<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER 0-22366
CREDENCE SYSTEMS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-2878499
(STATE OR OTHER JURISDICTION) (IRS EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
215 FOURIER AVE., FREMONT, CALIFORNIA 94539
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (510) 657-7400
- --------------------------------------------------------------------------------
FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
APPLICABLE ONLY TO CORPORATE ISSUERS:
At March 1, 2000, there were approximately 24,805,159 shares of the
Registrant's common stock, $0.001 par value per share, outstanding.
<PAGE>
CREDENCE SYSTEMS CORPORATION
INDEX PAGE NO.
----- --------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements...................................... 3
Condensed Consolidated Balance Sheets..................... 3
Condensed Consolidated Statements of Operations........... 4
Condensed Consolidated Statements of Cash Flows........... 5
Notes to Condensed Consolidated Financial Statements...... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 9
PART II.OTHER INFORMATION
Item 1. Legal Proceedings......................................... 25
Item 2. Changes in Securities..................................... 25
Item 3. Defaults Upon Senior Securities........................... 25
Item 4. Submission of Matters to a Vote of Securityholders........ 25
Item 5. Other Information......................................... 25
Item 6. Exhibits and Reports on Form 8-K.......................... 25
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
CREDENCE SYSTEMS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 31, OCTOBER 31,
2000 1999(a)
---------- -----------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents........................... $ 42,914 $ 52,104
Short-term investments.............................. 25,711 39,774
Accounts receivable, net............................ 102,826 71,506
Inventories......................................... 46,530 41,218
Other current assets................................ 22,786 23,111
---------- -----------
Total current assets.............................. 240,767 227,713
Long-term investments................................. 73,484 50,005
Property and equipment, net........................... 43,706 43,063
Other assets.......................................... 18,579 19,639
---------- -----------
Total assets...................................... $376,536 $340,420
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $ 27,044 $ 23,611
Accrued liabilities................................. 32,718 31,163
Income taxes payable................................ 9,337 6,212
---------- -----------
Total current liabilities......................... 69,099 60,986
Convertible subordinated notes........................ 96,610 96,610
Other liabilities..................................... 1,130 1,134
Minority interest..................................... 286 282
Stockholders' equity.................................. 209,411 181,408
---------- -----------
Total liabilities and stockholders' equity........ $376,536 $340,420
========== ===========
</TABLE>
See accompanying notes.
a) Derived from the audited consolidated balance sheet included in the
Company's Form 10-K for the year ended October 31, 1999.
3
<PAGE>
CREDENCE SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JANUARY 31,
--------------------
2000 1999
-------- --------
<S> <C> <C>
Net sales ............................................. $101,768 $ 26,490
Cost of goods sold .................................... 43,023 15,276
-------- --------
Gross margin .......................................... 58,745 11,214
Operating expenses:
Research and development ........................... 13,937 9,003
Selling, general and administrative ................ 19,344 12,231
-------- --------
Total operating expenses ....................... 33,281 21,234
-------- --------
Operating income (loss) ............................... 25,464 (10,020)
Interest and other income (expenses), net ............. 683 (301)
-------- --------
Income (loss) before income tax provision (benefit) ... 26,147 (10,321)
Income tax provision (benefit) ........................ 9,282 (3,729)
Minority interest ..................................... 3 (38)
-------- --------
Net income (loss) ..................................... $ 16,862 $ (6,554)
======== ========
Net income (loss) per share
Basic ............................................. $ 0.77 ($ 0.32)
======== ========
Diluted ........................................... $ 0.71 ($ 0.32)
======== ========
Number of shares used in computing per share amount
Basic ............................................. 21,952 20,418
======== ========
Diluted ........................................... 23,753 20,418
======== ========
</TABLE>
See accompanying notes.
4
<PAGE>
CREDENCE SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JANUARY 31,
--------------------
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................................ $ 16,862 $ (6,554)
Adjustments to reconcile net income (loss) to net cash used in operating activity:
Depreciation and amortization ................................................ 6,350 5,301
(Gain) loss on disposal of property and equipment ............................ (392) 424
Minority interest ............................................................ 3 (38)
Changes in operating assets and liabilities:
Accounts receivable, inventories and other current assets ................ (37,418) 10,113
Accounts payable, accrued liabilities and income taxes payable ........... 13,833 (10,505)
-------- --------
Net cash used in operating activities ................................. (762) (1,259)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale securities ....................................... (23,727) (7,731)
Maturities of available-for-sale short-term securities ........................... 5,732 17,739
Sales of available-for-sale securities ........................................... 8,579 2,690
Acquisition of property and equipment ............................................ (4,978) (2,086)
Other assets ..................................................................... (125) (682)
Proceeds from sale of property and equipment ..................................... 616 20
Long-term notes/deposits ......................................................... 57 --
-------- --------
Net cash provided by (used in) investing activities ...................... (13,846) 9,950
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common & treasury stock .............................................. 5,417 1,280
Other ............................................................................ 1 (19)
-------- --------
Net cash provided by financing activities ................................ 5,418 1,261
-------- --------
Net increase (decrease) in cash and cash equivalents ................................ (9,190) 9,952
Cash and cash equivalents at beginning of period .................................... 52,104 48,391
-------- --------
Cash and cash equivalents at end of period .......................................... $ 42,914 $ 58,343
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid .................................................................... $ -- $ --
Income taxes paid (refunded) ..................................................... $ 335 $(10,742)
NONCASH INVESTING ACTIVITIES:
Net transfers of inventory to property and equipment ............................. $ 644 $ 1,229
NONCASH FINANCING ACTIVITIES:
Income tax benefit from stock option exercises ................................... $ 5,724 $ --
</TABLE>
See accompanying notes.
5
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. QUARTERLY FINANCIAL STATEMENTS
The condensed consolidated financial statements and related notes for
the three months ended January 31, 2000 and 1999 are unaudited but include all
adjustments (consisting solely of normal recurring adjustments) which are, in
the opinion of management, necessary for a fair presentation of the financial
position and results of operations of the Company for the interim periods. The
results of operations for the three months ended January 31, 2000 and 1999 were
not necessarily indicative of the operating results to be expected for the full
fiscal year. The information included in this report should be read in
conjunction with the Company's audited consolidated financial statements and
notes thereto for the fiscal year ended October 31, 1999 included in the
Company's most recent Annual Report on Form 10-K and the additional risk factors
contained herein and therein, including, without limitation, risks relating to
fluctuations in our quarterly net sales and operating results, limited systems
sales; backlog, cyclicality of semiconductor industry, management of
fluctuations in our operating results, expansion of our product lines, limited
sources of supply; reliance on our subcontractors, highly competitive industry,
rapid technological change, importance of timely product introduction, customer
concentration; lengthy sales cycle, risks associated with acquisitions, changes
in financial accounting standards and accounting estimates, dependence on key
personnel, transition in our executive management, international sales,
proprietary rights, future capital needs; leverage, year 2000 readiness
disclosure, volatility of our stock price and effects of certain anti-takeover
provisions, as set forth in this Report. Any party interested in reviewing a
free copy of the Form 10-K or the Company's other publicly available documents
should write to the Chief Financial Officer of the Company.
USE OF ESTIMATES - The preparation of the accompanying unaudited
consolidated condensed financial statements requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements. Actual results could differ from those estimates.
2. INVENTORIES
Inventories are stated at the lower of standard cost (which approximates
first-in, first-out cost) or market. Inventories consist of the following (in
thousands):
<TABLE>
<CAPTION>
JANUARY 31, OCTOBER 31,
2000 1999
----------- ----------
(unaudited)
<S> <C> <C>
Raw materials ................ $18,431 $13,772
Work-in-process .............. 19,238 21,281
Finished goods ............... 8,861 6,165
------- -------
$46,530 $41,218
======= =======
</TABLE>
3. NET INCOME (LOSS) PER SHARE
Net income (loss) per basic share is based upon the weighted average
number of common shares outstanding during the period. Net income (loss) per
diluted share is based upon the weighted average number of common and dilutive
potential common shares outstanding during the period. The Company's convertible
subordinated notes are potential dilutive common shares and, accordingly, are
included in the fiscal 2000 calculation of net income (loss) per diluted share.
For the fiscal 1999 calculation the convertible subordinated notes are not
dilutive potential common shares and, accordingly, are excluded from the
calculation of net income (loss) per diluted share. Options to purchase
approximately 2,926,021 shares at an average price of $30.14 per share were
outstanding at January 31, 2000. Options to purchase 2,545,000 shares at an
average price of $16.62 per share were outstanding at January 31, 1999 but were
not included in the computation of diluted net income because the options'
exercise price was greater than the average market price of the common shares
and, therefore, the effect would be antidilutive. The following table sets forth
the computation of basic and dilutive earnings per share (in thousands), except
per share amounts:
6
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JANUARY 31,
------------------
2000 1999
------- --------
<S> <C> <C>
Numerator:
Numerator for basic and diluted net income (loss) per share-
net income (loss) .......................................... $ 16,862 $ (6,554)
-------- --------
Denominator:
Denominator for basic net income (loss) per share-
weighted-average shares .................................... 21,952 20,418
Effect of dilutive securities-employee stock options .......... 1,557 --
Effect of dilutive securities-subordinated convertible notes .. 244 --
Denominator for diluted earnings per share-adjusted
weighted-average shares and assumed conversions ............... 23,753 20,418
------- --------
Basic net income (loss) per share .......................... $ 0.77 $ ( 0.32)
======= ========
Diluted net income (loss) per share ........................ $ 0.71 $ ( 0.32)
======= ========
</TABLE>
4. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," (SFAS 133), which is required to be adopted
in fiscal years beginning after June 15, 2000. The Statement permits early
adoption as of the beginning of any fiscal quarter after its issuance. The
Company is currently evaluating whether to adopt the new statement earlier than
is required. SFAS 133 will require the Company to recognize all derivatives on
the balance sheet at fair value. Derivatives that are not hedges must be
adjusted to fair value through earnings. If the derivative is a hedge, depending
on the nature of the hedge, changes in the fair value of derivatives will either
be offset against the change in the fair value of the hedged assets, liabilities
or firm commitments through earnings, or recognized in other comprehensive
income until the hedged item is recognized in earnings. The ineffective portion
of a derivative's change in fair value will be immediately recognized in
earnings. Adoption of SFAS 133 is not expected to have a material impact on the
Company's financial condition or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101 ("SAB 101") "Revenue Recognition in Financial
Statements". SAB 101 provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements. All registrants are expected to
apply the accounting and disclosure described in SAB 101. Because the Company
has complied with generally accepted accounting principles for its historical
revenue recognition, the change if any, in its revenue policy resulting from SAB
101 will be reported as a change in accounting principle. The Company is
assessing the impact of SAB 101 on its financial statements.
5. CONTINGENCIES
The Company is involved in various claims arising in the ordinary course
of business, none of which, in the opinion of management, if determined
adversely against the Company, will have a material adverse effect on the
Company's business, financial condition or results of operations.
6. SPECIAL CHARGES
At January 31, 1999, approximately $1.5 million in accrued liabilities
related to special charges recorded in 1998 remained on the Company's balance
sheet, primarily representing rent on excess facilities. The cash expenditures
associated with these obligations occurred in fiscal 1999. Cash expenditures,
associated with the
7
<PAGE>
special charges, during the first fiscal quarter of 1999 were approximately $3.0
million, relating primarily to supplier commitments and excess facilities.
7. ACCUMULATED OTHER COMPREHENSIVE LOSS
Accumulated other comprehensive loss and changes thereto consist of:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
FISCAL QUARTER OCTOBER 31,
ENDED JANUARY ------------------
31, 2000 1999 1998
-------------- ------------------
<S> <C> <C> <C>
Beginning balance gain (loss) ...... ($661) ($241) $--
Unrealized gain (loss) on available-
for-sale securities ................ (376) (517) --
Currency translation adjustment .... 42 97 (241)
----- ----- -----
Total .............................. ($995) ($661) ($241)
===== ===== =====
</TABLE>
8. SUBSEQUENT EVENTS
On February 25, 2000, the Company issued an aggregate of 2,645,000
shares of its common stock in a public offering at $115 per share. The net
proceeds to the Company after expenses was approximately $288 million.
8
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion may contain predictions, estimates and other
forward-looking statements that involve a number of risks and uncertainties.
While this discussion represents the Company's current judgment on the future
direction of the business, such risks and uncertainties could cause actual
results to differ materially from any future performance suggested herein.
Factors that could cause actual results to differ are identified throughout the
discussion below, as well as in the section entitled "Risk Factors" below, and
elsewhere in this report. The Company undertakes no obligation to publicly
revise any forward-looking statements to reflect events or circumstances after
the date hereof or to reflect the occurrence of unanticipated events.
The following table sets forth items from the Condensed Consolidated
Statements of Operations as a percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JANUARY 31,
---------------------
2000 1999
----- -----
UNAUDITED
-----------
<S> <C> <C>
Net sales ......................................... 100.0% 100.0%
Cost of goods sold ................................ 42.3 57.7
----- -----
Gross margin ...................................... 57.7 42.3
Operating expenses
Research and development ....................... 13.7 34.0
Selling, general, and administrative ........... 19.0 46.2
----- -----
Operating expenses .......................... 32.7 80.2
----- -----
Operating income (loss) ........................... 25.0 (37.9)
Interest and other income (expenses), net ......... 0.7 (1.1)
----- -----
Income (loss) before income tax provision (benefit) 25.7 (38.9)
Income tax provision (benefit) .................... 9.1 (14.1)
----- -----
Net income (loss) ................................. 16.6% (24.8%)
===== =====
</TABLE>
RESULTS OF OPERATIONS
NET SALES
Net sales consist of revenues from systems sales, spare parts sales,
maintenance contracts and software sales. Net sales were $101.8 million for the
first quarter of fiscal 2000, representing an increase of 284% from the net
sales of $26.5 million in the comparable period of fiscal 1999. During fiscal
1999 and into the first quarter of fiscal 2000, 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 and into the first quarter of fiscal 2000. 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.
9
<PAGE>
International net sales accounted for approximately 78%, 64% and 69% of
total net sales in the first fiscal quarter of 2000 and fiscal years 1999 and
1998, respectively. Our net sales to the Asia Pacific region accounted for
approximately 70%, 55% and 60% of total net sales in the first fiscal quarter of
2000 and fiscal years 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, which could materially adversely affect demand for
our products.
Our net sales by product line in the first fiscal quarter of 2000 and
fiscal years 1999 and 1998 consisted of:
FISCAL YEARS ENDED
FISCAL QUARTER OCTOBER 31,
ENDED JANUARY ---------------------------
31, 2000 1999 1998
------------------- ------------ ------------
Mixed-Signal 67% 65% 66%
Logic 16 16 18
Memory 9 7 4
Service and software 8 12 12
------------------- ------------ ------------
Total 100% 100% 100%
=================== ============ ============
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 the first fiscal quarter of 2000 and fiscal years
1999 and 1998, representing less than 4% of our net sales in each period.
GROSS MARGIN
The Company's gross margin has been and will continue to be affected by a
variety of factors, including manufacturing efficiencies, pricing by competitors
or suppliers, new product introductions, product sales mix, production volume,
customization and reconfiguration of systems, international and domestic sales
mix and field service margins. Our gross margin was 57.7% for the first quarter
of fiscal 2000, compared with 42.3% for the first quarter of fiscal 1999 and
51.7% for all of fiscal 1999. The increase in gross margin as a percent of sales
was due to significantly lower average selling prices in fiscal 1999 as well as
higher costs caused by under-absorption of manufacturing expenses and product
development delays.
RESEARCH AND DEVELOPMENT
Research and development ("R&D") expenses were $13.9 million in the first
quarter of fiscal 2000, an increase of $4.9 million or 54.8% over the same
period of fiscal 1999. The lower level of spending in 1999 reflects cutbacks in
project expenses as well as savings generated by a two-week plant shutdown in
the first quarter of fiscal 1999. These project expense cutbacks were initiated
in fiscal 1998 while the Company was reacting to a severe downturn in the
industry. As a percentage of net sales, R&D expenses were 13.7% for the first
quarter of fiscal 2000, a decrease from 34.0% in the first quarter of fiscal
1999. The decrease in these expenses as a percentage of net sales is
attributable primarily to the significant lower net sales in the first quarter
of fiscal 1999 as compared with the comparable period of fiscal 2000. The
Company currently intends to continue to invest significant resources in the
development of new products and enhancements for the foreseeable future. These
investments typically include hiring additional staff as well as contracting
specific projects to outside parties. Accordingly, the Company expects these
expenses to increase in absolute dollars for the remainder of fiscal 2000.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses ("SG&A") were $19.3 million
in the first quarter of fiscal 2000, representing a $7.1 million or 58.2%
increase from the comparable period of fiscal 1999. The lower spending in 1999
was primarily due to reduced sales commissions on lower sales volume and reduced
payroll
10
<PAGE>
related expenses due to reduced headcount and due to the savings generated by a
two-week plant shutdown in the first quarter of fiscal 1999. As a percentage of
net sales, SG&A expenses were 19.0% for the first quarter of fiscal 2000,
compared with 46.2% for the corresponding period in fiscal 1999. This decrease
as a percentage of net sales is primarily due to the increase in net sales. The
Company expects SG&A expenses for the remainder of fiscal 1999 to increase in
absolute dollars as we hire additional staff and incur additional expense to
support the current business activity.
INTEREST AND OTHER INCOME EXPENSES, NET
The Company generated net interest and other income (expense) of $0.7
million for the first quarter of fiscal 2000, as compared to ($0.3) million for
the first quarter of fiscal 1999. The improvement is primarily due to lower
interest expense caused by lower average debt balances.
INCOME TAXES
The Company's estimated effective tax rate for the first quarter of fiscal
2000 was 35.5%, compared to 36% in the first three months of fiscal 1999. The
tax rate is computed based on projected fiscal year book income or loss.
Realization of the net deferred tax assets at January 31, 1999, is dependent on
the Company's 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
the Company will meet its 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.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used by operating activities was $0.8 million and $1.3 million for
the three months ended January 31, 2000 and 1999, respectively. Net cash flows
used in operating activities for the first quarter of 2000 was primarily due to
an increase in working capital amounts of $23.6 million, offset by net income
before depreciation and amortization of $23.2 million. The increased requirement
for working capital reflects the Company's current higher business activity
levels in fiscal 2000.
Investing activities used net cash flows of approximately $13.8 million and
provided $10.0 million in the three months ended January 31, 2000 and 1999,
respectively. For fiscal 2000, approximately $9.4 million was for net purchases
of available-for-sale securities and $5.0 million was for purchases of property
and equipment to support the Company's business.
Net cash flows from financing activities provided $5.4 million and $1.3
million for the three months ended January 31, 2000 and 1999, respectively.
These net cash flows represent the issuance of common stock through the
Company's employee equity plans.
As of January 31, 2000, the Company had working capital of approximately
$171.7 million, including cash and short-term investments of $68.6 million, and
accounts receivable and inventories representing $149.4 million. The Company
expects its accounts receivable to continue to represent a significant portion
of working capital. The Company believes that because of the relatively long
manufacturing cycles of many of its testers and the new products it has and
plans to continue to introduce, investments in inventories will also continue to
represent a significant portion of working capital. Significant investments in
accounts receivable and inventories may subject the Company to increased risks
which could materially adversely affect the Company's business, financial
condition and results of operations. Total current liabilities of $69.1 million
as of January 31, 2000 increased from $61.0 million as of October 31, 1999.
11
<PAGE>
The Company's principal sources of liquidity as of January 31, 2000
consisted of approximately $42.9 million of cash and cash equivalents,
short-term investments of $25.7 million and $20.0 million available under the
Company's unsecured working capital line of credit expiring on July 22, 2000. In
addition, the Company has $73.5 million of available-for-sale securities,
classified as long-term at January 31, 2000. No amounts were outstanding under
the unsecured line of credit.
On February 25, 2000, the Company issued an aggregate of 2,645,000 shares
of its common stock in a public offering at $115 per share. The net proceeds to
the Company after expenses was approximately $288 million.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," (SFAS 133), which is required to be adopted
in fiscal years beginning after June 15, 2000. The Statement permits early
adoption as of the beginning of any fiscal quarter after its issuance. The
Company is currently evaluating whether to adopt the new statement earlier than
is required. SFAS 133 will require the Company to recognize all derivatives on
the balance sheet at fair value. Derivatives that are not hedges must be
adjusted to fair value through earnings. If the derivative is a hedge, depending
on the nature of the hedge, changes in the fair value of derivatives will either
be offset against the change in the fair value of the hedged assets, liabilities
or firm commitments through earnings, or recognized in other comprehensive
income until the hedged item is recognized in earnings. The ineffective portion
of a derivative's change in fair value will be immediately recognized in
earnings. Adoption of SFAS 133 is not expected to have a material impact on the
Company's financial condition or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101 ("SAB 101") "Revenue Recognition in Financial
Statements". SAB 101 provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements. All registrants are expected to
apply the accounting and disclosure described in SAB 101. Because the Company
has complied with generally accepted accounting principles for its historical
revenue recognition, the change if any, in its revenue policy resulting from SAB
101 will be reported as a change in accounting principle. The Company is
assessing the impact of SAB 101 on its financial statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's investment portfolio and long-term debt obligations.
The Company maintains a strict investment policy which ensures the safety and
preservation of its invested funds by limiting default risk, market risk, and
reinvestment risk. The Company's investments consists primarily of commercial
paper, medium term notes, asset backed securities, US. Treasury notes and
obligations of U.S. Government agencies, bank certificates of deposit, auction
rate preferred securities, corporate bonds and municipal bonds. The table below
presents notional amounts and related weighted-average interest rates by year of
maturity for the Company's investment portfolio and long-term debt obligations
(in thousands, except percent amounts):
12
<PAGE>
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004 Thereafter
---------- ----------- ---------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Cash Equivalents
Fixed rate $ 42,914 - - - - -
Average rate 5.65% - - - - -
Short term investments
Fixed rate $ 23,209 $ 2,502 - - - -
Average rate 6.35% 6.16% - - - -
Long term investments
Fixed rate $ - $ 42,591 $ 15,100 $ 6,541 $ 4,003 $ 5,249
Average rate - 6.20% 6.41% 5.97% 7.28% 6.28%
------------ ------------ ----------- ----------- ----------- -------------
Total investment securities $66,123 $ 45,093 $ 15,100 $ 6,541 $ 4,003 $ 5,249
Average rate 5.90% 6.20% 6.41% 5.97% 7.28% 6.28%
Long term debt - Fixed rate - - $96,610 - - -
Average rate - - 5.25% - - -
</TABLE>
The Company mitigates default risk by attempting to invest in high credit
quality securities and by constantly positioning its portfolio to respond
appropriately to a significant reduction in a credit rating of any investment
issuer or guarantor. The portfolio includes only marketable securities with
active secondary or resale markets to ensure portfolio liquidity and maintains a
prudent amount of diversification.
The Company has no cash flow exposure due to rate changes for its $96.6
million Convertible Subordinated Notes. The Company has a $20 million line of
credit under which it can borrow either at the bank's prime rate or the LIBOR
rate. As of January 31, 2000, the Company had no borrowings under its line of
credit.
13
<PAGE>
RISK FACTORS
OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY WHICH MAY ADVERSELY AFFECT OUR
STOCK PRICE
<TABLE>
<CAPTION>
1997 1998 1999 2000
Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales 43 51 69 82 75 37 22 26 38 52 80 102
Net Income (loss) 3 (1) 7 9 9 (34) (11) (7) (5) 3 8 17
</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;
- changes in overhead absorption levels due to changes in the number of
systems manufactured, the timing and shipment of orders, availability
of components including custom 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;
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- natural disasters, political and economic instability, currency
fluctuations, 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 expansions.
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 operations 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 in the future.
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
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<PAGE>
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 require, or they will order 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 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 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
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
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<PAGE>
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 these 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 these new product lines. We also cannot be certain that we can
manufacture these systems per the time and quantity required by our 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.
17
<PAGE>
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
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.
18
<PAGE>
Because we must make new product development commitments well in advance
of sales, new product decisions must anticipate both future demand and the
availability of technology to satisfy that demand. We cannot be certain that we
will be successful in selecting, developing, manufacturing and marketing new
hardware and software products or enhancements and related software tools. Our
inability to introduce new products and related software tools that contribute
significantly to net sales, gross margins and net income would have a material
adverse effect on our business, financial condition and results of operations.
New product or technology introductions by our competitors could cause a decline
in sales or loss of market acceptance of our existing products. In addition, if
we introduce new products, existing customers may curtail purchases of the older
products and delay new product purchases. Any unanticipated decline in demand
for our hardware or software products could have a materially adverse 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 customer could make it substantially more difficult
for us to sell testers to that customer 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 approximately 46%, 39%,
34% and 30% of our net sales in the first quarter of fiscal 2000 and fiscal
years 1999, 1998, and 1997, respectively. Our agreement with Spirox can be
terminated for any reason on 90 days prior written notice. The semiconductor
industry is highly concentrated, and a small number of
19
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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 end user 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 losses, the potential for reductions in orders
by assembly and tester service companies which that customer may utilize or
reductions due to continuing or other technical, manufacturing or reliability
problems with our products or continued slow-downs in the semiconductor industry
or in other industries that manufacture products utilizing semiconductors. Our
ability to maintain or increase sales levels will depend upon:
- 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.
20
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CHANGES TO FINANCIAL ACCOUNTING STANDARDS MAY EFFECT 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, revenue
recognition, 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 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 78%, 64%, 69% and 70% of
our total net sales for the first quarter of fiscal 2000 and 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;
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- 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
material adverse effect on our business, financial condition or results of
operations. Net sales to the Asia Pacific region accounted for approximately
70%, 55%, 60% and 66% of our total net sales in the first quarter of fiscal 2000
and fiscal years 1999, 1998 and 1997, respectively, 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 distributors, Spirox Corporation, is a
Taiwanese based company. 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
22
<PAGE>
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.
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 January 31, 2000 of approximately 32%. 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 1999, the price of our common
stock ranged from a high of $49.88 to a low of $14.38. In fiscal 2000 through
March 7, 2000, the price of our common stock ranged from a high of $140.88 to a
low of $44.44. The market price of our common stock is likely to continue to
fluctuate significantly in the future, including fluctuations unrelated to our
performance.
23
<PAGE>
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.
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 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 to acquire us and may adversely
affect the voting and other rights of holders of our common stock.
24
<PAGE>
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See Exhibit Index on page 27.
(b) The Company filed a report on Form 8-K on February 9, 2000 announcing
the financial results for its first quarter ended January 31, 2000.
(c) The Company filed a report on Form 8-K on January 31, 2000 reporting
the filing of a registration statement for a proposed follow-on
offering of common stock.
(c) The Company filed a report on Form 8-K on December 15, 1999 reporting
its financial results for the fourth fiscal quarter and fiscal year
ended October 31, 1999.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant duly caused this Report to be signed on its behalf by
the undersigned thereunto duly authorized.
CREDENCE SYSTEMS CORPORATION
------------------------------------
(Registrant)
March 9, 2000 /S/ DENNIS P. WOLF
------------------------ ------------------------------------
Date Dennis P. Wolf
Dennis P. Wolf, Executive Vice President
Chief Financial Officer and Secretary
26
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER
- -------
27.1 EDGAR Financial Data Schedule
27
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF OPERATIONS, THE CONSOLIDATED BALANCE SHEETS, AND THE
ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-2000
<PERIOD-START> NOV-01-1999
<PERIOD-END> JAN-31-2000
<CASH> 42,914
<SECURITIES> 99,195
<RECEIVABLES> 102,826
<ALLOWANCES> 3,356
<INVENTORY> 46,530
<CURRENT-ASSETS> 240,767
<PP&E> 114,500
<DEPRECIATION> 70,794
<TOTAL-ASSETS> 376,536
<CURRENT-LIABILITIES> 69,099
<BONDS> 97,740
0
0
<COMMON> 23
<OTHER-SE> 209,388
<TOTAL-LIABILITY-AND-EQUITY> 376,536
<SALES> 101,768
<TOTAL-REVENUES> 101,768
<CGS> 43,023
<TOTAL-COSTS> 43,023
<OTHER-EXPENSES> 33,281
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,394
<INCOME-PRETAX> 26,147
<INCOME-TAX> 9,282
<INCOME-CONTINUING> 16,862
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,862
<EPS-BASIC> 0.77
<EPS-DILUTED> 0.71
</TABLE>
