<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 27, 2000
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------
CREDENCE SYSTEMS CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
-------------------
DELAWARE 3825 94-2878499
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification
Number)
215 FOURIER AVENUE
FREMONT, CALIFORNIA 94539
(510) 657-7400
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
-------------------
DR. GRAHAM J. SIDDALL
CHIEF EXECUTIVE OFFICER
CREDENCE SYSTEMS CORPORATION
215 FOURIER AVENUE
FREMONT, CALIFORNIA 94539
(510) 657-7400
(Name, address, including zip code, and telephone number, including area code,
of agent for service of process)
-------------------
COPIES TO:
WARREN T. LAZAROW, ESQ. WILLIAM D. SHERMAN, ESQ.
COLBY R. GARTIN, ESQ. COREY A. LEVENS, ESQ.
GERALD H. TSAI, ESQ. ANNE MARIE PETERS, ESQ.
BROBECK, PHLEGER & HARRISON LLP MORRISON & FOERSTER, LLP
TWO EMBARCADERO PLACE 755 PAGE MILL ROAD
2200 GENG ROAD PALO ALTO, CALIFORNIA 94308-1018
PALO ALTO, CA 94303 (650) 813-5600
(650) 424-0160
-------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after the effective date of this Registration Statement.
-------------------
If the only securities being registered on this form are being offered
pursuant to a dividend or interest reinvestment plans, please check the
following box. / /
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===============================================================================================================================
AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF REGISTERED OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED (1) PER SHARE (2) OFFERING PRICE (2) FEE (2)
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stock, $0.001 par value per share (3) 2,300,000 shares $96.50 $221,950,000 $58,595
==============================================================================================================================
</TABLE>
(1) Includes 300,000 shares which the underwriters have options to purchase
from the company to cover over-allotments, if any. See "Underwriters."
(2) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(c) under the Securities Act of 1933,
as amended, and based upon the price of the company's common stock as
reported on the Nasdaq National Market on January 25, 2000.
(3) Includes rights to purchase Credence's Series A Junior Participating
Preferred Stock associated with the common stock.
-------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THE REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
================================================================================
<PAGE>
SUBJECT TO COMPLETION, DATED JANUARY 27, 2000
PROSPECTUS
2,000,000 SHARES
[LOGO]
CREDENCE SYSTEMS CORPORATION
COMMON STOCK
$ PER SHARE
-------------------
We are selling 2,000,000 shares of our common stock. The underwriters
named in this prospectus may purchase up to 300,000 additional shares of common
stock from us to cover over-allotments.
Our common stock is quoted on the Nasdaq National Market under the symbol
"CMOS." The last reported sale price of the common stock on the Nasdaq National
Market on January 25, 2000 was $96.50 per share.
-------------------
INVESTING IN THE COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 7.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
-------------------
PER SHARE TOTAL
--------- -----
Public Offering Price $ $
Underwriting Discount $ $
Proceeds to Credence (before expenses) $ $
The underwriters are offering the shares subject to various conditions.
The underwriters expect to deliver the shares to purchasers on or about , 2000.
-------------------
SALOMON SMITH BARNEY CREDIT SUISSE FIRST BOSTON
SG COWEN
, 2000
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................................................................................. 3
Risk Factors........................................................................................ 7
Cautionary Note on Forward-Looking Statements....................................................... 18
Use of Proceeds..................................................................................... 18
Price Range of Common Stock......................................................................... 19
Dividend Policy..................................................................................... 19
Capitalization...................................................................................... 20
Selected Consolidated Financial Data................................................................ 21
Management's Discussion and Analysis of Financial Condition and Results of Operations............... 23
Business............................................................................................ 30
Management.......................................................................................... 41
Underwriters........................................................................................ 44
Legal Matters....................................................................................... 45
Experts............................................................................................. 45
Available Information............................................................................... 46
Incorporation of Certain Documents by Reference..................................................... 46
</TABLE>
Credence Systems Corporation, Credence, Fluence, SC, ValStar, Quartet,
Wavebridge, Quartet One, TDS, TDX, MemBIST, Triton, EPRO, BOST, Kalos, Duo and
Opmaxx are our trademarks. This prospectus also includes trademarks of other
companies.
Except as otherwise indicated, all information in this prospectus assumes
no exercise of the underwriters' over-allotment option. If this option is
exercised in full, the total price to the public for this offering would be $
million, the total underwriters' discounts and commissions would be $ million
and the total proceeds to us would be $ million.
Certain persons participating in this offering may engage in transactions
that stabilize, maintain or otherwise affect the price of the common stock,
including stabilizing bids, syndicate covering transactions or the imposition of
penalty bids. For a discussion of these activities, see "Underwriters."
You should rely only upon the information contained in this prospectus.
We have not authorized anyone to provide you with information different from
that contained in this prospectus. We are offering to sell, and seeking offers
to buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of common stock.
The words Credence, Credence Systems, we, our, and us refer to Credence
Systems Corporation and its subsidiaries, but not to any of the underwriters.
Our fiscal year ends on October 31, and our fiscal quarters end on January 31,
April 30 and July 31.
2
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS CERTAIN INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS OR INCORPORATED BY REFERENCE HEREIN. THIS SUMMARY IS NOT COMPLETE AND
DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER BEFORE
INVESTING IN OUR COMMON STOCK. YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER
WITH THE MORE DETAILED INFORMATION REGARDING OUR COMPANY AND THE COMMON STOCK
BEING SOLD IN THIS OFFERING, ESPECIALLY THE RISKS OF INVESTING IN OUR COMMON
STOCK DISCUSSED UNDER THE CAPTION "RISK FACTORS" AND OUR CONSOLIDATED FINANCIAL
STATEMENTS AND THE NOTES THERETO INCORPORATED BY REFERENCE HEREIN.
OUR BUSINESS
We design, manufacture, sell and service automatic test equipment, or
ATE, used for testing semiconductor integrated circuits, or ICs. We also
develop, license and distribute related software products. We serve a broad
spectrum of the semiconductor industry's testing needs through a wide range of
products that test digital logic, mixed-signal and non-volatile memory
semiconductors. We utilize our proprietary technologies to design products which
are intended to provide a lower total cost of ownership than many competing
products currently available while meeting the increasingly demanding
performance requirements of today's ATE market. Our products are primarily
designed to test semiconductors that are produced in high volume. Our customers
include major semiconductor manufacturers as well as assembly and test services
companies.
As advances in semiconductor process technology lower the average selling
prices of semiconductors, manufacturers are constantly seeking ways to reduce
manufacturing costs. Testing is a principal element in the cost structure of
high volume production of semiconductors. Test costs have become a greater
percentage of the total cost of manufacturing due to the increasing complexity
of ICs as they migrate towards system-on-a-chip. Although performance was the
dominant factor in the selection of ATE in the past, we believe that cost has
assumed a much greater importance to semiconductor manufacturers.
Our objective is to be the leading supplier of cost-effective ATE for
production testing of ICs used in high volume applications. We have developed
proprietary complementary metal oxide semiconductor, or CMOS, stabilization
methods that minimize the drift characteristic of CMOS and enable us to produce
testers that are smaller and require less power than those based upon
emitter-coupled logic technology, the conventional ATE process technology used
for the ICs used in ATE. These testers are intended to provide a lower total
cost of ownership than many competing products currently available while meeting
the performance demands of today's ATE market. CMOS technology allows the
circuits used in our testers to be reduced, or scaled down in size as IC process
technology improves. We believe this results in higher performance and frees
space on the die for additional functionality. This scalability feature also
enables us to develop and manufacture smaller, higher performance ICs for use in
our testers at what we believe to be a lower cost, and with a potentially
shorter development cycle, than traditional process technologies.
SALES, SERVICE AND SUPPORT
We currently market and sell our products in the United States
principally through our direct sales organization, with direct sales employees
and representatives in over sixteen locations. Outside the United States we
utilize both direct sales employees and a broad network of distributors, with
direct sales employees and distributors in over twenty countries.
CORPORATE INFORMATION
We were incorporated in California in March 1982 and were
reincorporated in Delaware in October 1993. Our principal executive offices are
located at 215 Fourier Avenue, Fremont, CA 94539, and our telephone number is
(510) 657-7400. Our worldwide website address is www.credence.com. The
information in our website is not a prospectus, does not constitute a part of
this prospectus and is not incorporated into this prospectus by reference.
3
<PAGE>
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Common stock offered..................................... 2,000,000 shares
Common stock to be outstanding
after the offering...................................... 24,516,842 shares
Over-allotment option.................................... 300,000 shares
Use of proceeds.......................................... We will use these net proceeds for working capital
and general corporate purposes. We may use a
portion of the net proceeds to acquire assets,
technologies and businesses. See "Use of
Proceeds."
Dividend policy.......................................... We do not anticipate paying any cash dividends in the forseeable
future. Any future determination to dividends will be at
the discretion of our board of directors and our lenders.
Nasdaq National Market Symbol............................ "CMOS"
</TABLE>
The number of shares of common stock outstanding after the offering is
based upon 22,516,842 shares of common stock outstanding as of October 31, 1999
and excludes:
- 2,974,426 shares of common stock subject to outstanding options as of
December 31, 1999 at a weighted average exercise price of $30.00;
- 598,945 shares that are available for future grant under our 1993 Stock
Option Plan as of December 31, 1999;
- 253,042 shares that are available for future issuance under our 1994
Employee Stock Purchase Plan as of December 31, 1999;
- 1,397,108 shares of common stock issuable upon conversion of our
convertible subordinated notes due September 15, 2002; and
- 253,200 shares of common stock issued between November 1, 1999 and
December 31, 1999 pursuant to our employee benefit plans.
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table summarizes our consolidated statement of operations
and balance sheet data as of and for the periods indicated. The consolidated
statement of operations data for each of the fiscal years in the three-year
period ended October 31, 1999 were derived from our consolidated financial
statements audited by Ernst & Young LLP and incorporated by reference in this
prospectus. The consolidated statement of operations data for the fiscal years
ended October 31, 1995 and 1996 were derived from our consolidated financial
statements audited by Ernst & Young LLP not included or incorporated by
reference in this prospectus. You should read this information together with the
discussion in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and our consolidated financial statements, including the
notes thereto, incorporated by reference in this prospectus.
The consolidated balance sheet data as of October 31, 1998 and 1999 were
derived from our consolidated financial statements audited by Ernst & Young LLP
and incorporated by reference in this prospectus. The consolidated balance sheet
data for the fiscal years ended October 31, 1995, 1996 and 1997 were derived
from our consolidated financial statements audited by Ernst & Young LLP not
included or incorporated by reference in this prospectus. The consolidated
balance sheet data as of October 31, 1999 presented on an as adjusted basis
reflects the net proceeds of the sale of common stock offered by us hereby at an
assumed public offering price of $96.50 per share, after deducting underwriting
discounts and commissions and estimated offering expenses payable by us.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED OCTOBER 31,
--------------------------------------------------------------------------
1995 1996 1997 1998 1999
-------------- ------------- -------------- -------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA
Total net sales........................ $ 176,805 $ 238,788 $ 204,092 $ 216,803 $ 197,183
-------------- ------------- -------------- -------------- -------------
Gross margin........................... 106,684 141,778 114,136 91,447 101,978
-------------- ------------- -------------- -------------- -------------
Operating expenses:
Research and development............ 24,859 35,442 37,350 47,484 38,908
Selling, general and administrative. 38,008 52,002 55,701 64,151 58,660
In-process research and development. -- -- 6,022 1,998 858
Special charges..................... -- -- -- 20,386 7,565
-------------- ------------- -------------- -------------- -------------
Total operating expenses........ 62,867 87,444 99,073 134,019 105,991
Operating income (loss)................ 43,817 54,334 15,063 (42,572) (4,013)
Income (loss) before income tax
provision (benefit) and minority
interest.............................. 46,649 58,267 18,230 (41,270) (3,752)
-------------- ------------- -------------- -------------- -------------
Net income (loss before extraordinary) 30,354 37,703 10,693 (26,282) (2,455)
items................................ ============== ============= ============== ============== =============
Net income (loss)...................... $ 30,354 $ 37,703 $ 10,693 $ (26,282) $ (809)
============== ============= ============== ============== =============
Net income (loss) per basic share...... $ 1.50 $ 1.75 $ 0.49 $ (1.22) $ (0.04)
============== ============= ============== ============== =============
Net income (loss) per diluted share.... $ 1.45 $ 1.72 $ 0.47 $ (1.22) $ (0.04)
============== ============= ============== ============== =============
Number of shares used in computing net
income (loss) per share amounts:
Basic .............................. 20,273 21,532 21,865 21,533 21,088
Diluted............................. 21,008 21,977 22,512 21,533 21,088
</TABLE>
<TABLE>
<CAPTION>
AS OF OCTOBER 31,
-----------------
AS OF OCTOBER 31, 1999
-------------------------------------------------------- -----------------
1995 1996 1997 1998 1999 AS ADJUSTED
---------- ---------- ---------- ----------- ---------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA
Cash, cash equivalents, restricted
cash and short term investments......... $ 83,579 $ 86,292 $ 177,776 $ 113,568 $91,878 $270,568
Working capital......................... 126,395 144,623 250,336 184,606 166,727 345,417
Total assets............................ 186,593 223,042 358,141 306,189 340,420 519,110
Convertible subordinated notes.......... -- -- 115,000 115,000 96,610 96,610
Retained earnings....................... 46,326 84,029 94,722 58,157 57,348 57,348
Total stockholders' equity.............. 150,286 189,782 204,911 150,017 181,408 360,098
</TABLE>
5
<PAGE>
QUARTERLY CONSOLIDATED FINANCIAL DATA
The following table sets forth our consolidated statement of operations
data for each of our last four quarters. This quarterly information is
unaudited, but has been prepared on the same basis as the annual consolidated
financial statements incorporated by reference herein. In our opinion, this
quarterly information reflects all adjustments consisting only of normal
recurring adjustments necessary for a fair presentation of the information for
the periods presented when read in conjunction with our consolidated financial
statements incorporated by reference herein. The operating results for any
quarter are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------
JAN. 31, APRIL 30, JULY 31, OCT. 31,
1999 1999 1999 1999
------------ ------------- ------------ ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA
Total net sales................................................. $ 26,490 $ 38,100 $ 52,378 $80,215
Gross margin.................................................... 11,214 19,099 27,552 44,113
Operating expenses:
Research and development..................................... 9,003 9,146 9,631 11,128
Selling, general and administrative.......................... 12,231 13,872 14,184 18,373
In-process research and development.......................... -- -- -- 858
Special charges.............................................. -- 6,231 -- 1,334
------------ ------------- ------------ ---------
Total operating expenses................................... 21,234 29,249 23,815 31,693
------------ ------------- ------------ ---------
Operating income (loss)......................................... (10,020) (10,150) 3,737 12,420
Income (loss) before income tax provision
(benefit) and minority interest.............................. (10,321) (9,910) 3,731 12,748
Net income (loss) before extraordinary
items........................................................ $ -- $ (6,331) $ 2,364 $ 8,066
============ ============= ============ =========
Net income (loss)............................................... $ (6,554) $ (5,173) $ 2,852 $ 8,066
============ ============= ============ =========
Net income (loss) per share:
Basic........................................................ $ (0.32) $ (0.25) $ 0.13 $ 0.37
Diluted...................................................... $ (0.32) $ (0.25) $ 0.13 $ 0.35
============ ============= ============ =========
Number of shares used in computing net
income (loss) per share amounts:
Basic...................................................... 20,418 20,811 21,257 21,724
Diluted.................................................... 20,418 20,811 22,116 22,739
============ ============= ============ =========
</TABLE>
6
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE MAKING AN
INVESTMENT DECISION. OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS
HAVE BEEN AND COULD CONTINUE TO BE MATERIALLY HARMED BY ANY OF THESE RISKS. IN
ADDITION, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE DUE TO ANY OF
THESE RISKS, AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT.
THIS PROSPECTUS ALSO CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS,
INCLUDING THE RISKS FACED BY US DESCRIBED BELOW AND ELSEWHERE IN THIS PROSPECTUS
OR INCORPORATED BY REFERENCE HEREIN.
RISKS RELATED TO OUR BUSINESS
OUR OPERATING RESULTS HAVE AND MAY CONTINUE TO FLUCTUATE SIGNIFICANTLY WHICH MAY
ADVERSELY AFFECT OUR STOCK PRICE
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
1997 1998 1999
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales 40 43 51 69 82 75 37 22 26 38 53 80
Net Income (loss) 1 3 (1) 7 9 9 (34) (11) (7) (9) 3 8
</TABLE>
A variety of factors affect our results of operations. The above graph
illustrates that our quarterly net sales and operating results have fluctuated
significantly. We believe they will continue to fluctuate for a number of
reasons, including:
- economic conditions in the semiconductor industry in general and
capital equipment industry specifically;
- manufacturing capacity and ability to volume produce systems,
including our newest systems, and meet customer requirements;
- timing of new product announcements and new product releases by us
or our competitors;
- market acceptance of our new products and enhanced versions of
existing products;
- 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;
- write-offs of excess and obsolete inventories and accounts
receivable that are not collectible;
- supply constraints;
- integration into our new facilities in Oregon;
- the implementation of our new ERP system;
- patterns of capital spending by our customers, delays,
cancellations or reschedulings of customer orders due to customer
financial difficulties or otherwise;
7
<PAGE>
- changes in overhead absorption levels due to changes in the number
of systems manufactured, the timing and shipment of orders,
availability of components including customs ICs, subassemblies
and services, customization and reconfiguration of our systems and
product reliability;
- expenses associated with acquisitions and alliances;
- operating expense reductions associated with cyclical industry
downturns, including costs relating to facilities consolidations
and related expenses;
- the proportion of our direct sales and sales through third
parties, including distributors and OEMS, the mix of products
sold, the length of manufacturing and sales cycles, product
discounts;
- natural disasters, political and economic instability, regulatory
changes and outbreaks of hostilities; and
- ability to hire and retain employees in a competitive market.
We presently intend to introduce new products and product enhancements in
the future, the timing and success of which will affect our business, financial
condition and results of operations. Our gross margins on system sales have
varied significantly and will continue to vary significantly based on a variety
of factors including:
- manufacturing inefficiencies;
- pricing concessions by us and our competitors and pricing by our
suppliers;
- hardware and software product sales mix;
- inventory write-downs;
- production volumes;
- new product introductions;
- product reliability;
- absorption levels and the rate of capacity utilization;
- customization and reconfiguration of systems;
- international and domestic sales mix and field service margins;
and
- 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, accounts receivable
that might not be collectible, and product warranty costs, we cannot be certain
that our estimates will be adequate.
We cannot forecast with any certainty the impact of these and other
factors on our sales and operating results in any future period. Results of
operations in any period, therefore, should not be considered indicative of the
results to be expected for any future period. Because of this difficulty in
predicting future performance, our operating results may fall below the
expectations of securities analysts or investors in some future quarter or
quarters. Our failure to meet these expectations would likely adversely affect
the market price of our common stock. In addition, our need for continued
significant expenditures for research and development, marketing and other
expenses for new products, capital equipment purchases and worldwide training
and customer service and support will impact our sales and operating results in
the future. Other significant expenditures may make it difficult for us to
reduce our significant fixed expenses in a particular period if we do not meet
our net sales goals for that period. These other expenditures include:
- research and development;
- distribution channels;
- marketing and other expenses for new products;
- capital equipment purchases and world-wide training; and
- customer support and service.
As a result, we cannot be certain that we will be profitable or that we will not
again sustain losses in the future.
8
<PAGE>
WE HAVE A LIMITED BACKLOG AND OBTAIN MOST OF OUR NET SALES FROM A RELATIVELY FEW
NUMBER OF SYSTEM SALES TRANSACTIONS WHICH CAN RESULT IN FLUCTUATIONS OF
QUARTERLY RESULTS
Other than some memory products and software products, for which the
price range is typically below $50,000, we obtain most of our net sales from the
sale of a relatively few number of systems that typically range in price from
$350,000 to $3.6 million. This has and could continue to result in our net sales
and operating results for a particular period being significantly impacted by
the timing of recognition of revenue from a single transaction. Our net sales
and operating results for a particular period could also be materially adversely
affected if an anticipated order from 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.
We believe that some of our customers may from time to time, place orders
with us for more systems than they will ultimately accept or for a more rapid
delivery than they will ultimately require. For this reason, our backlog may
include customer orders in excess of those actually delivered to them or other
customers.
Furthermore, we generally ship products generating most of our net sales
near the end of each quarter. Accordingly, our failure to receive an anticipated
order or a delay or rescheduling in a shipment near the end of a particular
period may cause net sales in a particular period to fall significantly below
expectations, which could have a material adverse effect on our business,
financial condition or results of operations. The relatively long manufacturing
cycle of many of our testers has caused and could continue to cause future
shipments of testers to be delayed from one quarter to the next. Furthermore, as
we and our competitors announce new products and technologies, customers may
defer or cancel purchases of our existing systems. We cannot forecast the impact
of these and other factors on our sales and operating results.
THE SEMICONDUCTOR INDUSTRY HAS BEEN CYCLICAL
Our business and results of operations depend largely upon the capital
expenditures of manufacturers of semiconductors and companies that specialize in
contract packaging and/or testing of semiconductors. This includes manufacturers
and contractors that are opening new or expanding existing fabrication
facilities or upgrading existing equipment, which in turn depend upon the
current and anticipated market demand for semiconductors and products
incorporating semiconductors. The semiconductor industry has been highly
cyclical with recurring periods of oversupply, which often have had a severe
effect on the semiconductor industry's demand for test equipment, including the
systems we manufacture and market. We believe that the markets for newer
generations of semiconductors will also be subject to similar fluctuations.
We have experienced shipment delays, delays in commitments and
restructured purchase orders by customers and we expect this activity to
continue. Accordingly, we cannot be certain that we will be able to achieve or
maintain our current or prior level of sales or rate of growth. 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 significant degree, or at all. In addition, our business, financial
condition or results of operations may be adversely affected by any factor
adversely affecting the semiconductor industry in general or particular segments
within the semiconductor industry. For example, the Asian financial crisis
contributed to widespread uncertainty and, in part, a slowdown in the
semiconductor industry. This slowdown in the semiconductor industry resulted in
reduced spending for semiconductor capital equipment, including ATE which we
sell. This industry slowdown had and may in the future have a material adverse
effect on our product backlog, balance sheet, financial condition and results of
operations. Therefore, there can be no assurance that our operating results will
not continue to be materially adversely affected if downturns or slowdowns in
the semiconductor industry occur again in the future.
WE HAVE OVER THE LAST SEVERAL YEARS EXPERIENCED SIGNIFICANT FLUCTUATIONS IN OUR
OPERATING RESULTS AND INCREASED THE SCALE OF OUR OPERATIONS
In fiscal 1999, we generated revenue of $26.5 million in the first
quarter and $80.2 million in the fourth quarter, an increase of 203%. In fiscal
1998, we generated revenue of $82.4 million for the first quarter and $22.4
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million for the fourth quarter, a decrease of 73%. Since 1993, except for
cost-cutting efforts during fiscal 1998 and most of 1999, we have overall
significantly increased the scale of our operations in general to support
periods of generally increased sales levels and expanded product offerings and
have expanded operations to address critical infrastructure and other
requirements, including the hiring of additional personnel, significant
investments in research and development to support product development, the new
facilities in Oregon, a new ERP system and numerous acquisitions. These
fluctuations in our sales and operations have placed and are placing a
considerable strain on our management, financial, manufacturing and other
resources. In order to effectively deal with the changes brought on by the
cyclical nature of the industry, we have been required to implement and improve
a variety of highly flexible operating, financial and other systems, procedures
and controls capable of expanding, or contracting consistent with our business.
However, we cannot be certain that any existing or new systems, procedures or
controls, including our new ERP system, will be adequate to support fluctuations
in our operations or that our systems, procedures and controls will be
cost-effective or timely. Any failure to implement, improve and expand or
contract such systems, procedures and controls efficiently and at a pace
consistent with our business could have a material adverse effect on our
business, financial condition or results of operations.
WE ARE EXPANDING AND INTEND TO CONTINUE THE EXPANSION OF OUR PRODUCT LINES
We are currently devoting and intend to continue to devote significant
resources to the development, production and commercialization of new products
and technologies. During fiscal 1999, we launched three major new products. We
invested and continue to invest significant resources in plant and equipment,
leased facilities, inventory, personnel and other costs, to begin or prepare to
increase production of our products. A significant portion of these
investments will provide the marketing, administration and after-sales service
and support 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 be adversely impacted by delays in new product
introductions or start-up costs associated with the initial production and
installation of our new product lines. We also cannot be certain that we can
manufacture these systems per the time and quantity required by customers. The
start-up costs include additional manufacturing overhead, additional inventory
and warranty reserve requirements and the enhancement of after-sales service and
support organizations. In addition, the increases in inventory on hand for new
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 our net sales will increase or remain at recent levels or
that any new products will be successfully commercialized or contribute to
revenue growth or that any of our additional costs will be covered.
THERE ARE LIMITATIONS ON OUR ABILITY TO FIND THE SUPPLIES AND SERVICES NECESSARY
TO RUN OUR BUSINESS
We obtain certain components, subassemblies and services necessary for
the manufacture of our testers from a limited group of suppliers. We do not
maintain long-term supply agreements with most of our vendors and we purchase
most of our components and subassemblies through individual purchase orders. The
manufacture of certain of our components and subassemblies is an extremely
complex process. We also rely on outside vendors to manufacture certain
components and subassemblies and to provide certain services. We have recently
experienced and continue to experience significant reliability, quality and
timeliness problems with several critical components including certain custom
integrated circuits. In addition, we and certain of our subcontractors are
experiencing significant shortages and delays in delivery of various components
and subassemblies. We cannot be certain that these or other problems will not
continue to occur in the future with our suppliers or outside subcontractors.
Our reliance on a limited group of suppliers and on outside subcontractors
involves several risks, including an inability to obtain an adequate supply of
required components, subassemblies and services and reduced control over the
price, timely delivery, reliability and quality of components, subassemblies and
services. Shortages, delays, disruptions or terminations of the sources for
these components and subassemblies have delayed and could continue to delay
shipments of our systems and new products and could continue to have a material
adverse effect on our business. Our continuing inability to obtain adequate
yields or timely deliveries or any other circumstance that would require us to
seek alternative sources of supply or to manufacture such components internally
could also have a material adverse effect on our business, financial condition
or results of operations. Such delays, shortages and disruptions would also
damage relationships with current and prospective customers and have and could
continue to allow competitors to penetrate our customer accounts. We cannot be
certain that our internal manufacturing capacity or that of our suppliers and
subcontractors will be sufficient to meet customer requirements.
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THE ATE INDUSTRY IS INTENSELY COMPETITIVE WHICH CAN ADVERSELY AFFECT OUR REVENUE
GROWTH
With the substantial investment required to develop test application
software and interfaces, we believe that once a semiconductor manufacturer has
selected a particular ATE vendor's tester, the manufacturer is likely to use
that tester for a majority of its testing requirements for the market life of
that semiconductor and, to the extent possible, subsequent generations of
similar products. As a result, once an ATE customer chooses a system for the
testing of a particular device, it is difficult for competing vendors to achieve
significant ATE sales to such customer for similar use. Our inability to
penetrate any large ATE customer or achieve significant sales to any ATE
customer could have a material adverse effect on our business, financial
condition or results of operations.
We face substantial competition from ATE manufacturers throughout the
world, as well as several of our customers. We do not currently compete in the
testing of microprocessors, linear ICs or DRAMS. Moreover, approximately
two-thirds of our net sales in fiscal 1998 and 1999 were derived from sales of
our mixed signal testers. Many competitors have substantially greater financial
and other resources with which to pursue engineering, manufacturing, marketing
and distribution of their products. Certain competitors have recently introduced
or announced new products with certain performance or price characteristics
equal or superior to products we currently offer. These competitors have
recently introduced products that compete directly against our products. We
believe that if the ATE industry continues to consolidate through strategic
alliances or acquisitions, we will continue to face significant additional
competition from larger 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.
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:
- product selection;
- timely and efficient completion of product design;
- implementation of manufacturing and assembly processes;
- successful coding and debugging of software;
- product performance;
- reliability in the field; and
- effective sales and marketing.
Because we must make new product development commitments well in advance
of sales, new product decisions must anticipate both future demand and the
availability of technology to satisfy that demand. We cannot be certain that we
will be successful in selecting, developing, manufacturing and marketing new
hardware and
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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 effect on
our business, financial condition or results of operations.
SIGNIFICANT DELAYS CAN OCCUR BETWEEN THE TIME WE INTRODUCE A SYSTEM AND THE TIME
WE ARE ABLE TO PRODUCE THAT SYSTEM IN VOLUME
We have in the past experienced significant delays in the introduction,
volume production and sales of our new systems and related feature enhancements.
We have experienced significant delays in the introduction of our VS2000 and
Kalos series testers as well as certain enhancements to our existing testers.
These delays have been primarily related to our inability to successfully
complete product hardware and software engineering within the time frame
originally anticipated, including design errors and redesigns of ICs. As a
result, some customers have experienced significant delays in receiving and
using our testers in production. We cannot be certain that these or additional
difficulties will not continue to arise or that delays will not continue to
materially adversely affect customer relationships and future sales. Moreover,
we cannot be certain that we will not encounter these or other difficulties 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 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.
WE MAY NOT BE ABLE TO DELIVER CUSTOM HARDWARE OPTIONS AND SOFTWARE APPLICATIONS
TO SATISFY SPECIFIC CUSTOMER NEEDS IN A TIMELY MANNER
We must develop and deliver customized hardware and software to meet our
customers' specific test requirements. We must be able to manufacture these
systems on a timely basis. Our test equipment may fail to meet our customers'
technical or cost requirements and may be replaced by competitive equipment or
an alternative technology solution. Our inability to meet such hardware and
software requirements could impact our ability to recognize revenue on the
related equipment. Our inability to provide a test system that meets
requested performance criteria when required by a device manufacturer would
severely damage our reputation with that customer. This loss of reputation may
make it substantially more difficult for us to sell test systems to that
manufacturer for a number of years.
WE RELY ON SPIROX CORPORATION FOR A SIGNIFICANT PORTION OF OUR REVENUES AND THE
TERMINATION OF THIS DISTRIBUTION RELATIONSHIP WOULD ADVERSELY AFFECT OUR
BUSINESS
One distributor, Spirox Corporation, a distributor in Taiwan that sells
to end-user customers in Taiwan and China, accounted for 39%, 34% and
30% of our net sales in fiscal 1999, 1998, and 1997, respectively. The
semiconductor industry is highly concentrated, and a small number of
semiconductor device manufacturers and contract assemblers account for a
substantial portion of the purchases of semiconductor test equipment generally,
including our test equipment. Our top ten customers have recently accounted for
at least a majority of our net sales. Consequently, our business, financial
condition and results of operations could be materially adversely affected by
the loss of or any reduction in orders by Spirox or any other significant
customer, including the potential for reductions in orders by assembly and test
service companies which that customer may utilize or reductions due to
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continuing or other technical, manufacturing or reliability problems with our
products or continued slow-downs in the semiconductor industry or in other
industries that manufacture products utilizing semiconductors. Our ability to
maintain or increase sales levels will depend upon:
- our ability to obtain orders from existing and new customers;
- our ability to manufacture systems on a timely and cost-effective
basis;
- our ability to complete the development of our new hardware and
software products;
- our customers' financial condition and success;
- general economic conditions; and
- our ability to meet increasingly stringent customer performance
and other requirements and shipment delivery dates.
OUR LONG AND VARIABLE SALES CYCLE DEPENDS UPON FACTORS OUTSIDE OF OUR CONTROL
AND COULD CAUSE US TO EXPEND SIGNIFICANT TIME AND RESOURCES PRIOR TO EARNING
ASSOCIATED REVENUES
Sales of our systems depend in part upon the decision of semiconductor
manufacturers to develop and manufacture new semiconductor devices or to
increase manufacturing capacity. As a result, sales of our testers are subject
to a variety of factors we cannot control. The decision to purchase a tester
generally involves a significant commitment of capital, with the attendant
delays frequently associated with significant capital expenditures. For these
and other reasons, our systems have lengthy sales cycles during which we may
expend substantial funds and management effort to secure a sale, subjecting us
to a number of significant risks. We cannot be certain that we will be able to
maintain or increase net sales in the future or that we will be able to retain
existing customers or attract new ones.
IF WE ENGAGE IN ACQUISITIONS, WE WILL INCUR A VARIETY OF COSTS, AND THE
ANTICIPATED BENEFITS OF THE ACQUISITIONS MAY NEVER BE REALIZED
We have developed in significant part through mergers and acquisitions of
other companies and businesses. We intend in the future to pursue additional
acquisitions of complementary product lines, technologies and businesses. We may
have to issue debt or equity securities to pay for future acquisitions, which
could be dilutive. We have also incurred and may continue to incur certain
liabilities or other expenses in connection with acquisitions, which have and
could continue to materially adversely affect our business, financial condition
and results of operations.
In addition, acquisitions involve numerous other risks, including:
- difficulties assimilating the operations, personnel, technologies
and products of the acquired companies;
- diversion of our management's attention from other business
concerns;
- risks of entering markets in which we have no or limited
experience; and
- 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 TO FINANCIAL ACCOUNTING STANDARDS MAY AFFECT OUR REPORTED RESULTS OF
OPERATIONS
We prepare our financial statements to conform with generally accepted
accounting principles, or GAAP. GAAP are subject to interpretation by the
American Institute of Certified Public Accountants, the SEC and various bodies
formed to interpret and create appropriate accounting policies. A change in
those policies can have a significant effect on our reported results and may
even affect our reporting of transactions completed before a change is
announced. Accounting policies affecting many other aspects of our business,
including rules relating to purchase and pooling-of-interests accounting for
business combinations, in-process research and development charges, employee
stock purchase plans and stock option grants have recently been revised or are
under review. Changes to those rules or the questioning of current practices may
have a material adverse effect on our reported financial results or on the way
we conduct our business. In addition, our preparation of financial statements in
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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.
OUR EXECUTIVE OFFICERS AND CERTAIN KEY PERSONNEL ARE CRITICAL TO OUR BUSINESS
Our future operating results depend substantially upon the continued
service of our executive officers and key personnel, none of whom are bound by
an employment or non-competition agreement. Our future operating results also
depend in significant part upon our ability to attract and retain qualified
management, manufacturing, technical, engineering, marketing, sales and support
personnel. Competition for personnel is intense, and we cannot ensure success in
attracting or retaining personnel. There may be only a limited number of persons
with the requisite skills to serve in these positions and it may be increasingly
difficult for us to hire personnel over time. Our business, financial condition
and results of operations could be materially adversely affected by the loss of
any of our key employees, by the failure of any key employee to perform in his
or her current position, or by our inability to attract and retain skilled
employees.
WE HAVE A NEW EXECUTIVE MANAGEMENT TEAM AND IF THEY ARE UNABLE TO WORK TOGETHER
EFFECTIVELY, OUR BUSINESS MAY BE HARMED
In July 1999, we announced the appointment of Dr. Graham J. Siddall as
our new President and Chief Executive Officer. Dr. Siddall joined Credence from
KLA-Tencor where he was Executive Vice President of the Wafer Inspection Group.
We have experienced several other transitions in executive management in recent
years. In conjunction with the departure in December 1998 of our former Chairman
and Chief Executive Officer, our Board of Directors appointed David A. Ranhoff,
Executive Vice President, and Dennis P. Wolf, Executive Vice President, Chief
Financial Officer and Secretary, jointly to the office of the President. The
Board also named a new Chairman, Dr. William Howard, Jr., and began a search for
a new chief executive officer which culminated in the appointment of Dr.
Siddall. These transitions have placed significant demands on our operational,
administrative and financial staff and we anticipate that these demands will not
decline 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 the way we are perceived by the market or on the price of our
common stock.
OUR INTERNATIONAL BUSINESS EXPOSES US TO ADDITIONAL RISKS
International sales accounted for approximately 64%, 69% and 70% of our
total net sales for the fiscal years 1999, 1998 and 1997, 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:
- changes in regulatory requirements;
- tariffs and other barriers;
- political and economic instability;
- an outbreak of hostilities;
- integration of foreign operations of acquired businesses;
- foreign currency exchange rate fluctuations;
- difficulties with distributors, joint venture partners, original
equipment manufacturers, foreign subsidiaries and branch
operations;
- potentially adverse tax consequences; and
- the possibility of difficulty in accounts receivable collection.
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
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material adverse effect on our business, financial condition or results of
operations. Net sales to the Asia Pacific region accounted for approximately
55%, 60% and 66% of our total net sales in the fiscal years 1999, 1998 and 1997,
and thus, demand for our products is subject to the risk of economic instability
in that region and could continue to be materially adversely affected. Countries
in the Asia Pacific region, including Korea and Japan, have experienced
weaknesses in their currency, banking and equity markets in the recent past.
These weaknesses could continue to adversely affect demand for our products, the
availability and supply of our product components, and our consolidated results
of operations. The recent Asian financial crisis contributed to a widespread
uncertainty and a slowdown in the semiconductor industry. This slowdown resulted
in reduced spending on semiconductor capital equipment, including ATE, and has
had, and may in the future have, a material adverse effect on our product
backlog, balance sheet and results of operations.
In addition, one of our major customers, Spirox Corporation, is a
Taiwanese distributor. This subjects a significant portion of our receivables
and future revenues to the risks associated with doing business in a foreign
country, including political and economic instability, currency exchange rate
fluctuations and regulatory changes. Disruption of business in Asia caused by
the previously mentioned factors could continue to have a material impact on the
Company's business, financial condition or results of operations.
IF THE PROTECTION OF PROPRIETARY RIGHTS IS INADEQUATE, OUR BUSINESS COULD BE
HARMED
We attempt to protect our intellectual property rights through patents,
copyrights, trademarks, maintenance of trade secrets and other measures,
including entering into confidentiality agreements. However, we cannot be
certain that others will not independently develop substantially equivalent
intellectual property or that we can meaningfully protect our intellectual
property. Nor can we be certain that our patents will not be invalidated, deemed
unenforceable, circumvented or challenged, or that the rights granted thereunder
will provide us with competitive advantages, or that any of our pending or
future patent applications will be issued with claims of the scope we seek, if
at all. Furthermore, we cannot be certain that others will not develop similar
products, duplicate our products or design around our patents, or that foreign
intellectual property laws, or agreements into which we have entered will
protect our intellectual property rights. Inability or failure to protect our
intellectual property rights could have a material adverse effect upon our
business, financial condition and results of operations. We have been involved
in extensive, expensive and time-consuming reviews of, and litigation
concerning, patent infringement claims.
OUR BUSINESS MAY BE HARMED IF WE ARE FOUND TO INFRINGE PROPRIETARY RIGHTS OF
OTHERS
We have at times been notified that we may be infringing intellectual
property rights of third parties, and we have litigated patent infringement
claims in the past. We expect to continue to receive notice of such claims in
the future. In July 1998, inTEST IP Corporation, or inTEST, alleged in writing
that one of our products is infringing a patent held by inTEST. We may also be
obligated to other third parties relating to this allegation. We believe we have
meritorious defenses to the claims. However, we cannot be certain of success in
defending this patent infringement claim or claims for indemnification resulting
from infringement claims.
Some of our customers have received notices from Mr. Jerome Lemelson
alleging that the manufacture of semiconductor products and/or the equipment
used to manufacture semiconductor products infringes certain patents issued to
Mr. Lemelson. We have been notified by customers that we may be obligated to
defend or settle claims that our products infringe Mr. Lemelson's patents, and
that if it is determined that the customers infringe Mr. Lemelson's patents,
that customer intends to seek indemnification from us for damages and other
related expenses.
We cannot be certain of success in defending current or future patent
infringement claims or claims for indemnification resulting from infringement
claims. Our business, financial condition and results of operations could be
materially adversely affected if we must pay damages to a third party or suffer
an injunction or if we expend significant amounts in defending any such action,
regardless of the outcome. With respect to any claims, we may seek to obtain a
license under the third party's intellectual property rights. We cannot be
certain, however, that the third party will grant us a license on reasonable
terms or at all. We could decide, in the alternative, to continue litigating
such claims. Litigation has been and could continue to be extremely expensive
and time consuming, and could materially adversely affect our business,
financial condition or results of operations, regardless of the outcome.
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OUR HIGH CAPITAL EXPENDITURES MAY REQUIRE US TO OBTAIN ADDITIONAL FINANCING
WHICH MAY NOT BE AVAILABLE ON TERMS SATISFACTORY TO US
Developing and manufacturing new ATE systems and enhancements is highly
capital intensive. In order to be competitive, we must make significant
investments in, among other things:
- capital equipment;
- expansion of operations;
- systems;
- procedures and controls;
- research and development and worldwide training; and
- customer service and support.
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, we currently have outstanding $96.6 million of
these notes which resulted in a ratio of long-term debt to total capitalization
at October 31, 1999 of approximately 35%. 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, exchange or redeem the
notes, which may also dilute 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.
A VARIETY OF FACTORS MAY CAUSE THE PRICE OF OUR STOCK TO BE VOLATILE
In recent years, the stock market in general, and the market for shares
of high-tech companies in particular, including ours, have
experienced extreme price fluctuations, which have often been unrelated to the
operating performance of affected companies. For example, in fiscal 1998, the
price of our common stock ranged from a high of $35.25 to a low of $9.31. In
fiscal 1999, the price of our common stock ranged from a high of $49.88 to a low
of $14.38. The market price of our common stock is likely to continue to
fluctuate significantly in the future, including fluctuations unrelated to our
performance.
We believe that fluctuations of our stock price may be caused by a
variety of factors, including:
- 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.
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RISKS RELATED TO THIS OFFERING
WE ARE SUBJECT TO ANTI-TAKEOVER PROVISIONS THAT COULD DELAY OR PREVENT AN
ACQUISITION OF OUR COMPANY
Provisions of our amended and restated certificate of incorporation,
shareholders rights plan, equity incentive plans, bylaws and of Delaware law may
discourage transactions involving a change in corporate control. In addition to
the foregoing, our classified board of directors, the stockholdings of our
officers, directors and persons or entities that may be deemed affiliates, our
shareholder rights plan and the ability of our board of directors to issue
preferred stock without further stockholder approval could have the effect of
delaying, deferring or preventing a third party from acquiring us and may
adversely affect the voting and other rights of holders of our common stock.
MANAGEMENT MAY APPLY THE PROCEEDS OF THIS OFFERING TO USES THAT DO NOT IMPROVE
OUR OPERATING RESULTS OR MARKET VALUE
The net proceeds from the sale of the common stock in this offering will
be used for working capital and general corporate purposes. A portion may be
used to acquire assets, technology and businesses. Our management will have
considerable discretion in the application of the net proceeds, and you will not
have the opportunity, as part of your investment decision, to assess whether the
proceeds are being used appropriately. The net proceeds may be used for
corporate purposes that do not improve our operating results or market value.
Pending application of the proceeds, they may be placed in investments that do
not produce income or that lose value. See "Use of Proceeds."
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CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS
This prospectus and the documents incorporated by reference herein
contain forward-looking statements which involve risks and uncertainties. These
forward-looking statements are not historical facts but rather are based on
current expectations, estimates and projections about our industry, our beliefs
and assumptions. We use words such as anticipates, expects, intends, plans,
believes, seeks, estimates and variations of these words and similar expressions
to identify forward-looking statements. These statements are not guarantees of
future performance and are subject to certain risks, uncertainties and other
factors, some of which are beyond our control, are difficult to predict and
could cause actual results to differ materially from those expressed or
forecasted in the forward-looking statements. These risks and uncertainties
include those described in "Risk Factors" and elsewhere in this prospectus and
the documents incorporated by reference herein. You should not place undue
reliance on these forward-looking statements, which reflect our management's
view only as of the date of this prospectus. We undertake no obligation to
update these statements or publicly release the result of any revision to the
forward-looking statements that we may make to reflect events or circumstances
after the date of this prospectus or to reflect the occurrence of unanticipated
events.
USE OF PROCEEDS
Our net proceeds from the sale of the 2,000,000 shares of common stock
offered by us, after deducting estimated underwriting discounts and commissions
and estimated expenses payable by us, are estimated to be approximately $
million ($ million if the underwriters' over-allotment option is exercised in
full). We will use these net proceeds for working capital and general corporate
purposes. In addition, we may use a portion of the net proceeds to acquire
assets, technologies and businesses. We currently have no commitments or
agreements with respect to any material acquisitions. Pending use of the net
proceeds, we plan to invest the net proceeds in short-term investment grade
securities. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations." We will have broad discretion as to the allocation and
use of the net proceeds that we will receive.
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PRICE RANGE OF COMMON STOCK
Our common stock commenced trading on the Nasdaq National Market on
October 28, 1993 and is traded under the symbol CMOS. The following table sets
forth, for the periods indicated, the high and low daily closing sales prices
for the common stock as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
COMMON STOCK PRICE
-------------------
HIGH LOW
-------- -------
<S> <C> <C>
FISCAL YEAR 1998
First Quarter............................................................... $35.25 $18.13
Second Quarter.............................................................. 34.00 24.87
Third Quarter............................................................... 28.50 16.87
Fourth Quarter.............................................................. 20.56 9.31
FISCAL YEAR 1999
First Quarter............................................................... $29.88 $14.38
Second Quarter.............................................................. 30.88 17.88
Third Quarter............................................................... 41.50 24.13
Fourth Quarter.............................................................. 49.88 36.88
FISCAL YEAR 2000
First Quarter through January 25, 2000...................................... $98.88 $44.44
</TABLE>
On January 25, 2000, the reported last sale price for the common stock as
reported by the Nasdaq National Market was $96.50 per share. As of December 10,
1999, there were 216 stockholders of record of the common stock.
DIVIDEND POLICY
We have not paid any dividends since our inception. We currently intend
to retain any earnings for use in developing and growing our business and do not
anticipate paying any cash dividends on our common stock in the foreseeable
future. Any determination to pay dividends in the future will be at the
discretion of our board of directors and our lenders and will be dependent on
our results of operations, financial condition, contractual restrictions,
restrictions imposed by applicable law and other factors deemed relevant by the
board of directors. Under our credit facility, we are required to get the bank's
approval prior to the payment of dividends.
19
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of October 31, 1999:
- on an actual basis; and
- as adjusted to reflect the sale of 2,000,000 shares of common
stock by us at an assumed offering price of $96.50 per share,
after deducting the underwriters' discounts and commissions and
the estimated offering expenses payable by us.
This table should be read in conjunction with our selected consolidated
financial data included elsewhere in this prospectus or incorporated by
reference herein (in thousands, except share amounts).
<TABLE>
<CAPTION>
AS OF OCTOBER 31, 1999
----------------------
ACTUAL AS ADJUSTED
---------- -----------
<S> <C> <C>
Convertible subordinated notes........................................................... $ 96,610 $ 96,610
Stockholders' equity
Preferred stock, $0.001 par value; 1,000,000 shares authorized; no shares issued and -- --
outstanding actual and as adjusted....................................................
Common stock, $0.001 par value; 40,000,000 shares authorized; 22,516,842 shares issued 22 24
and outstanding actual; 24,516,842 shares issued and outstanding as adjusted..........
Additional paid-in capital............................................................... 135,221 313,909
Treasury stock, at cost.................................................................. (10,522) (10,522)
Accumulated other comprehensive loss..................................................... (661) (661)
Retained earnings........................................................................ 57,348 57,348
Total stockholders' equity........................................................ 181,408 360,098
Total capitalization......................................................... $278,018 $456,708
========== ===========
</TABLE>
- -------------------
The number of shares of common stock outstanding after the offering is
based upon 22,516,842 shares of common stock outstanding as of October 31, 1999,
and excludes:
- 2,974,426 shares of common stock subject to outstanding
options as of December 31, 1999 at a weighted average
exercise price of $30.00;
- 598,945 shares that are available for future grants under
our 1993 Stock Option Plan as of December 31, 1999;
- 253,042 shares that are available for future issuance under
our 1994 Employee Stock Purchase Plan as of December 31,
1999;
- 1,397,108 shares of common stock issuable upon conversion
of our convertible subordinated notes due September 15,
2002; and
- 253,200 shares of common stock issued between November 1,
1999 and December 31, 1999 pursuant to our employee benefit
plans.
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data as of
and for the periods indicated. The consolidated statement of operations data and
other data for each of the fiscal years in the three-year period ended October
31, 1999 and the consolidated balance sheet data as of October 31, 1998 and 1999
were derived from our consolidated financial statements audited by Ernst & Young
LLP and incorporated by reference in this prospectus. The consolidated statement
of operations data for the fiscal years ended October 31, 1995 and 1996 and the
consolidated balance sheet data as of October 31, 1995, 1996 and 1997 were
derived from our consolidated financial statements audited by Ernst & Young LLP
not included or incorporated by reference in this prospectus. You should read
this information together with the discussion in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our consolidated
financial statements and condensed consolidated financial statements, including
the notes thereto, incorporated by reference in this prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED OCTOBER 31,
--------------------------------------------------------
1995 1996 1997 1998 1999
---------- ---------- ---------- ---------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA
Net sales:
Systems and upgrades................................. $160,030 $221,096 $186,264 $187,887 $172,584
Service, spare parts and software.................... 16,775 17,692 17,828 28,916 24,599
---------- ---------- ---------- ---------- -----------
Total net sales............................... 176,805 238,788 204,092 216,803 197,183
Cost of goods sold--on net sales....................... 70,121 97,010 89,956 97,004 95,205
Cost of goods sold--special charges.................... -- -- -- 28,352 --
---------- ---------- ---------- ---------- -----------
Gross margin.................................. 106,684 141,778 114,136 91,447 101,978
Operating expenses:
Research and development............................. 24,859 35,442 37,350 47,484 38,908
Selling, general and administrative.................. 38,008 52,002 55,701 64,151 58,660
In-process research and development.................. -- -- 6,022 1,998 858
Special charges...................................... -- -- -- 20,386 7,565
---------- ---------- ---------- ---------- -----------
Total operating expenses...................... 62,867 87,444 99,073 134,019 105,991
---------- ---------- ---------- ---------- -----------
Operating income (loss)................................ 43,817 54,334 15,063 (42,572) (4,013)
Interest income ....................................... 2,979 4,155 4,769 8,497 6,631
Interest and other income (expenses), net.............. (147) (222) (1,602) (7,195) (6,370)
---------- ---------- ---------- ---------- -----------
Income (loss) before income tax provision
(benefit) and minority interest...................... 46,649 58,267 18,230 (41,270) (3,752)
Income tax provision (benefit)......................... 16,295 20,564 7,531 (14,785) (1,372)
---------- ---------- ---------- ---------- -----------
Income (loss) before minority interest................. 30,354 37,703 10,699 (26,485) (2,380)
========== ========== ========== ========== ===========
Minority interest (benefit)............................ -- -- 6 (203) 75
---------- ---------- ---------- ---------- -----------
Net income (loss before extraordinary)
items................................................ 30,354 37,703 10,693 (26,282) (2,455)
Gain on extinguishment of debt, net of taxes of
$926 in 1999......................................... -- -- -- -- 1,646
---------- ---------- ---------- ---------- -----------
Net income (loss)...................................... $30,354 $37,703 $10,693 $(26,282) $ (809)
========== ========== ========== ========== ===========
NET INCOME (LOSS) PER SHARE:
Basic before extraordinary item...................... $ 1.50 $ 1.75 $ 0.49 $ (1.22) $ (0.12)
Basic extraordinary item............................. -- -- -- -- $ 0.08
---------- ---------- ---------- ---------- -----------
Basic................................................ $ 1.50 $ 1.75 $ 0.49 $ (1.22) $ (0.04)
========== ========== ========== ========== ===========
Diluted before extraordinary item.................... $ 1.45 $ 1.72 $ 0.47 $ (1.22) $ (0.12)
Diluted extraordinary item........................... -- $ -- -- -- $ 0.08
---------- ---------- ---------- ---------- -----------
Diluted.............................................. $ 1.45 $ 1.72 $ 0.47 $ (1.22) $ (0.04)
========== ========== ========== ========== ===========
NUMBER OF SHARES USED IN COMPUTING NET INCOME (LOSS)
PER SHARE AMOUNTS:
Basic................................................ 20,273 21,532 21,865 21,533 21,088
========== ========== ========== ========== ===========
Diluted.............................................. 21,008 21,977 22,512 21,533 21,899
========== ========== ========== ========== ===========
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
AS OF OCTOBER 31,
AS OF OCTOBER 31, 1999
-------------------------------------------------------- -------------------
1995 1996 1997 1998 1999 AS ADJUSTED
---------- ---------- ---------- ---------- ---------- -------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA
Cash, cash equivalents, restricted
cash and short term investments.. $ 83,579 $ 86,292 $177,776 $113,568 $ 91,878 $270,568
Working capital.................. 126,395 144,623 250,336 184,606 166,727 345,417
Total assets..................... 186,593 223,042 358,141 306,189 340,420 519,110
Convertible subordinated notes... -- -- 115,000 115,000 96,610 96,610
Retained earnings................ 46,326 84,029 94,722 58,157 57,348 57,348
Total stockholders' equity....... 150,286 189,782 204,911 150,017 181,408 360,098
</TABLE>
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CERTAIN STATEMENTS IN THIS DISCUSSION AND ANALYSIS ARE FORWARD LOOKING
STATEMENTS BASED ON CURRENT EXPECTATIONS, AND ENTAIL VARIOUS RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
EXPRESSED IN SUCH FORWARD LOOKING STATEMENTS. SUCH RISKS AND UNCERTAINTIES ARE
SET FORTH UNDER THE CAPTION "RISK FACTORS." THE FOLLOWING DISCUSSION SHOULD BE
READ IN CONJUNCTION WITH OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED
NOTES INCORPORATED BY REFERENCE OR INCLUDED ELSEWHERE HEREIN.
OVERVIEW
In addition to the historical information contained in this prospectus,
the discussion in this prospectus contains forward-looking statements, within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, that involve
risks and uncertainties, such as statements of our plans, objectives,
expectations and intentions. The cautionary statements made in this prospectus
should be read as being applicable to all related forward-looking statements
whenever they appear in this prospectus. Our actual results could differ
materially from those discussed herein. Factors that could cause or contribute
to such differences include those discussed below as well as those cautionary
statements and other factors set forth in "Risk Factors" and elsewhere herein.
Our sales, gross margins and operating results have in the past
fluctuated significantly and will, in the future, fluctuate significantly
depending upon a variety of factors. The factors that have caused and will
continue to cause our results to fluctuate include cyclicality or downturns in
the semiconductor market and the markets served by our customers, the timing of
new product announcements and releases by us or our competitors, market
acceptance of new products and enhanced versions of our products, manufacturing
inefficiencies associated with the start up of new products, changes in pricing
by us, our competitors, customers or suppliers, the ability to volume produce
systems and meet customer requirements, inventory obsolescence, patterns of
capital spending by customers, delays, cancellations or reschedulings of orders
due to customer financial difficulties or otherwise, expenses associated with
acquisitions and alliances, product discounts, product reliability, the
proportion of direct sales and sales through third parties, including
distributors and original equipment manufacturers, the mix of products sold, the
length of manufacturing and sales cycles, natural disasters, political and
economic instability, regulatory changes and outbreaks of hostilities. Due to
these and additional factors, historical results and percentage relationships
discussed in this prospectus will not necessarily be indicative of the results
of operations for any future period. For a further discussion of our business,
and risk factors affecting our results of operations, please refer to the
section entitled "Risk Factors" included elsewhere herein.
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
net sales for the fiscal years indicated:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED OCTOBER 31,
-----------------------------------
1999 1998 1997
---------- ---------- ---------
<S> <C> <C> <C>
Net sales..................................................................... 100% 100% 100%
Cost of goods sold--on net sales.............................................. 48 45 44
Cost of goods sold--special charges............................................ -- 13 --
---------- ---------- ---------
Gross margin.................................................................. 52 42 56
---------- ---------- ---------
Operating expenses:
Research and development...................................................... 20 22 18
Selling, general and administrative........................................... 30 30 27
In-process research and development........................................... -- 1 3
Special charges............................................................... 4 9 --
---------- ---------- ---------
Total operating expenses................................................. 54 62 48
---------- ---------- ---------
Operating income (loss)....................................................... (2)% (20)% 8%
========== ========== =========
</TABLE>
23
<PAGE>
1999 VS 1998
NET SALES. Net sales consist of revenues from the sale of systems,
upgrades, spare parts, maintenance contracts and software. Net sales declined 9%
to $197.2 million in fiscal 1999 from $216.8 million in fiscal 1998. Our net
sales increased from $26.5 million in the first quarter of fiscal 1999 to $80.2
million for the fourth quarter of fiscal 1999. This was in sharp contrast to
1998 when our net sales decreased from $82.4 million in the first quarter of
fiscal 1998 to $22.4 million for the fourth quarter of fiscal 1998. During
fiscal 1999, our net sales improved each sequential quarter because of three
principal factors:
- a significant increase in the worldwide demand for semiconductor
ATE;
- improved business and economic conditions in Asia and particularly
in Taiwan; and
- the launch of three major products: the Valstar high-performance
digital tester, the Quartet high-performance mixed signal tester
and the Kalos memory tester.
These factors resulted in our experiencing increasing net sales activity
through fiscal 1999. The improved worldwide demand for semiconductor ATE has led
to customers purchasing for increased capacity and the launch of our new
products has led to some customers purchasing products with new features or
capabilities.
International net sales accounted for approximately 64% and 69% of total
net sales in fiscal 1999 and 1998, respectively. Our net sales to the Asia
Pacific region accounted for approximately 55% and 60% of total net sales in
fiscal 1999 and 1998, respectively, and thus are subject to the risk of economic
instability in that region that materially adversely affected the demand for our
products in 1998. Capital markets in Korea and other areas of Asia have been
highly volatile, resulting in economic instabilities. These instabilities may
reoccur or worsen, which could materially adversely affect demand for our
products.
Our net sales by product line in fiscal 1999 and 1998 consisted of:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
OCTOBER 31,
-------------------
1999 1998
---------- --------
<S> <C> <C>
Mixed-Signal......................................................................... 65% 66%
Logic................................................................................ 16 18
Memory............................................................................... 7 4
Service and software................................................................. 12 12
---------- --------
Total................................................................................ 100% 100%
========== ========
</TABLE>
The increase in the memory percentage and the high percentage of net
sales attributable to mixed-signal products is principally derived from the
sales of the new Kalos and Quartet products. Revenues from software were not
material to our operations in fiscal 1999 and 1998, representing less than 4% of
our net sales in each period.
GROSS MARGIN. Our gross margin as a percentage of net sales increased to
51.7% in fiscal 1999 from 42.2% in fiscal 1998. The increase in 1999 was due
primarily to relatively low gross margins in 1998 attributable to the special
charges taken in that year. We recorded special charges to cost of goods sold in
1998 totaling $28.4 million, consisting primarily of write-offs for excess or
obsolete inventory, as more fully described below. Additionally, gross margins
were negatively impacted due to lower average selling prices caused by increased
competition in the markets the Company serves and due to inefficiencies caused
by the lower manufacturing volumes.
RESEARCH AND DEVELOPMENT. Research and development expenses as a
percentage of net sales were 19.7% and 21.9%, in fiscal 1999 and 1998,
respectively. R&D expenses declined in absolute dollars to $38.9 million in
fiscal 1999 from $47.5 million in fiscal 1998, reflecting lower investments in
the development of new products, and enhancements of existing product lines. We
restructured our business in the third and fourth quarters of fiscal 1998 in
response to a major downturn in the business at that time. As a result of that
industry downturn, we downsized our operations including reduced headcount,
reduced and delayed projects including facility expansions and certain research
and development projects. We currently intend to continue to invest significant
resources in the
24
<PAGE>
development of new products and enhancements for the foreseeable future and
would expect R&D expenses to be higher in absolute dollars in fiscal 2000 than
those recorded in fiscal 1999.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative,
or SG&A, expenses decreased to $58.7 million in fiscal 1999 from $64.2 million
in fiscal 1998, a decrease of 8.6%. The decrease in absolute dollars in fiscal
1999 resulted primarily from our downsizing which occurred in the latter half of
fiscal 1998. We restructured our business in the third and fourth quarters of
fiscal 1998 in response to a major downturn in the business at that time. As a
result of that industry downturn, we downsized our operations including reduced
headcount, reduced and delayed projects including facility expansions. During
early fiscal 1999, we undertook a project to replace a majority of our
financial, manufacturing, distribution, planning and control systems with the
R/3 system from SAP America, Inc. This system became operational in June 1999.
In September 1999, we relocated our Oregon operations to a newly constructed
facility in Hillsboro, Oregon. Because of these and other investments, we
anticipate that SG&A expenses will be higher in absolute dollars in fiscal 2000
than those recorded in fiscal 1999.
IN-PROCESS RESEARCH AND DEVELOPMENT. In September 1999, we purchased
Opmaxx, Inc. for $8.0 million in cash and the assumption of liabilities and the
conversion of employee stock options worth $0.6 million. Additionally, we agreed
to make payments to the common shareholders of Opmaxx in an amount equal to 10%
of the net receipts from sales of the Opmaxx products from September 1999
through December 31, 2003. In connection with this acquisition, we recognized
$0.9 million of acquired in-process research and development, or IPR&D. The
remaining $7.7 million has been capitalized, of which $7.5 million is for
purchased technology and other intangible assets which will be amortized ratably
over their estimated useful lives, ranging from two to five years. Opmaxx is
being integrated with our subsidiary, Fluence Technology, Inc.
Our management made certain assessments with respect to the determination
of all identifiable assets resulting from, or to be used in, research and
development activities as of the acquisition date. Each of these activities was
evaluated by both interviews and data analysis to determine our state of
development and related fair value. Our review indicated that the IPR&D had not
reached a state of technological feasibility and the underlying technology had
no alternative future use to us in other research and development projects or
otherwise. In the case of IPR&D, fair values of the corresponding technologies
were determined using an income approach, which included a discounted future
earnings methodology. Under this methodology, the value of the in-process
technology is comprised of the total present value of the anticipated after-tax
cash flows attributable to the in-process project, discounted to net present
value, taking into account the uncertainty surrounding the successful
development of the purchased IPR&D.
The IPR&D acquired from Opmaxx consists of products and projects related
to analog and mixed-signal self test. These products and projects are aimed at
the development of design verification and sensitivity analysis, design fault
coverage, test evaluation and optimization. We estimated that approximately 55%
of the research and development effort, based on time spent and complexity, had
been completed at the date of the acquisition. The significant work remaining to
complete the current versions of the products was estimated to take
approximately 8 engineering person years, at a cost of approximately $1 million
and be completed by the end of fiscal 2000.
SPECIAL CHARGES. In the second quarter of fiscal 1999, we recorded
special charges totaling $6.2 million, of which $0.3 million was for employee
severance and $5.9 million was for abandoned facilities. These charges were
recorded as a result of our response to a major downturn in the business outlook
for the ATE and related semiconductor and semiconductor equipment industries at
that time as well as the decision to relocate our Oregon operations from a
facility in Beaverton to a newly constructed facility in Hillsboro, Oregon.
In the fourth quarter of fiscal 1999, we recorded special charges
totaling $1.3 million. This charge included expenses related to the Opmaxx
acquisition of $0.6 million as well as the $0.7 million write-down of certain
intangible assets from another acquisition in the integration of Opmaxx with
Fluence.
EXTRAORDINARY GAIN--EXTINGUISHMENT OF DEBT. In fiscal 1999, we recorded a
pre-tax extraordinary gain of $2.6 million for the retirement of $18.4 million
of our convertible subordinated notes in exchange for 603,000 shares of our
common stock held in treasury.
INTEREST INCOME. We generated interest income of $6.6 million and $8.5
million in fiscal 1999 and 1998, respectively. The decrease was due to lower
average cash and investment balances in 1999 as compared to 1998.
25
<PAGE>
These lower average balances were the result of our net losses in fiscal 1998 as
well as $32.8 million dispersed for the repurchase of our common stock during
1998.
INTEREST AND OTHER EXPENSES. Interest and other expenses decreased to
$6.4 million in fiscal 1999 from $7.2 million in fiscal 1998, primarily due to
lower interest expense on a lower outstanding balance of our convertible
subordinated notes.
INCOME TAX. Our effective tax benefit rate was 36% for fiscal 1999 and
1998. The tax benefit rate for both years was less than the combined federal and
state statutory rate primarily due to non-deductible in-process research and
development expenses.
Realization of the net deferred tax assets is dependent on our ability to
generate approximately $40,000,000 of future taxable income. Management believes
that it is more likely than not that the assets will be realized, based on
forecasted income. However, there can be no assurance that we will meet our
expectations of future income. A valuation allowance was established in both
fiscal 1999 and 1998 to offset a portion of the deferred tax assets attributable
to the in-process research and development. Due to the period over which these
tax benefits will be recognized, sufficient uncertainty exists regarding the
realizability of a portion of these assets to warrant a valuation allowance.
Management will evaluate the realizability of the deferred tax assets on a
quarterly basis and assess the need for additional valuation allowances.
1998 VS 1997
NET SALES. Net sales increased 6% to $216.8 million in fiscal 1998 from
$204.1 million in fiscal 1997; however our net sales decreased from $82.4
million in the first quarter of fiscal 1998 to $22.4 million for the fourth
quarter of fiscal 1998. The year-over-year increase over 1997 was driven
primarily by increased worldwide demand for semiconductor ATE, including our
products, during the end of calendar 1997 and including the first quarter of our
fiscal 1998. This was followed by a very significant decline in worldwide demand
for semiconductor ATE, which led to a material decline in net sales of our
products in the last three quarters of fiscal 1998. During fiscal 1998, our net
sales were also materially adversely affected by our inability to complete three
major product introductions, consisting of the ValStar high-performance digital
tester, the Quartet high-performance mixed-signal tester and the Kalos memory
tester. We believe that our existing completed products were being primarily
purchased when our customers required increased capacity and that these three
newer products, once completed, will be primarily purchased by customers seeking
increased functionality instead of or in addition to increased capacity. We
believe we will be unable to achieve a significant increase in our net sales
until either increased demand for semiconductors causes an increase in capacity
buys or until we complete our major product introductions and can generate
increased functionality buys with our newer products.
International net sales accounted for approximately 69% and 70% of total
net sales in fiscal 1998 and 1997, respectively. Our net sales to the Asia
Pacific region accounted for approximately 60% and 66% of total net sales in
fiscal 1998 and 1997, respectively, and thus are subject to the risk of economic
instability in that region that materially adversely affected the demand for our
products in 1998. Capital markets in Korea and other areas of Asia have been
highly volatile, resulting in economic instabilities. These instabilities may
continue or worsen, which could continue to materially adversely affect demand
for our products.
GROSS MARGIN. Our gross margin as a percentage of net sales decreased to
42.2% in fiscal 1998 from 55.9% in fiscal 1997. The decrease was due primarily
to special charges taken in fiscal 1998 as a result of a significant decrease in
net sales in the last three quarters of fiscal 1998. We recorded special charges
to cost of goods sold in 1998 totaling $28.4 million, consisting primarily of
write-offs for excess or obsolete inventory, as more fully described below.
Additionally, gross margins were negatively impacted due to lower average
selling prices caused by increased competition in the markets we serve and due
to inefficiencies caused by the lower manufacturing volumes.
RESEARCH AND DEVELOPMENT. R&D expenses as a percentage of net sales were
21.9% and 18.3%, in fiscal 1998 and 1997, respectively. R&D expenses increased
to $47.5 million in fiscal 1998 from $37.4 million in fiscal 1997, reflecting
continued investments in the development of new products, as well as
enhancements of existing product lines.
26
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses increased to $64.2
million in fiscal 1998 from $55.7 million in fiscal 1997, an increase of 15.3%.
The increase in fiscal 1998 resulted primarily from marketing costs associated
with new product introductions and higher operating expenses associated with
acquisitions made during 1998 and the last half of fiscal 1997, partially offset
by decreases in expenditures in the latter three quarters of fiscal 1998 as we
responded to the general downturn in the semiconductor industry. During this
period of depressed revenues, we undertook a project to replace a majority of
our financial, manufacturing, distribution, planning and control systems with
the R/3 system from SAP America, Inc. This system became operational in June
1999.
IN-PROCESS RESEARCH AND DEVELOPMENT. In June 1998, the Company purchased
from Heuristics Physics Laboratories, Inc. certain assets and assumed certain
liabilities relating to their memory self test business for $8.0 million in cash
and the assumption of $0.2 million in liabilities. Additionally, the Company
agreed to make payments to the shareholder representatives of Heuristics in an
amount equal to 10% of our net sales of products derived from the assets
acquired from Heuristics' design for test division for a period of two years
following the acquisition. The amounts paid in 1999 under this arrangement were
insignificant. In connection with the Heuristics acquisition, we recognized $2.0
million of acquired in-process research and development. The remaining $6.2
million has been capitalized, of which $5.3 million is for purchased technology
and other intangible assets which will be amortized ratably over their estimated
useful lives of five years.
Our management made certain assessments with respect to the determination
of all identifiable assets resulting from, or to be used in, research and
development activities as of the acquisition date. Each of these activities was
evaluated, by both interviews and data analysis, to determine our state of
development and related fair value. Our review indicated that the IPR&D had not
reached a state of technological feasibility and the underlying technology had
no alternative future use to us in other research and development projects or
otherwise. In the case of IPR&D, fair values of the corresponding technologies
were determined using an income approach, which included a discounted future
earnings methodology. Under this methodology, the value of the in-process
technology is comprised of the total present value of the anticipated after-tax
cash flows attributable to the in-process project, discounted to net present
value, taking into account the uncertainty surrounding the successful
development of the purchased IPR&D.
The Heuristics acquired IPR&D consists of projects related to memory self
test. These projects are aimed at the development of products that can perform
self testing of on-chip memories, self testing of off-chip memories, automated
memory test vector generation, built-in memory repair analysis and built-in
automated memory circuit repair. The Company estimated that approximately 50% of
the research and development effort, based on complexity, had been completed at
the date of the acquisition. As of October 31, 1999, the Company has introduced
memory BOST products and has largely completed development of a memory BIST
software product. The Company recorded a $0.7 million write-down of the
intangible assets acquired from Heuristics in conjunction with the integration
of Opmaxx with Fluence in September 1999. This asset write-down was made based
on an assessment of the current market potential for these products. There can
be no assurance that these projects or products will achieve technological
feasibility or that the Company will be able to successfully market these
products.
During fiscal 1997, the Company expensed $6.0 million of IPR&D resulting
from the acquisition of certain assets of Summit Design, Inc. and Summit's
wholly owned subsidiary, Test Systems Strategies, Inc. The IPR&D associated with
the Test Systems Strategies acquisition related to the development of Standard
Tester Interface Language, or STIL, tools. The STIL development project is an
ongoing program that will provide a foundation for and be integrated into most
of the Fluence software products. We believe the life of this program will
continue into the foreseeable future.
SPECIAL CHARGES. In the third and fourth quarters of fiscal 1998, we
recorded special charges totaling $48.7 million, of which $28.4 million was
classified as cost of goods sold and the balance was classified as operating
expenses. These charges were recorded as a result of our response to a major
downturn in the current and forecasted business outlook for the ATE and related
semiconductor and semiconductor equipment industries which took place during the
period. As a result of this industry downturn, we have downsized our operations
including reducing headcount, reducing the volume of products being produced and
canceling and delaying various projects, including facilities expansions and
certain research and development projects. The impact of this downturn and these
decisions is that significant amounts of our inventories, receivables, fixed
assets, prepaid expenses, investments and purchased
27
<PAGE>
technologies have been impaired and certain liabilities have been incurred. As a
result, we have written down the related assets to their net realizable values
and made provision for the estimated liabilities.
Of the $48.7 million in charges, approximately $28.4 million was charged
as cost of goods sold, of which approximately $26.7 million was related to
write-down of excess or obsolete inventories. The elements of the charges during
fiscal 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Write-down of inventories to net realizable value
(including expected losses on supplier commitments)............................ $ 26,678
Write-down of excess fixed assets to fair value................................ 7,272
Write-down of purchased technology and investments to fair value............... 5,118
Write-off of prepaid and other current assets.................................. 2,444
Excess facility costs.......................................................... 2,641
Provision for uncollectible receivables........................................ 3,389
Employee termination benefits and accrued liabilities.......................... 1,196
-----------
$ 48,738
===========
</TABLE>
At October 31, 1998, approximately $4.8 million in accrued liabilities
related to special charges remained on our balance sheet, primarily the accrued
loss on supplier commitments of $2.4 million and approximately $1.9 million for
rent on excess facilities. The cash expenditures associated with these
obligations will occur primarily in fiscal 1999. Cash expenditures associated
with the special charges during fiscal 1998 were approximately $700,000,
relating primarily to excess facilities and to severance costs.
INTEREST INCOME. We generated interest income of $8.5 million and $4.8
million in fiscal 1998 and 1997, respectively. The increase was due to interest
earned on significantly higher average cash and investments balances provided by
the receipt of proceeds from the convertible subordinated notes issued in late
fiscal 1997.
INTEREST AND OTHER EXPENSES. Interest and other expenses increased to
$7.2 million in fiscal 1998 from $1.6 million in fiscal 1997, primarily due to
the interest expense on our convertible subordinated notes.
INCOME TAX. Our effective tax benefit rate for fiscal 1998 was 36%, and
the effective tax rate for fiscal 1997 was 41%. The effective tax benefit rate
in 1998 was reduced, and the effective tax rate in 1997 was increased by
non-deductible in-process research and development expenses.
YEAR 2000 READINESS
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 the 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. We implemented a Year 2000 plan which is
designed to cover all of our activities. The plan will be modified as
circumstances change and is monitored by our Board of Directors.
The impact of Year 2000 issues on our business will depend not only on
corrective actions that we have taken and will continue to 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 issues and results. 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
28
<PAGE>
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.
Although it is difficult for us to estimate the total costs of
implementing the plan, our current estimate is that such costs have been
approximately $1.9 million through October 31, 1999 and will be approximately
$200,000 additionally thereafter. 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. 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.
Although we are not aware of any material operational issues associated
with the Year 2000, 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.
LIQUIDITY AND CAPITAL RESOURCES
In fiscal 1999, net cash provided by operating activities was $22.0
million. This cash flow from operating activities was primarily attributable to
net income before depreciation and amortization, extraordinary gain and special
charges of $27.7 million, income tax refunds of $20.0 million, offset by cash
used for net changes in the remaining operating assets and liabilities,
particularly accounts receivable.
Net cash used in investing activities during fiscal 1999 was $30.5
million. This cash was primarily used for net purchases of property and
equipment of $18.0 million, $7.6 million was used to purchase other assets
including Opmaxx, Inc. and $6.6 million was used to purchase available-for-sale
securities.
Net cash provided by financing activities in fiscal 1999 of $12.6 million
was primarily due to the issuance of common stock and treasury stock in
accordance with our employee stock option and stock purchase plans. We also
recorded non-cash transactions during the year for the exchange of 603,000
shares of our common stock held in treasury for an aggregate of $18.4 million of
its convertible subordinated notes. These transactions resulted in an
extraordinary gain 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 October 31, 1999, our principal sources of liquidity consisted of
$141.9 million in cash, cash equivalents, and available-for-sale securities,
compared with $133.9 million at October 31, 1998. We have $20.0 million
available under our unsecured bank line of credit expiring in July 2000. At
October 31, 1999, there were no amounts outstanding under these agreements.
Borrowings are subject to our compliance with financial and other covenants. We
have outstanding long term debt of $96.6 million consisting of convertible
subordinated notes due in September 2002. Additionally, as of October 31, 1999,
we have operating leases for facilities and test and other equipment totaling
approximately $35.8 million due through 2014. We expect that our existing cash,
cash equivalents and available-for-sale investment balances, together with our
current line of credit, net proceeds from this offering and anticipated cash
flow from operations will satisfy our financing requirements for at least the
next 12 months.
We believe that because of the relatively long manufacturing cycles of
many of our testers and the new products we have introduced, and plan to
continue to introduce, investments in inventories will continue to represent a
significant portion of working capital. Significant investments in accounts
receivable and inventories subject us to increased risks, and could continue to
materially adversely affect our business, financial condition and results of
operations. The semiconductor industry has historically been highly cyclical and
has experienced downturns, which have had a material adverse effect on the
semiconductor industry's demand for automatic test equipment, including
equipment manufactured and marketed by us. In addition, the automatic test
equipment industry is highly competitive and subject to rapid technological
change. It is reasonably possible that events related to the above factors may
occur in the near term which would cause a change to our estimate of the net
realizable value of receivables, inventories or other assets, and the adequacy
of costs accrued for warranty and other liabilities. Such changes could
materially adversely affect our business, financial condition and results of
operations.
29
<PAGE>
BUSINESS
Credence Systems Corporation designs, manufactures, sells and services
automatic test equipment, or ATE, used for testing semiconductor integrated
circuits, or ICs. We also develop, license and distribute related software
products. We serve a broad spectrum of the semiconductor industry's testing
needs through a wide range of products that test digital logic, mixed-signal and
non-volatile memory semiconductors. We utilize our proprietary technologies to
design products which are intended to provide a lower total cost of ownership
than many competing products currently available while meeting the increasingly
demanding performance requirements of today's ATE market. Our products are
primarily designed to test semiconductors that are produced in high volume. Our
customers include major semiconductor manufacturers as well as assembly and test
services companies.
BACKGROUND
Dramatic advances in semiconductor process technology have improved the
performance and lowered the average selling prices of semiconductors to levels
that now support their use in a wide range of office, consumer, automotive,
communications, industrial and other products. In order to maintain or improve
gross margins as semiconductor devices decline, semiconductor manufacturers are
constantly seeking ways to reduce manufacturing costs.
Testing is a principal element in the cost structure of high volume
production of semiconductors. As a result of improved efficiencies in wafer
fabrication, test costs have become a higher percentage of the total cost of
manufacturing. This shift in cost structure has changed the traditional criteria
for selection of ATE. Although performance was the dominant factor in the
selection of ATE in the past, we believe that economic considerations
have assumed much greater importance to semiconductor manufacturers. Purchasers
of ATE now examine more carefully the total cost of ownership of ATE. Total cost
of ownership includes the initial purchase price of the tester, as well as the
tester's reliability, flexibility, size, power and air conditioning
requirements, upgradeability and maintenance costs, including spare parts.
Traditionally, semiconductor die were minimally tested at wafer probe and
underwent rigorous performance testing to full specification only at the
completion of final packaging. Today, assembly and packaging have become
increasingly expensive compared with the cost of the die, such that their costs
may exceed the cost of the die itself. This trend has influenced semiconductor
manufacturers to shift performance testing increasingly toward wafer probe. By
subjecting devices to performance testing earlier in the manufacturing process,
defective die are detected and eliminated before assembly and packaging costs
are incurred.
Increased facility costs and the trend toward performance testing at
wafer probe have led to the increased importance of smaller testers in the
semiconductor manufacturing process. Performance testing at wafer probe requires
that the device under test be located in close physical proximity to the
measuring circuits of the tester in order to minimize potential signal
distortions that can negatively impact testing yields. Smaller testers can more
easily be placed in close physical proximity to the circuits. In addition, wafer
probe test typically occurs in a clean room where potential contaminants must be
continually removed and temperatures kept constant. These special maintenance
requirements make clean rooms expensive to operate. Smaller testers occupy less
floor space and therefore assist in reducing clean room costs. In addition,
smaller testers that consume less power generally have reduced air conditioning
requirements.
For over 20 years, emitter-coupled logic, ECL, has been the conventional
process technology used by us and others for the ICs used in ATE due to its
speed, repeatability and precision. ECL technology, however, results in low
functionality per chip and requires continuous power. As a result, conventional
ATE systems generally are large, expensive and require significant electrical
power to operate.
Another process technology commonly used in the manufacture of
semiconductors is complementary metal oxide semiconductor, or CMOS. As compared
to ECL, CMOS technology allows higher functionality for a given chip size and
requires less power to operate. Some ATE manufacturers use a combination of ECL
and CMOS to lower the cost of ATE by reducing the use of ECL.
The production of ATE based exclusively on CMOS technology, however, had
been limited by the inability of CMOS to meet the timing and measurement demands
of semiconductor testing. Although the speed of CMOS was acceptable, its timing
stability was not. This problem results from the tendency of CMOS circuits to
experience
30
<PAGE>
timing drift as a function of temperature and voltage variation during tests. To
fully benefit from the economic and other advantages of CMOS technology, the
challenge has been to control this drift characteristic in order to produce
semiconductors for ATE that meet the performance requirements of semiconductor
testing.
THE CREDENCE SOLUTION AND STRATEGY
We have developed proprietary CMOS stabilization methods that
minimize the drift characteristic of CMOS and enable us to produce testers that
are smaller and require less power than those based upon ECL technology. These
testers are intended to provide a lower total cost of ownership than many
competing products currently available while meeting the performance demands of
today's ATE market. CMOS technology allows the circuits used in our testers to
be reduced, or scaled down in size as IC process technology improves. This
should result in higher performance and free space on the die for additional
functionality. This scalability feature enables us to develop and manufacture
smaller, higher performance ICs for use in our testers at what we believe to be
a lower cost, and with a potentially shorter development cycle, than traditional
process technologies.
Our objective is to be the leading supplier of cost-effective ATE for
production testing of ICs used in high volume applications. Our business
strategy incorporates the following key elements:
- TECHNOLOGY LEADERSHIP. We believe that our proprietary CMOS
stabilization technology enables the development of ATE that is
designed to meet the performance and cost of ownership
requirements of semiconductor manufacturers and assembly and test
services companies. In addition, we believe the scalability of
this technology will allow us to offer new products and
enhancements in a potentially shorter time and at a lower cost
than many of our competitors that base our products on traditional
less-scalable architecture.
- LOWER TOTAL COST OF OWNERSHIP. We seek to provide ATE to our
customers at a lower total cost of ownership than many competing
products currently available while meeting the performance
requirements of our customers. We believe that the system price,
reliability, flexibility, size, power and air conditioning
requirements, upgradeability and maintenance costs, including
spare parts, of our testers enable our customers to more cost
effectively test ICs.
- DIVERSE, HIGH-VOLUME MARKETS. Our products target the testing of
digital logic, mixed-signal and nonvolatile memory devices that
are used in a broad range of growing end-user market segments. Our
products are designed to test semiconductors that are manufactured
in high volume and are used in a variety of applications such as
automobiles, appliances, personal computers, personal
communications products, networking products, digital televisions
and multimedia hardware.
- WORLDWIDE TECHNICAL SUPPORT AND CUSTOMER SERVICE. As semiconductor
manufacturers expand their operations worldwide, they require that
their ATE suppliers have the capability to provide global support
and service and training. To meet this requirement, we utilize a
combination of direct sales, service and support personnel and a
broad network of independent distributors located in close
proximity to major customer sites. We and our distributors
currently maintain locations throughout the world to service and
support our customers.
- REDUCE TIME-TO-MARKET. We believe that our customers require
increasing levels of sophisticated software tools to assist in the
utilization of ATE that minimizes time-to-market. We are focusing
our software efforts on internal development of and acquisition of
companies or businesses that develop such tools. Through Fluence,
we have acquired the test development series, or TDS, and TDX
product lines from Summit Design, Inc. and Zycad, respectively,
and acquired the Analog Test and Analog BIST products of Opmaxx.
In addition, through the acquisition of certain assets of
Heuristics, we obtained memory BIST and related in-process
software products. These acquisitions are expected to add market
opportunities for growth in the future. We believe we are
positioned to capitalize on the Design-to-Test and the
Design-for-Test markets with our new software product lines that
integrate design and test.
PRODUCTS
We currently offer a wide variety of products that test digital logic,
mixed-signal and non-volatile memory ICs. Digital logic semiconductors produce
discrete on and off logical sequences that control functions, store data,
retrieve data and move and manipulate data at high rates of speed. An example of
digital logic semiconductors
31
<PAGE>
include logic devices such as microcontrollers. Some digital devices which store
and retrieve data are memory semiconductors. Non-volatile memory semiconductors
retain their data when the power is turned off. Mixed-signal semiconductors
combine both digital and analog functions. Analog semiconductors control
external functions such as sound, graphics, and motor controls by producing
continuous varying voltage or current. When these analog functions are combined
onto a digital integrated circuit, the resulting device is considered a
mixed-signal device.
Our CMOS-based ATE products--the SC, Valstar, DUO and Quartet
series--are designed to test high speed devices used in applications such as
networking and personal computing as well as multimedia, digital television,
high-definition television and personal communications. Our memory
products, Kalos Series, Delphi, EPRO 142 and BTMA test non-volatile memory, or
NVM, devices, including ROM, EPROM, EEPROM and Flash memories, are used in high
volume applications in the consumer, automotive and telecommunications markets.
During 1997, we introduced the ValStar 2000, a system which enables the testing
of very complex devices, with up to 1024 pins with high-speed requirements. Also
introduced in 1997 was the Kalos Flash memory test system, a highly integrated
parallel system that provides multi-site testing and is designed to lower the
overall cost of test.
During fiscal 1999, we acquired Opmaxx. The Opmaxx products are targeted
at analog and mixed signal design and test applications.
During fiscal 1998, we introduced the Quartet series. The Quartet system
is compatible with DUO, provides the enhanced capabilities required to test
consumer mixed signal products with 200 MHz I/O, 20 bit analog, video, and radio
frequency, or RF, input and output. Quartet directly addresses the cost
sensitive needs of consumer related system-on-a-chip, or SOC, devices.
The MemBIST products, acquired from Heuristics in fiscal 1998, generate
built-in self-test logic for embedded memories.
During fiscal 1997, we acquired two software products lines: the Test
Development Series product line in the Summit acquisition and the Test Design
expert product line in the Zycad acquisition. TDS converts simulation waveform
data and modifies it under user control to generate test programs for use on
ATE. TDX grades test vector coverage and provides other tools that enhance
design testability.
32
<PAGE>
The following table sets forth our current product offerings, their
features and examples of typical devices tested by each product. Included in
some of the basic features are the anticipated cycle speed in megahertz, timing
accuracy in either picoseconds, or ps, or nanoseconds, or ns, the number and
characteristics of the pins and the density in megabits, or Mb, of the device
that can be tested:
<TABLE>
<CAPTION>
- -------------- ------------ ---------------- ---------------------------- --------------------------------------------
PRODUCT SERIES MODELS BASIC FEATURES TYPICAL DEVICES
<S> <C> <C> <C> <C>
- -------------- ------------ ---------------- ---------------------------- --------------------------------------------
- -------------- ------------ ---------------- ---------------------------- --------------------------------------------
DIGITAL SC SC312 50-100 MHz Microcontrollers, ASSPs, DSPs and FPGAs
SC Micro 64-304 Pins
+ 350-500 ps accuracy
- -------------- ------------ ---------------- ---------------------------- --------------------------------------------
ValStar VS2000 200 MHZ Microprocessors, RISC circuits, PLDs,
+ 200 ps accuracy FPGAs, ASICs, core logic and graphic chip
384-1024 Pins sets
- -------------- ------------ ---------------- ---------------------------- --------------------------------------------
MIXED- DUO DUO DUO-100 MHz Multimedia devices, mass storage, DSPs,
SIGNAL DUO-SE DUO-SE-50 MHz ASICs, Datacom and specialty devices,
DUO-SX DUO-SX-200 MHz mobile communication devices, complex
DUO-RF DUO-RF-50-100 MHz audio devices
- -------------- ------------ ---------------- ---------------------------- --------------------------------------------
Quartet ONE 512 digital Multimedia devices, mass storage, DSPs,
200 MHz ASICs, Datacom and specialty devices,
+ 175 ps accuracy mobile communication devices, complex
Analog, Video, Audio, RF audio devices
- -------------- ------------ ---------------- ---------------------------- --------------------------------------------
MEMORY KALOS Kalos 50 MHz Flash memories, EEPROM, EPROM,
PRODUCTS 256 Mb Microcontrollers and NVM ASICs
Kalos xp + 1 ns
Personal Kalos
- -------------- ------------ ---------------- ---------------------------- --------------------------------------------
BTMA 2001 Benchtop Memory Analysis ROM, EEPROM, EPROM, Flash and SRAM
2555 and Verification Tester
2555A
Delphi
- -------------- ------------ ---------------- ---------------------------- --------------------------------------------
EPRO 142/AX 10 MHz
256 Mb
- -------------- ------------ ---------------- ---------------------------- --------------------------------------------
BOST MemBOST "Built-Off Self-Test" Processors, graphics engines, network
Embedded memory test controllers, AISC's and other multimedia
External solution for devices
digital and mixed signal
services
- -------------- ------------ ---------------- ---------------------------- --------------------------------------------
WORKCELL Triton Memory Kalos tester integrated ROM, EEPROM, EPROM, and Flash memories
into 8" wafer prober,
without extending outside
the prober perimeter
- -------------- ------------ ---------------- ---------------------------- --------------------------------------------
Matrix Test Memory Kalos tester integrated EEPROM, EPROM, Flash memories
with a FICO strip handler
for testing NVM devices
packaged prior to
singulation
- -------------- ------------ ---------------- ---------------------------- --------------------------------------------
SOFTWARE TDS tools Design to Test Generates tester specific Tools apply to digital logic devices
programs
Verifies timing
specification
- -------------- ------------ ---------------- ---------------------------- --------------------------------------------
TDX tools Design to Test Verifies test vector quality Tools apply to digital logic devices
Supports design for test
strategies
- -------------- ------------ ---------------- ---------------------------- --------------------------------------------
HPL MemBIST Generates BIST logic, Tools apply to all memory devices
Partitioned solutions using
BIST, ATE and BOST
- -------------- ------------ ---------------- ---------------------------- --------------------------------------------
Opmaxx Design Maxx Design verification and Tools apply to analog and mixed-signal
Design, FaultMax sensitivity analysis, design devices
Test TestMaxx fault coverage, test
evaluation and optimization
- -------------- ------------ ---------------- ---------------------------- --------------------------------------------
Opmaxx BISTMaxx BIST generation for analog Tools apply to analog and mixed-signal
Analog and mixed-signal devices devices
BIST
- -------------- ------------ ---------------- ---------------------------- --------------------------------------------
</TABLE>
33
<PAGE>
DIGITAL PRODUCTS
SC. The model SC 212 was first shipped in 1992 and incorporates one of
our proprietary CMOS stabilization methods. This product requires approximately
30 square feet of floor space and 4 kilowatts of power for 304 pins. The SC
Micro is a cost-reduced version of the SC 312. This system offers our customers
a full capability test system at a price currently below $2,000 per digital pin
channel. This per channel price has previously been available only in test
systems with reduced functionality--requiring users to compromise the quality of
their device testing. The SC Micro retains the customer's test quality while
lowering its test costs. In 1997, we expanded the SC series by
introducing and shipping the SC 312, which runs at a higher speed (100 MHz) and
has improved accuracy over the SC 212. The purchase price of these testers
typically ranges from $350,000 to $850,000 depending upon configuration.
VALSTAR. The VS2000 was introduced in 1997, and we believe it is one of
the first systems designed specifically with the desired performance cost
structure for volume production of high pin count VLSI devices. This product
offers up to 1,024 input/output, or I/O, pins at 200 MHz data rates, and
requires less than four square meters of floor space. A fully loaded system
consumes only 16 kilowatts of power, which is generally less than many
competitive systems, thus lowering operating costs. The purchase price of the VS
2000 typically ranges from $1,000,000 to $3,600,000 depending on configuration.
MIXED-SIGNAL PRODUCTS
QUARTET. Quartet is our new high performance mixed-signal
product series. The Quartet One was introduced in 1998 and started shipping in
early fiscal 1999. Quartet builds on the Duo series by addressing the needs of
device manufacturers serving the consumer-mixed-signal, or CMS, marketplace. CMS
devices combine the power of digital processors with CD quality audio, broadcast
video and wireless communications onto a single, cost sensitive SOC. The Quartet
One, the first of the Quartet series, addresses all four of these requirements
in an integrated, ready for volume production package. With 200 MHz digital, 20
bit audio, 300 MHz video and 6GHz RF, Quartet One is designed to meet the
demands of the most complex SOC devices. With typical system prices between
$750,000 and $2,000,000 depending on configuration, the Quartet provides a low
cost of test required by the CMS market.
DUO. The Duo series is our solution for high volume mixed-signal testing.
With over 450 systems in the field, Duo has become an important component of the
testing solution for both integrated device manufacturers and the semiconductor
manufacturing service companies. The typical purchase price of the Duo ranges
from $600,000 to $1,500,000 depending on configuration.
MEMORY PRODUCTS
KALOS. Introduced in November 1997, the Kalos is a highly integrated,
parallel system designed to test flash memory. Running at 50 MHz, it provides
multi-site testing and is designed to lower the customer's cost of test. The
Kalos features a unique tester-on-a-card architecture, which places all test
functions for each site on a single card and thus reduces floor space and power
consumption while increasing performance. The typical purchase price of the
Kalos ranges from $400,000 to $800,000 depending on configuration.
KALOS XP. Introduced in 1999, the Kalos xp is based upon the Kalos
tester. The Kalos xp features a wider, 96 pin test site enabling testing of high
pin count NVM and flash memory core microcontroller devices. Kalos xp provides
up to eight site-in-parallel test capabilities in a small footprint tester
package.
PERSONAL KALOS. Personal Kalos is a desktop engineering version of the
high-throughput Kalos tester. The typical price for a Personal Kalos ranges from
$100,000 to $120,000 depending on configuration.
BTMA. The 2001, 2555 and 2555A are NVM engineering testers focused on the
lab environment. Acquired from Heuristics in 1998, the BTMA line is designed to
be usable by design engineers and other non-test specialists to debug and
characterize NVM designs and yield problems. The BTMA software user interface
makes it a platform for this function. The purchase price for these testers
typically ranges from $50,000 to $250,000 depending on configuration.
DELPHI. Introduced in 1999, the Delphi is an updated version of the BTMA
2001 platform that uses a Windows NT-based work station. The purchase price of
this tester is typically $50,000 to $70,000 depending on configuration.
34
<PAGE>
EPRO. Our EPRO memory product line includes the model 142/AX. The model
142/AX was first shipped by EPRO in 1982. The purchase price of these
non-volatile memory testers typically ranges from $30,000 to $80,000, depending
upon configuration.
BOST. Built-Off Self-Test, or BOST, technology is a new process in
transforming the role of test from an expensive and passive device validation
procedure into a series of solutions that can shrink development cycles, reduce
costs, meet time-to-market demands and improve die yields. BOST integrates a
device specific BIST engine directly into a custom circuit on the load board.
Consulting services for BOST memory testing are currently available and pricing
is dependent on configuration.
WORKCELL PRODUCTS
In 1996, we established the Workcell product group. A Workcell enhances
manufacturing productivity by integrating previously distinct equipment into a
single, highly efficient tool. In 1997, we debuted our sophisticated Triton
series of wafer test systems. Triton Memory--the industry's first suite of
Workcell wafer test solutions-- features a production worthy wafer prober
integrated with a robust NVM ATE test system.
TRITON MEMORY. Leveraging our tester-on-a-card architecture, Triton
Memory tests as many as 16 sites in parallel at speeds of 50 MHz. All functions
required to test a Flash memory device appear on one card. An inherently
parallel, high-performance system that improves throughput rates, the Triton
Memory tests each device asynchronously from one another--while embedded within
an 8" wafer prober. The tester is an integral part of the prober's structure,
minimizing independent vibrations associated with current interface concepts.
The typical price of a Triton memory ranges from $450,000 to $1,300,000
depending on configuration.
MATRIX TEST-TM-. The Matrix Test was introduced in 1999 in conjunction
with Amkor Technology and FICO BV. The Matrix Test process is a zero-footprint
in-line flash memory test system and it integrates a Kalos non-volatile memory
test system with a Fico strip-based test handler to improve the test process.
This integrated solution is able to test a strip of flash memory devices without
singulating the parts, or separating them from the strip.
SOFTWARE PRODUCTS
Our software products provide tools to IC manufacturers to help
create detailed tests to ensure product quality and shorten time-to-market.
TDS. The TDS product line consists primarily of Converter, Conditioner,
and WaveBridge products. Converters take waveform data from simulator-specific
representations into an industry-standard representation. Conditioners modify
waveform data to enable it to fit specific tester environments. WaveBridge
modules generate the actual test programs. Converters are available to support
most commonly used simulators, and WaveBridge modules are available for a
variety of ATE models. Other programs that analyze waveform data and provide
other design-to-test functions are also included in the TDS product line.
TDX. The TDX product line allows the design engineer to verify complex
designs with full timing accuracy, Iddq, pattern generation, scan Generation and
testability analysis.
MEMBIST. MemBIST software generates built-in self test logic for designs
that use embedded memories. The software minimizes the test time and chip area
required for self test logic of embedded memories. Users can also designate
varying levels of detail for the diagnostic information to be produced by the
BIST logic, from simple pass/fail to topologically correct bitmaps that can be
used in failure analysis.
OPMAXX. The Opmaxx product line provides a set of software tools for
testing analog and mixed signal devices, as well as designing them for
testability. DesignMaxx provides analog design optimization, verification, and
sensitivity analysis. TestMaxx evaluates analog/mixed-signal fault coverage and
fault grades test stimulus. TestMaxx evaluates and optimizes analog/mixed-signal
tests. BISTMaxx generates built-in self test for analog/mixed signal device
functionality both on-chip and off-chip.
35
<PAGE>
CUSTOMERS, MARKETS AND APPLICATIONS
We target digital logic, mixed-signal, non-volatile memory device
and system-on-a-chip manufacturers that serve a broad range of growing end-user
market segments. Our customers manufacture semiconductors in high volume for use
in applications such as automobiles, appliances, personal computers, personal
communications products, networking products, digital televisions and multimedia
hardware.
In addition to marketing our products to major semiconductor
manufacturers, we have developed relationships with numerous assembly and test
services companies. Semiconductor manufacturers and fabless semiconductor
companies utilize these subcontractors as a means of lowering their fixed
production costs, thus minimizing the effects of cyclicality inherent in the
semiconductor industry. As a result, these assembly and test services companies
have become an increasingly important segment of the ATE market.
We believe that our success depends in large part upon the success of our
major customers. The loss of or any reduction in orders by a significant
customer (including the potential for reductions in orders by assembly and test
services companies which that customer may utilize), including reductions due to
market, economic or competitive condition in the semiconductor industry or in
other industries that manufacture products utilizing semiconductors has
materially adversely affected, and may continue to materially adversely affect
our business, financial condition or results of operations. Our ability to
increase sales in the future will depend in part upon our ability to obtain
orders from new customers as well as upon the financial condition and success of
our customers and the general global economy. There can be no assurance that our
sales will not decrease in the future or that we will be able to retain existing
customers or to attract new ones.
For information on our geographic data and major customers, see Note 4 to
the Consolidated Financial Statements incorporated by reference herein. Our
international sales are primarily denominated in United States dollars. We
anticipate that our international business will continue to account for a
significant portion of net sales in the foreseeable future.
We schedule production of our systems based upon order backlog and order
forecast. We include in our backlog only those customer orders for systems
(including upgrades) for which we have accepted purchase orders and assigned
shipment dates in approximately the following six months. Substantially all of
our orders are subject to cancellation or rescheduling by the customer with
limited or no penalties. Our backlog at any particular date may not necessarily
be representative of actual sales for any succeeding period due to orders
received for systems to be shipped in the same quarter, possible changes in
system delivery schedules, cancellation of orders and potential delays in system
shipments. As of October 31, 1999, our order backlog for systems, exclusive of
orders for spare parts and service and support, was approximately $124.5
million, as compared with $32.3 million as of October 31, 1998.
SALES, SERVICE AND SUPPORT
We currently market and sell our products in the United States
principally through our direct sales organization, with direct sales employees
and representatives in over 16 locations. Outside the United States, we utilize
both direct sales employees and a broad network of distributors, with direct
sales employees and distributors in over 20 countries. Sales through
distributors represented approximately 47%, 45% and 36% of net sales during
fiscal years 1999, 1998 and 1997, respectively.
We and our distributors have sales and support centers located in
the United States, Europe, Israel, and throughout Asia from which both direct
Credence personnel and independent sales and service representatives sell and
support the equipment. We believe that field support is critical to our
customers. Support encompasses many of the components of the total cost of
ownership for ATE. We seek to develop long-term relationships with major
ATE customers through extensive support consisting of teams of professional
sales, applications, training and service personnel. These personnel are located
in close physical proximity to key customer sites in order to provide the
required support in a timely fashion. The sales process includes consultations
with customers to help them purchase the most cost-effective equipment for their
needs, to help develop custom test programs to optimize production throughput,
to assist in long-term self-sufficiency through training of customer test
engineering personnel and to provide the service capacity and preventive
maintenance to reduce downtime for customers' systems. Customer support includes
field personnel and in-house applications personnel who work closely with design
engineering groups to modify existing equipment to meet the latest performance
requirements.
36
<PAGE>
In Japan, a wholly owned subsidiary provides sales and service to our
customers. In addition, we have a relationship with Innotech Corporation, a
distributor of our products in Japan. In 1997, we formed a joint venture with
Innotech to engage in the customization and manufacture of ATE products for sale
by both companies. In March 1996, we established a service and support
subsidiary in Korea. We also have a relationship with Itek, Inc., a distributor
of our products in Korea.
Our standard policy is to warrant our new systems against defects in
design, materials and workmanship for one year for parts and labor. We offer
customers additional support after the warranty period in the form of
maintenance contracts for specified time periods. Such contracts include various
options such as board replacement, priority response, planned preventive
maintenance, scheduled one-on-one training, daily on-site support and monthly
system and performance analysis.
RESEARCH AND DEVELOPMENT
The ATE market is subject to rapid technological change and new product
introductions. Our ability to be competitive in this market will depend in
significant part upon our ability to successfully develop and introduce new
products, enhancements and related software tools on a timely and cost-effective
basis. This will enable customers to integrate such products into their
operations as they begin volume manufacturing of the next generation of
semiconductors.
We have pursued a technology acquisition strategy to complement our
internal research and development efforts, including:
- in 1988, we completed the acquisition of Axiom Technology
Corporation, which added mixed-signal testing capability;
- in 1989, we completed the acquisition of ASIX Systems Corporation,
which added one of our proprietary CMOS stabilization methods;
- in 1990, we acquired the STS Division of Tektronix Inc., which
added a second proprietary CMOS stabilization method;
- in 1993, we acquired various patents from Tektronix;
- in March 1995, we acquired EPRO, which added non-volatile memory
testing capability;
- in July 1997, we acquired specified assets and assumed specified
liabilities of Test Systems Strategies,Inc., a wholly owned
subsidiary of Summit Design, Inc.;
- in August 1997, we acquired through Test Systems Strategies fault
simulation and test program development products of Zycad;
- in June 1998, we purchased specified assets from Heuristics which
added memory BIST design and test applications capability; and
- In September 1999, we acquired Opmaxx, through Fluence, which
added analog and mixed signal BIST design and test applications
capability.
Each of the stabilization methods we acquired provides a different
solution to the tendency of CMOS to experience timing drift as a function of
temperature and voltage variation. The first proprietary solution uses a timing
phase detection circuit combined with a voltage control mechanism to compensate
for thermal, voltage and process drift. The second uses a unique combination of
counters and heating circuits to provide stability through thermal means. These
methods allow our CMOS-based ICs to achieve the timing repeatability necessary
to meet the performance requirements of ATE and to realize the economic and
other advantages of CMOS technology over ECL technology. CMOS circuits use less
space than those based on ECL as the circuits require less power and can be more
closely packed together. In addition to these acquired stabilization methods, we
have also developed and continue to develop new and/or improved stabilization
techniques for our tester products.
During 1998, we enhanced our Duo product line with new capabilities
including high performance audio testing, testing of analog circuitry for
wireless communication applications and embedded memory test capability. These
features enable single insertion system-on-a-chip testing capability. These
capabilities resulted in the Quartet product line which was introduced in 1999.
We will continue to focus research and development efforts on ensuring
37
<PAGE>
that our products have the ability to efficiently test state-off-the-art
customer devices which combine analog, high speed digital logic, and memory on a
single circuit.
Our ongoing research and development efforts also include focusing on
increased cycle speed, accuracy and pin counts of our testers. In addition, we
are working on a software development program that is intended to provide for
upward compatibility through our products. We will also continue to focus
efforts on providing software solutions which allow more rapid, cost-effective
development of ATE test programs which reduce time-to-market of customer
integrated circuit designs. We currently intend to continue to invest
significant resources in the development of new products and enhancements for
the foreseeable future.
Research and development expenses were $38.9 million in 1999, excluding a
$0.9 million charge for acquired IPR&D, $47.5 million in fiscal 1998, excluding
a $2 million charge for acquired IPR&D, and $37.4 million in fiscal 1997,
excluding a $6 million charge for acquired IPR&D.
PROPRIETARY RIGHTS
We currently hold 52 active United States patents, which expire over time
through April 2018. In addition, we currently have 16 foreign patents, which
expire over time through September 2011. The two United States patents, acquired
from ASIX and Tektronix underlying our proprietary CMOS stabilization methods
expire in February 2007 and December 2007, respectively.
In 1993, we granted a license to Tektronix with respect to patents
obtained in the acquisition of the STS Division of Textronix, and certain other
intellectual property rights, the Tektronix Rights, including a patent covering
one of our proprietary CMOS stabilization technologies, that were assigned to us
by Tektronix in 1993. Tektronix has a worldwide, perpetual, irrevocable,
non-exclusive, royalty free, fully-paid, sublicensable and transferable license
to the Tektronix Rights. Tektronix may not grant rights under the Tektronix
Rights to make, use, sell or otherwise distribute ATE for testing ICs to any
entity other than a Tektronix joint venture affiliate and to a
successor-in-interest to Tektronix. Tektronix may not grant or assign such
rights to any other party that is a Credence competitor. In addition, Tektronix
may not knowingly sell components incorporating the Tektronix Rights to any
other party. We and Tektronix have granted to each other a worldwide, perpetual,
irrevocable, non-exclusive, royalty free, fully-paid, sublicensable and
transferable license to all improvements, enhancements, modifications or
derivative works created before August 1996, or the Improvements, of
intellectual property that was licensed or assigned pursuant to a Technology
Agreement dated December 31, 1990, as amended on August 12, 1993, including the
Tektronix Rights, to make, use and sell ATE for testing ICs. Tektronix's license
to the Improvements is subject to the same restrictions as its license to the
Tektronix Rights.
We attempt to protect our intellectual property rights through patents,
copyrights, trademarks and maintenance of trade secrets and other measures.
There can be no assurance that others will not independently develop equivalent
intellectual property or that we can meaningfully protect our intellectual
property. There can be no assurance that any patent we own will not be
invalidated, circumvented or challenged, that the rights granted thereunder will
provide competitive advantages to us or that any of our pending patent
applications will be issued. Furthermore, there can be no assurance that others
will not develop similar products, duplicate our products or design around the
patents owned by us. In addition, litigation has been and may continue to be
necessary to enforce our patents and other intellectual property rights, to
protect our trade secrets, to determine the validity and scope of the
proprietary rights of others, or to defend against claims of infringement or
invalidity. For additional information with respect to our intellectual
property, review the information set forth under "Risk Factors--If the
protection of proprietary rights is inadequate, our business could be harmed"
and "--Our business may be harmed if we are found to infringe proprietary rights
of others."
MANUFACTURING AND SUPPLIERS
Our manufacturing objective is to produce ATE that conforms to our
customers' requirements at the lowest commercially practical manufacturing cost.
We rely on outside vendors to manufacture certain components and subassemblies
including several custom integrated circuits. We seek to manage our inventory
levels through agreements with both suppliers and subcontractors that provide
just-in-time delivery of these components and subassemblies. We assemble these
components and subassemblies to create finished testers in the configuration
specified by our customers. In general, we use standard components and
prefabricated parts available from numerous suppliers. However, some components
and subassemblies necessary for the manufacture of our testers are
38
<PAGE>
obtained from a sole supplier or a limited group of suppliers and that we are in
the process of qualifying a second source for some of those components. There
can be no assurance that such alternative source will be qualified or available.
Our reliance on a sole or a limited group of suppliers and on outside
subcontractors involves certain risks, including a potential inability to obtain
an adequate supply of required components, and reduced control over pricing and
timely delivery of components. See "Risk Factors--There are limitations on our
ability to find the supplies and services necessary to run our business."
COMPETITION
The ATE industry is intensely competitive. We face substantial
competition throughout the world, primarily from ATE manufacturers located in
the United States, Europe and Japan, as well as from some of our customers. Our
competitors in the digital semiconductor testing market include:
- Advantest Corporation;
- Ando Electric Co. Ltd.;
- LTX Corporation;
- Schlumberger Ltd.;
- Agilent Technologies, Inc. (formerly a division of Hewlett-Packard
Company); and
- Teradyne, Inc.
In the mixed-signal semiconductor testing market, our competitors include:
- Teradyne;
- LTX;
- Agilent;
- Schlumberger; and
- Advantest.
In the non-volatile memory testing market, our competitors include:
- Teradyne;
- Agilent; and
- Advantest.
Fluence's principal competitors in the software design to test market are:
- Simutest, Inc.;
- Integrated Measurement Systems, Inc.; and
- in-house applications developed by companies in the semiconductor
industry.
The competitors in the software design for test and BIST market place include:
- Mentor Graphics, Inc.; and
- LogicVision, Inc. See "Risk Factors--The ATE industry is intensely
competitive which can adversely affect our revenue growth."
The principal elements of competition in our markets and the basis upon
which ATE customers select testers include throughput, tools for reducing
customer product time-to-market, product performance and total cost of
ownership. We believe that we compete favorably with respect to these factors.
EMPLOYEES
As of October 31, 1999, we had a total of 713 permanent employees and 112
temporary or contract employees. Of this total, 230 are engaged in
manufacturing, 197 are in research and development, 60 in applications, 175 in
sales, marketing and service, and 101 in general administration. Fluence has 62
employees primarily engaged in the development, sales and marketing of software
products. Our employees are highly skilled, and we believe our future results of
operations will depend in large part on our ability to attract and retain such
employees. None of our
39
<PAGE>
employees are represented by a labor union, and we have not experienced any work
stoppages. We consider our employee relations to be good.
LEGAL PROCEEDINGS
In July 1998, we received a written allegation from inTEST that we were
infringing on a patent held by inTEST. In addition to direct costs and diversion
of resources which may result, we may be obligated to indemnify third parties
for costs related to this allegation and we could be liable to inTEST. We are
involved in various other claims arising in the ordinary course of business,
none of which, in the opinion of management, if determined adversely against us,
will have a material adverse effect on our business, financial condition or
results of operations. See "Risk Factors--Our business may be harmed if we are
found to infringe proprietary rights of others."
40
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The directors, executive officers and key employees of our c\ompany and
their ages and positions as of January 15, 2000, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
Dr. William G. Howard, Jr............ 58 Chairman of the Board of Directors
Dr. Graham J. Siddall................ 53 President and Chief Executive Officer
David A. Ranhoff..................... 44 Executive Vice President and Chief Operating Officer
Dennis P. Wolf....................... 47 Executive Vice President, Chief Financial Officer and Secretary
Henk J. Evenhuis..................... 56 Director (2)
Bernard V. Vonderschmitt............. 76 Director (1)
Jos C. Henkens....................... 47 Director (2)
Jon D. Tompkins...................... 59 Director (1) (2)
KEY EMPLOYEES
George W. DeGeer..................... 53 Senior Vice President, Consumer Mixed Signal Business Line
Gary Smith........................... 53 Vice President, Low Cost Performance Business Line
Paul Sakamoto........................ 45 Vice President, Memory Products Business Line
John DiGirolamo...................... 58 CEO and President of Fluence Technology, Inc.
Debbie Moberly....................... 45 Vice President, Operations
Bart Freedman........................ 42 Vice President, Worldwide Field Operations
Robert E. Huston..................... 58 Vice President, Test Technology
Dave O'Brien......................... 43 Senior Vice President, Chief Information Officer
John R. Detwiler..................... 39 Vice President, Corporate Controller
</TABLE>
- -------------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
DR. WILLIAM HOWARD, JR. has served as one of our directors since February
1995, and as Chairman since December 1998. His current term as director ends in
2001. Dr. Howard has been a self-employed consultant for various semiconductor
and microelectronics companies since December 1990. From October 1987 to
December 1990, Dr. Howard was a senior fellow at the National Academy of
Engineering conducting studies of technology management. Dr. Howard held various
management positions at Motorola, Inc. between 1969 and 1987, most recently as
Senior Vice President and Director of Research and Development. Dr. Howard
serves on the boards of directors of BEI Electronics, Inc., Ramtron
International, Inc., and Xilinx, Inc., as well as several private companies.
DR. GRAHAM J. SIDDALL has served as our President and Chief Executive
Officer and as a director since July 1999. His current term as director ends in
2002. Dr. Siddall joined us from KLA-Tencor where he had been Executive Vice
President of the Wafer Inspection Group from May 1997 to May 1999. From December
1995 until May 1997, he served as Executive Vice President and Chief Operating
Officer of Tencor Instruments, Inc. Previously, Dr. Siddall served as Senior
Vice President for the Tencor Wafer Inspection Division from November 1994 to
December 1995. He joined Tencor as a vice president in 1988. Prior to joining
Tencor, Dr. Siddall served in a number of key roles at GCA Corporation, Hewlett
Packard Laboratories and Rank Taylor Hobson.
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<PAGE>
DAVID A. RANHOFF has served as our Executive Vice President and Chief
Operating Officer since November 1999. Mr. Ranhoff was our Executive Vice
President, Sales and Marketing from January 1997 to November 1999, and along
with Mr. Wolf, was named to the Office of the President from December 1998 until
July 1999. Mr. Ranhoff has served as our Senior Vice President, Sales and
Marketing from July 1996 to January 1997, as Senior Vice President, Sales,
Marketing and Service from July 1995 to June 1996, as Senior Vice President,
Sales and Service from August 1993 to July 1995 and as Vice President, Sales
from January 1993 to August 1993. He served as our Vice President, European
Operations from July 1990 to December 1992. From March 1988 to June 1990, Mr.
Ranhoff served as our Managing Director of European Operations and as National
Sales Manager from July 1985 to March 1988. Prior to joining us, Mr. Ranhoff
served for eight years in various sales and management positions for GenRad,
Inc.
DENNIS P. WOLF has served as Executive Vice President, Chief Financial
Officer and Secretary, since he joined Credence in March of 1998 and, along with
Mr. Ranhoff, was named to the Office of the President from December 1998 until
July 1999. Prior to joining Credence Mr. Wolf was the acting Co-Chief Executive
Officer from April 1997 to September 1997 and the Senior Vice President and
Chief Financial Officer from January 1997 to March 1998 at Centigram
Communications Corporation. Prior to joining Centigram, from October 1995 to
January 1997 Mr. Wolf was Vice President and Chief Financial Officer of Pyramid
Technology and served as Vice President and Chief Financial Officer of
Dynacraft, a National Semiconductor Company, from October 1993 to October 1995.
Additionally, he had held various executive and managerial positions at Apple
Computer from 1989 to 1993.
HENK J. EVENHUIS has served as one of our directors since September 1993.
His current term as director ends in 2000. Mr. Evenhuis is currently serving as
Executive Vice President and CFO of Fair, Isaac Corporation, a decision analytic
software company since October 1999. From June 1997 to October 1999, he was a
consultant to the semiconductor industry. Prior to that, he served as Executive
Vice President and CFO of Lam Research Corporation, a semiconductor equipment
manufacturer from April 1987 to June 1997. From 1983 to 1987, Mr. Evenhuis
served as Chief Financial Officer of Ferix Corporation, Trimedia Corporation and
Corvus Systems, Inc.
BERNARD V. VONDERSCHMITT has served as one of our directors since August
1993. His current term as director ends in 2000. Mr. Vonderschmitt co-founded
Xilinx, Inc. in February 1984. Mr. Vonderschmitt has been the Chairman of the
Board of Xilinx since January 22, 1996 and served as Chief Executive Officer of
Xilinx from February 1984 to January 21, 1996. From 1981 to 1984, he was Vice
President of the Microprocessor Division of Zilog, Inc., a semiconductor
manufacturer. Mr. Vonderschmitt held various management positions at RCA
Corporation for 20 years, most recently as the Vice President of the Solid State
Division. Mr. Vonderschmitt serves on the boards of directors of Xilinx,
International Microelectronics Products, Inc. and Sanmina Corporation, as well
as several private companies.
JOS C. HENKENS has served as one of our directors since February 1985.
His current term as director ends in 2001. Mr. Henkens has been a general
partner of Advanced Technology Ventures, a venture capital firm, since January
1983. Mr. Henkens also serves on the boards of directors of Actel Corporation, a
semiconductor manufacturer, and various private companies.
JON D. TOMPKINS has served as one of our directors since September 1999.
His current term as director ends in 2002. Mr. Tompkins was Chairman of the
Board of Directors for KLA-Tencor from July 1998 to June 30, 1999. From April
1997 until July 1998, he was Chief Executive Officer of KLA-Tencor. From April
1991 until April 1997, he was President and Chief Executive Officer of Tencor
prior to its merger with KLA. He was a Director of Tencor from 1991 until April
1997 and was appointed Chairman of the Board of Directors of Tencor in November
1993. He currently serves on the boards of directors of KLA-Tencor, Cymer,
Electro Scientific Industries, Levelite, LogicVision, Inc. and the Community
Foundation of Silicon Valley.
GEORGE W. DEGEER has served as our Senior Vice President of the Consumer
Mixed Signal Business Line since December 1998. Prior to that Mr. DeGeer was our
Senior Vice President, Operations from August 1996 to December 1998, as Senior
Vice President, Manufacturing from January 1995 to August, 1996, as Vice
President, Manufacturing from October 1993 to January 1995, as Director of
Manufacturing from July 1992 to October 1993, and as Vista Manufacturing Manager
from January 1991 to July 1992. Prior to joining us, Mr. DeGeer held various
manufacturing management positions at Tektronix for more than twenty years.
GARY SMITH has served as our Vice President of the Low Cost Performance
Business Line since December 1998. Prior to that Mr. Smith was our Marketing
Director for the ValStar and SC Series products from
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<PAGE>
February 1996 to December 1998. Prior to joining us, from September 1985 to
February 1996, Mr. Smith held various senior management positions in sales,
marketing and operations at Schlumberger. Mr. Smith possesses over 30 years of
experience in engineering and management in high technology industries.
PAUL SAKAMOTO has served as our Vice President of the Memory Products
Business Line since November 1998. Mr. Sakamoto served as our Vice President of
the North American Sales organization from February 1997 to November 1998. He
was our Vice President of the Customer Marketing and our Vice President of
Digital Product Marketing between February 1995 and February 1997. Prior to
joining us, Mr. Sakamoto held various sales and engineering positions including
Vice President of Sales at Micro Component Technology, Inc., Director of Sales
Development at Megatest Corporation and six years of experience at Intel
Corporation. Mr. Sakamoto has over 22 years of experience in the semiconductor
and semiconductor equipment industry.
JOHN DIGIROLAMO has served as Chief Executive Officer and President of
Fluence since October 1997. From July 1997 to October 1997, Mr. DiGirolamo
served as Vice President of Worldwide Sales and Marketing for Fluence. Mr.
DiGirolamo served as Director of Sales at Summit Design, Inc. from May 1996 to
July 1997. Mr. DiGirolamo served at Summit as Vice President, Worldwide Sales
from June 1995 to April 1996. Prior to joining Summit in 1995, Mr. DiGirolamo
held a variety of senior level positions within the industry, including a tenure
at GenRad, Inc. as General Manager and Director of Sales & Marketing for Western
operations. Mr. DiGirolamo possesses over 33 years of experience in the
semiconductor equipment and test industry.
DEBRA MOBERLY has served as our Vice President, Operations since December
1998. Ms. Moberly was our Vice President, Manufacturing from February 1996 to
December 1998, as Director, Marketing Operations from December 1994 to February
1996, and Director, Materials from May 1993 to December 1994. Ms. Moberly joined
us in January 1991 as Manufacturing Manager, joining us from Tektronix where she
had held positions of increasing responsibility in the manufacturing function
for more than seventeen years.
ROBERT E. HUSTON has served as Vice President, Test Technology since
August 1992. From February 1983 to August 1992 Mr. Huston was a co-founder and
fellow of Trilium Corporation and was the architect of the Micromaster series of
test systems. Mr. Huston was a fellow at LTX from August 1988 to August 1992,
developing high frequency test strategies. He served in various senior
engineering positions beginning in 1967 at Fairchild working with a team to
develop the LSI test system.
BART FREEDMAN has served as our Vice President, Worldwide Field
Operations since January 2000. From October 1996 to January 2000, he was our
Vice President of Asian Operations. From 1994 to 1996, Mr. Freedman served as
Vice President of North American Sales for Schlumberger Technologies, Inc. From
1985 to 1994, Mr. Freedman held a variety of senior level positions at
Tektronix, Inc., including U.S. Regional Sales Manager for the Semiconductor
Test Systems Division that we bought in December 1990. From 1980 through 1985,
Mr. Freedman was a design engineer and applications manager for Teradyne, Inc.
DAVID O'BRIEN has served as our Senior Vice President, Chief Information
Officer since February 1999. Prior to that Mr. O'Brien was our Senior Vice
President, Information Technology from July 1995 to February 1999. Mr. O'Brien
served as our Senior Vice President, Marketing from May 1994 to July 1995, as
Senior Vice President, Engineering from August 1993 to May 1994 and as Vice
President, Engineering from July 1992 to August 1993. Mr. O'Brien served as our
Vice President, Beaverton Business Unit from October 1991 to July 1992; Vice
President, Marketing--Vista from August 1991 to September 1991; Vice President
Software Products from October 1990 to July 1991; Vice President, Engineering
from July 1987 to September 1990; Director of Engineering from October 1986 to
June 1987; and Software Engineering Manager from January 1983 to September 1986.
JOHN R. DETWILER has served as our Vice President, Corporate Controller
since April 1999. Mr. Detwiler joined us from Silicon Wireless, Ltd., a start-up
in the wireless infrastructure products business, where he was the Vice
President of Finance from April 1998 to March 1999. From August 1992 to March
1998, Mr. Detwiler was at Madge Networks N.V., a developer and manufacturer of
LAN and WAN equipment, where he was the Senior Director of Finance. Prior to
Madge, Mr. Detwiler held positions of increasing responsibility in the audit and
consulting practices of Price Waterhouse LLP in Denver, Saudi Arabia and London.
Mr. Detwiler serves on the board of directors of Credence Capital Remarketing
Corporation.
Officers serve at the discretion of the Board of Directors, until their
successors are appointed. There are no family relationships among executive
officers or directors of the Company.
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<PAGE>
UNDERWRITERS
Subject to the terms and conditions stated in the underwriting agreement
dated the date hereof, each underwriter named below has severally agreed to
purchase, and we have agreed to sell to such underwriter, the number of shares
set forth opposite the name of that underwriter.
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- ------ ------------------
<S> <C>
Salomon Smith Barney Inc...........................................................
Credit Suisse First Boston Corporation.............................................
SG Cowen Securities Corporation....................................................
------------------
Total.............................................................................. 2,000,000
==================
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares included in this offering are subject to
approval of particular legal matters by counsel and to other conditions. The
underwriters are obligated to purchase all of the shares, other than those
covered by their over-allotment option described below, if they purchase any of
the shares.
The underwriters propose to offer some of the shares directly to the
public at the public offering price set forth on the cover page of this
prospectus and some of the shares to certain dealers at the public offering
price less a concession not in excess of $ per share. The underwriters may
allow, and such dealers may reallow, a discount not in excess of $ per share
on sales to certain other dealers. If all the shares are not sold at the public
offering price, the underwriters may change the public offering price and other
selling terms. The underwriters do not intend to confirm any sales to any
accounts over which they exercise discretionary authority.
We have granted to the underwriters an option, exercisable for 30 days
from the date of this prospectus, to purchase up to 300,000 additional shares of
our common stock at the public offering price less the underwriting discount.
The underwriters may exercise this option solely for the purpose of covering
over-allotments, if any, in connection with this offering. To the extent this
option is exercised, each underwriter will be obligated, subject to some
conditions, to purchase a number of additional shares approximately
proportionate to such underwriter's initial purchase commitment.
We and our executive officers and directors have agreed that, except as
set forth in the underwriting agreement, for a period of 90 days from the date
of this prospectus, we will not, without the prior written consent of Salomon
Smith Barney Inc., dispose of or hedge, any shares of our common stock or any
securities convertible into, or exercisable or exchangeable for, our common
stock. Salomon Smith Barney Inc., in its sole discretion, may release any of the
securities subject to these lock-up agreements at any time without notice.
The public offering price will be determined by negotiation between us
and the underwriters. Among the factors to be considered in determining the
public offering price will be:
- our records of operation;
- our current financial condition;
- our future prospectus;
- our markets;
- the economic conditions in and future prospectus for the industry
in which we compete;
- our management; and
- currently prevailing general conditions in the equity securities
markets, including current market valuations of publicly traded
companies considered comparable to us.
The prices at which the shares will sell in the public market after this
offering may, however, be lower than the price at which they are sold by the
underwriters.
Our common stock is listed on the Nasdaq National Market under the symbol
"CMOS."
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<PAGE>
The following table shows the underwriting discounts and commissions that
we will pay to the underwriters in connection with this offering. These amounts
are shown assuming both no exercise and full exercise of the underwriters'
option to purchase additional shares of common stock.
<TABLE>
<CAPTION>
PAID BY CREDENCE
---------------------------------
NO EXERCISE FULL EXERCISE
-------------- ---------------
<S> <C> <C>
Per Share.................................................... $ $
Total........................................................ $ $
</TABLE>
In connection with this offering, Salomon Smith Barney Inc., on behalf of
the underwriters, may purchase and sell shares of common stock in the open
market. These transactions may include over-allotment, syndicate covering
transactions and stabilizing transactions. Over-allotment involves syndicate
sales of shares in excess of the number of shares to be purchased by the
underwriters in this offering, which creates a syndicate short position.
Syndicate covering transactions involve purchases of the shares in the open
market after the distribution has been completed in order to cover syndicate
short positions. Stabilizing transactions consist of certain bids for or
purchases of shares made to prevent or retard a decline in the market price of
the shares while this offering is in progress.
The underwriters may also impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when
Salomon Smith Barney Inc, in covering syndicate short positions or making
stabilizing purchases, repurchases shares originally sold by that syndicate
member.
Any of these activities may cause the price of the shares to be higher
than it would otherwise be in the open market in the absence of such
transactions. Salomon Smith Barney Inc. may effect these transactions on the
Nasdaq National Market or in the over-the-counter market, or otherwise and may
discontinue them at any time.
We estimate that our total expenses for this offering will be $ .
Our lead managing underwriter, Salomon Smith Barney Inc., has
participated as lead managing underwriter in each of our three prior public
offerings and as exclusive placement agent in the issuance and sale of our
convertible subordinated notes due September 15, 2002. One of our other managing
underwriters, SG Cowen Securities Corporation, has participated as one of our
managing underwriters in each of our three prior public offerings.
The underwriters or their respective affiliates may in the future perform
various investment banking and advisory services for us from time to time, for
which they will receive customary fees. The underwriters may, from time to time,
engage in transactions with and perform services for us in the ordinary course
of business. We have agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, or to
contribute to payments the underwriters may be required to make in respect of
any of those liabilities.
LEGAL MATTERS
The validity of the shares of common stock offered by Credence hereby
will be passed upon for Credence by Brobeck, Phleger & Harrison LLP, Palo Alto,
California. A member of Brobeck, Phleger & Harrison LLP beneficially owns 76
shares of our common stock. Mr. Warren T. Lazarow, a partner at Brobeck, Phleger
& Harrison LLP, serves as Assistant Secretary of Credence and several of its
subsidiaries. Certain legal matters will be passed upon for the underwriters by
Morrison & Foerster LLP, Palo Alto, California.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedule included in our Annual Report on Form 10-K
for the year ended October 31, 1999, as set forth in their report, which is
incorporated by reference in this prospectus and elsewhere in the registration
statement. Our financial statements and schedule are incorporated by reference
in reliance on Ernst & Young LLP's report, given on their authority as experts
in accounting and auditing.
45
<PAGE>
AVAILABLE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. We have also filed with the SEC a registration
statement on Form S-3 to register the shares of common stock being offered in
this prospectus. This prospectus, which forms part of the registration
statement, does not contain all of the information included in the registration
statement. For further information about us and our common stock we propose to
sell in this offering, we refer you to the registration statement and the
exhibits and schedules filed as a part of the registration statement or
incorporated by reference herein. Statements contained in this prospectus as to
the contents of any contract or other document filed as an exhibit to the
registration statement or incorporated by reference herein are not necessarily
complete. If a contract or document has been filed as an exhibit to the
registration statement or incorporated by reference herein, we refer you to the
copy of the contract or document that has been filed or so incorporated. For
further information about us and the shares of common stock offered in this
prospectus, you should refer to the registration statement and its exhibits and
our other SEC filings. You may read and copy any document we file at the SEC's
public reference rooms in Washington, D.C., New York, New York and Chicago,
Illinois. Please call the SEC at 1-800-SEC-0330 for further information on the
public reference rooms. Our SEC filings are also available to the public from
the SEC's website at http://www.sec.gov.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC allows us to incorporate by reference the information we file
with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this prospectus and information we later file with the
SEC will automatically update and supersede this information. We incorporate by
reference the documents listed below and any future filings made with the SEC
under Sections 13(a), 13(c), 14 and 15(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act") until all of the shares of common stock
that are part of this offering have been sold. We incorporate by reference the
documents listed below.
1. Our Annual Report on Form 10-K for the fiscal year ended October
31, 1999.
2. Our Current Report on Form 8-K dated December 15, 1999.
3. The description of our common stock contained in our Registration
Statement on Form 8-A filed under Section 12 of the Exchange Act
with the SEC on September 10, 1993, as amended on October 21,
1993, and the description of our Series A Junior Participating
Preferred Stock contained in our Registration Statement on Form
8-A filed under Section 12 of the Exchange Act with the SEC on
June 19, 1998.
If you request a copy of any or all of the documents incorporated by
reference, then we will send to you the copies you requested at no charge.
However, we will not send exhibits to such documents, unless the exhibits are
specifically incorporated by reference in the documents. You should direct any
request for the copies to Credence Systems Corporation, Chief Financial Officer,
215 Fourier Avenue, Fremont, California 94539, (510) 657-7400.
You should rely only on the information contained in this prospectus and
incorporated by reference into this prospectus. We have not authorized anyone to
provide you with information different from that contained in this prospectus.
We are offering to sell, and seeking offers to buy, shares of our common stock
only in jurisdictions where offers and sales are permitted. The information
contained in this prospectus is accurate only as of the date of this prospectus,
regardless of the time of delivery of this prospectus or of any sale of the
shares.
46
<PAGE>
================================================================================
2,000,000 SHARES
CREDENCE SYSTEMS CORPORATION
COMMON STOCK
[LOGO]
------------
P R O S P E C T U S
, 2000
------------
SALOMON SMITH BARNEY
CREDIT SUISSE FIRST BOSTON
SG COWEN
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by us in connection with the
sale of common stock being registered. All amounts are estimates except the SEC
registration fee, the Nasdaq National Market listing fee and the NASD filing
fees.
<TABLE>
<S> <C>
SEC registration fee...................................................................... $ 58,595
NASD fee.................................................................................. 22,695
Nasdaq National Market listing fee........................................................ 17,500
Printing and engraving.................................................................... 125,000
Legal fees and expenses .................................................................. 350,000
Accounting fees and expenses.............................................................. 150,000
Blue sky fees and expenses................................................................ 10,000
Transfer agent fees....................................................................... 10,000
Miscellaneous............................................................................. 56,210
------------
Total................................................................................. $800,000
============
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
We have adopted provisions in our Amended and Restated Certificate of
Incorporation that limit the liability of our directors in certain instances. As
permitted by the Delaware General Corporation Law, directors will not be liable
to us for monetary damages arising from a breach of their fiduciary duty as
directors in certain circumstances. See Item 17 of this Registration Statement
regarding the opinion of the Securities and Exchange Commission as to
indemnification of liabilities arising under the Securities Act. Such limitation
does not affect liability for any breach of a director's duty to us or our
stockholders (i) with respect to approval by the director of any transaction
from which he derives an improper personal benefit, (ii) with respect to acts or
omissions involving an absence of good faith, that he believes to be contrary to
our best interests or the best interest of our stockholders, that involve
intentional misconduct or a knowing and culpable violation of law, that
constitute an unexcused pattern of inattention that amounts to an abdication of
his duty to us or our stockholders, or that show a reckless disregard for his
duty to us or our stockholders in circumstances in which he was, or should have
been, aware, in the ordinary course of performing his duties, of a risk of
serious injury to us or our stockholders, or (iii) based on transactions between
us and our directors or another corporation with interrelated directors or on
improper distributions, loans, or guarantees under applicable sections of the
Delaware General Corporation Law. Such limitation of liability also does not
affect the availability of equitable remedies such as injunctive relief or
rescission, although in certain circumstances equitable relief may not be
available as a practical matter. The limitation may relieve the directors of
monetary liability to us for grossly negligent conduct, including conduct in
situations involving attempted takeovers. No claim or litigation is currently
pending against our directors that would be affected by the limitation of
liability.
Our Amended and Restated Certificate of Incorporation and Bylaws provide
that we shall indemnify our directors and may indemnify our officers to the
fullest extent permitted by Delaware law, including circumstances in which
indemnification is otherwise discretionary under Delaware law. We have entered
into separate indemnification agreements with our directors and officers, which
may require us, among other things, to indemnify them against certain
liabilities that may arise by reason of their status or service as directors or
officers (other than liabilities arising from willful misconduct of a culpable
nature), and to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified. To the extent we may be
required to make substantial payments under the indemnification agreements that
are not covered by insurance, our available cash and stockholder's equity would
be adversely affected.
Reference is made to the form of Underwriting Agreement filed as Exhibit
1.1 to this Registration Statement for certain provisions regarding the
indemnification of officers and directors by the several Underwriters.
II-1
<PAGE>
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ------------
<S> <C>
1.1 Form of Underwriting Agreement
4.1(1) Form of Certificate of Designation for the Series A Junior Participating Preferred
Stock of the Company.
4.2(1) Form of Rights Certificate.
4.3(2) Fifth Amendment Agreement to the Investor Rights Agreement dated May 26, 1995.
5.1 Opinion of Brobeck, Phleger & Harrison LLP
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Brobeck, Phleger & Harrison LLP. Reference is made to Exhibit 5.1.
24.1 Power of Attorney (see signature page).
</TABLE>
- -------------------
(1) Incorporated by reference to an exhibit to the Company's Current Report on
Form 8-K as filed with the Commission on June 3, 1998.
(2) Incorporated by reference to an exhibit to the Company's Registration
Statement on Form S-3(Registration No. 33-92802), as amended.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons pursuant to
the Delaware General Corporation Code, our Certificate of Incorporation or the
Bylaws, indemnification agreements entered into between us and our officers and
directors, the Underwriting Agreement and all prior underwriting agreements, or
otherwise, we have been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act, and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by us
of expenses incurred or paid by a director, officer or controlling person in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered hereunder, we will, unless in the opinion of our counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by us is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
The undersigned Registrant hereby further undertakes that, for the
purposes of determining any liability under the Securities Act of 1933, each
filing of the Registrant's annual reports pursuant to Section 13(a) or Section
15(d) of the Securities Exchange Act of 1934 (and, when applicable, each filing
of an employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference to this
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
We hereby undertake that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as
part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by us pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this Registration Statement as of the time it
was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new Registration Statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Credence Systems Corporation certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form S-3 and has duly caused
this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Fremont, State of California, on this
27th day of January, 2000.
CREDENCE SYSTEMS CORPORATION
By /s/ DR. GRAHAM J. SIDDALL
--------------------------------------
Dr. Graham J. Siddall
CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below does hereby constitute and appoint, jointly and severally, Dr.
Graham J. Siddall and Dennis P. Wolf, or either of them, as his true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign the Registration Statement filed herewith and any and all
amendments to said Registration Statement (including post-effective amendments
and registration statements filed pursuant to Rule 462 and otherwise), and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, or their substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C> <C>
/s/ GRAHAM J. SIDDALL Chief Executive Officer and Director January 27, 2000
- ---------------------------------------- (Principal Executive Officer)
Graham J. Siddall
/s/ DENNIS P. WOLF Executive Vice President, Chief Financial
- ---------------------------------------- Officer and Secretary (Principal Financial January 27, 2000
Dennis P. Wolf and Accounting Officer)
/s/ WILLIAM G. HOWARD, JR. Chairman of the Board and Director January 27, 2000
- ----------------------------------------
William G. Howard, Jr.
/s/ HENK J. EVENHUIS Director January 27, 2000
- ----------------------------------------
Henk J. Evenhuis
/s/ JOS C. HENKENS Director January 27, 2000
- ----------------------------------------
Jos C. Henkens
/s/ BERNARD V. VONDERSCHMITT Director January 27, 2000
- ----------------------------------------
Bernard V. Vonderschmitt
/s/ JON D. TOMPKINS Director January 27, 2000
- ----------------------------------------
Jon D. Tompkins
</TABLE>
II-3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
1.1 Form of Underwriting Agreement
4.1(1) Form of Certificate of Designation for the Series A Junior Participating Preferred
Stock of the Company.
4.2(1) Form of Rights Certificate.
4.3(2) Fifth Amendment Agreement to the Investor Rights Agreement dated May 26, 1995.
5.1 Opinion of Brobeck, Phleger & Harrison LLP
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Brobeck, Phleger & Harrison LLP. Reference is made to Exhibit 5.1.
24.1 Power of Attorney (see signature page).
</TABLE>
- -------------------
(1) Incorporated by reference to an exhibit to the Company's Current Report
on Form 8-K as filed with the Commission on June 3, 1998.
(2) Incorporated by reference to an exhibit to the Company's Registration
Statement on Form S-3 (Registration No. 33-92802), as amended.
<PAGE>
EXHIBIT 1.1
Credence Systems Corporation
2,000,000 Shares*
Common Stock
($.001 par value)
Underwriting Agreement
New York, New York
February ___, 2000
Salomon Smith Barney Inc.
Credit Suisse First Boston Corporation
SG Cowen Securities Corporation
c/o Salomon Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
Credence Systems Corporation, a corporation organized under the laws of
Delaware (the "Company"), proposes to sell to you (the "Underwriters"),
2,000,000 shares of Common Stock, $.001 par value ("Common Stock"), of the
Company (said shares to be issued and sold by the Company being hereinafter
called the "Underwritten Securities"). The Company also proposes to grant to the
Underwriters an option to purchase up to 300,000 additional shares of Common
Stock to cover over-allotments (the "Option Securities"; the Option Securities,
together with the Underwritten Securities, being hereinafter called the
"Securities"). To the extent there are no additional Underwriters listed on
Schedule I other than you, the term Representatives as used herein shall mean
you, as Underwriters, and the terms Representatives and Underwriters shall mean
either the singular or plural as the context requires. Any reference herein to
the Registration Statement, a Preliminary Prospectus or the Prospectus shall be
deemed to refer to and include the documents incorporated by reference therein
pursuant to Item 12 of Form S-3 which were filed under the Exchange Act on or
before the Effective Date of the Registration Statement or the issue date of
such Preliminary Prospectus or the Prospectus, as the case may be; and any
reference herein to the terms "amend", "amendment" or "supplement" with respect
to the Registration Statement, any Preliminary Prospectus or the Prospectus
shall be deemed to refer to and include the filing of any document under the
Exchange Act after the Effective Date of the Registration Statement, or the
issue date of any Preliminary Prospectus or the Prospectus, as the case may be,
deemed to be incorporated therein by reference. Certain terms used herein are
defined in Section 17 hereof.
- ----------------------
* Plus an option to purchase from Credence Systems Corporation, up to
300,000 additional shares to cover over-allotments.
1
<PAGE>
1. REPRESENTATIONS AND WARRANTIES. The Company represents and warrants
to, and agrees with, each Underwriter as set forth below in this Section 1.
(a) The Company meets the requirements for use of Form S-3 under the
Act and has prepared and filed with the Commission a registration statement
(file number 333- ) on Form S-3, including a related preliminary prospectus, for
registration under the Act of the offering and sale of the Securities. The
Company may have filed one or more amendments thereto, including a related
preliminary prospectus, each of which has previously been furnished to you. The
Company will next file with the Commission one of the following: either (1)
prior to the Effective Date of such registration statement, a further amendment
to such registration statement (including the form of final prospectus) or (2)
after the Effective Date of such registration statement, a final prospectus in
accordance with Rules 430A and 424(b). In the case of clause (2), the Company
has included in such registration statement, as amended at the Effective Date,
all information (other than Rule 430A Information) required by the Act and the
rules thereunder to be included in such registration statement and the
Prospectus. As filed, such amendment and form of final prospectus, or such final
prospectus, shall contain all Rule 430A Information, together with all other
such required information, and, except to the extent the Representatives shall
agree in writing to a modification, shall be in all substantive respects in the
form furnished to you prior to the Execution Time or, to the extent not
completed at the Execution Time, shall contain only such specific additional
information and other changes (beyond that contained in the latest Preliminary
Prospectus) as the Company has advised you, prior to the Execution Time, will be
included or made therein.
(b) On the Effective Date, the Registration Statement did or will, and
when the Prospectus is first filed (if required) in accordance with Rule 424(b)
and on the Closing Date (as defined herein) and on any date on which Option
Securities are purchased, if such date is not the Closing Date (a "settlement
date"), the Prospectus (and any supplements thereto) will, comply in all
material respects with the applicable requirements of the Act and the Exchange
Act and the respective rules thereunder; on the Effective Date and at the
Execution Time, the Registration Statement did not or will not contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein not
misleading; and, on the Effective Date, the Prospectus, if not filed pursuant to
Rule 424(b), will not, and on the date of any filing pursuant to Rule 424(b) and
on the Closing Date and any settlement date, the Prospectus (together with any
supplement thereto) will not, include any untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements therein,
in the light of the circumstances under which they were made, not misleading;
provided, however, that the Company makes no representations or warranties as to
the information contained in or omitted from the Registration Statement, or the
Prospectus (or any supplement thereto) in reliance upon and in conformity with
information furnished in writing to the Company by or on behalf of any
Underwriter through the Representatives specifically for inclusion in the
Registration Statement or the Prospectus (or any supplement thereto).
(c) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of the jurisdiction in which it is chartered or organized with full
corporate power and authority to own or lease, as the case may be, and to
operate its properties and conduct its business as described in the Prospectus,
and is
2
<PAGE>
duly qualified to do business as a foreign corporation and is in good standing
under the laws of each jurisdiction which requires such qualification.
(d) All the outstanding shares of capital stock of each of the
Company's subsidiaries has been duly and validly authorized and issued and is
fully paid and nonassessable, and, except as otherwise set forth or incorporated
by reference in the Prospectus, all outstanding shares of capital stock of the
Company's subsidiaries are owned by the Company either directly or through
wholly owned subsidiaries free and clear of any perfected security interest or
any other security interests, claims, liens or encumbrances.
(e) The Company's authorized equity capitalization is as set forth in
the Prospectus; the capital stock of the Company conforms in all material
respects to the description thereof contained in the Prospectus; the outstanding
shares of Common Stock have been duly and validly authorized and issued and are
fully paid and nonassessable; the Securities have been duly and validly
authorized, and, when issued and delivered to and paid for by the Underwriters
pursuant to this Agreement, will be fully paid and nonassessable; the
certificates for the Securities are in valid and sufficient form; the holders of
outstanding shares of capital stock of the Company are not entitled to
preemptive or other rights to subscribe for the Securities and, except as set
forth in the Prospectus, no options, warrants or other rights to purchase,
agreements or other obligations to issue, or rights to convert any obligations
into or exchange any securities for, shares of capital stock of or ownership
interests in the Company are outstanding.
(f) There is no franchise, contract or other document of a character
required to be described in the Registration Statement or Prospectus, or to be
filed as an exhibit thereto, which is not described or filed or incorporated by
reference as required; and the statements in or incorporated by reference in the
Prospectus under the headings Legal Matters, fairly summarize
the matters therein described.
(g) This Agreement has been duly authorized, executed and delivered by
the Company and constitutes a valid and binding obligation of the Company
enforceable in accordance with its terms.
(h) The Company is not and, after giving effect to the offering and
sale of the Securities and the application of the proceeds thereof as described
in the Prospectus, will not be an "investment company" as defined in the
Investment Company Act of 1940, as amended.
(i) No consent, approval, authorization, filing with or order of any
court or governmental agency or body is required in connection with the
transactions contemplated herein, except such as have been obtained under the
Act and such as may be required under the blue sky laws of any jurisdiction in
connection with the purchase and distribution of the Securities by the
Underwriters in the manner contemplated herein and in the Prospectus.
(j) Neither the issue and sale of the Securities nor the consummation
of any other of the transactions herein contemplated nor the fulfillment of the
terms hereof will conflict with, result in a breach or violation or imposition
of any lien, charge or encumbrance upon any property or assets of the Company or
any of its subsidiaries pursuant to, (i) the charter or by-laws of the Company
or any of its subsidiaries, (ii) the terms of any indenture, contract, lease,
3
<PAGE>
mortgage, deed of trust, note agreement, loan agreement or other agreement,
obligation, condition, covenant or instrument to which the Company or any of its
subsidiaries is a party or bound or to which its or their property is subject,
or (iii) any statute, law, rule, regulation, judgment, order or decree
applicable to the Company or any of its subsidiaries of any court, regulatory
body, administrative agency, governmental body, arbitrator or other authority
having jurisdiction over the Company or any of its subsidiaries or any of its or
their properties.
(k) No holders of securities of the Company have rights to the
registration of such securities under the Registration Statement.
(l) The consolidated historical financial statements and schedules of
the Company and its consolidated subsidiaries included or incorporated by
reference in the Prospectus and the Registration Statement present fairly in all
material respects the financial condition, results of operations and cash flows
of the Company as of the dates and for the periods indicated, comply as to form
with the applicable accounting requirements of the Act and have been prepared in
conformity with generally accepted accounting principles applied on a consistent
basis throughout the periods involved (except as otherwise noted therein). The
selected financial data set forth under the caption "Selected Consolidated
Financial Data" in the Prospectus and Registration Statement fairly present, on
the basis stated in the Prospectus and the Registration Statement, the
information included therein.
(m) No action, suit or proceeding by or before any court or
governmental agency, authority or body or any arbitrator involving the Company
or any of its subsidiaries or its or their property is pending or, to the best
knowledge of the Company, threatened that (i) could reasonably be expected to
have a material adverse effect on the performance of this Agreement or the
consummation of any of the transactions contemplated hereby or (ii) could
reasonably be expected to have a material adverse effect on the condition
(financial or otherwise), prospects, earnings, business or properties of the
Company and its subsidiaries, taken as a whole, whether or not arising from
transactions in the ordinary course of business, except as set forth in or
contemplated in the Prospectus (exclusive of any supplement thereto).
(n) Each of the Company and each of its subsidiaries owns or leases
all such properties as are necessary to the conduct of its operations as
presently conducted.
(o) Neither the Company nor any subsidiary is in violation or default
of (i) any provision of its charter or bylaws, (ii) the material terms of any
indenture, contract, lease, mortgage, deed of trust, note agreement, loan
agreement or other agreement, obligation, condition, covenant or instrument to
which it is a party or bound or to which its property is subject, or (iii) any
material statute, law, rule, regulation, judgment, order or decree of any court,
regulatory body, administrative agency, governmental body, arbitrator or other
authority having jurisdiction over the Company or such subsidiary or any of its
properties, as applicable.
(p) Ernst & Young, LLP, who have certified certain financial
statements of the Company and its consolidated subsidiaries and delivered their
report with respect to the audited consolidated financial statements and
schedules included or incorporated by reference in the Prospectus, are
independent public accountants with respect to the Company within the meaning of
the Act and the applicable published rules and regulations thereunder.
4
<PAGE>
(q) There are no transfer taxes or other similar fees or charges under
Federal law or the laws of any state, or any political subdivision thereof,
required to be paid in connection with the execution and delivery of this
Agreement or the issuance by the Company or sale by the Company of the
Securities.
(r) The Company has filed all foreign, federal, state and local tax
returns that are required to be filed or has requested extensions thereof
(except in any case in which the failure so to file would not have a material
adverse effect on the condition (financial or otherwise), prospects, earnings,
business or properties of the Company and its subsidiaries, taken as a whole,
whether or not arising from transactions in the ordinary course of business,
except as set forth in or contemplated in the Prospectus (exclusive of any
supplement thereto)) and has paid all taxes required to be paid by it and any
other assessment, fine or penalty levied against it, to the extent that any of
the foregoing is due and payable, except for any such assessment, fine or
penalty that is currently being contested in good faith or as would not have a
material adverse effect on the condition (financial or otherwise), prospects,
earnings, business or properties of the Company and its subsidiaries, taken as a
whole, whether or not arising from transactions in the ordinary course of
business, except as set forth in or contemplated in the Prospectus (exclusive of
any supplement thereto).
(s) No labor problem or dispute with the employees of the Company or
any of its subsidiaries exists or is threatened or imminent, and the Company is
not aware of any existing or imminent labor disturbance by the employees of any
of its or its subsidiaries' principal suppliers, contractors or customers, that
could have a material adverse effect on the condition (financial or otherwise),
prospects, earnings, business or properties of the Company and its subsidiaries,
taken as a whole, whether or not arising from transactions in the ordinary
course of business, except as set forth in or contemplated in the Prospectus
(exclusive of any supplement thereto).
(t) The Company and each of its subsidiaries are insured by insurers
of recognized financial responsibility against such losses and risks and in such
amounts as are prudent and customary in the businesses in which they are
engaged; all policies of insurance insuring the Company or any of its
subsidiaries or their respective businesses, assets, employees, officers and
directors are in full force and effect; the Company and its subsidiaries are in
compliance with the terms of such policies and instruments in all material
respects; and there are no claims by the Company or any of its subsidiaries
under any such policy or instrument as to which any insurance company is denying
liability or defending under a reservation of rights clause; neither the Company
nor any such subsidiary has been refused any insurance coverage sought or
applied for; and neither the Company nor any such subsidiary has any reason to
believe that it will not be able to renew its existing insurance coverage as and
when such coverage expires or to obtain similar coverage from similar insurers
as may be necessary to continue its business at a cost that would not have a
material adverse effect on the condition (financial or otherwise), prospects,
earnings, business or properties of the Company and its subsidiaries, taken as a
whole, whether or not arising from transactions in the ordinary course of
business, except as set forth in or contemplated in the Prospectus (exclusive of
any supplement thereto).
(u) No subsidiary of the Company is currently prohibited, directly or
indirectly, from paying any dividends to the Company, from making any other
distribution on
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such subsidiary's capital stock, from repaying to the Company any loans or
advances to such subsidiary from the Company or from transferring any of such
subsidiary's property or assets to the Company or any other subsidiary of the
Company, except as described in or contemplated by the Prospectus.
(v) The Company and its subsidiaries possess all licenses,
certificates, permits and other authorizations issued by the appropriate
federal, state or foreign regulatory authorities necessary to conduct their
respective businesses, and neither the Company nor any such subsidiary has
received any notice of proceedings relating to the revocation or modification of
any such certificate, authorization or permit which, singly or in the aggregate,
if the subject of an unfavorable decision, ruling or finding, would have a
material adverse effect on the condition (financial or otherwise), prospects,
earnings, business or properties of the Company and its subsidiaries, taken as a
whole, whether or not arising from transactions in the ordinary course of
business, except as set forth in or contemplated in the Prospectus (exclusive of
any supplement thereto).
(w) The Company and each of its subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or specific
authorizations; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability; (iii) access to
assets is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(x) The Company has not taken, directly or indirectly, any action
designed to or which has constituted or which might reasonably be expected to
cause or result, under the Exchange Act or otherwise, in stabilization or
manipulation of the price of any security of the Company to facilitate the sale
or resale of the Securities.
(y) The Company and its subsidiaries are (i) in compliance with any
and all applicable foreign, federal, state and local laws and regulations
relating to the protection of human health and safety, the environment or
hazardous or toxic substances or wastes, pollutants or contaminants
("Environmental Laws"), (ii) have received and are in compliance in all material
respects with all permits, licenses or other approvals required of them under
applicable Environmental Laws to conduct their respective businesses and (iii)
have not received notice of any actual or potential liability for the
investigation or remediation of any disposal or release of hazardous or toxic
substances or wastes, pollutants or contaminants, except where such
non-compliance with Environmental Laws, failure to receive required permits,
licenses or other approvals, or liability would not, individually or in the
aggregate, have a material adverse change in the condition (financial or
otherwise), prospects, earnings, business or properties of the Company and its
subsidiaries, taken as a whole, whether or not arising from transactions in the
ordinary course of business, except as set forth in or contemplated in the
Prospectus (exclusive of any supplement thereto). Except as set forth in the
Prospectus, neither the Company nor any of the subsidiaries has been named as a
"potentially responsible party" under the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended.
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(z) In the ordinary course of its business, the Company periodically
reviews the effect of Environmental Laws on the business, operations and
properties of the Company and its subsidiaries, in the course of which it
identifies and evaluates associated costs and liabilities (including, without
limitation, any capital or operating expenditures required for clean-up, closure
of properties or compliance with Environmental Laws, or any permit, license or
approval, any related constraints on operating activities and any potential
liabilities to third parties). On the basis of such review, the Company has
reasonably concluded that such associated costs and liabilities would not,
singly or in the aggregate, have a material adverse effect on the condition
(financial or otherwise), prospects, earnings, business or properties of the
Company and its subsidiaries, taken as a whole, whether or not arising from
transactions in the ordinary course of business, except as set forth in or
contemplated in the Prospectus (exclusive of any supplement thereto).
(aa) Each of the Company and its subsidiaries has fulfilled its
obligations, if any, under the minimum funding standards of Section 302 of the
United States Employee Retirement Income Security Act of 1974 ("ERISA") and the
regulations and published interpretations thereunder with respect to each "plan"
(as defined in Section 3(3) of ERISA and such regulations and published
interpretations) in which employees of the Company and its subsidiaries are
eligible to participate and each such plan is in compliance in all material
respects with the presently applicable provisions of ERISA and such regulations
and published interpretations. The Company and its subsidiaries have not
incurred any unpaid liability to the Pension Benefit Guaranty Corporation (other
than for the payment of premiums in the ordinary course) or to any such plan
under Title IV of ERISA.
(bb) Except as set forth in the Registration Statement, the Company
and its subsidiaries own or possess all patents, trademarks, trademark
registrations, service marks, service mark registrations, trade names,
copyrights, licenses, inventions, trade secrets and rights described in the
Prospectus as being owned or possessed by them or any of them or necessary for
the conduct of their respective businesses, and the Company is not aware of any
claim to the contrary or any challenge by any other person to the rights of the
Company and its subsidiaries with respect to the foregoing.
(cc) Except as disclosed in the Registration Statement and the
Prospectus, the Company (i) does not have any material lending or other
relationship with any bank or lending affiliate of Salomon Smith Barney Holdings
Inc. and (ii) does not intend to use any of the proceeds from the sale of the
Securities hereunder to repay any outstanding debt owed to any affiliate of
Salomon Smith Barney Holding Inc.
(dd) Neither the Company nor any of its subsidiaries nor any of its or
their properties or assets has any immunity from the jurisdiction of any court
or from any legal process (whether through service or notice, attachment prior
to judgment, attachment in aid of execution or otherwise) under the laws of New
York.
Any certificate signed by any officer of the Company and delivered to the
Representatives or counsel for the Underwriters in connection with the offering
of the Securities shall be deemed a representation and warranty by the Company,
as to matters covered thereby, to each Underwriter.
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2. PURCHASE AND SALE.
(a) Subject to the terms and conditions and in reliance upon the
representations and warranties herein set forth, the Company agrees to sell to
each Underwriter, and each Underwriter agrees, severally and not jointly, to
purchase from the Company, at a purchase price of $ per share, the amount of the
Underwritten Securities set forth opposite such Underwriter's name in Schedule I
hereto.
(b) Subject to the terms and conditions and in reliance upon the
representations and warranties herein set forth, the Company hereby grants an
option to the several Underwriters to purchase, severally and not jointly, up to
300,000 Option Securities at the same purchase price per share as the
Underwriters shall pay for the Underwritten Securities. Said option may be
exercised only to cover over-allotments in the sale of the Underwritten
Securities by the Underwriters. Said option may be exercised in whole or in part
at any time (but not more than once) on or before the 30th day after the date of
the Prospectus upon written or telegraphic notice by the Representatives to the
Company setting forth the number of shares of the Option Securities as to which
the several Underwriters are exercising the option and the settlement date. The
number of shares of the Option Securities to be purchased by each Underwriter
shall be the same percentage of the total number of shares of the Option
Securities to be purchased by the several Underwriters as such Underwriter is
purchasing of the Underwritten Securities, subject to such adjustments as you in
your absolute discretion shall make to eliminate any fractional shares.
3. DELIVERY AND PAYMENT. Delivery of and payment for the Underwritten
Securities and the Option Securities (if the option provided for in Section 2(b)
hereof shall have been exercised on or before the third Business Day prior to
the Closing Date) shall be made at 10:00 AM, New York City time, on February
___, 2000, or at such time on such later date not more than three Business Days
after the foregoing date as the Representatives shall designate, which date and
time may be postponed by agreement between the Representatives and the Company
or as provided in Section 9 hereof (such date and time of delivery and payment
for the Securities being herein called the "Closing Date"). Delivery of the
Securities shall be made to the Representatives for the respective accounts of
the several Underwriters against payment by the several Underwriters through the
Representatives of the purchase price thereof to or upon the order of the
Company by wire transfer payable in same-day funds to an account specified by
the Company. Delivery of the Underwritten Securities and the Option Securities
shall be made through the facilities of The Depository Trust Company unless the
Representatives shall otherwise instruct.
If the option provided for in Section 2(b) hereof is exercised after the
third Business Day prior to the Closing Date, the Company will deliver the
Option Securities (at the expense of the Company) to the Representatives, at 388
Greenwich Street, New York, New York, on the date specified by the
Representatives (which shall be within three Business Days after exercise of
said option) for the respective accounts of the several Underwriters, against
payment by the several Underwriters through the Representatives of the purchase
price thereof to or upon the order of the Company by wire transfer payable in
same-day funds to an account specified by the Company. If settlement for the
Option Securities occurs after the Closing Date, the Company will deliver to the
Representatives on the settlement date for the Option Securities, and the
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<PAGE>
obligation of the Underwriters to purchase the Option Securities shall be
conditioned upon receipt of, supplemental opinions, certificates and letters
confirming as of such date the opinions, certificates and letters delivered on
the Closing Date pursuant to Section 6 hereof.
4. OFFERING BY UNDERWRITERS. It is understood that the several
Underwriters propose to offer the Securities for sale to the public as set forth
in the Prospectus.
5. AGREEMENTS. The Company agrees with the several Underwriters that:
(a) The Company will use its best efforts to cause the Registration
Statement, if not effective at the Execution Time, and any amendment thereof, to
become effective. Prior to the termination of the offering of the Securities,
the Company will not file any amendment of the Registration Statement or
supplement to the Prospectus or any Rule 462(b) Registration Statement unless
the Company has furnished you a copy for your review prior to filing and will
not file any such proposed amendment or supplement to which you reasonably
object. Subject to the foregoing sentence, if the Registration Statement has
become or becomes effective pursuant to Rule 430A, or filing of the Prospectus
is otherwise required under Rule 424(b), the Company will cause the Prospectus,
properly completed, and any supplement thereto to be filed with the Commission
pursuant to the applicable paragraph of Rule 424(b) within the time period
prescribed and will provide evidence satisfactory to the Representatives of such
timely filing. The Company will promptly advise the Representatives (1) when the
Registration Statement, if not effective at the Execution Time, shall have
become effective, (2) when the Prospectus, and any supplement thereto, shall
have been filed (if required) with the Commission pursuant to Rule 424(b) or
when any Rule 462(b) Registration Statement shall have been filed with the
Commission, (3) when, prior to termination of the offering of the Securities,
any amendment to the Registration Statement shall have been filed or become
effective, (4) of any request by the Commission or its staff for any amendment
of the Registration Statement, or any Rule 462(b) Registration Statement, or for
any supplement to the Prospectus or for any additional information, (5) of the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement or the institution or threatening of any proceeding for
that purpose and (6) of the receipt by the Company of any notification with
respect to the suspension of the qualification of the Securities for sale in any
jurisdiction or the institution or threatening of any proceeding for such
purpose. The Company will use its best efforts to prevent the issuance of any
such stop order or the suspension of any such qualification and, if issued, to
obtain as soon as possible the withdrawal thereof.
(b) If, at any time when a prospectus relating to the Securities is
required to be delivered under the Act, any event occurs as a result of which
the Prospectus as then supplemented would include any untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein in the light of the circumstances under which they were made
not misleading, or if it shall be necessary to amend the Registration Statement
or supplement the Prospectus to comply with the Act or the Exchange Act or the
respective rules thereunder, the Company promptly will (1) notify the
Representatives of such event, (2) prepare and file with the Commission, subject
to the second sentence of paragraph (a) of this Section 5, an amendment or
supplement which will correct such statement or omission or effect such
compliance and (3) supply any supplemented Prospectus to you in such quantities
as you may reasonably request.
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<PAGE>
(c) As soon as practicable, the Company will make generally available
to its security holders and to the Representatives an earnings statement or
statements of the Company and its subsidiaries which will satisfy the provisions
of Section 11(a) of the Act and Rule 158 under the Act.
(d) The Company will furnish to the Representatives and counsel for
the Underwriters, without charge, signed copies of the Registration Statement
(including exhibits thereto) and to each other Underwriter a copy of the
Registration Statement (without exhibits thereto) and, so long as delivery of a
prospectus by an Underwriter or dealer may be required by the Act, as many
copies of each Preliminary Prospectus and the Prospectus and any supplement
thereto as the Representatives may reasonably request. The Company will pay the
expenses of printing or other production of all documents relating to the
offering.
(e) The Company will arrange, if necessary, for the qualification of
the Securities for sale under the laws of such jurisdictions as the
Representatives may designate, will maintain such qualifications in effect so
long as required for the distribution of the Securities and will pay any fee of
the National Association of Securities Dealers, Inc., in connection with its
review of the offering; provided that in no event shall the Company be obligated
to qualify to do business in any jurisdiction where it is not now so qualified
or to take any action that would subject it to service of process in suits,
other than those arising out of the offering or sale of the Securities, in any
jurisdiction where it is not now so subject.
(f) The Company will not, without the prior written consent of Salomon
Smith Barney Inc., offer, sell, contract to sell, pledge, or otherwise dispose
of, (or enter into any transaction which is designed to, or might reasonably be
expected to, result in the disposition (whether by actual disposition or
effective economic disposition due to cash settlement or otherwise) by the
Company or any corporate affiliate of the Company or any corporate person in
privity with the Company or any corporate affiliate of the Company) directly or
indirectly, including the filing (or participation in the filing) of a
registration statement with the Commission in respect of, or establish or
increase a put equivalent position or liquidate or decrease a call equivalent
position within the meaning of Section 16 of the Exchange Act, any other shares
of Common Stock or any securities convertible into, or exercisable, or
exchangeable for, shares of Common Stock; or publicly announce an intention to
effect any such transaction, for a period of ninety (90) days after the date of
the Underwriting Agreement, provided, however, that the Company may issue and
sell Common Stock pursuant to any employee stock option plan, stock ownership
plan or dividend reinvestment plan of the Company in effect at the Execution
Time and the Company may issue Common Stock issuable upon the conversion of
securities or the exercise of warrants outstanding at the Execution Time.
(g) The Company will not take, directly or indirectly, any action
designed to or which has constituted or which might reasonably be expected to
cause or result, under the Exchange Act or otherwise, in stabilization or
manipulation of the price of any security of the Company to facilitate the sale
or resale of the Securities.
6. CONDITIONS TO THE OBLIGATIONS OF THE UNDERWRITERS. The obligations of
the Underwriters to purchase the Underwritten Securities and the Option
Securities, as the case may be, shall be subject to the accuracy of the
representations and warranties on the part of the
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Company contained herein as of the Execution Time, the Closing Date and any
settlement date pursuant to Section 3 hereof, to the accuracy of the statements
of the Company made in any certificates pursuant to the provisions hereof, to
the performance by the Company of its obligations hereunder and to the following
additional conditions:
(a) If the Registration Statement has not become effective prior to
the Execution Time, unless the Representatives agree in writing to a later time,
the Registration Statement will become effective not later than (i) 6:00 PM New
York City time on the date of determination of the public offering price, if
such determination occurred at or prior to 3:00 PM New York City time on such
date or (ii) 9:30 AM on the Business Day following the day on which the public
offering price was determined, if such determination occurred after 3:00 PM New
York City time on such date; if filing of the Prospectus, or any supplement
thereto, is required pursuant to Rule 424(b), the Prospectus, and any such
supplement, will be filed in the manner and within the time period required by
Rule 424(b); and no stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for that purpose shall have
been instituted or threatened.
(b) The Company shall have requested and caused Brobeck, Phleger &
Harrison LLP, counsel for the Company, to have furnished to the Representatives
their opinion, dated the Closing Date and addressed to the Representatives, to
the effect that:
(i) The Company is a corporation duly incorporated and validly
existing in good standing under the laws of the State of Delaware with corporate
power and authority to own, lease and operate its properties and to conduct its
business as described in the Registration Statement and the Prospectus (and any
amendment or supplement thereto), and, to such counsel's knowledge, is duly
registered and qualified to conduct its business and is in good standing in each
jurisdiction where the nature of its properties or the conduct of its business
requires such registration or qualification, except where the failure so to
register or qualify would not have a material adverse effect on the condition
(financial or other), business, properties, or results of operations of the
Company and its subsidiaries taken as a whole;
(ii) The authorized capital stock of the Company conforms in all
material respects as to legal matters to the description thereof incorporated by
reference in the Prospectus;
(iii) All the shares of capital stock of the Company outstanding
on or prior to the issuance of the Securities to be issued and sold hereunder,
have been duly authorized and validly issued, and are fully paid and
nonassessable;
(iv) The Securities to be issued and sold to Underwriters
hereunder have been duly authorized and, when issued and delivered to the
Underwriters against payment therefor in accordance with the terms hereof, will
be validly issued, fully paid and nonassessable and free of any preemptive
rights set forth in the Company's Certificate of Incorporation or Bylaws or to
the knowledge of such counsel, similar rights that entitle any person to acquire
any shares of capital stock upon the issuance thereof by the Company;
(v) Except as contemplated by or as disclosed in the Prospectus or
the documents incorporated by reference into the Prospectus or the Registration
Statement (the
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"Incorporated Documents"), to such counsel's knowledge, there are no outstanding
options, warrants or other rights calling for the issuance of, or any
commitment, plan or arrangement to issue, any shares of capital stock of the
Company or any security convertible into or exchangeable or exercisable for
capital stock of the Company other than the granting of options, issuance of
shares of Common Stock upon exercise of such options, direct issuance of shares
under the Company's currently existing stock option plan or employee stock
purchase plan and the Company's outstanding convertible notes;
(vi) Except as contemplated by or as disclosed in the Registration
Statement, the Prospectus, or Incorporated Documents or previously waived, to
such counsel's knowledge, there is no holder of any security of the Company who
has the right to have any Common Stock or other securities of the Company
included in the registration statement or the right, as a result of the filing
of the registration statement, to require registration under the Act of any
shares of Common Stock or other securities of the Company or, to such counsel's
knowledge, the contractual right to cause the Company to sell or otherwise issue
to them, or to permit them to underwrite the sale of, the Securities, except
such rights which have been effectively waived;
(vii) The form of certificates for the Securities conforms to the
requirements of the Delaware General Corporation Law;
(viii) The Registration Statement and all post-effective
amendments, if any, have become effective under the Act and, to the knowledge of
such counsel, no stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose are pending before
or contemplated by the Commission; and any required filing of the Prospectus
pursuant to Rule 424(b) has been made in accordance with Rule 424(b);
(ix) The Company has corporate power and authority to enter into
this Agreement and to issue, sell and deliver the Securities to be sold by it to
the Underwriters as provided herein, and this Agreement has been duly
authorized, executed and delivered by the Company and is a valid, legal and
binding agreement of the Company, except as enforcement of rights to indemnity
and contribution hereunder may be limited by Federal or state securities laws or
principles of public policy and subject to the qualification that the
enforceability of the Company's obligations hereunder may be limited by
bankruptcy, fraudulent conveyance, insolvency, reorganization, moratorium, and
other laws relating to or affecting creditors' rights generally and by general
equitable principles;
(x) Neither the offer, sale or delivery of the Securities by the
Company, the execution, delivery or performance of this Agreement, compliance by
the Company with the provisions hereof, nor consummation by the Company of the
transactions contemplated hereby conflicts or will conflict with or constitutes
or will constitute a breach of, or a default under, its certificate of
incorporation or bylaws of the Company, or, to counsel's knowledge, any material
agreement, indenture, lease or other instrument to which the Company is a party
or by which it is bound that is an exhibit to the Registration Statement, or, to
such counsel's knowledge, will result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Company nor will any
such action result in any violation of any existing federal law, California law
or the General Corporation Law of the State of Delaware, regulation, ruling
(assuming compliance with all applicable state securities and Blue Sky laws and
the rules or bylaws of the NASD),
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judgment, injunction, order or decree in each case known to such counsel,
applicable to the Company or any of its properties which, if issued against the
Company, would have a material adverse effect on the Company and its
subsidiaries, taken as a whole;
(xi) No consent, approval, authorization or other order of, or
registration or filing with, any court, regulatory body, administrative agency
or other governmental body, agency, or official is required on the part of the
Company (except as have been obtained under the Act and the Exchange Act or such
as may be required under state securities or Blue Sky laws and the rules or
bylaws of the NASD governing the purchase and distribution of the Securities)
for the valid issuance and sale of the Securities to the Underwriters as
contemplated by this Agreement, and;
(xii) To the knowledge of such counsel, (A) other than as
described or contemplated in the Prospectus, there are no legal or governmental
proceedings pending or threatened against the Company, or to which the Company,
or any of its property, is subject, which are required to be described in the
Registration Statement or Prospectus and (B) there are no agreements, contracts,
indentures, leases or other instruments, that are required to be described in
the Registration Statement or the Prospectus or to be filed as an exhibit to the
Registration Statement that are not described or filed as required, as the case
may be.
In addition to rendering legal advice and assistance to the Company in
the course of the preparation of the Registration Statement and the Prospectus,
involving, among other things, discussions and inquiries concerning certain
legal matters and the review of certain corporate records, documents and
proceedings (in addition to those described in paragraphs (i) through (xii)
above), counsel may state that it also participated in conferences with certain
officers and other representatives of the Company, including its independent
certified public accountants and with the Underwriters and Underwriters' counsel
at which the contents of the Registration Statement and the Prospectus, and
related matters were discussed. Counsel may state that it has not, however,
independently checked or verified the accuracy, completeness or fairness of the
information contained in the Registration Statement and Prospectus. In
connection with the preparation of the Registration Statement, counsel may state
that it did not, however, consult with and were not advised by litigation
attorneys or attorneys who practice intellectual property law at the firm with
respect to intellectual property matters and the current litigation involving
the Company described in or incorporated by reference in the Registration
Statement. Counsel may note that the Company retained separate counsel to handle
such matters.
Counsel shall state, however, that based upon counsel's participation
as described in the preceding paragraph, counsel confirms that counsel has no
reason to believe that (except for financial statements and schedules and other
financial and statistical data included or incorporated by reference therein as
to which such counsel expresses no belief) the Registration Statement, as of its
effective date, did not comply as to form in all material respects with the
requirements of the Act or contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading or that (except for financial
statements and schedules and other financial and statistical data included or
incorporated by reference therein as to which we express no belief) the
Prospectus or any amendment or supplement thereto, as of its respective date,
and as of the Closing Date, contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. For purposes of this paragraph, it is
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understood that such statement of counsel relating to documents incorporated by
reference in the Prospectus shall relate to such Incorporated Documents (except
for financial statements and schedules and other financial and statistical data
included or incorporated by reference therein) as of the date of filing such
documents.
(c) The Representatives shall have received from Morrison & Foerster
LLP, counsel for the Underwriters, such opinion or opinions, dated the Closing
Date and addressed to the Representatives, with respect to the issuance and sale
of the Securities, the Registration Statement, the Prospectus (together with any
supplement thereto) and other related matters as the Representatives may
reasonably require, and the Company shall have furnished to such counsel such
documents as they request for the purpose of enabling them to pass upon such
matters.
(d) The Company shall have furnished to the Representatives a
certificate of the Company, signed by the Chairman of the Board or the President
and the principal financial or accounting officer of the Company, dated the
Closing Date, to the effect that the signers of such certificate have carefully
examined the Registration Statement, the Prospectus, any supplements to the
Prospectus and this Agreement and that:
(i) the representations and warranties of the Company in this
Agreement are true and correct in all material respects on and as of the Closing
Date with the same effect as if made on the Closing Date and the Company has
complied with all the agreements and satisfied all the conditions on its part to
be performed or satisfied at or prior to the Closing Date;
(ii) no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that purpose have
been instituted or, to the Company's knowledge, threatened; and
(iii) since the date of the most recent financial statements
included or incorporated by reference in the Prospectus (exclusive of any
supplement thereto), there has been no material adverse effect on the condition
(financial or otherwise), prospects, earnings, business or properties of the
Company and its subsidiaries, taken as a whole, whether or not arising from
transactions in the ordinary course of business, except as set forth in or
contemplated in the Prospectus (exclusive of any supplement thereto).
(e) The Company shall have requested and caused Ernst & Young LLP to
have furnished to the Representatives, at the Execution Time and at the Closing
Date, letters, dated respectively as of the Execution Time and as of the Closing
Date, in form and substance satisfactory to the Representatives, confirming that
they are independent accountants within the meaning of the Act and the Exchange
Act and the respective applicable rules and regulations adopted by the
Commission thereunder and that they have performed a review of the unaudited
interim financial information of the Company for the three-month period ended
January 31, 2000, and as at January 31, 2000, in accordance with Statement on
Auditing Standards No. 71, and stating in effect that:
(i) in their opinion the audited financial statements and
financial statement schedules included or incorporated by reference in the
Registration Statement and the
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Prospectus and reported on by them comply as to form in all material respects
with the applicable accounting requirements of the Act and the Exchange Act and
the related rules and regulations adopted by the Commission;
(ii) on the basis of a reading of the latest unaudited financial
statements made available by the Company and its subsidiaries; their limited
review, in accordance with standards established under Statement on Auditing
Standards No. 71, of the unaudited interim financial information for the
three-month period ended January 31, 2000, and as at January 31, 2000,
incorporated by reference in the Registration Statement and the Prospectus;
carrying out certain specified procedures (but not an examination in accordance
with generally accepted auditing standards) which would not necessarily reveal
matters of significance with respect to the comments set forth in such letter; a
reading of the minutes of the meetings of the stockholders, directors and audit
committee of the Company and each of its subsidiaries; and inquiries of certain
officials of the Company who have responsibility for financial and accounting
matters of the Company and its subsidiaries as to transactions and events
subsequent to January 31, 2000, nothing came to their attention which caused
them to believe that:
(1) any unaudited financial statements included or
incorporated by reference in the Registration Statement and the Prospectus do
not comply as to form in all material respects with applicable accounting
requirements of the Act and with the related rules and regulations adopted by
the Commission with respect to financial statements included or incorporated by
reference in quarterly reports on Form 10-Q under the Exchange Act; and said
unaudited financial statements are not in conformity with generally accepted
accounting principles applied on a basis substantially consistent with that of
the audited financial statements included or incorporated by reference in the
Registration Statement and the Prospectus;
(2) with respect to the period subsequent to January 31,
2000, there were any changes, at a specified date not more than five days prior
to the date of the letter, in the long-term debt of the Company and its
subsidiaries or capital stock of the Company or decreases in the stockholders'
equity of the Company as compared with the amounts shown on the January 31,
2000, consolidated balance sheet included or incorporated by reference in the
Registration Statement and the Prospectus, or for the period from February 1,
2000, to such specified date there were any decreases, as compared with the
period from November 1, 1999, to November ___, 1999, in net revenues of the
Company and its subsidiaries, except in all instances for changes or decreases
set forth in such letter, in which case the letter shall be accompanied by an
explanation by the Company as to the significance thereof unless said
explanation is not deemed necessary by the Representatives; and
(3) the information included or incorporated by reference in
the Registration Statement and Prospectus in response to Regulation S-K, Item
301 (Selected Financial Data), and Item 302 (Supplementary Financial
Information) agrees with the accounting records of the Company and its
subsidiaries, excluding any questions of legal interpretation; and
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(iii) they have performed certain other specified procedures as a
result of which they determined that certain information of an accounting,
financial or statistical nature (which is limited to accounting, financial or
statistical information derived from the general accounting records of the
Company and its subsidiaries) set forth in the Registration Statement and the
Prospectus and in Exhibit 12 to the Registration Statement, including the
information set forth under the captions "Summary Consolidated Financial Data,"
"Quarterly Consolidated Financial Data," "Dividend Policy," "Capitalization,"
"Selected Consolidated Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business" in the Prospectus,
the information included or incorporated by reference in Items 1, 6, 7, 7A and
11 of the Company's Annual Report on Form 10-K, incorporated by reference in the
Registration Statement and the Prospectus, and the information included in the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included or incorporated by reference in the Company's Quarterly
Reports on Form 10-Q, incorporated by reference in the Registration Statement
and the Prospectus, agrees with the accounting records of the Company and its
subsidiaries, excluding any questions of legal interpretation.
References to the Prospectus in this paragraph (e) include any supplement
thereto at the date of the letter.
(f) Subsequent to the Execution Time or, if earlier, the dates as of
which information is given in the Registration Statement (exclusive of any
amendment thereof) and the Prospectus (exclusive of any supplement thereto),
there shall not have been (i) any change or decrease specified in the letter or
letters referred to in paragraph (e) of this Section 6 or (ii) any change, or
any development involving a prospective change, in or affecting the condition
(financial or otherwise), earnings, business or properties of the Company and
its subsidiaries, taken as a whole, whether or not arising from transactions in
the ordinary course of business, except as set forth in or contemplated in the
Prospectus (exclusive of any supplement thereto) the effect of which, in any
case referred to in clause (i) or (ii) above, is, in the sole judgment of the
Representatives, so material and adverse as to make it impractical or
inadvisable to proceed with the offering or delivery of the Securities as
contemplated by the Registration Statement (exclusive of any amendment thereof)
and the Prospectus (exclusive of any supplement thereto).
(g) Prior to the Closing Date, the Company shall have furnished to the
Representatives such further information, certificates and documents as the
Representatives may reasonably request.
(h) The Securities shall have been listed and admitted and authorized
for trading on the Nasdaq National Market, and satisfactory evidence of such
actions shall have been provided to the Representatives.
If any of the conditions specified in this Section 6 shall not have been
fulfilled in all material respects when and as provided in this Agreement, or if
any of the opinions and certificates mentioned above or elsewhere in this
Agreement shall not be in all material respects reasonably satisfactory in form
and substance to the Representatives and counsel for the Underwriters, this
Agreement and all obligations of the Underwriters hereunder may be canceled at,
or at any time prior to, the Closing Date by the Representatives. Notice of such
cancellation shall be given to the Company in writing or by telephone or
facsimile confirmed in writing.
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The documents required to be delivered by this Section 6 shall be
delivered at the office of Morrison & Foerster LLP, counsel for the
Underwriters, at 755 Page Mill Road, Palo Alto, CA 94304, on the Closing Date.
7. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If the sale of the Securities
provided for herein is not consummated because any condition to the obligations
of the Underwriters set forth in Section 6 hereof is not satisfied, because of
any termination pursuant to Section 10 hereof or because of any refusal,
inability or failure on the part of the Company to perform any agreement herein
or comply with any provision hereof other than by reason of a default by any of
the Underwriters, the Company will reimburse the Underwriters severally through
Salomon Smith Barney on demand for all out-of-pocket expenses (including
reasonable fees and disbursements of counsel) that shall have been incurred by
them in connection with the proposed purchase and sale of the Securities.
8. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter, the directors, officers, employees and agents of each Underwriter
and each person who controls any Underwriter within the meaning of either the
Act or the Exchange Act against any and all losses, claims, damages or
liabilities, joint or several, to which they or any of them may become subject
under the Act, the Exchange Act or other Federal or state statutory law or
regulation, at common law or otherwise, insofar as such losses, claims, damages
or liabilities (or actions in respect thereof) arise out of or are based upon
any untrue statement or alleged untrue statement of a material fact contained in
the registration statement for the registration of the Securities as originally
filed or in any amendment thereof, or in any Preliminary Prospectus or the
Prospectus, or in any amendment thereof or supplement thereto, or arise out of
or are based upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, and agrees to reimburse each such indemnified party, as
incurred, for any legal or other expenses reasonably incurred by them in
connection with investigating or defending any such loss, claim, damage,
liability or action; PROVIDED, HOWEVER, that the Company will not be liable in
any such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon any such untrue statement or alleged untrue
statement or omission or alleged omission made therein in reliance upon and in
conformity with written information furnished to the Company by or on behalf of
any Underwriter through the Representatives specifically for inclusion therein.
This indemnity agreement will be in addition to any liability which the Company
may otherwise have. The indemnification contained in this paragraph (a) with
respect to any Preliminary Prospectus shall not inure to the benefit of any
Underwriter (or to the benefit of any person controlling such Underwriter) on
account of any such loss, claim, damage, liability or expense arising from the
sale of the Securities by such Underwriter to any person if a copy of the
Prospectus shall not have been delivered or sent to such person within the time
required by the Act and the regulations thereunder, and the untrue statement or
alleged untrue statement or omission or alleged omission of a material fact
contained in such Preliminary Prospectus was corrected in the Prospectus,
provided that the Company has delivered the Prospectus to the several
Underwriters in requisite quantity on a timely basis to permit such delivery or
sending.
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(b) Each Underwriter severally and not jointly agrees to indemnify and
hold harmless the Company, each of its directors, each of its officers who signs
the Registration Statement, and each person who controls the Company within the
meaning of either the Act or the Exchange Act, to the same extent as the
foregoing indemnity from the Company to each Underwriter, but only with
reference to written information relating to such Underwriter furnished to the
Company by or on behalf of such Underwriter through the Representatives
specifically for inclusion in the documents referred to in the foregoing
indemnity. This indemnity agreement will be in addition to any liability which
any Underwriter may otherwise have. The Company acknowledges that the statements
set forth in the last paragraph of the cover page regarding delivery of the
Securities, the legend related to stabilization, syndicate covering transactions
and penalty bids and, under the heading "Underwriters", (i) the list of
Underwriters and their respective participation in the sale of the Securities,
(ii) the sentences related to concessions and reallowances and (iii) the
paragraph related to stabilization, syndicate covering transactions and penalty
bids in any Preliminary Prospectus and the Prospectus constitute the only
information furnished in writing by or on behalf of the several Underwriters for
inclusion in any Preliminary Prospectus or the Prospectus.
(c) Promptly after receipt by an indemnified party under this Section
8 of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
Section 8, notify the indemnifying party in writing of the commencement thereof;
but the failure so to notify the indemnifying party (i) will not relieve it from
liability under paragraph (a) or (b) above unless and to the extent it did not
otherwise learn of such action and such failure results in the forfeiture by the
indemnifying party of substantial rights and defenses and (ii) will not, in any
event, relieve the indemnifying party from any obligations to any indemnified
party other than the indemnification obligation provided in paragraph (a) or (b)
above. The indemnifying party shall be entitled to appoint counsel of the
indemnifying party's choice at the indemnifying party's expense to represent the
indemnified party in any action for which indemnification is sought (in which
case the indemnifying party shall not thereafter be responsible for the fees and
expenses of any separate counsel retained by the indemnified party or parties
except as set forth below); PROVIDED, HOWEVER, that such counsel shall be
satisfactory to the indemnified party. Notwithstanding the indemnifying party's
election to appoint counsel to represent the indemnified party in an action, the
indemnified party shall have the right to employ separate counsel (including
local counsel), and the indemnifying party shall bear the reasonable fees, costs
and expenses of such separate counsel if (i) the use of counsel chosen by the
indemnifying party to represent the indemnified party would present such counsel
with a conflict of interest, (ii) the actual or potential defendants in, or
targets of, any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that there may be legal defenses available to it and/or other indemnified
parties which are different from or additional to those available to the
indemnifying party, (iii) the indemnifying party shall not have employed counsel
satisfactory to the indemnified party to represent the indemnified party within
a reasonable time after notice of the institution of such action or (iv) the
indemnifying party shall authorize the indemnified party to employ separate
counsel at the expense of the indemnifying party. An indemnifying party will
not, without the prior written consent of the indemnified parties, settle or
compromise or consent to the entry of any judgment with respect to any pending
or threatened claim, action, suit or proceeding in respect of which
indemnification or contribution may be sought hereunder (whether or not the
18
<PAGE>
indemnified parties are actual or potential parties to such claim or action)
unless such settlement, compromise or consent includes an unconditional release
of each indemnified party from all liability arising out of such claim, action,
suit or proceeding.
(d) In the event that the indemnity provided in paragraph (a) or (b)
of this Section 8 is unavailable to or insufficient to hold harmless an
indemnified party for any reason, the Company and the Underwriters severally
agree to contribute to the aggregate losses, claims, damages and liabilities
(including legal or other expenses reasonably incurred in connection with
investigating or defending same) (collectively "Losses") to which the Company
and one or more of the Underwriters may be subject in such proportion as is
appropriate to reflect the relative benefits received by the Company on the one
hand and by the Underwriters on the other from the offering of the Securities;
PROVIDED, HOWEVER, that in no case shall any Underwriter (except as may be
provided in any agreement among underwriters relating to the offering of the
Securities) be responsible for any amount in excess of the underwriting discount
or commission applicable to the Securities purchased by such Underwriter
hereunder. If the allocation provided by the immediately preceding sentence is
unavailable for any reason, the Company and the Underwriters severally shall
contribute in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of the Company on the one hand and
of the Underwriters on the other in connection with the statements or omissions
which resulted in such Losses as well as any other relevant equitable
considerations. Benefits received by the Company shall be deemed to be equal to
the total net proceeds from the offering (before deducting expenses) received by
it, and benefits received by the Underwriters shall be deemed to be equal to the
total underwriting discounts and commissions, in each case as set forth on the
cover page of the Prospectus. Relative fault shall be determined by reference
to, among other things, whether any untrue or any alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
relates to information provided by the Company on the one hand or the
Underwriters on the other, the intent of the parties and their relative
knowledge, access to information and opportunity to correct or prevent such
untrue statement or omission. The Company and the Underwriters agree that it
would not be just and equitable if contribution were determined by pro rata
allocation or any other method of allocation which does not take account of the
equitable considerations referred to above. Notwithstanding the provisions of
this paragraph (d), no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. For purposes of
this Section 8, each person who controls an Underwriter within the meaning of
either the Act or the Exchange Act and each director, officer, employee and
agent of an Underwriter shall have the same rights to contribution as such
Underwriter, and each person who controls the Company within the meaning of
either the Act or the Exchange Act, each officer of the Company who shall have
signed the Registration Statement and each director of the Company shall have
the same rights to contribution as the Company, subject in each case to the
applicable terms and conditions of this paragraph (d).
9. DEFAULT BY AN UNDERWRITER. If any one or more Underwriters shall fail
to purchase and pay for any of the Securities agreed to be purchased by such
Underwriter or Underwriters hereunder and such failure to purchase shall
constitute a default in the performance of its or their obligations under this
Agreement, the remaining Underwriters shall be obligated severally to take up
and pay for (in the respective proportions which the amount of Securities set
forth opposite their names in Schedule I hereto bears to the aggregate amount of
Securities set forth
19
<PAGE>
opposite the names of all the remaining Underwriters) the Securities which the
defaulting Underwriter or Underwriters agreed but failed to purchase; provided,
however, that in the event that the aggregate amount of Securities which the
defaulting Underwriter or Underwriters agreed but failed to purchase shall
exceed 10% of the aggregate amount of Securities set forth in Schedule I hereto,
the remaining Underwriters shall have the right to purchase all, but shall not
be under any obligation to purchase any, of the Securities, and if such
nondefaulting Underwriters do not purchase all the Securities, this Agreement
will terminate without liability to any nondefaulting Underwriter or the
Company. In the event of a default by any Underwriter as set forth in this
Section 9, the Closing Date shall be postponed for such period, not exceeding
five Business Days, as the Representatives shall determine in order that the
required changes in the Registration Statement and the Prospectus or in any
other documents or arrangements may be effected. Nothing contained in this
Agreement shall relieve any defaulting Underwriter of its liability, if any, to
the Company and any nondefaulting Underwriter for damages occasioned by its
default hereunder.
10. TERMINATION. This Agreement shall be subject to termination in the
absolute discretion of the Representatives, by notice given to the Company prior
to delivery of and payment for the Securities, if at any time prior to such time
(i) trading in the Company's Common Stock shall have been suspended by the
Commission or the Nasdaq National Market or trading in securities generally on
the New York Stock Exchange or the Nasdaq National Market shall have been
suspended or limited or minimum prices shall have been established on either of
such Exchanges, (ii) a banking moratorium shall have been declared either by
Federal or New York State authorities or (iii) there shall have occurred any
outbreak or escalation of hostilities, declaration by the United States of a
national emergency or war, or other calamity or crisis the effect of which on
financial markets is such as to make it, in the sole judgment of the
Representatives, impractical or inadvisable to proceed with the offering or
delivery of the Securities as contemplated by the Prospectus (exclusive of any
supplement thereto).
11. REPRESENTATIONS AND INDEMNITIES TO SURVIVE. The respective
agreements, representations, warranties, indemnities and other statements of the
Company or its officers and of the Underwriters set forth in or made pursuant to
this Agreement will remain in full force and effect, regardless of any
investigation made by or on behalf of any Underwriter or the Company or any of
the officers, directors, employees, agents or controlling persons referred to in
Section 8 hereof, and will survive delivery of and payment for the Securities.
The provisions of Sections 7 and 8 hereof shall survive the termination or
cancellation of this Agreement.
12. NOTICES. All communications hereunder will be in writing and
effective only on receipt, and, if sent to the Representatives, will be mailed,
delivered or telefaxed to the Salomon Smith Barney Inc. General Counsel (fax
no.: (212) 816-7912) and confirmed to the General Counsel, Salomon Smith Barney
Inc., at 388 Greenwich Street, New York, New York, 10013, Attention: General
Counsel; or, if sent to the Company, will be mailed, delivered or telefaxed to
Credence Systems Corporation, 215 Fourier Ave., Fremont, CA 94539, Attention:
Vice President - Finance and confirmed to Brobeck, Phleger & Harrison LLP, at
2200 Geng Road, Palo Alto, CA 94303, Attention: Warren T. Lazarow, Esq.
13. SUCCESSORS. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective successors and the
officers, directors, employees, agents and
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<PAGE>
controlling persons referred to in Section 8 hereof, and no other person will
have any right or obligation hereunder.
14. APPLICABLE LAW. This Agreement will be governed by and construed in
accordance with the laws of the State of New York applicable to contracts made
and to be performed within the State of New York.
15. COUNTERPARTS. This Agreement may be signed in one or more
counterparts, each of which shall constitute an original and all of which
together shall constitute one and the same agreement.
16. HEADINGS. The section headings used herein are for convenience only
and shall not affect the construction hereof.
17. DEFINITIONS. The terms which follow, when used in this Agreement,
shall have the meanings indicated.
"Act" shall mean the Securities Act of 1933, as amended, and the
rules and regulations of the Commission promulgated thereunder.
"Business Day" shall mean any day other than a Saturday, a Sunday or
a legal holiday or a day on which banking institutions or trust companies
are authorized or obligated by law to close in New York City.
"Commission" shall mean the Securities and Exchange Commission.
"Effective Date" shall mean each date and time that the Registration
Statement, any post-effective amendment or amendments thereto and any
Rule 462(b) Registration Statement became or become effective.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the Commission promulgated
thereunder.
"Execution Time" shall mean the date and time that this Agreement is
executed and delivered by the parties hereto.
"Preliminary Prospectus" shall mean any preliminary prospectus
referred to in paragraph 1(a) above and any preliminary prospectus
included in the Registration Statement at the Effective Date that omits
Rule 430A Information.
"Prospectus" shall mean the prospectus relating to the Securities
that is first filed pursuant to Rule 424(b) after the Execution Time or,
if no filing pursuant to Rule 424(b) is required, shall mean the form of
final prospectus relating to the Securities included in the Registration
Statement at the Effective Date.
"Registration Statement" shall mean the registration statement
referred to in paragraph 1(a) above, including exhibits and financial
statements, as amended at the Execution Time (or, if not effective at the
Execution Time, in the form in which it shall
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become effective) and, in the event any post-effective amendment
thereto or any Rule 462(b) Registration Statement becomes effective
prior to the Closing Date, shall also mean such registration
statement as so amended or such Rule 462(b) Registration Statement,
as the case may be. Such term shall include any Rule 430A Information
deemed to be included therein at the Effective Date as provided by
Rule 430A.
"Rule 424", "Rule 430A" and "Rule 462" refer to such rules under the
Act.
"Rule 430A Information" shall mean information with respect to the
Securities and the offering thereof permitted to be omitted from the
Registration Statement when it becomes effective pursuant to Rule 430A.
"Rule 462(b) Registration Statement" shall mean a registration
statement and any amendments thereto filed pursuant to Rule 462(b)
relating to the offering covered by the registration statement referred
to in Section 1(a) hereof.
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicate hereof, whereupon
this letter and your acceptance shall represent a binding agreement among the
Company and the several Underwriters.
Very truly yours,
Credence Systems Corporation
By:
-----------------------------
Name:
Title:
The foregoing Agreement is hereby confirmed and accepted as of the date first
above written.
Salomon Smith Barney Inc.
Credit Suisse First Boston Corporation
SG Cowen Securities Corporation
By: Salomon Smith Barney Inc.
By:
--------------------------
Name:
Title
22
<PAGE>
[FORM OF LOCK-UP AGREEMENT]
EXHIBIT A
[LETTERHEAD OF OFFICER, DIRECTOR OR MAJOR STOCKHOLDER OF
CORPORATION]
CREDENCE SYSTEMS CORPORATION
PUBLIC OFFERING OF COMMON STOCK
February ___, 2000
Salomon Smith Barney Inc.
Credit Suisse First Boston Corporation
SG Cowen Securities Corporation
c/o Salomon Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
This letter is being delivered to you in connection with the proposed
Underwriting Agreement (the "Underwriting Agreement"), between Credence Systems
Corporation, a Delaware corporation (the "Company"), and each of you relating to
an underwritten public offering of Common Stock, $.001 par value (the "Common
Stock"), of the Company.
In order to induce you and the other Underwriters to enter into the
Underwriting Agreement, the undersigned will not, without the prior written
consent of Salomon Smith Barney Inc., offer, sell, contract to sell, pledge or
otherwise dispose of, (or enter into any transaction which is designed to, or
might reasonably be expected to, result in the disposition (whether by actual
disposition or effective economic disposition due to cash settlement or
otherwise) by the Company or any affiliate of the Company or any person in
privity with the Company or any affiliate of the Company) directly or
indirectly, including the filing (or participation in the filing of) a
registration statement with the Securities and Exchange Commission in respect
of, or establish or increase a put equivalent position or liquidate or decrease
a call equivalent position within the meaning of Section 16 of the Securities
Exchange Act of 1934, as amended, and the rules and regulations of the
Securities and Exchange Commission promulgated thereunder with respect to, any
shares of capital stock of the Company or any securities convertible into or
exercisable or exchangeable for such capital stock, or publicly announce an
intention to effect any such transaction, for a period of ninety (90) days after
the date of this Agreement, other than shares of Common Stock disposed of as
bona fide gifts approved by Salomon Smith Barney Inc.
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<PAGE>
If for any reason the Underwriting Agreement shall be terminated prior to
the Closing Date (as defined in the Underwriting Agreement), the agreement set
forth above shall likewise be terminated.
Yours very truly,
By:
-----------------------------
Name:
---------------------------
Title:
--------------------------
Address:
------------------------
------------------------
------------------------
24
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SCHEDULE I
NUMBER OF UNDERWRITTEN
UNDERWRITERS SECURITIES TO BE PURCHASED
- ------------ --------------------------
Salomon Smith Barney Inc. .........................
Credit Suisse First Boston Corporation ............
SG Cowen Securities Corporation....................
---------
Total ..................................... 2,000,000
=========
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EXHIBIT 5.1
[LETTERHEAD OF BROBECK, PHLEGER & HARRISON LLP]
January 27, 2000
Salomon Smith Barney, Inc.
Credit Suisse First Boston Corporation
SG Cowen Securities Corporation
c/o Salomon Smith Barney, Inc.
388 Greenwich Street
New York, NY 10013
Re: Credence Systems Corporation Registration Statement
on Form S-3 for 2,300,000 Shares of Common Stock
Ladies and Gentlemen:
We have acted as counsel to Credence Systems Corporation, a
Delaware corporation (the "Company"), in connection with the proposed issuance
and sale by the Company of up to 2,300,000 shares of the Company's Common Stock
(the "Shares") pursuant to the Company's Registration Statement on Form S-3 (the
"Registration Statement") filed with the Securities and Exchange Commission
under the Securities Act of 1933, as amended (the "Act").
This opinion is being furnished in accordance with the
requirements of Item 16 of Form S-3 and Item 601(b)(5)(i) of Regulation S-K.
We have reviewed the Company's charter documents and the
corporate proceedings taken by the Company in connection with the issuance and
sale of the Shares. Based on such review, we are of the opinion that the Shares
have been duly authorized, and if, as and when issued in accordance with the
Registration Statement and the related prospectus (as amended and supplemented
through the date of issuance) will be legally issued, fully paid and
nonassessable.
We consent to the filing of this opinion letter as Exhibit 5.1
to the Registration Statement and to the reference to this firm under the
caption "Legal Matters" in the prospectus which is part of the Registration
Statement. In giving this consent, we do not thereby admit that we are within
the category of persons whose consent is required under Section 7 of the Act,
the rules and regulations of the Securities and Exchange Commission promulgated
thereunder, or Item 509 of Regulation S-K.
This opinion letter is rendered as of the date first written
above and we disclaim any obligation to advise you of facts, circumstances,
events or developments which hereafter may be brought to our attention and which
may alter, affect or modify the opinion expressed herein. Our opinion is
expressly limited to the matters set forth above and we render no opinion,
<PAGE>
Page 2
whether by implication or otherwise, as to any other matters relating to the
Company or the Shares.
Very truly yours,
/s/ BROBECK, PHLEGER & HARRISON
-------------------------------
BROBECK, PHLEGER & HARRISON LLP
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Summary
Consolidated Financial Data", "Selected Consolidated Financial Data" and
"Experts" in the Registration Statement (Form S-3) and related
Prospectus of Credence Systems Corporation for the registration of 2,300,000
shares of its common stock and to the incorporation by reference therein of our
report dated November 24, 1999, with respect to the consolidated financial
statements and schedule of Credence Systems Corporation included in its Annual
Report (Form 10-K) for the year ended October 31, 1999, filed with the
Securities and Exchange Commission.
/s/ ERNST & YOUNG LLP
San Jose, California
January 26, 2000
