SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 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 September 8, 1999, there were 21,722,791 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>
July 31, October 31,
1999 1998a
-------------- --------------
<S> <C> <C>
ASSETS (unaudited)
Current assets:
Cash and cash equivalents................ $ 66,066 $ 48,391
Restricted cash.......................... - 2,400
Short-term investments................... 52,810 62,777
Accounts receivable, net................. 47,091 33,901
Inventories.............................. 35,822 37,406
Other current assets..................... 27,115 40,676
-------------- ---------------
Total current assets................... 228,904 225,551
Long-term investments...................... 26,381 20,357
Property and equipment, net................ 42,396 41,764
Other assets............................... 16,055 18,517
============== ===============
Total assets........................... $313,736 $306,189
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................... $ 20,616 $ 8,090
Accrued liabilities....................... 24,495 26,978
Income taxes payable...................... 5,291 5,877
Total current liabilities............... 50,402 40,945
Convertible Subordinated Notes.............. 96,610 115,000
Minority interest........................... 175 227
Stockholders' equity........................ 166,549 150,017
============== ===============
Total liabilities and stockholders' equity...$313,736 $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 Nine Months Ended
July 31, July 31,
---------------------- --------------------
1999 1998 1999 1998
--------- -------- -------- -------
<S> <C> <C> <C> <C>
Net sales .................................................. $ 52,378 $ 37,322 $ 116,968 $ 194,357
Cost of goods sold ......................................... 24,826 16,901 59,103 84,003
Cost of goods sold - restructure and other ................. -- 20,952 -- 20,952
--------- --------- --------- ---------
Gross margin ............................................... 27,552 (531) 57,865 89,402
Operating expenses:
Research and development ................................ 9,631 11,569 27,780 37,293
Selling, general and administrative ..................... 14,184 13,987 40,287 52,226
Special charges ......................................... -- 23,224 6,231 23,224
--------- --------- --------- ---------
Total operating expenses ............................ 23,815 48,780 74,298 112,743
--------- --------- --------- ---------
Operating income (loss) .................................... 3,737 (49,311) (16,433) (23,341)
Interest and other income (expenses), net .................. (6) (7) (67) 1,151
--------- --------- --------- ---------
Income (loss) before income tax provision (benefit) ........ 3,731 (49,318) (16,500) (22,190)
Income tax provision (benefit) ............................. 1,352 (15,682) (5,948) (6,458)
Minority interest (benefit) ................................ 15 (50) (31) (124)
========= ========= ========= =========
Net income (loss) before extraordinary items ............... 2,364 (33,586) (10,521) (15,608)
========= ========= ========= =========
Gain on extinguishment of debt (net of taxes of $275 & $926) 488 -- 1,646 --
--------- --------- --------- ---------
Net income (loss) .......................................... $ 2,852 $ (33,586) $ (8,875) $ (15,608)
========= ========= ========= =========
Net income (loss) per share
Basic (before extraordinary items) .................... $ 0.11 $ (1.55) $ (0.51) $ (0.72)
Basic (extraordinary items) ........................... $ 0.02 -- $ 0.08 --
--------- --------- --------- ---------
Basic .................................................. $ 0.13 $ (1.55) $ (0.43) $ (0.72)
========= ========= ========= =========
Diluted (before extraordinary items) .................. $ 0.11 $ (1.55) $ (0.51) $ (0.72)
Diluted (extraordinary items) ......................... $ 0.02 -- $ 0.08 --
--------- --------- --------- ---------
Diluted ................................................ $ 0.13 $ (1.55) $ (0.43) $ (0.72)
========= ========= ========= =========
Number of shares used in computing per share amount
Basic .................................................. 21,257 21,674 20,874 21,726
========= ========= ========= =========
Diluted ................................................ 22,116 21,674 20,874 21,726
========= ========= ========= =========
</TABLE>
See accompanying notes.
4
<PAGE>
CREDENCE SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (decrease) in cash and cash equivalents
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended July 31,
---------------------------
1999 1998
<S> <C> <C>
--------- ---------
Cash flows from operating activities:
Net (loss) ...................................................................... $ (8,875) $ (15,608)
Adjustments to reconcile net (loss) to net cash provided by operating activities:
Depreciation and amortization ................................................ 15,248 12,838
Special charges .............................................................. 6,231 44,177
Loss on disposal of property and equipment ................................... 333 149
Deferred income taxes ..................................................... -- (11,512)
Gain on extinguishment of debt ............................................... (2,572) --
Minority interest ............................................................ (31) 124
Changes in operating assets and liabilities:
Restricted cash, accounts receivable, inventories and other current assets 1,701 (23,503)
Accounts payable, accrued liabilities and income taxes payable ............ 9,362 4,157
--------- ---------
Net cash provided by operating activities .............................. 21,397 10,822
Cash flows from investing activities:
Purchases of available-for-sale securities ...................................... (69,114) (135,080)
Maturities of available-for-sale short-term securities .......................... 17,489 63,644
Sales of available-for-sale securities .......................................... 55,568 11,977
Acquisition of property and equipment ........................................... (13,939) (8,319)
Other assets .................................................................... (1,734) (10,498)
--------- ---------
Net cash (used in) investing activities ................................... (11,730) (78,276)
Cash flows from financing activities:
Issuance of common stock ........................................................ 6,977 3,109
Other ........................................................................... (21) --
Issuance (purchase) of treasury stock .......................................... 1,052 (12,795)
--------- ---------
Net cash provided by (used in) financing activities ....................... 8,008 (9,686)
--------- ---------
Net increase (decrease) in cash and cash equivalents ............................... 17,675 (77,140)
Cash and cash equivalents at beginning of period ................................... 48,391 132,761
========= =========
Cash and cash equivalents at end of period ......................................... $ 66,066 $ 55,621
========= =========
Supplemental disclosures of cash flow information:
Interest paid ................................................................... $ 3,018 $ 3,103
Income taxes refunded ........................................................... $ 19,357 $ --
Income taxes paid ............................................................... $ -- $ 12,492
Non-cash investing activities:
Net transfers of inventory to property and equipment ............................ $ 2,654 $ 7,427
Non-cash financing activities:
Income tax benefit from stock option exercises .................................. $ 1,923 $ 970
Issuance of treasury stock for convertible subordinated notes ................... $ 15,433 $ --
Exchange of convertible subordinated notes for common stock plus issuance costs.. $ (18,005) $ --
</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 July 31, 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 July 31, 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 the 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, and 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):
July 31, October 31,
1999 1998
----------- -----------
(unaudited)
Raw materials $ 11,205 $ 9,860
Work-in-process 19,095 21,609
Finished goods 5,522 5,937
============= =============
$ 35,822 $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 2,568,705 shares at an average price of $22.72
per share were outstanding at July 31, 1999. Options are 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>
3. Net Income (Loss) Per Share (continued)
---------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31, July 31,
----------------------------- ------------------------------
1999 1998 1999 1998
------------ ------------- ------------ --------------
<S> <C> <C> <C> <C>
Numerator: (in thousands, except per share amounts)
Numerator for basic and diluted net income (loss)
per share-net income (loss) $ 2,852 $ (33,586) $ (8,875) $ (15,608)
------------ ------------ ------------ ------------
Denominator:
Denominator for basic net income (loss)
per share-weighted-average shares 21,257 21,674 20,874 21,726
Effect of dilutive securities-employee stock options 859 - - -
------------ ------------ ------------ ------------
Denominator for diluted earnings per share-adjusted
weighted-average shares and assumed conversions 22,116 21,674 20,874 21,726
------------ ------------ ------------ ------------
Basic net income (loss) per share$ 0.13 $ (1.55) $ (0.43) $ (0.72)
============ ============ ============ ============
Diluted net income (loss) per share $ 0.13 $ (1.55) $ (0.43) $ (0.72)
============ ============= ============ ==============
</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. For
the periods ended July 31, 1999 and 1998, total comprehensive income (loss)
amounted to:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31, July 31,
---------------------------- ------------------------------
1999 1998 1999 1998
------------ ------------- ------------ --------------
(in thousands)
<S> <C> <C> <C> <C>
Net income (loss) $ 2,852 $ (33,586) $ (8,875) $ (15,608)
Other comprehensive income, net of tax:
Foreign currency translation adjustment 1 (18) 47 (98)
Unrealized gain (loss) on available-for-sale securities (799) (131) (369) 70
------------ ------------- ------------ --------------
Other comprehensive income (loss) (798) (149) (322) (28)
$ 2,054 $ (33,735) $ (9,197) $ (15,636)
Total comprehensive income (loss) ============ ============= ============ ==============
</TABLE>
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.
7
<PAGE>
6. Extraordinary Item and Special Charges
--------------------------------------
During the third fiscal quarter of 1999, the Company recorded an
extraordinary gain of $ 488,000, net of tax of $275,000 on the exchange of
275,000 shares of the Company's common stock held in treasury for an aggregate
of $9,350,000 of its 5 1/4% Convertible Subordinated Notes due 2002 (the
"Notes"). For the nine month period ended July 31, 1999, the Company recorded an
extraordinary gain of $1,646,000, net of tax of $926,000 on the exchange of
603,000 shares of the Company's common stock held in treasury for an aggregate
of $18.4 of its Notes. The Company may engage in similar transactions in the
future.
For the nine month period ended July 31, 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. As of July 31, 1999, approximately
$2.4 million in accrued liabilities related to special charges recorded in 1998
and 1999 remained on the Company's balance sheet, representing rent and
settlement costs on excess facilities. These amounts will be paid out over the
next six months.
In the third quarter of fiscal 1998, the Company recorded restructure and
other costs totaling $39.4 million. These charges were the result of the
Company's response to a major downturn in the business outlook for the ATE and
related semiconductor and semiconductor equipment industries which took place
during the period. Also in the third capital fiscal quarter of 1998, the Company
recognized approximately $4.8 million of acquired in-process research and
development expense related to the acquisition of certain assets and assumed
liabilities of Heuristic Physics Laboratories, Inc.
As of July 31, 1999, approximately $2.4 million in accrued liabilities
related to special charges recorded in 1998 and 1999 remained on the Company's
balance sheet, representing rent and settlement costs on excess facilities.
These amounts will be paid out over the next six months.
7. Subsequent Event - Acquisition of Opmaxx, Inc.
----------------------------------------------
On July 20, 1999 the Company announced that it would be exercising its
right to acquire Opmaxx, Inc. Opmaxx provides solutions for integrating design,
test and manufacturing of analog/mixed signal systems. The acquisition will be
accounted for in the fourth fiscal quarter of 1999 under the purchase method of
accounting. The acquisition was closed in September 1999 for approximately $8.0
million in cash and assumed liabilities.
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.
8
<PAGE>
The following table sets forth items from the Condensed Consolidated
Statements of Operations as a percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31, July 31,
--------------------------- ---------------------------
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.................................... 47.4% 45.3% 50.5% 43.2%
Cost of goods sold - restructure and other......... - 56.1% - 10.8%
------------ ------------ ------------ ------------
Gross margin.......................................... 52.6% (1.4%) 49.5% 46.0%
Operating expenses
Research and development........................... 18.4% 31.0% 23.8% 19.2%
Selling, general, and administrative............... 27.1% 37.5% 34.4% 26.9%
Special charges.................................... - 62.3% 5.3% 11.9%
----------------------------------------------------------
Total operating expenses........................ 45.5% 130.8% 63.5% 58.0%
Operating income (loss)............................... 7.1% (132.2%) (14.1%) (12.0%)
Interest and other income (expenses), net............. (0.0)% 0.0% (0.0%) 0.6%
---------------------------- ----------------------------
Income (loss) before income taxes..................... 7.1 % (132.2%) (14.1%) (11.4%)
Income taxes provision (benefit)...................... 2.6% (42.2%) (5.1 %) (3.3%)
Minority interest..................................... 0.0% (0.0%) (0.0%) (0.1%)
%)
---------------------------- ----------------------------
Net income (loss) before extraordinary items.......... 4.5% (90.0%) (9.0%) (8.0%)
============================ ============================
Gain on extinguishment of debt........................ 0.9% - 1.4% -
------------ ------------ ------------ ------------
Net income (loss)..................................... 5.4% (90.0%) (7.6%) (8.0%)
============================ ============================
</TABLE>
9
<PAGE>
RESULTS OF OPERATIONS
NET SALES
Net sales consist of revenues from systems sales, spare parts, maintenance
contracts and software products principally in the semiconductor automatic test
equipment market ("ATE"). Net sales were $52.4 million for the third quarter of
fiscal 1999, representing an increase of 40.0% from the net sales of $37.3
million in the comparable period of fiscal 1998. The increase was due primarily
to an improvement in the overall health of the semiconductor industry and the
backend capital equipment sector specifically. The Company experienced improved
overall demand from integrated device manufacturers as well as contract test
house customers. Net sales were $117 million for the nine month period ended
July 31, 1999 compared to $194.4 million for the comparable period of fiscal
1998. The decline in net sales of $77.4 million, or 40% for the nine month
period, was due primarily to higher demands for ATE in the first and second
quarters of fiscal 1998. International net sales accounted for approximately
63.7% and 69.5% of the total net sales for the third quarter and nine months of
fiscal 1999, compared to approximately 61% and 72% for the comparable periods in
1998. The Company's international net sales 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 requirements, international and domestic sales
mix and field service margins. The gross margin was 52.6% and 49.5% for the
third quarter and nine month periods of fiscal 1999, compared with 54.7% and
56.8% (without the restructuring charge) for the comparable periods of fiscal
1998. The decrease in gross margin as a percent of sales was due to lower
average selling prices, changes in the mix of products sold, and 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 $9.6 million in the third
quarter of fiscal 1999, a decrease of $2.0 million or 17.0% from $11.6 million
in the same period of fiscal 1998. R&D expenses were $27.8 million in the first
nine months of fiscal 1999, a decrease of $9.5 million or 25% from the same
period in fiscal 1998. R&D expenses decreased due to lower headcount and related
expenses, outside services and project related expenses. The Company currently
intends to continue to invest significant resources in the development of
derivative 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 $14.2 million in
the third quarter of fiscal 1999 compared to $14.0 million in the third quarter
of fiscal 1998. SG&A expenses increased due to commission expenses associated
with higher revenues offset in part by lower headcount and related expenses. As
a percentage of net sales, SG&A expenses were 27.1% for the third quarter of
fiscal 1999, compared with 37.5% for the corresponding period in fiscal 1998.
SG&A expenses were $40.3 million in the first nine months of fiscal 1999, a
decrease of $11.9 million or 23% from the same period in fiscal 1998. 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 current employees and the costs of moving the Company's
primary Oregon operations into a new facility.
10
<PAGE>
SPECIAL CHARGES AND EXTRAORDINARY ITEM
During the third fiscal quarter of 1999, the Company recorded an
extraordinary gain of $ 488,000, net of tax of $275,000 on the exchange of
275,000 shares of the Company's common stock held in treasury for an aggregate
of $9,350,000 of its Notes. For the nine month period ended July 31, 1999, the
Company recorded an extraordinary gain of $1,646,000, net of tax of $926,000 on
the exchange of 603,000 shares of the Company's common stock held in treasury
for an aggregate of $18.4 of its Notes. The Company may engage in similar
transactions in the future.
For the nine month period ended July 31, 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. As of July 31, 1999, approximately
$2.4 million in accrued liabilities related to special charges recorded in 1998
and 1999 remained on the Company's balance sheet, representing rent and
settlement costs on excess facilities. These amounts will be paid out over the
next six months.
In the third quarter of fiscal 1998, the Company recorded restructure and
other costs totaling $39.4 million. These charges were the result of the
Company's reaction to a major downturn in the business outlook for the ATE and
related semiconductor and semiconductor equipment industries which took place
during the period. Also in the third fiscal quarter of 1998, the Company
recognized approximately $4.8 million of acquired in-process research and
development expense related to the acquisition of certain assets and assumed
liabilities of Heuristic Physics Laboratories, Inc.
As of July 31, 1999, approximately $2.4 million in accrued liabilities
related to special charges recorded in 1998 and 1999 remained on the Company's
balance sheet, representing rent and settlement costs on excess facilities.
These amounts will be paid out over the next six months.
INTEREST AND OTHER INCOME EXPENSES, NET
Net interest and other expenses for the third fiscal quarter of 1999 was at
$6,000, down from $7,000 as of the third fiscal quarter of 1998. For the nine
month periods ended July 31, 1999 and 1998, the net interest and other expenses
were $67,000 and income of $1.2 million, respectively. Overall expenses are
attributable to the disposal of fixed assets.
INCOME TAXES The Company's income tax benefit is based on a projected
effective tax rate.
The projected effective tax rate for the first nine months of fiscal 1999
was 36% compared to 29% for the first nine months of fiscal 1998. Excluding the
impact of in-process research and development, the Company's effective tax rate
for the first nine months of fiscal 1998 was 34%.
Realization of a portion of the net deferred tax assets at July 31, 1999 is
dependent on the Company's ability to generate approximately $42,000,000 of
future taxable income. Management believes that it is more likely than not that
the assets may be realized based on current profitability. However, there can be
no assurance that the Company will meet its expectations of future income.
Management evaluates the realizability of the deferred tax assets quarterly and
assesses 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."
11
<PAGE>
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 all but two systems as of July 31, 1999. The
remaining 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
$1.6 million through July 31, 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.
12
<PAGE>
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.
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 principally because the Company's
international revenues are denominated primarily in United States dollars.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $21.4 million for the nine
months ended July 31, 1999. This cash flow from operating activities was
primarily attributable to net income before depreciation and amortization and
special charges of approximately $12.6 million, income tax refunds of $19.4
million, offset by cash used for net changes in the remaining operating assets
and liabilities.
Net cash used in investing activities was $11.7 million for the nine months
ended July 31, 1999. Cash flow used in investing activities was primarily
attributable to purchases of property and equipment of approximately $13.9
million, and net maturities and sales of available-for-sale securities of
approximately $3.9 million.
Net cash provided by financing activities was $8.0 million for the nine
months ended July 31, 1999. The cash provided by financing activities was
primarily attributable to treasury stock and common stock issued in accordance
with the Company's employee stock option and stock purchase plans.
The Company recorded non-cash transactions during the nine month period
ended July 31, 1999 for the exchange of 603,000 shares of the Company's Common
Stock held in treasury for an aggregate of $18.4 million of its Notes. These
transactions resulted in extraordinary gains of $1.6 million, net of tax of $0.9
million, as well as an increase in paid-in capital of $15.4 million.
As of July 31, 1999, the Company had working capital of approximately $179
million including cash and short-term investments of $119 million, $47.1 million
of accounts receivable and $35.8 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 will continue to 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 $50.4 million for the nine months ending
July 31, 1999.
The Company's principal sources of liquidity as of July 31, 1999 consisted
of approximately $ 66.1 million of cash and cash equivalents, short-term
investments of $52.8 million and $20 million available under the Company's
unsecured working capital line of credit expiring July 22, 2000. In addition,
the Company has $26.4 million of available for sale securities classified as
long-term. As of July 31, 1999, no amounts were outstanding under the unsecured
line of credit. Additionally, as of July 31, 1999, the Company had operating
lease commitments for facilities and test and other equipment totaling
approximately $ 42.3 million.
13
<PAGE>
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 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 $ 66,066 - - - - -
Average rate 4.85% - - - - -
Short term investments
Fixed rate $ 52,810 - - - - -
Average rate 5.58% - - - - -
Long term investments
Fixed rate $ - $ 16,354 $ 10,027 - - -
Average rate - 5.36% 5.32% - - -
------------ ------------ -------------- ----------- --------- -------------
Total investment securities $ 118,876 $ 16,354 10,027 - - -
Average rate 5.19% 5.36% 5.32% - - -
Long term debt
Fixed rate - - - $ 96,610 - -
Average rate - - - 5.25% - -
</TABLE>
The Company attempts to mitigate 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 maintain a prudent amount of diversification.
The Company has no current cash flow exposure due to rate changes for its
$96.6 million Convertible Subordinated Notes. The Company has a $20 million line
of credit under which it can borrow either at the bank's prime rate or the LIBOR
rate. As of July 31, 1999, the Company had no borrowings under its line of
credit.
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 Q3
<S> <C> <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 54.2
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 3.5
</TABLE>
14
<PAGE>
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 alliances;
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, and 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
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 domestic sales mix and field service margins;
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.
15
<PAGE>
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 continue to be profitable or that we will not sustain
losses in the future. 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.
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.
16
<PAGE>
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 third quarter of fiscal
1999, the net sales were $52.4 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.
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 continue 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.
17
<PAGE>
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.
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 products under development internally as well as products obtained in
acquisitions. Our customers require testers and software products with
additional features and higher performance and other capabilities. We are
therefore required to enhance the performance and other capabilities of our
existing systems and software products and related software tools. Any success
we may have in developing new and enhanced systems and software products and new
features to our existing systems and software products will depend upon a
variety of factors, including:
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.
18
<PAGE>
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.
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
42%, 34%, 30% and 25% of our net sales in the first nine months 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 systems 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.
19
<PAGE>
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.
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 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.
20
<PAGE>
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.
Transition in Our Executive Management
- --------------------------------------
On July 31, 1999 the Company announced the appointment of Graham J. Siddall
as the new President and Chief Executive Officer of Credence Systems
Corporation. Mr. Siddall joins the Company from KLA-Tencor where he was
Executive Vice President of the Wafer Inspection Group. The Company has
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 the search for a new
chief executive officer which culminated in the appointment of Mr. Siddall.
These transitions have placed significant demands on our operational,
administrative and financial staff and we anticipate that these demands will
continue in the near term. We cannot be certain that such transitions will not
have a material adverse effect on our business, financial condition and results
of operations, or on the way we are perceived by the market or on the price of
our common stock.
International Sales
- -------------------
International sales accounted for approximately 64%, 70%, 69%, 70% and 67%
of our total net sales for the third quarter and first nine months 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
62%, 60%, 66% and 58% of our total net sales for the first nine months 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
21
<PAGE>
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.
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 outstanding $96.6 million of such Notes which resulted in a ratio
22
<PAGE>
of long-term debt to total long-term capitalization at July 31, 1999 of
approximately 37%. As a result, our principal and interest obligations are
substantial. The degree to which we are leveraged could materially adversely
affect our ability to obtain financing for working capital, acquisitions or
other purposes and could make our business more vulnerable to industry downturns
and competitive pressures. Our ability to meet debt service obligations will be
dependent upon our future performance, which will be subject to financial,
business and other factors affecting our operations, many of which are beyond
our control. If we raise additional funds by issuing equity securities, our
stockholders could be significantly diluted. We may exchange Notes for shares of
our common stock or may refinance 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 all but two systems by July 31, 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.
23
<PAGE>
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
$1.6 million through July 31, 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 nine months of fiscal 1999, the
price of our common stock ranged from a high of $42.44 to a low of $13.69. 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
None
Item 5. Other Information
(a) The acquisition of Opmaxx, Inc. was closed in September 1999 for
approximately $8.0 million in cash and assumed liabilities. The
acquisition will be accounted for in the fourth fiscal quarter of 1999
under the purchase method of accounting.
(b) On July 31, 1999 the Company announced the appointment of Graham J.
Siddall as the new President and Chief Executive Officer of Credence
Systems Corporation. Mr. Siddall joins the Company from KLA-Tencor
where he was Executive Vice President of the Wafer Inspection Group.
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 August 26, 1999 reporting
its financial results for the third quarter of fiscal year 1999.
(c) The Company filed a report on Form 8-K on July 22, 1999 reporting the
planned acquisition of Opmaxx, Inc.
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)
Sept. 10, 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
10.4 Amendment to Loan Agreement dated July 23, 1999 between Silicon Valley
Bank and Credence Systems Corporation.
10.5 Employment Agreement by and between the Company and Graham J. Siddall
27.2 EDGAR Financial Data Schedule
28
<PAGE>
AMENDMENT
TO
LOAN AGREEMENT
--------------
This Amendment to Loan Agreement is entered into as of July 23, 1999 (the
"Amendment") by and between SILICON VALLEY BANK ("Agent" or "Bank") and CREDENCE
SYSTEMS CORPORATION, a Delaware corporation ("Credence" or "Borrower").
RECITALS
Borrower, Credence Korea, Credence Systems K.K., Bank and Bank of Hawaii
are parties to that certain Loan Agreement dated as of July 26, 1996, as amended
by an Amendment to Loan Agreement dated as of July 25, 1997, an Amendment to
Loan Agreement dated as of July 24, 1998, and an Amendment to Loan Agreement
dated as of February 5, 1999. Bank of Hawaii, Credence Korea and Credence
Systems K.K. have elected not to continue to be parties to the Agreement. Bank
and Borrower desire to amend the Agreement to reflect such withdrawals and to
reflect certain other changes, all in accordance with the terms of this
Amendment.
NOW, THEREFORE, the parties agree as follows:
1. Bank of Hawaii, Credence Korea and Credence Systems, K.K. shall cease to
be parties to the Agreement. All references to such entities in the Agreement
are deleted.
2. The following definitions in Section 1.1 are amended and replaced in
their entirety to read as follows:
a. "Collateral" means the property of each Borrower described on
Exhibit D attached hereto.
b. "Committed Line" means Twenty Million Dollars ($20,000,000)
c. "Maturity Date" means July 22, 2000.
3. The defined terms "Optional Currency", "Optional Currency Rate Advance",
"Optional Currency Rate" and "Optional Currency Rate Instruments" are deleted
from the Agreement.
4. The first paragraph of Section 2.1 (a) is amended to read as follows:
"Subject to the terms and conditions of this Agreement, Bank will make
Advances to Borrower in United States Dollars in an amount that does
not exceed the Committed Line minus the face amount of all outstanding
Letters of Credit (including undrawn and drawn but unreimbursed
Letters of Credit) minus the reserve, if any, taken under Section
2.1.1(d). Notwithstanding the foregoing, if the aggregate amount of
outstanding Advances plus Letters of Credit plus the reserve, if any,
taken under Section 2.1.1(d) exceed Fifteen Million Dollars
($15,000,000), then Bank will make Advances to Borrower in an
aggregate amount not to exceed the lesser of (i) the Committed Line or
(ii) the Borrowing Base plus one hundred percent (100%) of Accounts
that are supported by one or more letters of credit in an amount and
of a tenor, and issued by a financial institution, acceptable to Bank.
Subject to the terms and conditions of this Agreement, amounts
borrowed pursuant to this Section 2.1 may be repaid and reborrowed at
any time during the term of this Agreement."
5. Section 2.1(c) is deleted. All references to Optional Currency, Optional
Currency Rate Advance, Optional Currency Rate and Optional Currency Rate
Instrument are deleted. All Advances shall be made only in United States
Dollars.
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6. The reference in Section 2.1(c) to " 150 basis points" is amended to
read "200 basis points".
7. The first sentence in Section 2.1.1(c) is amended to read as follows:
"The maximum aggregate obligation at any one time for undrawn and drawn but
unreimbursed Letters of Credit shall be Fifteen Million Dollars ($15,000,000).
8. The reference in the last paragraph of Section 5.3 to "Twenty Million
Dollars ($20,000,000)" is amended to read "Fifteen Million Dollars
($15,000,000)".
9. Section 5.8 is deleted in its entirety.
10. Section 5.9 is 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, excluding
Subordinated Debt, of not less than One Hundred Twenty Five Million
Dollars ($125,000,000)."
11. Section 5.10 is deleted in its entirety and replaced with the
following:
"5.10 Profitability. Beginning the fiscal quarter ending July 31,
1999, on a consolidated basis, have a minimum net profit of at least
One Dollar ($1.00) for the four-quarter period beginning the fiscal
quarter ending July 31, 1999. Borrower may suffer losses in up to two
quarters, provided that Borrower may suffer a loss from continuing
operations in only one quarter."
12. Article 11 is deleted in its entirety and replaced with the following:
"11. Springing Lien. Borrower grants Bank a continuing security
interest in all currently existing and hereafter acquired or arising
Collateral in order to secure Prompt repayment of all Obligations and
in order to secure prompt performance by Borrower of its covenants and
duties under the Loan Documents. Except as set forth in the Schedule,
such security interest constitutes a valid, first priority security
interest in the Collateral. Borrower shall from time to time execute
and deliver to Bank, at the request of Bank, all financing statements
and other documents that Bank may reasonably request, in form
satisfactory to Bank, to perfect and continue perfected Bank's
security interest in the Collateral. Notwithstanding any provision of
this Section 11 to the contrary, the grant of security interest
hereunder shall not be effective unless at any time the balance of
Borrower's unrestricted cash and marketable securities is below Ninety
Million Dollars ($90,000,000), at which time such grant shall
automatically be effective and Bank shall have the right to file with
the California Secretary of State or such other appropriate government
office, the financing statements on Form UCC-1 delivered in connection
with this Amendment. Bank shall otherwise retain such financing
statements in its offices."
13. The attached Exhibit C is hereby added and incorporated by reference
into the Agreement.
14. As a condition to the effectiveness of this Amendment, Bank shall
receive a fee of Seventy-Five Thousand Dollars ($75,000), payable upon the date
hereof, plus all Bank Expenses incurred in connection with the preparation of
this Amendment.
15. 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 Borrower authorizing the execution and delivery of
this Amendment;
b. executed financing statement on Form UCC-1; and
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<PAGE>
c. such other documents, and completion of such other matters, as Bank
may reasonably deem necessary or appropriate.
16. 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.
17. 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.
18. This Amendment may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one instrument.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the
first date above written.
CREDENCE SYSTEMS CORPORATION
By:
--------------------------------------------
Title:
--------------------------------------------
SILICON VALLEY BANK
By:
--------------------------------------------
Title:
--------------------------------------------
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EXHIBIT C
COMPLIANCE CERTIFICATE
TO: SILICON VALLEY BANK
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, BBC Monthly within 20 days Yes No
if outstanding Advances
exceed $15,000,000
</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, excluding Sub Debt $125,000,000 $ Yes No
Profitability 1 $ Yes No
</TABLE>
1. Borrower, on a consolidated basis, to have a minimum net profit of at least
$1.00 for the four-quarter period that begins with the fiscal quarter ending on
July 31, 1999. Borrower may suffer losses in up to 2 quarters, provided only one
such loss is from continuing operations.
Comments Regarding Exceptions: See Attached.
Sincerely,
SIGNATURE
- ----------------------------------------------
TITLE
- ----------------------------------------------
DATE
- ----------------------------------------------
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<PAGE>
EXHIBIT D
The Collateral shall consist of all right, title and interest of Borrower
in and to the following:
(a) All goods and equipment now owned or hereafter acquired, including, without
limitation, all machinery, fixtures, vehicles (including motor vehicles and
trailers), and any interest in any of the foregoing, and all attachments,
accessories, accessions, replacements, substitutions, additions, and
improvements to any of the foregoing, wherever located;
(b) All inventory, now owned or hereafter acquired, including, without
limitation, all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products including such
inventory as is temporarily out of Borrower's custody or possession or in
transit and including any returns upon any accounts or other proceeds, including
insurance proceeds, resulting from the sale or disposition of any of the
foregoing and any documents of title representing any of the above, and
Borrower's Books relating to any of the foregoing;
(c) All contract rights and general intangibles now owned or hereafter acquired,
including, without limitation, goodwill, trademarks, servicemarks, trade styles,
trade names, patents, patent applications, leases, license agreements, franchise
agreements, blueprints, drawings, purchase orders, customer lists, route lists,
infringements, claims, computer programs, computer discs, computer tapes,
literature, reports, catalogs, design rights, income tax refunds, payments of
insurance and rights to payment of any kind;
(d) All now existing and hereafter arising accounts, contract rights, royalties,
license rights and all other forms of obligations owing to Borrower arising out
of the sale or lease of goods, the licensing of technology or the rendering of
services by Borrower, whether or not earned by performance, and any and all
credit insurance, guaranties, and other security therefor, as well as all
merchandise returned to or reclaimed by Borrower and Borrower's Books relating
to any of the foregoing;
(e) All documents, cash, deposit accounts, securities, investment property,
financial assets, securities entitlements, securities accounts, letters of
credit, certificates of deposit, instruments and chattel paper now owned or
hereafter acquired and Borrower's Books relating to the foregoing;
(f) All copyright rights, copyright applications, copyright registrations and
like protections in each work of authorship and derivative work thereof, whether
published or unpublished, now owned or hereafter acquired; all trade secret
rights, including all rights to unpatented inventions, know-how, operating
manuals, license rights and agreements and confidential information, now owned
or hereafter acquired; all mask work or similar rights available for the
protection of semiconductor chips, now owned or hereafter acquired; all claims
for damages by way of any past, present and future infringement of any of the
foregoing; and
Any and all claims, rights and interests in any of the above and all
substitutions for, additions and accessions to and proceeds thereof.
Inclusion of any property in the description of Collateral in this Exhibit
shall not imply any obligation to maintain any license or retain any property
that would otherwise expire or be disposed of in the ordinary course of
Borrower's business in compliance with the Loan Agreement.
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CORPORATE RESOLUTIONS TO BORROW
- --------------------------------------------------------------------------------
Borrower: CREDENCE SYSTEMS CORPORATION
- --------------------------------------------------------------------------------
I, the undersigned Secretary or Assistant Secretary of Credence Systems
Corporation (the "Corporation"), HEREBY CERTIFY that the Corporation is
organized and existing under and by virtue of the laws of the State of Delaware.
I FURTHER CERTIFY that the Certificate of Incorporation and Bylaws
previously delivered to Bank are in full force and effect and have not been
amended, modified or restated.
I FURTHER CERTIFY that at a meeting of the Directors of the Corporation (or
by other duly authorized corporate action in lieu of a meeting), duly called and
held, at which a quorum was present and voting, the following resolutions were
adopted.
BE IT RESOLVED, that any one (1) of the following named officers,
employees, or agents of this Corporation, whose actual signatures are shown
below:
NAMES POSITION ACTUAL SIGNATURES
Office of the President
Dennis P. Wolf EVP & CFO /s/ Dennis P. Wolf
-------------- ----------------------- -------------------
John Detwiler VP Corporate Controller /s/ John Detwiler
------------- ----------------------- -------------------
Suguna Vepa Director of Treasury /s/ Suguna Vepa
----------- ----------------------- -------------------
acting for an on behalf of this Corporation and as its act and deed be, and they
hereby are, authorized and empowered:
Borrow Money. To borrow from time to time from Silicon Valley Bank
("Bank"), on such terms as may be agreed upon between the officers, employees,
or agents and Bank, such sum or sums of money as in their judgment should be
borrowed, without limitation, including such sums as are specified in that
certain Loan Agreement dated as of July 26, 1996, as amended from time to time,
including the Amendment to Loan Agreement dated as of July 23, 1999 (the "Loan
Agreement").
Execute Loan Agreement. To execute and deliver to Bank the Loan Agreement,
any amendment thereto, and one or more renewals, extensions, modifications,
refinancing, consolidations, or substitutions for one or more of the notes, or
any portion of the Loan Agreement.
Grant Security. To grant a security interest to Bank in the Collateral
described in the Loan Agreement, which security interest shall secure all of the
Corporation's Obligations, as described in the Loan Agreement.
Negotiate Items. To draw, endorse, and discount with Bank all drafts, trade
acceptances, promissory notes, or other evidences of indebtedness payable to or
belonging to the Corporation or in which the Corporation may have an interest,
and either to receive cash for the same or to cause such proceeds to be credited
to the account of the Corporation with Bank, or to cause such other disposition
of the proceeds derived therefrom as they may deem advisable.
Letters of Credit. To execute letters of credit applications and other
related documents pertaining to Bank's issuance of letters of credit.
PA\932979.1
1190989-901501
6
34
<PAGE>
Foreign Exchange Contracts. To request Bank to enter into foreign exchange
contracts on its behalf.
Further Acts. In the case of lines of credit, to designate additional or
alternate individuals as being authorized to request advances thereunder, and in
all cases, to do and perform such other acts and things, to pay any and all fees
and costs, and to execute and deliver such other documents and agreements as
they may in their discretion deem reasonably necessary or proper in order to
carry into effect the provisions of these Resolutions.
BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to these
resolutions and performed prior to the passage of these resolutions are hereby
ratified and approved, that these Resolutions shall remain in full force and
effect and Bank may rely on these Resolutions until written notice of their
revocation shall have been delivered to and received by Bank. Any such notice
shall not affect any of the Corporation's agreements or commitments in effect at
the time notice is given.
I FURTHER CERTIFY that the officers, employees, and agents named above are
duly elected, appointed, or employed by or for the Corporation, as the case may
be, and occupy the positions set forth opposite their respective names; that the
foregoing Resolutions now stand of record on the books of the Corporation; and
that the Resolutions are in full force and effect and have not been modified or
revoked in any manner whatsoever.
IN WITNESS WHEREOF, I have hereunto set my hand on August 12, 1999 and
attest that the signatures set opposite the names listed above are their genuine
signatures.
CERTIFIED AND ATTESTED BY:
X
-------------------------------------
PA\932979.1
1190999-901501
7
35
<PAGE>
FINANCING STATEMENT - FOLLOW INSTRUCTIONS CAREFULLY
This Financing Statement is presented for filing pursuant to the Uniform
Commercial Code and will remain effective, with certain exceptions, for 5 years
from date of filing.
- --------------------------------------------------------------------------------
A. NAME & TEL. # OF CONTACT AT FILER B. FILING OFFICE ACCT. #
(optional) (optional)
- --------------------------------------------------------------------------------
C. RETURN COPY TO: (Name and Mailing Address)
SILICON VALLEY BANK, ATTN: LOAN SERVICES
ADMINISTRATION
3003 TASMAN DRIVE
SANTA CLARA, CA 95054-1191
- --------------------------------------------------------------------------------
D. OPTIONAL DESIGNATION (if applicable): LESSOR/LESSEE CONSIGNOR/CONSIGNEE
NON-UCC FILING
- --------------------------------------------------------------------------------
1. DEBTOR'S EXACT FULL LEGAL NAME - insert only one debtor name (1a or 1b)
- --------------------------------------------------------------------------------
1a. ENTITY'S NAME
Credence Systems Corp
- --------------------------------------------------------------------------------
1b. INDIVIDUAL'S LAST NAME FIRST NAME MIDDLE NAME SUFFIX
- --------------------------------------------------------------------------------
1c. MAILING ADDRESS CITY STATE COUNTRY POSTAL CODE
215 FOURIER AVENUE FREMONT CA USA 94539
- --------------------------------------------------------------------------------
1d. S.S. OR TAX I.D.# OPTIONAL 1e. TYPE OF ENTITY
ADD'NL INFO RE
ENTITY DEBTOR
1f. ENTITY'S STATE OR 1g. ENTITY'S ORGANIZATIONAL I.D.#, if any
COUNTRY OR ORGANIZATION
- --------------------------------------------------------------------------------
2. ADDITIONAL DEBTOR'S EXACT FULL LEGAL NAME
insert only one debtor name (2a or 2b)
- --------------------------------------------------------------------------------
2a. ENTITY'S NAME
- --------------------------------------------------------------------------------
2b. INDIVIDUAL'S LAST NAME FIRST NAME MIDDLE NAME SUFFIX
- --------------------------------------------------------------------------------
2c. MAILING ADDRESS CITY STATE COUNTRY POSTAL CODE
- --------------------------------------------------------------------------------
2d. S.S. OR TAX I.D.# OPTIONAL 2e. TYPE OF ENTITy
ADD'NL INFO RE
ENTITY DEBTOR
2f. ENTITY'S STATE OR 2g. ENTITY'S ORGANIZATIONAL I.D.#, if any
COUNTRY OR ORGANIZATION
- --------------------------------------------------------------------------------
3. SECURED PARTY'S (ORIGINAL S/P or ITS TOTAL ASSIGNEE) EXACT FULL LEGAL NAME
insert only one secured party name (3a or 3b)
- --------------------------------------------------------------------------------
3a. ENTITY'S NAME
Silicon Valley Bank
- --------------------------------------------------------------------------------
3b. INDIVIDUAL'S LAST NAME FIRST NAME MIDDLE NAME SUFFIX
- --------------------------------------------------------------------------------
3c. MAILING ADDRESS CITY STATE COUNTRY POSTAL CODE
3003 TASMAN DRIVE SANTA CLARA CA USA 95054
- --------------------------------------------------------------------------------
4. This FINANCING STATEMENT covers the following types or items of property:
SEE EXHIBIT A ATTACHED HERETO FOR COLLATERAL DESCRIPTION.
- --------------------------------------------------------------------------------
5. CHECK This FINANCING STATEMENT is signed by the Secured Party
BOX instead of the Debtor to perfect a security interest
(if applicable) (a) in collateral already subject to a security interest
in another jurisdiction when it was brought into this
state, or when the debtor's location was changed to this
state, or (b) in accordance with other statutory
provisions (additional date may be required)
- --------------------------------------------------------------------------------
6. REQUIRED SIGNATURE (S)
- --------------------------------------------------------------------------------
7. If filed in Florida (check one)
Documentary stamp tax paid Documentary stamp tax not applicable
- --------------------------------------------------------------------------------
8. This FINANCING STATEMENT is to be filed (for record)
(or recorded) in the REAL ESTATE RECORDS
Attach Addendum (if applicable)
- --------------------------------------------------------------------------------
9. Check to REQUEST SEARCH CERTIFICATE(S) on Debtor(s)
[ADDITIONAL FEE]
(optional) All Debtors Debtor 1 Debtor 2
- --------------------------------------------------------------------------------
CREDENCE SYSTEMS CORPORATION
- --------------------------------------------------------------------------------
8
36
<PAGE>
DEBTOR: CREDENCE SYSTEMS, INC.
SECURED PARTY: SILICON VALLEY BANK
EXHIBIT A
---------
The Collateral shall consist of all right, title and interest of Borrower
in and to the following:
(i) All goods and equipment now owned or hereafter acquired, including,
without limitation, all machinery, fixtures, vehicles (including motor vehicles
and trailers), and any interest in any of the foregoing, and all attachments,
accessories, accessions, replacements, substitutions, additions, and
improvements to any of the foregoing, wherever located;
(ii) All inventory, now owned or hereafter acquired, including, without
limitation, all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products including such
inventory as is temporarily out of Borrower's custody or possession or in
transit and including any returns upon any accounts or other proceeds, including
insurance proceeds, resulting from the sale or disposition of any of the
foregoing and any documents of title representing any of the above, and
Borrower's Books relating to any of the foregoing;
(iii) All contract rights and general intangibles now owned or hereafter
acquired, including, without limitation, goodwill, trademarks, servicemarks,
trade styles, trade names, patents, patent applications, leases, license
agreements, franchise agreements, blueprints, drawings, purchase orders,
customer lists, route lists, infringements, claims, computer programs, computer
discs, computer tapes, literature, reports, catalogs, design rights, income tax
refunds, payments of insurance and rights to payment of any kind;
(iv) All now existing and hereafter arising accounts, contract rights,
royalties, license rights and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods, the licensing of technology or the
rendering of services by Borrower, whether or not earned by performance, and any
and all credit insurance, guaranties, and other security therefor, as well as
all merchandise returned to or reclaimed by Borrower and Borrower's Books
relating to any of the foregoing;
(v) All documents, cash, deposit accounts, securities, investment property,
financial assets, securities entitlements, securities accounts, letters of
credit, certificates of deposit, instruments and chattel paper now owned or
hereafter acquired and Borrower's Books relating to the foregoing;
(vi) All copyright rights, copyright applications, copyright registrations
and like protections in each work of authorship and derivative work thereof,
whether published or unpublished, now owned or hereafter acquired; all trade
secret rights, including all rights to unpatented inventions, know-how,
operating manuals, license rights and agreements and confidential information,
now owned or hereafter acquired; all mask work or similar rights available for
the protection of semiconductor chips, now owned or hereafter acquired; all
claims for damages by way of any past, present and future infringement of any of
the foregoing; and
Any and all claims, rights and interests in any of the above and all
substitutions for, additions and accessions to and proceeds thereof.
Inclusion of any property in the description of Collateral in this Exhibit
shall not imply any obligation to maintain any license or retain any property
that would otherwise expire or be disposed of in the ordinary course of
Borrower's business in compliance with the Loan Agreement.
PA\936569.1
1190989-901501
9
37
<PAGE>
Credence Systems
Corporation
215 Fourier Avenue
Fremont, CA 94539
(510) 657-7400
FAX (510) 623-2560
CREDENCE
SYSTEMS CORPORATION
July 29, 1999
Mr. Graham J. Siddall
Dear Graham,
On behalf of the Board of Directors of Credence Systems Corporation (the
"Company"), I am pleased to extend to you an offer to become the President &
Chief Executive Officer of the Company. Under your leadership, Credence has the
opportunity to become the company that shapes the future of Semiconductor Test
Equipment. Our offer consists of the following benefits, terms and conditions:
POSITION: Upon commencement of your employment with the Company, you will become
the President and Chief Executive Officer of the Company, responsible for
leading and managing the Company in all regards. You will also be appointed as a
member of the Board of Directors of the Company and shall be nominated to serve
on the Company's board as long as you serve as Chief Executive Officer. You will
report directly to the Board of Directors of the Company.
SALARY: You will receive a base salary paid at the rate of $33,333.33 per month,
an annualized rate of $400,000.00, which will be reviewed annually on or about
your employment anniversary date. You will be paid semi-monthly, less payroll
deductions and required withholdings, in accordance with the Company's regular
payroll practices.
BONUS: Your annual target bonus for FY 2000 is up to $250,000.00. A prorated
portion of your bonus will be guaranteed for nine (9) months and will be paid in
three (3) equal quarterly installments of $62,500.00 each. This period includes
the fourth quarter of FY 1999, ending October 31, 1999 and the first six (6)
months of FY 2000, ending April 30, 2000. The balance of your bonus will also be
paid quarterly based upon your achievement of relevant performance objectives
that you will propose to the Board of Directors by December 31, 1999, subject to
their approval.
1
38
<PAGE>
Special Bonuses: Before December 31, 1999, you will design and submit
performance objectives to the Board of Directors for the balance of FY 2000 for
their approval. With extraordinary accomplishment, beyond a base plan, you have
the opportunity to participate in an additional bonus of up to $100,000.00. This
Special Bonus will be paid following the end of FY 2000 and before December
31,2000.
On September 9, 1999, the Company will pay you $125,000.00 as a sign-on bonus.
STOCK OPTIONS: Subject to approval by the Board of Directors, upon commencement
of your employment with Credence Systems Corporation, which is expected to occur
on or before July 29, 1999, you will be granted an incentive stock option, to
the maximum extent permitted by law, to purchase five hundred thousand (500,000)
shares of the Company's Common Stock at an option price set by the Board of
Directors and reflecting current market price at that time. The Company intends
to evaluate your performance at the end of each Fiscal Year for the purpose of
additional stock option grants. Such grants will be subject to the sole approval
of the Board of Directors of the Company.
VESTING: Your option will vest over a four (4) year period, with 1/48th vesting
at the end of each continuous month of employment with the Company.
TERMINATION BENEFITS: Provided the parties enter into a mutual general release,
mutual nondisparagement and nonsolicitation and confidentiality agreement, if
you are involuntarily terminated by the Company (but not a successor) prior to a
Change of Control without "Cause," or if you terminate your employment with the
Company (but not a successor), prior to a Change of Control for "Good Reason" on
or before June 30, 2000, the Company will provide you with your then effective
base salary and target bonus in accordance with the Company's standard payroll
policy until June 30, 2001 and the Company will immediately accelerate the
vesting of all such unvested stock options as if you were a full-time employee
as of June 30, 2001 and ceased employment on June 30, 2001, and will extend the
final exercise date of your options as if you were employed at that date.
Provided the parties enter into a mutual general release, mutual
nondisparagement and nonsolicitation and confidentiality agreement, if you are
involuntarily terminated by the Company (but not a successor) prior to a Change
of Control without "Cause" or if you terminate your employment with the Company
(but not a successor) prior to a Change of Control for "Good Reason" after June
30, 2000, or if you die, the Company will provide you or your estate with your
then effective base salary and target bonus in accordance with the Company's
standard payroll policy, for a period of twelve (12) months after the date of
such termination, and the Company will accelerate immediately the vesting of all
such unvested stock options for an additional twelve (12) months after such date
of
2
39
<PAGE>
termination and will extend the final exercise date of your options as if you
were employed for such 12-month period.
In addition, regardless of the dates of termination referred to above, in the
event of a termination without Cause or for Good Reason, if you choose to
continue your health care pursuant to COBRA, the Company would pay your COBRA
premiums during such period of severance referred to above.
For the purposes of this Offer, a termination for "Cause" will mean a
termination initiated by the Company (or a successor) for any of the following
reasons: (i) repeated failure to perform any essential duty of your position,
other than for a medical reason documented by a physician, after being given
written notice of such failure by the Board of Directors and thirty (30) days in
which to cure your performance; (ii) an act committed by you which constitutes
gross misconduct and which is injurious to the Company or any subsidiary or a
successor; (iii) your being convicted of a crime; (iv) committing an act of
fraud against, or the misappropriation of property belonging to, the Company or
any subsidiary or a successor; (v) an act of dishonesty committed by you in
connection with your responsibilities as an employee and intended to result in
the personal enrichment of yourself, your family or others; or (vi) a material
breach of any confidentiality or proprietary information or other material
agreement between you and the Company or any subsidiary or any successor. If
your employment is terminated by the Company (or a successor) for "Cause" or if
you leave voluntarily without "Good Reason," you will be paid your base salary
and all unused and unpaid vacation earned through your date of termination, but
no other benefits. In such event, all stock vesting and benefits will cease on
your date of termination.
"Good Reason" means (i) failure by the Company or any subsidiary or successor to
comply with any material terms of this letter agreement or any other material
agreement between you and the Company or any subsidiary or successor, (ii) a
diminution in the nature or scope of your authority, title, function or duties,
(iii) a reduction in your base salary or benefits (unless such reduction is part
of an officer-wide program to reduce expenses) or (iv) relocation of your
principal office to a location outside Silicon Valley.
CHANGE OF CONTROL: Provided the parties enter into a Mutual general release,
mutual nondisparagement and nonsolicitation and confidentiality agreement, in
the event of a (i) Change of Control (as defined in the Credence Systems
Corporation Addendum to the Stock Option Agreement), and (ii) at any time after
such Change of Control, the Company or its successor terminates you without
Cause or you leave for Good Reason or you die, the Company or its successor
shall pay you or your estate as soon as soon as practicable after such date of
termination an amount equal to 200% of your then effective annual base salary
and 200% of your target bonus and the Company shall immediately accelerate the
vesting on all your unvested stock options through the twenty-four (24)
3
40
<PAGE>
month period following such termination date, and shall extend the final
exercise date of your options as if you were employed for such 24-month period.
In the event that you become entitled to termination benefits within one year
following a Change of Control, if any of the payments or benefits to which you
are entitled will be subject to an excise tax under the Internal Revenue Code,
the Company will "gross up" the amount of such payments and benefits so that on
an after-tax basis you will receive the same amount of payments and benefits as
you would have received absent the imposition of such excise tax.
In the event of a Change of Control and a subsequent termination without Cause
or for Good Reason, other then as set forth in this section entitled Change of
Control, you shall not be entitled to any other benefits or compensation from
the Company or any successor. If, after a Change of Control, your employment is
terminated by the Company or any successor for Cause or you leave voluntarily
without a Good Reason, you will be paid your base salary and for all unused
vacation earned through your date of termination but no other benefits. In such
event, all stock vesting and benefits will cease on your date of termination.
MISCELLANEOUS: You will be entitled to participate in the Company's other
benefit plans as a full-time employee to the extent set forth in such plans.
You shall have no duty to seek other employment or otherwise take action to
mitigate payments the Company may be required to make in connection with any
termination of your employment. If your termination from the Company or a
successor would give rise to termination payments under this letter agreement,
the Company or its successor shall enter into a mutual general release, mutual
nondisparagement and nonsolicitation and confidentiality agreement on reasonable
terms; the term of the nonsolicit shall be the same as the term for which base
salary is paid if the termination is prior to a Change of Control and shall be
24 months if the termination is after a Change of Control.
The Company shall reimburse you for your reasonable attorneys fees incurred in
connection with the review of this agreement.
The employment terms in this letter constitute the complete, final and exclusive
embodiment of the entire agreement between you and Credence Systems Corporation
with respect to the terms and conditions of your employment. These terms
supercede any other agreements or promises made to you by anyone, whether oral
or written. This agreement is governed by California law and, except as set
forth herein, and shall be binding on the Company's successor and assigns.
California is an "at-will" employment state, and Credence Systems Corporation is
an at-will employer. This means that either you or the Company or any successor
has the right
4
41
<PAGE>
to terminate the employment relationship at any time, for any reason, with or
without cause. This is the full and final agreement between you and the Company
or any successor on these terms. Although your job duties, title, compensation
and benefits, and the personnel policies and procedures may change from
time-to-time, the at-will nature of your employment may only be changed in a
document signed by you and the Chairman of the Board of Directors.
As required by law, this offer is subject to satisfactory proof of your right to
work in the United States of America. You will also be required to sign the
Company's standard proprietary assignment of information and inventions
agreement.
Graham, we are very excited about your joining the Credence Systems team and
look forward to a mutually rewarding relationship. We are convinced that your
experience and commitment to develop a great company is an excellent match for
both you and Credence Systems Corporation. We look forward to your positive
acceptance of this offer.
This offer will remain open to you until Thursday, July 29, 1999. If you wish to
accept employment at Credence Systems Corporation under the terms described
above, please sign, date and return a copy of this letter to signify your
approval.
START DATE: You will start full-time employment at Credence Systems Corporation
on or before Thursday, July 29, 1999.
I look forward to your favorable reply and to a productive and enjoyable work
relationship with you.
Sincerely,
Credence Systems Corporation,
William G. Howard, Jr.
Chairman
Accepted:
Graham J. Siddall July 29, 1999
cc: Board of Directors, Credence Systems Corporation
Michael V. Parsells
5
42
<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
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000893162
<NAME> q#ygjp9a
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> JUL-31-1999
<EXCHANGE-RATE> 1
<CASH> 66,066
<SECURITIES> 52,810
<RECEIVABLES> 51,078
<ALLOWANCES> 3,987
<INVENTORY> 35,822
<CURRENT-ASSETS> 228,904
<PP&E> 95,231
<DEPRECIATION> 52,835
<TOTAL-ASSETS> 313,736
<CURRENT-LIABILITIES> 50,402
<BONDS> 96,610
0
0
<COMMON> 22
<OTHER-SE> 166,527
<TOTAL-LIABILITY-AND-EQUITY> 313,736
<SALES> 116,968
<TOTAL-REVENUES> 116,968
<CGS> 59,103
<TOTAL-COSTS> 59,103
<OTHER-EXPENSES> 74,298
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,681
<INCOME-PRETAX> (16,500)
<INCOME-TAX> (5,984)
<INCOME-CONTINUING> (10,583)
<DISCONTINUED> 0
<EXTRAORDINARY> 1,646
<CHANGES> 0
<NET-INCOME> (8,937)
<EPS-BASIC> (0.43)
<EPS-DILUTED> (0.43)
</TABLE>
