled under Part Two, you will make yourself available during the Salary
Continuation Period to render such consulting services to the Company within
your area of expertise as may reasonably be requested by the Company's Chief
Executive Officer, but in no event may more than ten (10) hours of such services
will be required of you per month.
2. Cessation of Benefits.
Your Salary Continuation Period will immediately terminate, and all salary
continuation payments and Company-paid Health Care Coverage and Life Insurance
Coverage will immediately cease, should you:
(a) own, manage, operate, join, control or participate in the
ownership, management, operation or control of, or be employed by or
connected in any manner with, any enterprise which is engaged in any
business competitive with or similar to that of the Company; provided,
however, that such restriction will not apply to any passive investment
representing an interest of less than one percent (1%) of an outstanding
class of publicly-traded securities of any corporation or other enterprise;
(b) encourage or solicit any of the Company's employees to leave the
Company's employ for any reason or interfere in any other manner with
employment relationships at the time existing between the Company and its
employees; or
(c) induce any of the Company's clients, customers, suppliers,
vendors, distributors, licensors or licensees to terminate their existing
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8
business relationships with the Company or interfere in any other manner
with any existing business relationship between the Company and any client,
customer, supplier, vendor, distributor, licensor, licensee or other third
party.
Part FOUR -- LIMITATION ON BENEFITS
-----------------------------------
The benefit limitation of this Part Four shall be applicable only to the extent
the payments and benefits made to you pursuant to Paragraphs 2, 3 and 4 of Part
Two are attributable to your Involuntary Termination following a Change in
Control.
1. Benefit Limit.
The aggregate Present Value (measured as of the Change in Control) of the
benefits to which you become entitled under Part Two at the time of your
Involuntary Termination, namely, the salary continuation payments, the Option
Parachute Payment attributable to your Severance-Accelerated Options and your
Company-paid Health Care Coverage and Life Insurance Coverage, will in no event
exceed in amount the greater of the following dollar amounts (the "Benefit
Limit"):
(a) 2.99 times your Average Compensation, less the Present Value,
measured as of the Change in Control, of all Other Parachute Payments to
which you are entitled, or
(b) the amount which yields you the greatest after-tax amount of
benefits under Part Two of this letter agreement after taking into account
any excise tax imposed under Code Section 4999 on the payments and benefits
which are provided you under Part Two or which constitute Other Parachute
Payments. The Option Parachute Payment attributable to the accelerated
vesting of your Acquisition-Accelerated Options at the time of the Change
in Control shall also be subject to the Benefit Limitation. However, no
other terms or provisions of your Acquisition-Accelerated Options shall be
affected by this letter agreement.
2. Resolution Procedure.
In the event there is any disagreement between you and the Company as to whether
one or more payments to which you become entitled in connection with either the
Change in Control or your subsequent Involuntary Termination constitute
Parachute Payments, Option Parachute Payments or Other Parachute Payments or as
to the determination of the Present Value of any of those payments, such dispute
will be resolved as follows:
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9
(i) In the event temporary, proposed or final Treasury Regulations in
effect at the time under Code Section 280G (or applicable judicial
decisions) specifically address the status of any such payment or the
method of valuation therefor, the characterization afforded to such payment
by the Regulations (or such decisions) will, together with the applicable
valuation methodology, be controlling.
(ii) In the event Treasury Regulations (or applicable judicial
decisions) do not address the status of any payment in dispute, the matter
will be submitted for resolution to independent tax counsel mutually
acceptable to you and the Company ("Independent Counsel"). The resolution
reached by Independent Counsel will be final and controlling; provided,
however, that if in the judgment of Independent Counsel the status
of the payment in dispute can be resolved through the obtainment of a
private letter ruling from the Internal Revenue Service, a formal and
proper request for such ruling will be prepared and submitted by
Independent Counsel, and the determination made by the Internal Revenue
Service in the issued ruling will be controlling. All expenses incurred in
connection with the retention of Independent Counsel and (if applicable)
the preparation and submission of the ruling request will be shared equally
by you and the Company.
(iii) In the event Treasury Regulations (or applicable judicial
decisions) do not address the appropriate valuation methodology for any
payment in dispute, the Present Value thereof will, at the Independent
Counsel's election, be determined through an independent third-party
appraisal, and the expenses incurred in obtaining such appraisal will be
shared equally by you and the Company.
3. Status of Benefits.
A. No benefits shall be provided you under Part Two of this letter
agreement (including the accelerated vesting of your outstanding Options, the
salary continuation payments and the Company-paid Health Care Coverage and Life
Insurance Coverage) until the Present Value of the Option Parachute Payment
attributable to both your Severance-Accelerated Options and your
Acquisition-Accelerated Options has been determined and the status of any
payments in dispute under Paragraph 2 above has been resolved in accordance
therewith. The post-service exercise period in effect for your Options shall be
stayed and shall not run until the resolution process hereunder is completed.
B. Once the requisite determinations under Paragraph 2 have been made, then
to the extent the aggregate Present Value, measured as of the Change in Control,
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10
of (i) the Option Parachute Payment attributable to your Severance-Accelerated
Options plus (ii) the Parachute Payment attributable to your other benefit
entitlements under Part Two of this letter agreement would, when added to the
Present Value of all your Other Parachute Payments (including the Option
Parachute Payment attributable to your Acquisition-Accelerated Options), exceed
the Benefit Limit, your salary continuation payments will first be reduced, and
then the period of your Company-paid Health Care Coverage and Life Insurance
Coverage will be shortened, to the extent necessary to assure that such Benefit
Limit is not exceeded.
Part Five -- MISCELLANEOUS
--------------------------
1. Termination for Cause.
Should your employment cease by reason of a Termination for Cause or should you
depart or voluntarily resign under circumstances which would otherwise
constitute grounds for a Termination for Cause, then the Company will only be
required to pay you (i) any unpaid compensation earned for services previously
rendered through the date of such termination and (ii) any accrued but unpaid
vacation benefits or sick days, and no benefits will be payable to you under
Part Two of this letter agreement.
2. Death.
Should you die before receipt of one or more salary continuation payments to
which you become entitled under this letter agreement, then those payments will
be made to the executors or administrators of your estate. Should you die before
you exercise all your outstanding Options as accelerated hereunder, then such
Options may be exercised, within twelve (12) months after your death, by the
executors or administrators of your estate or by persons to whom the Options are
transferred pursuant to your will or in accordance with the laws of inheritance.
In no event, however, may any such Option be exercised after the specified
expiration date of the option term.
3. General Creditor Status.
All cash payments to which you become entitled hereunder will be paid, when due,
from the general assets of the Company, and no trust fund, escrow arrangement or
other segregated account will be established as a funding vehicle for such
payment. Accordingly, your right (or the right of the personal representatives
or beneficiaries of your estate) to receive such cash payments hereunder will at
all times be that of a general creditor of the Company and will have no priority
over the claims of other general creditors.
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11
4. Indemnification.
To the maximum extent permitted by law, the indemnification provisions for
Officers and Directors under the Company By-Laws and Certificate of
Incorporation and pursuant to contract will be extended to you, during the
period following your Involuntary Termination, with respect to any and all
matters, events or transactions occurring or effected during your employment
with the Company.
5. Miscellaneous.
This letter agreement will be binding upon the Company, its successors and
assigns (including, without limitation, the surviving entity in any Change in
Control) and is to be construed and interpreted under the laws of the State of
California. This letter agreement supersedes all prior agreements between you
and the Company relating to the subject of severance benefits payable upon a
change in control or ownership of the Company or a change in management, and you
will not be entitled to any other severance benefits upon such a termination
other than those that are provided in this letter agreement and your stock
option agreements and the Plan. This letter may only be amended by written
instrument signed by you and an authorized officer of the Company. If any
provision of this letter agreement as applied to you or the Company or to any
circumstance should be adjudged by a court of competent jurisdiction to be void
or unenforceable for any reason, the invalidity of that provision will in no way
affect (to the maximum extent permissible by law) the application of such
provision under circumstances different from those adjudicated by the court, the
application of any other provision of this letter agreement, or the
enforceability or invalidity of this letter agreement as a whole. Should any
provision of this letter agreement become or be deemed invalid, illegal or
unenforceable in any jurisdiction by reason of the scope, extent or duration of
its coverage, then such provision will be deemed amended to the extent necessary
to conform to applicable law so as to be valid and enforceable or, if such
provision cannot be so amended without materially altering the intention of the
parties, then such provision will be stricken and the remainder of this letter
agreement will continue in full force and effect.
6. At Will Employment.
Nothing in this letter agreement is intended to provide you with any right to
continue in the employ of the Company (or any subsidiary) for any period of
specific duration or interfere with or otherwise restrict in any way your rights
or the rights of the Company (or any subsidiary), which rights are hereby
expressly reserved by each, to terminate your employment at will or as otherwise
specified in your employment contract.
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12
Please indicate your acceptance of the foregoing by signing the enclosed copy of
this letter and returning it to the Company.
Very truly yours,
CREDENCE SYSTEMS CORPORATION
By: /s/ Dr. William Howard
-------------------------------------------
Title: Chairman
-------------------------------------------
ACCEPTANCE
I hereby agree to all the terms and provisions of the foregoing letter agreement
governing the special benefits to which I may become entitled upon an
involuntary termination of my employment, or my voluntary resignation, under
certain prescribed circumstances following a change in control or ownership of
the Company or the appointment of a new permanent Chief Executive Officer of the
Company. I also have had an opportunity to consult with my own counsel. I
acknowledge that Brobeck, Phleger & Harrison LLP serves as counsel to the
Company with respect to the foregoing letter agreement.
Signature: /s/ David Ranhoff
-------------------------------------------------------
Dated: 3/31/99
-------------------------------------------------------
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Exhibit 99.19
CREDENCE SYSTEMS CORPORATION
215 Fourier Avenue
Fremont, CA 94539
March 31, 1999
Mr. Dennis P. Wolf
Dear Dennis:
We are pleased to inform you that the Company's Board of Directors has approved
a special severance benefit program for you. The purpose of this letter
agreement is to set forth the terms and conditions of your severance benefits
and to explain the limitations that will govern their overall value.
Your severance package will become payable should the Company terminate your
employment, or should you otherwise resign from the Company, under certain
circumstances following a substantial change in ownership or control of the
Company or upon the appointment of a new permanent Chief Executive Officer. To
understand the full scope of your benefits, you should familiarize yourself with
the definitional provisions of Part One of this letter agreement. The benefits
comprising your severance package are detailed in Part Two, and certain
restrictions applicable to your benefits are specified in Part Three. Part Four
sets forth the dollar limitation which will govern your total severance package
in the event your termination occurs in connection with a change in control or
ownership of the Company. Part Five deals with ancillary matters affecting your
severance arrangement.
Part One -- DEFINITIONS
-----------------------
For purposes of this letter agreement, the following definitions will be in
effect:
Average Compensation means the average of your W-2 wages from the Company for
the five (5) calendar years (or such fewer number of calendar years of
employment with the Company) completed immediately prior to the calendar year in
which a Change in Control is effected. Any W-2 wages for a partial year of
employment will be annualized, in accordance with the frequency which such wages
are paid during such partial year, before inclusion in your Average
Compensation.
Base Salary means the monthly rate of base salary in effect for you immediately
prior to the Change in Control or Change in Management (as applicable) or (if
greater) the monthly rate of base salary in effect at the time of your
Involuntary Termination.
Board means the Company's Board of Directors.
Change in Control means a change in the ownership or control of the Company
effected through any of the following transactions:
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2
(i) a merger or consolidation approved by the
Company's stockholders in which securities possessing more
than fifty percent (50%) of the total combined voting power of
the Company's outstanding securities are transferred to a
person or persons different from the persons holding those
securities immediately prior to such transaction;
(ii) any stockholder-approved sale, transfer or other
disposition of all or substantially all of the Company's
assets in complete liquidation or dissolution of the Company;
(iii) the acquisition, directly or indirectly, by any
person or related group of persons (other than the Company or
a person that directly or indirectly controls, is controlled
by or is under common control with, the Company) of beneficial
ownership (within the meaning of Rule 13d-3 of the Securities
Exchange Act of 1934, as amended) of securities possessing
more than fifty percent (50%) of the total combined voting
power of the Company's outstanding securities pursuant to a
tender or exchange offer made directly to the Company's
stockholders; or
(iv) a change in the composition of the Board over a
period of thirty-six (36) consecutive months or less such that
a majority of the Board members ceases, by reason of one or
more contested elections for Board membership, to be comprised
of individuals who either (A) have been Board members
continuously since the beginning of such period or (B) have
been elected or nominated for election as Board members during
such period by at least a majority of the Board members
described in clause (A) who were still in office at the time
the Board approved such election or nomination.
Change in Management means the appointment by the Board of a new permanent Chief
Executive Officer.
Code means the Internal Revenue Code of 1986, as amended.
Common Stock means the Company's common stock.
Company means Credence Systems Corporation, a Delaware corporation, or any
successor corporation, whether or not resulting from a Change in Control.
Disability means your inability to perform the normal and usual duties of your
position with the Company by reason of any physical or medical impairment which
is expected to result in death or continue for a period of twelve (12)
consecutive months or more.
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3
Fair Market Value means, with respect to the shares of Common Stock subject to
any of your Options, the closing selling price per share of Common Stock on the
date in question, as such price is reported by the National Association of
Securities Dealers on the Nasdaq National Market. If there is no closing selling
price reported for the Common Stock on the date in question, then the Fair
Market Value will be the closing selling price on the last preceding date for
which such report exists.
Health Care Coverage means the continued health care coverage to which you and
your eligible dependents may be entitled during any Salary Continuation Period
in effect for you under this letter agreement.
Involuntary Termination means (i) the involuntary termination of your employment
with the Company other than a Termination for Cause or (ii) your voluntary
resignation within ninety (90) days following (A) a material reduction in your
duties and responsibilities as Executive Vice President and Chief Financial
Officer of the Company or (B) a material reduction in your level of cash
compensation (rate of Base Salary plus target bonus under any
corporate-performance based bonus or incentive programs) or (C) the consummation
date of a Change of Control pursuant to which a comparable position in the
Company is not offered to you by the acquiring entity in the Change of Control
transaction.
In no event shall any of the following constitute grounds for a resignation
qualifying as an Involuntary Termination under this letter agreement:
- a change or other alteration in your duties which occurs by reason of
the Company's conversion from a public company into a subsidiary or division of
the acquiring entity in a Change in Control transaction but which does not
otherwise materially affect your day-to-day functions; or
- a general reduction in the level of base salary or target bonuses
payable to the executive officers of the Company which is applied to all or
substantially all of the Company's executive officers in connection with a cost
reduction program .
In addition, an Involuntary Termination will not be deemed to occur in the event
your employment terminates by reason of your death or Disability or a
Termination for Cause or in the event the acquiring entity in a Change in
Control transaction offers you a position comparable to your position with the
Company immediately prior to the Change in Control and at substantially the same
level of cash compensation.
Life Insurance Coverage means the continued coverage to which you may be
entitled under the Company's group-term and executive life insurance plans
during any Salary Continuation Period in effect for you under this letter
agreement.
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4
Option means any option granted to you under the Plan which is outstanding at
the time of the Change in Control or Change in Management (as applicable) or
upon your subsequent Involuntary Termination. In connection with a Change in
Control, your Options will be divided into two (2) separate categories as
follows:
Acquisition-Accelerated Options: any outstanding Option (or
installment thereof) which automatically accelerates, pursuant to the
acceleration provisions of the agreement evidencing that Option, upon a
Change in Control.
Severance-Accelerated Options: any outstanding Option (or installment
thereof) which, pursuant to Part Two of this letter agreement, accelerates
upon your Involuntary Termination following the Change in Control.
Option Parachute Payment means, with respect to any Acquisition-Accelerated
Option or any Severance-Accelerated Option, the portion of that Option deemed to
be a parachute payment under Code Section 280G and the Treasury Regulations
issued thereunder. The portion of such Option which is categorized as an Option
Parachute Payment will be calculated in accordance with the valuation provisions
established under Code Section 280G and the applicable Treasury Regulations and
will include an appropriate dollar adjustment to reflect the lapse of your
obligation to remain in the Company's employ as a condition to the vesting of
the accelerated installment. In no event, however, will the Option Parachute
Payment attributable to any Acquisition-Accelerated Option or
Severance-Accelerated Option (or accelerated installment) exceed the spread (the
excess of the Fair Market Value of the accelerated option shares over the option
exercise price payable for those shares) existing at the time of acceleration.
Other Parachute Payment means any payment in the nature of compensation (other
than the benefits to which you become entitled under Part Two of this letter
agreement) which are made to you in connection with the Change in Control and
which accordingly qualify as parachute payments within the meaning of Code
Section 280G(b)(2) and the Treasury Regulations issued thereunder. Your Other
Parachute Payment will include (without limitation) the Present Value, measured
as of the Change in Control, of the aggregate Option Parachute Payment
attributable to your Acquisition-Accelerated Options (if any).
Parachute Payment means any payment or benefit provided you under Part Two of
this letter agreement in connection with a Change in Control (other than the
Option Parachute Payment attributable to your Severance-Accelerated Options)
which is deemed to constitute a parachute payment within the meaning of Code
Section 280G(b)(2) and the Treasury Regulations issued thereunder.
Plan means (i) the Company's 1993 Stock Option Plan, as amended or restated from
time to time, and (ii) any successor stock incentive plan subsequently
implemented by the Company.
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5
Present Value means the value, determined as of the date of the Change in
Control, of any payment in the nature of compensation to which you become
entitled in connection with the Change in Control or your subsequent Involuntary
Termination, including (without limitation) the Option Parachute Payment
attributable to your Severance-Acceleration Options, the additional benefits to
which you become entitled under Part Two of this letter agreement and the Option
Parachute Payment attributable to your Acquisition-Accelerated Options. The
Present Value of each such payment will be determined in accordance with the
provisions of Code Section 280G(d)(4), utilizing a discount rate equal to one
hundred twenty percent (120%) of the applicable federal rate in effect at the
time of such determination, compounded semi-annually to the effective date of
the Change in Control or Change. Salary Continuation Period means the period for
which the payment of your Base Salary may, pursuant to Part Two of this letter
agreement, be continued following an Involuntary Termination of your employment
within a specified period following a Change in Control or Change in Management
(as applicable).
Termination for Cause means the Company's termination of your employment for any
of the following reasons: (i) your commission of any act of fraud, embezzlement
or dishonesty, (ii) your unauthorized use or disclosure of any confidential or
proprietary information of the Company, (iii) any intentional misconduct by you
which has a materially adverse effect upon the Company's business or reputation
or (iv) your continued failure to perform the major duties, functions and
responsibilities of your position after you have received written notice from
the Company identifying the deficiencies in your performance and have been given
a reasonable opportunity to cure those deficiencies, if curable.
Part Two - SEVERANCE BENEFITS
-----------------------------
Should your employment with the Company terminate by reason of an Involuntary
Termination within twelve (12) months after a Change in Control or Change in
Management, then you will become entitled to receive the severance benefits
provided under this Part Two. However, those benefits will be subject to the
restrictive covenants of Part Three of this letter agreement and will be in lieu
of all other severance benefits to which you might otherwise be entitled upon
such termination of your employment. In addition, any severance benefits paid to
you in connection with an Involuntary Termination following a Change in Control
will be subject to the dollar limitation of Part Four.
1. Accelerated Vesting.
(a) Change in Management. Should your employment with the Company
terminate by reason of an Involuntary Termination within twelve (12) months
after a Change in Management, then a portion of each outstanding Option
which you hold at the time of your Involuntary Termination, to the extent
not otherwise exercisable for all the shares of Common Stock subject to
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that Option, will immediately become exercisable on an accelerated basis
and may be exercised for any or all of the shares subject to that
accelerated portion until the earlier of (i) the expiration of the option
term or (ii) the end of the three (3)-month period following the date of
your Involuntary Termination. The number of option shares which shall vest
and become exercisable upon such an accelerated basis in connection with
such Involuntary Termination shall be equal to the number of shares for
which the Option would have become exercisable under the Exercise Schedule
in effect for that Option had you remained in the Company's employ for an
additional twelve (12) month period after such Involuntary Termination.
However, to the extent any Option is not exercisable for one or more shares
at the time of your Involuntary Termination, after taking into account the
acceleration provided under this paragraph, the Option will immediately
terminate with respect to those shares.
(b) Change in Control. Should your employment with the Company
terminate by reason of an Involuntary Termination within twelve (12) months
after a Change in Control, each outstanding Option which you hold at the
time of your Involuntary Termination, to the extent not otherwise
exercisable for all the shares of Common Stock subject to that Option, will
immediately become exercisable for all those option shares and may be
exercised for any or all of those shares as fully vested shares until the
earlier of (i) the expiration of the option term or (ii) the end of the
three (3)-month period following the date of your Involuntary Termination.
2. Severance Payment.
You will be entitled to salary continuation payments at your applicable rate of
Base Salary for a Salary Continuation Period of twelve (12) months. These salary
continuation payments will be made to you in accordance with the Company's
normal payroll practices and will be subject to the Company's collection of all
applicable federal and state income and employment withholding taxes.
3. Health Care Coverage.
Should you elect continued health care coverage under the Company's medical plan
pursuant to your rights under Code Section 4980B ("COBRA"), the Company will
provide such COBRA coverage, without charge, to you and your eligible
dependents. Such Company-paid coverage will continue until the earlier of (i)
the expiration of your Salary Continuation Period or (ii) the first date on
which you are covered under another employer's health benefit program without
exclusion for any pre-existing medical condition. Any additional health care
coverage to which you and your dependents may be entitled under COBRA following
the period of such Company-paid coverage will be at your sole cost and expense.
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4. Life Insurance Coverage.
You will be entitled to Life Insurance Coverage through your continued
participation in the Company's group term and executive life insurance plans
following your Involuntary Termination, and the Company will pay the entire
premium charged for such continued Life Insurance Coverage. Such Company-paid
coverage will continue until the earlier of (i) the expiration of your Salary
Continuation Period or (ii) the first date on which you are provided with
comparable coverage under another employer's life insurance plan. However, you
will be responsible for the satisfaction of any income and employment tax
liability attributable to your Company-paid Life Insurance Coverage. Your
payments and benefits under Paragraphs 2, 3 and 4 of this Part Two will
immediately terminate in the event you fail to abide by the restrictive
covenants set forth in Part Three of this letter agreement. In addition, those
payments and benefits will be subject to the dollar limitation of Part Four of
this letter agreement in the event of your Involuntary Termination following a
Change in Control.
Part THREE -- CONSULTING SERVICES
AND SPECIAL RESTRICTIVE COVENANTS
---------------------------------
1. Consulting Services.
In consideration for the salary continuation payments to which you become
entitled under Part Two, you will make yourself available during the Salary
Continuation Period to render such consulting services to the Company within
your area of expertise as may reasonably be requested by the Company's Chief
Executive Officer, but in no event may more than ten (10) hours of such services
will be required of you per month.
2. Cessation of Benefits.
Your Salary Continuation Period will immediately terminate, and all salary
continuation payments and Company-paid Health Care Coverage and Life Insurance
Coverage will immediately cease, should you:
(a) own, manage, operate, join, control or participate in the
ownership, management, operation or control of, or be employed by or
connected in any manner with, any enterprise which is engaged in any
business competitive with or similar to that of the Company; provided,
however, that such restriction will not apply to any passive investment
representing an interest of less than one percent (1%) of an outstanding
class of publicly-traded securities of any corporation or other enterprise;
(b) encourage or solicit any of the Company's employees to leave the
Company's employ for any reason or interfere in any other manner with
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employment relationships at the time existing between the Company and its
employees; or
(c) induce any of the Company's clients, customers, suppliers,
vendors, distributors, licensors or licensees to terminate their existing
business relationships with the Company or interfere in any other manner
with any existing business relationship between the Company and any client,
customer, supplier, vendor, distributor, licensor, licensee or other third
party.
Part FOUR -- LIMITATION ON BENEFITS
-----------------------------------
The benefit limitation of this Part Four shall be applicable only to the extent
the payments and benefits made to you pursuant to Paragraphs 2, 3 and 4 of Part
Two are attributable to your Involuntary Termination following a Change in
Control.
1. Benefit Limit.
The aggregate Present Value (measured as of the Change in Control) of the
benefits to which you become entitled under Part Two at the time of your
Involuntary Termination, namely, the salary continuation payments, the Option
Parachute Payment attributable to your Severance-Accelerated Options and your
Company-paid Health Care Coverage and Life Insurance Coverage, will in no event
exceed in amount the greater of the following dollar amounts (the "Benefit
Limit"):
(a) 2.99 times your Average Compensation, less the Present Value,
measured as of the Change in Control, of all Other Parachute Payments to
which you are entitled, or
(b) the amount which yields you the greatest after-tax amount of
benefits under Part Two of this letter agreement after taking into account
any excise tax imposed under Code Section 4999 on the payments and benefits
which are provided you under Part Two or which constitute Other Parachute
Payments.
The Option Parachute Payment attributable to the accelerated vesting of your
Acquisition-Accelerated Options at the time of the Change in Control shall also
be subject to the Benefit Limitation. However, no other terms or provisions of
your Acquisition-Accelerated Options shall be affected by this letter agreement.
2. Resolution Procedure.
In the event there is any disagreement between you and the Company as to whether
one or more payments to which you become entitled in connection with either the
Change in Control or your subsequent Involuntary Termination constitute
Parachute Payments, Option Parachute Payments or Other Parachute Payments or as
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to the determination of the Present Value of any of those payments, such dispute
will be resolved as follows:
(i) In the event temporary, proposed or final Treasury Regulations in
effect at the time under Code Section 280G (or applicable judicial
decisions) specifically address the status of any such payment or the
method of valuation therefor, the characterization afforded to such payment
by the Regulations (or such decisions) will, together with the applicable
valuation methodology, be controlling.
(ii) In the event Treasury Regulations (or applicable judicial
decisions) do not address the status of any payment in dispute, the matter
will be submitted for resolution to independent tax counsel mutually
acceptable to you and the Company ("Independent Counsel"). The resolution
reached by Independent Counsel will be final and controlling; provided,
however, that if in the judgment of Independent Counsel the status
of the payment in dispute can be resolved through the obtainment of a
private letter ruling from the Internal Revenue Service, a formal and
proper request for such ruling will be prepared and submitted by
Independent Counsel, and the determination made by the Internal Revenue
Service in the issued ruling will be controlling. All expenses incurred in
connection with the retention of Independent Counsel and (if applicable)
the preparation and submission of the ruling request will be shared equally
by you and the Company.
(iii) In the event Treasury Regulations (or applicable judicial
decisions) do not address the appropriate valuation methodology for any
payment in dispute, the Present Value thereof will, at the Independent
Counsel's election, be determined through an independent third-party
appraisal, and the expenses incurred in obtaining such appraisal will be
shared equally by you and the Company.
3. Status of Benefits.
A. No benefits shall be provided you under Part Two of this letter
agreement (including the accelerated vesting of your outstanding Options,
the salary continuation payments and the Company-paid Health Care Coverage
and Life Insurance Coverage) until the Present Value of the Option
Parachute Payment attributable to both your Severance-Accelerated Options
and your Acquisition-Accelerated Options has been determined and the status
of any payments in dispute under Paragraph 2 above has been resolved in
accordance therewith. The post-service exercise period in effect for your
Options shall be stayed and shall not run until the resolution process
hereunder is completed.
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B. Once the requisite determinations under Paragraph 2 have been made,
then to the extent the aggregate Present Value, measured as of the Change
in Control, of (i) the Option Parachute Payment attributable to your
Severance-Accelerated Options (or installments thereof) plus (ii) the
Parachute Payment attributable to your other benefit entitlements under
Part Two of this letter agreement would, when added to the Present Value of
all your Other Parachute Payments (including the Option Parachute Payment
attributable to your Acquisition-Accelerated Options), exceed the Benefit
Limit, your salary continuation payments will first be reduced, and then
the period of your Company-paid Health Care Coverage and Life Insurance
Coverage will be shortened, to the extent necessary to assure that such
Benefit Limit is not exceeded.
Part Five - MISCELLANEOUS
-------------------------
1. Termination for Cause.
Should your employment cease by reason of a Termination for Cause or should you
depart or voluntarily resign under circumstances which would otherwise
constitute grounds for a Termination for Cause, then the Company will only be
required to pay you (i) any unpaid compensation earned for services previously
rendered through the date of such termination and (ii) any accrued but unpaid
vacation benefits or sick days, and no benefits will be payable to you under
Part Two of this letter agreement.
2. Death.
Should you die before receipt of one or more salary continuation payments to
which you become entitled under this letter agreement, then those payments will
be made to the executors or administrators of your estate. Should you die before
you exercise all your outstanding Options as accelerated hereunder, then such
Options may be exercised, within twelve (12) months after your death, by the
executors or administrators of your estate or by persons to whom the Options are
transferred pursuant to your will or in accordance with the laws of inheritance.
In no event, however, may any such Option be exercised after the specified
expiration date of the option term.
3. General Creditor Status.
All cash payments to which you become entitled hereunder will be paid, when due,
from the general assets of the Company, and no trust fund, escrow arrangement or
other segregated account will be established as a funding vehicle for such
payment. Accordingly, your right (or the right of the personal representatives
or beneficiaries of your estate) to receive such cash payments hereunder will at
all times be that of a general creditor of the Company and will have no priority
over the claims of other general creditors.
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4. Indemnification.
To the maximum extent permitted by applicable law, the indemnification
provisions for Officers and Directors under the Company By-Laws and Certificate
of Incorporation and pursuant to contract will be extended to you, during the
period following your Involuntary Termination, with respect to any and all
matters, events or transactions occurring or effected during your employment
with the Company.
5. Miscellaneous.
This letter agreement will be binding upon the Company, its successors and
assigns (including, without limitation, the surviving entity in any Change in
Control) and is to be construed and interpreted under the laws of the State of
California. This letter agreement supersedes all prior agreements between you
and the Company relating to the subject of severance benefits payable upon a
change in control or ownership of the Company or a change in management, and you
will not be entitled to any other severance benefits upon such a termination
other than those that are provided in this letter agreement or your stock option
agreements and the Plan. This letter agreement specifically supersedes those
provisions of the employee offer letter agreement dated March 13, 1998 by and
between the Company and you as such provisions relate to the subject matter of
this letter agreement. This letter may only be amended by written instrument
signed by you and an authorized officer of the Company. If any provision of this
letter agreement as applied to you or the Company or to any circumstance should
be adjudged by a court of competent jurisdiction to be void or unenforceable for
any reason, the invalidity of that provision will in no way affect (to the
maximum extent permissible by law) the application of such provision under
circumstances different from those adjudicated by the court, the application of
any other provision of this letter agreement, or the enforceability or
invalidity of this letter agreement as a whole. Should any provision of this
letter agreement become or be deemed invalid, illegal or unenforceable in any
jurisdiction by reason of the scope, extent or duration of its coverage, then
such provision will be deemed amended to the extent necessary to conform to
applicable law so as to be valid and enforceable or, if such provision cannot be
so amended without materially altering the intention of the parties, then such
provision will be stricken and the remainder of this letter agreement will
continue in full force and effect.
6. At Will Employment.
Nothing in this letter agreement is intended to provide you with any right to
continue in the employ of the Company (or any subsidiary) for any period of
specific duration or interfere with or otherwise restrict in any way your rights
or the rights of the Company (or any subsidiary), which rights are hereby
expressly reserved by each, to terminate your employment at will or as otherwise
specified in your employment contract.
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Please indicate your acceptance of the foregoing by signing the enclosed copy of
this letter and returning it to the Company.
Very truly yours,
CREDENCE SYSTEMS CORPORATION
By: /s/ Dr. William G. Howard
------------------------------------------
Title: Chairman
------------------------------------------
ACCEPTANCE
I hereby agree to all the terms and provisions of the foregoing letter agreement
governing the special benefits to which I may become entitled upon an
involuntary termination of my employment, or my voluntary resignation, under
certain prescribed circumstances following a change in control or ownership of
the Company or the appointment of a new permanent Chief Executive Officer of the
Company. I also have had an opportunity to consult with my own counsel. I
acknowledge that Brobeck, Phleger & Harrison LLP serves as counsel to the
Company with respect to the foregoing letter agreement.
Signature: /s/ Dennis P. Wolf
-----------------------------------------------------
Dated: 3/31/99
-----------------------------------------------------
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Exhibit 99.20
CREDENCE SYSTEMS CORPORATION
215 Fourier Avenue
Fremont, CA 94539
Dr. William G. Howard, Jr.
Dear Bill:
This letter agreement is intended to memorialize the terms and
conditions under which you have agreed to serve as the Chairman of the Company's
Board of Directors and for your services performed during the period the Company
is engaged in the search for a new Chief Executive Officer. Those terms and
conditions may be summarized as follows:
1. You will assume your new position as Chairman of the Board of Directors,
effective December 8, 1998, and during the period you serve in that
capacity prior to the Board's appointment of a new permanent Chief
Executive Officer, you will have both executive officer and employee status
with the Company.
2. As an employee, your base salary will be $10,000 per month and will be paid
in accordance with the Company's normal payroll practices, subject to the
Company's collection of all applicable income and employment tax
withholdings. You will be reimbursed for all reasonable expenses incurred
in connection with your employment.
3. You were granted a stock option on December 8, 1998 to purchase 15,000
shares of the Company's common stock at an exercise price of $19.8125 per
share, the closing selling price on December 8, 1998. The option will be a
non-statutory option under the federal tax laws and will have a maximum
term of ten (10) years, subject to earlier termination upon your cessation
of service with the Company as an employee, consultant or Board member. The
option will become exercisable for all of the option shares upon the
earlier of (i) your completion of six (6) years of service with the Company
measured from the December 8, 1998 grant date or (ii) the Board's
appointment of a new permanent Chief Executive Officer.
4. During your period of employment with the Company, you will not be eligible
to receive any compensation payable to the non-employee members of the
Board, whether in the form of cash fees or automatic option grants under
the Company's 1993 Stock Option Plan.
5. You will be eligible to participate in all group term life insurance plans,
group health plans, accidental death and dismemberment plans and short-term
disability programs and other executive perquisites which are made
available to the Company's executives and for which you qualify. You will
accrue paid vacation benefits at the rate of one (1) week per calendar
quarter.
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6. The executive officer and employee status of your position as Chairman of
the Board is not for any specified period of time. As a result, either you
or the Company are free to terminate that status at any time for any
reason, with or without cause. In addition, your employment status with the
Company will terminate immediately upon the Board's appointment of a new
Chief Executive Officer or upon your death or disability. At the time your
employment status terminates, the Company will only be required to pay you
(i) any unpaid base salary for services rendered through the date of such
termination and (ii) the dollar value of all accrued and unused vacation
benefits based upon the level of base salary in effect for you at the time
of your termination. The termination of your executive officer and employee
status will not affect your continuation on the Board as a non-employee
director or as Chairman of the Board, if the Board so determines.
7. This letter agreement constitutes the full and complete agreement between
us concerning the terms of your service as an executive officer and
employee of the Company in your capacity as Chairman of the Board. Although
your duties, title, compensation and/or benefits, as well as the Company's
personnel policies and procedures, may change from time to time, the "at
will" nature of your employment may only be changed by an express written
agreement signed by you and a duly authorized officer of the Company.
To indicate your acceptance of the foregoing terms of your employment,
please sign the acceptance paragraph below and return it to my attention.
Very truly yours,
/s/ Dennis Wolf_____________________
ACCEPTANCE
I hereby accept and agree to the terms and conditions
specified above for my employment with Credence Systems Corporation in the
executive officer position of Chairman of the Board.
/s/ Dr. William G. Howard, Jr.______
Dr. William G. Howard, Jr.
Dated: March 31, 1999
58
