<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 24, 1996
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
INTEGRATED MEASUREMENT SYSTEMS, INC.
(Exact name of registrant as specified in charter)
<TABLE>
<S> <C> <C>
OREGON 3825 93-0840631
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
9525 S.W. GEMINI DRIVE, BEAVERTON, OREGON 97008
(503) 626-7117
(Address, including zip code and telephone number,
including area code, of registrant's principal executive offices)
KEITH L. BARNES
PRESIDENT AND CHIEF EXECUTIVE OFFICER
INTEGRATED MEASUREMENT SYSTEMS, INC.
9525 S.W. GEMINI DRIVE, BEAVERTON, OREGON 97008
(503) 626-7117
(Name, address, including zip code and telephone number,
including area code, of agent for service)
--------------------------
WITH COPIES TO:
<TABLE>
<S> <C>
WILLIAM C. CAMPBELL, Esq. MARK A. BERTELSEN, Esq.
STEPHEN M. GOING, Esq. RICHARD J. HART, Esq.
Ater Wynne Hewitt Dodson & Skerritt, LLP BETSEY SUE, Esq.
222 S.W. Columbia, Suite 1800 Wilson Sonsini Goodrich & Rosati
Portland, Oregon 97201 Professional Corporation
(503) 226-1191 650 Page Mill Road
Palo Alto, California 94304
(415) 493-9300
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
--------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM
SECURITIES AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED (1) SHARE (2) PRICE (1)(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, $.01 par
value........................ 2,900,000 shares $26.50 $76,850,000 $26,500
</TABLE>
(1) Includes 375,000 shares subject to the Underwriters' over-allotment option.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) based on the average of the high and low prices
reported on the Nasdaq National Market on May 22, 1996.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INTEGRATED MEASUREMENT SYSTEMS, INC.
CROSS-REFERENCE SHEET PURSUANT TO REGULATION S-K, ITEM 501(B),
SHOWING LOCATION OF INFORMATION REQUIRED BY FORM S-1
<TABLE>
<CAPTION>
FORM S-1 ITEM NUMBER AND CAPTION LOCATION OR CAPTION IN PROSPECTUS
- ---------------------------------------------------------------- -----------------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus...................... Forepart of the Registration Statement; Outside Front
Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus.......................................... Inside Front and Outside Back Cover Pages; Additional
Information
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges........................... Prospectus Summary; The Company; Risk Factors
4. Use of Proceeds...................................... Use of Proceeds
5. Determination of Offering Price...................... Outside Front Cover Page; Underwriters
6. Dilution............................................. *
7. Selling Security Holders............................. Prospectus Summary; Principal and Selling
Shareholders
8. Plan of Distribution................................. Outside Front Cover Page; Underwriters
9. Description of Securities to Be Registered........... Description of Capital Stock
10. Interests of Named Experts and Counsel............... *
11. Information with Respect to the Registrant........... Outside Front Cover Page; Prospectus Summary; The
Company; Risk Factors; Dividend Policy; Price Range
of Common Stock; Selected Financial Data;
Management's Discussion and Analysis of Financial
Condition and Results of Operations; Business;
Management; Certain Transactions; Principal and
Selling Shareholders; Description of Capital Stock;
Shares Eligible for Future Sale; Financial
Statements
12. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities...................... *
</TABLE>
- ------------------------
* Not applicable or answer is in the negative.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS (SUBJECT TO COMPLETION)
ISSUED MAY 24, 1996
2,525,000 SHARES
[LOGO]
INTEGRATED MEASUREMENT SYSTEMS, INC.
COMMON STOCK
---------------------
OF THE 2,525,000 SHARES OF COMMON STOCK OFFERED HEREBY, 1,130,000 SHARES ARE
BEING SOLD BY THE COMPANY AND 1,395,000 SHARES ARE BEING SOLD BY THE SELLING
SHAREHOLDERS. SEE "PRINCIPAL AND SELLING SHAREHOLDERS." THE COMPANY WILL NOT
RECEIVE ANY PART OF THE PROCEEDS FROM THE SALE OF SHARES BY THE SELLING
SHAREHOLDERS. THE COMPANY'S COMMON STOCK IS TRADED IN THE OVER-THE-COUNTER
MARKET UNDER THE NASDAQ NATIONAL MARKET SYMBOL "IMSC." THE LAST REPORTED
SALE PRICE FOR THE COMPANY'S COMMON STOCK ON MAY 23, 1996, AS
REPORTED ON THE NASDAQ NATIONAL MARKET, WAS $26 PER SHARE. SEE
"PRICE RANGE OF COMMON STOCK."
------------------------------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
COMMENCING ON PAGE 6 HEREOF.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
PRICE $ A SHARE
------------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS (1) COMPANY (2) SHAREHOLDERS
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
PER SHARE........................... $ $ $ $
TOTAL (3)........................... $ $ $ $
</TABLE>
- ------------------------------
(1) THE COMPANY AND THE SELLING SHAREHOLDERS HAVE AGREED TO INDEMNIFY THE
UNDERWRITERS AGAINST CERTAIN LIABILITIES, INCLUDING LIABILITIES UNDER THE
SECURITIES ACT OF 1933, AS AMENDED.
(2) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY ESTIMATED AT $350,000.
(3) THE COMPANY AND A SELLING SHAREHOLDER HAVE GRANTED TO THE UNDERWRITERS AN
OPTION, EXERCISABLE WITHIN 30 DAYS OF THE DATE HEREOF, TO PURCHASE UP TO AN
AGGREGATE OF 375,000 ADDITIONAL SHARES AT THE PRICE TO PUBLIC LESS
UNDERWRITING DISCOUNTS AND COMMISSIONS FOR THE PURPOSE OF COVERING
OVER-ALLOTMENTS, IF ANY. IF THE UNDERWRITERS EXERCISE SUCH OPTION IN FULL,
THE TOTAL PRICE TO PUBLIC, UNDERWRITING DISCOUNTS AND COMMISSIONS, PROCEEDS
TO COMPANY AND PROCEEDS TO SELLING SHAREHOLDERS WILL BE $ ,
$ , $ AND $ , RESPECTIVELY. SEE
"UNDERWRITERS."
------------------------------
THE SHARES ARE OFFERED, SUBJECT TO PRIOR SALE, WHEN, AS AND IF ACCEPTED BY
THE UNDERWRITERS NAMED HEREIN AND SUBJECT TO APPROVAL OF CERTAIN LEGAL MATTERS
BY WILSON SONSINI GOODRICH & ROSATI, COUNSEL FOR THE UNDERWRITERS. IT IS
EXPECTED THAT DELIVERY OF THE SHARES WILL BE MADE ON OR ABOUT , 1996 AT
THE OFFICE OF MORGAN STANLEY & CO. INCORPORATED, NEW YORK, N.Y., AGAINST PAYMENT
THEREFOR IN IMMEDIATELY AVAILABLE FUNDS.
------------------------
MORGAN STANLEY & CO.
INCORPORATED
COWEN & COMPANY
SOUNDVIEW FINANCIAL GROUP, INC.
, 1996
<PAGE>
INTEGRATED MEASUREMENT SYSTEMS
TEST STATIONS AND TEST SOFTWARE
PROVIDE ENGINEERING TEST SOLUTIONS
THE ATS FT TEST STATION
VERIFIES
AND CHARACTERIZES COMPLEX
DIGITAL ELECTRONIC
DEVICES.
[PHOTOS/ART]
[INSIDE FRONT COVER PAGE]
(1) ATS FT STATION PICTURE
The picture portrays two engineers reviewing test results on IMS Flexible
Timing Test Station (ATS FT). The picture shows the test station with the test
fixture, that contains the device-under-test, on top. The CRT shows the test
results in graphic form.
(2) DANTES VIRTUAL TEST SCHEMATIC
The Schematic illustrates several Virtual Test Software functions. It
depicts the test capture and documentation capabilities of Dantes, as well as
test simulation and test fixture design features.
DANTES VIRTUAL TEST SOFTWARE SIMULATES TEST, FACILITATES TEST FIXTURE DESIGN AND
DOCUMENTS THE TEST PROCESS BEFORE PROTOTYPE PRODUCTION.
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE COMMON STOCK OF THE COMPANY ON THE NASDAQ
NATIONAL MARKET IN ACCORDANCE WITH RULE 10b-6A UNDER THE SECURITIES EXCHANGE ACT
OF 1934. SEE "UNDERWRITERS."
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE
IN THIS PROSPECTUS.
THE COMPANY
Integrated Measurement Systems, Inc. ("IMS" or the "Company") designs,
manufactures, markets and services a family of versatile, high-performance
engineering Test Stations and test software used to test and measure complex
electronic devices. In addition, the Company develops, markets and supports a
line of Virtual Test Software that permits design and test engineers to
accelerate test program development and to conduct simulated tests of electronic
device designs prior to the fabrication of a prototype of the actual device. The
Company's products enable its customers to shorten time-to-market, enhance
accuracy of design, reduce both the time required to test and the cost of
testing the customers' devices and provide reliable and prompt feedback to both
design and test engineers. Customers use the Company's products to test complex
digital and mixed-signal devices such as microprocessors, microcontrollers,
application specific integrated circuits and multi-chip modules. Successful
implementation of the Company's strategy to bridge the gap between electronic
design automation ("EDA") and automated test equipment ("ATE") will require
continuing product innovation, growth in market share, creating and maintaining
strategic relationships, maintaining a high level of customer service and
expanding product distribution.
The Company markets and supports its products worldwide through a network of
direct sales force personnel, independent distributors and dedicated sales
agents employed by Cadence Design Systems, Inc. ("Cadence"). The Company has
sold over 900 Test Stations to customers in the semiconductor, aerospace,
automotive, computer, consumer electronics, datacommunications, medical
electronics, network computing, telecommunications and other industries. Based
on 1995 net sales, the Company's top five customers are: Intel, Tokyo Electron
Limited (the Company's distributor in Japan), Hughes Microelectronics, Lucky
Goldstar and Samsung. These five customers represented 53% of net sales for
1995, while the balance of net sales came from customers individually providing
less than 3% of net sales.
The Company completed its initial public offering of Common Stock on July
21, 1995 at a price of $11 per share. The Company is currently a majority-owned
subsidiary of Cadence and, upon completion of this Offering, Cadence will
continue to own approximately 30% of the Company's outstanding Common Stock (27%
if the Underwriters' over-allotment option is exercised in full).
RECENT DEVELOPMENTS
In the first three months of 1996, the Company's net sales increased 31% and
net income increased 115%, in each case as compared to the same period of 1995.
In October 1995, the Company introduced two new products in its Test Station
product line, the Logic Master ATS FT (Digital) and the Logic Master MTS
(Mixed-Signal). Commercial shipments of the ATS FT Test Station commenced in
December 1995 and the Company currently expects to commence commercial shipments
of the MTS Test Station in the second half of calendar 1996. Furthermore, in
October 1995, the Company announced support for Credence mixed-signal testers
under its Virtual Test product line.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered.............................. 2,525,000 shares, including
1,130,000 shares by the Company and
1,395,000 shares by the Selling Shareholders
Common Stock to be outstanding after the 7,874,266 shares (1)(2)
offering..........................................
Use of proceeds................................... For working capital and general corporate
purposes. See "Use of Proceeds."
Nasdaq National Market symbol..................... IMSC
</TABLE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED
------------------------------- ----------------------
1993 1994 1995 3/31/95 3/31/96(3)
--------- --------- --------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales..................................................... $ 23,117 $ 30,052 $ 41,093 $ 9,084 $ 11,915
Gross margin.................................................. 12,902 17,617 25,327 5,446 7,507
Operating income.............................................. 162 2,981 5,469 965 2,071
Net income.................................................... 131 1,910 3,535 627 1,346
Net income per share (4)...................................... $ 0.02 $ 0.30 $ 0.53 $ 0.10 $ 0.19
Weighted average number of common and common equivalent shares
outstanding (4).............................................. 6,366 6,366 6,685 6,366 6,922
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
----------------------------
ACTUAL AS ADJUSTED(1)(5)
--------- -----------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................................ $ 8,986 $ 37,147
Total assets......................................................................... 36,226 64,387
Capital lease obligations, net of current portion.................................... 33 33
Shareholders' equity (6)............................................................. 28,460 56,621
</TABLE>
- --------------------------
(1) Assumes the Underwriters' over-allotment option is not exercised. See
"Underwriters."
(2) Reflects the issuance of 43,662 shares of Common Stock upon the exercise of
currently outstanding options upon completion of this offering and excludes
an additional 763,676 shares of Common Stock issuable upon exercise of
outstanding options at a weighted average exercise price of $11.32, of which
81,275 are exercisable.
(3) Results include a cumulative charge to Cost of service and other sales of
$327,000 related to the Company's change in accounting method for spare
parts inventory.
(4) For an explanation of the determination of the number of shares used in
computing net income per share, see Note 2 of Notes to the Financial
Statements.
(5) Adjusted to give effect to (i) the exercise, subsequent to March 31, 1996,
of options to acquire 44,411 shares of Common Stock, and (ii) the sale by
the Company of 1,130,000 shares of Common Stock offered hereby and the
application of the estimated net proceeds therefrom. See "Use of Proceeds"
and "Capitalization."
(6) The Company has never declared a cash dividend.
3
<PAGE>
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, BY THE SELLING
SHAREHOLDERS OR BY ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES BY ANY PERSON IN ANY
JURISDICTION WHERE SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCE CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary......................................................................................... 3
The Company................................................................................................ 5
Risk Factors............................................................................................... 6
Use of Proceeds............................................................................................ 13
Dividend Policy............................................................................................ 13
Price Range of Common Stock................................................................................ 13
Capitalization............................................................................................. 14
Selected Financial Data.................................................................................... 15
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 16
Business................................................................................................... 25
Management................................................................................................. 40
Certain Transactions....................................................................................... 50
Principal and Selling Shareholders......................................................................... 53
Description of Capital Stock............................................................................... 55
Shares Eligible for Future Sale............................................................................ 57
Underwriters............................................................................................... 59
Legal Matters.............................................................................................. 60
Experts.................................................................................................... 60
Additional Information..................................................................................... 60
Index to Financial Statements.............................................................................. F-1
</TABLE>
------------------------
Test Station Software, Virtual Test Software, ATS FT Test Station, Time
Navigator Software, MTS Test Station, ATS Blazer Test Station, Logic Master XL
Test Station, MCM Test Station, Mixed-Signal Test Station, IMS Test Environment,
IMS TestVIEW, IMS-LINK, ATE-Link, Dantes and STL are trademarks of the Company.
IMS and the IMS logo are registered trademarks of the Company. This Prospectus
also includes trademarks and tradenames of companies other than Integrated
Measurement Systems, Inc.
------------------------
EXCEPT AS OTHERWISE NOTED HEREIN, ALL INFORMATION IN THIS PROSPECTUS ASSUMES
THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED.
4
<PAGE>
THE COMPANY
Integrated Measurement Systems, Inc. ("IMS" or the "Company") designs,
manufactures, markets and services a family of versatile, high performance
engineering test stations and related test software ("Test Stations") used to
test and measure complex electronic devices. In addition, the Company develops,
markets and supports a line of virtual test software ("Virtual Test Software")
that permits design and test engineers to accelerate test program development
and to conduct simulated tests of electronic device designs prior to the
fabrication of a prototype of the actual device. The Company's products enable
its customers to shorten time-to-market, enhance accuracy of design, reduce both
the time required to test and the cost of testing the customers' devices and
provide reliable and prompt feedback to both design and test engineers.
Customers use the Company's products to test complex digital and mixed-signal
devices such as microprocessors, microcontrollers and other logic integrated
circuits ("ICs"), application specific integrated circuits ("ASICs") and
multi-chip modules ("MCMs").
Since ICs, ASICs and MCMs have become more complex and competition to
develop the newest and most powerful designs has become more intense, demand has
increased for technologically advanced design, test and manufacturing products
that can reduce development and production time and cost and shorten
time-to-market for next generation technologies. At the front end of this
process, electronic design automation ("EDA") technology has made significant
strides in solving design problems by enabling design engineers to make more
accurate, complex and reliable designs, at a much faster pace. On the back end,
automated test equipment ("ATE") permits testing of physical devices on the
manufacturing floor with high speed and accuracy.
The steps between design and production include verifying and characterizing
the physical devices in the engineering lab (generally referred to as
"engineering test"). The engineering test process represents a substantial part
of the entire development cycle for microprocessors, microcontrollers, custom
ICs, ASICs and MCMs. Anomalies found within the circuits at this stage can be
identified and redesigned, reducing the likelihood that production devices will
contain hidden flaws and improving production yields. Minimal hidden flaws and
higher yield can translate into the elimination or reduction of product recalls
and updates and reduced cost per device.
The Company's Test Stations provide cost-effective, easy to use, versatile
and interactive systems for engineering verification and characterization, while
the Company's Virtual Test Software provides a solution to the problems inherent
in developing test programs, designing test fixtures, simulating test processes
and documenting the process prior to the fabrication of physical prototypes. IMS
works with leading ATE vendors to provide complete Virtual Test solutions for
integration between design and test and to accelerate test program development.
The Company's strategy is to bridge the gap between EDA and ATE and, in
particular, to design, develop, manufacture and market innovative,
cost-effective, high performance Test Stations and software to increase
productivity, accelerate time-to-market for new products and reduce the cost of
testing. The key elements of the Company's strategy include providing product
innovation, expanding market share, creating and maintaining strategic
relationships, maintaining a high level of customer service and expanding
product distribution. In marketing its products, the Company targets leading
semiconductor and electronic systems companies worldwide. To compete
successfully for those markets, IMS bases its marketing strategy on providing
complete solutions consisting of products, training, on-site service and support
and active customer involvement in the Company's product design and
specification process.
The Company markets and supports its products worldwide through a network of
direct sales force personnel, independent distributors and dedicated agents
employed by Cadence Design Systems, Inc. ("Cadence"). Since its inception, the
Company has sold over 900 Test Stations to customers in the semiconductor,
aerospace, automotive, computer, consumer electronics, datacommunications,
medical electronics, network computing, telecommunications and other industries.
Based on 1995 net sales, the Company's top five customers are: Intel, Tokyo
Electron Limited (the Company's distributor in Japan), Hughes Microelectronics,
Lucky Goldstar and Samsung. These five customers represented 53% of net sales
for 1995, while the balance of net sales came from customers individually
providing less than 3% of net sales.
The Company is currently a 55% owned subsidiary of Cadence. Upon completion
of this offering, Cadence will continue to own approximately 30% of the
Company's outstanding Common Stock (27% if the Underwriters' over-allotment
option is exercised in full). The Company was incorporated in Oregon in 1983.
The Company operated as an independent entity until it was acquired by Valid
Logic, Inc. ("Valid Logic") in 1989. In 1991, the Company became a wholly-owned
subsidiary of Cadence as a result of the merger of Valid Logic with Cadence.
Both Cadence and Valid Logic operated the Company as a separate subsidiary. On
July 21, 1995, the Company completed an initial public offering of Common Stock,
in which 375,000 shares were sold by the Company, and 2,615,000 shares were sold
by Cadence, at a price of $11 per share. The Company's executive offices are
located at 9525 S.W. Gemini Drive, Beaverton, Oregon 97008, and its telephone
number is (503) 626-7117.
5
<PAGE>
RISK FACTORS
PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY SHOULD CAREFULLY
CONSIDER THE FOLLOWING RISK FACTORS IN ADDITION TO THE OTHER INFORMATION
PRESENTED IN THIS PROSPECTUS. THIS PROSPECTUS CONTAINS CERTAIN INFORMATION AND
TREND ANALYSIS THAT CONSTITUTE "FORWARD-LOOKING STATEMENTS" AS DEFINED IN
SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, WHICH INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE
RESULTS DESCRIBED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE
SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE
FOLLOWING RISK FACTORS AND IN MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
FLUCTUATIONS IN OPERATING RESULTS. The Company's results of operations have
fluctuated and may continue to fluctuate from period to period, depending on a
number of factors including the volume and mix of products sold to the Company's
customers, the timing and shipment of significant orders, the timing of new
product introductions, the timing of expenditures in anticipation of future
sales, the length of sales cycles and the cyclical nature of high technology
industries. The Company derives a substantial portion of its net sales from the
sale of Test Stations which typically range in price from $200,000 to $1.2
million per unit and may be priced as high as $1.8 million for a single unit. As
a result, the receipt of a single order, and the timing of the receipt and
shipment of a single order can have a significant impact on the Company's net
sales and results of operations for a particular period. Historically, a
substantial portion of the Company's net sales have been realized near the end
of each quarter, reflecting the purchasing patterns of high technology companies
in making capital expenditures. Therefore, the Company's quarterly sales and
results of operations may be negatively impacted if an order is received too
late in a given quarter to permit product shipment and the recognition of
revenue during that quarter. In addition, the Company's product sales have
fluctuated based on seasonal factors, such as customers' capital budget approval
cycles in the first calendar quarter, holidays in Europe and the U.S. during the
third calendar quarter, among other factors. As a result, the Company has
historically experienced relative declines in product sales for the first and
third quarters and relative increases in product sales for the second and fourth
quarters. The Company expects that seasonal fluctuation will continue to affect
the Company's results of operations in future periods. A significant portion of
the Company's operating expenses are relatively fixed in nature, and planned
expenditures are based in part on anticipated orders. In addition, the need for
continued expenditures for research, development and engineering makes it
difficult to reduce expenses in a particular quarter if the Company's sales
goals for that quarter are not met. The inability to reduce spending quickly
enough to compensate for any revenue shortfall would magnify the adverse impact
of such revenue shortfall on the Company's results of operations. In addition,
announcements by the Company or its competitors of new products and technologies
may cause customers to defer purchases of the Company's existing systems, which
could have a material adverse effect on the Company's results of operations.
Results of operations in any period should not be considered indicative of the
results to be expected for any future period, and fluctuations in operating
results may also result in fluctuations in the price of the Company's Common
Stock. There can be no assurance that the Company will remain profitable in any
future period. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
CUSTOMER CONCENTRATION. A relatively small number of customers account for
a significant percentage of the Company's sales volume and net sales. The loss
of a major customer or any reduction in orders by such customers, including
reductions due to market or competitive conditions, would have a material
adverse effect on the Company's business, financial condition and results of
operations. Moreover, the Company's future success will depend in part upon its
ability to obtain orders from new customers, as well as the financial condition
and success of its customers and the general economy. Based on 1995 net sales,
the Company's top five customers are: Intel, Tokyo Electron Limited (the
Company's distributor in Japan), Hughes Microelectronics, Lucky Goldstar and
Samsung. These five customers represented 53% of net sales for 1995, while the
balance of net sales came from customers individually providing less than 3% of
net sales. For the years ended December 31, 1993, 1994 and 1995 and the first
three months of 1996, sales to Intel represented approximately 16%, 22%, 30% and
47% of the Company's net sales, respectively. For the year ended December 31,
1993 and the first three months of 1996, sales to Tokyo Electron Limited
represented 12% and 10%, respectively, of the Company's net sales. No other
customer or distributor accounted for
6
<PAGE>
more than 10% of the Company's net sales during the periods indicated. The
Company expects that a limited number of customers will continue to account for
a high percentage of the Company's net sales for the foreseeable future. See
"Business -- Markets and Customers."
TECHNOLOGICAL CHANGE; IMPORTANCE OF TIMELY PRODUCT INTRODUCTION. The market
for electronic design and test equipment is characterized by rapid technological
change requiring significant expenditures for new product introductions and
enhancements to existing products. The Company's ability to remain competitive
in this market will depend in significant part upon its ability to successfully
develop and introduce new products and enhancements on a timely and
cost-effective basis that keep pace with technological developments, evolving
industry standards and methodologies, and the increasingly sophisticated needs
of the Company's customers. The success of the Company in developing new and
enhanced products depends upon a variety of factors, including, but not limited
to, its continued ability to adequately fund new product developments, timely
and efficient completion of product design, timely and efficient implementation
of manufacturing and assembly processes and product performance and acceptance
at customer locations. Because commitments to develop new products generally
must be made well in advance of sales, new product decisions must anticipate
both future demand and the availability of technology to satisfy such demand.
Further technological advances, such as the successful introduction by
competitors of alternatives to Test Stations or Virtual Test Software, may cause
a decline in the demand for and sales of the Company's products. There can be no
assurance that the Company will be successful in developing and marketing new
products and product enhancements that respond to technological change, evolving
industry standards and changing customer requirements; that the Company will not
experience difficulties that could delay or prevent the successful development,
introduction and marketing of these products; or that its new products and
product enhancements will adequately meet the requirements of the marketplace
and achieve market acceptance. In particular, the Company's Virtual Test
Software alternative to traditional methods of developing test programs for the
testing of complex electronic devices on expensive test equipment has not yet
achieved widespread market acceptance. In addition, since Virtual Test Software
was first developed by Cadence, expansion of the market will depend on the
Company's ability to successfully market services and provide upgrades to its
Virtual Test Software, which predominately operates in conjunction with Cadence
software tools. Failure of the Company, for technological or other reasons, to
develop and introduce new products and product enhancements in a timely and
cost-effective manner would have a material adverse effect on the Company's
business, financial condition and results of operations. The introduction of
products embodying new technologies or changes in industry standards or customer
requirements could render the Company's existing products obsolete and
unmarketable. There can be no assurance that the announcement of new product
offerings or changes in existing product standards will not cause customers to
defer purchases of existing Company products, which could adversely affect the
Company's results of operations.
DEPENDENCE ON SINGLE AND SOLE SOURCE SUPPLIERS. The Company purchases many
key components from sole or single source vendors for which alternative sources
are not currently available. The inability to develop alternative sources for
these single or sole source components or to obtain sufficient quantities of
these components could result in delays or reductions in product shipments which
would adversely affect the Company's business, financial condition and results
of operations. In the event of a reduction or interruption of supply, a
significant amount of time, in some cases as much as twelve to twenty-four
months, would be required to accommodate these alternative suppliers. In such
event, the Company's operating results would be materially adversely affected.
In addition, the manufacture of these components is extremely complex, and the
Company's reliance on the suppliers of these components exposes the Company to
potential production difficulties and quality variations, which could negatively
impact pricing, timely delivery and quality of acceptable components. For
example, the Company depends on a sole sourced custom integrated circuit in one
of its Test Stations. In 1994, significant portions of new deliveries of this
part did not meet specifications, thereby resulting in Test Stations being
unable to detect failures when operating at speeds below 10 MHz. Recently, the
Company experienced late delivery of IC components used in the driver module of
certain of its Test Stations. In addition, the limits within which these
components operated required the Company to change its product specifications
for those Test Stations. The Company has thus far avoided any material adverse
impact on timing of customer deliveries for its Test Stations resulting from
such supply problems. However, no assurance can be given that supply problems
will not recur or, if such
7
<PAGE>
problems do recur, that satisfactory solutions would be available. Any prolonged
inability to obtain adequate amounts of fully functional components or any other
circumstances that would require the Company to seek alternative sources of
supply would have a material adverse effect on the Company's business, financial
condition and results of operation and could damage the Company's relationships
with its customers. See "Business -- Manufacturing."
DEPENDENCE ON THIRD PARTY MANUFACTURERS. The Company relies on a limited
number of independent manufacturers to provide certain components and assemblies
made to the Company's specifications and used in the Company's products. In the
event that the Company's subcontractors were to experience financial,
operational, production or quality assurance difficulties or a catastrophic
event that resulted in a reduction or interruption in supply to the Company, the
Company's operating results would be materially adversely affected until the
Company was able to establish sufficient manufacturing supply from alternative
sources. There can be no assurance that alternative manufacturing sources will
be able to meet the Company's future requirements or that existing or
alternative sources will continue to be available to the Company at favorable
prices. See "Business -- Manufacturing."
FUTURE CAPITAL NEEDS. Development and manufacture of new Test Stations,
enhancements to existing Test Stations and the further development of Virtual
Test Software require a substantial investment of funds. Additional funds may
also be required to satisfy the Company's cash requirements for future
generations of products and the Company's working capital needs. Possible
fluctuations in operating results of the Company may delay the funding of some
new products. Such a delay may have a material adverse impact on future
operating and financial results. Following the completion of this offering, the
Company may be unable to obtain financing on favorable terms due to the change
in its relationship with Cadence. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
IMPLEMENTATION OF NEW INFORMATION SYSTEM. The Company is currently in the
process of implementing a new information system to handle the Company's
financial, accounting and production planning and control functions. No
assurance can be given that the implementation of this system will not result in
significant disruptions to the Company's business, such as the loss of data
while converting systems, errors in planning production requirements, delays in
the Company's ability to timely effect periodic closings of its accounting
records and other similar problems. Any such disruptions or any failure to
successfully implement this new information system in a timely manner could have
a material adverse effect on the Company's business, financial condition or
results of operations.
UNCERTAINTIES WITH RESPECT TO INDEPENDENT CORPORATE STATUS. The Company was
independent from its inception in 1983 to February 1989, when it was acquired by
Valid Logic. As a subsidiary of Valid Logic, the timing of the Company's new
product development and introductions was substantially influenced by the
capital needs of Valid Logic, and those decisions affected the Company's
financial performance. In 1991, Valid Logic merged with Cadence, and the Company
became a wholly-owned subsidiary of Cadence. Cadence currently owns 55% of the
Company's outstanding Common Stock. Following this offering, Cadence will
continue to own approximately 30% of the Company's Common Stock (27% if the
Underwriters' over-allotment option is exercised in full). Due to its ownership
history, the Company's operating history during prior periods cannot necessarily
be regarded as indicative of the Company's prospects as a fully independent
company. For example, the Company may no longer be able to rely on or benefit
from its relationship with Cadence to obtain credit or favorable terms of
purchase from suppliers. Following the consummation of this offering, the
Company will continue to be responsible for the services that were provided by
Cadence prior to the Company's initial public offering, including legal, tax,
risk management and distribution services in a number of markets. In addition,
the Company will continue to rely on certain Cadence services provided under
Joint Sales Agency and Corporate Services Agreements. For example, the Company
currently sells and supports its products in Europe, Israel and Taiwan through
12 Cadence employees located in Cadence facilities and who act as dedicated
agents of the Company under the terms of the Corporate Services Agreement. There
can be no assurance that the Company will retain the services of such dedicated
agents for the term of the Corporate Services Agreement or that replacement
personnel could be retained on a timely basis, if at all. The loss of such
personnel and the failure to attract and retain replacement employees, or the
costs associated with hiring new sales personnel and providing
8
<PAGE>
adequate facilities and benefits to such employees would likely have a material
adverse effect on the Company's business, financial condition and results of
operations. There can be no assurance that the transition to a more independent
corporate status will not adversely affect the Company's business, financial
condition or results of operations. In addition, the Company's ability to work
cooperatively with companies in related industries can be expected to change, to
the extent such other companies recognize the change in the Company's
relationship with Cadence. The Company could find it more difficult to recruit
skilled people or obtain customers to whom the Company's status as a subsidiary
of Cadence has been important. No assurance can be given that such factors will
not have a material adverse affect on the Company's business, financial
condition or results of operations in future periods. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Certain Transactions."
HIGHLY COMPETITIVE INDUSTRY. The electronic design and test industries are
intensely competitive. The Company faces substantial competition from
manufacturers located throughout the world. Certain of the Company's
competitors, including Hewlett-Packard, have substantially greater financial,
technical and marketing resources, greater name recognition and a larger
installed customer base than the Company. New product introductions or product
announcements by the Company's competitors could cause a decline in sales or
loss of market acceptance of the Company's existing or future products.
Moreover, increased competitive pressure could lead to intensified price-based
competition, which could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company experiences
competition in the verification segment of its business principally from
Hewlett-Packard. In the characterization segment of its business, the Company
competes with a number of other test companies, including certain ATE companies.
In addition, no assurance can be given that other companies, including Cadence,
which retains certain rights to the Virtual Test Software technology, and other
EDA companies, will not enter into the Virtual Test Software business. The
Company believes that, in order to remain competitive, significant financial
investments in new product development and customer service and support will be
required. There can be no assurance that the Company will be able to access the
necessary financing or to compete successfully in the future. See "Business --
Competition."
Significant delays have occurred in the past between the Company's
introduction of a new system and the commencement by the Company of volume
production of such system. No assurance can be given that difficulties will not
arise in the future with respect to the introduction and production of the
Company's products and that delays in such processes would not adversely affect
future business, financial condition and results of operations. The Company
believes that continued market acceptance of its current generation Test
Stations, and acceptance of its future generation Test Stations, as well as of
its Virtual Test Software, are of critical importance to its future financial
results. To the extent that these products are not introduced in a timely manner
or do not achieve significant sales due to lack of customer acceptance, or if
the Company is unable to correct any technical or other difficulties associated
with these products or produce the volume of products necessary to satisfy
customer demand, or if the introduction and production of its products fails for
any other reason, the Company's business, financial condition and results of
operations would be materially adversely affected. See "Business -- Research and
Development" and " -- Competition."
DEPENDENCE ON KEY PERSONNEL. The Company's future operating results depend
in significant part upon the continued services of its key technical and senior
management personnel. The Company's future operating results also depend in part
upon its ability to attract and retain qualified management, technical and sales
and support personnel for its operations. Competition for such personnel is
intense, and the Company may find it difficult to attract key talent in a timely
and efficient manner. Many of the Company's employees continue to hold
previously issued options to acquire Cadence Common Stock, which are subject to
vesting under Cadence's stock option plans. However, no new Cadence options will
be issued to the Company's employees. The loss of any key employee, the failure
of any key employee to perform in his or her current position or the Company's
inability to attract and retain skilled employees, as needed, could materially
adversely affect the Company's business, financial condition and results of
operations. See "Business -- Employees."
PROPRIETARY RIGHTS. The Company's success is heavily dependent upon its
proprietary technology. The Company does not currently have any patents and
historically has relied principally on trade secret and
9
<PAGE>
copyright law to protect its technology. The Company's policy has been to enter
into nondisclosure/ confidentiality agreements with its employees, and it
generally enters into agreements with third parties that likewise limit access
to and distribution of its proprietary information. There can be no assurance
that the steps taken by the Company will provide adequate protection of its
technology or that competitors will not be able to develop similar or
functionally equivalent technology. In the future, the Company may receive
notice of claims of infringement of other parties' proprietary rights and there
can be no assurance that infringement or invalidity claims (or claims for
indemnification resulting from infringement claims against third parties, such
as customers) will not be asserted against the Company or that any such
assertions will not have a material adverse affect on the Company's business,
financial condition or results of operations. Several of the Company's customers
have informed the Company that they have received letters from Jerome H.
Lemelson alleging that certain equipment used in the manufacture of electronic
devices infringes certain patents issued to Mr. Lemelson relating to electronic
manufacturing technologies. Such customers may seek indemnification from the
Company for any damages and expenses resulting from this matter. The Company
cannot predict the outcome of this or any similar claim or its effect upon the
Company, and there can be no assurance that any such litigation or claim would
not have a material adverse effect on the Company's business, financial
condition or results of operations. If any Company equipment is found to
infringe a patent, a court may grant an injunction to prevent making, selling or
using the equipment in the United States. Irrespective of the validity or the
success of such claims, the Company could incur significant costs with respect
to the defense thereof which could have a material adverse effect on the
Company's business, financial condition or results of operations. If any claims
or actions are asserted against the Company, the Company may seek to obtain a
license of such third party's intellectual property rights. There can be no
assurance, however, that under such circumstances, a license would be available
under reasonable terms or at all.
The Company hires employees who have previously been employed by competitors
of the Company, and hires contractors who have previously performed work for
competitors of the Company. Some of these competitors include companies with
whom the Company has in the past held detailed business discussions, including
in-depth due diligence. The Company's policy with respect to such employees and
contractors is to assure that they do not work in areas directly equivalent to
their former employment for the express duration of any post-employment
covenants that such employees and contractors may have with their previous
employer, and in general, to require all its employees to adhere to
confidentiality obligations owed previous employers. There can be no assurance
that such policies will be sufficient to prevent claims from being asserted
against the Company by previous employers of Company employees or consultants,
or that such claims would not ultimately prove successful. Such claims, if made,
could have a material adverse effect on the Company's business, financial
condition and results of operations.
GENERAL ECONOMIC AND MARKET CONDITIONS; CYCLICALITY. The industries in
which the Company competes and the markets that it serves are highly cyclical.
During recent years, segments of these industries, including the semiconductor,
aerospace, automotive, computer, consumer electronics, datacommunications,
medical electronics, network computing and telecommunications, industries, have
experienced significant economic downturns from time to time. The semiconductor
industry is particularly volatile due to rapid technological change, short
product life cycles, fluctuations in manufacturing capacity and pricing and
gross margin pressures. The Company's operations may in the future experience
substantial fluctuations from period to period as a consequence of such industry
patterns, general economic conditions affecting the timing of orders from major
customers and other factors affecting capital spending. There can be no
assurance that such factors will not have a material adverse effect on the
Company's business, financial condition or results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
LENGTHY SALES CYCLE. Sales of the Company's products depend in significant
part upon the decision of companies in technology industries to develop and
manufacture new electronic devices or to increase manufacturing capacity. As a
result, sales of the Company's Test Stations and Virtual Test Software are
subject to a variety of factors outside the Company's control, such as general
economic downturns. In addition, the decision to purchase the Company's products
generally involves a significant commitment of
10
<PAGE>
capital, with the attendant delays frequently associated with significant
capital expenditures. For these and other reasons, sales of the Company's
systems have lengthy sales cycles during which the Company may expend
substantial funds and management effort to secure a sale. This subjects the
Company to a number of significant risks, including fluctuations in operating
results, over which the Company has little control.
INTERNATIONAL SALES. International sales accounted for approximately 33%,
40%, 32% and 30% of the Company's net sales for the years ended December 31,
1993, 1994 and 1995, and for the three months ended March 31, 1996,
respectively, and the Company expects that international sales will continue to
account for a significant portion of its net sales in future periods.
International sales are subject to certain inherent risks including tariffs,
embargoes and other barriers, difficulties in staffing and managing foreign
sales and service operations, difficulties in managing distributors, potentially
adverse tax consequences, the possibility of difficulty in collecting accounts
receivable and potential foreign currency fluctuations. In addition, the Company
relies on dedicated agents employed by Cadence for sales in certain
international markets. See "Business --Marketing and Distribution." The Company
is also subject to risks associated with legislation and regulations relating to
the import or export of high technology products. The export of the Company's
products to certain countries is limited by law. The Company cannot predict
whether quotas, duties, taxes or other charges or restrictions upon the
importation or exportation of the Company's products in the future will be
implemented by the United States or any other country. Fluctuations in currency
exchange rates could cause the Company's products to become relatively more
expensive to customers in a particular country, leading to a reduction in sales
or profitability in that country. Furthermore, future international activity may
result in higher proportion of foreign currency denominated sales, and in such
event gains and losses on the conversion to U.S. dollars arising from
international operations may contribute to fluctuations in the Company's results
of operations. In addition, international sales typically are adversely affected
in the third quarter of each year as many customers and end-users reduce their
business activities during the summer months. There can be no assurance that any
of these factors will not have a material adverse effect on the Company's
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
CONCENTRATION OF STOCK OWNERSHIP. Following the completion of this
offering, Cadence will beneficially own approximately 30% (27% assuming the
Underwriters' over-allotment option is exercised in full) of the outstanding
shares of Common Stock of the Company. Cadence will continue to have
considerable representation on the Company's Board of Directors and will
continue to have significant influence on the Company's direction. See
"Management -- Directors, Executive Officers and Key Employees," "Certain
Transactions" and "Principal and Selling Shareholders."
EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS. Certain provisions of the
Company's Restated Articles of Incorporation ("Restated Articles"), Restated
Bylaws ("Restated Bylaws") and the Oregon Business Corporation Act will
effectively make it more difficult for a third party to acquire control of the
Company through either a tender offer or a proxy contest for the election of
directors. The Oregon Control Share Act and the Business Combination Act limit
the ability of parties who acquire a significant amount of voting stock to
exercise control of the Company. In addition, the Company's Restated Articles
and Restated Bylaws contain provisions which (i) classify the Board of Directors
into three classes, with one class being elected each year, (ii) provide that
directors may be removed by shareholders only for cause and only upon the vote
of 75% of the votes then entitled to be cast for the election of directors and
(iii) permit the Board to establish the rights, preferences and privileges of,
and to issue, preferred stock without shareholders' approval. These provisions
may have the effect of lengthening the time required for a person to acquire
control of the Company through a proxy contest or the election of a majority of
the Board of Directors and may deter efforts to obtain control of the Company.
See "Description of Capital Stock -- Common Stock" and
"-- Oregon Control Share and Business Combination Statutes; Certain Provisions
of Restated Articles."
ABSENCE OF DIVIDENDS. The Company has not declared or paid dividends on its
Common Stock, except for the declaration of a non-cash dividend for the purpose
of settling intercompany accounts with Cadence. The Company does not anticipate
paying cash dividends with respect to the Common Stock in the foreseeable
future. See "Dividend Policy."
11
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE. Sales of the Company's Common Stock in the
public market after this offering could adversely affect the market price of the
Company's Common Stock. Upon completion of this offering, the Company will have
approximately 7,874,266 shares of Common Stock outstanding, of which 5,516,604
shares (5,891,604 if the Underwriters' over-allotment option is exercised in
full) will be freely transferable without restriction or registration under the
Securities Act of 1933, as amended (the "Securities Act"), unless such shares
are held by "affiliates" of the Company, as that term is defined in Rule 144
under the Securities Act. Upon completion of this offering, Cadence will
continue to hold approximately 2,365,350 shares (2,160,350 shares if the
Underwriters' over-allotment option is exercised in full), and will be eligible
to sell these shares in the public market pursuant to Rule 144, subject to
certain contractual restrictions on resale, including lock-up agreements under
which the Company, officers and directors of the Company and the Selling
Shareholders have agreed, subject to certain exceptions, not to sell or
otherwise dispose of any of their shares for a period of 120 days after the date
of this Prospectus. However, Morgan Stanley & Co. Incorporated may, in its sole
discretion, at any time without notice, release all or any portion of the shares
subject to lock-up agreements. In addition, Cadence will have certain rights
with respect to registration of such shares of Common Stock for sale to the
public. Sales of Common Stock by Cadence in the public market, or the
availability of such shares for sale, could adversely affect the market price of
the Common Stock. In addition, 763,676 shares are issuable upon exercise of
outstanding options granted under the Company's stock option plans as of the
date of this prospectus. The Company currently intends to file a Registration
Statement on Form S-8 covering an aggregate of 1,250,000 shares of Common Stock
reserved for issuance under its stock option plans in order to permit the resale
of such shares issued upon the exercise of such options in the public market
without restriction. The Company has filed a Registration Statement on Form S-8
covering 250,000 shares that have been reserved for issuance under its 1995
Employee Stock Purchase Plan permitting the resale of such shares in the public
market without restriction under the Securities Act. See "Management -- Stock
Option Plans," "-- 1995 Employee Stock Purchase Plan," "Description of Capital
Stock -- Registration Rights" and "Shares Eligible for Future Sale."
POSSIBLE VOLATILITY OF STOCK PRICE. The Company's Common Stock has
experienced significant price volatility and such volatility may occur in the
future, particularly as a result of announcements of developments related to the
Company's business, fluctuations in the Company's financial results and general
conditions in the electronic design and test industries, the semiconductor
industry or the economy. In addition, in recent years the stock market in
general, and the market for shares of small capitalization stocks in particular,
have experienced extreme price fluctuations, which have often been unrelated to
the operating performance of affected companies. Such fluctuations could
adversely affect the market price of the Company's Common Stock. See "Price
Range of Common Stock" and "Underwriters."
12
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,130,000 shares of
Common Stock offered by the Company hereby (at an assumed public offering of $26
per share after deducting estimated underwriting discounts and commissions and
estimated offering expenses) are estimated to be approximately $27.5 million
(approximately $31.7 million assuming the Underwriters' over-allotment option is
exercised in full). The Company will not receive any proceeds from the sale of
Common Stock by the Selling Shareholders.
The principal purposes of this offering are to increase the Company's equity
capital, which is a competitive factor in the semiconductor equipment industry,
expand the public market for the Common Stock and to facilitate future access to
public equity markets. Although the Company intends to use the net proceeds for
working capital and for general corporate purposes, the Company currently has no
specific plans for the net proceeds of this offering. The Company may use a
portion of the net proceeds to acquire complementary businesses, products or
technologies; however, it currently has no commitments or agreements with
respect to such transactions.
Pending the above uses, the Company intends to invest the net proceeds from
this offering in short-term investment grade, interest-bearing securities.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common Stock.
On March 31, 1995, the Company declared a $1.0 million non-cash dividend to
Cadence for the purpose of settling intercompany accounts. The Company currently
intends to retain the earnings from its operations for use in the operation and
expansion of its business and does not anticipate paying cash dividends with
respect to the Common Stock in the forseeable future. The payment of any future
dividends will be determined by the Board of Directors in light of then current
conditions, including the Company's earnings and financial condition.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded over-the-counter on the Nasdaq National
Market under the symbol "IMSC." The Company completed its initial public
offering of Common Stock on July 21, 1995, at a price of $11 per share. The
following table sets forth, for the periods indicated, the high and low sales
prices for the Company's Common Stock as reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
---------- ----------
<S> <C> <C>
FISCAL 1995
Third Quarter (from July 21, 1995)..................................... $ 165/8 $ 123/8
Fourth Quarter......................................................... 153/4 115/8
FISCAL 1996
First Quarter.......................................................... 17 121/2
Second Quarter (through May 23, 1996).................................. 273/4 155/8
</TABLE>
On May 23, 1996, the last reported sale price for the Company's Common Stock
as reported by the Nasdaq National Market was $26 per share. As of March 15,
1996, there were approximately 1,575 shareholders who held beneficial interests
in shares of Common Stock registered in nominee names of banks and brokerage
houses.
13
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1996 and as adjusted to give effect to (i) the exercise, subsequent to March
31, 1996, of options to acquire 44,411 shares of Common Stock, and (ii) the sale
of the 1,130,000 shares of Common Stock offered by the Company hereby at an
assumed public offering price of $26 per share, after deducting estimated
underwriting discounts and commissions and estimated offering expenses payable
by the Company, and the application of the estimated net proceeds therefrom.
<TABLE>
<CAPTION>
MARCH 31, 1996
----------------------
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Capital lease obligations, net of current portion (1)..................................... $ 33 $ 33
--------- -----------
Shareholders' equity:
Preferred stock, par value $.01, 10,000,000 shares authorized, no shares issued and
outstanding, actual and as adjusted.................................................... -- --
Common stock, par value $.01, 15,000,000 shares authorized, 6,699,855 shares issued and
outstanding, actual; 7,874,266 shares issued and outstanding, as adjusted (2).......... 67 79
Additional paid-in capital.............................................................. 21,097 49,246
Retained earnings....................................................................... 7,296 7,296
--------- -----------
Total shareholders' equity............................................................ 28,460 56,621
--------- -----------
Total capitalization.................................................................. $ 28,493 56,654
--------- -----------
--------- -----------
</TABLE>
- ------------------------
(1) See Note 3 of Notes to the Financial Statements.
(2) Excludes 718,812 shares of Common Stock issuable upon exercise of
outstanding options as of March 31, 1996 at a weighted average exercise
price of $10.22 per share, of which 112,302 were then exercisable.
14
<PAGE>
SELECTED FINANCIAL DATA
The statement of income data presented below for each of the three years
ended December 31, 1993, 1994 and 1995 and the balance sheet data as of December
31, 1994 and 1995 are derived from the financial statements of the Company,
which are included elsewhere in this Prospectus and have been audited by Arthur
Andersen LLP, independent public accountants, whose report thereon also is
included herein. The balance sheet data as of December 31, 1991, 1992 and 1993
and the statement of income data for the year ended December 31, 1992 are
derived from financial statements not included in this Prospectus and have been
audited by Arthur Andersen LLP. The statement of income data for the year ended
December 31, 1991 and the three-month periods ended March 31, 1995 and March 31,
1996 and the balance sheet data as of March 31, 1995 and March 31, 1996 are
unaudited and have been derived from the Company's books and records. In the
opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the information are set forth
herein. The results of operations for the three months ended March 31, 1996 are
not necessarily indicative of results to be expected for any future period. The
Company has never declared a cash dividend. The selected financial data should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Financial Statements and Notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996(1)
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF INCOME DATA:
Product sales............................. $ 17,129 $ 19,221 $ 19,357 $ 23,981 $ 33,076 $ 7,304 $ 9,170
Service and other sales................... 3,034 3,154 3,760 6,071 8,017 1,780 2,745
--------- --------- --------- --------- --------- --------- ---------
Net sales............................. 20,163 22,375 23,117 30,052 41,093 9,084 11,915
Cost of product sales..................... 7,548 8,677 8,616 10,090 12,827 2,949 3,213
Cost of service and other sales........... 1,030 1,556 1,599 2,345 2,939 689 1,195
--------- --------- --------- --------- --------- --------- ---------
Total cost of sales................... 8,578 10,233 10,215 12,435 15,766 3,638 4,408
--------- --------- --------- --------- --------- --------- ---------
Gross margin.............................. 11,585 12,142 12,902 17,617 25,327 5,446 7,507
Operating expenses:
Research, development and
engineering............................ 3,215 3,117 3,130 3,664 6,177 1,309 1,988
Selling, general and administrative..... 7,277 7,776 9,610 10,972 13,681 3,172 3,448
--------- --------- --------- --------- --------- --------- ---------
Total operating expenses.............. 10,492 10,893 12,740 14,636 19,858 4,481 5,436
--------- --------- --------- --------- --------- --------- ---------
Operating income.......................... 1,093 1,249 162 2,981 5,469 965 2,071
Other income, net......................... 244 130 71 114 319 51 101
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes................ 1,337 1,379 233 3,095 5,788 1,016 2,172
Provision for income taxes................ 557 539 102 1,185 2,253 389 826
--------- --------- --------- --------- --------- --------- ---------
Net income................................ $ 780 $ 840 $ 131 $ 1,910 $ 3,535 $ 627 $ 1,346
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net income per share (2).................. $ 0.12 $ 0.13 $ 0.02 $ 0.30 $ 0.53 $ 0.10 $ 0.19
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Weighted average number of common and
common equivalent shares outstanding
(2)...................................... 6,366 6,366 6,366 6,366 6,685 6,366 6,922
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
<CAPTION>
DECEMBER 31, MARCH 31,
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................. $ 1,986 $ 1,872 $ 1,290 $ 4,384 $ 8,930 $ 5,021 $ 8,986
Working capital........................... 9,428 9,270 8,347 10,903 17,588 10,683 20,181
Total assets.............................. 16,491 18,065 18,565 22,662 35,001 23,453 36,226
Capital lease obligations, net of current
portion.................................. 10 -- 109 83 54 122 33
Shareholders' equity...................... 13,655 14,601 15,104 18,269 26,484 18,045 28,460
</TABLE>
- --------------------------
(1) Results include a cumulative charge to Cost of service and other sales of
$327,000 related to the Company's change in accounting method for spare
parts inventory.
(2) For an explanation of a determination of the number of shares used in
computing net income per share, see Note 2 of Notes to the Financial
Statements.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
Selected Financial Data and the Company's Financial Statements and the Notes
thereto included elsewhere in this Prospectus. Except for the historical
information contained herein, the discussion in this Prospectus contains certain
trend analysis and other information which constitute forward-looking statements
that involve risks and uncertainties, such as statements of the Company's
objectives, expectations and intentions. The cautionary statements made in this
Prospectus should be read as being applicable to all related forward-looking
statements wherever they appear in this Prospectus. The Company's actual results
could differ materially from those discussed herein due to numerous factors
including those discussed in "Risk Factors," as well as those discussed
elsewhere herein.
OVERVIEW
The Company was founded in 1983 to design and develop engineering Test
Stations to test and measure complex electronic devices at the prototype stage.
The Company was acquired by Cadence in 1991 as a result of the merger of Valid
Logic into Cadence, in a transaction accounted for as a pooling. Cadence has
operated the Company as a separate subsidiary.
In July 1995, the Company successfully completed an initial public offering
of common stock, yielding net proceeds to the Company and Cadence of $3.3
million and $26.6 million, respectively. Cadence currently owns 55.4% of the
outstanding common stock of the Company, with the remaining 44.6% publicly
owned.
The Company has been profitable for each of the last eight years and has
financed its business activities during that period principally through cash
generated from its own operations. The Company's net sales have increased each
of the last three years, with 1995 net sales increasing 77.8% over 1993 net
sales. This sales growth, combined with more moderate percentage growth in cost
of sales and operating expenses, has resulted in increases in net income of
$131,000, $1.9 million, $3.5 million, and $1.3 million for 1993, 1994, 1995, and
the first three months of 1996, respectively. The increase in net sales has
resulted from the Company's design and development of new products and
enhancements of existing products, the growth of the complex device market which
the Company serves, and successful penetration into foreign markets.
During the last three years, the Company has generated most of its revenue
from sales of its Logic Master, XL, ATS and ATS Blazer Test Station product
families and related software. In 1994, the Company began generating revenue
from the sale of Virtual Test Software and related services. For the year 1995
and the first three months of 1996, Virtual Test software accounted for 4.6% and
7.5% of the Company's net sales, respectively. Introduced during the fourth
quarter of 1995, the Company's ATS FT Test Station generated 14.9% of 1995
annual net sales, and 28.3% of net sales for the first three months of 1996. The
Company also generates revenue from selling maintenance contracts, installation,
consulting services, training and refurbishment services. The Company has a
program for identifying obsolete inventory as new products are introduced and
systematically provides reserves for such obsolescence in its financial
statements.
Future operating results will depend on many factors, including demand for
the Company's products, the introduction of new products by the Company and by
its competitors, the Company's ability to operate independently from Cadence and
industry acceptance of Virtual Test Software. Results of operations for the
periods discussed here should not be considered indicative of the results to be
expected in any future period, and fluctuations in operating results may also
result in fluctuations in the market price of the Company's Common Stock. There
can be no assurance that the Company's net sales will grow or that such growth
will be sustained in future periods or that the Company will remain profitable
in any future period.
Following this offering, Cadence will continue to provide certain services
to the Company pursuant to a Corporate Services Agreement. Under this agreement,
Cadence provides dedicated agents to sell and support the Company's products in
Germany, England, France, Israel and Taiwan. In addition, Cadence will provide
the Company with office space and related services in several locations in the
United States until June 1, 1999, unless terminated earlier under the terms of
such agreement. Furthermore, although the
16
<PAGE>
Company may establish its own foreign sales subsidiaries, until those
subsidiaries are established, the Company will continue to sell its products in
Europe, Israel and Taiwan through dedicated sales agents employed by
subsidiaries of Cadence. The Company pays Cadence the cost of Cadence's expense
(plus an agency fee) for Cadence's employees who fulfill the dedicated agent
functions of the Company under the Corporate Services Agreement. See "Business
- -- Employees" and "Certain Transactions -- Agreements with Cadence."
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated selected items of
the Company's statements of income as a percentage of its net sales:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
YEAR ENDED DECEMBER 31, 31,
------------------------------------- ------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Product sales............................................... 83.7% 79.8% 80.5% 80.4% 77.0%
Service and other sales..................................... 16.3 20.2 19.5 19.6 23.0
----- ----- ----- ----- -----
Net sales............................................... 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- -----
Cost of product sales....................................... 37.3 33.6 31.2 32.5 27.0
Cost of service and other sales............................. 6.9 7.8 7.2 7.6 10.0
----- ----- ----- ----- -----
Total cost of sales..................................... 44.2 41.4 38.4 40.1 37.0
----- ----- ----- ----- -----
Gross margin................................................ 55.8 58.6 61.6 59.9 63.0
Operating expenses:
Research, development and engineering..................... 13.5 12.2 15.0 14.4 16.7
Selling, general and administrative....................... 41.6 36.5 33.3 34.9 28.9
----- ----- ----- ----- -----
Total operating expenses................................ 55.1 48.7 48.3 49.3 45.6
----- ----- ----- ----- -----
Operating income............................................ 0.7 9.9 13.3 10.6 17.4
Other income, net........................................... 0.3 0.4 0.8 0.6 0.8
----- ----- ----- ----- -----
Income before income taxes.................................. 1.0 10.3 14.1 11.2 18.2
Provision for income taxes.................................. 0.4 3.9 5.5 4.3 6.9
----- ----- ----- ----- -----
Net income.................................................. 0.6% 6.4% 8.6% 6.9% 11.3%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
NET SALES. Net sales is comprised of product sales (including sales of Test
Stations, Test Station software and Virtual Test Software) and service and other
sales (including primarily maintenance contracts and refurbishment services).
Net sales increased 31.2% from $9.1 million in the three months ended March 31,
1995 to $11.9 million in the three months ended March 31, 1996. The increase in
net sales reflects the introduction of the Company's new ATS FT Test Stations,
which contributed 28.3% of net sales during the first quarter of 1996, and
continued contributions from the Company's ATS Blazer and XL Test Station
products. In addition, sales of Virtual Test Software and related services grew
to 7.5% of net sales during the first three months of 1996, compared to 3.4% in
the first quarter of 1995.
COST OF SALES. Cost of sales consists of material, labor, manufacturing and
service overhead as well as amortization of capitalized software development
costs. Total cost of sales increased 21.2% from $3.6 million in the three months
ended March 31, 1995 to $4.4 million in the three months ended March 31, 1996.
Product cost of sales increased 9.0% from $2.9 million for the first three
months of 1995 to $3.2 million for the same period in 1996, primarily due to
higher sales volume, partially offset by benefits from lower costs of materials
and manufacturing efficiencies. Service and other cost of sales increased 73.4%
from $689,000 in the first three months of 1995 to $1.2 million in the first
three months of 1996, due to a one-time $327,000 charge in the first quarter of
1996 for the Company's change in accounting for spare parts costs associated
with refurbishment services and increased labor costs associated with expanding
customer service center and training services.
17
<PAGE>
GROSS MARGIN. The Company's gross margin increased 37.8% from $5.4 million
in the three months ended March 31, 1995 to $7.5 million in the three months
ended March 31, 1996. As a percentage of net sales, gross margin increased from
59.9% for the three months ended March 31, 1995 to 63.0% for the three months
ended March 31, 1996. Product gross margin, as a percent of related sales,
increased from 59.6% for the first three months of 1995, to 65.0% for the first
three months of 1996. The increase in product gross margin resulted from an
increase in sales of higher margin ATS FT Test Stations during the first quarter
of 1996. Service and other gross margin, as a percent of related sales, declined
from 61.3% for the first three months of 1995, to 56.5% for the first three
months of 1996, due primarily to the charge to cost of service and other sales
related to the change in accounting method for spare parts, partially offset by
higher gross margin on Virtual Test Software related services.
RESEARCH, DEVELOPMENT AND ENGINEERING. Research, development and
engineering expenses consist primarily of employee costs, cost of material
consumed, depreciation of equipment and engineering related costs. Research,
development and engineering expenses increased 51.9% from $1.3 million for the
three months ended March 31, 1995 to $2.0 million for the three months ended
March 31, 1996. As a percentage of net sales, research, development and
engineering expenses increased from 14.4% in the three months ended March 31,
1995 to 16.7% in the three months ended March 31, 1996. The increase was
principally attributable to increased expenditures on enhancements to the
Company's existing products and the development of future generation hardware
and software products. The Company anticipates that research, development and
engineering expenses will continue to increase in dollar amount in the future
reflecting the Company's strategy to invest in new products and existing product
enhancements.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses include salaries and commissions of sales personnel, marketing expenses
and general administrative expenses. Selling, general and administrative
expenses increased 8.7% from $3.2 million for the three months ended March 31,
1995 to $3.4 million for the three months ended March 31, 1996. The increase was
principally attributable to higher commissions associated with higher sales
volume and increased investment in the various selling and administrative
functions. As a percentage of net sales, selling, general and administrative
expenses decreased from 34.9% in the three months ended March 31, 1995 to 28.9%
in the three months ended March 31, 1996 as a result of control over increases
in selling, general and administrative expenses as net sales increased. This
trend is not expected to continue, and the Company's spending for selling,
general and administrative expenses is expected to grow in dollar amount and as
a percentage of net sales, reflecting planned headcount increases required to
execute the Company's business strategies for the Test Station and Virtual Test
product lines.
OTHER INCOME, NET. Other income includes interest income, interest expense
and gain and loss on sale of assets. Other income, net increased from $51,000 in
the three months ended March 31, 1995 to $101,000 in the three months ended
March 31, 1996 due to interest generated on higher average cash and cash
equivalent balances.
INCOME TAXES. The Company's effective rate for Federal and state taxes was
38.3% for the three months ended March 31, 1995 and 38.0% for the three months
ended March 31, 1996.
YEARS ENDED DECEMBER 31, 1995 AND 1994
NET SALES. Net sales increased 36.7% from $30.1 million in 1994 to $41.1
million in 1995. This was principally due to an increase in product sales of
37.9% from $24.0 million in 1994 to $33.1 million in 1995. The increase in
product sales during 1995 was due principally to higher sales volume for the
Company's Test Station and Virtual Test Software products, and also resulted in
part from the Company's first shipments of the new ATS FT Test Stations during
the fourth quarter of 1995. Service and other sales increased 32.1% from $6.1
million in 1994 to $8.0 million in 1995, reflecting growth in the Company's Test
Station installed base and Virtual Test Software related services.
COST OF SALES. Total cost of sales increased 26.8% from $12.4 million in
1994 to $15.8 million in 1995. Product cost of sales increased 27.1% from $10.1
million in 1994 to $12.8 million in 1995, primarily due to higher sales volume
and sales of higher cost ATS Blazer and FT Test Stations. Service and other cost
of sales
18
<PAGE>
increased 25.3% from $2.3 million in 1994 to $2.9 million in 1995. The increase
in service and other cost of sales resulted from higher costs associated with
supporting a larger installed base of the Company's Test Stations.
GROSS MARGIN. Gross margin increased 43.8% from $17.6 million in 1994 to
$25.3 million in 1995, and, as a percentage of net sales, from 58.6% in 1994 to
61.6% in 1995. Product gross margin, as a percent of sales, increased from 57.9%
in 1994 to 61.2% in 1995, reflecting the benefit of increased sales volume on
relatively fixed manufacturing overhead, and increased sales of higher-margin
Test Stations and software products. Service and other gross margin improved, as
a percent of sales, from 61.4% in 1994 to 63.3% in 1995 as the result of
enhanced cost efficiencies in the service segment as service and other sales
increased.
RESEARCH, DEVELOPMENT AND ENGINEERING. Research, development and
engineering expenses increased 68.6% from $3.7 million in 1994 to $6.2 million
in 1995. This increase in the dollar amount of research, development and
engineering expenses reflected the additional hiring of research and development
engineers necessary to execute the Company's strategy to enhance research and
development efforts to remain ahead of technology advances and to develop future
generation Test Stations and the Virtual Test Software products. As a percentage
of net sales, research, development and engineering expenses increased from
12.2% in 1994 to 15.0% in 1995. The Company has capitalized certain software
development costs relating to these activities, in compliance with SFAS No. 86,
in the amounts of approximately $1.1 million and $1.0 million in 1994 and 1995,
respectively.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased 24.7% from $11.0 million in 1994 to $13.7 million in 1995,
primarily as a result of higher commission expenses associated with increased
sales volume as well as increased staffing in the software sales force. Selling,
general and administrative expenses as a percentage of net sales were 36.5% and
33.3% in 1994 and 1995, respectively, reflecting slower growth in expenses than
in net sales.
OTHER INCOME, NET. Other income increased from $114,000 in 1994 to $319,000
in 1995, as a result of interest earnings on higher average cash and cash
equivalent balances.
INCOME TAXES. The Company's effective tax rate was 38.3% and 38.9% for the
years ended December 31, 1994 and 1995, respectively. The change in effective
tax rates from 1994 to 1995 was primarily due to changes in the relative
significance of certain non-deductible expenses and changes in effective rates
for state income taxes.
YEARS ENDED DECEMBER 31, 1994 AND 1993
NET SALES. Net sales increased 30.0% from $23.1 million in 1993 to $30.1
million in 1994. The increase in net sales in 1994 was principally due to an
increase in sales of the ATS Blazer Test Station, which was introduced by the
Company at the end of 1993, as well as overall increased business activity in
the Asian market, which increased 78.4% from 1993 to 1994. Service and other
sales increased 61.5% from $3.8 million in 1993 to $6.1 million in 1994. The
increase in service and other sales for 1994 was principally attributable to the
Company's changeover to direct sales and service in Europe, which led to higher
revenues from customers previously served by distributors and an increase in
service contract penetration. In addition, the increase in service and other
sales in 1994 reflects the inclusion of maintenance revenues relating to Virtual
Test Software products. International net sales represented approximately 32.6%
and 39.7% of total net sales for the years 1993 and 1994, respectively.
COST OF SALES. Total cost of sales increased 21.7% from $10.2 million in
1993 to $12.4 million in 1994. Product cost of sales increased 17.1% from $8.6
million in 1993 to $10.1 million in 1994, reflecting higher sales volume and
increased sales of higher-cost ATS Blazer Test Stations. Service and other cost
of sales increased 46.7% from $1.6 million in 1993 to $2.3 million in 1994, due
primarily to increased labor and other costs necessary to support growth in the
Company's Test Station installed base.
GROSS MARGIN. Gross margin increased 36.5% from $12.9 million in 1993 to
$17.6 million in 1994, reflecting favorable product mix, increased sales volumes
and certain other operational efficiencies. As a percentage of net sales, gross
margin increased from 55.8% in 1993 to 58.6% in 1994. Product gross margin,
19
<PAGE>
as a percent of related sales, increased from 55.5% in 1993 to 57.9% in 1994,
reflecting increased sales of higher-margin Test Stations and software. Service
and other gross margin, as a percent of related sales, increased from 57.5% in
1993 to 61.4% in 1994, as sales of Test Station and software maintenance
revenues grew faster than related costs of sales.
RESEARCH, DEVELOPMENT AND ENGINEERING. Research, development and
engineering expenses increased 17.1% from $3.1 million in 1993 to $3.7 million
in 1994. This increase in the dollar amount of research, development and
engineering expenses reflected additional hiring of research and development
engineers for next generation Test Stations and the Virtual Test Software
products. Research, development and engineering expenses as a percentage of net
sales decreased slightly from 1993 to 1994. The Company has capitalized certain
software development costs in compliance with SFAS No. 86 in the amounts of
approximately $889,000 in 1993 and $1.1 million in 1994 relating to these
activities.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased 14.2% from $9.6 million in 1993 to $11.0 million in 1994,
primarily as a result of higher commission expenses associated with increased
sales volume as well as increased staffing in Asia and Europe. Selling, general
and administrative expenses as a percentage of net sales was 41.6% and 36.5% in
1993 and 1994, respectively. This decrease reflects the fact that the Company's
revenue grew at a faster rate than expenses in 1994.
OTHER INCOME, NET. Other income, net increased from $71,000 in 1993 to
$114,000 in 1994, as a result of interest earnings on higher average cash and
cash equivalent balances.
INCOME TAXES. The Company's effective tax rate was 43.8% and 38.3% for the
years ended December 31, 1993 and 1994, respectively. The lower effective rate
in 1994 was primarily a result of changes in the relative significance of
certain non-deductible expenses as a percentage of income before income taxes.
20
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain unaudited quarterly financial
information for each of the Company's last nine fiscal quarters and as a
percentage of the Company's total net sales represented by each line item in
such unaudited quarterly financial information. In the opinion of management,
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of the information are set forth herein. Results of
operations for the periods presented below should not be considered indicative
of the results to be expected in any future period, and fluctuations in
operating results may also result in fluctuations in the market price of the
Company's Common Stock.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------
3/31/94 6/30/94 9/30/94 12/31/94 3/31/95 6/30/95
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA: (IN THOUSANDS)
Product sales............................. $ 5,780 $ 5,722 $ 5,555 $ 6,924 $ 7,304 $ 8,078
Service and other sales................... 1,258 1,511 1,544 1,758 1,780 1,771
----------- ----------- ----------- ----------- ----------- -----------
Net sales............................. 7,038 7,233 7,099 8,682 9,084 9,849
Cost of product sales..................... 2,571 2,348 2,352 2,819 2,949 3,236
Cost of service and other sales........... 506 598 537 704 689 627
----------- ----------- ----------- ----------- ----------- -----------
Total cost of sales................... 3,077 2,946 2,889 3,523 3,638 3,863
----------- ----------- ----------- ----------- ----------- -----------
Gross margin.............................. 3,961 4,287 4,210 5,159 5,446 5,986
Operating expenses:
Research, development and engineering... 875 855 942 992 1,309 1,409
Selling, general and administrative..... 2,617 2,687 2,664 3,004 3,172 3,388
----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses.............. 3,492 3,542 3,606 3,996 4,481 4,797
----------- ----------- ----------- ----------- ----------- -----------
Operating income.......................... 469 745 604 1,163 965 1,189
Other income (expense), net............... (7) 41 36 44 51 62
----------- ----------- ----------- ----------- ----------- -----------
Income before income taxes................ 462 786 640 1,207 1,016 1,251
Provision for income taxes................ 177 301 245 462 389 480
----------- ----------- ----------- ----------- ----------- -----------
Net income................................ $ 285 $ 485 $ 395 $ 745 $ 627 $ 771
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
9/30/95 12/31/95 3/31/96(1)
----------- ----------- -----------
<S> <C> <C> <C>
STATEMENT OF INCOME DATA:
Product sales............................. $ 8,642 $ 9,052 $ 9,170
Service and other sales................... 1,854 2,612 2,745
----------- ----------- -----------
Net sales............................. 10,496 11,664 11,915
Cost of product sales..................... 3,197 3,445 3,213
Cost of service and other sales........... 729 894 1,195
----------- ----------- -----------
Total cost of sales................... 3,926 4,339 4,408
----------- ----------- -----------
Gross margin.............................. 6,570 7,325 7,507
Operating expenses:
Research, development and engineering... 1,557 1,902 1,988
Selling, general and administrative..... 3,621 3,500 3,448
----------- ----------- -----------
Total operating expenses.............. 5,178 5,402 5,436
----------- ----------- -----------
Operating income.......................... 1,392 1,923 2,071
Other income (expense), net............... 135 71 101
----------- ----------- -----------
Income before income taxes................ 1,527 1,994 2,172
Provision for income taxes................ 586 798 826
----------- ----------- -----------
Net income................................ $ 941 $ 1,196 $ 1,346
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------
3/31/94 6/30/94 9/30/94 12/31/94 3/31/95 6/30/95
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
AS A PERCENTAGE OF NET SALES:
Product sales............................. 82.1% 79.1% 78.3% 79.8% 80.4% 82.0%
Service and other sales................... 17.9 20.9 21.7 20.2 19.6 18.0
----------- ----------- ----------- ----------- ----------- -----------
Net sales............................. 100.0 100.0 100.0 100.0 100.0 100.0
Cost of product sales..................... 36.5 32.5 33.1 32.5 32.5 32.8
Cost of service and other sales........... 7.2 8.2 7.6 8.1 7.6 6.4
----------- ----------- ----------- ----------- ----------- -----------
Total cost of sales................... 43.7 40.7 40.7 40.6 40.1 39.2
----------- ----------- ----------- ----------- ----------- -----------
Gross margin.............................. 56.3 59.3 59.3 59.4 59.9 60.8
Operating expenses:
Research, development and engineering... 12.4 11.8 13.3 11.4 14.4 14.3
Selling, general and administrative..... 37.2 37.1 37.5 34.6 34.9 34.4
----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses.............. 49.6 48.9 50.8 46.0 49.3 48.7
----------- ----------- ----------- ----------- ----------- -----------
Operating income.......................... 6.7 10.4 8.5 13.4 10.6 12.1
Other income (expense), net............... (0.1) 0.5 0.5 0.5 0.6 0.6
----------- ----------- ----------- ----------- ----------- -----------
Income before income taxes................ 6.6 10.9 9.0 13.9 11.2 12.7
Provision for income taxes................ 2.5 4.2 3.4 5.3 4.3 4.9
----------- ----------- ----------- ----------- ----------- -----------
Net income................................ 4.1% 6.7% 5.6% 8.6% 6.9% 7.8%
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
9/30/95 12/31/95 3/31/96(1)
----------- ----------- -----------
<S> <C> <C> <C>
AS A PERCENTAGE OF NET SALES:
Product sales............................. 82.3% 77.6% 77.0%
Service and other sales................... 17.7 22.4 23.0
----------- ----------- -----------
Net sales............................. 100.0 100.0 100.0
Cost of product sales..................... 30.5 29.5 27.0
Cost of service and other sales........... 6.9 7.7 10.0
----------- ----------- -----------
Total cost of sales................... 37.4 37.2 37.0
----------- ----------- -----------
Gross margin.............................. 62.6 62.8 63.0
Operating expenses:
Research, development and engineering... 14.8 16.3 16.7
Selling, general and administrative..... 34.5 30.0 28.9
----------- ----------- -----------
Total operating expenses.............. 49.3 46.3 45.6
----------- ----------- -----------
Operating income.......................... 13.3 16.5 17.4
Other income (expense), net............... 1.3 0.6 0.8
----------- ----------- -----------
Income before income taxes................ 14.6 17.1 18.2
Provision for income taxes................ 5.6 6.8 6.9
----------- ----------- -----------
Net income................................ 9.0% 10.3% 11.3%
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
- ------------------------------
(1) Results include a cumulative charge to Cost of service and other sales of
$327,000 related to the Company's change in accounting method for spare
parts inventory.
21
<PAGE>
The Company's net sales were higher in each of the four quarters of 1995
than in the corresponding quarter in the previous year, reflecting further
development of the Virtual Test Software business and the introduction of the
ATS FT Test Stations in October 1995. The increase in service and other sales
from an average of 18.4% of net sales in the first three quarters of 1995 to
22.4% and 23.0% of net sales for the fourth quarter of 1995 and the first
quarter of 1996, respectively, reflects an increase in refurbishment services in
the systems business, as well as higher Virtual Test Software consulting
services. In addition, the Company's gross margin improved as a percentage of
sales from 56.3% in the first quarter of 1994 to 63.0% in the first quarter of
1996. Gross margins as a percentage of net sales have been between 60.8% and
63.0% for each of the Company's last four fiscal quarters due to increased sales
volumes, certain operational efficiencies associated with higher sales volumes
and an increased percentage of software sales which generally have higher gross
margin than the Company's hardware products. The Company's research, development
and engineering expenses increased in the seven most recent quarters in dollar
amount, reflecting the hiring of additional personnel and other expenses for new
product development and enhancement of existing products. The recent reduction
in selling, general and administrative expense, as a percentage of net sales,
from an average of 34.6% in the first three quarters of 1995 to 30.0% and 28.9%
in the fourth quarter of 1995 and the first quarter of 1996, respectively,
reflects controls over the rate of spending in this area. The recent reduction
in selling, general and administrative expense, as a percentage of net sales, is
not expected to be sustained in the future as the Company plans to increase
sales and marketing expenditures with respect to its market segments.
Historically, net sales have been seasonally slower in the first and third
calendar quarters of each year, as a result of customers' budget approval cycles
during the first quarter and as many customers and end-users, particularly
outside of the United States, reduce their business activities during the summer
months.
FORWARD LOOKING STATEMENTS
All statements and trend analysis contained in this Prospectus relative to
future size or degree of penetration of markets for the Company's products, the
Company's growth rate and improving trends for net sales and gross margin,
constitute "forward looking statements" as defined in Section 27A of the
Securities Act of 1933, as amended. These forward looking statements are subject
to the business and economic risks the Company faces and the Company's actual
results of operations may differ materially from those contained in the forward
looking statements. For a more detailed discussion of these and other business
risks, see "Risk Factors."
Results of operations for the periods discussed above should not be
considered indicative of the results to be expected in any future period, and
fluctuations in operating results may also result in fluctuations in the market
price of the Company's Common Stock. Like most high technology and high growth
companies, the Company faces certain business risks that could have adverse
effects on the Company's results of operations.
The Company derives a substantial portion of its revenue from the sale of
Test Stations which typically range in price from $200,000 to $1.2 million per
unit and may be priced as high as $1.8 million for a single unit. As a result,
the timing of the receipt and shipment of a single order can have a significant
impact on the Company's net sales and results of operations for a particular
period. Historically, a substantial portion of the Company's net sales have been
realized near the end of each quarter, reflecting the purchasing patterns of
high technology companies in making capital expenditures. Therefore, the
Company's quarterly sales and results of operations may be negatively impacted
if an order is received too late in a given quarter to permit product shipment
and the recognition of revenue during that quarter. A significant portion of the
Company's operating expenses are relatively fixed in nature and planned
expenditures are based, in part, on anticipated orders. In addition, the need
for continued expenditures for research, development and engineering makes it
difficult to reduce expenses in a particular quarter if the Company's sales
goals for that quarter are not met. The inability to reduce the Company's
expenses quickly enough to compensate for any revenue shortfall would magnify
the adverse impact of such revenue shortfall on the Company's results of
operations. In addition, the Company's future operating results and financial
condition are subject to influences driven by rapid technological changes, a
highly competitive industry, a lengthy sales cycle, and the cyclical nature of
general economic conditions.
For the years ended December 31, 1993, 1994 and 1995 and the first three
months of 1996, sales to Intel represented approximately 15.5%, 22.4%, 30.2% and
46.6% of the Company's net sales, respectively. For the year ended December 31,
1993 and the first three months of 1996, sales to Tokyo Electron Limited
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represented 11.6% and 10.1% of net sales, respectively. No other customer
accounted for in excess of 10% of the Company's net sales in 1993, 1994, 1995 or
the three months ended March 31, 1996. The Company's five largest customers
based on 1995 net sales are Intel, Tokyo Electron Limited, Hughes
Microelectronics, Lucky Goldstar and Samsung. Sales of the Company's products to
a limited number of customers are expected to continue to account for a high
percentage of net sales over the short term. The loss of a major customer or any
reduction in orders by such customers would have a material adverse effect on
the Company's financial condition and results of operations.
The Company purchases some key components from sole or single source vendors
for which alternative sources are not currently available. The inability to
develop alternative sources for single or sole source components or to obtain
sufficient quantities of these components could result in delays or reductions
in product shipments which would adversely effect the Company's financial
condition and results of operations.
The Company has thus far avoided any material adverse impact on its results
of operations resulting from such risks. No assurance can be given that such
risks will not affect the Company's financial postion or results of operations
in the future.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1996, the Company's principal sources of liquidity consisted
of cash and cash equivalents of approximately $9.0 million, and funds available
under an existing bank line of credit of $10.0 million. Since 1988, the Company
has relied on cash generated from operations as its principal source of
liquidity and has not relied on Cadence for working capital. The Company's cash
flows from operations amounted to $1.3 million for the period ended March 31,
1996.
OPERATING ACTIVITIES. The Company's net cash from operating activities
includes cash received from customers, payments to suppliers, payments to
employees and interest received and paid. Net cash generated from operating
activities amounted to $2.5 million, $6.3 million, $5.0 million and $1.3 million
for 1993, 1994, 1995 and the first three months of 1996, respectively. Cash
received from customers amounted to $22.7 million, $29.6 million, $37.0 million
and $11.3 million for 1993, 1994, 1995 and the first three months of 1996,
respectively. Combined payments to suppliers and employees for 1993, 1994, 1995
and the first three months of 1996 were $19.9 million, $22.8 million, $31.1
million and $9.6 million, respectively. The period to period increases in cash
from customers and payments to suppliers and employees are directly related to
the increase in net sales and expenses associated with those sales. The
Company's trade receivables, inventories and accounts payable have fluctuated
from period to period as a result of the timing of shipments, cash collections
and inventory receipts near period end. The size and timing of a single customer
shipment or collection can have a significant impact on trade receivables and
inventories. Notwithstanding the Company's growth in net sales during 1995 and
the first quarter of 1996, the Company has been able to manage its trade
receivables, inventories and accounts payable at relatively consistent levels as
a result of an asset management program. As a result of cash flows from
operating activities, combined with the proceeds of the Company's initial public
offering in 1995 of $3.3 million, the Company has increased its cash and cash
equivalent balances from $1.3 million at December 31, 1993 to $9.0 million at
March 31, 1996.
INVESTING ACTIVITIES. Capital equipment expenditures were $1.7 million in
each of 1993 and 1994, $1.9 million in 1995, and $1.0 million for the first
three months of 1996 primarily for computers, software, demonstration equipment
and engineering equipment used in the Company's operations. Expenditures to
increase the Company's service spare parts pool were $448,000, $295,000,
$600,000 and $23,000 for 1993, 1994, 1995 and the three months ended March 31,
1996, respectively. In addition, the Company capitalized certain expenses
associated with software development costs of $889,000, $1.1 million, $1.0
million and $170,000 for 1993, 1994, 1995 and the three months ended March 31,
1996, respectively.
FINANCING ACTIVITIES. In 1993 and 1994 and for the first three months of
1996, net cash used in financing activities were $56,000, $168,000 and $56,000,
respectively. In 1995, net cash provided by financing activities amounted to
$3.0 million, primarily from the $3.3 million in net proceeds received in the
Company's initial public offering. Cash used for payments of certain capital
leases obtained by the Company for computers and equipment used in operations
was $56,000, $168,000, $254,000 and $60,000 for 1993, 1994, 1995 and the three
months ended March 31, 1996, respectively.
During 1995 and the first three months of 1996, the Company also realized
reductions in current income tax liabilities of $2.3 million and $626,000,
respectively, resulting from the benefit of tax deductions of
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<PAGE>
employee gains upon exercise of Cadence stock options. The tax benefit of the
stock option deduction is reflected as an increase in additional paid-in capital
in the accompanying Statements of Shareholders' Equity. The employee gains are
not expenses of the Company for financial reporting purposes, and the exercise
of these stock options does not increase the number of shares of Company Common
Stock outstanding.
At the end of 1995, the Company secured a $10.0 million revolving line of
credit with U.S. National Bank of Oregon, which is available for general
corporate purposes when needed. Under the agreement, the Company can borrow,
with interest at the bank's prime lending rate, or if lower, at certain margins
above banker's acceptance or interbank offering rates. There have been no
borrowings against the line of credit to date.
The Company believes that the proceeds from this offering, together with
existing funds, funds expected to be generated by operating activities, and the
available line of credit, will satisfy the Company's anticipated working capital
and other general corporate purposes through at least the next twelve months.
The Company currently has no significant capital commitments other than
commitments under facility operation leases and vendor contracts for development
services, consulting services and parts. The Company may from time to time
consider the acquisition of complementary businesses, products or technologies.
The Company presently has no significant understandings, commitments or
agreements with respect to any such acquisitions. Any such transactions, if
consummated, may use a portion of the Company's working capital or require the
issuance of additional equity.
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<PAGE>
BUSINESS
The Company designs, manufactures, markets and services a family of
versatile, high-performance engineering Test Stations and test software used to
test and measure complex electronic devices. In addition, the Company develops,
markets and supports a line of Virtual Test Software that permits design and
test engineers to accelerate test program development and to conduct simulated
tests of electronic device designs prior to the fabrication of the prototype of
the actual device. The Company's products enable its customers to shorten
time-to-market, enhance accuracy of design, reduce both the time required to
test and the cost of testing the customers' devices and provide reliable and
prompt feedback to both design and test engineers. Customers use the Company's
products to test complex digital and mixed-signal devices such as
microprocessors, microcontrollers, integrated circuits, application specific
integrated circuits and multi-chip modules.
The Company markets and supports its products worldwide through a network of
direct sales force personnel, independent distributors and dedicated sales
personnel employed by affiliated companies. The Company has sold over 900 Test
Stations to customers in the semiconductor, aerospace, automotive, computer,
consumer electronics, datacommunications, medical electronics, network
computing, telecommunications and other industries. Based on 1995 sales, the
Company's top five customers are: Intel; Tokyo Electron Limited (the Company's
distributor in Japan); Hughes Microelectronics; Lucky Goldstar and Samsung.
These five customers represented 53% of net sales for 1995, while the balance of
net sales came from customers individually providing less than 3% of net sales.
INDUSTRY BACKGROUND
Continuous improvements in integrated circuit process and design
technologies have led to design and production of more complex and more reliable
devices at a lower cost per function. As performance and complexity have
increased and cost per function has decreased, the use of integrated circuits
has expanded beyond their original primary applications in computer systems to
applications such as telecommunication systems, automotive products, consumer
goods and industrial automation and control systems. In addition, system users
and designers have demanded systems with more functionality, higher performance,
greater reliability, shorter design cycle times and lower costs. These demands
have resulted in increased integrated circuit content as a percentage of system
cost.
The process of designing and manufacturing integrated circuits is complex
and capital-intensive, involving stages of design, prototype manufacture,
verification and characterization of the prototypes, device manufacture and
production test. These stages have intricate dependencies, as illustrated on the
following chart:
PROCESS FLOW FROM DESIGN TO PRODUCTION TEST
PROCESS FLOW FROM DESIGN TO PRODUCTION TEST -- SCHEMATIC
The schematic illustrates the process flow from design to production test:
(1) Starting with a box representing the Design phase which starts with
the aid of Electronic Design Automation Software
(2) Moving to a box representing the Prototype Manufacturing phase where
prototype fabrication of the IC takes place
(3) Moving to a box representing the Engineering test phase which is
segmented in two processes
(a) Verification where the Engineering Test Station checks the
prototype to ensure design conformity and functional performance
(b) Characterization where the Engineering Test Station checks the
timing, electrical and environmental limits
(4) Transferring to a box representing Device Manufacturing where the
ICs are produced in quantity.
(5) Ending with a box representing Production Test where the final
quality assurance and performance sorting takes place. The graphic
illustrates that the information resulting from this process at the
engineering test and production phases is fed back to the design phase.
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<PAGE>
Each stage in this process has come under pressure as integrated circuits
have increased in complexity, density and speed. Density of microprocessors has
increased from tens of thousands to millions of transistors. The speed with
which a given integrated circuit can process data has likewise increased
dramatically. Line widths in new generation integrated circuits have decreased
from 5 microns to line widths approaching .18 micron, as more circuits are
packed into the same area. In addition, the number of channels through which
data may be entered or extracted (the "pin count") has increased from single
digits thirty years ago to as many as one thousand pins in chips being developed
today. These developments have occurred in an environment of decreasing cost and
shorter development cycles.
The vast increase in complexity, speed and capability of today's integrated
circuits, and the ability to build them in very tight time-to-market windows,
has been supported and made possible by several generations of technology at the
critical stages of the process: design; engineering test; manufacture and
production test.
DESIGN. At the design stage, several generations and many improvements in
EDA software have allowed design engineers to work with integrated circuit
designs at increasingly higher levels of abstraction, permitting such engineers
to design significantly more complex integrated circuits in less time.
PROTOTYPE MANUFACTURE. After the integrated circuit has been designed,
prototypes are manufactured, allowing the design and test engineers to evaluate
the performance of the integrated circuit before committing to volume
production.
ENGINEERING TEST. At the engineering test stage -- where prototype
integrated circuits are verified and characterized -- successive generations of
Test Stations have significantly reduced the time and expense required to
develop, debug and perform prototype tests, and have greatly enhanced the
ability of test engineers to exchange data with both their design engineering
and production engineering counterparts. Prototype verification Test Stations
are used by design or test engineering groups to verify design conformance or
analyze failures of complex electronic device prototypes. Characterization Test
Stations are used to establish performance specifications for an integrated
circuit design, including timing, electrical characteristics and operation under
varied environmental conditions, such as heat and vibration.
MANUFACTURING. A host of advances in semiconductor manufacturing process
technology have made possible the fabrication of devices that have roughly
doubled in complexity, speed and power every two years for the past twenty
years, while per-unit costs have declined. The impact of evolving process
technologies has been apparent at both the prototype and production stages.
PRODUCTION TEST. The demand for automated, high throughput test equipment
to test production parts has led to the development of several successive
generations of automated test equipment. ATE machines have contributed to the
decrease of device production time by achieving very high throughput testing of
complex devices.
To date, the integrated circuit design process has been serial and iterative
- -- design must be complete before prototypes can be built; prototypes must be
built before they can be tested; and prototypes must be production-ready before
production test software can be written, debugged and refined. Production test
software takes significant time to develop and debug. Until a physical part
exists, it cannot be determined whether a test has been properly designed, or
whether the part has been designed so it can be tested. Even then, test failures
can raise the question of whether the prototype is flawed, or the test has an
error. The problem is compounded when a device has been designed in a way that
some or all of its functionality cannot effectively be tested which, when
discovered, requires the addition of another iteration into the design and
development cycle.
Semiconductor design and test engineers initially used "instrument clusters"
- -- combinations of oscilloscopes, probes, meters, signal generators, analyzers
and other standard electrical engineering tools -- to test prototype integrated
circuits. For tests that could not be done using such tool sets, such as
specialized tests where complex test vectors and precise timing were critical,
these engineers turned to ATE machines designed for volume production testing to
verify and characterize prototypes. However, as integrated circuits became more
complex, the combination of instrument clusters and ATE was not a satisfactory
solution for
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the engineering test problem. Instrument clusters alone did not have the
capability to thoroughly and adequately test increasingly complex prototypes at
the engineering test stage. ATE machines, which are very effective at
high-throughput testing, provide only pass/fail information, and do not have the
flexibility or versatility to efficiently test whether and within what limits a
given part works, or efficiently analyze why it fails to work. For engineering
test, it is more important to be able to change test vectors, reprogram the
tester, debug the test program, and adjust all the variables of the test easily,
routinely and quickly than it is to rapidly test a large volume of one part in a
short time. In addition, fabless integrated circuit designers often do not have
access to ATE machines for use in engineering test, and the in-house development
of specialized test equipment for purposes of verification and characterization
is costly and time-consuming.
THE IMS SOLUTION
The Company's Test Stations give test engineers a flexible, powerful,
cost-effective way to verify and characterize prototype integrated circuits.
Each IMS Test Station integrates the functions of a variety of individual test
instruments into a single unit that offers increased verification and
characterization performance at a significant cost savings over ATE systems. The
IMS Test Stations stimulate the device under test by sending defined signals to
it and then measuring the actual output and comparing it with the expected
output. The IMS Test Stations perform these functions at real-time device
operating speeds. Using the Company's products, design and test engineers can
identify failures, assess areas of concern, run rapid diagnostic sequences to
pinpoint the cause(s) of failure, and identify changes needed to correct design
errors or weaknesses, such as timing problems. Each IMS Test Station is designed
to work with industry standard computers to receive and execute test commands
and report the results of test procedures. Each IMS Test Station can also be
linked to widely used EDA software tools, including those offered by Cadence,
Mentor Graphics, Synopsys and others. The result is a reduction of the overall
time required for verification and characterization, more timely feedback to
design engineers and hence lower cost of design, reduced time-to-market and
increased competitiveness for the companies designing today's increasingly
complex integrated circuits.
IMS TEST SOLUTIONS
BRIDGE THE GAP FROM DESIGN TO PRODUCTION TEST
[L]
IMS TEST SOLUTIONS
BRIDGE THE CAP FROM DESIGN TO
PRODUCTION TEST -- SCHEMATIC
The Schematic illustrates how Virtual Test Software connects the design phase of
electronic devices to the production phase.
The Schematic illustrates the process flow from design to production:
(1) Starting with a box labeled Design
(2) Moving to a box labeled Prototype Manufacturing
(3) Moving next to a box labeled Engineering Test which is subdivided to
a) Verifications (Sub-box)
b) Characterization (Sub-box)
(4) Transferring to a box labeled Device Manufacturing
(5) Ending with a box labeled Production Test
(6) The Schematic shows a rectangle labled Virtual Test which underlies
the whole process and which illustrates that Virtual Test receives input
from the Design Box and connects it to both the Engineering Test Box and the
Production Test Box
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The Company's Virtual Test Software accelerates test program development,
and allows simulation of the device to be tested on a simulation of the ATE
equipment and the test fixture for the device, at the design stage and prior to
the production of a prototype. Virtual Test Software thus allows the test
engineer to develop and debug the test software for the intended ATE system, and
to test for any design flaws in the device (including testing to insure that the
device being designed is itself capable of being tested) before the device is
ever cast in silicon.
Virtual Test Software reduces time to market and test cost in two ways.
First, it reduces the number of iterations between design and test by allowing
test engineers to develop and debug much of their ATE test program and the test
fixture before the device design has been committed to prototype or production
manufacturing. Second, Virtual Test minimizes the need to use expensive and
scarce ATE resources to develop and debug test programs, allowing the ATE System
to be used to find manufacturing defects, its primary use. Accordingly, Virtual
Test Software both reduces the time for the test phases of the development cycle
and allows the test phases to overlap the design and prototype manufacture
phase, thus breaking through the constraint previously represented by the need
for a physical device, and allowing concurrent engineering for faster
time-to-market.
IMS STRATEGY
Since its founding in 1983, the Company's objective has been to become a
leading provider of engineering test solutions that enable design and test
engineers to effectively and efficiently evaluate and test new complex
electronic circuits. To achieve this objective, the Company has focused on using
its core technology to design, develop, manufacture and market innovative,
cost-effective, high performance Test Stations and software to increase
productivity, shorten time-to-market for new products and to reduce the cost of
test. The key elements of the Company's strategy are set forth below.
PROVIDE PRODUCT INNOVATION. The Company intends to continue its focus on
the engineering test marketplace by enhancing its existing Test Station product
line and introducing new Test Station families that are cost-effective, highly
interactive, easy to use and that pass data effectively between EDA and ATE
products and by continuing to introduce enhancements to its Virtual Test
Software and related software products.
EXPAND MARKET SHARE. Based on the number of Company systems installed
worldwide, the Company is a leading supplier of products in the prototype
verification market. The Company intends to leverage that position to increase
its penetration of the characterization market. Due to the Company's knowledge
of the technologies underlying both design and test, the Company believes it can
maintain its leadership position in the market for test development and
simulation (Virtual Test), and intends to devote resources to developing that
market. The Company believes it can also expand its market share by providing
solutions that further bridge the gap between EDA and ATE tools.
CREATE AND MAINTAIN STRATEGIC RELATIONSHIPS. The Company seeks to enhance
its market position by establishing and maintaining strategic relationships with
both EDA and ATE vendors. The Company's relationship with Cadence has provided
the Company with access to technological advances in EDA software as well as
Cadence's broad customer base. The Company has close working relationships with
several leading ATE vendors, including its strategic relationships with
Credence, LTX and Teradyne, which have enhanced market acceptance of Virtual
Test Software. The Company intends to maintain its current strategic
relationships and establish new strategic alliances with additional EDA and ATE
vendors to further strengthen its competitive position.
MAINTAIN HIGH LEVEL OF CUSTOMER SERVICE. The Company believes that a high
level of customer service and support is critical to the adoption and successful
utilization of engineering test technology. By continuing to work closely with
its customers to solve engineering test problems, the Company expects to develop
subsequent generations of Test Stations and Virtual Test Software products that
address the needs of test engineers in the rapidly changing integrated circuit
markets and to use its expertise in interfacing with high performance EDA and
ATE tools.
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EXPAND WORLDWIDE PRODUCT DISTRIBUTION. The Company seeks to expand its
product distribution through ongoing investments in direct sales and through its
relationships with key distributors. The Company intends to build upon
established distributor relationships in foreign markets where partnering adds
market leverage and in other markets where investment in direct sales has not
yet been warranted, and to continue its relationship with Cadence to distribute
its products in certain foreign markets.
PRODUCTS
IMS TEST STATION PRODUCTS
The Company's Test Stations perform a number of functions in bridging the
gap from EDA to ATE. At the beginning of the process, design engineering data,
including EDA simulation data, is converted into data compatible with the
Company's Test Station, thus bridging the gap between design software and
verification. The IMS Test Station software enables data conversion from all
popular simulation products including Verilog, VHDL, Quicksim and others.
During the design verification phase, the user performs tests which verify
whether the circuit conforms to the design specifications. The engineer looks
for fundamental manufacturing process errors or design errors by matching the
previously converted EDA simulation against the actual prototype. Failure to
adequately verify design functionality can lead to costly design alterations
prior to product release.
At the next stage of the process, the characterization phase, the circuit is
subjected to various tests which are intended to define the limits of the device
over several variables, including, but not limited to, temperature ranges,
electrical characteristics and clock and data operating speeds. Failure to
adequately test performance capabilities at this stage can result in a final
product that fails to meet the market requirements of electronic system
manufacturers. The value of many ICs increases as the devices operate at higher
speeds. For example, a 100 MHz microprocessor will sell for more than a 66 MHz
microprocessor. The Company's Test Stations can help identify the areas of the
design or fabrication process that is limiting the operating speed of the IC.
These areas can then be corrected to increase the speed of the device and, as a
result, the device's selling price.
When a failure is found during any phase, Test Station failure analysis
systems can assist the test engineer in probing the device to determine the
nature of the anomaly. Once a logical failure is identified, the physical
location on the circuit can be determined. A laser can then be used to penetrate
the device's passivation layers and single or multiple probes may be inserted at
the excavated site for physical probing. After the fault has been analyzed, the
device design can be corrected.
The Company complies with fixturing conventions which facilitates
compatibility with ATE equipment. Compatible design between the Company's Test
Stations and ATE systems enables rapid movement of devices from the engineering
test environment to production test.
The Company currently offers four families of IMS Test Stations under the
names ATS FT, MTS, ATS Blazer and Logic Master XL. Each family includes multiple
mainframe options and a choice of configurable modules. The Company offers
specialized mixed-signal Test Stations and MCM Test Stations. The Company's Test
Stations are designed and configured to match varying customer requirements.
Generally, they differ from one another as to the maximum clock speed and data
rates (from 40 MHz to 400 MHz), pincount of the device to be tested (from 16
pins to 1,000 or more pins), device technology (digital, mixed-signal, MCM),
flexibility in the number and variety of applications (verification,
characterization, failure analysis, etc.) and price. Test Stations typically
range in price from $200,000 to $1.2 million, though high-pin-count mixed-signal
device systems can sell for as much as $1.8 million, depending on configuration
and intended application.
ATS FT TEST STATION (DIGITAL). The ATS FT (Flexible Timing) Test Stations
are used to perform in depth timing analysis of complex ICs such as ASICs,
microprocessors, and digital signal processors (DSPs). The Company's ATS FT Test
Stations include Time Navigator Software which enables users to rapidly diagnose
timing problems which may exist in complex digital designs. The ATS FT is
available in a variety of pincount configurations and with clock rates up to 400
MHz. The ATS FT's distinguishing characteristic is its
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ability to vary timing to the device in each device clock cycle. This capability
allows the ATS FT to perform critical timing path analysis on the user's device.
The ATS FT can also include-mixed signal test, scan and direct current
parametric test capabilities.
MTS TEST STATION (MIXED-SIGNAL). The Mixed-Signal Test Stations (MTS)
provides all of the digital test capabilities of the ATS FT or ATS Blazer Test
Stations, plus analog test capabilities required for testing multimedia, data
communications, telecommunications, automotive, consumer and medical devices and
multi-chip modules (MCMs). The MTS provides a low noise environment for
interfacing both VXI and GPIB instrumentation to the device under test. A common
software programming language allows easy control over both the digital and
analog capabilities of the system. The Company currently expects to begin
commercial shipments of the MTS Test Station in the second half of calendar
1996.
ATS BLAZER TEST STATION (DIGITAL). The ATS Blazer provides performance and
interactivity for rapid prototype verification, characterization, quality
assurance and failure analysis. The ATS Blazer family provides the performance
characteristics required for testing advanced devices, including complex ASICs,
MCMs and CISC and RISC microprocessors. With a choice of modules (200 MHz, 125
MHz or 100 MHz data speed), a choice of mainframes, optional scan modules (up to
32 M scan data per scan channel) and optional Memory Test capability, the ATS
Blazer can be configured for cost-effective performance for specific target
devices. The system Parametric Measurement Unit ("PMU") provides high
performance DC stimulus and measurement at any system pin. All ATS Blazer data
modules provide per-pin timing adjustment. Standard memory depth per pin is
64K/128K, with options of 2M/4M. Memory can be upgraded in the field. Test
sequencing tools and throughput-enhancing features also make the ATS Blazer
suitable for high pin-count, high performance wafer sorting.
LOGIC MASTER XL TEST STATION (DIGITAL). The Logic Master XL family is a
cost-effective alternative for testing complex devices which do not demand the
performance of the ATS Blazer. A Logic Master XL Test Station can be configured
with modules operating at 100 MHz, 60 MHz, or 40 MHz data rates, with up to 448
input/output pins. Since the input and output may be split, a maximum system can
support 896 data pins, consisting of 448 input and 448 output pins. Optional
scan modules can be added to the Test Station. The system PMU provides high
performance DC stimulus and measurement at any system pin.
Generally, the Company expects future generations of Test Stations to
support increasing pin counts, faster data and clock rates and more exacting
data collection and feedback requirements.
The following table summarizes the Company's current Test Station product
offerings.
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TEST STATION SYSTEM PRODUCTS
<TABLE>
<CAPTION>
PRODUCT FAMILY APPLICATIONS SERVED KEY FEATURES
<S> <C> <C>
ATS FT Test Stations Verification, 200/125 MHz Data
(Digital) Characterization, 400 MHz Clocks
Critical Timing IEEE 1149.1 Scan Module
Analysis,
Failure Analysis,
Yield Enhancement
MTS Test Stations Verification, Same digital capabilities as the
(Mixed-signal)* Characterization, ATS FT or ATS Blazer Test Stations
Critical Timing GPIB/VXI Instumentation Interface
Analysis, Low noise environment
Failure Analysis,
Yield Enhancement
ATS Blazer Test Stations Verification, 200/125/100 MHz
(Digital) Characterization, IEEE Scan Module
Failure Analysis, Memory Test Module
Yield Enhancement
Logic Master XL Test Verification 100/60/40 MHz
Stations Up to 896 pins (448 Input/448
(Digital) Output)
IEEE Scan Module
</TABLE>
- ------------------------
*The Company currently expects to begin commercial shipments of the MTS Test
Station in the second half of calendar 1996.
TEST STATION SOFTWARE PRODUCTS
The Company has developed significant Test Station software products which
are either embedded in the Company's Test Stations or sold as separate add-on
software products. The Test Station software constitutes an important component
of the overall system product content and value. These software packages provide
optimal operation in various applications, including interactive device
verification, fully automated device characterization, and EDA and ATE system
linkages. A key advantage of the IMS products is the interactive ease of use
provided by the software. Whereas production ATE systems require dedicated Test
Engineers to program the systems, IMS systems are developed for use by design
and product engineers. This ease of use allows the engineers to be more
productive and to decrease product time-to-market.
IMS TEST ENVIRONMENT. This software product provides an interactive screen
interface environment for viewing and controlling all Test Station parameters.
This screen interface allows the test designer or test engineer to change the
values on the screen and easily establish new conditions to be implemented on
the device under test. IMS Test Environment also provides multi-variable
plotting capabilities (Shmoo) and a comprehensive library of support routines
(Test LITE) that speed high level language development using ANSI C.
IMS TESTVIEW. This software product provides efficient programming, with a
large library of support routines for data processing and additional test
instrumentation. Built on LabVIEW from National Instruments for Sun
workstations, TestVIEW provides the advantages of a graphical user interface and
also executes rapidly, since the programs are compiled.
IMS-LINK AND ATE-LINK. This software product links the engineering test
phase of integrated circuit development and the EDA and ATE phases. IMS-Link
provides automated EDA simulation output translation to IMS Test Station format.
ATE-Link automates the translation of IMS Test Station output to be format
usable by ATE systems.
The Company's Test Stations can be interfaced to a network, allowing the
Test Station access to other resources on the network, and allowing multiple
workstations on the network to have access to the Test Station. Using various
software tools available from the Company or from third-party vendors, users can
import and export test data to and from the EDA environment. In addition, test
information can be exported for use on ATE systems.
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The following table summarizes the Company's current Test Station software
product offerings.
TEST STATION SOFTWARE PRODUCTS
<TABLE>
<CAPTION>
PRODUCT CAPABILITY
<S> <C>
IMS Test Interactive debug environment for verification
Intuitive, easy-to-learn
Flexible Shmoo plot capability
Library of C routines for turnkey characterization programs (Test
LITE)
IMS TestVIEW Graphical test environment
Supports verification, characterization and failure analysis
Supports digital and mixed-signal device technologies
Integrates software in IMS TCL or ANSI C
IMS-Link Off-line facility for test preparation and rule checking
Linkage between EDA tools and IMS Test Stations
Graphical front end to conversion process
Translates pattern data from Verilog and other popular simulators
Generates IMS Test Station setup files
ATE-Link Works with WaveBridge, PBridge or VBridge software to convert
IMS Test Station files to ATE patterns and timing files
Converts IMS Test Station files into Waveform Generation Language
(WGL) or Standard Event Format (SEF ASCII)
Boundary Scan Test preparation and execution using the Teradyne VICTORY tool set
Supports MCM designs with partial boundary scan implementation
Automatic generation of boundary scan tests
Automatic diagnostics for boundary scan faults
Based on IEEE 1149.1 and BSDL industry standards
Fault Dictionary Complete Fault Dictionary test preparation and fault
identification
Cadence Verifault Fault Dictionary
Open Fault Dictionary interface
</TABLE>
VIRTUAL TEST SOFTWARE
While EDA tools have helped improve designer productivity, little has been
done to provide test development engineers with software productivity tools. As
a result, test development times have increased while design time has been
reduced. To address this trend, the Company has made a major commitment to
providing a set of software tools for test engineers. These tools, called
Virtual Test Software, allow the test engineer to accelerate the generation of a
test program, simulate the test environment, develop the test fixture and
document the entire test process. These tools are run on a workstation rather
than on an expensive ATE system. This software can be used to simulate the ATE
environment and eliminate the need to use ATE machines for debugging test
programs, and allows test engineers to develop test programs in parallel with
the design, prototype manufacturing and engineering test processes.
With Virtual Test Software tools, test engineers begin test development work
before device design is completed. Through the use of tester modeling and
simulation, both the test itself and the testability of the design can be
verified on a workstation before first silicon deliveries.
DANTES. The Company believes that the Dantes product is currently the only
commercially available Virtual Test Software product supporting a broad range of
ATE systems. Dantes provides graphical test capture, automated test fixture
design, layout and analysis, test program simulation and document generation for
most phases of the test process. In addition, Dantes provides an interface with
ATE machines by allowing ATE code generation and ATE emulator interface. Dantes
currently operates in conjunction
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with Cadence EDA software and certain ATE machines manufactured by Advantest,
Credence, LTX, Teradyne and Yokogawa. The Company plans to expand its interfaces
to work with software produced by other EDA vendors and ATE machines produced by
other manufacturers. The Dantes product was originally developed by Cadence and
acquired by the Company in 1994. See "Certain Transactions."
SIMULATION AND TEST LANGUAGE (STL). The STL product provides a Virtual Test
solution for digital applications. The STL product compiles data for simulation
or for a functional test program and permits test engineers to compare
simulation results with normative test data.
The following table sets forth the Company's Virtual Test Software product
offerings.
VIRTUAL TEST SOFTWARE PRODUCTS
<TABLE>
<CAPTION>
PRODUCT APPLICATION CAPABILITY
<S> <C> <C>
Dantes Mixed-signal Graphic test capture
Integrated tester rule checking
Automated test fixture design, layout, analysis
Test program simulation
Automated ATE code generation
ATE emulator interface
Documentation generation
Simulation and Test Digital High level language stimulus generation
Language (STL) Compilation for simulation or functional test
program
Compare simulation results with expected data
</TABLE>
Although Virtual Test Software is a relatively new methodology, revenues for
this product line have grown to 8% of the Company's net sales for the quarter
ended March 31, 1996. The Company believes that its Virtual Test Software
provides a significant advantage to semiconductor designers in shortening
time-to-market and in reducing development cost. However, no assurance can be
given that the Company will be successful in marketing its Virtual Test Software
or that its Virtual Test Software will adequately meet the requirements of the
marketplace and achieve rapid market acceptance.
The success of the Company in developing new and enhanced products depends
upon a variety of factors, including, but not limited to, its continued ability
to adequately fund new product developments, timely and efficient completion of
product design, timely and efficient implementation of manufacturing and
assembly processes and product performance and acceptance at customer locations.
There can be no assurance that the Company will be successful in developing and
marketing new products and product enhancements that respond to technological
change, evolving industry standards and changing customer requirements; that the
Company will not experience difficulties that could delay or prevent the
successful development, introduction and marketing of these products; or that
its new products and product enhancement will adequately meet the requirements
of the marketplace and achieve market acceptance. In particular, the Company's
Virtual Test Software alternative to traditional methods of developing the test
programs for testing complex electronic devices on expensive test equipment has
not yet achieved widespread market acceptance. See "Risk Factors --
Technological Change; Importance of Timely Product Introductions."
TECHNOLOGY
The Company has used a variety of proprietary hardware and software
technologies to design its Test Stations. The Company's proprietary hardware
technology includes, among other things, full-custom gallium arsenide integrated
circuits, semi-custom ECL integrated circuits, semi-custom CMOS integrated
circuits, mixed-signal hybrid assemblies, MCMs and high-speed printed circuit
boards, all of which are manufactured to the Company's specifications by third
parties. These technologies provide fast data conversions from simulator formats
to Test Station formats, complex high speed verification and characterization
capabilities, and support an interactive user environment that allows the
Company's customers to debug complex circuits.
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<PAGE>
The Company's proprietary software technology provides highly refined
capability to convert all generally used simulation data to Test Station
formats, and to enable rapid interactive debug capability for the Company's
customers. The Company's products can exchange data with the EDA design
environments sold by Cadence, Mentor Graphics, Synopsys and ViewLogic and with
the ATE environments of Credence and Teradyne. The Company's proprietary Virtual
Test Software provides an innovative solution to manufacturing test program
development, fixture development and tester rule checking prior to production of
the prototype.
MARKETS AND CUSTOMERS
The Company's products serve design, product and test engineers in the
semiconductor, aerospace, automotive, computer, consumer electronics,
datacommunication, medical electronics, multimedia, network computing,
telecommunications and other industries. The Company's marketing strategy has
been to target its sales efforts in the research and development and production
engineering departments of major corporations in those industries. The Company
seeks a broad base of customers in a variety of industries to reduce the effect
of the cyclical nature of any one industry.
For the years ended December 31, 1993, 1994 and 1995 and the first three
months of 1996, sales to Intel represented approximately 16%, 22%, 30% and 47%
of the Company's net sales, respectively. For the year ended December 31, 1993
and the first three months of 1996, sales to Tokyo Electron represented 12% and
10%, respectively, of the Company's net sales. No other customer accounted for
more than 10% of the Company's net sales in 1993, 1994, 1995 or the three months
ended March 31, 1996. The Company's five largest customers based on 1995 net
sales are Intel, Tokyo Electron Limited, Hughes Microelectronics, Lucky Goldstar
and Samsung.
The loss of a major customer or any reduction in orders by such customers,
including reductions due to market or competitive conditions, would have a
material adverse effect on the Company's business, financial condition and
results of operations. Moreover, the Company's future success will depend in
part upon its ability to obtain orders from new customers, as well as the
financial condition and success of its customers and the general economy. See
"Risk Factors -- Customer Concentration" and Note 9 of Notes to the Financial
Statements.
ENGINEERING TEST STATION MARKET. The Company's engineering Test Stations
are part of the Logic Test market, which is the largest segment of the overall
semiconductor ATE market. The Logic ATE market is broken into two major sectors,
Engineering Test and Production Test. The Company's Test Stations are primarily
used in Engineering Test applications for prototype verification and
characterization.
PRODUCTION MARKET. Production ATE Systems are used after production
manufacturing to find defective parts or to sort for performance
characteristics. Production ATE systems typically require high throughput,
timing accuracy and timing flexibility. Production ATE systems are typically the
most expensive test systems used. The production ATE market is highly
competitive and under pricing pressures as lower cost ATE systems enter the
market.
VIRTUAL TEST MARKET. The Company believes semiconductor companies will
continue to seek ways to improve test engineering productivity and ATE capital
utilization and will, therefore, allocate funds from their test engineering
budgets or ATE capital budgets to purchase the Company's Virtual Test Software.
In addition, Virtual Test Software may be used with the existing installed based
of ATE equipment as well as newly purchased equipment.
While all semiconductor companies can potentially use Virtual Test Software
to reduce time-to-market and save development cost, it is important to recognize
that both the methodology and product are new and the market is therefore
difficult to quantify.
CUSTOMER SUPPORT AND SERVICE
To be competitive, the Company believes it must provide a high level of
support and service. Support and service accounted for 20% and 23% of the
Company's net sales for the fiscal year ended December 31, 1995 and the three
months ended March 31, 1996, respectively. The Company maintains and supports
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<PAGE>
products sold directly in the United States with the Company's service and
support personnel. The Company's international distributors and dedicated
international sales agents generally provide maintenance and support to their
customers. In addition, Cadence acts as a sales agent for the Company's Virtual
Test Software in which capacity it provides "first call" support to its own
customers. The Company offers a toll-free technical support hotline to customers
and distributors. Support engineers answer the technical support calls and
generally provide same-day responses to questions that cannot be resolved during
the initial call. When necessary, however, support engineers are dispatched to
the customer's facility. In addition, the Company provides refurbishment
services to customers who purchase used Test Stations.
The Company maintains a rapid response program which is designed to quickly
respond to customer support issues. Many of the Company's customers currently
have support agreements with the Company. The Company ranked first in 1994 and
1993 in customer satisfaction and quality in the test equipment market according
to VLSI Research, Inc. The Company's general warranty period ranges from three
months to one year for its Test Stations. During such warranty period, the
Company will repair or replace failed components. The Company generally warrants
its software products for three months. During such warranty period, the Company
will investigate all reported problems and will endeavor to provide a solution.
Warranty costs have not been significant to date, but no assurance can be given
that such costs will not increase in the future or that any such increase would
not have a material adverse effect on the Company's financial condition and
results of operations. A majority of the Company's customers enter into
maintenance agreements with the Company which become effective upon the
expiration of the warranty period.
MANUFACTURING OPERATIONS
The Company's Test Stations are complex and are used by the Company's
customers in critical projects which demand a high level of quality and
reliability. The Company invests significant resources to assure the high
quality and reliability of its Test Stations and is committed to providing a
high level of service to its customers in the event of malfunction to minimize
downtime. The Company's manufacturing operations primarily consist of order
administration, materials planning, procurement, final assembly, quality control
of materials, components and subassemblies, final systems integration and
extensive calibration and testing. The Company uses a manufacturing control
computer system to monitor orders, as well as purchasing, inventory, production
and manufacturing costs.
The Company currently uses several independent third-party vendors to
manufacture its subassemblies and semiconductor components, including circuit
boards, integrated circuits and integrated circuits packaging, cable assembly
and mechanical parts. External manufacturing is performed to the Company's
specifications with technical support from the Company. If any of the Company's
third-party vendors were to experience financial, operational, production or
quality assurance difficulties or a catastrophic event that resulted in a
reduction or interruption in supply to the Company, the Company's operating
results would be materially adversely affected until the Company was able to
establish sufficient manufacturing supply from alternative sources. While to
date suitable third party manufacturing capacity has been available, there can
be no assurance that such manufacturers will be able to meet the Company's
future requirements or that such services will continue to be available to the
Company at favorable prices. See "Risk Factors -- Dependence on Third Party
Manufacturers."
The Company believes it has developed a strong vendor base, purchasing
components and subassemblies both from national distributors and directly from
vendors' factories. Some of the subassembly vendors are small, local companies
to which IMS represents substantial volume.
The components used in the Company's products consist of standard parts
available from a multitude of vendors, along with a number of proprietary items
available only from sole or single source suppliers. The Company has supply
commitments from a limited number of its vendors and generally purchases
components on a purchase order basis as opposed to entering into long-term
volume agreements. The Company seeks to limit the risk of supply disruptions
through close relationships with vendors and through a safety stock program that
provides a reserve supply of critical components that will give the Company time
to develop a second source supplier in a timely fashion in the event of a supply
disruption. However, no assurance can be given that these efforts will prove
successful in all cases.
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<PAGE>
Currently, the Company purchases a number of critical parts from sole source
suppliers for which alternative sources are not available. The Company's
reliance on a sole or a limited group of suppliers and on outside subcontractors
involves several risks, including a potential inability to obtain an adequate
supply of required components and reduced control over pricing and timely
delivery of components. The Company has generally been able to obtain adequate
supplies of components in a timely manner from current vendors, or, when
necessary to meet production needs, from alternate vendors. However, the Company
has occasionally experienced component supply, quality or third party assembly
problems. For example, the Company depends on a sole sourced custom integrated
circuit in one of its Test Stations. In 1994, a significant portion of new
deliveries of this part did not meet specifications, thereby resulting in Test
Stations being unable to detect failures when operating at speeds below 10 MHz.
Recently, the Company experienced late delivery of IC components used in the
driver module of certain of its Test Stations. In addition, the limits within
which these components operated required the Company to change its product
specifications for those Test Stations. The Company has thus far been able to
avoid any material adverse impact on timing of customer deliveries for its Test
Stations resulting from problems of this type. However, no assurance can be
given that supply problems will not recur and, if such problems do recur, that
these strategies will be effective in every case. Any prolonged inability to
obtain adequate supplies of quality components or any other circumstances that
would require the Company to seek alternative sources of supply could have a
material adverse effect on the Company's business, financial condition and
results of operation and could damage the Company's relationships with its
customers.
The Company is currently in the process of implementing a new information
system to handle the Company's financial, accounting and production planning and
control functions. No assurance can be given that the implementation of this
system will not result in significant disruptions to the Company's business such
as the loss of data while converting systems, errors in planning production
requirements, delays in the Company's ability to effect timely closings of its
accounting records and other similar problems. Any such disruptions or any
failure to successfully implement this new information system in a timely manner
could have a material adverse effect on the Company's business, financial
condition or results of operations.
MARKETING AND DISTRIBUTION
The Company markets its products domestically through a direct sales force
which, as of March 31, 1996, consisted of 36 direct sales and applications
engineering professionals, sales managers and sales support personnel. The
direct sales force has primary responsibility for developing orders,
coordinating distribution, providing demonstrations and providing applications
support. The Company employs skilled applications and service engineers and
technically proficient sales people capable of serving the sophisticated needs
of prospective customers' engineering staffs as part of the customer support
process. The sales force is managed from the Company's headquarters in
Beaverton, Oregon and its three regional offices in Irvine and San Jose,
California; and Boston, Massachusetts.
The Company markets its products internationally through independent
distributors managed by the Company and through dedicated agents employed by
Cadence subsidiaries in England, France, Germany and Israel. The Company also
sells through independent distributors in Scandinavia and Italy. The Company may
choose to establish foreign sales subsidiaries to conduct its foreign sales
operations in some locations, and may take over distribution directly from
Cadence in some jurisdictions. In Asia, the Company sells through dedicated
employees of Cadence subsidiaries in Taiwan and through distributors in Japan,
the People's Republic of China, the Philippines, Hong Kong, Malaysia/Singapore
and Korea. International sales accounted for approximately 33%, 40%, 32% and 30%
of the Company's net sales for the years ended December 31, 1993, 1994 and 1995,
and for the three months ended March 31, 1996, respectively. The Company's
foreign sales and service operations are subject to risks inherent in foreign
operations, including unexpected changes in regulatory requirements, exchange
rates, tariffs or other barriers and potentially negative tax consequences. In
addition, in certain jurisdictions, there is a risk of reduced protection for
the Company's copyrights, trademarks and trade secrets. See Note 9 to Notes to
the Financial Statements.
The Company exhibits at trade shows to promote existing products and to
introduce new products, and participates in technical forums to exchange
marketing and product information with its vendors and
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<PAGE>
customers. The Company also uses advertising in trade journals, technical
articles, direct mail and telephone solicitations to build interest in the
Company and its products. The Company provides extensive training for its sales
representatives and distributors and supports its representatives and
distributors with marketing tools, including sales brochures, demonstration test
equipment and promotional product literature.
RESEARCH AND DEVELOPMENT
The electronic design and test equipment market is subject to rapid
technological change and new product introductions. The Company's ability to
remain competitive in this market will depend in significant part upon its
ability to continue to successfully develop and introduce new products and
enhancements on a timely and cost-effective basis. There can be no assurance
that the Company will be successful in developing and marketing new products and
product enhancements that respond to technological change, evolving industry
standards and changing customer requirements, that the Company will not
experience difficulties that could delay or prevent the successful development,
introduction and marketing of these products, or that its new products and
product enhancements will adequately meet the requirements of the marketplace
and achieve market acceptance.
The selection of new capabilities for existing products and of
specifications for new product lines is driven in significant part by strong
communication links with customers. Accordingly, maintaining those communication
links is a significant strategic necessity for the Company. The Company's
ongoing research and development efforts include the enhancement of current
generation Test Stations and Virtual Test Software and the ongoing development
of future generation products.
The Company has historically devoted the great majority of its research and
development efforts to the design and development of engineering Test Stations
and related hardware and software technologies. Its Virtual Test Software
technology was originally developed by Cadence employees and transferred to the
Company. The Company is currently developing additional software products for
its Virtual Test product line and expects to devote considerable internal
research and development efforts to this product line in the future.
Research and development expenditures for 1993, 1994, 1995 and the three
months ended March 31, 1996 were $3.1 million, $3.7 million, $6.2 million and
$2.0 million, respectively. The Company's research and development efforts with
respect to both hardware and software are handled by the Company's research and
development department. The ratio of software engineers to hardware engineers is
approximately five to one.
COMPETITION
The design and test equipment market is highly competitive. Although the
Company believes that it has a competitive advantage in the verification market
due to the high performance and cost effectiveness of its products, the Company
anticipates that technical advancement in the industry generally could lead to
increased competition in the future.
The Company believes that the principal competitive factors in the
verification and characterization markets are product performance and
reliability, price, ease of use, marketing and distribution capability, service
and support and the supplier's reputation and financial stability. The Company
believes that it competes favorably with respect to all principal competitive
factors and that it is particularly strong in the areas of product performance,
ease of use, low cost and service and support.
The Company currently competes with a number of other verification and
characterization equipment manufacturers. Some of these manufacturers, such as
Hewlett-Packard, Teradyne and Tektronix have greater financial, marketing,
manufacturing and technological resources than the Company. New product
introductions or product announcements by the Company's competitors could cause
a decline in sales or loss of market acceptance of the Company's existing
products. Moreover, increased competitive pressure could lead to intensified
price-based competition, which could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
believes that its long-term success will depend largely on its ability to
identify design and test needs ahead of its competitors and develop products
which respond to those needs in a timely manner. In addition, no assurance can
be given that other companies, including Cadence, which retains certain rights
to the Virtual Test Software technology, and
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other EDA companies, will not develop methodologies and products that are
competitive with the Company's Virtual Test Software business. The Company also
believes that to remain competitive, it will require significant financial
resources in order to invest in new product development and to maintain a
worldwide customer service and support network. There can be no assurance that
the Company will be able to compete successfully in the future. See "Risk
Factors -- Highly Competitive Industry."
BACKLOG
The Company schedules production of its Test Stations based upon order
backlog and order forecast. The Company includes in its backlog only those
customer orders for systems and services for which it has accepted purchase
orders and assigned shipment or performance dates within the following twelve
months. The majority of the Company's orders, however, are subject to
cancellation or rescheduling by the customer with limited or no penalties.
Accordingly, the Company's 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, cancellations of orders and potential delays in system
shipments.
PROPRIETARY RIGHTS
The Company does not currently have any patents and historically has relied
principally on trade secret and copyright law to protect its technology. The
Company believes that, because of the rapid pace of technological change in the
data communications and telecommunications industries, the legal intellectual
property protection for its products is a less significant factor in the
Company's success than the knowledge, abilities and experience of the Company's
employees, the frequency of its product enhancements, the effectiveness of its
marketing activities and the timeliness and quality of its support services. The
Company's policy has been to enter into nondisclosure/confidentiality agreements
with all employees, and it generally enters into agreements with vendors and
others that likewise limit access to and distribution of its proprietary
information. There can be no assurance that the steps taken by the Company will
provide adequate protection of its technology or that competitors will not be
able to develop similar or functionally equivalent technology. In the future,
the Company may receive notice of claims of infringement of other parties'
proprietary rights and there can be no assurance that infringement or invalidity
claims (or claims for indemnification resulting from infringement claims against
third parties, such as customers) will not be asserted against the Company or
that any such assertions will not have a material adverse affect on the
Company's business, financial condition and results of operations. If any claims
or actions are asserted against the Company, the Company may seek to obtain a
license of such third party's intellectual property rights. There can be no
assurance, however, that under such circumstances, a license would be available
under reasonable terms or at all. See "Risk Factors -- Proprietary Rights." The
Company also licenses and/ or holds marketing rights to certain software, to
which the copyright is owned by other parties including Cadence. See "Certain
Transactions."
EMPLOYEES
At March 31, 1996, the Company had 222 employees, including 53 in marketing
and sales, 68 in manufacturing, 70 in research, development and engineering and
31 in administration and finance. The Company believes that its future success
will depend on its continued ability to attract and retain highly qualified
technical, management and marketing personnel. The Company's employees are not
subject to a collective bargaining unit and the Company believes that its
employee relations are very good. The Company also currently sells and supports
its products in Europe, Israel and Taiwan through Cadence employees located in
Cadence facilities and who act as dedicated agents of the Company under the
terms of the Corporate Services Agreement. These Cadence employees sell and
support the Company's products on a full-time basis and coordinate their efforts
with the Company's manufacturing facility in the United States. The Company pays
to Cadence the full cost of Cadence's expense (plus an agency fee) for Cadence's
employees who will fulfill dedicated agent functions of the Company in certain
markets under the terms of a Corporate Services Agreement between the Company
and Cadence. See "Certain Transactions." There can be no assurance that the
Company will retain the services of such agents for the term of the Corporate
Services Agreement or that replacement personnel could be retained on a timely
basis, if at all. The loss of
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such personnel and the failure to attract and retain replacement employees, or
the costs associated with hiring new sales personnel and providing adequate
facilities and benefits to such employees would likely have a material adverse
effect on the Company's business, financial condition and results of operations.
PROPERTIES
The Company's executive offices, as well as its principal manufacturing,
engineering and marketing operations, are located in a leased building of
approximately 75,000 square feet in Beaverton, Oregon. The lease expires on
December 31, 1998. The Company believes the space will be adequate through that
period and, if required, suitable space is available nearby. The Company also
leases a total of approximately 7,500 square feet of office space in which its
eastern and western regional sales offices are located. Under a Corporate
Services Agreement between Cadence and the Company, Cadence has agreed to
provide office space and associated office support for certain Company personnel
located in the United States and a number of foreign countries. See "Certain
Transactions -- Agreements with Cadence."
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MANAGEMENT
The following table sets forth certain information with respect to the
executive officers and directors of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------------- --- ------------------------------------------------------------
<S> <C> <C>
Keith L. Barnes.............................. 44 President, Chief Executive Officer and Director
Sar Ramadan.................................. 53 Chief Financial Officer, Secretary and Treasurer
Mark Allison................................. 39 Vice President, Marketing
W. Barry Baril............................... 44 Vice President, Engineering
James P. Fraine.............................. 40 Vice President, Sales
Donald E. Grant.............................. 54 Vice President, Operations
Gwyn Harvey.................................. 42 Director of Human Resources
Kenneth R. Lindsay........................... 51 Vice President, Asia Operations
Marvin S. Wolfson............................ 43 General Manager, Test Software Division
H. Raymond Bingham (1)....................... 50 Chairman of the Board
Delbert W. Yocam (2)......................... 52 Director, Compensation Committee Chairman
C. Scott Gibson (1)(2)....................... 43 Director, Audit Committee Chairman
James M. Hurd (1)............................ 48 Director
James E. Solomon............................. 59 Director
</TABLE>
- ------------------------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
Mr. Barnes has been the Company's President since April 1991 and became a
director of the Company in 1989. From 1989 to 1991, Mr. Barnes was the Company's
General Manager. Mr. Barnes is a member of the Board of Trustees for the Oregon
Graduate Institute of Science and Technology. Mr. Barnes is Chairman Ex-officio
of the American Electronics Association, Oregon Council, and was a member of the
Board of Directors of the American Electronics Association in 1993. Mr. Barnes
is a director of Eclipse Technology, a manufacturer of laser imaging products.
Mr. Ramadan joined the Company in 1993 as Chief Financial Officer, and was
elected Secretary and Treasurer in 1995. Prior to joining IMS, Mr. Ramadan held
the positions of Finance Director and Chief Accounting Officer of Mentor
Graphics Corp., a supplier of EDA software, from 1987 to 1993. In addition he
was Vice President of Finance for CAD/CAM Resources Inc., a computer aided
mechanical design business, between 1985 and 1987, and Vice President Group
Controller at Computervision Corporation from 1979 to 1985.
Mr. Allison joined the Company in November 1995 as Vice President of
Marketing. Prior to joining the Company, Mr. Allison was Director of Memory
Marketing for Credence Corporation during 1995 and Director of Marketing for
Megatest Corporation, from 1985 to 1995. Both companies are ATE manufacturers.
Mr. Baril is a founder of the Company, and has been the Vice President of
Engineering since the Company's inception in 1983. Previously, Mr. Baril was
Engineering Group Manager for the Logic Analyzer Division of Tektronix, a high
technology company, for one year, Hybrid Circuit Project Manager and Group
Leader for three years in Tektronix labs, and a Hybrid Circuit Project Leader
and Design Engineer for four years at Burr Brown, an analog integrated circuit
company.
Mr. Fraine joined the Company in 1994 as Vice President of Sales. Prior to
joining the Company, he was the National Sales Manager at Teradyne, Inc., an ATE
company, from 1989 to 1994 and held the position of Account Manager at GenRad,
Inc. from 1976 to 1986. In addition, Mr. Fraine has held several sales and
marketing positions at STS/Axiom Technology, Inc., a mixed-signal test equipment
company.
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Mr. Grant joined the Company in 1989 as Vice President of Operations. Prior
to joining the Company, Mr. Grant was Director of Manufacturing at Protocol
Systems, a medical device manufacturer, from 1986 to 1989 and Director of
Operations at Kentrox Industries from 1983 to 1986. Mr. Grant held various
manufacturing positions with Hewlett Packard from 1972 to 1983.
Ms. Harvey joined the Company in 1987 as Director of Human Resources. Prior
to joining the Company, Ms. Harvey worked in a variety of human resources
positions with Metheus Corporation, Computervision Corporation,
Metheus-Computervision, Inc., Sierracin-EOI and Fairchild, a Schlumberger
Company.
Mr. Lindsay is a founder of the Company, and has served as Vice President of
Asia Operations since 1992, Asian Business Manager from 1989 to 1992 and Vice
President and Director of Marketing from 1983 to 1989. Prior to joining the
Company, Mr. Lindsay was world wide Marketing Manager for the Semiconductor Test
Systems Division of Tektronix, and held other marketing, management, and
engineering positions at Tektronix.
Mr. Wolfson joined the Company in 1992 as Vice President of Marketing and
became General Manager of the Software Division in 1994. In November 1995, Mr.
Wolfson became the General Manager of the Test Software Division. Prior to
joining the Company, Mr. Wolfson held a variety of positions with Mentor
Graphics, a supplier of EDA software, between 1983 and 1992, including Marketing
Director, General Manager and Product Group Vice President. Prior to joining
Mentor Graphics, Mr. Wolfson held engineering management positions with
Honeywell's Solid State Electronics Division, as well as a number of technical
and managerial positions in the EDA simulator industry.
Mr. Bingham has been a director of the Company since July 1993 and Chairman
of the Board since May 1995. Mr. Bingham joined Cadence in June 1993 as
Executive Vice President and Chief Financial Officer. From June 1985 to May
1993, he served as Executive Vice President and Chief Financial Officer of Red
Lion Hotels and Inns, which owns and operates a chain of hotels. Mr. Bingham
serves as a director of Sunstone Investors Inc.
Mr. Yocam has served as a director of the Company since May 1995. He has
been an independent consultant from November 1994 to the present. Mr. Yocam
served as President, Chief Operating Officer and a director of Tektronix, Inc.,
a high technology company, from September 1992 through November 1994. He was an
independent consultant from November 1989 until September 1992. Mr. Yocam was
with Apple Computer, Inc. from November 1979 through November 1989, serving in a
variety of executive management positions including Chief Operating Officer from
August 1986 through August 1988 and President of Apple Pacific from August 1988
to November 1989. Mr. Yocam is also a director of Adobe Systems, Inc., Castelle,
Inc., Oracle Corp. and Sapiens International Corp.
Mr. Gibson has served as a director of the Company since May 1995. Mr.
Gibson co-founded Sequent Computer Systems, Inc., a computer system supplier, in
1983 and served as Sequent's President from 1988 through March 1992. Mr. Gibson
serves as Chairman of the Board of Directors of Adaptive Solutions, Inc., and a
director of Inference Corp., RadiSys Corporation and TriQuint Semiconductor,
Inc. Mr. Gibson also serves as a Vice Chairman of the Oregon Graduate Institute
of Science and Technology and as a director of several privately held technology
companies.
Mr. Hurd has served as a director of the Company since May 1995. Mr. Hurd
co-founded Planar Systems, Inc., a publicly traded manufacturer of high
performance information displays and has served as its President and Chief
Executive Officer since 1983. Mr. Hurd is also a director of Planar Systems,
Inc. Mr. Hurd is a member of the Board of Trustees for the Oregon Graduate
Institute of Science and Technology.
Mr. Solomon has served as a director of the Company since April 1995. Mr.
Solomon has served as Senior Vice President and Chief Technology Officer for
Cadence since February 1994. Mr. Solomon has served as Senior Vice President of
Cadence's Analog Division from January 1993 to February 1994 and as
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President of Cadence's Analog Division from December 1988 to January 1993. Mr.
Solomon also served as Co-Chairman of the Board of Directors of Cadence from May
1988 until May 1989. Mr. Solomon is also the Chairman of the Board of Smart
Machines, Inc., and Xulu Entertainment, Inc., private companies.
The Company's directors are divided into three classes and serve for three
year terms, with one class being elected by the shareholders each year. The
terms of the current directors will expire as follows: Messrs. Bingham and Yocam
in 1997, Messrs. Barnes and Gibson in 1998 and Messrs. Solomon and Hurd in 1999.
The members of the Audit Committee currently are Messrs. Gibson, Hurd and
Bingham. The Audit Committee reviews the scope of the independent annual audit,
the independent public accountants' letter to the Board of Directors concerning
the effectiveness of the Company's internal financial and accounting controls
and the Board of Directors' response to that letter, if deemed necessary. The
Board of Directors also has appointed a Compensation Committee which reviews
executive compensation and establishes executive compensation levels and also
administers the Company's stock option plans and the 1995 Employee Stock
Purchase Plan. During the fiscal year ended December 31, 1995, the Compensation
Committee held nine meetings. The members of the Compensation Committee
currently are Messrs. Yocam and Gibson.
Article V of the Company's Restated Articles of Incorporation, (the
"Restated Articles"), provides that the Company's directors may be removed only
for cause, and only at a meeting called expressly for that purpose by a vote of
75% of the votes then entitled to be cast for the election of directors.
Executive officers of the Company are appointed by the Board of Directors
and serve at the discretion of the Board.
DIRECTOR COMPENSATION
The members of the Company's Board of Directors are reimbursed for
out-of-pocket and travel expenses incurred in attending Board meetings. In
addition, non-employee members of the Board of Directors receive an annual
retainer of $10,000, $1,000 for each Board meeting attended and $1,000 for each
meeting of a committee of the Board attended. Under the Company's 1995 Stock
Option Plan for Nonemployee Directors, each person who is a nonemployee director
receives certain stock options. See "-- 1995 Stock Option Plan for Nonemployee
Directors."
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EXECUTIVE COMPENSATION
The following table provides certain summary information concerning
compensation for the fiscal years ended December 31, 1994 and 1995 of the
Company's Chief Executive Officer and each of the four other most highly
compensated executive officers of the Company (collectively, the "named
executive officers"), for the fiscal year ended December 31, 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
----------------------------------------------- --------------
OTHER ANNUAL STOCK OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION GRANTED COMPENSATION
- ---------------------------------------------- --------- ---------- --------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Keith L. Barnes .............................. 1994 $ 185,000 $ 58,366 $ 7,115(1) 70,000(2) $ 7,493(3)
President and Chief Executive Officer 1995 195,000 98,886 11,538(1) 84,000 7,654(3)
James P. Fraine .............................. 1994 59,583 -- 27,436(4) -- 27,237(5)
Vice President, Sales 1995 132,250 -- 83,101(4) 14,000 7,331(5)
Kenneth R. Lindsay ........................... 1994 82,400 -- 104,831(4) 3,000(2) 661(6)
Vice President, Asia Operations 1995 95,983 1,689 52,916(4) 28,000 8,052(3)
Marvin S. Wolfson ............................ 1994 124,080 37,626 -- -- 404(6)
General Manager, Test Software Division 1995 124,080 28,265 -- 31,000 404(6)
W. Barry Baril ............................... 1994 108,760 30,831 -- 15,000(2) 1,579(6)
Vice President, Engineering 1995 113,440 31,149 4,423(1) 70,000 361(6)
</TABLE>
- ------------------------
(1) Reflects a cash payment in lieu of vacation.
(2) Reflects options to purchase shares of Cadence Common Stock.
(3) Represents automobile allowance and Company payments of additional insurance
premiums.
(4) Represents sales commissions.
(5) Represents relocation reimbursement and Company payments of additional
insurance premiums.
(6) Represents Company payments of additional insurance premiums.
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<PAGE>
OPTION GRANT TABLE
The following table sets forth certain information concerning options
granted to the named executive officers during the year ended December 31, 1995
under the Company's 1995 Stock Option Plan.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED ANNUAL
NUMBER OF PERCENT OF RATES OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO EXERCISE TERM(3)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION ------------------------
NAME GRANTED(1) FISCAL 1995 SHARE(2) DATE 5% 10%
- ---------------------------------------- ----------- ------------- ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Keith L. Barnes......................... 84,000 15% $ 8.50 5/10/05 $ 448,560 $ 1,138,200
James P. Fraine......................... 14,000 3 8.50 5/10/05 74,760 189,700
Kenneth R. Lindsay...................... 28,000 5 8.50 5/10/05 149,520 379,400
Marvin S. Wolfson....................... 31,000 6 8.50 5/10/05 165,540 420,050
W. Barry Baril.......................... 70,000 13 8.50 5/10/05 373,800 948,500
</TABLE>
- ------------------------
(1) Options granted become exercisable starting with the end of the month of the
grant date, with 1/48th of the total number of options granted becoming
exercisable at that time and with an additional 1/48th of such options
becoming exercisable each month thereafter, with a total four-year vesting
period.
(2) Options were granted at an exercise price equal to the estimated fair market
value of the Company's Common Stock at the time of grant.
(3) The potential realizable value is calculated based upon the term of the
option at its time of grant (10 years) and is calculated by assuming that
the stock price on the date of grant appreciates at the indicated annual
rate compounded annually for the entire term of the option and that the
option is exercised and sold on the last day of its term for the appreciated
price. The 5% and 10% assumed rates of appreciation are derived from the
rules of the Securities and Exchange Commission and do not represent the
Company's estimates or projection of the future Common Stock price. There
can be no assurance that the Common Stock will appreciate at any particular
rate or at all in future years.
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<PAGE>
OPTION EXERCISES AND HOLDING
The following table sets forth certain information with respect to the named
executive officers concerning the exercise of options granted under the
Company's 1995 Stock Incentive Plan during the year ended December 31, 1995, and
the value of unexercised options held as of December 31, 1995.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FY-END(1) AT FY-END(1)(2)
ACQUIRED ON VALUE -------------------------- --------------------------
NAME EXERCISE(1) REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Keith L. Barnes.................. -- -- 14,004 69,996 $ 87,525 $ 437,475
James P. Fraine.................. -- -- 2,334 11,666 14,588 72,913
Kenneth R. Lindsay............... -- -- 4,668 23,332 29,175 145,825
Marvin S. Wolfson................ -- -- 5,168 25,832 32,300 161,450
W. Barry Baril................... -- -- 11,671 58,329 72,944 364,556
</TABLE>
- ------------------------
(1) The above table excludes information regarding exercises and the year-end
value of options to acquire shares of Common Stock of Cadence (the Company's
majority shareholder) granted prior to the Company's initial public offering
and in years prior to 1995. Cadence offers its employees a stock option
program, including employees employed by subsidiaries of Cadence. Prior to
contemplation of the Company's initial public offering, Cadence offered
options to acquire Common Stock of Cadence to Company employees and officers
under the stock option program. All of the options to acquire Common Stock
of Valid Logic held by Company employees as of the 1991 merger of Cadence
and Valid Logic, of which the Company was then a subsidiary, were exchanged
for options to acquire shares of Common Stock of Cadence. The options to
acquire Common Stock of Cadence have been vesting since Cadence's merger
with Valid Logic. No options to acquire Common Stock of Cadence were granted
in 1995 to any officers of the Company. In 1995, Company employees,
including officers, exercised 422,827 options to acquire Common Stock of
Cadence and realized gains of $7,123,995. Of these 422,827 options
exercised, officers of the Company exercised options for 228,095 shares of
Cadence Common Stock and realized gains of $3,771,390. The named executive
officers accounted for gains of $3,007,025.
Gains from the exercise and sale of Cadence options do not impact the
Company's expenses or results of operations. Furthermore, such options do
not enter into the calculation of the Company's outstanding shares nor its
earnings per share calculations.
The Shares Acquired on Exercise, Value Realized, Number of Securities
Underlying Unexercised Options at FY-End (Exercisable/Unexercisable) and
Value of Unexercised In-the-Money Options at FY-End
(Exercisable/Unexercisable) with respect to the Cadence options held by the
named executive officers is as follows: Mr. Barnes -- 137,718, $2,114,391,
0, 35,836, $0 and $1,189,100; Mr. Fraine -- 13,275, $239,251, 6, 24,219,
$191 and $770,467; Mr. Lindsay -- 5,380, $60,215, 937, 4,220, $31,332 and
$140,368; Mr. Wolfson -- 11,460, $202,506, 3,124, 4,167, $111,097 and
$148,189; Mr. Baril -- 22,895, $390,661, 1,467, 15,330, $49,413, and
$505,093. The Cadence share numbers presented herein do not reflect the
3-for-2 stock split to be paid as a dividend to Cadence shareholders of
record as of May 16, 1996.
(2) Amounts reflected are based upon the market value of the underlying
securities at fiscal year end minus the exercise price.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors consists of two
persons, neither of whom has been or is an officer or an employee of the
Company.
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<PAGE>
STOCK OPTION PLANS
1995 STOCK INCENTIVE PLAN
The Company's 1995 Stock Incentive Plan (the "1995 Plan"), which was
approved by the Company's sole shareholder on May 11, 1995, provides for grants
of both "incentive stock options" within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code") and "non-qualified stock
options" which are not qualified for treatment under Section 422 of the Code,
and for direct stock grants and sales to employees or consultants of the
Company. The purposes of the 1995 Plan are to attract and retain the best
available personnel for positions of substantial responsibility, to provide
additional incentives to the employees and consultants of the Company and to
promote the Company's business. The 1995 Plan is administered by the
Compensation Committee of the Board of Directors.
The term of each option granted under the 1995 Plan will generally be ten
years from the date of grant, or such shorter period as may be established at
the time of the grant. An option granted under the 1995 Plan may be exercised at
such times and under such conditions as determined by the Compensation
Committee. If a person who has been granted an option ceases to be an employee
or consultant of the Company, such person may exercise that option only during
the exercise period established by the Compensation Committee at the time the
options were granted, which shall not exceed 90 days after the date of
termination, and only to the extent that the option was exercisable on the date
of termination. If a person who has been granted an option ceases to be an
employee or consultant as a result of such person's total and permanent
disability, such person may exercise that option at any time within twelve
months after the date of termination, but only to the extent that the option was
exercisable on the date of termination. No option granted under the 1995 Plan is
transferable other than at death, and each option is exercisable during the life
of the optionee only by the optionee. In the event of the death of a person who
has received an option, the option generally may be exercised by a person who
acquired the option by bequest or inheritance during the twelve month period
after the date of death, to the extent that such option was exercisable at the
date of death.
The exercise price of incentive stock options granted under the 1995 Plan
may not be less than the fair market value of a share of Common Stock on the
last market trading day prior to the date of grant of the option. Non-qualified
stock options may not be granted for less than 85% of fair market value and
options granted to greater than 10% shareholders may not be granted for less
than 110% of fair market value. The consideration to be paid upon exercise of an
option, including the method of payment, will be determined by the Compensation
Committee and may consist entirely of cash, check, shares of Common Stock or any
combination of such methods of payment as permitted by the Compensation
Committee.
Certain options authorized to be granted under the 1995 Plan are intended to
qualify as incentive stock options for federal income tax purposes. Under
federal income tax law currently in effect, the optionee will recognize no
income upon grant or upon a proper exercise of an incentive stock option. If an
employee exercises an incentive stock option and does not dispose of any of the
option shares within two years following the date of grant and within one year
following the date of exercise, then any gain realized upon subsequent
disposition of the shares will be treated as income from the sale or exchange of
a capital asset. If an employee disposes of shares acquired upon exercise of an
incentive stock option before the expiration or either the one-year holding
period or the two-year waiting period, any amount realized will be taxable as
ordinary compensation income in the year of such disqualifying disposition to
the extent that the lesser of the fair market value of the shares on the
exercise date or the fair market value of the shares on the date of disposition
exceeds the exercise price. The Company will not be allowed any deduction for
federal income tax purposes at either the time of the grant or exercise of an
incentive stock option. Upon any disqualifying disposition by an employee, the
Company will be entitled to a deduction to the extent the employee realized
ordinary income.
Certain options authorized to be granted under the 1995 Plan will be treated
as non-qualified stock options for federal income tax purposes. Under federal
income tax law presently in effect, no income is realized by the grantee of a
non-qualified stock option pursuant to the 1995 Plan until the option is
exercised. At the time of exercise of a non-qualified stock option, the optionee
will realize ordinary compensation
46
<PAGE>
income, and the Company will be entitled to a deduction, in the amount by which
the market value of the shares subject to the option at the time of exercise
exceeds the exercise price. The Company's deduction is conditioned upon
withholding on the income amount. Upon the sale of shares acquired upon exercise
of a non-qualified stock option, the excess of the amount realized from the sale
over the market value of the shares on the date of exercise will be taxable.
The 1995 Plan will continue in effect until May 2005, unless earlier
terminated by the Board of Directors, but such termination will not affect the
terms of any options outstanding at that time. The Board of Directors may amend,
terminate or suspend the 1995 Plan at any time, provided that no amendment
regarding amount, price or timing of the grants may be made more than once every
six months, other than to conform with changes in certain requirements of the
Securities Exchange Act of 1934 and Internal Revenue Code. Amendments that would
materially increase the number of shares that may be issued, materially modify
the requirements as to eligibility for 1995 Plan participation, or materially
increase the benefits to 1995 Plan participants must be approved by a vote of
the Company's shareholders.
Set forth below is information as to the number of options to purchase
Company Common Stock that have been granted under the 1995 Plan to the persons
and groups identified in the table as of December 31, 1995. The closing price of
the Common Stock on the Nasdaq National Market was $26 on May 23, 1996.
The Company has reserved 1,250,000 shares of Common Stock for issuance under
the 1995 Plan. During the period of January 1, 1996 to May 20, 1996, options to
purchase 262,275 shares of Common Stock were granted to the Company's employees
under the 1995 Plan at exercise prices ranging from $12.75 to $24.00, which
represent the closing market price on the last trading day prior to date of the
option grants. The Company's named executive officers were granted options under
the 1995 Plan as follows: Mr. Barnes -- 120,000; Mr. Fraine -- 7,000; Mr.
Lindsay -- 5,000; Mr. Wolfson -- 5,000 and Mr. Baril -- 10,000.
1995 STOCK OPTION PLAN FOR NONEMPLOYEE DIRECTORS
Nonemployee members of the Board of Directors participate in the Company's
1995 Stock Option Plan for Nonemployee Directors (the "1995 Nonemployee Director
Plan"), which was adopted to promote the interests of the Company and its
shareholders by strengthening the Company's ability to attract and retain
experienced and knowledgeable nonemployee directors by enhancing their incentive
to work on behalf of the Company and its shareholders and to encourage them to
acquire an increased proprietary interest in the Company. Under the 1995
Nonemployee Director Plan, a 10,000 share stock option is granted to each new
nonemployee director at the time such person is first elected or appointed to
the Board. In addition, each nonemployee director receives an option to purchase
3,000 shares of Common Stock annually after each annual meeting of shareholders.
Set forth below is a summary of the material terms of the 1995 Nonemployee
Director Plan.
Each option expires ten years from the date of its grant. Outstanding
options will expire earlier if an optionee terminates service as a director
before the end of the ten year term. If an optionee terminates service as a
director for any reason other than retirement, total disability or death, the
option will automatically expire 90 days after the date of termination. If an
optionee dies or terminates service due to retirement or total disability, the
options then outstanding will expire one year after the date of death or
termination or on the stated expiration date, whichever is earlier. Options are
not assignable and may not be transferred other than by will or the laws of
descent and distribution.
The exercise price of options granted under the 1995 Nonemployee Director
Plan may not be less than the fair market value of a share of Common Stock on
the date of grant of the option. Payment of the option exercise price may be in
cash or, to the extent permitted by the Compensation Committee, by delivery of
previously owned Company stock having a fair market value equal to the option
exercise or a combination of cash and stock. The Compensation Committee may also
permit "cashless" option exercises by allowing optionees to surrender portions
of their options in payment for the stock to be received.
All options granted under the 1995 Nonemployee Director Plan are
non-qualified -- not intended to qualify under Section 422 of the Code. No gain
will be recognized by the optionee at the time of a grant. Generally, at
exercise, ordinary income will be recognized by the optionee in an amount equal
to the
47
<PAGE>
difference between the option exercise price and the fair market value of the
shares on the date of exercise, and the Company will receive a tax deduction for
the same amount. At the time the optionee disposes of the shares, the
appreciation or depreciation of the shares since the option was exercised will
be treated as either a short or long term capital gain, depending on how long
the shares have been held.
The 1995 Nonemployee Director Plan continues in effect until terminated by
the Board of Directors or by shareholders but such termination will not affect
the terms of any options outstanding at that time. The Board of Directors may
amend, terminate or suspend the 1995 Nonemployee Director Plan at any time,
provided that no amendment regarding amount, price or timing of the grants may
be made more than once every six months other than to conform with changes in
certain Internal Revenue Code requirements. Amendments that would materially
increase the number of shares that may be issued, materially modify the
requirements as to eligibility of the 1995 Nonemployee Director Plan
participation, or materially increase the benefits to the 1995 Nonemployee
Director Plan participants must be approved by shareholders.
The number of options which may be granted under the 1995 Nonemployee
Director Plan in fiscal year 1995 may not exceed 60,000 and any subsequent
fiscal year may not exceed 18,000, subject to stock splits and similar events.
Options that are forfeited or terminated will again be available for grant. On
May 6, 1996, options to purchase 3,000 shares of Common Stock were granted to
each of the Company's five nonemployee Directors.
CADENCE OPTIONS
Most employees of the Company continue to hold options to purchase Common
Stock of Cadence granted under Cadence's 1987 and 1993 Stock Option Plans.
Options under Cadence's 1987 Stock Option Plan continue to vest as long as the
Company is a majority owned subsidiary of Cadence or the employee provides
consulting services to Cadence. Options granted under the Cadence 1993 Stock
Option Plan continue to vest as long as Cadence is a shareholder of the Company.
The Stockholder Agreement between the Company and Cadence, as amended, provides
that with respect to options granted under the 1987 Stock Option Plan, Cadence
will retain certain Company employees as consultants and allow the continuation
of vesting of options held by such consultants until fully vested. The balance
of Company employees who are holders of options will be compensated, in the form
of cash for the value of unvested stock options. Such payout will be contingent
upon each employee's continued employment with the Company for the remaining
unvested period related to these stock options. Compensation will be paid to the
employees, over the remaining vesting period, in the amount equal to the
difference between the option price and the fair market value, as defined, of
Cadence Common Stock on the date of the cancellation of these stock options.
1995 EMPLOYEE STOCK PURCHASE PLAN
On December 15, 1995, the Board of Directors adopted, and on May 6, 1996 the
shareholders approved, the Company's 1995 Employee Stock Purchase Plan (the
"ESPP"). The Company has reserved 250,000 shares of Common Stock for issuance
under the ESPP. The purpose of the ESPP is to provide a convenient and practical
means by which employees may participate in stock ownership of the Company. The
Board of Directors believes that the opportunity to acquire a proprietary
interest in the success of the Company through the acquisition of shares of
Common Stock pursuant to the ESPP is an important aspect of the Company's
ability to attract and retain highly qualified and motivated employees. The
following is a summary of the basic terms and provisions of the ESPP.
The ESPP is administered by the Compensation Committee of the Board of
Directors. The Compensation Committee has the power to make and interpret all
rules and regulations it deems necessary to administer the ESPP and has broad
authority to amend the ESPP, subject to certain amendments requiring shareholder
approval.
All regular employees of the Company and its subsidiaries, including the
Company's officers, are eligible to participate in the ESPP if they: (i) have
been customarily employed by the Company more than five months in any calendar
year, and (ii) are employed in a position with regular hours of more than twenty
hours per week. Eligible employees may elect to contribute from 1% to 10% of
their cash compensation during each pay period. The ESPP provides for two annual
six-month offering periods, beginning on February 1 and August 1 of each year
(the "Enrollment Dates"). During the offering periods, participants
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<PAGE>
accumulate funds in an account via payroll deduction. At the end of each
six-month offering period, the purchase price is determined and the accumulated
funds are used to automatically purchase shares of Common Stock. The purchase
price per share is equal to 85% of the lower of the fair market value of the
Common Stock (a) on the Enrollment Date of the offering period or (b) the date
of purchase. Unless a participant files a withdrawal notice before the beginning
of the next offering period, such participant will automatically be re-enrolled
for the next offering period.
Neither payroll deductions credited to a participant's account nor any
rights with regard to the purchase of shares under the ESPP may be assigned,
transferred, pledged or otherwise disposed of in any way by the participant.
Upon termination of a participant's employment for any reason the payroll
deductions credited to the participant's account will be returned to the
participant. As of March 31, 1996, there were 219 employees of the Company
eligible to participate in the ESPP and 91 employees participating.
The ESPP is intended to qualify as an "employee stock purchase plan" within
the meaning of Section 423 of the Code. Under the Code, no taxable income is
recognized by the participant with respect to shares purchased under the ESPP
either at the time of enrollment or at any purchase date within an offering
period.
If the participant disposes of shares purchased pursuant to the ESPP more
than two years from the Enrollment Date and more than one year from the date on
which the shares were purchased, the participant will recognize ordinary income
equal to the lesser of (i) the excess of the fair market value of the shares at
the time of disposition over the purchase price, or (ii) 15% of the fair market
value of the shares on the Enrollment Date. Any gain on the disposition in
excess of the amount treated as ordinary income will be capital gain. The
Company is not entitled to take a deduction for the amount of the discount in
circumstances indicated above.
If the participant disposes of shares purchased pursuant to the ESPP within
two years after the Enrollment Date or within one year after the purchase date,
the employee will recognize ordinary income on the excess of the fair market
value of the stock on the purchase date over the purchase price. Any difference
between the sale price of the shares and the fair market value on the purchase
date will be capital gain or loss. The Company is entitled to a deduction from
income equal to the amount the employee is required to report as ordinary
compensation income.
The federal income tax rules relating to employee stock purchase plans
qualifying under Section 423 of the Code are complex. Therefore, the foregoing
outline is intended to summarize only certain major federal income tax rules
concerning qualified employee stock purchase plans.
EMPLOYMENT CONTRACTS
The Company has entered into Employment Agreements with each of its
executive officers. Each such Employment Agreement is terminable by either
party. If an executive officer resigns voluntarily or is properly terminated for
cause, all pay and benefits under the agreement will cease as of the date of
such resignation or termination. If an executive officer is terminated other
than for cause (including the voluntary resignation by an officer upon a breach
by the Company of its obligations to the executive officer), the executive
officer would receive all base salary, commissions and bonuses earned through
the date of termination plus a payment equal to all accumulated but unused
vacation and sick leave. In addition, the officer would be entitled to continued
vesting of options (or alternatively be paid the in-the-money value of such
options), certain benefits, and payment of base salary for a severance period,
which is two years in the case of Mr. Barnes, 18 months in the case of Mr.
Ramadan and six months for each other executive officer. By agreement with
Cadence, Cadence would also accelerate any Cadence options that the executive
officer may hold which would, by their original vesting schedule, vest on or
before July 1, 1997. If there is a change in control of the Company, then the
vesting schedule of the Company options held by Mr. Barnes and Mr. Ramadan would
accelerate so that all such options would be immediately exercisable, and if any
other executive officer is terminated without cause in conjunction with a change
in control, then the vesting schedule for that executive officer would be
accelerated so that all Company options would vest (or the in-the-money value be
paid) as of the date of termination, and all Cadence options that would have
vested by July 1, 1997 (or the in-the-money value) would also be paid.
49
<PAGE>
CERTAIN TRANSACTIONS
The following is a description of certain transactions and relationships
entered into or existing within the past three years between the Company and
Cadence.
HISTORICAL TRANSACTIONS
In certain foreign markets, primarily Europe, the Company invoices its
customers through Cadence subsidiaries. The Company reimburses Cadence through
the intercompany account for the cost of the Company's dedicated sales agents in
these markets plus an agency fee due to the fact that these dedicated sales
agents are employees of Cadence subsidiaries and are located in Cadence
facilities. During the last three fiscal years and the three month period ended
March 31, 1996, the amount of such reimbursements equaled $772,000, $1,240,000,
$2,260,000 and $397,000, respectively. The dedicated sales agents, who are
employees of Cadence subsidiaries, sell and support Company products on a
full-time basis and coordinate their efforts with the Company's manufacturing
facility in the United States.
In addition, Cadence provides selling, service and production support
related to the Company's Virtual Test Software and charges the Company for the
cost of such services. These costs, which have been charged to the Company,
equaled $0, $410,000, $211,000 and $40,000 for the fiscal years ended December
31, 1993, 1994 and 1995 and the three months ended March 31, 1996, respectively,
and have been reflected in the Financial Statements included elsewhere in this
Prospectus.
For the fiscal year ended December 31, 1995 and the three months ended March
31, 1996, Cadence charged the Company approximately $227,000 and $44,000,
respectively, for utilization of certain domestic sales offices, general
liability insurance and other services. Prior to 1995, Cadence had not charged
the Company, but the estimated costs equaled $191,000 for both the fiscal years
ended December 31, 1993 and 1994. These amounts have been reflected in the
Financial Statements included elsewhere in this Prospectus.
Under Cadence corporate policy, interest is charged on past due intercompany
balances. Interest is charged beginning the first day of the fourth month after
the charge originated. The rate is computed using the applicable federal rate
for short-term loans compounded semi-annually. For the years ended December 31,
1993 and 1994, the Company paid Cadence $10,000 and $20,000, respectively, for
net interest on past due intercompany balances. For the year ended December 31,
1995, and for the three months ended March 31, 1996, there was no net interest
on past due intercompany balances.
Other than the transactions described above and certain income tax matters,
the Company has operated substantially independently of Cadence. Although the
Company has experienced substantial independence as a subsidiary of Cadence, its
operating history while a wholly-owned or majority-owned subsidiary of Cadence
cannot necessarily be regarded as indicative of the Company's prospects as a
fully independent company.
AGREEMENTS WITH CADENCE
In managing the intercompany relationship between them, the Company and
Cadence have entered into several agreements for the purpose of defining their
ongoing relationship. These agreements were reached while the Company was a
wholly-owned subsidiary of Cadence and, while certain of these agreements were
amended during May 1996, such agreements should not be regarded as the result of
arm's length negotiations between independent parties. There can be no assurance
that such agreements, or the transactions provided for therein, have been or
will be effected on terms at least as favorable to the Company as could have
been obtained from unaffiliated third parties. Management believes that these
agreements, had they been in place on a historical basis, would not have
resulted in any material change in the Company's historical financial condition
or results of operations.
The Company and Cadence entered into an Asset Transfer Agreement effective
as of June 30, 1994, under which the Company acquired the Dantes technology from
Cadence for a purchase price of $55,000. Under this Agreement, the Company
acquired all of Cadence's right, title and interest in and to the Dantes
technology and all related intellectual property rights; however, Cadence
retained a perpetual, worldwide royalty-free right to use, modify, create
derivative works based upon, market, distribute and sublicense the
50
<PAGE>
transferred assets in the form delivered by Cadence. Prior to June 30, 1999,
Cadence is not permitted to transfer its retained rights, except in connection
with a business combination involving Cadence or any Cadence subsidiary, nor is
it permitted to use the transferred assets to create products equivalent to
Dantes before June 30, 1999.
Cadence and the Company are parties to a Joint Sales Agreement dated as of
June 30, 1994, which was amended as of April 1, 1995 and as of May 20, 1996.
This agreement provides that each company's sales force may sell certain defined
software products of the other. The agreement covers Company's software
products, including Dantes and STL, and those Cadence products needed for the
operation of Dantes and STL. The agreement provides for cooperative sales and
customer support for each party from the other, Cadence's continued manufacture
of the Company's software products, and fees generally equal to 10 percent of
net sales of the software for such services to be paid reciprocally. The
agreement operates on a worldwide basis, and extends to Cadence's subsidiaries
and any future subsidiaries formed by either company. The term of this agreement
expires June 30, 1998, and it is renewable by mutual agreement of the parties.
Cadence and the Company are parties to a Corporate Services Agreement under
which Cadence provides certain services and support to the Company. The
agreement provides for Cadence to act as the Company's agent in Germany,
England, France, Israel and Taiwan. Under the agreement Cadence provides
dedicated agents who are employees of Cadence or Cadence subsidiaries that sell
and support Company products on a full-time basis and coordinate their efforts
with the Company's manufacturing facility in the United States. The agreement
requires the Company to pay Cadence an agency fee with respect to the dedicated
agents, and provides further that the Company owns the intellectual property
such dedicated agents create. Most of these dedicated agents are located in
countries outside the United States, though one -- a member of the Virtual Test
Software design and development team -- is employed in the United States (at
Cadence's facilities in San Jose). In addition, the Amended Corporate Services
Agreement grants the Company the option to acquire insurance coverage through
Cadence policies and to hire the dedicated agents if the Company elects to
commence operations where such dedicated agent is located. The Amended Corporate
Services Agreement will expire on June 1, 1999, unless sooner terminated under
the terms of such Amended Corporate Services Agreement.
Cadence and the Company are parties to a Tax Sharing Agreement that provides
for the allocation between Cadence and the Company of all responsibilities,
liabilities and benefits relating to taxes paid or payable by either Cadence or
the Company for all taxable periods, whether beginning before, on, or after the
Company's July 21, 1995, initial public offering. Prior to the initial public
offering, the Company was included in the consolidated tax returns of Cadence.
The Company's share of Cadence's consolidated income tax liability for the
period before the initial public offering was determined on a separate company
basis computed under Internal Revenue Code guidelines and was $3,000, $1,160,000
and $381,000 for the years ended December 31, 1993, 1994 and the three months
ended March 31, 1995, respectively. The Company estimates that there is no
additional obligation to Cadence for the period from April 1, 1995 to the date
of the initial public offering. In lieu of payment by the Company to Cadence of
this separate Company liability, Cadence has contributed such annual tax
obligations to the Company's capital. Any adjustments (for example, pursuant to
an Internal Revenue Service audit) discovered during the post-offering period,
but relating to the pre-offering period, will be settled between the Company and
Cadence in cash. Subsequent to the Company's initial public offering, the
Company is responsible for filing its own income tax returns.
The Company and Cadence are parties to a Shareholder Agreement that limits
the ability of Cadence to sell and vote the Common Stock owned by it under
certain circumstances. The Shareholder Agreement provides that in connection
with any sale or series of sales of Common Stock by Cadence to a single
purchaser or related group of purchasers of in excess of 10% of the outstanding
shares of Common Stock in a private transaction exempt from the registration
provisions of the Securities Act (i) the outstanding shares of Common Stock will
not be sold at a price in excess of the average closing price of the Common
Stock during the ten business days preceding the date of the notice required by
clause (iii) below; (ii) that the purchaser will be required to agree in writing
not to institute or participate in any business combination or other transaction
that will result in the purchase or exchange of the shares of Common Stock owned
by the remaining shareholders of the Company, provided that this restriction
will not apply to a transaction
51
<PAGE>
approved by a majority of such remaining shareholders; and (iii) the transaction
will not be consummated before the fifteenth business day after receipt by the
Company of notice of the proposed transaction, including a description of the
principal terms thereof. Except as otherwise expressly provided, the
restrictions on the ability of Cadence to sell Common Stock terminate when
Cadence ceases to own 35% or more of the outstanding shares of Common Stock, and
are therefore expected to terminate upon the consummation of this offering.
The Shareholder Agreement also provides that (i) except with respect to the
election or removal of directors and voting on any "Significant Event,"
including any amendment to the Company's articles of incorporation or bylaws,
disposition of the Company, recapitalization, liquidation or other action
presented for a vote of shareholders, which Cadence determines to be materially
adverse to Cadence's interests and which is out of the ordinary course of
business of the Company, Cadence will vote its shares of Common Stock in
accordance with the recommendations of the Board of Directors in at least the
same proportion as the shares held by all other shareholders are voted, (ii) all
of the shares of Common Stock owned by Cadence will be represented in person or
by proxy at all meetings of shareholders of the Company and (iii) Cadence will
not solicit proxies with respect to the Common Stock. The restrictions on the
ability of Cadence to vote its shares of Common Stock will terminate on the
earlier of the date that Cadence ceases to own 35% or more of the outstanding
shares of Common Stock or such date as Cadence's stock ownership decreases to a
level where Cadence ceases to be able to elect a majority of the Board of
Directors, and therefore such restrictions are expected to terminate upon the
consummation of this offering. The Shareholder Agreement also provides that
Cadence is entitled to certain rights with respect to the registration of its
shares of Common Stock under the Securities Act. The Company and Cadence have
agreed to indemnify each other against certain liabilities, including
liabilities under the Securities Act. See "Description of Capital Stock --
Registration Rights."
52
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of May 20, 1996, and such beneficial
ownership as adjusted to reflect the sale of 1,130,000 shares by the Company and
1,395,000 shares by the Selling Shareholders pursuant to this Prospectus, by (i)
each person known by the Company to own beneficially more than five percent of
the outstanding shares of Common Stock, (ii) each director of the Company, (iii)
each of the named executive officers, (iv) all officers and directors of the
Company as a group and (v) the Selling Shareholders. Unless otherwise indicated
below, to the knowledge of the Company, all persons listed below have sole
voting and investment power with respect to their shares of Common Stock, except
to the extent authority is shared by spouses under applicable law.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING (1)(2) SHARES TO BE OFFERING (1) (2) (3)
DIRECTORS, NAMED EXECUTIVE OFFICERS AND 5% --------------------- SOLD IN ---------------------
SHAREHOLDERS NUMBER PERCENT OFFERING NUMBER PERCENT
- ------------------------------------------------- ---------- --------- ------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
3,709,000 55.4% 1,343,650 2,365,350 30.0%
Cadence Design Systems, Inc. ....................
2655 Seely Road
Building 5, MS 5B2
San Jose, CA 95134
490,000 7.3 -- 490,000 6.2
Columbia Special Fund............................
P.O. Box 1350
Portland, Oregon
Keith L. Barnes.................................. 34,008 * 20,700 13,308 *
James P. Fraine.................................. 4,813 * 2,080 2,733 *
Kenneth R. Lindsay............................... 8,689 * 3,295 5,394 *
Marvin S. Wolfson................................ 9,564 * 3,565 5,999 *
W. Barry Baril................................... 22,462 * 7,900 14,562 *
H. Raymond Bingham............................... 5,777 * 1,188 4,589 *
Delbert W. Yocam................................. 3,777 * -- 3,777 *
C. Scott Gibson.................................. 7,877 * -- 7,877 *
James M. Hurd.................................... 3,777 * -- 3,777 *
James E. Solomon................................. 3,777 * -- 3,777 *
<CAPTION>
OTHER OFFICERS AND EMPLOYEES
- -------------------------------------------------
<S> <C> <C> <C> <C> <C>
Donald E. Grant.................................. 14,752 * 5,600 9,152 *
Gwyn Harvey...................................... 2,937 * 1,100 1,837 *
Sar Ramadan...................................... 15,752 * 5,600 10,152 *
Karen Ranjit..................................... 890 * 322 568 *
All Officers and Directors as a Group (14
persons)........................................ 137,962 2.0% 51,028 86,934 1.1%
</TABLE>
- ------------------------
* Less than one percent of the outstanding Common Stock.
(1) Benefical ownership is determined in accordance with rules of the SEC, and
includes voting power and investment power with respect to shares. Shares
issuable upon the exercise of outstanding stock options that are currently
exercisable or become exercisable within 60 days from May 20, 1996 are
considered outstanding for the purpose of calculating the percentage of
Common Stock owned by such person, but not for the purpose of calculating
the percentage of Common Stock owned by any other person. The number of
shares that are issuable upon the exercise of options that are currently
exercisable or exercisable within 60 days of May 20, 1996 is as follows:
Messrs. Bingham, Yocam, Gibson, Hurd, and
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<PAGE>
Solomon -- 3,777; Mr. Barnes -- 29,508; Mr. Fraine -- 4,813; Mr. Lindsay --
8,689; Mr. Wolfson -- 9,564; Mr. Baril -- 21,462; Mr. Grant -- 14,752; Ms.
Harvey -- 2,937; Mr. Ramadan -- 14,752; Ms. Ranjit -- 890; all Executive
Officers and Directors as a group -- 125,362.
(2) Excludes with respect to each of the following principal and selling
shareholders, the number of shares issuable upon the exercise of options
that are not currently exercisable and do not become exercisable within 60
days of May 20, 1996: Mr. Barnes -- 174,492; Mr. Fraine -- 16,187; Mr.
Lindsay -- 24,311; Mr. Wolfson -- 26,436; Mr. Baril -- 58,538; Mr. Bingham
-- 9,223; Mr. Grant -- 42,248; Ms. Harvey -- 9,063; Mr. Ramadan -- 42,248;
Ms. Ranjit -- 2,360.
(3) Assumes no exercise of the Underwriters' over-allotment option, which grants
the Underwriters' the option to purchase 205,000 shares of Common Stock held
by Cadence and 170,000 shares of the Company's Common Stock.
54
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 15,000,000 shares of
Common Stock, par value $.01, and 10,000,000 shares of Preferred Stock, par
value $.01 per share. The following summary description of the Company's capital
stock does not purport to be complete and is qualified in its entirety by the
provisions of the Company's Restated Articles of Incorporation and Restated
Bylaws, which have been filed as exhibits to the Registration Statement of which
this Prospectus is a part.
COMMON STOCK
After this offering, approximately 7,874,266 shares of Common Stock will be
outstanding. Holders of Common Stock are entitled to receive such dividends as
may from time to time be declared by the Board of Directors of the Company out
of funds legally available therefor. Holders of Common Stock are entitled to one
vote per share on all matters on which the holders of Common Stock are entitled
to vote and do not have any cumulative voting rights. Holders of Common Stock
have no preemptive, conversion, redemption or sinking fund rights. In the event
of a liquidation, dissolution or winding up of the Company, holders of Common
Stock are entitled to share equally and ratably in the assets of the Company, if
any, remaining after the payment of all debts and liabilities of the Company and
the liquidation preference of any outstanding class or series of Preferred
Stock. The outstanding shares of Common Stock are, and the shares of Common
Stock offered by the Company hereby when issued will be, fully paid and
nonassessable. The rights, preferences and privileges of holders of Common Stock
are subject to any series of Preferred Stock which the Company may issue in the
future as described below.
PREFERRED STOCK
The Company is authorized to issue up to 10,000,000 shares of Preferred
Stock. The Board of Directors has the authority to issue Preferred Stock in one
or more series and to fix the number of shares constituting any such series, the
voting powers, designations, preferences and relative, participating, optional
or other special rights and qualifications, limitations or restrictions thereof,
including the dividend rights, dividend rate, terms of redemption, redemption
price or prices, conversion and voting rights and liquidation preferences of the
shares constituting any series, without any further vote or action by the
shareholders of the Company. The issuance of Preferred Stock by the Board of
Directors could adversely effect the rights of holders of Common Stock. For
example, issuance of Preferred Stock could result in a series of securities
outstanding that would have preference over the Common Stock with respect to
dividends and in liquidation, and that could (upon conversion or otherwise)
enjoy all of the rights appurtenant to the Common Stock.
The authority possessed by the Board of Directors to issue Preferred Stock
could potentially be used to discourage attempts by others to obtain control of
the Company through merger, tender offer, proxy or consent solicitation or
otherwise by making such attempts more difficult or more costly to achieve. The
Board of Directors may issue Preferred Stock without shareholder approval and
with voting rights that could adversely affect the voting power of holders of
Common Stock. There are no agreements or understandings for the issuance of
Preferred Stock, and the Board of Directors has no present intention of issuing
any shares of Preferred Stock.
OREGON CONTROL SHARE AND BUSINESS COMBINATION STATUTES; CERTAIN PROVISIONS OF
RESTATED ARTICLES
The Company is subject to the Oregon Control Share Act (OBCA Sections
60.801-60.816) (the "Control Share Act"). The Control Share Act generally
provides that a person (the "Acquiring Person") who acquires voting stock of an
Oregon corporation in a transaction which results in such Acquiring Person
holding more than 20%, 33 1/3% or 50% of the total voting power of such
corporation (a "Control Share Acquisition") cannot vote the shares it acquires
in the Control Share Acquisition ("control shares") unless voting rights are
accorded to such control shares by the holders of a majority of the outstanding
voting shares, excluding the control shares held by the Acquiring Person and
shares held by the Company's officers and inside directors ("interested
shares"), and by the holders of a majority of the outstanding voting shares,
including interested shares. The foregoing vote would be required at the time an
Acquiring Person's holdings exceed 20% of the total voting power of a company,
and again at the time the Acquiring Person's holdings
55
<PAGE>
exceed 33 1/3% and 50%. The term "Acquiring Person" is broadly defined to
include persons acting as a group. A transaction in which voting power is
acquired solely by receipt of an immediately revocable proxy does not constitute
a "Control Share Acquisition."
The Acquiring Person may, but is not required to, submit to the Company an
"Acquiring Person Statement" setting forth certain information about the
Acquiring Person and its plans for acquiring the Company's stock. The Acquiring
Person Statement may also request that the Company call a special meeting of
shareholders to determine whether the control shares will be allowed to retain
voting rights. If the Acquiring Person does not request a special meeting of
shareholders, the issue of voting rights of control shares will be considered at
the next annual meeting or special meeting of shareholders that is held more
than 60 days after the date of the Control Share Acquisition. If the Acquiring
Person's control shares are accorded voting rights and represent a majority or
more of all voting power, shareholders who do not vote in favor of the
restoration of such voting rights will have the right to receive the appraised
"fair value" of their shares, which may not be less than the highest price paid
per share by the Acquiring Person for the control shares.
The Company is subject to the Oregon Business Combination Act (OBCA Sections
60.825-60.845) (the "Business Combination Act"). The Business Combination Act
generally provides that in the event a person or entity acquires 15% or more of
the voting stock of an Oregon corporation (an "Interested Shareholder"), the
corporation and the Interested Shareholder, or any affiliated entity, may not
engage in certain business combination transactions for a period of three years
following the date the person became an Interested Shareholder. Business
combination transactions for this purpose include (a) a merger or plan of share
exchange, (b) any sale, lease, mortgage or other disposition of the assets of
the corporation where the assets have an aggregate market value equal to 10% or
more of the aggregate market value of the corporation's assets or outstanding
capital stock and (c) certain transactions that result in the issuance of
capital stock of the corporation to the Interested Shareholder. These
restrictions do not apply if (i) the Interested Shareholder, as a result of the
transaction in which such person became an Interested Shareholder, owns at least
85% of the outstanding voting stock of the corporation (disregarding shares
owned by directors who are also officers, and certain employee benefit plans),
(ii) the Board of Directors approves the share acquisition or business
combination before the Interested Shareholder acquired 15% or more of the
corporation's voting stock, or (iii) the Board of Directors and the holders of
at least two-thirds of the outstanding voting stock of the corporation
(disregarding shares owned by the Interested Shareholder) approve the
transaction after the Interested Shareholder acquires 15% or more of the
corporation's voting stock. The Control Share Act and the Business Combination
Act may have the effect of encouraging any potential acquiror to negotiate with
the Company's Board of Directors and will also discourage certain potential
acquirors unwilling to comply with its provisions.
The Company's Restated Articles and Bylaws contain provisions which (i)
classify the Board of Directors into three classes as nearly equal in number as
possible, each of which, after an interim arrangement, will serve for three
years with one class being elected each year (the "Classified Board Provisions")
and (ii) provide that directors may be removed by shareholders only for cause
and only upon the vote of 75% of the votes then entitled to be cast for the
election of directors. The Classified Board Provisions and the availability of
Preferred Stock for issuance without shareholder approval may have the effect of
lengthening the time required for a person to acquire control of the Company
through a proxy contest or the election of a majority of the Board of Directors
and may deter any potential unfriendly offers or other efforts to obtain control
of the Company. This could deprive the Company's shareholders of opportunities
to realize a premium for their Common Stock and could make removal of incumbent
directors more difficult. At the same time, these provisions may have the effect
of inducing any persons seeking control of the Company to negotiate terms
acceptable to the Board of Directors. In addition, the provisions of the
Restated Articles regarding removal of directors will make the removal of any
director more difficult even if such removal is believed by the shareholders to
be in their best interests. Since these provisions make the removal of directors
more difficult, they increase the likelihood that incumbent directors will
retain their positions and, since the Board has the power to retain and
discharge management, could perpetuate incumbent management.
56
<PAGE>
REGISTRATION RIGHTS AGREEMENT
The Company and Cadence are parties to a Shareholder Agreement providing
Cadence with certain registration rights. In the event that the Company proposes
to register any of its securities under the Securities Act, Cadence is entitled
to notice of such registration and is entitled to include its shares of Common
Stock in such registration, subject to certain marketing and other limitations.
Cadence also has the right to require the Company, on no more than three
occasions, to file a registration statement under the Securities Act in order to
register its shares of Common Stock. Cadence may also require the Company to
file a Form S-3 registration with respect to its shares of Common Stock. The
Company may, under certain circumstances, defer such registration, and the
underwriters involved in such registrations have the right, subject to certain
limitations, to limit the number of shares included in such registrations.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and registrar for the Common Stock is First Interstate
Bank of Oregon, N.A.
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of Common Stock in the public market
could adversely affect prevailing market prices. Upon completion of this
offering, the Company will have 7,874,266 shares of Common Stock outstanding, of
which 5,516,604 shares (5,891,604 shares if the over-allotment option is
exercised in full) will be freely tradeable without restriction or further
registration under the Securities except for shares purchased by an existing
"affiliate" of the Company as that term is defined under the Securities Act
("Affiliates") which resales will be subject to the resale limitations of Rule
144 promulgated under the Securities Act. Upon completion of this offering,
Cadence will continue to hold 2,365,350 shares (2,160,350 shares if the
Underwriters' over-allotment option is exercised in full), and will be eligible
to sell these shares in the public market pursuant to Rule 144, subject to
certain contractual restrictions on resale. In addition, 763,676 shares are
issuable upon exercise of outstanding options as of the date of this Prospectus.
The Company currently intends to file a Registration Statement on Form S-8
covering an aggregate of 1,250,000 shares of Common Stock reserved for issuance
under its stock option plans in order to permit the resale of shares issued upon
the exercise of such options in the public market without restriction. The
Company has filed a Registration Statement on Form S-8 covering 250,000 shares
that have been reserved for issuance under its 1995 Employee Stock Purchase Plan
permitting the resale of such shares in the public market without restrictions
under the Securities Act. Sales of shares in the public market, or the
availability of such shares for sale, could adversely affect the market price of
the Common Stock.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned "restricted securities"
within the meaning of Rule 144 ("Restricted Shares") for at least two years,
including persons who may be deemed "affiliates" of the Company, would be
entitled to sell within any three month period a number of shares that does not
exceed the greater of 1% of the number of shares of Common Stock then
outstanding (which will equal approximately 78,743 shares immediately after the
offering) or the average weekly trading volume of the Common Stock on all
exchanges and/or reported through the automated quotation system of a registered
securities association during the four calendar weeks preceding the date on
which notice of the sale is filed with the Securities and Exchange Commission.
Such sales are also subject to certain manner of sale provisions, notice
requirements and the availability of current public information about the
Company. In addition, a person (or persons whose shares are aggregated) who is
not and is not deemed to have been an affiliate of the Company at any time
during the 90 calendar days preceding a sale, and who has beneficially owned for
at least three years the shares proposed to be sold, would be entitled to sell
such shares under Rule 144 as currently in effect without regard to the volume
limitations described above. The Company is unable to estimate accurately the
number of Restricted Shares that ultimately will be sold under the foregoing
rules because the number of shares will depend in part on the market price for
the Common Stock, the circumstances of the sellers and other factors. Subject to
certain exceptions, the Company, the Selling Shareholder and the directors and
officers of the Company have agreed for a period of 120 days after the date of
this Prospectus, without the prior written consent of Morgan Stanley & Co.
Incorporated, they will not (1) offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase,
57
<PAGE>
or otherwise transfer or dispose of, directly or indirectly, any shares of
Common stock or any securities convertible into or exercisable or exchangeable
for Common Stock or (2), directly or indirectly, enter into any swap or similar
agreement that transfers, in whole or in part, the economic risk of ownership of
the Common Stock. Morgan Stanley & Co. Incorporated may, in its sole discretion,
at any time without notice, release all or any portion of the securities subject
to lock-up agreements.
Restricted Shares also may be sold pursuant to a registration statement
filed by the Company under the Securities Act in the future or another exemption
from registration that might be available without compliance with the
requirements of Rule 144. Cadence and the Company are parties to a Shareholder
Agreement providing Cadence with certain registration rights covering shares of
Common Stock that are owned by Cadence. Pursuant to such Shareholder Agreement,
Cadence has the right, subject to certain terms and conditions, to require the
Company to register its shares of Common Stock under the Securities Act for
offer and sale to the public (including by way of an underwritten public
offering). Exercise of these registration rights by Cadence could result in the
distribution of substantial amounts of Common Stock, including distributions in
underwritten public offerings. See "Description of Capital Stock -- Registration
Rights Agreement."
The Company can make no prediction as to the effect, if any, that sales of
shares of Common Stock, or the availability of such shares for sale, will have
on the market price prevailing from time to time. Nevertheless, sales of
substantial amounts of Common Stock in the public market (including shares
issued upon the exercise of options that may be granted pursuant to any employee
stock option or other equity plan of the Company), or the perception that such
sales may occur, could adversely affect prevailing market prices for the Common
Stock.
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<PAGE>
UNDERWRITERS
Under the terms and subject to conditions contained in an Underwriting
Agreement dated the date hereof, the Underwriters named below, for whom Morgan
Stanley & Co. Incorporated, Cowen & Company and SoundView Financial Group, Inc.
are serving as the Representatives, have severally agreed to purchase, and the
Company and Selling Shareholders have agreed to sell to the Underwriters, the
respective number of shares of Common Stock set forth opposite their respective
names below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- ----------------------------------------------------------------------------------------- ----------
<S> <C>
Morgan Stanley & Co. Incorporated........................................................
Cowen & Company..........................................................................
SoundView Financial Group, Inc...........................................................
----------
Total................................................................................ 2,525,000
----------
----------
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by counsel,
and to certain other conditions, including the conditions that no stop order
suspending the effectiveness of the Registration Statement is in effect and no
proceedings for such purpose are pending before or threatened by the Securities
and Exchange Commission and that there has been no material adverse change or
any development involving a prospective material adverse change in the business,
financial condition or results of operations of the Company from that set forth
in the Registration Statement. The Underwriters are obligated to take and pay
for all of the shares of Common stock offered hereby (other than those covered
by the over-allotment option described below) if any such shares are taken.
The Underwriters initially propose to offer part of the shares of Common
Stock offered hereby directly to the public at the public offering price set
forth on the cover page hereof and part to certain dealers at a price which
represents a concession not in excess of $ per share under the public
offering price. Any Underwriter may allow, and such dealers may reallow, a
concession not in excess of $ a share to other Underwriters or to certain
other dealers.
The Company and Cadence have granted to the Underwriters an option,
exercisable for 30 days from the date of this Prospectus, to purchase up to an
additional 375,000 shares of Common Stock at the public offering price set forth
on the cover page hereof, less underwriting discounts and commissions. The
Underwriters may exercise such option solely for the purpose of covering
over-allotments, if any, incurred in the sale of shares of Common Stock offered
hereby.
In connection with this offering, certain Underwriters and selling group
members (if any) or their respective affiliates who are qualified registered
market makers on the Nasdaq National Market may engage
59
<PAGE>
in passive market making transactions in the Common Stock on the Nasdaq National
Market in accordance with Rule 10b-6A under the Securities Exchange Act of 1934
during the two business day period before commencement of offers or sales of
Common Stock. The passive market making transactions must comply with applicable
price and volume limits and be identified as such. In general, a passive market
maker may display its bid at a price not in excess of the highest independent
bid for the security; if all independent bids are lowered below the passive
market maker's bid, however, such bid must then be lowered when certain purchase
limits are exceeded. Net purchases by a passive market maker on each day are
generally limited to a specified percentage of the passive market making average
daily trading volume in the Common Stock during a price period and must be
discontinued when such limit is reached. Passive market making may stabilize the
market price of the Common Stock at a level above that which might otherwise
prevail and, if commenced, may be discontinued at any time.
The Company, the Selling Shareholders and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act of 1933, as amended.
Subject to certain exceptions, the Company and the Selling Shareholders each
have agreed in the Underwriting Agreement that it will not for a period of 120
days after the date of this Prospectus, without the prior written consent of
Morgan Stanley & Co. Incorporated, (1) offer, pledge, sell, contract to sell,
sell any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase, or otherwise transfer or
dispose of any shares of, directly or indirectly, Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock or (2) directly
or indirectly enter into any swap or similar agreement that transfers, in whole
or in part, the economic risk of ownership of the Common Stock.
See "Shares Eligible for Future Sale" for a description of certain
arrangements by which all directors and executive officers of the Company have
agreed not to sell or otherwise dispose of Common Stock of the Company for a
period of 120 days after the date of this Prospectus, without the prior written
consent of Morgan Stanley & Co. Incorporated.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Ater Wynne Hewitt Dodson & Skerritt, LLP, Portland, Oregon. Certain
legal matters in connection with the offering will be passed upon for the
Underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California.
EXPERTS
The financial statements and related schedule of the Company and its
subsidiaries at December 31, 1994 and 1995 and for each of the three years in
the period ended December 31, 1995 included in this Prospectus and elsewhere in
the Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports, with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act"), and in accordance therewith files
reports, proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). Reports, proxy statements and other information
filed by the Company may be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at certain of its regional offices located at Seven
World Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material can be obtained from the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Common
Stock of the Company is quoted on the Nasdaq National Market. Reports and other
information concerning the Company may be inspected at the National Association
of Securities Dealers, Inc., 1735 K Street, Washington, D.C.
60
<PAGE>
A Registration Statement on Form S-1, including amendments thereto, relating
to the Common Stock offered hereby has been filed by the Company with the
Securities and Exchange Commission, Washington, D.C. This Prospectus does not
contain all of the information set forth in the Registration Statement and the
exhibits and schedules thereto. Statements contained in this Prospectus as to
the contents of any contract or other document referred to are not necessarily
complete and in each instance reference is made to the copy of such contract or
other document filed as an exhibit to the Registration Statement. Each such
statement is qualified in all respects by such reference to such exhibit. For
further information with respect to the Company and the Common Stock offered
hereby, reference is made to such Registration Statement and the exhibits and
schedules filed as a part of the Registration Statement. A copy of the
Registration Statement, including Exhibits and schedules thereto may be
inspected without charge at the public reference facilities maintained by the
Commission at 450 Fifth Street, NW, Judiciary Plaza, Washington D.C. 20549, and
copies of all or any part thereof may be obtained from the Commission upon the
payment of certain fees prescribed by the Commission.
61
<PAGE>
INTEGRATED MEASUREMENT SYSTEMS, INC.
INDEX TO THE FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Public Accountants................................................................... F-2
Balance Sheets............................................................................................. F-3
Statements of Income....................................................................................... F-4
Statements of Shareholders' Equity......................................................................... F-5
Statements of Cash Flows................................................................................... F-6
Notes to the Financial Statements.......................................................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Integrated Measurement Systems, Inc.:
We have audited the accompanying balance sheets of Integrated Measurement
Systems, Inc. (an Oregon corporation) as of December 31, 1994 and 1995, and the
related statements of income, shareholders' equity, and cash flows for each of
the years in the three-year period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based upon
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Integrated Measurement
Systems, Inc. as of December 31, 1994 and 1995 and the results of its operations
and its cash flows for each of the years in the three-year period ended December
31, 1995 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Portland, Oregon,
January 26, 1996, except
for Note 10, as to
which the date is
May 6, 1996
F-2
<PAGE>
INTEGRATED MEASUREMENT SYSTEMS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995 MARCH 31, 1996
--------- --------- --------------
<S> <C> <C> <C>
(UNAUDITED)
Current assets:
Cash and cash equivalents................................................. $ 4,384 $ 8,930 $ 8,986
Trade receivables, less allowance for doubtful accounts of $182, $338 and
$340..................................................................... 4,424 8,117 9,359
Receivable from Cadence, net.............................................. 1,748 1,094 870
Inventories............................................................... 3,223 5,830 6,620
Deferred income taxes..................................................... 775 1,237 1,237
Prepaid expenses and other current assets................................. 250 735 734
--------- --------- -------
Total current assets.................................................... 14,804 25,943 27,806
Property, plant and equipment, net.......................................... 4,134 5,178 4,909
Service spare parts, net.................................................... 1,764 2,223 1,835
Software development costs, net............................................. 1,960 1,657 1,676
--------- --------- -------
$ 22,662 $ 35,001 $ 36,226
--------- --------- -------
--------- --------- -------
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C> <C>
Current liabilities:
Accounts payable.......................................................... $ 976 $ 2,660 $ 2,427
Accrued compensation...................................................... 1,006 1,629 1,855
Accrued warranty.......................................................... 286 801 753
Deferred revenue.......................................................... 1,129 2,291 1,850
Other current liabilities................................................. 296 810 522
Current tax liability..................................................... -- -- 65
Capital lease obligations -- current...................................... 208 164 153
--------- --------- -------
Total current liabilities............................................... 3,901 8,355 7,625
Deferred income taxes....................................................... 409 108 108
Capital lease obligations, net of current portion........................... 83 54 33
Commitments
Shareholders' equity:
Preferred stock, $.01 par value, authorized 10,000,000 shares; none issued
and outstanding.......................................................... -- -- --
Common stock, $.01 par value, authorized 15,000,000 shares; issued and
outstanding 6,324,000, 6,699,803 and 6,699,855........................... 63 67 67
Additional paid-in capital................................................ 14,764 20,467 21,097
Retained earnings......................................................... 3,442 5,950 7,296
--------- --------- -------
Total shareholders' equity.............................................. 18,269 26,484 28,460
--------- --------- -------
$ 22,662 $ 35,001 $ 36,226
--------- --------- -------
--------- --------- -------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
INTEGRATED MEASUREMENT SYSTEMS, INC.
STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Product sales............................................... $ 19,357 $ 23,981 $ 33,076 $ 7,304 $ 9,170
Service and other sales..................................... 3,760 6,071 8,017 1,780 2,745
--------- --------- --------- --------- ---------
Net sales................................................. 23,117 30,052 41,093 9,084 11,915
Cost of product sales....................................... 8,616 10,090 12,827 2,949 3,213
Cost of service and other sales............................. 1,599 2,345 2,939 689 1,195
--------- --------- --------- --------- ---------
Total cost of sales....................................... 10,215 12,435 15,766 3,638 4,408
--------- --------- --------- --------- ---------
Gross margin.............................................. 12,902 17,617 25,327 5,446 7,507
Operating expenses:
Research, development and engineering..................... 3,130 3,664 6,177 1,309 1,988
Selling, general and administrative....................... 9,610 10,972 13,681 3,172 3,448
--------- --------- --------- --------- ---------
Total operating expenses................................ 12,740 14,636 19,858 4,481 5,436
--------- --------- --------- --------- ---------
Operating income........................................ 162 2,981 5,469 965 2,071
Other income, net........................................... 99 142 349 60 115
Interest expense............................................ (28) (28) (30) (9) (14)
--------- --------- --------- --------- ---------
Income before income taxes.................................. 233 3,095 5,788 1,016 2,172
Provision for income taxes.................................. 102 1,185 2,253 389 826
--------- --------- --------- --------- ---------
Net income................................................ $ 131 $ 1,910 $ 3,535 $ 627 $ 1,346
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income per share........................................ $ 0.02 $ 0.30 $ 0.53 $ 0.10 $ 0.19
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average number of common and common equivalent
shares outstanding......................................... 6,366 6,366 6,685 6,366 6,922
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
INTEGRATED MEASUREMENT SYSTEMS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------------ PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1992................................ 6,324 $ 63 $ 13,137 $ 1,401 $ 14,601
Contributed capital..................................... -- -- 372 -- 372
Net income.............................................. -- -- -- 131 131
----- --- ----------- ----------- -------------
Balance, December 31, 1993................................ 6,324 63 13,509 1,532 15,104
Contributed capital..................................... -- -- 1,255 -- 1,255
Net income.............................................. -- -- -- 1,910 1,910
----- --- ----------- ----------- -------------
Balance, December 31, 1994................................ 6,324 63 14,764 3,442 18,269
Contributed capital..................................... -- -- 177 -- 177
Net proceeds from initial public offering............... 375 4 3,253 -- 3,257
Stock issued under stock option plans................... 1 -- 3 -- 3
Net income.............................................. -- -- -- 3,535 3,535
Dividend to Cadence..................................... -- -- -- (1,027) (1,027)
Tax benefit from Cadence stock option transactions by
IMS employees.......................................... -- -- 2,270 -- 2,270
----- --- ----------- ----------- -------------
Balance, December 31, 1995................................ 6,700 67 20,467 5,950 26,484
Net income.............................................. -- -- -- 1,346 1,346
Stock issued under stock option plans................... -- -- 4 -- 4
Tax benefit from Cadence stock option transactions by
IMS employees.......................................... -- -- 626 -- 626
----- --- ----------- ----------- -------------
Balance, March 31, 1996 (unaudited)....................... 6,700 $ 67 $ 21,097 $ 7,296 $ 28,460
----- --- ----------- ----------- -------------
----- --- ----------- ----------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
INTEGRATED MEASUREMENT SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Cash flows from operating activities:
Cash received from customers................................... $ 22,745 $ 29,565 $ 36,994 $ 7,800 $ 11,293
Interest received.............................................. 93 203 320 61 110
Payments to suppliers.......................................... (11,360) (13,030) (16,986) (3,252) (5,230)
Payments to employees.......................................... (8,522) (9,792) (14,082) (3,243) (4,389)
Income taxes paid.............................................. -- -- (495) -- (5)
Other taxes paid............................................... (445) (575) (733) (110) (424)
Interest paid.................................................. (28) (28) (30) (9) (14)
--------- --------- --------- --------- ---------
Net cash provided by operating activities.................... 2,483 6,343 4,988 1,247 1,341
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Purchases of equipment......................................... (1,672) (1,724) (1,874) (211) (1,036)
Additions to service spare parts............................... (448) (295) (600) (150) (23)
Software development costs..................................... (889) (1,062) (974) (179) (170)
--------- --------- --------- --------- ---------
Net cash used in investing activities........................ (3,009) (3,081) (3,448) (540) (1,229)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Principal payments under capital leases........................ (56) (168) (254) (70) (60)
Net proceeds from initial public offering...................... -- -- 3,257 -- --
Proceeds from employee stock option exercises.................. -- -- 3 -- 4
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing activities.......... (56) (168) 3,006 (70) (56)
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents......... (582) 3,094 4,546 637 56
Cash and cash equivalents at beginning of period................. 1,872 1,290 4,384 4,384 8,930
--------- --------- --------- --------- ---------
Cash and cash equivalents at end of period....................... $ 1,290 $ 4,384 $ 8,930 $ 5,021 $ 8,986
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Reconciliation of net income to net cash provided by operating
activities:
Net income..................................................... $ 131 $ 1,910 $ 3,535 $ 627 $ 1,346
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization................................ 1,630 2,300 3,071 579 1,007
Contributed capital.......................................... 372 1,255 177 177 --
Provision (benefit) for deferred income taxes................ 99 25 (763) 8 --
Net change in payable to or receivable from Cadence............ 444 (1,985) (373) 720 224
(Increase) decrease in trade receivables....................... 515 1,119 (3,693) (891) (1,242)
(Increase) decrease in inventories............................. 35 670 (2,606) (665) (790)
(Increase) decrease in prepaid expenses and other current
assets........................................................ (199) 28 (485) (219) 1
Decrease in notes receivable................................... -- 235 -- -- --
Increase in current tax liability.............................. -- -- -- -- 691
Increase (decrease) in accounts payable and accrued expenses... (698) 507 4,963 843 545
Increase (decrease) in deferred revenue........................ 154 279 1,162 68 (441)
--------- --------- --------- --------- ---------
Net cash provided by operating activities........................ $ 2,483 $ 6,343 $ 4,988 $ 1,247 $ 1,341
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Supplemental schedule of noncash financing activities:
Purchase of assets through capital lease....................... $ 259 $ 244 $ 181 $ 174 $ 29
Tax benefit from Cadence stock option transactions by IMS
employees..................................................... $ -- $ -- $ 2,270 $ -- $ 626
Noncash dividend to Cadence.................................... $ -- $ -- $ 1,027 $ 1,027 $ --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
INTEGRATED MEASUREMENT SYSTEMS, INC.
NOTES TO THE FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1. COMPANY BACKGROUND AND INITIAL PUBLIC OFFERING:
Integrated Measurement Systems, Inc. (the Company or IMS) commenced
operations in August 1983. The Company was independent until acquired by Valid
Logic in 1989. In 1991, Valid Logic merged with Cadence Design Systems, Inc.
(Cadence) in a transaction accounted for as a pooling. From that time until July
21, 1995, the Company was a wholly owned subsidiary of Cadence.
On July 21, 1995, the Company successfully completed an initial public
offering of common stock. A total of 2,990,000 shares were sold at a price of
$11 per share. Of these, 375,000 shares were sold by the Company, and 2,615,000
were sold by Cadence. The net proceeds to the Company from this offering, after
deduction of expenses directly related to the offering, were $3.3 million, while
net proceeds to Cadence amounted to approximately $26.6 million. Following the
initial public offering, Cadence owns 55% of the outstanding common stock of the
Company, with the remaining 45% publicly owned.
The Company is engaged in designing, developing, manufacturing, marketing
and servicing high-performance engineering Test Stations and test software to
test and measure the performance of complex electronic devices. In addition, the
Company develops, markets and supports a line of Virtual Test Software that
permits design and test engineers to automate test program development and to
conduct simulated tests of electronic device designs prior to the fabrication of
a prototype of the actual device. Virtual Test Software and related services
accounted for approximately 5% of net sales for both of the years ended December
31, 1994 and 1995 and 8% of net sales for the first quarter of 1996. Virtual
Test Software revenue was insignificant in 1993.
The Company markets and supports its products worldwide through a network of
direct sales force personnel, independent distributors and dedicated agents
employed by Cadence in international locations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
INTERIM FINANCIAL INFORMATION
The interim financial statements included herein have been prepared, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the management of the Company believes that the
disclosures are adequate to make the information presented not misleading.
Interim financial statements are by necessity somewhat tentative; judgments are
used to estimate interim amounts for items that are normally determinable only
on an annual basis. For example, the effective income tax rate is based on
estimates of annual amounts of taxable income.
The interim period information included herein reflects all adjustments
which are, in the opinion of the management of the Company, necessary for a fair
statement of the results of the respective interim periods. Results of
operations for interim periods are not necessarily indicative of results to be
expected for an entire year.
USE OF ESTIMATES
The preparation of financial statements in conformance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company generally recognizes revenue from product sales and software
licenses as the product ships and there are no significant obligations
remaining. Contract service and support revenues that are
F-7
<PAGE>
INTEGRATED MEASUREMENT SYSTEMS, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
billed in advance are recorded as deferred revenue and recognized ratably over
the contractual period as the services and support are performed. Revenue from
other services, such as consulting and training, is recognized as the related
services are performed or when certain milestones are achieved.
PRODUCT WARRANTY
The Company provides a warranty for its products and establishes an
estimated accrual at the time of sale considered adequate to cover warranty
costs during the warranty period.
CASH AND CASH EQUIVALENTS
The Company classifies all highly liquid investments purchased with an
original maturity of three months or less as cash equivalents. The Company
invests with high credit quality financial institutions which bear minimal
credit risk.
INVENTORIES
Inventories, consisting principally of computer hardware, electronic
sub-assemblies and test equipment, are valued at standard costs which
approximate the lower of cost (first-in, first-out) or market. Costs used for
inventory valuation purposes include material, labor and manufacturing overhead.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1994 1995 1996
--------- --------- -----------
<S> <C> <C> <C>
(UNAUDITED)
Raw materials.......................................................... $ 1,274 $ 2,613 $ 2,553
Work-in-progress....................................................... 1,719 2,945 3,393
Finished goods......................................................... 230 272 674
--------- --------- -----------
Total inventories.................................................... $ 3,223 $ 5,830 $ 6,620
--------- --------- -----------
--------- --------- -----------
</TABLE>
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost and consists principally of
computer equipment, furniture and leasehold improvements. Depreciation of
computer equipment and furniture is computed principally on a straight-line
basis over the estimated useful lives of the assets, generally three to five
years. Leasehold improvements are amortized on a straight-line basis over the
lesser of the term of the lease, or the estimated useful lives of the
improvements.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
Leasehold improvements............................................................ $ 190 $ 200
Computer equipment and furniture.................................................. 10,719 13,053
--------- ---------
10,909 13,253
Less accumulated depreciation..................................................... (6,775) (8,075)
--------- ---------
Net property, plant and equipment............................................... $ 4,134 $ 5,178
--------- ---------
--------- ---------
</TABLE>
SERVICE SPARE PARTS
Service spare parts consist of electronic components which are used to
service Test Stations for which the Company has entered into equipment
maintenance agreements with customers. Subsequent to December 31, 1995, the
Company reclassified its service spare parts from inventory to non-current
assets to more accurately reflect the use of such parts in the Company's service
business. These assets are not held for sale, diminish in value in a reasonably
predictable manner, and therefore are subject to depreciation. Beginning January
1, 1996, depreciation of the Company's service spare parts is being computed on
a
F-8
<PAGE>
INTEGRATED MEASUREMENT SYSTEMS, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
straight-line basis over the estimated useful lives of the assets, generally
eight years, and charged to Cost of Service and Other Sales. Prior to 1996, the
Company charged normally recurring adjustments necessary to present inventory at
its estimated net realizable value to Cost of Service and Other Sales. In order
to reflect this change, the Company recorded a charge to Cost of Service and
Other Sales of $327 during the first quarter of 1996, representing the
cumulative difference in financial statement carrying value between the
depreciated cost under the new accounting method at January 1, 1996 and the net
inventory carrying value of the service spare parts assets at December 31, 1995.
Cost and accumulated depreciation of service spare parts are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1994 1995 1996
--------- --------- -----------
<S> <C> <C> <C>
(UNAUDITED)
Service spare parts, at cost........................................... $ 2,075 $ 2,675 $ 2,697
Less obsolesence reserve/accumulated depreciation...................... (311) (452) (862)
--------- --------- -----------
Net service spare parts.............................................. $ 1,764 $ 2,223 $ 1,835
--------- --------- -----------
--------- --------- -----------
</TABLE>
RESEARCH, DEVELOPMENT AND ENGINEERING COSTS
Research, development and engineering costs are expensed as incurred.
SOFTWARE DEVELOPMENT COSTS
The Company capitalizes certain software development costs incurred once
technological and economic feasibility of the product has been demonstrated.
These capitalized costs are amortized over the estimated economic life of the
related product, generally three years, computed principally on a straight-line
basis. Amortization is included in product cost of sales in the accompanying
Statements of Income.
The Company capitalized software development costs amounting to $889, $1,062
and $974 in 1993, 1994 and 1995, respectively. Related amortization expense of
$409, $625 and $1,277 was recorded in 1993, 1994 and 1995, respectively.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
--------- ---------
<S> <C> <C>
Software development costs........................................................... $ 3,682 $ 4,656
Less accumulated amortization........................................................ (1,722) (2,999)
--------- ---------
Net software development costs..................................................... $ 1,960 $ 1,657
--------- ---------
--------- ---------
</TABLE>
INCOME TAXES
The Company accounts for income taxes under the asset and liability method
as defined by the provisions of Statement of Financial Accounting Standards
(SFAS) No. 109, "Accounting for Income Taxes". Under this method, deferred
income taxes are recognized for the future tax consequences attributable to
temporary differences between the financial statement and tax balances of
existing assets and liabilities. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. Under SFAS 109, the effect on deferred taxes of a change in tax rates
is recognized in income in the period that includes the enactment date.
F-9
<PAGE>
INTEGRATED MEASUREMENT SYSTEMS, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Net income per share is computed using the weighted average number of common
and dilutive common equivalent shares (stock options) assumed to be outstanding
during the period, using the treasury stock method. The Company's stock options
which were granted during the twelve-month period prior to its initial public
offering have been considered outstanding for all periods presented.
RECLASSIFICATIONS
Certain reclassifications have been made in the accompanying financial
statements for 1993, 1994 and 1995 to conform with the 1996 presentation.
3. CAPITAL LEASE OBLIGATIONS:
The Company leases certain equipment under capital lease agreements. All
lease obligations are secured by the related asset. A schedule of future minimum
lease payments under capital lease agreements as of December 31, 1995 is as
follows:
<TABLE>
<S> <C>
1996................................................................. $ 175
1997................................................................. 40
1998................................................................. 11
1999................................................................. 9
---------
Total minimum payments............................................... 235
Amount representing interest......................................... (17)
---------
Present value of future minimum lease payments....................... 218
Less current portion............................................... (164)
---------
Long-term capital lease obligation................................... $ 54
---------
---------
</TABLE>
4. COMMITMENTS:
The Company leases its facilities and certain equipment under operating
leases that expire in 1998. The approximate minimum lease payments under these
operating leases at December 31, 1995 are as follows:
<TABLE>
<S> <C>
1996................................................................. $ 901
1997................................................................. 901
1998................................................................. 878
</TABLE>
Rent expense was approximately $868, $875 and $1,111 for the years ended
December 31, 1993, 1994 and 1995, respectively.
5. LINE OF CREDIT:
In December 1995, the Company secured a revolving line of credit with a bank
allowing maximum borrowings of $10,000. The Company can borrow, with interest at
the bank's prime lending rate, or if lower, at certain margins above bankers'
acceptance on interbank offering rates. There have been no borrowings against
the line of credit to date. Certain financial covenants are included in this
agreement, which the Company was in compliance with at December 31, 1995. The
line of credit is renewable April 30, 1997.
6. EMPLOYEE AND DIRECTOR STOCK OPTION AND 401(K) SAVINGS PLANS:
The Company has a profit sharing plan and trust that qualifies as a deferred
salary arrangement under Section 401(k) of the Internal Revenue Code. Under the
terms of the plan, the employees of the Company may make voluntary contributions
to the plan as a percentage of compensation, but not in excess of the
F-10
<PAGE>
INTEGRATED MEASUREMENT SYSTEMS, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
6. EMPLOYEE AND DIRECTOR STOCK OPTION AND 401(K) SAVINGS PLANS: (CONTINUED)
maximum allowed under the Code. Employees become eligible to participate in the
plan upon completion of six months of continuous employment and having attained
the age of 21. The Company currently does not match employee contributions and
does not intend to do so in the future.
On May 10, 1995, the Company's Board of Directors approved the adoption of
the 1995 Stock Incentive Plan (the 1995 Plan) pursuant to which 1,250,000 shares
of the Company's common stock have been reserved for issuance. Under the 1995
Plan, incentive stock options may be granted to selected employees. Options
under the 1995 Plan vest ratably over a four-year period from the date of grant,
and are exercisable at prices generally not less than the fair market value at
the grant date.
On May 10, 1995, the Board of Directors approved the adoption of the 1995
Stock Option Plan for Nonemployee Directors (the "Nonemployee Director Plan")
covering directors who are not employees of the Company. The Nonemployee
Director Plan allows for the automatic grant of 10,000 options upon becoming a
director and 3,000 options annually thereafter. Grants to-date have been made at
fair market value on the date of grant. These options vest ratably over three
years from the date of grant. Upon consummation of the Company's initial public
offering, 50,000 stock options were awarded under the Nonemployee Director Plan.
Stock options outstanding and related transactions under the Company's two
stock option plans are summarized as follows:
<TABLE>
<CAPTION>
SHARES PRICE PER SHARE
--------- -----------------
<S> <C> <C>
Granted................................................................... 542,250 $ 8.50 - $15.50
Exercised................................................................. (803) 8.50 - 8.50
Canceled.................................................................. (7,197) 8.50 - 8.50
--------- -----------------
Balance at December 31, 1995............................................ 534,250 8.50 - 15.50
Granted................................................................... 188,000 12.75 - 13.25
Exercised................................................................. (52) 12.50 - 12.50
Canceled.................................................................. (3,386) 10.00 - 13.25
--------- -----------------
Balance at March 31, 1996............................................... 718,812 8.50 - $ 15.50
--------- -----------------
--------- -----------------
</TABLE>
At March 31, 1996, a total of 112,302 outstanding options were exercisable
in accordance with the terms under which they were granted.
As of December 31, 1995, employees of the Company also held approximately
384,000 Cadence stock options, under the original terms of their issuance. These
options were granted to IMS employees by Cadence prior to 1995 (see note 1).
Upon exercise of Cadence options, proceeds equal to the option exercise price
pass to Cadence, and there is no impact on the number of shares of Company stock
outstanding.
Certain unvested Cadence stock options held by Company employees will be
canceled as a result of any offering that reduces Cadence's common stock
ownership in the Company to below certain percentages as specified in the
Cadence Stock Option Plans. Cadence will compensate such employees in the form
of cash for the value of these unvested stock options. Such pay out will be
contingent upon each employees continued employment with the Company for the
remaining unvested period related to these options. Compensation expense, equal
to the difference of the option price and the fair market value, as defined, of
Cadence Common Stock on the date of cancellation of these options, will be
reflected as a charge in the Company's Statement of Income over the remaining
vesting period.
The Financial Accounting Standards Board has issued SFAS 123, "Accounting
for Stock-Based Compensation" which establishes a fair value approach to
measuring compensation expense related to
F-11
<PAGE>
INTEGRATED MEASUREMENT SYSTEMS, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
6. EMPLOYEE AND DIRECTOR STOCK OPTION AND 401(K) SAVINGS PLANS: (CONTINUED)
employee stock plans. In 1996, the Company must either account for awards
granted under employee stock plans after January 1, 1995 under the provisions of
SFAS 123 or provide detailed disclosures in lieu of adoption. The Company plans
to only adopt the disclosure provisions of SFAS 123.
7. INCOME TAXES:
The accompanying Statements of Income present the Company's income tax
expense computed on a separate return basis. The taxable income of the Company
will be included in the Cadence consolidated income tax returns through July 20,
1995. The Company will file independent income tax returns beginning July 21,
1995, the date of the Company's initial public offering.
Income tax liabilities through March 31, 1995, have been settled with
Cadence. The settlement with Cadence is reflected as contributed capital in the
accompanying Statement of Shareholders' Equity. Income tax liabilities for the
period April 1 through July 20, 1995 will be settled with Cadence in cash.
The provision (benefit) for income taxes is as follows:
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal.................................................................... $ -- $ 934 $ 2,529
State...................................................................... 3 226 487
--------- --------- ---------
3 1,160 3,016
Deferred..................................................................... 99 25 (763)
--------- --------- ---------
Total...................................................................... $ 102 $ 1,185 $ 2,253
--------- --------- ---------
--------- --------- ---------
</TABLE>
The effective tax rate differs from the Federal statutory rate as follows:
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Federal statutory tax rate..................................................... 34.0% 34.0% 34.0%
State taxes, net of Federal tax effect......................................... 4.4 4.4 4.1
Other, net..................................................................... 5.4 (0.1) 0.8
--- --- ---
Total........................................................................ 43.8% 38.3% 38.9%
--- --- ---
--- --- ---
</TABLE>
The net deferred tax asset as of December 31, 1994 and 1995 consist of the
following tax effects relating to temporary differences:
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
Deferred tax assets:
Inventory valuation................................................................. $ 427 $ 641
Accrued vacation and other compensation............................................. 176 209
Book in excess of tax depreciation.................................................. 129 194
Allowance for doubtful accounts..................................................... 70 129
Accrued warranty.................................................................... 110 398
Other............................................................................... 135 158
--------- ---------
1,047 1,729
Deferred tax liabilities:
Software development costs.......................................................... (681) (600)
--------- ---------
Net deferred tax asset.............................................................. $ 366 $ 1,129
--------- ---------
--------- ---------
</TABLE>
For the year ended December 31, 1995, the current tax liability has been
reduced by $2,270 for the tax benefit from tax deduction of employee gains upon
exercise of Cadence stock options. The tax benefit of the
F-12
<PAGE>
INTEGRATED MEASUREMENT SYSTEMS, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
7. INCOME TAXES: (CONTINUED)
stock option deduction is reflected as an increase in Additional Paid-in Capital
in the accompanying Statements of Shareholders' Equity. The employee gains are
generally not expenses of the Company for financial reporting purposes, and the
exercise of these stock options does not increase the number of shares of
Company common stock outstanding.
8. TRANSACTIONS WITH CADENCE:
In certain foreign markets, primarily Europe, Cadence acts as sales agent
for the Company. Cadence is reimbursed its cost plus a fee by the Company
through intercompany accounts for related costs incurred on the Company's
behalf.
Cadence provides selling, service and production support related to the
Company's Virtual Test Software. These expenses have been reflected in the
accompanying Statements of Income based on contractual agreements with Cadence,
which reflect estimated costs required to provide such support.
Cadence provides facilities for certain domestic Company sales personnel.
Intercompany charges for utilization of these facilities have been reflected in
the accompanying Statements of Income as Selling, General and Administrative
expense.
Certain corporate services such as treasury, tax, legal and risk management
have been handled by Cadence in the past. The Company has begun to manage these
activities independently subsequent to the initial public offering. Management
does not expect these costs to increase significantly from their historical
levels.
For the years 1993, 1994 and 1995, the costs of the above services provided
by Cadence totaled $1,142, $1,883 and $2,698, respectively. During 1993 and
1994, a portion of these costs were withheld from revenues collected on the
Company's behalf in accordance with the sales agency agreement in effect for
those years. The net adjustments to present the Company on a stand-alone basis
were a reduction to income before income taxes of $367 and $60 for 1993 and
1994, respectively. These adjustments have been credited to Additional Paid-in
Capital in the accompanying Statements of Shareholders' Equity.
On March 31, 1995, the Company's Board of Directors approved a non-cash
dividend to Cadence in the amount of $1,027 which was the intercompany
outstanding balance at March 31, 1995. This dividend has been reflected in the
accompanying Statements of Shareholders' Equity. It is the intent of Cadence and
the Company to settle all intercompany activity subsequent to March 31, 1995 in
cash.
9. GEOGRAPHIC AND CUSTOMER INFORMATION:
The Company sells to customers located throughout the United States,
Asia-Pacific and Europe. Credit evaluations of its customers' financial
conditions are performed periodically, and the Company generally does not
require collateral from its customers. The Company maintains reserves for
potential credit losses and such losses have been both immaterial and within
management's expectations.
In 1993, 1994, and 1995, one customer accounted for 16 percent, 22 percent
and 30 percent of net sales, respectively. In 1993, another customer represented
12 percent of net sales. The concentrations of credit risk with respect to trade
receivables are, in management's opinion, considered minimal due to the size and
financial stability of the Company's customers.
F-13
<PAGE>
INTEGRATED MEASUREMENT SYSTEMS, INC.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
9. GEOGRAPHIC AND CUSTOMER INFORMATION: (CONTINUED)
Export sales represent sales to the Company's customers throughout
Asia-Pacific and Europe. Sales by customer geographic region, generally
denominated in U.S. dollars, for the periods ended December 31, were:
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
United States.......................................................... $ 15,591 $ 18,132 $ 27,854
Asia-Pacific........................................................... 4,347 7,755 8,403
Europe................................................................. 2,935 3,982 4,656
Other.................................................................. 244 183 180
--------- --------- ---------
Total................................................................ $ 23,117 $ 30,052 $ 41,093
--------- --------- ---------
--------- --------- ---------
</TABLE>
Like most high technology, high growth companies, IMS faces certain business
risks which may impact the Company's results of operations. For further
discussion of such risks, see Management's Discussion and Analysis of Financial
Condition and Results of Operations.
10. SUBSEQUENT EVENT:
On May 6, 1996, the shareholders approved the adoption of the 1995 Employee
Stock Purchase Plan (the "ESPP") pursuant to which 250,000 shares of the
Company's Common Stock have been reserved for issuance to participating
employees. Each eligible employee may elect to contribute up to 10 percent of
their cash compensation during each pay period. The ESPP provides for two
semi-annual offering periods, beginning February 1 and August 1 of each year.
During the offering periods, participants accumulate funds in an account via
payroll deduction. At the end of each six-month offering period, the purchase
price is determined and the accumulated funds are used to automatically purchase
shares of the Company's Common Stock. The purchase price per share is equal to
85 percent of the lower of the fair market value of the Common Stock (a) on the
Enrollment Date of the offering period or (b) on the date of the purchase.
F-14
<PAGE>
[LOGO]
<TABLE>
<S> <C> <C>
TEST STATIONS
IMS Time TestVIEW
Navigator Graphical Test
identifies Environment
timing errors provides for
fast program
development
ATS Blazer
Test Stations
provide high
performance
engineering
test
capability
IMS-Link Shmoo Plots
accepts design provide graphic
data from EDA display of test
databases results
</TABLE>
(1) IMS TEST STATIONS
The pictures portray:
(A) Three different models of ATS Blazer Test Stations (center). Around this
picture are four screen views of IMS software as follows
(B) TIME NAVIGATOR which facilitates identifying IC timing errors (upper
left-hand corner)
(C) TEST VIEW which is a test environment that provides for graphical test
program development (upper right-hand corner)
(D) SHMOO PLOTS which provides graphic display of multivariable test results
(lower right-hand corner)
(E) IMS-LINK which accepts design data from electronic design automation
data bases (lower left-hand corner)
TEST SOFTWARE
Dantes Virtual Test software supports the design, development
simulation and debugging of mixed-signal test programs
[INSIDE BACK PAGE]
(2) TEST SOFTWARE
The picture shows a screen shot of Dantes Virtual Test Software which
supports, the design and debugging of mixed-signal test programs.
<PAGE>
[LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, expected to be incurred by the
Registrant in connection with the offering described in this Registration
Statement. All amounts, except the SEC registration fee, the NASD filing fee and
the NASDAQ National Market System listing fee are estimates.
<TABLE>
<S> <C>
SEC Registration Fee.............................................. $ 26,500
NASD Filing Fee................................................... 8,185
NASDAQ Listing Fee................................................ 17,500
Printing and Engraving Expenses................................... 70,000
Accounting Fees and Expenses...................................... 35,000
Legal Fees and Expenses........................................... 50,000
Blue Sky Fees and Expenses (including fees of Counsel)............ 10,000
Transfer Agent and Registrar Fees................................. 3,000
Director and Officer Liability Insurance.......................... 88,000
Miscellaneous Expenses............................................ 41,815*
---------
Total......................................................... $ 350,000*
---------
---------
</TABLE>
- ------------------------
*Estimate.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
As an Oregon corporation the Company is subject to the Oregon Business
Corporation Act ("OBCA") and the exculpation from liability and indemnification
provisions contained therein. Pursuant to Section 60.047(2)(d) of the OBCA,
Article IV of the Company's Restated Articles of Incorporation (the "Articles")
eliminates the liability of the Company's directors to the Company or its
shareholders, except for any liability related to breach of the duty of loyalty,
actions not in good faith and certain other liabilities.
Section 60.387 et seq. of the OBCA allows corporations to indemnify their
directors and officers against liability where the director or officer has acted
in good faith and with a reasonable belief that actions taken were in the best
interests of the corporation or at least not adverse to the corporation's best
interests and, if in a criminal proceeding, the individual had no reasonable
cause to believe the conduct in question was unlawful. Under the OBCA,
corporations may not indemnify against liability in connection with a claim by
or in the right of the corporation but may indemnify against the reasonable
expenses associated with such claims. Corporations may not indemnify against
breaches of the duty of loyalty. The OBCA provides for mandatory indemnification
of directors against all reasonable expenses incurred in the successful defense
of any claim made or threatened whether or not such claim was by or in the right
of the corporation. Finally, a court may order indemnification if it determines
that the director or officer is fairly and reasonably entitled to
indemnification in view of all the relevant circumstances whether or not the
director or officer met the good faith and reasonable belief standards of
conduct set out in the statute.
The OBCA also provides that the statutory indemnification provisions are not
deemed exclusive of any other rights to which directors or officers may be
entitled under a corporation's articles of incorporation or bylaws, any
agreement, general or specific action of the board of directors, vote of
shareholders or otherwise.
The Articles require the Company to indemnify its directors and officers to
the fullest extent not prohibited by law.
Effective as of May 11, 1995, the Company entered into indemnity agreements
with each executive officer of the Company and each member of the Company's
Board of Directors. These indemnity agreements provide for indemnification of
the indemnitee to the fullest extent allowed by law.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Within the last three years, the Company has sold securities without
registration under the Securities Act of 1933, as amended (the "Act"), in the
transactions and in reliance on the exemptions from registration described
below.
During the period from May 10, 1995 through May 23, 1996, the Company has
issued options to purchase an aggregate of 819,525 shares of Common Stock and
has sold an aggregate of 1,604 shares of Common Stock for an aggregate purchase
price of $14,090, in each case pursuant to the Company's 1995 Stock Incentive
Plan and the 1995 Stock Option Plan for Nonemployee Directors and in reliance on
Rule 701 promulgated under the Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement
3.1 Restated Articles of Incorporation of Integrated Measurement Systems, Inc.*
3.2 Restated Bylaws of Integrated Measurement Systems, Inc.*
5.1 Opinion of Ater Wynne Hewitt Dodson & Skerritt as to the legality of the securities being registered
10.1 Form of Indemnity Agreement between Integrated Measurement Systems, Inc. and each of its executive
officers and directors*
10.2 1995 Stock Incentive Plan*
10.3 1995 Stock Option Plan for Nonemployee Directors*
10.4 Form of Employment Agreement between Integrated Measurement Systems, Inc. and each of its executive
officers (with the terms relating to each executive officer attached as Exhibit A thereto)*
10.5 Shareholder Agreement between Integrated Measurement Systems, Inc. and Cadence Design Systems, Inc.*
10.6 Shareholder Agreement between Integrated Measurement Systems, Inc. and Cadence Design Systems, Inc.*
10.7 Asset Transfer Agreement between Integrated Measurement Systems, Inc. and Cadence Design Systems, Inc.*
10.8 Corporate Services Agreement between Integrated Measurement Systems, Inc. and Cadence Design Systems,
Inc.*
10.9 Tax Sharing Agreement between Integrated Measurement Systems, Inc. and Cadence Design Systems, Inc.*
10.10 Lease Agreement between Integrated Measurement Systems, Inc. and Beaverton-Richmond Tech Properties, a
Joint Venture, as amended by Amendment One and Amendment Two*
10.11 Line of Credit Agreement between Integrated Measurement Systems, Inc. and U.S. Bank of Oregon+
10.12 Integrated Measurement Systems, Inc. 1995 Employee Stock Purchase Plan.+
10.13 Employment Agreement dated March 16, 1996 between Integrated Measurement Systems, Inc. and Keith L.
Barnes++
10.14 Employment Agreement dated March 16, 1996 between Integrated Measurement Systems, Inc. and Sar
Ramadan.++
10.15 Amended Stockholder Agreement between Integrated Measurement Systems, Inc. and Cadence Design Systems,
Inc.
10.16 Amended Corporate Services Agreement between Integrated Measurement Systems, Inc. and Cadence Design
Systems, Inc.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
10.17 Second Amendment to Joint Sales Agency Agreement between Cadence Design Systems, Inc. and Integrated
Measurement Systems, Inc.
<S> <C>
16.1 Letter of Arthur Andersen LLP regarding change in accounting principals.++
23.1 Consent of Ater Wynne Hewitt Dodson & Skerritt (included in legal opinion filed as Exhibit 5.0)
23.2 Consent of Arthur Andersen LLP
24.1 Powers of Attorney (included on signature page at page II-4)
</TABLE>
- ------------------------
* Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration No. 33-92408).
+ Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.
++ Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1996.
(b) Financial Statement Schedules
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting agreement certificates
in such denominations and registered in such names as required by the
underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered hereunder, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Portland, State of
Oregon, on the 23rd day of May, 1996.
INTEGRATED MEASUREMENT SYSTEMS, INC.
By: /s/ KEITH L. BARNES
---------------------------------------
Keith L. Barnes
PRESIDENT AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Keith L. Barnes and Sar Ramadan and each of them
singly, as true and lawful attorneys-in-fact and agents with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities to sign the Registration Statement (including
post-effective amendments), and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission granting unto said attorneys-in-fact and agents and full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or his substitute, may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been duly signed by the following persons in the
capacities indicated on May 23, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------------------ ---------------------------------------
<C> <S> <C>
/s/ KEITH L. BARNES
-------------------------------------- President, Chief Executive Officer and
Keith L. Barnes Director (Principal Executive Officer)
/s/ SAR RAMADAN
-------------------------------------- Chief Financial Officer (Principal
Sar Ramadan Financial and Accounting Officer)
/s/ H. RAYMOND BINGHAM
-------------------------------------- Chairman of the Board
H. Raymond Bingham
/s/ C. SCOTT GIBSON
-------------------------------------- Director
C. Scott Gibson
-------------------------------------- Director
James M. Hurd
/s/ JAMES E. SOLOMON
-------------------------------------- Director
James E. Solomon
/s/ DELBERT W. YOCAM
-------------------------------------- Director
Delbert W. Yocam
</TABLE>
II-4
<PAGE>
INTEGRATED MEASUREMENT SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT END
DESCRIPTION PERIOD EXPENSES DEDUCTIONS OF PERIOD
- ------------------------------------------------------------ --------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
Year Ended December 31, 1993:
Allowance for doubtful accounts........................... $ 200 $ -- $ (53) $ 147
Year Ended December 31, 1994:
Allowance for doubtful accounts........................... 147 69 (34) 182
Year Ended December 31, 1995:
Allowance for doubtful accounts........................... 182 220 (64) 338
</TABLE>
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT DESCRIPTION NUMBERED PAGE
- ----------- -------------------------------------------------------------------------------------------- -------------
<C> <S> <C>
1.1 Form of Underwriting Agreement..............................................................
3.1 Restated Articles of Incorporation of Integrated Measurement Systems, Inc.*.................
3.2 Restated Bylaws of Integrated Measurement Systems, Inc.*....................................
5.1 Opinion of Ater Wynne Hewitt Dodson & Skerritt as to the legality of the securities being
registered..................................................................................
10.1 Form of Indemnity Agreement between Integrated Measurement Systems, Inc. and each of its
executive officers and directors*...........................................................
10.2 1995 Stock Incentive Plan*..................................................................
10.3 1995 Stock Option Plan for Nonemployee Directors*...........................................
10.4 Form of Employment Agreement between Integrated Measurement Systems, Inc. and each of its
executive officers (with the terms relating to each executive officer attached as Exhibit A
thereto)*...................................................................................
10.5 Shareholder Agreement between Integrated Measurement Systems, Inc. and Cadence Design
Systems, Inc.*..............................................................................
10.6 Shareholder Agreement between Integrated Measurement Systems, Inc. and Cadence Design
Systems, Inc.*..............................................................................
10.7 Asset Transfer Agreement between Integrated Measurement Systems, Inc. and Cadence Design
Systems, Inc.*..............................................................................
10.8 Corporate Services Agreement between Integrated Measurement Systems, Inc. and Cadence Design
Systems, Inc.*..............................................................................
10.9 Tax Sharing Agreement between Integrated Measurement Systems, Inc. and Cadence Design
Systems, Inc.*..............................................................................
10.10 Lease Agreement between Integrated Measurement Systems, Inc. and Beaverton-Richmond Tech
Properties, a Joint Venture, as amended by Amendment One and Amendment Two*.................
10.11 Line of Credit Agreement between Integrated Measurement Systems, Inc. and U.S. Bank of
Oregon+.....................................................................................
10.12 Integrated Measurement Systems, Inc. 1995 Employee Stock Purchase Plan.+....................
10.13 Employment Agreement dated March 16, 1996 between Integrated Measurement Systems, Inc. and
Keith L. Barnes++...........................................................................
10.14 Employment Agreement dated March 16, 1996 between Integrated Measurement Systems, Inc. and
Sar Ramadan.++..............................................................................
10.15 Amended Stockholder Agreement between Integrated Measurement Systems, Inc. and Cadence
Design Systems, Inc.........................................................................
10.16 Amended Corporate Services Agreement between Integrated Measurement Systems, Inc. and
Cadence Design Systems, Inc. ...............................................................
10.17 Second Amendment to Joint Sales Agency Agreement between Cadence Design Systems, Inc. and
Integrated Measurement Systems, Inc. .......................................................
16.1 Letter of Arthur Andersen LLP regarding change in accounting principals.++..................
23.1 Consent of Ater Wynne Hewitt Dodson & Skerritt (included in legal opinion filed as Exhibit
5.0)........................................................................................
23.2 Consent of Arthur Andersen LLP..............................................................
24.1 Powers of Attorney (included on signature page at page II-4)................................
</TABLE>
- ------------------------
* Incorporated by reference to the Company's Registration Statement on Form
S-1 (Registration No. 33-92408).
+ Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.
++ Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1996.
<PAGE>
REGISTRATION NO. 33-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
EXHIBITS
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
INTEGRATED MEASUREMENT SYSTEMS, INC.
(Exact Name of Registrant as specified in its charter)
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- --------------------------------------------------------------------------------
<PAGE>
2,525,000 Shares
INTEGRATED MEASUREMENT SYSTEMS, INC.
Common Stock, $.01 par value
UNDERWRITING AGREEMENT
June __, 1996
<PAGE>
June __, 1996
Morgan Stanley & Co. Incorporated
Cowen & Company
Soundview Financial Group, Inc.
c/o Morgan Stanley & Co. Incorporated
1251 Avenue of the Americas
New York, New York 10020
Dear Sirs:
Integrated Measurement Systems, Inc., an Oregon corporation (the
"Company"), proposes to issue and sell to the several Underwriters named in
Schedule II hereto (the "Underwriters"), and certain stockholders of the Company
named in Schedule I hereto severally propose to sell to the several
Underwriters, an aggregate of 2,525,000 shares of the common stock, $.01 par
value, of the Company (the "Firm Shares"), of which 1,130,000 shares are to be
issued and sold by the Company and 1,395,000 shares are to be sold by the
Selling Stockholders.
The Company also proposes to issue and sell, and Cadence Design Systems,
Inc., a Delaware corporation and a selling stockholder ("Cadence") also proposes
to sell, to the several Underwriters not more than an additional 375,000 shares
of the Company's common stock, $.01 par value (the "Additional Shares"), if and
to the extent that you, as Managers of the offering, shall have determined to
exercise, on behalf of the Underwriters, the right to purchase such shares of
common stock granted to the Underwriters in Article III hereof. Such Additional
Shares shall be sold by Cadence insofar as set forth on Schedule I and shall be
sold by the Company as to the balance of the total number of Additional Shares.
The selling stockholders named in Schedule I hereto, other than Cadence are
hereinafter sometimes collectively referred to as the Individual Selling
Stockholders. Cadence and the Individual Selling Stockholders are hereinafter
sometimes collectively referred to as the Selling Stockholders. The Firm Shares
and the Additional Shares are hereinafter collectively referred to as the
Shares. The shares of common stock, $.01 par value, of the Company to be
outstanding after giving effect to the sales contemplated hereby are hereinafter
referred to as the Common Stock. The Company and the Selling Stockholders are
hereinafter sometimes collectively referred to as the Sellers.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement, including a prospectus, relating to the
Shares. The registration statement as amended at the time it becomes effective,
including the information (if any) deemed to be part of the registration
statement at the time of effectiveness pursuant to Rule 430A under the
Securities Act of 1933, as amended (the "Securities Act"), is hereinafter
referred to as the "Registration Statement;" the prospectus in the form first
used to confirm sales of Shares is hereinafter referred to as the "Prospectus."
If the Company files a registration statement to register a portion of the
Shares and relies on Rule 462(b) under the Securities Act for such registration
statement to become effective upon filing with the Commission (the "Rule 462
Registration Statement"), then any reference to the "Registration Statement"
shall be deemed to refer to both the registration statement referred to above
(Commission File No. ___-_________) and the Rule 462 Registration Statement, in
each case as amended from time to time.
<PAGE>
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<PAGE>
I.
A. The Company and Cadence, jointly and severally, represent and warrant
to each of the Underwriters that:
(i) The Registration Statement has become effective, no stop
order suspending the effectiveness of the Registration Statement is in
effect, and no proceedings for such purpose are pending before or
threatened by the Commission.
(ii) (I) Each document filed or to be filed pursuant to the
Exchange Act complied or will comply when so filed in all material respects
with the Exchange Act and the applicable rules and regulations of the
Commission thereunder; (II) each part of the Registration Statement, when
such part became effective, did not contain and each such part, as amended
or supplemented, if applicable, will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading,
(III) the Registration Statement and the Prospectus comply and, as amended
or supplemented, if applicable, will comply in all material respects with
the Securities Act and the applicable rules and regulations of the
Commission thereunder and (IV) the Prospectus does not contain and, as
amended or supplemented, if applicable, will not contain any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading, except that the representations
and warranties set forth in this paragraph I.A (ii) do not apply to
statements or omissions in the Registration Statement or the Prospectus
based upon information relating to any Underwriter furnished to the Company
in writing by such Underwriter through you expressly for use therein.
(iii) The Company has been duly incorporated, and is an active
corporation under the laws of the State of Oregon, has the corporate power
and authority to own its property and to conduct its business as described
in the Prospectus and is duly qualified to transact business and is in good
standing in each jurisdiction in which the conduct of its business or its
ownership or leasing of property requires such qualification, except to the
extent that the failure to be so qualified or be in good standing would not
have a material adverse effect on the Company.
(iv) The Shares to be sold by the Company have been duly
authorized, and, when issued and delivered in accordance with the terms of
this Agreement, will be validly issued, fully paid and non-assessable, and
the issuance of such Shares will not be subject to any preemptive or
similar rights.
(v) This Agreement has been duly authorized, executed and
delivered by the Company and is a valid and binding agreement of the
Company.
(vi) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the
condition, financial or otherwise, or in the earnings,
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<PAGE>
business or operations of the Company and the Subsidiary, taken as a whole,
from that set forth in the Prospectus.
(vii) There are no legal or governmental proceedings pending or
threatened to which the Company or the Subsidiary is a party or to which
any of the properties of the Company or the Subsidiary is subject that are
required to be described in the Registration Statement or the Prospectus
and are not so described or any statutes, regulations, contracts or other
documents that are required to be described in the Registration Statement
or the Prospectus or to be filed as exhibits to the Registration Statement
that are not described or filed as required.
(viii) Each preliminary prospectus filed as part of the
registration statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 or Rule 462 under the Securities
Act, complied when so filed in all material respects with the Securities
Act and the rules and regulations of the Commission thereunder.
(ix) Each of the Company and the Subsidiary maintains a system of
internal accounting controls sufficient to provide reasonable assurance
that (1) transactions are executed in accordance with management's general
or specific authorization; (2) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability; (3)
access to assets is permitted only in accordance with management's general
or specific authorization; and (4) the recorded accountability for assets
is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
The representations and warranties of Cadence set forth in paragraphs
(ii), (vi), (vii) and (ix) are made on the basis that, after due inquiry,
Cadence has no knowledge of or reasonable grounds to believe in the existence of
any facts which would make such representations and warranties untrue,
incomplete or incorrect.
B. The Company represents and warrants to each of the Underwriters that:
(i) The execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement will
not contravene any provision of applicable law or the articles of
incorporation or bylaws of the Company or the Subsidiary or any agreement
or other instrument binding upon the Company or the Subsidiary that is
material to the Company and the Subsidiary, taken as a whole, or any
judgment, order or decree of any governmental body, agency or court having
jurisdiction over the Company or the Subsidiary, and no consent, approval,
authorization or order of or qualification with any governmental body or
agency is required for the performance by the Company of its obligations
under this Agreement, except such as may be required by the securities or
Blue Sky laws of the various states in connection with the offer and sale
of the Shares.
(ii) Each of the Company and the Subsidiary has all necessary
consents, authorizations, approvals, orders, certificates and permits of
and from, and has made all declarations and filings with, all federal,
state, local and other governmental authorities, all self-regulatory
organizations and all
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<PAGE>
courts and other tribunals, to own, lease, license and use its properties
and assets and to conduct its business in the manner described in the
Prospectus, except to the extent that the failure to obtain or file would
not have a material adverse effect on the Company and the Subsidiary, taken
as a whole.
(iii) Integrated Measurement Systems (F.S.C.), Inc., a [Guam]
corporation (the "Subsidiary"), has been duly incorporated, is validly
existing as a corporation in good standing under the laws of [Guam], has
the corporate power and authority to own its property and to conduct its
business as described in the Prospectus and is duly qualified to transact
business and is in good standing in each jurisdiction in which the conduct
of its business or its ownership or leasing of property requires such
qualification, except to the extent that the failure to be so qualified or
be in good standing would not have a material adverse effect on the Company
and the Subsidiary, taken as a whole. All of the issued shares of capital
stock of the Subsidiary of the Company have been duly and validly
authorized and issued, are fully paid and non-assessable, and owned
directly by the Company, free and clear of all liens, encumbrances,
equities or claims. The Company does not own, directly or indirectly, an
interest in any other corporation, partnership, business, trust or other
entity.
(iv) The shares of Common Stock (including the Shares to be sold
by the Selling Stockholders) outstanding prior to the issuance of the
Shares to be sold by the Company have been duly authorized and are validly
issued, fully paid and non-assessable.
(v) Each of the Company and the Subsidiary (i) is in compliance
with any and all applicable foreign, federal, state and local laws and
regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants (collectively, "Environmental Laws"), (II) has received all
permits, licenses or other approvals required of it under applicable
Environmental Laws to conduct its business and (III) is in compliance with
all terms and conditions of any such permit, license or approval, except
where such noncompliance with Environmental Laws, failure to receive
required permits, licenses or other approvals or failure to comply with the
terms and conditions of such permits, licenses or approvals would not,
singly or in the aggregate, have a material adverse effect on the Company
and the Subsidiary, taken as a whole.
(vi) The costs and liabilities associated with Environmental Laws
(including, without limitation, any capital or operating expenditures
required for clean-up, closure of properties or compliance with
Environmental Laws or any permit, license or approval, any related
constraints on operating activities and any potential liabilities to third
parties) would not, singly or in the aggregate, reasonably be expected to
have a material adverse effect on the Company and the Subsidiary, taken as
a whole.
(vii) Each of the Company and the Subsidiary owns or possesses
adequate licenses or other rights to use all patents, copyrights,
trademarks, service marks, trade names, maskwork rights, technology and
know-how necessary (in any material respect) to conduct its business in the
manner described in the Prospectus and, except as disclosed in the
Prospectus, neither the Company nor the
-5-
<PAGE>
Subsidiary have received any notice of infringement or conflict with
(and neither the Company nor the Subsidiary know of any infringement or
conflict with) asserted rights of others with respect to any patents,
copyrights, trademarks, service marks, trade names, maskwork rights,
technology or know-how which could result in any material adverse effect
upon the Company and the Subsidiary, taken as a whole; and, except as
disclosed in the Prospectus, the discoveries, inventions, products or
processes of the Company referred to in the Prospectus do not, to the
knowledge of the Company or the Subsidiary, infringe or conflict with
any right or patent of any third party, or any discovery, invention,
product or process which is the subject of a patent application filed by
any third party, known to the Company or the Subsidiary which could have
a material adverse effect on the Company and the Subsidiary, taken as a
whole.
(viii) The Company is not and, after giving effect to the
offering and sale of the Shares and the application of the proceeds thereof
as described in the Prospectus will not be, an "investment company" as such
term is defined in the Investment Company Act of 1940, as amended.
(ix) There is no owner of any securities of the Company who
has any rights, not effectively satisfied or waived, to require
registration of any shares of capital stock of the Company in connection
with the filing of the Registration Statement.
(x) As of the date the Registration Statement becomes effective,
the Common Stock will be authorized for listing on the Nasdaq National
Market System upon official notice of issuance.
(xi) The Company has complied with all provisions of Section
517.075, Florida Statutes (Chapter 92-198, Laws of Florida), relating to
issuers doing business with Cuba.
II.
A. Cadence represents and warrants to each of the Underwriters that (i)
it is duly incorporated and is validly existing as a corporation in good
standing under the laws of the State of Delaware and, (ii) to the best of its
knowledge, that all the representations of the Company set forth in Section I.B
are true and correct.
B. Each of the Selling Stockholders, severally and not jointly,
represents and warrants to each of the Underwriters that:
(i) This Agreement has been duly authorized, executed and
delivered by such Selling Stockholder and constitutes a valid and binding
obligation upon such Selling Stockholder.
(ii) The execution and delivery by such Selling Stockholder (or
on its behalf by attorney-in-fact, as applicable) and the performance by
such Selling Stockholder of its obligations under, this Agreement, and,
with respect to the Individual Selling Stockholders, the Custody Agreement
(or by an attorney-in-fact on their behalf) signed by such Individual
Selling Stockholder and ________________, as Custodian, relating to the
deposit of the Shares to be sold by such Individual Selling Stockholder
(the "Custody Agreement"),any lock-up agreement signed by such Individual
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<PAGE>
Selling Stockholder relating to resale restrictions on the Company stock owned
or held by such Individual Selling Stockholder ("Lock-Up Agreement") and the
Power of Attorney appointing certain individuals as such Individual Selling
Stockholder's attorneys-in-fact to the extent set forth therein, relating to the
transactions contemplated hereby and by the Registration Statement (the "Power
of Attorney"), will not contravene any provision of applicable law, or, in the
case of Cadence, Cadence's certificate or articles of incorporation or by-laws,
or any agreement or other instrument binding upon such Selling Stockholder or
any judgment, order or decree of any governmental body, agency or court having
jurisdiction over such Selling Stockholder, and no consent, approval,
authorization or order of or qualification with any governmental body or agency
is required for the performance by such Selling Stockholder of its obligations
under this Agreement or, in the case of Individual Selling Stockholders, the
Custody Agreement, Lock-Up Agreement or Power of Attorney of such Individual
Selling Stockholder, except such as may be required by the securities or Blue
Sky laws of the various states in connection with the offer and sale of the
Shares.
(iii) Such Selling Stockholder has, and on the Closing Date
will have, good and valid marketable title to the Shares to be sold by such
Selling Stockholder and the legal right and power, and all authorization and
approval required by law, to enter into this Agreement and to sell, transfer
and deliver the Shares to be sold by such Selling Stockholder.
(iv) The Shares to be sold by such Selling Stockholder
pursuant to this Agreement have been duly authorized and are validly issued,
fully paid and non-assessable.
(v) Upon delivery of and payment for the Shares to be sold by
such Selling Stockholder pursuant to this Agreement, the Underwriters will
receive good and valid title to such Shares free and clear of any security
interests, claims, liens and other encumbrances.
(vi) With respect to Individual Selling Stockholders, all
information furnished by or on behalf of such Individual Selling Stockholders
for use in the Registration Statement and Prospectus is, and on the Closing
Date will be, true, correct, and complete, and does not, and on the Closing
Date will not, contain any untrue statement of a material fact or omit to
state any material fact necessary to make such information not misleading.
(vii) To the best knowledge of each such Selling Stockholder,
other than Cadence: (i) each part of the Registration Statement, when such
part became effective, did not contain and each such part, as amended or
supplemented, if applicable, will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein not misleading, and (ii) the
Prospectus does not contain and, as amended or supplemented, if applicable,
will not contain any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading, except that
the representations and warranties set forth in this paragraph (h) do not
apply to statements or omissions in the Registration Statement or the
Prospectus based upon information relating to any Underwriter furnished to
the Company in writing by such Underwriter through you expressly for use
therein.
-7-
<PAGE>
III.
Each Seller, severally and not jointly, hereby agrees to sell to the
several Underwriters, and each Underwriter, upon the basis of the
representations and warranties herein contained, but subject to the conditions
hereinafter stated, agrees, severally and not jointly, to purchase from such
Seller at $________ a share -- the purchase price -- the number of Firm Shares
(subject to such adjustments to eliminate fractional shares as you may
determine) that bears the same proportion to the number of Firm Shares to be
sold by such Seller as the number of Firm Shares set forth in Schedule II hereto
opposite the name of such Underwriter bears to the total number of Firm Shares.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company and Cadence
hereby agree to sell to the Underwriters the Additional Shares, and the
Underwriters shall have a one-time right to purchase, severally and not jointly,
up to 375,000 Additional Shares at the purchase price. Additional Shares may
be purchased as provided in Article V hereof solely for the purpose of covering
over-allotments made in connection with the offering of the Firm Shares. If any
Additional Shares are to be purchased, each Underwriter agrees, severally and
not jointly, to purchase the number of Additional Shares (subject to such
adjustments to eliminate fractional shares as you may determine) that bears the
same proportion to the total number of Additional Shares to be purchased as the
number of Firm Shares set forth in Schedule I hereto opposite the name of such
Underwriter bears to the total number of Firm Shares.
The Company hereby agrees that, without the prior written consent of Morgan
Stanley & Co. Incorporated on behalf of the Underwriters, it will not, during
the period ending 120 days after the date of the Prospectus, (1) offer, pledge,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase, or
otherwise transfer or dispose of, directly or indirectly, any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock, or (2) enter into any swap or similar arrangement that transfers,
in whole or in part, the economic risk of ownership of the Common Stock, whether
any such transaction described in clause (1) or (2) above is to be settled by
delivery of Common Stock or such other securities, in cash or otherwise, other
than (i) the Shares to be sold hereunder, (ii) any shares of such Common Stock
sold by the Company upon the exercise of an option under the Company's stock
option plan outstanding on the date hereof, and (iii) any option to purchase
Common Stock, and any shares of Common Stock sold by the Company upon the
exercise of options, granted under the Company's 1995 Stock Incentive Plan, the
1995 Stock Option Plan for Non-Employee Directors and 1995 Employee Stock
Purchase Plan, provided that, the holder of such option enters into a lock-up
agreement similar to the agreement set forth in this paragraph for the period
from the date of such grant until the date 120 days after the date of the
Prospectus. The Company hereby further agrees that during the period ending 120
days after the date of the Prospectus, it will not waive, amend or alter any
lock up provision contained in any stock option agreement between the Company
and any person without the prior written consent of Morgan Stanley & Co.
Incorporated on behalf of the Underwriters.
Each Selling Stockholder hereby agrees that, without the prior written
consent of Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it
will not, during the period ending 120 days after the date of the Prospectus,
(1) offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any
-8-
<PAGE>
option or contract to sell, grant any option, right or warrant to purchase,
or otherwise transfer or dispose of directly or indirectly, any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock, or (2) enter into any swap or similar arrangement that transfers,
in whole or in part, the economic risk of ownership of the Common Stock, whether
any such transaction described in clause (1) or (2) above is to be settled by
delivery of Common Stock or such other securities, in cash or otherwise. In
addition, each Selling Stockholder agrees that, without the prior written
consent of Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it
will not, during the period ending 120 days after the date of the Prospectus,
make any demand for or exercise any right with respect to, the registration of
any shares of Common Stock or any security convertible into or exercisable or
exchangeable for Common Stock.
IV.
The Sellers are advised by you that the Underwriters propose to make a
public offering of their respective portions of the Shares as soon after the
Registration Statement and this Agreement have become effective as in your
judgment is advisable. The Sellers are further advised by you that the Shares
are to be offered to the public initially at $____ a share (the public offering
price) and to certain dealers selected by you at a price that represents a
concession not in excess of $___ a share under the public offering price, and
that any Underwriter may allow, and such dealers may reallow, a concession, not
in excess of $____ a share, to any Underwriter or to certain other dealers.
V.
Payment for the Firm Shares shall be made in Federal or other funds
immediately available in New York City against delivery of such Firm Shares for
the respective accounts of the several Underwriters at 10:00 A.M., New York City
time, on _________, or at such other time on the same or such other date, not
later than _________, as shall be designated in writing by you. The time and
date of each such payment are hereinafter referred to as the Closing Date.
Payment for any Additional Shares shall be made in Federal or other
funds immediately available in New York City against delivery of such Additional
Shares for the respective accounts of the several Underwriters at 10:00 A.M.,
New York City time, on such date (which may be the same as the Closing Date but
shall in no event be earlier than the Closing Date nor later than ten business
days after the giving of the notice hereinafter referred to) as shall be
designated in a written notice from you to the Company of your determination, on
behalf of the Underwriters, to purchase a number, specified in said notice, of
Additional Shares, or on such other date, in any event not later than
___________ as shall be designated in writing by you. The time and date of such
payment are hereinafter referred to as the Option Closing Date. The notice of
the determination to exercise the option to purchase Additional Shares and of
the Option Closing Date may be given at any time within 30 days after the date
of this Agreement.
Certificates for the Firm Shares and Additional Shares shall be in
definitive form and registered in such names and in such denominations as you
shall request in writing not later than two full business days prior to the
Closing Date or the Option Closing Date, as the case may be. The certificates
evidencing the Firm Shares and Additional Shares shall be delivered to you on
the Closing Date or the Option Closing Date, as the
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<PAGE>
case may be, for the respective accounts of the several Underwriters, with any
transfer taxes payable in connection with the transfer of the Shares to the
Underwriters duly paid, against payment of the purchase price therefor.
VI.
The obligations of the Sellers and the several obligations of the
Underwriters hereunder are subject to the condition that the Registration
Statement shall have become effective not later than the date hereof.
The several obligations of the Underwriters hereunder are subject to the
following further conditions:
(a) Subsequent to the execution and delivery of this Agreement and
prior to the Closing Date, there shall not have occurred any change, or any
development involving a prospective change, in the condition, financial or
otherwise, or in the earnings, business or operations, of the Company and
the Subsidiary, taken as a whole, from that set forth in the Registration
Statement, that, in your judgment, is material and adverse and that makes
it, in your judgment, impracticable to market the Shares on the terms and
in the manner contemplated in the Prospectus.
(b) The Underwriters shall have received on the Closing Date a
certificate, dated the Closing Date and signed by the chief executive
officer and the chief financial officer of the Company, to the effect set
forth in clause (a) above, and to the effect that the representations and
warranties of the Company contained in this Agreement are true and correct
as of the Closing Date and that the Company has complied with all of the
agreements and satisfied all of the conditions on its part to be performed
or satisfied hereunder on or before the Closing Date.
The officers signing and delivering such certificate may rely upon the
best of their knowledge as to proceedings threatened.
(c) The Underwriters shall have received on the Closing Date a
certificate, dated the Closing Date and signed by each of
(i) the chief executive officer and the chief financial
officer of Cadence to the effect set forth in clause (a) above, and to
the effect that the representations and warranties of Cadence
contained in this Agreement are true and correct as of the Closing
Date and that Cadence has complied with all of the agreements and
satisfied all of the conditions on its part to be performed or
satisfied hereunder on or before the Closing Date (the officers
signing and delivering such certificate may rely upon the best of
their knowledge as to proceedings threatened); and
(ii) by the Individual Selling Stockholders (or by their
attorneys-in-fact on their behalf) to the effect that the
representations and warranties of the Individual Selling Stockholders
contained in this Agreement are true and correct as of the Closing
Date and that each such Individual Selling Stockholder has complied
with all of the agreements and satisfied
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<PAGE>
all of the conditions on its part to be performed or satisfied
hereunder on or before the Closing Date.
(d) You shall have received on the Closing Date an opinion of Ater
Wynne Hewitt Dodson & Skerritt, counsel for the Company, dated the Closing
Date, to the effect that
(i) the Company has been duly incorporated as an active
corporation under the laws of the State of Oregon, has the corporate
power and authority to own its property and to conduct its business as
described in the Prospectus and is duly qualified to transact business
and is in good standing in each jurisdiction in which the conduct of
its business or its ownership or leasing of property requires such
qualification, except to the extent that the failure to be so
qualified or be in good standing would not have a material adverse
effect on the Company;
(ii) the Company owns all of the shares of capital stock of the
Subsidiary;
(iii) the authorized capital stock of the Company conforms as to
legal matters to the description thereof contained in the Prospectus;
(iv) the shares of Common Stock (including the Shares to be
sold by the Selling Stockholders) outstanding prior to the issuance of
the Shares to be sold by the Company have been duly authorized and are
validly issued, fully paid and non-assessable;
(v) the Shares to be sold by the Company have been duly
authorized when issued and delivered in accordance with the terms of
this Agreement, will be validly issued, fully paid and non-assessable,
and the issuance of such Shares will not be subject to any statutory
preemptive or, to such counsel's knowledge, similar rights;
(vi) the Company has corporate power and authority to enter
into this Agreement and to issue, sell and deliver to the Underwriters
the Shares to be issued and sold by the Company and this Agreement has
been duly authorized, executed and delivered by the Company;
(vii) the execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement
will not contravene any provision of applicable law or the articles of
incorporation or bylaws of the Company or, to the best of such
counsel's knowledge, any agreement or other instrument binding upon
the Company or the Subsidiary that is material to the Company and the
Subsidiary, taken as a whole, or, to the best of such counsel's
knowledge, any judgment, order or decree of any governmental body,
agency or court having jurisdiction over the Company or the Subsidiary
and no consent, approval, authorization or order of or qualification
with any governmental body or agency is required for the performance
by the Company of its obligations under this Agreement, except
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such as may be required by the securities or Blue Sky laws of the
various states in connection with the offer and sale of the Shares;
(viii) the statements (1) in the Prospectus under the captions
"Risk Factors -- Effect of Certain Anti-Takeover Provisions," "Risk
Factors--Shares Eligible for Future Sale," "Management," "Certain
Transactions--Description of Agreements with Cadence," "Description of
Capital Stock," and "Shares Eligible for Future Sale," and (2) in the
Registration Statement in Items 14 and 15, in each case insofar as
such statements constitute summaries of the legal matters, documents
or proceedings referred to therein, fairly present the information
called for with respect to such legal matters, documents and
proceedings and fairly summarize the matters referred to therein;
(ix) after due inquiry, such counsel does not know of any
legal, regulatory or governmental proceeding pending or threatened to
which either the Company or the Subsidiary is a party or to which any
of the properties of the Company or the Subsidiary is subject that are
required to be described in the Registration Statement or the
Prospectus and are not so described or of any statutes, regulations,
contracts or other documents that are required to be described in the
Registration Statement or the Prospectus or to be filed as exhibits to
the Registration Statement that are not described or filed as
required;
(x) the Company is not and, after giving effect to the
offering and the sale of the Shares and the application of the
proceeds thereof as described in the Prospectus will not be, an
"investment company" or an entity "controlled" by an "investment
company," as such terms are defined in the Investment Company Act of
1940, as amended;
(xi) to the best knowledge of such counsel, there is no legal
or beneficial owner of any securities of the Company who has any
rights, not effectively satisfied or waived, to require registration
of any shares of capital stock of the Company in connection with the
filing of the Registration Statement;
(xii) to the best of such counsel's knowledge: (i) the
Registration Statement has become effective under the Securities Act,
no stop order proceedings with respect thereto have been instituted or
are pending or threatened under the Securities Act; and (ii) any
required filing of the Prospectus and any supplement thereto pursuant
to Rule 424(b) of the rules and regulations has been made in the
manner and within the time period required by such Rule 424(b);
(xiii) to such counsel's knowledge, each document filed pursuant
to the Exchange Act (except for financial statements and schedules and
other financial information derived therefrom included therein as to
which such counsel need not express any opinion) complied when so
filed as to form in all material respects with the Exchange Act and
the applicable rules and regulations of the Commission thereunder,
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(xiv) such counsel is of the opinion that the Registration
Statement and Prospectus (except for financial statements and
schedules and other financial data included therein as to which such
counsel need not express any opinion) comply as to form in all
material respects with the Securities Act and the rules and
regulations of the Commission thereunder, (2) believes that (except
for financial statements and schedules and other financial data as to
which such counsel need not express any belief) the Registration
Statement and the prospectus included therein at the time the
Registration Statement became effective did not contain any untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading and (3) believes that (except for financial statements and
schedules and other financial data as to which such counsel need not
express any belief) the Prospectus does not contain any untrue
statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading;
(e) You shall have received on the Closing Date an opinion of
Cooley Godward Castro Huddleson & Tatum, counsel for Cadence, dated the
Closing Date, to the effect that
(i) Cadence has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State of
Delaware.
(ii) this Agreement has been duly authorized, executed and
delivered by Cadence;
(iii) the execution and delivery by Cadence of, and the
performance by Cadence of its obligations under, this Agreement will
not contravene any provision of applicable law, or the certificate of
incorporation or bylaws of Cadence or, to the best of such counsel's
knowledge, any agreement or other instrument binding upon Cadence that
is material Cadence or, to the best of such counsel's knowledge, any
judgment, order or decree of any governmental body, agency or court
having jurisdiction over Cadence where such judgment order or decree
would have, singly or in the aggregate, an material adverse effect on
Cadence, and no consent, approval, authorization or order of or
qualification with any governmental body or agency is required for the
performance by Cadence of its obligations under this Agreement, except
such as have been obtained or may be required by the securities or
Blue Sky laws of the various states in connection with the offer and
sale of the Shares or under the rules or regulations of the National
Association of Securities Dealers with respect to underwriting
arrangements;
(iv) Cadence has the corporate power, and all authorization and
approval required by law, to enter into this Agreement and to sell,
transfer and deliver the Shares to be sold by Cadence; and, to such
counsel's knowledge, Cadence has valid marketable title to the Shares
to be sold by it and such sale, transfer and delivery is not subject
to any right of first refusal or other contractual restriction; and
each of the certificates evidencing such Shares is in proper legal
form; and
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(v) assuming the Underwriters purchase the Shares to be sold
by the Selling Stockholder for value, in good faith and without notice
of any adverse claim, upon delivery of and payment for the Shares to
be sold by Cadence pursuant to this Agreement, the Underwriters will
receive valid title to such Shares free and clear of any security
interests, claims, liens, equities and other encumbrances.
(f) You shall have received on the Closing Date an opinion of Ater
Wynne Hewitt Dodson & Skerritt, counsel for the Individual Selling
Stockholders, dated the Closing Date, to the effect that
(i) this Agreement has been duly authorized, executed and
delivered by or on behalf of such Individual Selling Stockholders;
(ii) the execution and delivery by each Individual Selling
Stockholder (or by an attorney-in-fact on their behalf) of, and the
performance by such Individual Selling Stockholder of its obligations
under, this Agreement and the Custody Agreement, the Lock-Up Agreement
and Powers of Attorney of such Individual Selling Stockholder will not
contravene any provision of applicable law, or, to the best of such
counsel's knowledge, any agreement or other instrument binding upon
such Individual Selling Stockholder or, to the best of such counsel's
knowledge, any judgment, order or decree of any governmental body,
agency or court having jurisdiction over such Individual Selling
Stockholder, and no consent, approval, authorization or order of or
qualification with any governmental body or agency is required for the
performance by such Individual Selling Stockholder of its obligations
under this Agreement, the Custody Agreement or the Lock-Up Agreement
or Power of Attorney of such Individual Selling Stockholder, except
such as may be required by the securities or Blue Sky laws of the
various states in connection with offer and sale of the Shares;
(iii) each of the Individual Selling Stockholders has the legal
right and power, and all authorization and approval required by law or
contract, to enter into this Agreement, the Custody Agreement, the
Lock-Up Agreement and Power of Attorney of such Individual Selling
Stockholder and to sell, transfer and deliver the Shares to be sold by
such Individual Selling Stockholder; and each of the Individual
Selling Stockholders has good and marketable title to the Shares to be
sold by such Individual Selling Stockholder, and such sale, transfer
and delivery is not subject to any right of first refusal or other
contractual restriction;
(iv) each of the Custody Agreement, the Lock-Up Agreement and
the Power of Attorney of each Individual Selling Stockholder has been
duly authorized, executed and delivered by such Individual Selling
Stockholder (or by an attorney-in-fact on their behalf, as may be
applicable) and is a valid and binding agreement of such Individual
Selling Stockholder; and
(v) Assuming the Underwriters purchase the Shares to be sold
by each Individual Selling Stockholder for value, in good faith and
without notice of adverse claim within the
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meaning of the Uniform Commercial Code, delivery of the certificates
for the Shares to be sold by each Individual Selling Stockholder
pursuant to this Agreement will pass good and marketable title to such
Shares free and clear of any security interests, claims, liens,
equities and other encumbrances.
(g) You shall have received on the Closing Date an opinion of
Wilson Sonsini Goodrich & Rosati, Professional Corporation, counsel for the
Underwriters, dated the Closing Date, covering the matters referred to in
subparagraphs (v), (vi), (x) and (xiv) of paragraph (d) above and to the
effect that the statements in the Prospectus under "Underwriters," insofar
as such statements constitute a summary of this Agreement, fairly present
the information called for with respect to such Agreement.
With respect to subparagraph (xiv) of paragraph (d) above, Ater Wynne
Hewitt Dodson & Skerritt and Wilson Sonsini Goodrich & Rosati may state that
their opinion and belief are based upon their participation in the preparation
of the Registration Statement and Prospectus and any amendments or supplements
thereto and review and discussion of the contents thereof, but are without
independent check or verification except as specified.
The opinions of Ater Wynne Hewitt Dodson & Skerritt and Cooley Godward
Castro Huddleson & Tatum described in paragraphs (d), (e) and (f) above shall be
rendered to you at the request of the Company or the Selling Stockholders, as
the case may be, and shall so state therein.
(h) You shall have received, on each of the date hereof and the
Closing Date, a letter dated the date hereof or the Closing Date, as the
case may be, in form and substance satisfactory to you, from Arthur
Andersen L.L.P., independent public accountants, containing statements and
information of the type ordinarily included in accountants' "comfort
letters" to underwriters with respect to the financial statements and
certain financial information contained in the Registration Statement and
the Prospectus.
(i) The "lock-up" agreements between you and certain officers and
directors of the Company relating to sales of shares of Common Stock of the
Company or any securities convertible into or exercisable or exchangeable
for such Common Stock, delivered to you on or before the date hereof, shall
be in full force and effect on the Closing Date.
(j) The shares of Common Stock of the Company shall have received
approval for listing, upon official notice of issuance, on the Nasdaq
National Market System.
All the agreements, opinions, certificates and letters mentioned above or
elsewhere in this Agreement shall be deemed in compliance with the provisions
hereof only if Wilson Sonsini Goodrich & Rosati, counsel for the Underwriters,
shall be reasonably satisfied that they comply in form and scope.
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The several obligations of the Underwriters to purchase Additional Shares
hereunder are subject to the delivery to you on the Option Closing Date of such
documents as you may reasonably request with respect to the good standing of the
Company, the due authorization, issuance and sale of the Additional Shares and
other matters related to the issuance and sale of the Additional Shares.
VII.
In further consideration of the agreements of the Underwriters herein
contained, the Company covenants as follows:
(a) To furnish to you, without charge, four (4) signed copies of
the Registration Statement (including exhibits thereto) and for delivery to
each other Underwriter a conformed copy of the Registration Statement
(without exhibits thereto) and, during the period mentioned in paragraph
(c) below, as many copies of the Prospectus and any supplements and
amendments thereto or to the Registration Statement as you may reasonably
request. In the case of the Prospectus, to furnish copies of the
Prospectus in New York City, prior to 5:00 p.m., local time, on the
business day following the date of this Agreement, in such quantities as
you may reasonably request.
(b) Before amending or supplementing the Registration Statement or
the Prospectus, to furnish to you a copy of each such proposed amendment or
supplement and to file no such proposed amendment or supplement to which
you reasonably object.
(c) If, during such period after the first date of the public
offering of the Shares as in the opinion of your counsel the Prospectus is
required by law to be delivered in connection with sales by an Underwriter
or dealer, any event shall occur or condition exist as a result of which it
is necessary to amend or supplement the Prospectus in order to make the
statements therein, in the light of the circumstances when the Prospectus
is delivered to a purchaser, not misleading, or if, in the opinion of your
counsel, it is necessary to amend or supplement the Prospectus to comply
with law, forthwith to prepare, file with the Commission and furnish, at
its own expense, to the Underwriters and to the dealers (whose names and
addresses you will furnish to the Company) to which Shares may have been
sold by you on behalf of the Underwriters and to any other dealers upon
request, either amendments or supplements to the Prospectus so that the
statements in the Prospectus as so amended or supplemented will not, in the
light of the circumstances when the Prospectus is delivered to a purchaser,
be misleading or so that the Prospectus, as amended or supplemented, will
comply with law.
(d) To endeavor to qualify the Shares for offer and sale under the
securities or Blue Sky laws of such jurisdictions as you shall reasonably
request and to pay all expenses (including fees and disbursements of
counsel) in connection with such qualification and in connection with any
review of the offering of the Shares by the National Association of
Securities Dealers, Inc; provided, however, that the Company shall not be
required to qualify the Shares under the laws of any jurisdiction where the
Company is not otherwise subject to suit if such qualification would
constitute or require the consent of the Company to suit in such
jurisdiction.
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(e) To make generally available to the Company's security holders
and to you as soon as practicable an earning statement covering the
twelve-month period ending June 30, 1997 that satisfies the provisions of
Section 11(a) of the Securities Act and the rules and regulations of the
Commission thereunder.
VIII.
Each Selling Stockholder, severally and not jointly, agrees to pay or cause
to be paid all taxes, if any, on the transfer and sale of the Shares being sold
by such Selling Stockholder and the fees and expenses of counsel retained by
such Selling Stockholder who is not also counsel to the Company. The Company
agrees to pay all costs and expenses incident to the performance of the
obligations of the Selling Stockholders and the Company under this Agreement
(except as set forth above), including, but not limited to, all expenses
incident to (i) the preparation and filing of the Registration Statement
(including all exhibits thereto) and the Prospectus and all amendments and
supplements thereto, (ii) the preparation, issuance and delivery of the Shares,
including any transfer taxes payable in connection with the transfer and sale of
the Shares to the Underwriters, (iii) the fees and disbursements of the
Company's counsel and accountants, (iv) the qualification of the Shares under
state securities or Blue Sky laws in accordance with the provisions of paragraph
(d) of Article VII hereof, including filing fees and the fees and disbursements
of counsel for the Underwriters in connection therewith and in connection with
the preparation of any Blue Sky or Legal Investment Memoranda, (v) the printing
and delivery to the Underwriters, in quantities as hereinabove stated, of copies
of the Registration Statement (including all exhibits thereto) and all
amendments thereto and of each preliminary prospectus and the Prospectus and any
amendments or supplements thereto, (vi) the printing and delivery to the
Underwriters of copies of any Blue Sky or Legal Investment Memoranda, (vii) the
filing fees and expenses, if any, incurred with respect to any filing with the
National Association of Securities Dealers, Inc., made in connection with the
offering of the Shares, (viii) any expenses incurred by the Company in
connection with a "road show" presentation to potential investors, (ix) the
listing of the Common Stock on the Nasdaq National Market and (x) all document
production charges and expenses of counsel to the Underwriters (but not
including their fees for professional services) in connection with the
preparation of this Agreement; PROVIDED, however, that such Selling Stockholder
agrees to pay or cause to be paid its pro rata share (based on the percentage
which the number of Shares sold by such Selling Stockholder bears to the total
number of Shares sold) of all underwriting discounts and commissions.
IX.
The Company and Cadence, jointly and severally, agree to indemnify and hold
harmless each Underwriter and each person, if any, who controls any Underwriter
within the meaning of either Section 15 of the Securities Act or Section 20 of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or is
under common control with, or is controlled by, any Underwriter, from and
against any and all losses, claims, damages and liabilities (including, without
limitation, any legal or other expenses reasonably incurred in connection with
defending or investigating any such action or claim) caused by any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement or any amendment thereof, any preliminary prospectus or
the Prospectus (as amended or supplemented if the Company shall have furnished
any amendments or supplements thereto), or caused by any omission or alleged
omission to state therein a
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material fact required to be stated therein or necessary to make the statements
therein not misleading, except insofar as such losses, claims, damages or
liabilities are caused by any such untrue statement or omission or alleged
untrue statement or omission based upon information relating to any Underwriter
furnished to the Company in writing by such Underwriter through you expressly
for use therein; provided, however, that the foregoing indemnity agreement with
respect to any preliminary prospectus shall not inure to the benefit of any
Underwriter from whom the person asserting such losses, claims, damages or
liabilities purchased Shares, or any person controlling such Underwriter, if a
copy of the Prospectus (as then amended or supplemented if the Company shall
have furnished any amendments or supplements thereto) was not sent or given by
or on behalf of such Underwriter to such person, if required by law so to have
been delivered, at or prior to the written confirmation of the sale of the
shares to such person, and if the Prospectus (as so amended or supplemented)
would have cured the defect giving rise to such loss, claim, damage or
liability. The liability of Cadence under the indemnity agreement contained in
this paragraph or for breach of its representations and warranties under
Article I and Article II hereof shall be limited to an amount equal to $
___________ [1.25 x total proceeds]. Notwithstanding the foregoing, Cadence
shall not be required to make any payment required by the provisions of this
paragraph unless the parties indemnified under this paragraph have demanded
payment from the Company and the Company has refused to make such payment or
failed to make such payment in full within 30 days from the date of such demand.
Each Individual Selling Stockholder agrees, severally and not jointly,
to indemnify and hold harmless each Underwriter and each person, if any, who
controls any Underwriter within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act, or is under common control
with, or is controlled by, any Underwriter, and the Company, its directors, its
officers who sign the Registration Statement and each person, if any, who
controls the Company within the meaning of either such Section, from and against
any and all losses, claims, damages and liabilities (including, without
limitation, any legal or other expenses reasonably incurred in connection with
defending or investigating any such action or claim) caused by any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement or any amendment thereof, any preliminary prospectus or
the Prospectus (as amended or supplemented if the Company shall have furnished
any amendments or supplements thereto), or caused by any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, except insofar as such
losses, claims, damages or liabilities are caused by any such untrue statement
or omission or alleged untrue statement or omission based upon information
relating to any Underwriter furnished to the Company in writing by such
Underwriter through you expressly for use therein; PROVIDED, however, that the
foregoing indemnity agreement with respect to any preliminary prospectus shall
not inure to the benefit of any Underwriter from whom the person asserting any
such losses, claims, damages or liabilities purchased Shares, or any person
controlling such Underwriter, if a copy of the Prospectus (as then amended or
supplemented if the Company shall have furnished any amendments or supplements
thereto) was not sent or given by or on behalf of such Underwriter to such
person, if required by law so to have been delivered, at or prior to the written
confirmation of the sale of the Shares to such person, and if the Prospectus (as
so amended or supplemented) would have cured the defect giving rise to such
losses, claims, damages or liabilities. The liability of each Individual
Selling Stockholder under the indemnity agreement contained in this paragraph
shall be limited to an amount equal to the net proceeds received by such
Individual Selling Stockholder from the offering of the Shares sold by such
Individual Selling Stockholder. In addition, no Individual Selling Stockholder
shall be liable under the indemnity agreement contained in this paragraph unless
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and until you, as managers of the offering, have made written demand on the
Company for payment under this paragraph and the amount specified in such demand
is not paid in full by the Company within 30 days after receipt of the demand by
the Company.
Each Underwriter agrees, severally and not jointly, to indemnify and hold
harmless the Company, the Selling Stockholders, the directors of the Company,
the officers of the Company who sign the Registration Statement and each person,
if any, who controls the Company or any Selling Stockholder within the meaning
of either Section 15 of the Securities Act or Section 20 of the Exchange Act
from and against any and all losses, claims, damages and liabilities (including,
without limitation, any legal or other expenses reasonably incurred in
connection with defending or investigating any such action or claim) caused by
any untrue statement or alleged untrue statement of a material fact contained in
the Registration Statement or any amendment thereof, any preliminary prospectus
or the Prospectus (as amended or supplemented if the Company shall have
furnished any amendments or supplements thereto), or caused by any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, but only with
reference to information relating to such Underwriter furnished to the Company
in writing by such Underwriter through you expressly for use in the Registration
Statement, any preliminary prospectus, the Prospectus or any amendments or
supplements thereto.
In case any proceeding (including any governmental investigation) shall be
instituted involving any person in respect of which indemnity may be sought
pursuant to any of the three preceding paragraphs, such person (the "Indemnified
Party") shall promptly notify the person against whom such indemnity may be
sought (the "Indemnifying Party") in writing and the Indemnifying Party, upon
request of the Indemnified Party, shall retain counsel reasonably satisfactory
to the Indemnified Party to represent the Indemnified Party and any others the
Indemnifying Party may designate in such proceeding and shall pay the fees and
disbursements of such counsel related to such proceeding. In any such
proceeding, any Indemnified Party shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense of
such Indemnified Party unless (i) the Indemnifying Party and the Indemnified
Party shall have mutually agreed to the retention of such counsel or (ii) the
named parties to any such proceeding (including any impleaded parties) include
both the Indemnifying Party and the Indemnified Party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. It is understood that the Indemnifying Party
shall not, in respect of the legal expenses of any Indemnified Party in
connection with any proceeding or related proceedings in the same jurisdiction,
be liable for (a) the fees and expenses of more than one separate firm (in
addition to any local counsel) for all Underwriters and all persons, if any, who
control any Underwriter within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act, (b) the fees and expenses of
more than one separate firm (in addition to any local counsel) for the Company,
its directors, its officers who sign the Registration Statement and each person,
if any, who controls the Company within the meaning of either such Section and
(c) the fees and expenses of more than one separate firm (in addition to any
local counsel) for the Selling Stockholders and all persons, if any, who control
the Selling Stockholders within the meaning of either such Section, and that all
such fees and expenses shall be reimbursed as they are incurred. In the case of
any such separate firm for the Underwriters and such control persons of
Underwriters, such firm shall be designated in writing by Morgan Stanley & Co.
Incorporated. In the case of any such separate firm for the Company, and such
directors, officers and control persons of the Company, such firm shall be
designated in writing by the Company. In the case of any such separate firm for
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the Selling Stockholders and such controlling persons of Selling Stockholders,
such firm shall be designated in writing by the Selling Stockholders. The
Indemnifying Party shall not be liable for any settlement of any proceeding
effected without its written consent, but if settled with such consent or if
there be a final judgment for the plaintiff, the Indemnifying Party agrees to
indemnify the Indemnified Party from and against any loss or liability by reason
of such settlement or judgment. Notwithstanding the foregoing sentence, if at
any time an Indemnified Party shall have requested an Indemnifying Party to
reimburse the Indemnified Party for fees and expenses of counsel as contemplated
by the second and third sentences of this paragraph, the Indemnifying Party
agrees that it shall be liable for any settlement of any proceeding effected
without its written consent if (i) such settlement is entered into more than 30
days after receipt by such Indemnifying Party of the aforesaid request and
(ii) such Indemnifying Party shall not have reimbursed the Indemnified Party in
accordance with such request prior to the date of such settlement. No
Indemnifying Party shall, without the prior written consent of the Indemnified
Party, effect any settlement of any pending or threatened proceeding in respect
of which any Indemnified Party is or could have been a party and indemnity could
have been sought hereunder by such Indemnified Party, unless such settlement
includes an unconditional release of such Indemnified Party from all liability
on claims that are the subject matter of such proceeding.
If the indemnification provided for in the first, second or third paragraph
of this Article IX is unavailable to an Indemnified Party or insufficient in
respect of any losses, claims, damages or liabilities referred to therein, then
each Indemnifying Party under such paragraph, in lieu of indemnifying such
Indemnified Party thereunder, shall contribute to the amount paid or payable by
such Indemnified Party as a result of such losses, claims, damages or
liabilities (i) in such proportion as is appropriate to reflect the relative
benefits received by the Indemnifying Party or parties on the one hand and the
Indemnified Party or parties on the other hand from the offering of the Shares
or (ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Indemnifying Party or parties on the one hand and of the Indemnified Party
or parties on the other hand in connection with the statements or omissions that
resulted in such losses, claims, damages or liabilities, as well as any other
relevant equitable considerations. The relative benefits received by the
Sellers on the one hand and the Underwriters on the other hand in connection
with the offering of the Shares shall be deemed to be in the same respective
proportions as the net proceeds from the offering of the Shares (before
deducting expenses) received by each Seller and the total underwriting discounts
and commissions received by the Underwriters, in each case as set forth in the
table on the cover of the Prospectus, bear to the aggregate public offering
price of the Shares. The relative fault of the Sellers on the one hand and the
Underwriters on the other hand shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Sellers or by the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Underwriters' respective obligations to contribute
pursuant to this Article IX are several in proportion to the respective number
of Shares they have purchased hereunder, and not joint.
The Sellers and the Underwriters agree that it would not be just or
equitable if contribution pursuant to this Article IX were determined by PRO
RATA allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation that does not take account of the
equitable considerations referred to in the immediately preceding paragraph.
The amount paid or payable by an
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indemnified party as a result of the losses, claims, damages and liabilities
referred to in the immediately preceding paragraph shall be deemed to include,
subject to the limitations set forth above, any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
Article IX, no Underwriter shall be required to contribute any amount in excess
of the amount by which the total price at which the Shares underwritten by it
and distributed to the public were offered to the public exceeds the amount of
any damages that such Underwriter has otherwise been required to pay by reason
of such untrue or alleged untrue statement or omission or alleged omission. A
Selling Stockholder shall not be required to contribute any amount in excess of
the amount by which ___________ [1.25 x total proceeds], in the case of Cadence,
and the net proceeds of the offering (before deducting expenses) received by
each Individual Selling Stockholder, in the case of the Individual Selling
Stockholders, exceeds the amount of any damages which each such Selling
Stockholder has otherwise been required to pay be reason of such losses, claims,
damages or liabilities (or actions or proceedings in respect thereof) referred
to in the immediately preceding paragraph and in no case shall such Selling
Stockholder be required to contribute any amounts under this paragraph or the
immediately preceding paragraph which in the aggregate when taken together with
any amounts paid by such Selling Stockholder under the first paragraph of this
Article IX exceeds ___________ [1.25 x total proceeds], in the case of Cadence,
and the net proceeds of the offering (before deducting expenses) received by
each Individual Selling Stockholder, in the case of the Individual Selling
Stockholders. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The remedies provided for in this Article IX are not
exclusive and shall not limit any rights or remedies which may otherwise be
available to any indemnified party at law or in equity.
The indemnity and contribution provisions contained in this Article IX and
the representations and warranties of the Company and the Selling Stockholders
contained in this Agreement shall remain operative and in full force and effect
regardless of (i) any termination of this Agreement, (ii) any investigation made
by or on behalf of any Underwriter or any person controlling any Underwriter,
the Selling Stockholders or any person controlling the Selling Stockholders, or
the Company, its officers or directors or any person controlling the Company and
(iii) acceptance of and payment for any of the Shares.
X.
This Agreement shall be subject to termination, in your sole discretion, by
notice given by you to the Company, if (a) after the execution and delivery of
this Agreement and prior to the Closing Date (i) trading generally shall have
been suspended or materially limited on or by, as the case may be, any of the
New York Stock Exchange, the American Stock Exchange, the National Association
of Securities Dealers, Inc., the Chicago Board of Options Exchange, the Chicago
Mercantile Exchange or the Chicago Board of Trade, (ii) trading of any
securities of the Company shall have been suspended on any exchange or in any
over-the-counter market, (iii) a general moratorium on commercial banking
activities in New York shall have been declared by either Federal or New York
State authorities, or (iv) there shall have occurred any outbreak or escalation
of hostilities or any change in financial markets or any calamity or crisis
that, in your judgment, is material and adverse and (b) in the case of any of
the events specified in clauses (a)(i) through (iv), such
-21-
<PAGE>
event singly or together with any other such event makes it, in your judgment,
impracticable to market the Shares on the terms and in the manner contemplated
in the Prospectus.
XI.
This Agreement shall become effective upon the later of (i) execution and
delivery hereof by the parties hereto and (ii) release of notification of the
effectiveness of the Registration Statement by the Commission.
If, on the Closing Date or the Option Closing Date, as the case may be, any
one or more of the Underwriters shall fail or refuse to purchase Shares that it
or they have agreed to purchase hereunder on such date, and the aggregate number
of Shares which such defaulting Underwriter or Underwriters agreed but failed or
refused to purchase is not more than one-tenth of the aggregate number of the
Shares to be purchased on such date, the other Underwriters shall be obligated
severally in the proportions that the number of Firm Shares set forth opposite
their respective names in Schedule I bears to the aggregate number of Firm
Shares set forth opposite the names of all such non-defaulting Underwriters, or
in such other proportions as you may specify, to purchase the Shares which such
defaulting Underwriter or Underwriters agreed but failed or refused to purchase
on such date; PROVIDED, however, that in no event shall the number of Shares
that any Underwriter has agreed to purchase pursuant to Article III be increased
pursuant to this Article XI by an amount in excess of one-ninth of such number
of Shares without the written consent of such Underwriter. If, on the Closing
Date or the Option Closing Date, as the case may be, any Underwriter or
Underwriters shall fail or refuse to purchase Shares and the aggregate number of
Shares with respect to which such default occurs is more than one-tenth of the
aggregate number of Shares to be purchased on such date, and arrangements
satisfactory to you, the Company and the Selling Stockholder (or, in the case of
the Option Closing Date, you, the Company and Cadence) for the purchase of such
Shares are not made within 36 hours after such default, this Agreement shall
terminate without liability on the part of any non-defaulting Underwriter, the
Company or Selling Stockholder. In any such case either you or the relevant
Sellers shall have the right to postpone the Closing Date or the Option Closing
Date, as the case may be, but in no event for longer than seven days, in order
that the required changes, if any, in the Registration Statement and in the
Prospectus or in any other documents or arrangements may be effected. Any
action taken under this paragraph shall not relieve any defaulting Underwriter
from liability in respect of any default of such Underwriter under this
Agreement.
If this Agreement shall be terminated by the Underwriters, or any of them,
because of any failure or refusal on the part of any Seller to comply with the
terms or to fulfill any of the conditions of this Agreement, or if for any
reason any Seller shall be unable to perform its obligations under this
Agreement, the Sellers will reimburse the Underwriters or such Underwriters as
have so terminated this Agreement with respect to themselves, severally, for all
out-of-pocket expenses (including the fees and disbursements of their counsel)
reasonably incurred by such Underwriters in connection with this Agreement or
the offering contemplated hereunder.
This Agreement may be signed in two or more counterparts, each of which
shall be an original, with the same effect as if the signatures thereto and
hereto were upon the same instrument.
-22-
<PAGE>
This Agreement shall be governed by and construed in accordance with the
internal laws of the State of New York.
Very truly yours,
INTEGRATED MEASUREMENT SYSTEMS, INC.
By:
-------------------------------------
CADENCE DESIGN SYSTEMS, INC.
By:
-------------------------------------
The Selling Stockholders named in
Schedule I hereto, acting severally
By:
-------------------------------------
--------------------
ATTORNEY-IN-FACT
Accepted, __________, 1995
MORGAN STANLEY & CO. INCORPORATED
COWEN & COMPANY
SOUNDVIEW FINANCIAL GROUP, INC.
Acting severally on behalf of
themselves and the several
Underwriters named herein.
By: MORGAN STANLEY & CO. INCORPORATED
By:
-------------------------------------
-23-
<PAGE>
SCHEDULE I
NUMBER OF FIRM SHARES
SELLING STOCKHOLDERS TO BE SOLD
- -------------------------------------------------- ---------------------
--------------------
Cadence Design Systems, Inc. [ ]
[Officers and Directors] [ ]
--------------------
Total. . . . . . . . . . . . . [ ]
ADDITIONAL SHARES FROM CADENCE
- --------------------------------------------------
--------------------
Cadence Design Systems, Inc.* [ ]
-24-
<PAGE>
- --------------------
* Does not include [ ] Additional Shares to be sold by the Company.
-25-
<PAGE>
SCHEDULE I
Number of Firm Shares to be
Underwriter Purchased
- ---------------------------------------- ---------------------------
Morgan Stanley & Co. Incorporated [ ]
Cowen & Company [ ]
Soundview Financial Group, Inc. [ ]
------------------
TOTAL. . . . . . . . . . . . .
------------------
------------------
<PAGE>
ATER WYNNE HEWITT DODSON & SKERRITT, LLP
222 S.W. Columbia, Suite 1800
Portland, Oregon 97201
(503) 226-1191 (Phone)
(503) 226-0079 (Fax)
May 23, 1996
Board of Directors
Integrated Measurement Systems, Inc.
9525 S.W. Gemini Drive
Beaverton, OR 97008
In connection with the public offering of 2,525,000 shares of common
stock, par value $0.01 per share (the "Common Stock"), of Integrated Measurement
Systems, Inc., an Oregon corporation (the "Company"), under the Registration
Statement on Form S-1 (the "Registration Statement") and the proposed sale of
the Common Stock pursuant to the terms of an underwriting agreement (the
"Underwriting Agreement") to be entered into by and among the Company, the
Selling Shareholders, and Morgan Stanley & Co. Incorporated, Cowen & Company and
SoundView Financial Group, Inc., as representatives of the several underwriters,
we have examined such corporate records, certificates of public officials and
officers of the Company and other documents as we have considered necessary or
proper for the purpose of this opinion.
Based on the foregoing and having regard to legal issues which we deem
relevant, it is our opinion that the shares of Common Stock to be sold pursuant
to the Underwriting Agreement, when such shares have been delivered against
payment therefor as contemplated by the Underwriting Agreement, will be validly
issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the above-
mentioned Registration Statement and to the reference to this firm under the
caption "Legal Matters" in the prospectus constituting a part of the
Registration Statement. This consent shall not be construed to cause this firm
to be in the category of persons whose consent is required to be filed pursuant
to Section 7 of the Securities Act of 1933, as amended, or the rules thereunder.
This opinion has been prepared solely for your use in connection with the
Registration Statement and should not be quoted in whole or in part or otherwise
<PAGE>
Board of Directors
Integrated Measurement Systems, Inc.
May 23, 1996
Page 2
be referred to, nor be relied upon by, nor be filed with or furnished to any
governmental agency or other person or entity, except as otherwise provided
in this paragraph, without the prior written consent of this firm.
Very truly yours,
ATER WYNNE HEWITT DODSON & SKERRITT, LLP
<PAGE>
AMENDED
STOCKHOLDER AGREEMENT
This Amended Stockholder Agreement, dated May 23, 1996, supersedes and
replaces the Stockholder Agreement dated May 10, 1995, by and between Integrated
Measurement Systems, Inc., an Oregon corporation (the "Company" or "IMS") and
Cadence Design Systems, Inc., a Delaware corporation (the "Stockholder" or
"Cadence".)
In consideration of the mutual promises and agreements hereinafter set
forth, and for other valuable consideration, the Company and the Stockholder
agree as follows:
1. HANDLING OUTSTANDING CADENCE OPTIONS HELD BY IMS EMPLOYEES. The Company
and Stockholder acknowledge that, as of the date of this Agreement, there are
issued and outstanding options for the purchase of Stockholder's common stock
held by employees of the Company (the "Employee Cadence Options") granted under
both Stockholder's 1987 Stock Incentive Plan (the "1987 Cadence Options") and
Stockholder's 1993 Stock Incentive Plan (the "1993 Cadence Options.") The 1987
Cadence Options include both qualified Incentive Stock Options, and nonqualified
stock options. The 1993 Cadence Options are all nonqualified stock options.
1.1 MODIFICATION OF EMPLOYMENT AGREEMENTS. Cadence consents to the
modification of the commitments made in employment agreements entered into
between IMS and certain of its key executives effective May 10, 1995, to conform
those employment agreements to the covenants and commitments contained herein.
1.2 1993 CADENCE PLAN. Cadence warrants that its 1993 Stock Option Plan
has been amended to provide continuing vesting under the plan, provided that
Cadence continues to be a stockholder in a company that has employee
participants in the plan. Cadence further warrants that it will continue to be
a shareholder of IMS, with a minimum holding of at least 100 shares, until at
least December 31, 1999.
1.3 PRESERVATION OF VALUE OF CADENCE OPTIONS BELOW THRESHOLDS. The
parties recognize that if Cadence's percentage of ownership of IMS' outstanding
stock drops below 50%, 1987 Cadence Options held by IMS employees will cease to
vest. The parties wish to preserve the value of those stock options to the IMS
employees, in ways that maximize the benefit to each of their shareholder groups
that the options represent. The parties agree to achieve those goals as stated
in the following sections:
1.4 CONSULTANTS. Cadence has determined that consulting services from the
employees designated as "consultants" on the attached list would be useful to
Cadence, and wishes to use their services in that capacity in a manner that does
not interfere with their primary duties to IMS. Cadence therefore commits that,
if Cadence's ownership of IMS issued and outstanding common stock drops below
50% at any time while 1987 Cadence Options remain unvested, Cadence will offer
the IMS employees on the attached list the opportunity to consult with Cadence
at least through the vesting term of their unvested 1987 Cadence Options or
longer if useful to Cadence.
1.4.1 TERMS OF CONSULTANCY. The consulting agreements shall
provide for consulting within the consultants' areas of expertise at such
times as do not interfere with their duties to IMS, on appropriate terms to
be memorialized in a consulting agreement, while the consultants remain
employees of IMS.
1 - AMENDED STOCKHOLDER AGREEMENT
<PAGE>
1.4.2 VESTING OF CADENCE OPTIONS FOR CONSULTANTS. The consulting
agreements will further provide that the consultant's 1987 Cadence Options
shall continue to vest for the period of that consultancy. Cadence further
commits that 1987 Cadence Options vested as of the end date of that
consultancy will remain exercisable for 30 days after that consultancy
ends.
1.5 IN THE MONEY VALUE FOR NON-CONSULTANTS. The parties recognize that if
Cadence's ownership percentage of IMS drops below 50% with respect to the 1987
plan, the potential arises for IMS employees who hold 1987 Cadence Options which
have not then become exercisable under the particular plan, and who have not
been given the opportunity to act as consultants to Cadence, to be unable to
obtain the in-the-money value of those not yet exercisable options (the "Lapsed
Options.") In recognition of the value IMS employees have, through their
performance, brought to Cadence, Cadence hereby commits to pay the in-the-money
value of the Lapsed Options that would become lost to IMS employees as a result
of a change in Cadence's percentage ownership of IMS, as follows.
1.5.1 IN-THE-MONEY-VALUE. Cadence and IMS agree that the in-the-
money-value for a given share of Cadence stock represented by a Lapsed
Option (an "Option Share") shall be calculated at, and fixed as, the value
represented by the difference (if positive) obtained by subtracting the
option exercise price from the average of the daily closing trade price for
Cadence stock for the twenty business days next preceeding the date on
which Cadence's ownership dropped below the requisite threshold.
1.5.2 WHEN BECOMES DUE. The "in the money value" for each Option
Share held by a non-consultant shall become due on the same date that the
option giving rise to the Option Share would have become exercisable but
for the change in ownership. That means, for example, that the in-the-
money value would never become due with respect to Option Shares whose
options would not have become exercisable because an employee resigned from
or is terminated by the company.
1.5.3 WHEN PAYABLE. Cadence shall pay all accrued and due in-the-
money-value within thirty days of the end of the calendar quarter in which
the in-the-money value falls due, based on a schedule submitted by IMS,
certified as true and correct by the Chief Financial Officer, to Cadence of
all vested in-the-money value due to IMS employees.
1.6 INFORMATION FLOW. IMS shall inform Cadence's Stock Administration
department immediately of the departure of any IMS employee holding Employee
Cadence Options, and shall on request submit to Cadence a list of all remaining
IMS employee holders of Employee Cadence Options. If IMS fails to give Notice
concerning the termination of an IMS employee to Cadence within 15 days
following termination, and as a result of that failure, the employee is able to
exercise an option which by its terms should have expired, IMS shall reimburse
Cadence for the difference between the exercise price and the market price of
each exercised share, measured as of the date of exercise of the wrongfully
exercised option.
1.7 GOOD FAITH DECISIONS. In making decisions that may have the potential
to result in Cadence's holdings in IMS slipping below the 50% levels, and
therefore triggering Cadence's obligations under this Section 1, IMS shall, in
determining the economic viability of such choices, consider in good faith the
cost to Cadence of that decision under this Section as if it is IMS' own cost.
2 - AMENDED STOCKHOLDER AGREEMENT
<PAGE>
2. ENTIRE AGREEMENT; MODIFICATION. This Agreement sets forth the entire
agreement and understanding between the parties hereto with respect to the
subject matter hereof, and merges and supersedes any and all prior discussions,
agreements, and understandings between or among them with respect thereto, and
no party shall be bound by any condition, definition, warranty or
representation, other than those expressly set forth or provided for in this
Agreement or in any document or instrument delivered pursuant to this Agreement,
or as may be set forth in writing and signed by the party or parties to be bound
thereby on or subsequent to the date hereof. This Agreement may not be changed
or modified, except by an agreement in writing executed by the Company and the
Stockholder.
3. GOVERNING LAW. This Agreement shall be governed by Oregon law
(excluding the choice of law provisions).
4. COUNTERPARTS. This Agreement may be executed in one or more
counterparts.
5. SEVERABILITY. If any term, provision, covenant or restriction
contained in this Agreement is held by a court of competent jurisdiction to be
invalid, void, or unenforceable, then the remainder of this Agreement shall
remain operative and in full force and effect. If any provision contained in
this Agreement is invalidated, the parties hereto will use their best efforts to
adopt an appropriate substitute for the invalidated provision consistent with
the intent of the parties.
6. BINDING EFFECT OF AGREEMENT. The terms of this Agreement shall be
binding on and inure to the benefit of the parties hereto and their respective
subsidiaries, parents or other affiliated entities, agents, attorneys, heirs,
executors, successors, representatives and assigns.
7. NOTICES. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
delivered by hand or certified or registered mail, return receipt requested, to
the addresses set forth below the signatures of the respective parties hereto.
In the case of communications to the Stockholder, a copy shall be delivered
concurrently to H. Raymond Bingham, Executive Vice President, and to such other
person or persons or to such other address or addresses as may be designated by
Stockholder. In the case of communications to the Company, a copy shall be
delivered concurrently to William C. Campbell, Ater Wynne Hewitt Dodson &
Skerritt, 222 S.W. Columbia, Suite 1800, Portland, Oregon 97201 or to such other
person or persons or to such other address or addresses as may be designated by
IMS.
3 - AMENDED STOCKHOLDER AGREEMENT
<PAGE>
8. HEADINGS. The headings in the sections of this Agreement are inserted
for convenience only and shall not constitute a part hereof.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
INTEGRATED MEASUREMENT SYSTEMS, INC.
By:
-----------------------------------------
Sar Ramadan, Chief Financial Officer,
Secretary, and Treasurer
CADENCE DESIGN SYSTEMS, INC.
By:
-----------------------------------------
Stephen Y. Fong, Vice President of
Finance and Treasurer
4 - AMENDED STOCKHOLDER AGREEMENT
<PAGE>
Prosective Consultants for Cadence
The parties agree that these individuals possess knowledge or experience,
as well as current industry exposure and understanding in connection with their
duties at IMS, that would render them valuable consultants for Cadence, on a
"time available" basis.
IMS Employee Position at IMS
- ------------ ---------------
Senior Industry Management Expertise:
- -------------------------------------
Keith Barnes President and CEO
Wilfred Baril VP of Engineering
Ken Lindsay VP of Asian Operations
Sar Ramadan Chief Financial Officer
Gwyn Harvey Director of Human Resources
Engineering Expertise:
- ----------------------
John Miller Software Engineering Manager
Mike Bergath Hardware Engineering Manager
Dave Verhoeven Software Engineering Manager
Brian Batson "THOR" Project Manager
Marketing and Sales Expertise:
- ------------------------------
Mike Kondradt Senior Product Marketing Manager
Sam Duran Software Regional Manager
Bill Bunker Northwest Regional Manager
Brette Wilde European Manager
Jack Frost Asian Applications Manager
Hugh Huang Greater China Manager
<PAGE>
AMENDED CORPORATE SERVICES AGREEMENT
This Amended Corporate Services Agreement is entered into between Cadence
Design Systems, Inc. (Cadence) and Integrated Measurement Systems, Inc. (IMS)
this first day of May, 1996.
The parties entered into a Corporate Services Agreement effective May 1,
1995. They now wish to modify and update that agreement, as shown here.
The parties agree:
1. DEFINITIONS.
1.1 CADENCE AND IMS. "Cadence" and "IMS" as used herein shall refer to
the parent companies, and wholly owned subsidiaries of either (except that for
these purposes, IMS will not be regarded as a Cadence subsidiary.)
1.2 DEDICATED AGENT. An employee of Cadence is a "Dedicated Agent" during
those periods with respect to which IMS is obligated to pay or has paid Cadence
a fee equal to the Agent Fees as provided for in this Agreement. Numbers of
Dedicated Agents in particular Cadence facilities as of the date of this
agreement are listed on the attached Exhibit A.
2. AGENT SERVICES AND FEE. Cadence will supply the following services as
agent for IMS, and IMS will pay Cadence an Agent Fee for Cadence's services
hereunder, calculated as follows.
2.1 FEE COMPONENT FOR OFFICE SPACE AND ASSOCIATED SUPPORT.
2.1.1 PRINCIPLE. Cadence supplies office space and associated
office support (telephones and faxes, parking, use of conference rooms,
employee lounges, and the like) to IMS at a number of locations around the
United States and (through Cadence wholly-owned subsidiaries) elsewhere in
the world. IMS pays for that space and support at the price shown on
Exhibit A, on an allocated charge per headcount basis, as a part of its
Agent Fee.
2.1.2 CHANGES. The parties may from time to time agree to add
Dedicated Agents, or IMS personnel in those locations where IMS has direct
business presence, at specific sites, and so increase the space needed, or
to add sites; such changes will be reflected on revised "Exhibits A" to
replace the original executed with this Agreement. Cadence shall not be
obligated to lease or outfit additional space for IMS' benefit, however,
and any additional space will be provided on a "space available" basis
only.
2.1.3 COST AND FEE REVIEW. The parties will meet semiannually to
review the fair market value of the office space and associated services at
each location, and will adjust the Agent Fees shown on Exhibit A to reflect
that fair market value.
2.2 DEDICATED AGENTS.
Page 1 -- Corporate Services Agreement
<PAGE>
2.2.1 FEE COMPONENT FOR AGENT COST. IMS shall pay Cadence, as
part of its Agent Fee, an amount equal to the fully-loaded payroll cost for
and discretionary expenses such as travel, materials and supplies, and
communications incurred by each Dedicated Agent. That cost shall include
any extraordinary hiring, termination, or transfer expenses Cadence
experiences due to IMS or Cadence policy or the law of the particular
jurisdictions, provided that the parties shall work in good faith to
minimize such expenses to be charged to IMS.
2.2.2 CHANGES IN DEDICATED AGENTS. In countries outside the
United States where Dedicated Agents are employed, IMS may periodically
request that Cadence add, transfer, or terminate Dedicated Agents. During
the term of this agreement, Cadence will add or subtract such Dedicated
Agents for the applicable countries on thirty days' notice from IMS, or
such longer period of time as may be required under Cadence policy or local
law. However, IMS shall not add any new Dedicated Agents in any country in
which IMS has chosen to establish its own business presence, either itself
or through an IMS subsidiary.
2.2.3 INTELLECTUAL PROPERTY. Cadence acknowledges that the Agent
Fee paid by IMS fully covers Cadence's costs with respect to the Dedicated
Agents, and hereby commits to assign and does assign to IMS, free of claims
by Cadence, all intellectual property developed by Dedicated Agents while
they are or were Dedicated Agents, to the extent Cadence has rights to that
intellectual property under applicable agreements with the Dedicated Agent
pursuant to local law. Cadence will take such steps as may be necessary to
document such assignment in order to preserve such rights, on request and
at IMS' expense. Likewise, IMS will require that such Dedicated Agents,
when retained by IMS will honor confidentiality obligations to Cadence and
its customers.
3. INSURANCE.
3.1 OPTION TO PURCHASE COVERAGE THROUGH CADENCE. IMS may elect to
purchase insurance coverage through Cadence insurance policies, to the extent
and during the time those policies permit that coverage.
3.2 PROCEDURE. On request, Cadence will assist IMS to determine what
insurance coverage IMS can acquire more cost-effectively through Cadence (as a
part of Cadence policies) than independently. IMS shall by Notice inform
Cadence of which coverages it wishes to purchase through Cadence, and which
coverages purchased through Cadence it wishes to terminate. IMS' rights to
become covered by, or exclude itself from coverage under, Cadence policies shall
meet these conditions:
3.2.1 TERMS OF POLICY. IMS' Notice may request that IMS be added
or deleted from Cadence policies only as of dates the policy itself permits
for such modifications.
3.2.2 QUALIFICATION. IMS shall not be entitled to coverage under
any Cadence policy as to which IMS does not qualify under the policy terms.
Page 2 -- Corporate Services Agreement
<PAGE>
3.3 COPIES OF POLICIES. Cadence shall, on request, provide IMS with
copies of all applicable insurance coverages, and shall request companies
writing such insurance to copy IMS with any policy changes affecting IMS.
3.4 COST. IMS shall reimburse Cadence the full incremental cost to
Cadence of IMS' coverage under any existing Cadence policy. That incremental
cost shall be billed to IMS as part of Cadence's Agent Fee for all non-US
jurisdictions.
4. SETTLEMENT OF ACCOUNTS.
4.1 INVOICING. Cadence shall invoice IMS monthly for the services herein
provided. Cadence shall bill for personnel costs under section 2.2 in the
local currency of the country in which such costs were incurred. Cadence shall
bill for the dollar-denominated amounts shown on Exhibit A in dollars or in the
local currency at equivalent exchange rates, as Cadence determines. If it is
more convenient administratively for Cadence to do so, Cadence may cause its
separate operating companies and subsidiaries to invoice IMS directly for
services they provide hereunder.
4.2 PAYMENT. Each party shall pay invoices properly tendered for any
matter between them within thirty days of receipt of the invoice. Overdue
unpaid invoices shall bear interest at 9% per year until paid.
5. DURATION.
5.1 MAXIMUM TERM. This Agreement will not last beyond June 1, 1999,
unless expressly extended.
5.2 INTERIM TERMINATION. During the term of this agreement, IMS may elect
to decline particular space, or to reduce its space requirements at particular
locations, on thirty days' Notice to Cadence, delivered both to Cadence's Notice
address as shown on this agreement and to the particular office location where
the space needs are being reduced. During the term of this agreement, IMS may
also elect to transition particular Cadence Dedicated Agents to become IMS
employees, subject to the rights of the employee as described above. Notice of
such action shall be delivered both to Cadence at the Notice address shown on
this agreement, and to the headquarters address of the particular Cadence
subsidiary for whom the Dedicated Agent works. Cadence may elect to terminate
some or all of its obligations hereunder on thirty days' Notice in the event IMS
breaches a material obligation hereunder and such breach remains uncured for
thirty days after Notice to IMS. After June 1, 1997, Cadence may elect to
terminate its agreement with respect to particular facilities or subsidiaries on
180 days' Notice to IMS.
6. SOFTWARE. Cadence has issued software licenses and provides maintenance
and updates for its suite of software products to IMS without charge, for IMS'
own use in designing and supporting its own products. As of the date Cadence's
ownership in IMS drops below 50%, in the absence of any other agreement Cadence
will continue to permit IMS a no-charge license to its suite of design tools
currently held by IMS, but will charge IMS for maintenance on those tools, at
the rate Cadence charges its most favored strategic customers and technology
partners.
7. OTHER MATTERS.
Page 3 -- Corporate Services Agreement
<PAGE>
7.1 NOTICE. "Notice" means notice given as described here. Notice will
be given to IMS at 9525 S.W. Gemini Drive, Beaverton, Oregon 97008, ATTN:
Chief Financial Officer. Notice will be given to Cadence at 2655 Seely Road,
Building 5, MS 5B2, San Jose, Ca. 95134, ATTN: Chief Financial Officer. Notice
may be given in any form that leaves a hard copy in the hands of the recipient.
Each party can change its own Notice address and designated Notice recipient, by
Notice. Notice shall be effective when actually received by the designated
person. If sent certified or registered mail, postage prepaid, return receipt
requested, notice is considered effective on the date the return receipt shows
the notice was accepted, refused, or returned undeliverable.
7.2 SEVERABILITY. Each clause of this agreement is severable. If any
clause is ruled void or unenforceable, the balance of the agreement shall
nonetheless remain in effect.
7.3 NON-WAIVER. A waiver of one or more breaches of any clause of this
agreement shall not act to waive any other breach, whether of the same or
different clauses.
7.4 ASSIGNMENT. This agreement may not be assigned without the express
written consent of each party, which consent will not be unreasonably withheld.
7.5 GOVERNING LAW. This agreement is governed by the laws of the state of
California. Each party consents to service of process through the method
prescribed for notice in this agreement.
7.6 INTEGRATION. This agreement is the complete agreement between the
parties as of the date hereof with respect to Corporate Services, and supersedes
all prior agreements, written or oral. It may be modified only in writing
signed by the original parties hereto, or by their successors or superiors in
office.
INTEGRATED MEASUREMENT SYSTEMS, INC. CADENCE DESIGN SYSTEMS, INC.
By: By:
------------------------------------- -------------------------------
Print: Print:
---------------------------------- ----------------------------
Title: Title:
---------------------------------- ----------------------------
Date: Date:
----------------------------------- -----------------------------
Page 4 -- Corporate Services Agreement
<PAGE>
Exhibit A
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Cadence Dedicated Agents and Support Fees
- -------------------------------------------------------------------------------
Location Dedicated Agents Fee per Agent Per 95 Total Fees
Month
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Cadence UK 5 Cost plus $650 $3,250
- -------------------------------------------------------------------------------
Cadence Germany 3 Cost plus $600 1,800
- -------------------------------------------------------------------------------
Cadence France 2 Cost plus $650 1,300
- -------------------------------------------------------------------------------
Cadence Israel 1 Cost plus $704 704
- -------------------------------------------------------------------------------
Cadence Taiwan 3 Cost plus $306 918
- -------------------------------------------------------------------------------
Arizona 2 Cost plus $457 914
- -------------------------------------------------------------------------------
California 9 Cost plus $500 4,500
- -------------------------------------------------------------------------------
Maryland 1 Cost plus $767 767
- -------------------------------------------------------------------------------
Massachusetts 7 Cost plus $262 1,834
- -------------------------------------------------------------------------------
Minnesota 2 Cost plus $731 1,462
- -------------------------------------------------------------------------------
Texas 2 Cost plus $705 1,410
- -------------------------------------------------------------------------------
TOTAL FEES PER MONTH: COST PLUS $ 18,859
- -------------------------------------------------------------------------------
TOTAL FEES PER YEAR: COST PLUS $226,308
- -------------------------------------------------------------------------------
</TABLE>
"Cost" here refers to Cadence's cost for the Dedicated Agent in question as
described in Section 2.1.
Page 5 -- Corporate Services Agreement
<PAGE>
SECOND AMENDMENT TO JOINT SALES AGENCY AGREEMENT
BETWEEN
CADENCE DESIGN SYSTEMS, INC.
AND
INTEGRATED MEASUREMENT SYSTEMS, INC.
As of May 20, 1996, Cadence Design Systems, Inc. (Cadence) and Integrated
Measurement Systems, Inc. (IMS) agree to extend the initial term of the Joint
Sales Agency Agreement between the parties through June, 1998.
Except as here provided, the Joint Sales Agreement between the parties
dated June 30, 1994, and as amended effective April 1, 1995, remains in full
force and effect.
CADENCE DESIGN SYSTEMS, INC. INTEGRATED MEASUREMENT SYSTEMS, INC.
By: By:
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Page 1 -- Second Amendment to Joint Sales Agency Agreement
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EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports and to all references to our firm included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Portland, Oregon
, 1996
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareholders of
Integrated Measurement Systems, Inc.:
We have audited, in accordance with generally accepted auditing standards,
the financial statements of Integrated Measurement Systems, Inc. included in
this registration statement and have issued our report thereon dated January 26,
1996 (except for the matter discussed in Note 10 to the financial statements as
to which the date is May 6, 1996). Our audits were made for the purpose of
forming an opinion on those statements taken as a whole. The Valuation and
Qualifying accounts schedule is the responsibility of the Company's management
and is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audits of
the basic financial statements and, in our opinion, fairly state in all material
respects the financial data required to be set forth therein in relation to the
basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Portland, Oregon
January 26, 1996
