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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
COMMISSION FILE NUMBER 0-26274
INTEGRATED MEASUREMENT SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
OREGON 93-0840631
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
9525 SW GEMINI DRIVE, BEAVERTON, OREGON 97008
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (503) 626-7117
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF CLASS
Common Stock, $.01 par value per share
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
-----
The aggregate market value the voting stock held by non-affiliates of the
Registrant was $86,699,314 on March 14, 1997, based upon the last price of the
Common Stock on that date reported in the NASDAQ National Market System. On
March 14, 1997, there were 7,477,330 shares of the Registrant's Common Stock
outstanding, including 2,759,000 held by affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
Document Part of Form 10-K into which incorporated
-------- -----------------------------------------
Portions of Proxy Statement
dated April 1, 1997 Part III
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INTEGRATED MEASUREMENT SYSTEMS, INC.
1996 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Item 1. Business 3
Item 2. Properties 7
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 8
PART II
Item 5. Market for Registrant's Common Equity and Related 8
Stockholder Matters
Item 6. Selected Financial Data 9
Item 7. Management's Discussion and Analysis of Results of 10
Operations and Financial Condition
Item 8. Financial Statements and Supplementary Data 15
Item 9. Changes in and Disagreements with Accountants on 15
Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of Registrant 16
Item 11. Executive Compensation 16
Item 12. Security Ownership of Certain Beneficial Owners and 16
Management
Item 13. Certain Relationships and Related Transactions 16
PART IV
Item 14. Exhibits, Financial Statements Schedules, and Reports 16
on Form 8-K
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PART I
ITEM 1. BUSINESS
GENERAL
Integrated Measurement Systems, Inc. (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 Design Systems, Inc. ("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
successfully completed an initial public offering of common stock, with 375,000
new shares sold by the Company, and 2,615,000 shares sold by Cadence.
Subsequently, in February 1997, the Company completed a secondary public
offering of common stock, in which 700,000 new shares were sold by the Company
and 950,000 shares were sold by Cadence. Following the February 1997 offering,
Cadence owns approximately 37% of the outstanding common stock of the Company.
The Company's common stock is traded on the NASDAQ National Market System under
the symbol IMSC.
PRODUCTS AND SERVICES
The Company designs, manufactures, markets and services a family of versatile,
high performance engineering Test Stations 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 automate
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, application specific
integrated circuits and multi-chip modules (MCM's).
IMS TEST STATION PRODUCTS
The Company's Test Stations play a variety of roles in bridging the gap between
electronic design automation (EDA) to automated test equipment (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
Stations enable data conversion from all popular simulation products including
Verilog, VHDL, Quicksim and others.
The IMS Test Stations stimulate the device under test by sending defined signals
to it and then measure the actual output and compare 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 short diagnostic sequences to
pinpoint the cause(s) of failure, and identify changes needed to correct design
errors or weaknesses. 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.
The Company complies with industry standard 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.
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The Company currently offers four families of IMS Test Stations under the names
ATS FT, MSTS, ATS Blazer and Logic Master XL. Each family includes multiple
mainframe options and a choice of configurable modules. 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), size of the device to be tested (from 16
pins to 896 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).
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. Whether embedded with the system or sold separately, 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.
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 traditional ATE systems.
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 the Company's Dantes Virtual Test Software tools, test engineers begin test
development work much earlier in the process, 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.
Although Virtual Test Software is a new and the market is difficult to quantify,
the Company believes that its Dantes Virtual Test Software provides a
significant advantage to semiconductor designers to reduce time to market and
save development cost. The Dantes product line currently operates in
conjunction with Cadence EDA software and certain ATE machines manufactured by
Advantest, Credence, Hewlett-Packard, LTX, Teradyne and Yokogawa. In late 1996,
the Company released Dantes version 2.0, supporting a Final Test Schematic
environment which enables users to build and view a complete top down test for
an integrated circuit, and to partition test simulation into smaller segments.
In 1996, revenues from the sale of Virtual Test Software and related services
comprised 9% of the Company's net sales.
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
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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 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. The Company's Virtual Test
Software technology was originally developed by Cadence employees and
purchased by 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 1996, 1995 and 1994 were $7.8 million,
$6.2 million and $3.7 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 of approximately 73 employees.
The ratio of software engineers to hardware engineers is approximately four to
one.
MANUFACTURING OPERATIONS
The Company's test systems 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 systems 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 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 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. In the event that 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 could be
materially adversely affected until the Company was able to establish sufficient
manufacturing supply from alternative sources. The Company has partially
mitigated this risk by securing $10 million of insurance coverage against
potential losses resulting from an insurable peril experienced by any of the
Company's suppliers. 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.
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.
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. The Company has thus
far been able to avoid any material adverse impact on timing of customer
deliveries for its Test Stations. However, no assurance can be given that
supply problems will not recur or, if such problems do recur, that the
Company's solutions to these problems 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 operations and could damage the
Company's relationships with its customers.
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MARKETING AND SALES
The Company markets its products domestically through a direct sales force which
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 Santa Clara, 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. In Asia the
Company sells through dedicated agents employed by Cadence subsidiaries in
Taiwan and through distributors in Japan, the People's Republic of China,
Hong Kong, Malaysia/Singapore and Korea. 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. Additional
information regarding foreign sales is contained in Note 10 to the Financial
Statements contained in this Annual Report.
The Company uses advertising in trade journals, technical articles, exhibits at
trade shows, 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.
For the year ended December 31, 1996, 1995, and 1994, sales to Intel represented
approximately 36%, 30% and 22% of the Company's net sales, respectively. No
other customer accounted for more than 10% of the Company's net sales in 1996,
1995 or 1994.
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. In addition, although the Company believes
it is currently the only vendor offering a Virtual Test Software solution, no
assurance can be given that other vendors will not offer competing products.
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 rights to
the original Dantes technology, and 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 continue to compete
successfully in the future.
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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 21% of the Company's net sales
for the fiscal year ended December 31, 1996. The Company maintains and supports
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.
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 1995,
1994 and 1993 in customer satisfaction and quality in the test equipment market
according to VLSI Research, Inc. The Company warrants its Test Systems for
three to twelve months. 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 assurances 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.
EMPLOYEES
At December 31, 1996, the Company had 251 employees, including 71 in marketing
and sales, 76 in manufacturing and service, 73 in research, development and
engineering and 31 in administration and finance. The Company also has 15
dedicated employees on the payroll of affiliated companies which are
international subsidiaries of Cadence. The Company reimburses Cadence the full
cost of the employees' expense to Cadence under the terms of a Corporate
Services Agreement between the Company and Cadence. These employees work full
time on the Company's business and report to and are directly managed by the
Company. See "Item 13. Certain Relationships and Related Transactions." 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 represented by a collective
bargaining unit and the Company believes that its employee relations are very
good.
ITEM 2. 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 additional 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.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to no material legal proceedings.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders of the Company
during the fourth quarter of the fiscal year ended December 31, 1996.
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded publicly 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 bid prices for the
Company's Common Stock as reported by the Nasdaq National Market.
HIGH LOW
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FISCAL 1995
Third Quarter (from July 21, 1995) . . . . . . . . . . $16 3/8 $12 3/8
Fourth Quarter . . . . . . . . . . . . . . . . . . . . 15 1/2 11 5/8
FISCAL 1996
First Quarter. . . . . . . . . . . . . . . . . . . . . 16 3/4 12 1/2
Second Quarter . . . . . . . . . . . . . . . . . . . . 27 1/2 15 5/8
Third Quarter. . . . . . . . . . . . . . . . . . . . . 25 1/2 11
Fourth Quarter . . . . . . . . . . . . . . . . . . . . 21 14 3/4
As of March 12, 1997, there were approximately 1,955 shareholders who held
beneficial interests in shares of Common Stock registered in nominee names of
banks and brokerage houses. The Company has not paid any cash dividends on
its common stock, and it does not anticipate paying any cash dividends in
the foreseeable future.
During the period from January 1, 1996 through October 8, 1996, the effective
date of the Company's Registration Statements on Form S-8 relating to its
option plans, the Company issued options to purchase an aggregate of 435,950
shares of Common Stock and sold an aggregate of 2,357 shares of Common Stock
for an aggregate purchase price of $21,257, 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
Securities Act of 1933.
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ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Statement of income data:
Net sales. . . . . . . . . . . . . . . . . . . . $50,837 $41,093 $30,052 $23,117 $22,375
Gross margin % . . . . . . . . . . . . . . . . . 64.3% 61.6% 58.6% 55.8% 54.3%
Operating income . . . . . . . . . . . . . . . . $9,495 $5,469 $2,981 $162 $1,249
Operating income % . . . . . . . . . . . . . . . 18.7% 13.3% 9.9% 0.7% 5.6%
Net income . . . . . . . . . . . . . . . . . . . $6,166 $3,535 $1,910 $131 $840
Net income per common and
common equivalent share. . . . . . . . . . . . . $0.88 $0.53 $0.30 $0.02 $0.13
<CAPTION>
December 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance sheet data:
Cash and cash equivalents. . . . . . . . . . . . $9,545 $8,930 $4,384 $1,290 $1,872
Total assets . . . . . . . . . . . . . . . . . . $44,314 $35,184 $22,662 $18,565 $18,065
Long-term obligations, net of
current portion. . . . . . . . . . . . . . . . . $278 $54 $83 $109 $--
Shareholders' equity . . . . . . . . . . . . . . $34,859 $26,484 $18,269 $15,104 $14,601
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Unless otherwise indicated, all numerical references are in thousands,
except percentages and share data.
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 Annual Report. This Annual Report, including
the following discussion and analysis of financial condition and results of
operations, contains certain statements, trend analysis and other information
that constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995, as amended, which may involve risks
and uncertainties. Such forward looking statements include, but are not limited
to, statements including the words "anticipate," "believe," "plan," "estimate,"
"expect," "intend" and other similar expressions. The Company's actual results
could differ materially from those discussed herein due to numerous factors
including, but not limited to, those discussed in the following discussion and
analysis of financial condition and results of operations, 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. 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. At December 31, 1996, Cadence owned 55% of the
outstanding common stock of the Company, with the remaining 45% publicly owned.
In February 1997, the Company completed a secondary public offering of its
Common Stock, with 700,000 shares issued by the Company, and 950,000 sold by
Cadence, yielding net proceeds to the Company and Cadence of $13.4 million and
$18.6 million, respectively. Following this offering, Cadence continued to
own approximately 37% of the Company's Common Stock.
The Company has been profitable for each of the last nine 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 over the last
three years at an annual compound rate of 30%, reflecting the Company's
successful introduction of higher margin Test Station and Virtual Test Software
products during these periods. This sales growth, combined with more moderate
percentage growth in operating expenses, has resulted in net income of $6.2
million, $3.5 million, and $1.9 million for 1996, 1995, and 1994, respectively.
The increase in net sales has resulted from the Company's development and
marketing of new products and enhancements of existing products, the growth of
the complex device market which the Company serves, and successful penetration
by the Company into foreign markets.
During the last three years, the Company has generated most of its revenue from
sales of its XL, ATS, ATS Blazer, FT and MSTS 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 years ended December 31,
1995 and 1996, and for the fourth quarter of 1996, Virtual Test Software and
related services accounted for 4.6%, 8.6% and 11.1% of the Company's net sales,
respectively. Introduced during the fourth quarter of 1995, the Company's ATS
FT Test Station generated 27.1% and 16.2% of 1996 and 1995 annual net sales,
respectively. The Company also generates revenue from selling maintenance
contracts, installation, consulting, and training services, which collectively
generated 14.9% of net sales.
Future operating results will depend on many factors, including demand for the
Company's products; receipt, timing and shipment of orders; 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.
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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.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 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, consisting primarily of revenue derived from maintenance contracts. Net
sales increased 23.7% from $41.1 million in the year ended December 31, 1995 to
$50.8 million in the year ended December 31, 1996. The increase in net sales
was primarily due to an increase in product sales of 21.7% from $33.1 million in
the year ended December 31, 1995 to $40.2 million in the year ended December 31,
1996, reflecting the successful 1995 introduction of the Company's ATS FT Test
Stations, which contributed 27.1% of net sales during 1996, continued
contributions from the Company's ATS Blazer and XL Test Station products and a
117.9% increase in sales of Virtual Test Software. Service and other sales
increased 32.1% from $8.0 million for the year ended December 31, 1995 to $10.6
million for the year ended December 31, 1996, due principally to growth in sales
of Virtual Test Software related services. Combined sales of Virtual Test
Software product and Virtual Test Software related services grew to 8.6% of net
sales during the year 1996, compared to 4.6% in 1995. International sales, as a
percentage of the Company's net sales, declined from 32% for the year ended
December 31, 1995 to 26% for the year ended December 31, 1996, due primarily to
general economic weakness and slowing down of customer capital expenditures in
Europe, Japan and Korea.
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 15.0% from $15.8 million in the year ended
December 31, 1995 to $18.1 million in the year ended December 31, 1996. Product
cost of sales increased 10.7% from $12.8 million for the year 1995 to $14.2
million for 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 33.9% from $2.9 million in the year 1995 to
$3.9 million in 1996, due primarily to a one-time $327 charge in the first
quarter of 1996 for the Company's change in accounting for spare parts, and
increased labor costs associated with expanding customer service center,
training and Virtual Test Software related services.
GROSS MARGIN. The Company's gross margin increased 29.1% from $25.3 million in
the year ended December 31, 1995 to $32.7 million in the year ended December 31,
1996. As a percentage of net sales, gross margin increased from 61.6% for the
year ended December 31, 1995 to 64.3% for the year ended December 31, 1996.
Product gross margin, as a percent of related sales, increased from 61.2% for
the year 1995, to 64.7% for 1996. The increase in product gross margin resulted
from an increase in sales of higher margin ATS FT Test Stations and Virtual Test
Software products during 1996. Service and other gross margin, as a percent of
related sales, declined from 63.3% for 1995, to 62.9% for 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
associated with increased sales of 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 26.2% from $6.2 million for the year ended
December 31, 1995 to $7.8 million for the year ended December 31, 1996. As a
percentage of net sales, research, development and engineering expenses
increased from 15.0% in the year ended December 31, 1995 to 15.3% in the year
ended December 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. The Company has
capitalized certain software development costs relating to these activities, in
compliance with SFAS No. 86, in the amounts of $715 and $1.0 million in 1996
and 1995, respectively.
11
<PAGE>
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 12.6% from $13.7 million for the year ended December 31, 1995
to $15.4 million for the year ended December 31, 1996. The increase was
principally attributable to higher commissions associated with higher sales
volume and increased investment in the various selling and marketing functions.
As a percentage of net sales, selling, general and administrative expenses
decreased from 33.3% in the year ended December 31, 1995 to 30.3% in the year
ended December 31, 1996 as a result of control over increases in selling,
general and administrative expenses as net sales increased. The Company
anticipates that selling and marketing expenses will increase as a percentage of
net sales as well as in dollar amount in the future, as the Company markets its
newer products worldwide.
As a result of Cadence's ownership reduction to below 50% after the Company's
secondary stock offering in February 1997, the Company expects to recognize
additional compensation expense of approximately $350 in the fiscal year 1997 as
a result of payments made by Cadence to certain Company employees in respect of
Cadence stock options held by such employees.
OTHER INCOME, NET. Other income includes interest income, interest expense and
gain and loss on sale of assets. Other income, net decreased from $319 in the
year ended December 31, 1995 to $217 in the year ended December 31, 1996 due to
the one-time write-off of expenses associated with the Company's withdrawn
secondary public stock offering in June 1996, due to unfavorable stock market
conditions at that time.
INCOME TAXES. The Company's effective rate for Federal and state taxes was
36.5% for the year ended December 31, 1996 and 38.9% for the year ended
December 31, 1995. The change in effective tax rates from 1995 to 1996 was
primarily due to the generation of research and development tax credits during
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.
International sales, as a percentage of the Company's net sales, declined from
40% for the year ended December 31, 1994 to 32% for the year ended December 31,
1995 due to slower sales growth in Europe and Asia than in the United States.
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 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,
12
<PAGE>
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 $1.0 million and $1.1 million in 1995 and 1994, 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
33.3% and 36.5% in 1995 and 1994, respectively, reflecting slower growth in
expenses than in net sales.
OTHER INCOME, NET. Other income increased from $114 in 1994 to $319 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 38.9% and 38.3% for the
years ended December 31, 1995 and 1994, 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.
FORWARD LOOKING STATEMENTS
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 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. A significant portion of the Company's
operating expenses are relatively fixed 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.
A substantial portion of the Company's net sales are typically realized in the
last few weeks of each quarter. The portion of net sales realized during the
last month of each quarter during 1996 ranged from 43% to 75% of quarterly net
sales, as compared to a range of 44% to 59% of quarterly net sales for each
quarter of 1995. As a result, the timing of the receipt and shipment, and the
magnitude of the sales price, of a single order can have a significant impact on
the Company's net sales and results of operations for a particular quarter and
the Company's quarterly net 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.
For the years ended December 31, 1996, 1995 and 1994, sales to Intel Corporation
represented approximately 36.4%, 30.2%, and 22.4% of the Company's net sales,
respectively. No other customer accounted for in excess of 10% of the Company's
net sales in 1996, 1995, or 1994. For 1996, 50.3% of net sales came from
customers individually accounting for less than 5% of net sales. 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. 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.
13
<PAGE>
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 position or results of operations in the
future.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, the Company's principal sources of liquidity consisted
of cash and cash equivalents of approximately $9.5 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.
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 $6.0 million, $5.0 million and $6.3 million for 1996, 1995, and
1994, respectively. Cash received from customers amounted to $48.0 million,
$37.0 million and $29.6 million for 1996, 1995 and 1994, respectively. Combined
payments to suppliers and employees for 1996, 1995 and 1994 were $40.5 million,
$31.1 million and $22.8 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. Trade receivables increased from $8.1 million at
December 31, 1995 to $11.4 million at December 31, 1996, reflecting an increase
in the Company's net sales in, as well as in the portion of net sales realized
in the final month of, the fourth quarter of 1996 as compared to the fourth
quarter of 1995. Inventories increased from $5.8 million at December 31, 1995
to $7.9 million at December 31, 1996, primarily due to additional parts
inventories required to produce the Company's FT and MSTS Test Station products
and increases in safety stock for certain critical components. 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 $9.5 million at December 31, 1996.
INVESTING ACTIVITIES. Capital equipment expenditures of $3.3 million, $1.9
million, and $1.7 million in 1996, 1995, and 1994, respectively, were 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 $1.1 million, $600 and $295 for 1996, 1995 and 1994,
respectively. The higher level of spare parts additions during 1996 reflects
the stocking of parts for servicing the Company's new ATS FT Test Station
product line. In addition, the Company capitalized certain expenses associated
with software development costs of $715, $1.0 million and $1.1 million for 1996,
1995 and 1994, respectively.
FINANCING ACTIVITIES. In 1996 and 1994, net cash used in financing activities
was $12 and $168, 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 $300, $254 and $168 for 1996, 1995 and 1994,
respectively. In 1996 and 1995, the Company received $288 and $3, respectively,
from the issuance of stock under employee stock option and stock purchase plans.
During 1996 and 1995, the Company also realized reductions in current income tax
liabilities of $1.9 million and $2.3 million, respectively, resulting from the
benefit of tax deductions of 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
14
<PAGE>
accompanying Statements of Shareholders' Equity. The employee gains are not
expenses of the Company for financial reporting purposes, and the exercise of
Cadence stock options does not increase the number of shares of Company
Common Stock outstanding. The tax benefits realized from the stock option
deduction will decrease in the future as employee holdings of Cadence stock
options declines due to option exercises and cancellations. The timing and
magnitude of this decrease in tax benefits is uncertain as the number of
employee stock options which are exercised, and the amount of gains realized
upon exercise, will be determined by fluctuations in the market value of
Cadence Common Stock. Such future decreases in the tax benefits from the
stock option deduction will increase the amount of the Company's income tax
payments and will, consequently, reduce the Company's net cash flows from
operating activities.
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 term of the current credit
line agreement ends April 30, 1997. It is management's intent to renew the
agreement at that time.
The Company completed a secondary public offering of its Common Stock in
February, 1997, issuing 700,000 shares in exchange for net proceeds of $13.4
million. 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 operating 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
THE FINANCIAL STATEMENTS AND SCHEDULE LISTED IN ITEM 14(a)(1) AND (2) ARE
INCLUDED IN THIS REPORT BEGINNING ON PAGE F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
15
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information required by Item 401 of Regulation S-K is included under the
captions "Election of Directors" and "Management" in the Company's Proxy
Statement dated April 1, 1997 and is incorporated herein by reference. The
information required by Item 405 of Regulation S-K is included under the
caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the
Company's Proxy Statement dated April 1, 1997 and is incorporated herein
by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included under the caption "Executive
Compensation" in the Company's Proxy Statement dated April 1, 1997 and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included under the caption "Stock Owned
by Management and Principal Shareholders" in the Company's Proxy Statement
dated April 1, 1997 and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included under the caption "Certain
Transactions and Relationships" in the Company's Proxy Statement dated April
1, 1997 and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
(1) Financial Statements and Supplementary Data
The documents and schedule listed below are filed as part of this
report on the pages indicated:
Page
----
Independent Auditors' Report F-1
Statements of Income F-2
Balance Sheets F-3
Statements of Shareholders' Equity F-4
Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-7
Selected Quarterly Financial Data F-16
16
<PAGE>
(2) Financial Statement Schedules
The documents and schedule listed below are filed as part of this
report on the pages indicated:
Page
----
Schedule II -- Valuation and Qualifying Accounts F-17
Independent Auditors' Report on Financial Statements Schedule F-18
All other financial statement schedules have been omitted since they
are not required, not applicable or the information is included in the
consolidated financial statements or notes.
(3) Exhibits
Sequential
Page Number
-----------
3.1. Restated Articles of Incorporation of Integrated
Measurement Systems, Inc. Incorporated by
reference to Exhibit 3.1 of the Company's
Registration Statement on Form S-1 (Registration
No. 33-92408)
3.2. Restated Bylaws of Integrated Measurement Systems,
Inc. Incorporated by reference to Exhibit 3.2 of
the Company's Registration Statement on Form S-1
(Registration No. 33-92408)
10.1. Form of Indemnity Agreement between Integrated
Measurement Systems, Inc. and each of its executive
officers and directors. Incorporated by reference
to Exhibit 10.1 of the Company's Registration
Statement on Form S-1 (Registration No. 33-92408)
10.2. 1995 Stock Incentive Plan. Incorporated by
reference to Exhibit 10.2 of the Company's
Registration Statement on Form S-1 (Registration
No. 33-92408)
10.3. 1995 Stock Option Plan for Nonemployee Directors.
Incorporated by reference to Exhibit 10.3 of the Company's
Registration Statement on Form S-1 (Registration
No. 33-92408)
10.4. Form of Employment Agreement between Integrated
Measurement Systems, Inc. and each of its executive
officers. Incorporated by reference to Exhibit
10.4 of the Company's Registration Statement on
Form S-1 (Registration No. 33-92408)
10.5. Stockholder Agreement between Integrated
Measurement Systems, Inc. and Cadence Design
Systems, Inc. Incorporated by reference to
Exhibit 10.5 of the Company's Registration
Statement on Form S-1 (Registration No. 33-92408)
10.6. Shareholder Agreement between Integrated
Measurement Systems, Inc. and Cadence Design
Systems, Inc. Incorporated by reference to
Exhibit 10.6 of the Company's Registration
Statement on Form S-1 (Registration No. 33-92408)
10.7. Asset Transfer Agreement between Integrated
Measurement Systems, Inc. and Cadence Design
Systems, Inc. Incorporated by reference to
Exhibit 10.7 of the Company's Registration
Statement on Form S-1 (Registration No. 33-92408)
10.8. Corporate Services Agreement between Integrated
Measurement Systems, Inc. and Cadence Design
Systems, Inc. Incorporated by reference to
Exhibit 10.8 of the Company's Registration
Statement on Form S-1 (Registration No. 33-92408)
10.9. Tax Sharing Agreement between Integrated
Measurement Systems, Inc. and Cadence Design
Systems, Inc. Incorporated by reference to
Exhibit 10.9 of the Company's Registration
Statement on Form S-1 (Registration No. 33-92408)
10.10. Lease Agreement between Integrated Measurement
Systems, Inc. and Beaverton-Richmond Tech
Properties, a Joint Venture, as amended by
17
<PAGE>
Amendment One and Amendment Two. Incorporated by
reference to Exhibit 10.10 of the Company's
Registration Statement on Form S-1 (Registration
No. 33-92408)
10.11. Line of Credit agreement with US Bank. Incorporated by
reference to Exhibit 10.11 of the Company's Annual Report on
Form 10-K for the year ended December 31, 1995.
10.12. Integrated Measurement Systems, Inc. 1995 Employee Stock
Purchase Plan. Incorporated by reference to Exhibit 10.12 of
the Company's Annual Report on Form 10-K for the year ended
December 31, 1995.
10.13. Employment Agreement dated March 16, 1996 between Integrated
Measurement Systems, Inc. and Keith L. Barnes. Incorporated
by reference to Exhibit 10.a of the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1996.
10.14. Employment Agreement dated March 16, 1996 between
Integrated Measurement Systems, Inc. and Ramadan.
Incorporated by reference to Exhibit 10.b of the Company's
Quarterly Report on Form 10-Q for the quarter ended March
31, 1996.
10.15. Amended Stockholder Agreement between Integrated Measurement
Systems, Inc. and Cadence Design Systems, Inc. Incorporated
by reference to Exhibit 10.15 of the Company's Registration
Statement on Form S-1 (Registration No. 333-20495)
10.16. Amended Corporate Services Agreement between Integrated
Measurement Systems, Inc. and Cadence Design Systems, Inc.
Incorporated by reference to Exhibit 10.16 of the Company's
Registration Statement on Form S-1 (Registration No. 333-20495)
10.17. Second Amendment to Joint Sales Agency Agreement between
Integrated Measurement Systems, Inc. and Cadence Design
Systems, Inc. Incorporated by reference to Exhibit 10.17 of
the Company's Registration Statement on From S-1
(Registration No. 333-20495)
10.18. Employment Agreement dated December 31, 1996 between
Integrated Measurement Systems, Inc. and David Brinker.
Incorporated by reference to Exhibit 10.18 of the Company's
Registration Statement on Form S-1 (Registration No.
333-20495)
10.19. Integrated Measurement Systems, Inc. Executive Deferred
Compensation Plan. Incorporated by reference to Exhibit 10
of the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996.
10.20. Separation letter agreement between Integrated Measurement
Systems, Inc. and Marvin Wolfson. Incorporated by reference
to Exhibit 10.20 of the Company's Registration Statement on
Form S-1 (Registration No. 333-20495)
16.1. Letter of Arthur Andersen LLP regarding change in accounting
principles. Incorporated by reference to Exhibit 10.a of the
Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1996.
23.1. Consent of Arthur Andersen LLP*
- --------------------------
* Filed Herewith
(b) Reports on Form 8-K
Two reports on Form 8-K were filed during the quarter ended December 31,
1996, and are incorporated herein by reference. The contents of
the reports are summarized below:
On Form 8-K dated October 30, 1996:
On October 30, 1996, Integrated Measurement Systems, Inc. announced a
new mixed-signal Test Station configured for data communications
applications. Full text is attached to this report as Exhibit 99a.
On October 31, 1996, Integrated Measurement Systems, Inc. announced a
60e data module for their ATS Blazer(tm) and MTS Blazer(tm) Test
Stations providing a low-cost entry point for testing complex devices
such as deep submicron ASICs, microprocessors, mixed-signal devices
and MCMs. Full text is attached to this report as Exhibit 99b.
On November 4, 1996, Integrated Measurement Systems, Inc. announced
several enhancements to their Dantes(tm) test design and verification
environment that helps test engineers improve test productivity and
reduce time-to-market. Full text is attached to this report as
Exhibit 99c.
On Form 8-K dated December 20, 1996:
On December 20, 1996, Integrated Measurement Systems, Inc. announced
the sale, valued at over one million dollars, of an Advanced Test
Station to the Cadence Design Services Group. This sales expands IMS'
business into consulting services, provides access to new customers
and applications, expands Cadence Design Services' capabilities to
include testing of complex IC devices and reinforces the strategic
alliance between Cadence Design Systems and Integrated Measurement
Systems, Inc. Cadence Design Systems, Inc. owns approximately 37% of
Integrated Measurement Systems, Inc.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 20th day of March,
1997.
INTEGRATED MEASUREMENT SYSTEMS, INC.
By /s/ SAR RAMADAN
_________________________________
Sar Ramadan
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated, on the 20th day of March, 1997.
Signature Title
/s/ KEITH L. BARNES President, Chief Executive Officer, and Director
______________________ (Principal Executive Officer)
Keith L. Barnes
/s/ SAR RAMADAN Chief Financial Officer (Principal Financial
______________________ and Accounting Officer)
Sar Ramadan
/s/ H. RAYMOND BINGHAM
______________________ Chairman of the Board
H. Raymond Bingham
/s/ C. SCOTT GIBSON
______________________ Director
C. Scott Gibson
/s/ JAMES E. SOLOMON
______________________ Director
James E. Solomon
/s/ JAMES M. HURD
______________________ Director
James M. Hurd
19
<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, 1996 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, 1996. 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, 1996 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,
1996 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Portland, Oregon
January 24, 1997, except for Note 11,
as to which the date is February 19, 1997
F-1
<PAGE>
STATEMENTS OF INCOME
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Sales:
Product sales. . . . . . . . . . . . . . . . . . . . . . . $ 40,244 $ 33,076 $ 23,981
Service and other sales. . . . . . . . . . . . . . . . . . 10,593 8,017 6,071
---------- ---------- ----------
Net sales . . . . . . . . . . . . . . . . . . . . . . . 50,837 41,093 30,052
Cost of sales:
Cost of product sales. . . . . . . . . . . . . . . . . . . 14,203 12,827 10,090
Cost of service and other sales. . . . . . . . . . . . . . 3,935 2,939 2,345
---------- ---------- ----------
Total cost of sales . . . . . . . . . . . . . . . . . . 18,138 15,766 12,435
---------- ---------- ----------
Gross margin. . . . . . . . . . . . . . . . . . . . . . 32,699 25,327 17,617
Operating expenses:
Research, development and engineering. . . . . . . . . . . 7,796 6,177 3,664
Selling, general and administrative. . . . . . . . . . . . 15,408 13,681 10,972
---------- ---------- ----------
Total operating expenses. . . . . . . . . . . . . . . . 23,204 19,858 14,636
---------- ---------- ----------
Operating income. . . . . . . . . . . . . . . . . . . . 9,495 5,469 2,981
Other income, net. . . . . . . . . . . . . . . . . . . . . . 217 319 114
---------- ---------- ----------
Income before income taxes . . . . . . . . . . . . . . . . . 9,712 5,788 3,095
Provision for income taxes . . . . . . . . . . . . . . . . . 3,546 2,253 1,185
---------- ---------- ----------
Net income. . . . . . . . . . . . . . . . . . . . . . . $ 6,166 $ 3,535 $ 1,910
---------- ---------- ----------
---------- ---------- ----------
Net income per common and common equivalent share. . . . . . $ 0.88 $ 0.53 $ 0.30
---------- ---------- ----------
---------- ---------- ----------
Weighted average number of common and common
equivalent shares outstanding. . . . . . . . . . . . . . . 7,003 6,685 6,366
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
December 31,
-----------------------------
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . $ 9,545 $ 8,930
Trade receivables, less allowance for doubtful accounts
of $489 and $338. . . . . . . . . . . . . . . . . . . . . . . . 11,352 8,117
Receivable from Cadence, net . . . . . . . . . . . . . . . . . . . 2,125 1,094
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,940 5,830
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . 1,690 1,420
Prepaid expenses and other current assets. . . . . . . . . . . . . 1,118 735
---------- ----------
Total current assets. . . . . . . . . . . . . . . . . . . . . . 33,770 26,126
Property, plant and equipment, net . . . . . . . . . . . . . . . . . 5,924 5,178
Service spare parts, net . . . . . . . . . . . . . . . . . . . . . . 2,567 2,223
Software development costs, net. . . . . . . . . . . . . . . . . . . 1,446 1,573
Other assets, net. . . . . . . . . . . . . . . . . . . . . . . . . . 607 84
---------- ----------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . $ 44,314 $ 35,184
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,251 $ 2,660
Accrued compensation . . . . . . . . . . . . . . . . . . . . . . . 2,036 1,629
Accrued warranty . . . . . . . . . . . . . . . . . . . . . . . . . 500 801
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . 1,727 2,291
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . 979 --
Other current liabilities. . . . . . . . . . . . . . . . . . . . . 750 810
Capital lease obligations - current. . . . . . . . . . . . . . . . 247 164
---------- ----------
Total current liabilities . . . . . . . . . . . . . . . . . . . 8,490 8,355
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . 417 291
Capital lease obligations, net of current portion. . . . . . . . . . 278 54
Deferred compensation. . . . . . . . . . . . . . . . . . . . . . . . 270 --
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;
6,726,257 and 6,699,803 issued and outstanding. . . . . . . . . 67 67
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . 22,676 20,467
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . 12,116 5,950
---------- ----------
Total shareholders' equity. . . . . . . . . . . . . . . . . . . 34,859 26,484
---------- ----------
Total liabilities and shareholders' equity. . . . . . . . . . . $ 44,314 $ 35,184
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Additional Total
Common Stock Paid-in Retained Shareholders'
Shares Amount Capital Earnings Equity
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
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 employee stock option plans . . . 1 -- 3 -- 3
Dividend to Cadence. . . . . . . . . . . . . . . . . -- -- -- (1,027) (1,027)
Tax benefit from Cadence stock option
transactions by IMS employees . . . . . . . . . . -- -- 2,270 -- 2,270
Net income . . . . . . . . . . . . . . . . . . . . . -- -- -- 3,535 3,535
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1995 . . . . . . . . . . . . . . 6,700 67 20,467 5,950 26,484
Stock issued under employee stock plans. . . . . . . 26 -- 288 -- 288
Tax benefit from Cadence stock option
transactions by IMS employees . . . . . . . . . . -- -- 1,921 -- 1,921
Net income . . . . . . . . . . . . . . . . . . . . . -- -- -- 6,166 6,166
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1996 . . . . . . . . . . . . . . 6,726 $ 67 $ 22,676 $ 12,116 $ 34,859
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Cash received from customers . . . . . . . . . . . . . . . $ 47,958 $ 36,994 $ 29,565
Interest received. . . . . . . . . . . . . . . . . . . . . 428 320 203
Payments to suppliers. . . . . . . . . . . . . . . . . . . (22,782) (16,986) (13,030)
Payments to employees. . . . . . . . . . . . . . . . . . . (17,717) (14,082) (9,792)
Income taxes paid. . . . . . . . . . . . . . . . . . . . . (629) (495) --
Other taxes paid . . . . . . . . . . . . . . . . . . . . . (1,257) (733) (575)
Interest paid. . . . . . . . . . . . . . . . . . . . . . . (33) (30) (28)
---------- ---------- ----------
Net cash provided by operating activities . . . . . . . 5,968 4,988 6,343
---------- ---------- ----------
Cash flows from investing activities:
Purchases of equipment and software. . . . . . . . . . . . (3,299) (1,874) (1,724)
Purchases of service spare parts . . . . . . . . . . . . . (1,057) (600) (295)
Software development costs . . . . . . . . . . . . . . . . (715) (974) (1,062)
Purchases of long-term investments . . . . . . . . . . . . (270) -- --
---------- ---------- ----------
Net cash used in investing activities . . . . . . . . . (5,341) (3,448) (3,081)
---------- ---------- ----------
Cash flows from financing activities:
Principal payments under capital leases. . . . . . . . . . (300) (254) (168)
Net proceeds from initial public offering. . . . . . . . . -- 3,257 --
Proceeds from employee stock plans . . . . . . . . . . . . 288 3 --
---------- ---------- ----------
Net cash provided by (used in) financing activities . . (12) 3,006 (168)
---------- ---------- ----------
Net increase in cash and cash equivalents . . . . . . . 615 4,546 3,094
Cash and cash equivalents at beginning of year . . . . . . . 8,930 4,384 1,290
---------- ---------- ----------
Cash and cash equivalents at end of year . . . . . . . . . . $ 9,545 $ 8,930 $ 4,384
---------- ---------- ----------
---------- ---------- ----------
Reconciliation of net income to net cash provided by
operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 6,166 $ 3,535 $ 1,910
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization . . . . . . . . . . . . . 3,492 3,071 2,300
Contributed capital . . . . . . . . . . . . . . . . . . -- 177 1,255
Provision (benefit) for deferred income taxes . . . . . (144) (763) 25
Increase in deferred compensation . . . . . . . . . . . 270 -- --
Net change in receivable from Cadence. . . . . . . . . . . (1,031) (373) (1,985)
(Increase) decrease in trade receivables . . . . . . . . . (3,235) (3,693) 1,119
(Increase) decrease in inventories . . . . . . . . . . . . (2,110) (2,606) 670
(Increase) decrease in prepaid expenses and other
current assets. . . . . . . . . . . . . . . . . . . . . (383) (485) 28
Decrease in notes receivable . . . . . . . . . . . . . . . -- -- 235
Increase in income taxes payable . . . . . . . . . . . . . 2,900 -- --
Increase in accounts payable and accrued expenses. . . . . 607 4,963 507
Increase (decrease) in deferred revenue. . . . . . . . . . (564) 1,162 279
---------- ---------- ----------
Net cash provided by operating activities. . . . . . . . . . $ 5,968 $ 4,988 $ 6,343
---------- ---------- ----------
---------- ---------- ----------
F-5
<PAGE>
<CAPTION>
Year ended December 31,
----------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Supplemental schedule of noncash financing activities:
Purchases of assets through capital leases . . . . . . . . $ 607 $ 181 $ 244
Tax benefit from Cadence stock option transactions
by IMS employees. . . . . . . . . . . . . . . . . . . . $ 1,921 $ 2,270 $ --
Noncash dividend to Cadence. . . . . . . . . . . . . . . . $ -- $ 1,027 $ --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(All numerical references in thousands, except percentages and share data)
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. At
December 31, 1996, Cadence owned 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 9% of net sales for the year ended December 31,
1996, and 5% of net sales for both of the years ended December 31, 1995 and
1994.
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:
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.
Reclassifications
Certain reclassifications have been made in the accompanying financial
statements for 1994 and 1995 to conform with the 1996 presentation.
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 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.
F-7
<PAGE>
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.
December 31,
--------------------
1996 1995
--------- ---------
Raw materials . . . . . . . . . . $ 4,098 $ 2,613
Work-in-progress. . . . . . . . . 2,912 2,945
Finished goods. . . . . . . . . . 930 272
--------- ---------
Total inventories . . . . . . . . $ 7,940 $ 5,830
--------- ---------
--------- ---------
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.
December 31,
--------------------
1996 1995
--------- ---------
Leasehold improvements. . . . . . $ 313 $ 200
Computer equipment and
furniture . . . . . . . . . . . 14,756 13,053
--------- ---------
15,069 13,253
Less accumulated
depreciation. . . . . . . . . . (9,145) (8,075)
--------- ---------
Net property, plant and
equipment . . . . . . . . . . . $ 5,924 $ 5,178
--------- ---------
--------- ---------
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 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:
F-8
<PAGE>
December 31,
--------------------
1996 1995
--------- ---------
Service spare parts, at cost. . . $ 3,732 $ 2,675
Less accumulated
depreciation. . . . . . . . . . (1,165) (452)
--------- ---------
Net service spare parts . . . . . $ 2,567 $ 2,223
--------- ---------
--------- ---------
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 Cost of Product Sales in the accompanying
Statements of Income. The Company capitalized software development costs
amounting to $715, $974 and $1,062 in 1996, 1995 and 1994, respectively.
Related amortization expense of $842, $1,277 and $625 was recorded in 1996, 1995
and 1994, respectively.
December 31,
--------------------
1996 1995
--------- ---------
Software development costs. . . . $ 5,231 $ 4,516
Less accumulated
amortization. . . . . . . . . . (3,785) (2,943)
--------- ---------
Net software development
costs . . . . . . . . . . . . . $ 1,446 $ 1,573
--------- ---------
--------- ---------
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.
Stock-Based Compensation Plans
The Company accounts for its stock-based plans under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). In 1996,
the Company adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123").
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.
F-9
<PAGE>
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, 1996 is as
follows:
1997. . . . . . . . . . . . . . . $ 240
1998. . . . . . . . . . . . . . . 169
1999. . . . . . . . . . . . . . . 175
-------
Total minimum payments. . . . . . 584
Amount representing interest. . . (59)
-------
Present value of future minimum
lease payments. . . . . . . . . 525
Less current portion. . . . . . . (247)
-------
Long-term capital lease
obligation. . . . . . . . . . . $ 278
-------
-------
4. COMMITMENTS:
The Company leases its facilities and certain equipment under operating leases
that expire from 1998 to 2001. The approximate minimum lease payments under
these operating leases at December 31, 1996 are as follows:
1997. . . . . . . . . . . . . . . $ 1,081
1998. . . . . . . . . . . . . . . 1,046
1999. . . . . . . . . . . . . . . 118
2000. . . . . . . . . . . . . . . 90
2001. . . . . . . . . . . . . . . 60
Rent expense was approximately $1,189, $1,111 and $875 for the years ended
December 31, 1996, 1995 and 1994, 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, 1996. The line of credit is renewable April 30, 1997.
6. EMPLOYEE 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 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 July 1, 1996, the Company implemented an Executive Deferred Compensation
Plan (the "Plan") for the purpose of providing eligible executives and
employees with a program for deferring compensation earned during employment.
The Plan is intended to constitute an unfunded deferred compensation
arrangement for the benefit of
F-10
<PAGE>
a select group of management or highly compensated employees of the Company.
Under the terms of the Plan, eligible executives and employees of the Company
may make voluntary contributions to the Plan as a percentage of compensation,
but not in excess of limitations stated in the Plan. The Company has
invested these voluntary contributions in a variety of investment funds for
the intended use of paying plan benefits when participating executives and
employees become eligible to receive such benefits under the terms of the
Plan. These investments have been included in Other Assets in the
accompanying Balance Sheets. The Company currently does not match executive
or employee contributions and does not intend to do so in the near future.
7. EMPLOYEE AND DIRECTOR STOCK PLANS:
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.
Subsequent to December 31, 1996, the Company's Board of Directors approved an
amendment to reserve an additional 600,000 shares of Common Stock for
issuance under the 1995 Plan. This amendment remains subject to shareholder
approval. 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, expire ten years from the date of
grant, and are exercisable at prices generally not less than the fair market
value at the grant date. During 1996, the Company cancelled and reissued
certain incentive stock options granted to non-officer employees. The
reissued options were granted at fair market value on the date of reissuance
and have been reflected in the following table as cancellations and new
grants. These options vest ratably over four years from the date of the
reissuance.
On May 10, 1995, the Board of Directors approved the adoption of the 1995
Stock Option Plan for Nonemployee Directors (the "Nonemployee Director Plan")
pursuant to which 250,000 shares of the Company's Common Stock have been
reserved for issuance. The Nonemployee Director Plan covers 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. Since consummation of the Company's initial public
offering, 65,000 stock options were awarded under the Nonemployee Director
Plan.
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, of which 18,641 shares have been issued as of December 31, 1996.
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.
During 1995, the Financial Accounting Standards Board issued SFAS 123 which
defines a fair value based method of accounting for an employee stock option
or similar equity instrument and encourages all entities to adopt that method
of accounting for all of their employee stock compensation plans. However,
it also allows an entity to continue to measure compensation cost for those
plans using the method of accounting prescribed in APB 25. Entities electing
to remain with the accounting in APB 25 must make pro forma disclosures of
net income and, if presented, earnings per share, as if the fair value based
method of accounting defined in the Statement had been applied.
The Company has elected to account for its stock-based compensation plan
under APB 25. However, the Company has computed, for pro forma disclosure
purposes, the value of all options granted during 1996 and 1995 using the
Black-Scholes option-pricing model as prescribed by SFAS 123, using the
following weighted average assumptions for grants in 1996 and 1995:
F-11
<PAGE>
Risk-free interest rate . . . . . 6%
Expected dividend yield . . . . . 0%
Expected life . . . . . . . . . . 4 years
Expected volatility . . . . . . . 61%
The total value of options granted during 1996 and 1995 would be amortized on
a pro forma basis over the vesting period of the options. Options generally
vest equally over four years. If the Company had accounted for these plans
in accordance with SFAS 123, the Company's net income and net income per
share would have decreased as reflected in the following pro forma amounts:
Year ended December 31,
-----------------------
1996 1995
---------- ----------
Net income:
As reported . . . . . . . . . . $ 6,166 $ 3,535
Pro forma . . . . . . . . . . . $ 5,092 $ 3,194
Net income per share:
As reported . . . . . . . . . . $ 0.88 $ 0.53
Pro forma . . . . . . . . . . . $ 0.74 $ 0.49
The Company has not and does not currently contemplate any plans to issue
equity instruments other than options to purchase Common Stock of the
Company. Options are issued with an exercise price equal to the price of the
closing trade on the Nasdaq National Market on the date of issuance.
A summary of the status of the Company's stock option plans and changes are
presented in the following table:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------------
1996 1995
------------------------- -------------------------
Wtd. Avg. Wtd. Avg.
Shares Ex. Price Shares Ex. Price
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Options outstanding at beginning of year . . . . . . . . . . 534,264 $ 9.36 -- $ --
Granted. . . . . . . . . . . . . . . . . . . . . . . . . . . 442,200 14.57 542,250 9.36
Exercised. . . . . . . . . . . . . . . . . . . . . . . . . . 7,813 9.38 803 8.50
Cancelled. . . . . . . . . . . . . . . . . . . . . . . . . . 107,043 17.91 7,183 9.05
---------- ---------- ---------- ----------
Options outstanding at end of year . . . . . . . . . . . . . 861,608 $ 10.97 534,264 $ 9.36
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Exercisable at end of year . . . . . . . . . . . . . . . . . 241,698 $ 9.81 78,433 $ 8.85
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Shares issued under the ESPP . . . . . . . . . . . . . . . . 18,641 $ 11.26 -- --
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average fair value of options granted . . . . . . . -- $ 6.85 -- $ 4.88
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average fair value of shares issued
under the ESPP. . . . . . . . . . . . . . . . . . . . . . -- $ 3.87 -- --
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
The following table sets forth the exercise price range, number of shares
outstanding at December 31, 1996, weighted average remaining contractual life,
weighted average exercise price, number of exercisable shares and weighted
average exercise price of exercisable options by groups of similar price and
grant date:
F-12
<PAGE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ------------------------------
Weighted
Average Weighted Weighted
Exercise Outstanding Remaining Average Average
Price shares Contractual Exercise Exercisable Exercise
Range at 12/31/96 Life (Years) Price Options Price
-------------- ------------ ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
$ 8.50-$ 8.50 380,387 8.36 $ 8.50 156,973 $ 8.50
$10.00-$12.38 59,761 8.46 $ 10.24 29,294 $ 10.13
$12.50-$12.50 162,832 9.37 $ 12.50 16,345 $ 12.50
$12.75-$13.13 90,750 9.05 $ 12.80 18,583 $ 12.75
$13.25-$24.00 167,878 9.21 $ 14.36 20,503 $ 14.51
</TABLE>
As of December 31, 1996, employees of the Company also held approximately
334,949 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
cancelled 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's Common Stock on the date of cancellation of these options, will be
reflected as a charge in the Company's Statements of Income over the remaining
vesting period.
8. 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 was
included in the Cadence consolidated income tax returns through July 20, 1995.
The Company has been filing independent income tax returns since 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 Statements of Shareholders' Equity. Income tax liabilities for the
period April 1 through July 20, 1995 were settled with Cadence in cash.
The provision (benefit) for income taxes is as follows:
Year ended December 31,
--------------------------------
1996 1995 1994
-------- -------- --------
Current:
Federal. . . . . . . . . . . $ 3,098 $ 2,529 $ 934
State. . . . . . . . . . . . 592 487 226
-------- -------- --------
3,690 3,016 1,160
Deferred . . . . . . . . . . . (144) (763) 25
-------- -------- --------
Total. . . . . . . . . . . . $ 3,546 $ 2,253 $ 1,185
-------- -------- --------
-------- -------- --------
F-13
<PAGE>
The effective tax rate differs from the Federal statutory rate as follows:
Year ended December 31,
--------------------------------
1996 1995 1994
-------- -------- --------
Federal statutory
tax rate . . . . . . . . . . 34.0% 34.0% 34.0%
State taxes, net
of Federal tax
effect . . . . . . . . . . . 4.1 4.1 4.4
Research and
development tax credits. . . (1.9) -- --
Other, net . . . . . . . . . . 0.3 0.8 (0.1)
-------- -------- --------
Total. . . . . . . . . . . . 36.5% 38.9% 38.3%
-------- -------- --------
-------- -------- --------
The net deferred tax asset consists of the following tax effects relating to
temporary differences:
December 31,
-------------------------
1996 1995
---------- ----------
Deferred tax assets:
Inventory valuation. . . . . . . $ 723 $ 641
Accrued vacation and
other compensation. . . . . . 444 209
Book in excess of tax
depreciation. . . . . . . . . 86 194
Allowance for doubtful
accounts. . . . . . . . . . . 168 129
Accrued warranty . . . . . . . . 187 398
Research and development
credit carryforward . . . . . 222 --
Other. . . . . . . . . . . . . . 54 158
---------- ----------
1,884 1,729
---------- ----------
Deferred tax liabilities:
Service spare parts
valuation . . . . . . . . . . (69) --
Software development
costs . . . . . . . . . . . . (542) (600)
---------- ----------
(611) (600)
---------- ----------
Net deferred tax asset . . . . . $ 1,273 $ 1,129
---------- ----------
---------- ----------
The Company's research and development credit carryforwards can be used to
reduce future federal and state income tax liabilities and expire in 2004.
For the years ended December 31, 1996 and 1995, income taxes payable have been
reduced by $1,921 and $2,270, respectively, for the tax benefit from tax
deduction of 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 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.
F-14
<PAGE>
9. TRANSACTIONS WITH CADENCE:
In certain foreign markets, primarily Europe, Cadence employees act as sales
agents 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 and were not
significant. The Company has managed these activities independently since the
initial public offering. For the years 1996, 1995 and 1994, the costs of the
above services provided by Cadence totaled $2,608, $2,698 and $1,883,
respectively. In December 1996, the Company sold a mixed-signal Test Station to
Cadence, to be used by Cadence's design services group providing engineering
test services to their customers, for a purchase price of approximately $1,260.
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 due from Cadence 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.
10. 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 1996, 1995, and 1994, one customer accounted for 36 percent, 30 percent and
22 percent of net sales, respectively. 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.
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, were:
Year ended December 31,
--------------------------------------
1996 1995 1994
---------- ---------- ----------
United States. . . . $ 37,591 $ 27,854 $ 18,132
Asia-Pacific . . . . 8,999 8,403 7,755
Europe . . . . . . . 3,790 4,656 3,982
Other. . . . . . . . 457 180 183
---------- ---------- ----------
Total . . . . . . $ 50,837 $ 41,093 $ 30,052
---------- ---------- ----------
---------- ---------- ----------
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.
11. SUBSEQUENT EVENT:
In February, 1997, the Company issued an additional 700,000 shares of Common
Stock, and Cadence sold 950,000 shares of the Company's Common Stock in a
registered public stock offering. Net proceeds to the Company amounted to $13.4
million. Subsequent to this offering, Cadence owns approximately 37% of the
Company's Common Stock.
F-15
<PAGE>
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Quarter ended
---------------------------------------------------------
March 31 June 30 September 30 December 31
---------------------------------------------------------
<S> <C> <C> <C> <C>
1996
Net sales $ 11,915 $ 12,612 $ 12,737 $ 13,573
Gross margin $ 7,507 $ 8,104 $ 8,290 $ 8,798
Operating income $ 2,071 $ 2,319 $ 2,382 $ 2,723
Net income $ 1,346 $ 1,398 $ 1,637 $ 1,785
Net income per common and common
equivalent share $ 0.19 $ 0.20 $ 0.23 $ 0.25
- -----------------------------------------------------------------------------------------------------------
1995
Net sales $ 9,084 $ 9,849 $ 10,496 $ 11,664
Gross margin $ 5,446 $ 5,986 $ 6,570 $ 7,325
Operating income $ 965 $ 1,189 $ 1,392 $ 1,923
Net income $ 627 $ 771 $ 941 $ 1,196
Net income per common and common
equivalent share $ 0.10 $ 0.12 $ 0.14 $ 0.17
- -----------------------------------------------------------------------------------------------------------
</TABLE>
F-16
<PAGE>
INTEGRATED MEASUREMENT SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
<TABLE>
<CAPTION>
Additions
Charged to
Beginning Cost & Ending
Description Balance Expenses Deductions Balance
- --------------- ------- -------- ---------- -------
<S> <C> <C> <C> <C>
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
Year ended December 31, 1996
Allowance for doubtful accounts 338 151 -- 489
</TABLE>
F-17
<PAGE>
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 the
1996 Form 10-K annual report and have issued our report thereon dated January
24, 1997. 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
F-18
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our reports dated January 24, 1997 included in this Form 10-K into the
Company's previously filed Registration Statement File No. 33-1658, No.
333-13693 and No. 333-13695 on Form S-8.
ARTHUR ANDERSEN LLP
Portland, Oregon,
March 25, 1997
