<PAGE>
PROSPECTUS Filed pursuant to Rule 424(b)(4)
Registration No. 333-95469
Registration No. 333-31084
2,300,000 SHARES
[LOGO]
CREDENCE SYSTEMS CORPORATION
COMMON STOCK
$115.00 PER SHARE
-------------------
We are selling 2,300,000 shares of our common stock. The underwriters
named in this prospectus may purchase up to 345,000 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 February 24, 2000 was $115.375 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.
-------------------
<TABLE>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public Offering Price $115.00 $264,500,000
Underwriting Discount $ 5.75 $ 13,225,000
Proceeds to Credence (before expenses) $109.25 $251,275,000
</TABLE>
The underwriters are offering the shares subject to various conditions.
The underwriters expect to deliver the shares to purchasers on or about
March 1, 2000.
-------------------
SALOMON SMITH BARNEY CREDIT SUISSE FIRST BOSTON
SG COWEN
February 25, 2000
<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............................................................................................ 31
Management.......................................................................................... 42
Underwriters........................................................................................ 45
Legal Matters....................................................................................... 46
Experts............................................................................................. 46
Available Information............................................................................... 47
Incorporation of Certain Documents by Reference..................................................... 47
</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
$304.2 million, the total underwriters' discounts and commissions would be
$15.2 million and the total proceeds to us would be $289.0 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..................................... 2,300,000 Shares
Common stock to be outstanding
after the offering...................................... 24,816,842 Shares
Over-allotment option.................................... 345,000 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;
- 623,879 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; and
- 1,397,108 shares of common stock issuable upon conversion of our
convertible subordinated notes due September 15, 2002.
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 a
public offering price of $115.00 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
items................................ 30,354 37,703 10,693 (26,282) (2,455)
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 $ 342,353
Working capital......................... 126,395 144,623 250,336 184,606 166,727 417,202
Total assets............................ 186,593 223,042 358,141 306,189 340,420 590,895
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.............. 150,286 189,782 204,911 150,017 181,408 431,883
</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........................................................ (6,554) (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
9
<PAGE>
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.
10
<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
our mixed signal testers. Many competitors have more diverse product offerings
and 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 and several of such competitors have targeted the subcontractor
market for penetration of their systems. 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
11
<PAGE>
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 45%, 39%, 34% and 30%
of our net sales in fiscal 2000, 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
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
12
<PAGE>
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, revenue recognition, 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
13
<PAGE>
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 fiscal years 2000, 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
14
<PAGE>
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.
15
<PAGE>
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. In fiscal
2000, through February 24, 2000, our stock price ranged from a low of $44.44 to
a high of $118.31. 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.
16
<PAGE>
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."
17
<PAGE>
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 2,300,000 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 $250.5
million ($288.2 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.
18
<PAGE>
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............................................................. $ 98.88 $44.44
Second Quarter through February 24, 2000.................................. $118.31 $87.81
</TABLE>
On February 24, 2000, the reported last sale price for the common stock
as reported by the Nasdaq National Market was $115.375 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 2,300,000 shares of common
stock by us at an offering price of $115.00 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
and outstanding actual; 24,816,842 shares issued and outstanding as adjusted.......... 22 24
Additional paid-in capital............................................................... 135,221 385,694
Treasury stock, at cost.................................................................. (10,522) (10,522)
Accumulated other comprehensive loss..................................................... (661) (661)
Retained earnings........................................................................ 57,348 57,348
---------- -----------
Total stockholders' equity........................................................ 181,408 431,883
---------- -----------
Total capitalization......................................................... $278,018 $528,493
========== ===========
</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;
- 623,879 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; and
- 1,397,108 shares of common stock issuable upon conversion
of our convertible subordinated notes due September 15,
2002.
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. 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 a
public offering price of $115.00 per share, after deducting underwriting
discounts and commissions and estimated offering expenses payable by us. 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 21,088
========== ========== ========== ========== ===========
</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 $342,353
Working capital.................. 126,395 144,623 250,336 184,606 166,727 417,202
Total assets..................... 186,593 223,042 358,141 306,189 340,420 590,895
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....... 150,286 189,782 204,911 150,017 181,408 431,883
</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>
Recent Financial Results
On February 9, 2000, we publicly announced our financial results for our
first fiscal quarter ended January 31, 2000. Highlights from our first quarter
results include the following:
- Our net sales were $101.8 million, an increase of 284% from net
sales of $26.5 million in the first quarter of fiscal 1999.
- Our net income for the first quarter of fiscal 2000 was $16.9
million or $0.71 per diluted share, compared to a net loss of $6.6
million or $0.32 in the first quarter of fiscal 1999.
The following table presents certain unaudited consolidated financial
data for the three month periods ended January 31, 1999 and January 31, 2000.
The results presented below are not necessarily indicative of the results that
may occur for the full fiscal year:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED JANUARY 31,
--------------------------------
2000 1999
-------------- --------------
(UNAUDITED)
<S> <C> <C>
Net sales..................................................... $ 101,768 $ 26,490
Cost of goods sold--on net sales............................... 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
In-process research and development........................... -- --
Special charges............................................... -- --
-------------- --------------
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 taxes............................. 26,147 (10,321)
Income taxes (benefit)........................................ 9,282 (3,729)
Minority interest (benefit)................................... 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 computed per share amount
Basic..................................................... 21,952 20,418
============== ==============
Diluted................................................... 23,753 20,418
============== ==============
</TABLE>
30
<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
31
<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
32
<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.
33
<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>
34
<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.
35
<PAGE>
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.
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.
36
<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.
37
<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
38
<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
39
<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
40
<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."
41
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The directors, executive officers and key employees of our company 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, Chief Executive Officer and Director
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, as Chairman since December 1998 and as interim Chief Executive Officer
from December 1998 to July 1999. 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.
42
<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 and Company, Inc., 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
43
<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.
44
<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. ......................................................... 837,250
Credit Suisse First Boston Corporation............................................. 788,000
SG Cowen Securities Corporation.................................................... 344,750
Bear, Stearns & Co. Inc. .......................................................... 110,000
FleetBoston Robertson Stephens Inc. ............................................... 110,000
Adams, Harkness & Hill, Inc. ...................................................... 55,000
Black & Company, Inc. ............................................................. 55,000
------------------
Total.............................................................................. 2,300,000
==================
</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, for whom Salomon Smith Barney Inc., Credit Suisse First
Boston Corporation and SG Cowen Securities Corporation are acting as
representatives 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 $3.45 per share. The underwriters may allow, and
such dealers may reallow, a discount not in excess of $0.10 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.
We have granted to the underwriters an option, exercisable for 30 days
from the date of this prospectus, to purchase up to 345,000 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 was determined by negotiation between us
and the underwriters. Among the factors to be considered in determining the
public offering price were:
- 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."
45
<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.................................................... $5.75 $5.75
Total........................................................ $13,225,000 $15,208,750
</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 $800,000.
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 representatives 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 representatives 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.
46
<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 and Form 10-K/A for the fiscal year
ended October 31, 1999.
2. Our Current Reports on Form 8-K dated December 15, 1999,
January 31, 2000 and February 10, 2000.
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.
47
<PAGE>
================================================================================
2,300,000 SHARES
CREDENCE SYSTEMS CORPORATION
COMMON STOCK
[LOGO]
------------
P R O S P E C T U S
FEBRUARY 25, 2000
------------
SALOMON SMITH BARNEY
CREDIT SUISSE FIRST BOSTON
SG COWEN
================================================================================
