<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-26274
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INTEGRATED MEASUREMENT SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
OREGON 93-0840631
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9525 S.W. GEMINI DRIVE, BEAVERTON, OR 97008
(Address of principal executive offices) (zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (503) 626-7117
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NO CHANGE
Former name, former address, and former
fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by 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
------- -------
At July 31, 1998, there were 7,517,316 shares of Integrated Measurement Systems,
Inc. common stock, $0.01 par value, outstanding.
(Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.)
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INTEGRATED MEASUREMENT SYSTEMS, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PART 1 FINANCIAL INFORMATION PAGE NUMBER
<S> <C>
Item 1. Financial Statements
Statements of Operations for the three months and six
months ended June 30, 1998 and 1997 3
Balance Sheets as of June 30, 1998 and December 31,
1997 4
Statements of Cash Flows for the six months
ended June 30, 1998 and 1997 5
Notes to the Financial Statements 6-7
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 8-13
PART II OTHER INFORMATION
Item 2. Changes in Securities. 14
Item 4. Submission of Matters to a Vote of
Security Holders 14
Item 6. Exhibits and Reports on Form 8-K. 14
SIGNATURES 15
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTEGRATED MEASUREMENT SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(In thousands, except net income per share)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
SALES:
Systems $ 4,849 $ 7,238 $ 9,807 $ 17,087
Software 1,202 852 2,497 1,747
Service 2,356 2,936 4,595 5,472
---------- ---------- ---------- ----------
NET SALES 8,407 11,026 16,899 24,306
---------- ---------- ---------- ----------
COST OF SALES:
Systems 1,611 2,709 3,340 6,465
Software 262 50 407 98
Service 945 993 1,916 1,867
---------- ---------- ---------- ----------
TOTAL COST OF SALES 2,818 3,752 5,663 8,430
---------- ---------- ---------- ----------
GROSS MARGIN 5,589 7,274 11,236 15,876
OPERATING EXPENSES:
Research, development and engineering 1,706 1,702 3,450 3,602
Selling, general and administrative 4,203 4,099 8,252 8,118
---------- ---------- ---------- ----------
Total operating expenses 5,909 5,801 11,702 11,720
---------- ---------- ---------- ----------
OPERATING INCOME (LOSS) (320) 1,473 (466) 4,156
Other income, net 184 302 402 494
---------- ---------- ---------- ----------
Income (loss) before income taxes (136) 1,775 (64) 4,650
Provision for (benefit from) income taxes (48) 601 (24) 1,651
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ (88) $ 1,174 $ (40) $ 2,999
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
BASIC EARNINGS (LOSS) PER SHARE $ (0.01) $ 0.16 $ (0.01) $ 0.41
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
DILUTED EARNINGS (LOSS) PER SHARE $ (0.01) $ 0.15 $ (0.01) $ 0.40
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average number of common shares
outstanding for basic earnings per share 7,541 7,478 7,537 7,274
Incremental shares from assumed conversions
of employee stock options 0 212 0 263
---------- ---------- ---------- ----------
Adjusted weighted average shares for diluted
earnings per share. 7,541 7,690 7,537 7,537
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See accompanying notes to unaudited financial statements
3
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INTEGRATED MEASUREMENT SYSTEMS, INC. AND SUBSIDIARIES
BALANCE SHEETS
(In thousands, except per share data)
<TABLE>
<CAPTION>
As of As of
June 30, December 31,
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,985 $ 17,464
Short-term investments 14,211 8,371
Trade receivables, less allowance for doubtful accounts
of $503 and $577 11,075 10,582
Receivable from Cadence, net - 219
Inventories, net 15,052 11,311
Income taxes receivable 1,749 336
Deferred income taxes 1,862 1,637
Prepaid expenses and other current assets 1,766 1,597
---------- ----------
Total current assets 51,700 51,517
PROPERTY, PLANT AND EQUIPMENT, NET 9,149 7,418
SERVICE SPARE PARTS, NET 3,764 3,395
OTHER ASSETS, NET 4,451 3,193
---------- ----------
Total assets $ 69,064 $ 65,523
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,483 $ 2,321
Payable to Cadence, net 254 -
Accrued compensation 1,410 1,354
Accrued warranty 238 442
Deferred revenue 2,470 1,852
Other current liabilities 392 475
Capital lease obligations - current 194 181
---------- ----------
Total current liabilities 8,441 6,625
DEFERRED INCOME TAXES 812 483
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION 96 152
DEFERRED COMPENSATION 1,048 830
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value, authorized 10,000,000 shares;
none issued and outstanding - -
Common stock, $.01 par value, authorized 15,000,000 shares;
issued and outstanding 7,533,857 and 7,521,393 75 75
Additional paid-in capital 41,311 40,037
Retained earnings 17,281 17,321
---------- ----------
Total shareholders' equity 58,667 57,433
---------- ----------
Total liabilities and shareholders' equity $ 69,064 $ 65,523
---------- ----------
---------- ----------
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED FINANCIAL STATEMENTS.
4
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INTEGRATED MEASUREMENT SYSTEMS, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 18,079 $ 26,718
Interest received 431 533
Payments to suppliers (10,592) (10,834)
Payments to employees (8,527) (9,340)
Income taxes paid (107) (769)
Other taxes paid (267) (433)
Interest paid (13) (23)
--------- ---------
Net cash (used in) provided by operating activities (996) 5,852
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (5,840) -
Purchases of equipment and software (2,643) (2,050)
Purchases of service spare parts (742) (637)
Software development costs (1,103) (358)
Purchases of long-term investments (218) (106)
--------- ---------
Net cash used in investing activities (10,546) (3,151)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital leases (76) (158)
Net proceeds from public stock offering - 13,518
Proceeds from employee stock plans 139 526
--------- ---------
Net cash provided by financing activities 63 13,886
--------- ---------
Net (decrease) increase in cash and cash equivalents (11,479) 16,587
Beginning cash and cash equivalents balance 17,464 9,545
--------- ---------
Ending cash and cash equivalents balance $ 5,985 $ 26,132
--------- ---------
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ (40) $ 2,999
Adjustments to reconcile net income to
cash (used in) provided by operating activities:
Depreciation and amortization 2,044 1,852
Provision for deferred income taxes 104 (113)
Capital contribution from Cadence - 91
Deferred compensation 218 106
Net change in payable to or receivable from Cadence 473 1,998
(Increase) decrease in trade receivables (493) 216
Increase in inventories (3,741) (1,771)
Increase in prepaid expenses and other current assets (169) (537)
Net change in income taxes payable or receivable (278) 993
Increase (decrease) in accounts payable and accrued
liabilities 268 (547)
Increase in deferred revenue 618 565
--------- ---------
Net cash (used in) provided by operating activities $ (996) $ 5,852
--------- ---------
--------- ---------
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Purchase of assets through capital lease $ 33 $ 59
--------- ---------
--------- ---------
Tax benefit from Cadence and IMS stock options $ 1,135 $ 1,222
--------- ---------
--------- ---------
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED FINANCIAL STATEMENTS.
5
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INTEGRATED MEASUREMENT SYSTEMS, INC.
NOTES TO THE FINANCIAL STATEMENTS
(In thousands, except share data)
(Unaudited)
(1) 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
utilized for inventory valuation purposes include material, labor and
manufacturing overhead. Inventories consists of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---- ----
<S> <C> <C>
Raw materials. . . . . . . . . . . . $ 9,475 $ 5,780
Work-in-progress . . . . . . . . . . 2,031 4,037
Finished goods . . . . . . . . . . . 3,546 1,494
-------- --------
$ 15,052 $ 11,311
-------- --------
-------- --------
</TABLE>
(2) NEW ACCOUNTING PRONOUNCEMENTS
In July 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income." The statement is effective for the
Company's fiscal year ending December 31, 1998. SFAS 130 sets standards
for reporting and display of comprehensive income and its components in a
full set of general purpose financial statements. Comprehensive income is
the total of net income and all other nonowner changes in equity. The only
nonowner changes in equity recorded by the Company have been unrealized
holding gains/losses on short-term investment securities classified as
available-for-sale under SFAS 115, "Accounting for Certain Investments in
Debt and Equity Securities." These holding gains and losses were not
material, and therefore are not reported separately in the accompanying
financial statements. The accumulated unrealized gains/losses on
short-term investments are included in Additional Paid-in Capital in the
accompanying Balance Sheets.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes accounting and
reporting standards for all derivative instruments. SFAS 133 is
effective for fiscal years beginning after June 15, 1999. The Company
does not have any derivative instruments and, accordingly, the adoption
of SFAS 133 will have no impact on the Company's financial position or
results of operations.
(3) BASIS OF PRESENTATION
The interim financial statements included herein have been prepared,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
such rules and regulations, although the management of the Company believes
that the disclosures are adequate to make the information presented not
misleading. Interim financial statements are by necessity somewhat
tentative; judgments are used to estimate interim amounts for items that
are normally determinable only on an annual basis. The financial
information as of December 31, 1997 is derived from the Company's audited
financial statements.
The interim period information presented herein includes normally recurring
adjustments which are, in the opinion of the management of the Company,
only necessary for a fair statement of the results of the respective
interim periods. Results of operations for interim periods are not
necessarily indicative of results to be expected for an entire year.
6
<PAGE>
(4) EARNINGS PER SHARE
Earnings per share amounts presented in the accompanying Statements of
Operations have been calculated in accordance with Statement of Accounting
Standards No. 128, "Earnings per Share." Following is a summary of
outstanding common stock options not included in the computation of diluted
earnings per share because the options would have been anti-dilutive.
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Three months ended June 30, . . . . . . . 1,539,842 154,534
Six months ended June 30, . . . . . . . . 1,539,842 144,827
</TABLE>
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(All numerical references are in thousands, except for percentages and share
data)
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
COMPANY'S FINANCIAL STATEMENTS AND THE NOTES THERETO INCLUDED ELSEWHERE IN THIS
QUARTERLY REPORT, AS WELL AS THE COMPANY'S FINANCIAL STATEMENTS AND THE NOTES
THERETO, AND THE MANAGEMENT DISCUSSION AND ANALYSIS PRESENTED IN THE COMPANY'S
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997. THIS QUARTERLY
REPORT, INCLUDING THE FOLLOWING DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTAINS CERTAIN STATEMENTS, TREND ANALYSES AND OTHER
INFORMATION THAT CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
THE PRIVATE SECURITIES LITIGATION REFORM ACT, 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 IN SUCH FORWARD LOOKING STATEMENTS
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 AND IN THE COMPANY'S
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997.
RECENT EVENTS
In June 1998, the Company entered into a definitive agreement to acquire the
technology and assets of PerformIC, the developer of an advanced Test Station
for memory engineering test. The transaction is expected to close in early
September, 1998. Under the terms of the agreement, the Company will pay up to
$1.5 million in cash in exchange for the in-process technology, inventory and
other assets of PerformIC. Of this amount, $400 was paid in advance during
June 1998. With this acquisition, the Company is opening its new European
Design Center in Dresden, Germany.
During the third quarter of 1998, the Company is implementing a plan of
reorganization which will reduce the Company's worldwide employee headcount
by approximately 5%. Management's decision to implement this plan is the
result of recent shortfalls in net sales versus operating budgets, and is
aimed at maintaining acceptable operating expense levels as the Company
invests in the ongoing operations of the new European Design Center.
As a result of this acquisition and reorganization plan, the Company expects
to record a charge against earnings currently estimated in the range of $2.5
million to $3.5 million during the third quarter of 1998. This charge is
expected to include amounts written off for acquired in-process research and
development costs, adjustments to revalue or write-off certain of the
Company's existing inventories made obsolete as a result of the PerformIC
acquisition, and severance and other costs associated with the Company's
reorganization plan.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 AND 1997
NET SALES
Net sales of $8,407 for the three-month period ended June 30, 1998 reflected a
decrease of $2,619 or 24% from the second quarter of 1997.
The decline in net sales reflects a slowdown in capital spending for the
Company's Test Stations by several of the Company's customers during the
second quarter of 1998, as compared to historical net sales levels. Sales to
the Company's semiconductor manufacturing customers were particularly soft,
despite an improvement in sales activity to Intel. For the second quarter of
1998, Intel accounted for 32% of net sales, compared to 16% for the same
period in 1997. Sales to IBM contributed 11% of net sales for the three
months ended June 30, 1998. Other customers contributing more than 10% of
net sales during the second quarter of 1997 included Advanced Micro Devices
(14%) and DVS Test, the Company's distributor in southeast Asia (13%). While
improved from the first quarter of 1998, sales to the Company's customers in
international markets continued to be relatively soft, contributing $2.6
million of second quarter 1998 net sales, compared to $3.8 million of second
quarter 1997 net sales.
Systems sales decreased $2,389 or 33% in the second quarter of 1998, as compared
to the second quarter of 1997, primarily due to the slowdown in customer capital
spending cited above. Software sales increased $350 or 41% in the three months
ended June 30, 1998, from the same period in 1997, due primarily to increased
sales of Virtual Test Software products. Sales of services declined $580 or 20%
during the second quarter of 1998 from the second quarter of 1997, predominantly
because certain Virtual Test consulting services contracts were completed during
the latter part of 1997.
8
<PAGE>
In June 1998, the Company announced the availability of Virtual Test
Emulator-TM-, the industry's first test emulation software product to provide
complete test-program execution and debug without the use of automated test
equipment. In July 1998, the Company announced the first of a new family of
advanced engineering Test Stations, designated Electra-TM-, for mixed-signal
IC design verification, characterization, yield enhancement and failure
analysis. The new Electra Test Station is scheduled to be available for
shipment during the third quarter of 1998. Actual net sales to be realized
in future periods from these new products are subject to many risks,
including those discussed below under "Future Operating Results."
GROSS MARGIN
The Company's gross margin of $5,589 in the second quarter of 1998 decreased 23%
from $7,274 for the same period of 1997, as a direct result of the decrease in
net sales discussed above. As a percentage of net sales, gross margin was 66%
of net sales for the second quarters of 1998 and 1997. The gross margin from
sales of the Company's Test Station systems was 67% for the first quarter of
1998, compared to 63% for the same period of 1997, due to a favorable mix of
complex, high-margin systems, and reductions in certain materials costs. Sales
of software yielded gross margin of 78% during the second quarter of 1998, as
compared to 94% during the first quarter of 1997, reflecting higher costs
associated with sales of custom software products during the second quarter of
1998. Sales of services yielded gross margins of 60% during the second quarter
of 1998, down from 66% during the second quarter of 1997 due primarily to the
completion of certain higher margin Virtual Test consulting contracts in 1997.
OPERATING EXPENSES
Research, development and engineering (R&D) expenses amounted to $1,706 for
the three months ended June 30, 1998, compared to $1,702 for the same period
in 1997. R&D expenses amounted to 20% of net sales in the three months ended
June 30, 1998, compared to 15% in the three months ended June 30, 1997. The
increase in R&D spending as a percent of net sales was attributable to
decline in net sales relative to prior year levels discussed above. In
addition, capitalization of software development costs increased during the
second quarter of 1998, reflecting significant investment in software
technology to be included in future new products currently under development.
These factors were partially offset by higher costs associated with headcount
increases required to implement the Company's plans for development of new
systems and software products. Spending for research and development is
expected to increase during the fourth quarter of 1998, as a direct result
of the acquisition of the technology and assets of PerformIC discussed above.
Selling, general and administrative expenses of $4,203 for the second quarter
of 1998 increased $104 or 3% from $4,099 in the second quarter of 1997. As a
percentage of net sales, selling, general and administrative expense
increased to 50% in the three months ended June 30, 1998 from 37% in the
three months ended June 30, 1997. The increase in selling, general and
administrative expenses as a percent of net sales reflects the decrease in
net sales discussed above. Spending for selling, general and administrative
expenses is expected to increase beginning in the fourth quarter of 1998, as
a direct result of the PerformIC acquisition discussed above.
OTHER INCOME, NET
Other income, net decreased to $184 in the three months ended June 30, 1998,
from $302 in the quarter ended June 30, 1997, reflecting the effect of lower
average cash balances on interest income in the second quarter of 1998, combined
with the impact of lower pre-tax returns from investments in non-taxable
municipal debt obligations.
INCOME TAXES
The Company's effective tax rate was 35% for the three-month period ended June
30, 1998 and 34% for the three months ended June 30, 1997. The lower effective
tax rate for the second quarter of 1997 was due to the cumulative year-to-date
effect of a decrease in the estimated effective rate to 35.5% during the second
quarter of 1997.
9
<PAGE>
NET INCOME
As a result of the various factors discussed above, the diluted net loss per
share of $0.01 for the second quarter of 1998 compared to diluted net income per
share of $0.15 in the same period of 1997.
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
NET SALES
Net sales of $16,899 for the six-month period ended June 30, 1998 reflected a
decrease of $7,407 or 30% from the first half of 1997.
The decline in net sales reflects the continued slowdown in capital spending for
the Company's Test Station systems by the Company's customers during the first
half of 1998, as compared to the first half of 1997. Many of the Company's
semiconductor manufacturing customers have reduced, delayed or frozen capital
spending during the first half of 1998 due to overall industry economic
conditions. For the first half of 1998, Intel accounted for 22% of net sales,
compared to 23% for the same period in 1997.
Systems sales decreased $7,280 or 43% in the first half of 1998, as compared to
the first half of 1997, primarily due to slowdown in customer capital spending
cited above. Software sales increased $750 or 43% in the six months ended June
30, 1998, from the same period in 1997, due primarily to an increase in sales of
Virtual Test Software products. Sales of services declined $877 or 16% during
the first half of 1998 from the first half of 1997, due primarily to the
completion of certain Virtual Test consulting services contracts during the
latter part of 1997.
GROSS MARGIN
The Company's gross margin of $11,236 in the first half of 1998 decreased 29%
from $15,876 for the same period of 1997, as a direct result of the decrease in
net sales discussed above. As a percentage of net sales, gross margin increased
to 66% of net sales for the first half of 1998 from 65% of net sales for the
first half of 1997, reflecting the favorable impact of the increase in higher
margin software product sales discussed above. The gross margin from sales of
the Company's Test Station systems was 66% for the first half of 1998, compared
to 62% for the same period of 1997, reflecting favorable pricing for high-end
Test Stations and reductions of certain material costs in the first half of
1998. Sales of software yielded gross margin of 84% during the first six months
of 1998, as compared to 94% during the first half of 1997, reflecting higher
costs associated with sales of custom software products during the first half of
1998. Sales of services yielded gross margins of 58% during the first half of
1998, down from 66% during the first half of 1997 due primarily to the
completion of certain higher margin Virtual Test consulting contracts in 1997.
OPERATING EXPENSES
Research, development and engineering (R&D) expenses amounted to $3,450 for the
six months ended June 30, 1998, compared to $3,602 for the same period in 1997.
R&D expenses amounted to 20% of net sales in the six months ended June 30, 1998,
compared to 15% in the six months ended June 30, 1997. The increase in R&D
spending as a percent of net sales was attributable to decline in net sales
relative to prior year levels discussed above. In addition, capitalization of
software development costs increased during the first half of 1998, reflecting
significant investment in software technology to be included in future new
products currently under development. These factors were partially offset by
higher costs associated with headcount increases required to implement the
Company's plans for development of new systems and software products.
Selling, general and administrative expenses of $8,252 for the first half of
1998 increased $134 or 2% from $8,118 in the first half of 1997. As a
percentage of net sales, selling, general and administrative expense increased
to 49% in the six months ended June 30, 1998 from 33% in the six months ended
June 30, 1997. The increase in selling, general and administrative expenses as
a percent of net sales reflects the decrease in net sales discussed above.
10
<PAGE>
OTHER INCOME, NET
Other income, net, decreased to $402 in the six months ended June 30, 1998, from
$494 in the six months ended June 30, 1997, primarily due to the impact of lower
pre-tax returns from investments in non-taxable municipal debt obligations in
1998.
INCOME TAXES
The Company's effective tax rate was 35% for the six-month periods ended June
30, 1998 and 1997.
NET INCOME
As a result of the various factors discussed above, the diluted net loss per
share of $0.01 for the first half of 1998 compared to diluted net income per
share of $0.40 in the same period of 1997.
FUTURE OPERATING RESULTS
Like most high technology companies, the Company faces certain business risks
that could have adverse effects on the Company's results of operations,
including, but not limited to the following. Sales of the Company's products
to a limited number of customers are expected to continue to account for a
significant percentage of net sales over the foreseeable future. Any
significant reduction or loss of orders from Intel or any other major
customer would have a material adverse effect on the Company's financial
condition and results of operations. The Company purchases some key
components from sole or single source vendors for which alternative sources
are not currently available. The Company is dependent on high-dollar
customer orders, deriving a substantial portion of its net sales from the
sale of Test Stations which typically range in price from $0.2 to $1.2
million per unit and may be priced as high as $1.8 million for a single unit.
A substantial portion of the Company's net sales is typically realized in
the last few weeks of each quarter. As a result, the timing of the receipt
and shipment of a single order can have a material impact on the Company's
net sales and results of operations for a particular quarter. Therefore, 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. Most 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. The Company's future operating results and financial
condition are also subject to other influences, including those driven by
rapid technological changes, operating in a highly competitive industry, a
lengthy sales cycle, and the cyclical nature of general economic conditions.
Future operating results will depend on many factors, including demand for
the Company's products, the introduction of new products by the Company and
by its competitors, industry acceptance of Virtual Test software, the level
and timing of available shippable orders and backlog, the duration and
severity of the economic downturn in Asia, and the business risks discussed
above. 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
return to profitability in the near future.
Results of operations for the periods discussed above should not be considered
indicative of the results to be expected for any future period, and fluctuations
in the operating results may also result in fluctuations in the market price of
the Company's common stock.
YEAR 2000
The Company is in the process of assessing its Year 2000 (Y2K) issues. The
Company's plan for assessing Y2K issues includes steps to review, test and
implement corrective measures for the Company's products and information
systems. In addition, the Company has identified its most critical vendors
and suppliers, and is requesting sufficient information from each of them to
assess their Y2K readiness.
To-date, the Company has completed an initial review of its current products
and believes them to be free of any problems associated with the year 2000.
However, testing of these current products, and of earlier-version products
sold to customers, has not yet been completed. The Company is currently in
the process of formulating specific plans for product testing, and plans to
conduct such testing during the next several quarters. The Company is also in
the process of assessing its Y2K issues with respect to its information
systems. Initial reviews have not identified any significant information
systems Y2K issues beyond those which will be corrected through
implementation of previously planned systems upgrades. Plans for testing of
the Company's information systems are currently being developed.
Until the Company completes previously planned upgrades to its information
systems, testing of the Company's products and information systems, and
assessment of the Y2K readiness of the Company's critical vendors and
suppliers, the costs to address the Company's Year 2000 issues cannot be
determined with certainty. Failure to identify and/or adequately address any
significant Y2K issue with respect to the Company's products, information
systems or vendors and suppliers could have a material adverse effect on the
Company's business, financial condition and results of operations. At this
time, no assurance can be given that the Company will incur no adverse
effects resulting from such Y2K issues, and that such effect will not be
material to the Company's business, results of operations, or financial
condition.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1998, the Company's principal sources of liquidity consisted of
cash and short-term investments of approximately $20.2 million, and funds
available under an existing bank line of credit of $10.0 million. To date,
there have been no borrowings against the Company's bank line of credit.
11
<PAGE>
The Company's operating activities used cash during the six months ended June
30, 1998 of $1.0 million, compared to providing cash of $5.8 million for the
same period last year. This change was primarily attributable to lower
collections from customers resulting from lower net sales and extended payment
terms.
The Company's trade receivables have increased to $11.1 million from $10.6
million since December 31, 1997, reflecting the effect of extended payment terms
granted to certain customers and distributors, primarily in Asia. The financial
difficulties facing the Asia region may cause these receivables to age further
during upcoming quarters. Inventories have grown by $3.7 million during the
first half of 1998, reflecting the production of Test Station systems
manufactured, but not shipped as a result of the reduction in net sales
discussed above, as well as purchases of materials for new Test Station products
planned for introduction later in 1998. Deferred revenue increased $618 to $2.5
million, reflecting the invoicing associated with significant renewal of annual
customer maintenance contracts during the first quarter of 1998.
During the first half of 1998, the Company invested $4.5 million in equipment,
purchased software, service spare parts and software development costs, as
necessary to develop, distribute and service new and existing Test Station and
Virtual Test products. During the third quarter of 1998, the Company will make
payments of approximately $1.0 million for the acquisition of the technology and
assets of PerformIC discussed above.
During the first half of 1998, the Company realized reductions in current tax
liabilities of $1,135 resulting from the benefit of tax deductions of employee
gains upon exercise of stock options. Most of this amount resulted from
exercise of stock options of Cadence Design Systems, Inc. (Cadence), the
Company's former majority shareholder. The noncash benefit of the stock option
deduction is reflected as an increase to Additional Paid-in Capital in the
accompanying Balance Sheets. 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 the Company's Common Stock outstanding.
The tax benefits realized from the stock option deduction are expected to
decrease in the future as employee holdings of Cadence stock options decline 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.
During the second quarter of 1998, the Company announced that it intends to
repurchase up to 500,000 shares of its currently outstanding common stock over
the next 12 months in open market and negotiated transactions. This repurchase
program authorizes the repurchase of shares in increments in accordance with SEC
regulations and Board of Directors' guidance. As of June 30, 1998, this program
had resulted in the repurchase of 10,000 shares at a total cost of $90. This
program will continue during the second half of 1998 as authorized by the Board
of Directors.
The Company believes that cash on hand, short-term investments, and cash
generated from operations, as well as cash available from the Company's existing
$10.0 million short-term line of credit, will be sufficient to meet the
Company's working capital and other cash requirements for at least the next
twelve months. Company management is continually evaluating opportunities to
develop and introduce new products, and to acquire complementary businesses or
technologies. At present, the Company has no understandings, commitments or
agreements with respect to any such opportunities other than the PerformIC
acquisition discussed above. Any transactions resulting from such
opportunities, if consummated, may require the use of some of the Company's cash
or necessitate funding from other sources.
12
<PAGE>
PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
During the quarter ended June 30, 1998, the Company made no sales of
securities that were not registered under the Securities Act of 1933.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders held May 5, 1997, the stockholders of
the Company approved the following matters:
1. The nominees for directors listed below were elected directors of the
Company, each to a three-year term and until their successors are duly
elected and qualified:
<TABLE>
<CAPTION>
ELECTION OF DIRECTORS FOR OPPOSED ABSTAINED
--------------------- --------- ------- ---------
<S> <C> <C> <C>
Keith L. Barnes 6,837,504 0 289,620
C. Scott Gibson 6,838,416 0 288,708
</TABLE>
2. A proposal for the approval of an amendment to the Company's 1995
Stock Incentive Plan (the 1995 Plan) increasing from 1,620,000 shares
to 1,995,000 shares the number of shares of Common Stock that are
reserved for issuance under the 1995 Plan was approved by a vote of
4,673,895 for, 2,436,899 opposed and 16,330 abstained.
3. A proposal for the ratification of the selection of Arthur Andersen
LLP as independent public accountants for the fiscal year ending
December 31, 1998 was approved by a vote of 7,122,180 for, 1,869
opposed and 3,075 abstained
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits (exhibit reference numbers refer to Item 601 of Regulation S-K)
27. Financial Data Schedule
(b) Reports on Form 8-K:
Two reports on Form 8-K were filed during the quarter ended June 30,
1998, and are incorporated herein by reference.
On June 1, 1998, a Form 8-K was filed. The contents of the report are
summarized below:
Integrated Measurement Systems, Inc. Announces Stock Repurchase Program
On May 27, 1998, Integrated Measurement Systems, Inc. announced that
it intends to repurchase up to 500,000 shares of its currently
outstanding common stock over the next 12 months in open market and
negotiated transactions. This repurchase program starts immediately
in increments in accordance with SEC regulations and Board of
Directors' guidance.
On June 22, 1998, a Form 8-K was filed. The contents of the report are
summarized below:
IMS announces CFO, Sar Ramadan Leaves to Join Onyx Software
On June 18, 1998, Integrated Measurement Systems, Inc. announced that
its Chief Financial Officer, Sar Ramadan will be departing July 15,
1998, and has accepted a position at Onyx Software of Bellevue,
Washington.
13
<PAGE>
SIGNATURES
Pursuant to the requirements 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 August 11, 1998.
INTEGRATED MEASUREMENT SYSTEMS, INC.
(Registrant)
/s/ KEITH BARNES
------------------------------
Keith Barnes
President and Chief Executive Officer
(on behalf of the Registrant)
/s/ DAVID ALLWORTH
------------------------------
David Allworth
Corporate Controller and Acting Chief
Financial Officer (as Principal
Financial Officer)
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE INCOME
STATEMENT FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 1998, AND THE BALANCE SHEET AS
OF JUNE 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 5,985
<SECURITIES> 14,211
<RECEIVABLES> 11,075
<ALLOWANCES> 503
<INVENTORY> 15,052
<CURRENT-ASSETS> 51,700
<PP&E> 20,279
<DEPRECIATION> 11,130
<TOTAL-ASSETS> 69,064
<CURRENT-LIABILITIES> 8,441
<BONDS> 96
0
0
<COMMON> 75
<OTHER-SE> 58,592
<TOTAL-LIABILITY-AND-EQUITY> 69,064
<SALES> 12,304
<TOTAL-REVENUES> 16,899
<CGS> 3,747
<TOTAL-COSTS> 5,663
<OTHER-EXPENSES> 11,702
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13
<INCOME-PRETAX> (64)
<INCOME-TAX> (24)
<INCOME-CONTINUING> (40)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (40)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
