<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Quarter Ended September 30, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File No. 0-26274
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
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 October 31, 1998, there were 7,425,816 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.)
<PAGE>
INTEGRATED MEASUREMENT SYSTEMS, INC.
Index to Form 10-Q
<TABLE>
<CAPTION>
PART 1 FINANCIAL INFORMATION Page Number
<S> <C>
Item 1. Financial Statements
Consolidated Statements of Operations for the three months and
nine months ended September 30, 1998 and 1997 ................... 3
Consolidated Balance Sheets as of September 30, 1998 and
December 31, 1997 ............................................... 4
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1998 and 1997 ............................... 5
Notes to the Financial Statements ................................ 6-8
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition .................. 9-14
PART II OTHER INFORMATION
Item 2. Changes in Securities. ........................................... 15
Item 6. Exhibits and Reports on Form 8-K. ................................ 15
SIGNATURES ....................................................................... 16
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Integrated Measurement Systems, Inc.
Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
SALES:
Systems .................................. $ 6,310 $ 8,215 $ 16,117 $ 25,302
Software ................................. 961 853 3,458 2,600
Service .................................. 2,202 2,999 6,797 8,471
Net sales ............................. 9,473 12,067 26,372 36,373
COST OF SALES:
Systems .................................. 4,339 3,068 7,679 9,532
Software ................................. 153 56 560 155
Service .................................. 1,055 903 2,971 2,770
Total cost of sales ................... 5,547 4,027 11,210 12,457
Gross margin .......................... 3,926 8,040 15,162 23,916
OPERATING EXPENSES:
Research, development and engineering .... 1,607 1,806 5,057 5,408
Selling, general and administrative ...... 4,515 4,163 12,767 12,281
Merger & restructuring ................... 1,508 -- 1,508 --
Total operating expenses .............. 7,630 5,969 19,332 17,689
Operating income (loss) ............... (3,704) 2,071 (4,170) 6,227
Other income, net .......................... 216 229 618 723
Income (loss) before income taxes .......... (3,488) 2,300 (3,552) 6,950
Provision for (benefit from) income taxes .. (138) 782 (162) 2,433
Net income (loss) $ .................. (3,350) $ 1,518 $ (3,390) $ 4,517
Basic earnings (loss) per share $ .......... (0.45) $ 0.20 $ (0.45) $ 0.61
Diluted earnings (loss) per share .......... $ (0.45) $ 0.20 $ (0.45) $ 0.59
Weighted average number of common shares
outstanding for basic earnings per share 7,483 7,492 7,519 7,347
Incremental shares from assumed conversions
of employee stock options ................ 0 285 0 322
Adjusted weighted average shares for diluted
earnings per share ....................... 7,483 7,777 7,519 7,669
</TABLE>
See accompanying notes to unaudited financial statements
<PAGE>
Integrated Measurement Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except per share data)
<TABLE>
<CAPTION>
As of As of
September 30, December 31,
1998 1997
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................... $ 5,575 $17,464
Short-term investments ....................................... 7,546 8,371
Trade receivables, less allowance for doubtful accounts
of $502 and $577 ..................................... 12,985 10,582
Receivable from Cadence, net ................................. -- 219
Inventories, net ............................................. 15,017 11,311
Income taxes receivable ...................................... 488 336
Deferred income taxes ........................................ 2,288 1,637
Prepaid expenses and other current assets .................... 2,279 2,428
------- -------
Total current assets ................................. 46,178 52,348
Property, plant and equipment, net ........................... 9,647 7,418
Service spare parts, net ..................................... 3,674 3,395
Other assets, net ............................................ 4,086 2,362
------- -------
Total assets ......................................... $63,585 $65,523
------- -------
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................. $ 2,372 $ 2,321
Payable to Cadence, net ...................................... 541 --
Accrued compensation ......................................... 1,341 1,354
Accrued warranty ............................................. 248 442
Deferred revenue ............................................. 1,842 1,852
Other current liabilities .................................... 1,025 475
Capital lease obligations - current .......................... 335 181
------- -------
Total current liabilities .................................... 7,704 6,625
Deferred income taxes ........................................ 984 483
Capital lease obligations, net of current portion ............ 468 152
Deferred compensation ........................................ 952 830
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 7,430,816 and 7,521,393 ....... 74 75
Additional paid-in capital ................................... 39,472 40,037
Retained earnings ............................................ 13,931 17,321
------- -------
Total shareholders' equity ........................... 53,477 57,433
------- -------
Total liabilities and shareholders' equity ........... $63,585 $65,523
------- -------
------- -------
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE>
Integrated Measurement Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net income .................................................... $ (3,390) $ 4,517
Adjustments to reconcile net income to
cash (used in) provided by operating activities:
Acquired in-process research and development ............... 861 --
Depreciation and amortization .............................. 3,089 2,882
Provision for deferred income taxes ........................ (150) (147)
Capital contribution from Cadence .......................... -- 284
Deferred compensation ...................................... 122 197
Net change in payable to or receivable from Cadence ........... 760 2,524
Increase in trade receivables ................................. (2,403) (1,418)
Increase in inventories ....................................... (3,501) (2,396)
Increase (decrease) in prepaid expenses and other current
assets ................................................ 149 (711)
Net change in income taxes payable or receivable .............. (152) 1,304
Increase (decrease) in accounts payable and accrued liabilities 226 (983)
(Decrease) increase in deferred revenue ....................... (10) 97
-------- --------
Net cash (used in) provided by operating activities ........... (4,399) 6,150
-------- --------
Cash flows from investing activities:
Acquisition of PerformIC ...................................... (1,060) --
Purchases of short-term investments ........................... (5,840) (11,311)
Sales of short-term investments ............................... 6,665 --
Purchases of equipment and software ........................... (3,911) (2,779)
Purchases of service spare parts .............................. (782) (1,047)
Software development costs .................................... (1,778) (720)
-------- --------
Net cash used in investing activities ......................... (6,706) (15,857)
-------- --------
Cash flows from financing activities:
Principal payments under capital leases ....................... (136) (206)
Net proceeds from public stock offering ....................... -- 13,367
Proceeds from employee stock plans ............................ 469 834
Repurchase of common stock .................................... (1,117) --
-------- --------
Net cash (used in) provided by financing activities ........... (784) 13,995
-------- --------
Net (decrease) increase in cash and cash equivalents .......... (11,889) 4,288
Beginning cash and cash equivalents balance ................... 17,464 9,545
-------- --------
Ending cash and cash equivalents balance ...................... $ 5,575 $ 13,833
-------- --------
-------- --------
Supplemental Schedule of Non-cash Financing Activities:
Purchase of assets through capital lease ...................... $ 33 $ 59
Tax benefit from Cadence and IMS stock options ................ $ -- $ 1,873
Other Supplemental Cash Flow disclosures:
Income taxes paid ............................................. $ 110 $ 1,275
Interest paid ................................................. $ 19 $ 33
</TABLE>
See accompanying notes to unaudited financial statements.
<PAGE>
Integrated Measurement Systems, Inc.
Notes to the Financial Statements
(In thousands, except share data)
(Unaudited)
(1) Recent Events
On September 3, 1998, the Company acquired all of the assets of PerformIC for
a cash price of $1,435 of which $1,060 has been paid. The remaining $375
will be paid in accordance with the terms of the acquisition agreement
between now and September 3, 1999. PerformIC, located in Dresden, Germany,
is a developer of technologies aimed at addressing the engineering test needs
of memory manufacturers. The transaction was accounted for as a purchase.
In connection with the purchase price allocation, the Company allocated a
portion of the purchase price to acquired in-process research and
development. At that time, the development of these products had not reached
technological feasibility and the technology was believed to have no
alternative future use. In accordance with generally accepted accounting
principals, a one-time charge for in-process research and development of $861
has been reflected in the accompanying Consolidated Statements of Operations
as merger and restructuring costs. In addition, royalties will be payable on
future revenues derived from the acquired technology for up to five years
from the date of acquisition.
The nature of efforts required to develop the purchased in-process technology
into commercially viable products principally relate to the completion of all
planning, designing, prototyping, verification and testing activities that
are necessary to establish that the products can be produced to meet its
design specifications, including functions, features and technical
performance requirements. The Company currently believes that the research
and development efforts will result in commercially feasible products in the
next 12 months at an estimated cost of approximately $1.5 million.
Pro forma combined income statement data for the periods ended September 30,
1998 and 1997 was not materially different from results presented in the
accompanying Consolidated Statements of Operations.
During the third quarter of 1998, the Company implemented a restructuring
plan, including a reduction in the Company's worldwide employee headcount by
approximately 5%, the termination of certain international distributor
agreements, and the establishment of direct sales operations in Europe and
Asia. The restructuring charge of $2,688 consisted of payments in connection
with the termination of distributors, costs to set up direct international
operations as a result of the termination of a support agreement with
Cadence, employee severance, writedowns of inventory made obsolete by the
acquisition of PerformIC, and associated legal and consulting costs. Charges
affecting inventories of $2,041 have been classified in Systems Cost of Sales
in the accompanying Statements of Operations. The remainder of the
restructuring expenses were recorded as merger and restructuring expense in
operating expenses.
The following is an analysis of the restructuring charge and reserves at
September 30, 1998:
<TABLE>
<CAPTION>
<S> <C>
Inventory write-downs $2,041
Employee severance 81
Distributor termination costs & other 566
------
$2,688
------
------
</TABLE>
Approximately $400 of the restructuring costs have not been paid and are
included in other current liabilities in the accompanying Balance Sheets as of
September 30, 1998.
(2) 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>
September 30, December 31,
1998 1997
<S> <C> <C>
Raw materials ............... $10,010 $ 5,780
Work-in-progress ............ 2,926 4,037
Finished goods .............. 2,081 1,494
------- -------
$15,017 $11,311
------- -------
------- -------
</TABLE>
(3) 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 non-owner changes in equity. The only non-owner 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," and foreign
currency translation adjustment resulting from translation of subsidiary
financial statements into US dollars from the local currencies in which the
subsidiary financial statements are maintained. These adjustments were not
<PAGE>
material, and therefore have not been reported separately in the accompanying
financial statements.
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 has had no
impact on the Company's financial position or results of operations.
(4) 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.
Certain reclassifications have been made to prior year amounts to conform to
the current year presentation.
(5) 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 September 30, ...... 1,759,112 31,950
Nine months ended September 30, ....... 1,759,112 17,950
</TABLE>
<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
On September 3, 1998, the Company acquired all of the assets of PerformIC for
a cash price of $1,435 of which $1,060 has been paid. The remaining $375
will be paid in accordance with the terms of the acquisition agreement
between now and September 3, 1999. PerformIC, located in Dresden, Germany, is
a developer of technologies aimed at addressing the engineering test needs of
memory manufacturers. The transaction was accounted for as a purchase. In
connection with the purchase price allocation, the Company allocated a
portion of the purchase price to acquired in-process research and
development. At that time, the development of these products had not reached
technological feasibility and the technology was believed to have no
alternative future use. In accordance with generally accepted accounting
principals, a one-time charge for in-process research and development of $861
has been reflected in the accompanying Consolidated Statements of Operations
as merger and restructuring costs. In addition, royalties will be payable on
future revenues derived from the acquired technology for up to five years
from the date of acquisition.
The nature of efforts required to develop the purchased in-process technology
into commercially viable products principally relate to the completion of all
planning, designing, prototyping, verification and testing activities that
are necessary to establish that the products can be produced to meet its
design specifications, including functions, features and technical
performance requirements. The Company currently believes that the research
and development efforts will result in commercially feasible products in the
next 12 months at an estimated cost of approximately $1.5 million.
Pro forma combined income statement data for the periods ended September 30,
1998 and 1997 was not materially different from results presented in the
accompanying Consolidated Statements of Operations.
During the third quarter of 1998, the Company implemented a restructuring
plan, including a reduction in the Company's worldwide employee headcount by
approximately 5%, the termination of certain international distributor
agreements, and the establishment of direct sales operations in Europe and
Asia. The restructuring charge of $2,688 consisted of payments in connection
with the termination of distributors, costs to set up direct international
operations as a result of the termination of a support agreement with
Cadence, employee severance, writedowns of inventory made obsolete by the
acquisition of PerformIC, and associated legal and consulting costs. Charges
affecting inventories of $2,041 have been classified in Systems Cost of Sales
in the accompanying Consolidated Statements of Operations. The remainder of
the restructuring expenses were recorded as merger and restructuring expense
in operating expenses.
RESULTS OF OPERATIONS
<PAGE>
Three Months Ended September 30, 1998 and 1997
Net Sales
Net sales of $9,473 for the three-month period ended September 30, 1998
reflected a decrease of $2,594 or 21% from the third quarter of 1997.
The decline in net sales reflects a slowdown in capital spending for the
Company's prototype verification systems by certain of the Company's
customers during the third quarter of 1998, as compared to net sales in the
third quarter of 1997. For the third quarter of 1998, one customer accounted
for 11% of net sales. During the third quarter of 1997, two other customers
accounted for 34% and 12% of net sales, respectively. Sales to the Company's
customers in international markets improved significantly, accounting for
$4,847 or 51% of net sales during the third quarter of 1998, compared to
$3,184 or 26% of net sales in the third quarter of 1997.
Systems sales decreased $1,905 or 23% in the third quarter of 1998, as
compared to the third quarter of 1997, primarily due to the slowdown in
capital spending cited above. Software sales increased $108 or 13% in the
three months ended September 30, 1998, from the same period in 1997, due
primarily to increased sales of Virtual Test Software products. Sales of
services declined $797 or 27% during the third quarter of 1998 from the third
quarter of 1997, predominantly because certain Virtual Test consulting
services contracts were completed during the latter part of 1997.
In July 1998, the Company announced the first of a new family of advanced
prototype verification systems, designated ElectraTM, for mixed-signal IC
design verification, characterization, yield enhancement and failure
analysis. In October 1998, the Company announced the availability of
Vanguard-TM-, its new 500 MHz prototype verification system for complex
high-speed digital integrated circuits. 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 $3,926 in the third quarter of 1998 decreased
$4,114 or 51% from $8,040 for the same period of 1997. Contributing to this
decline were charges to Systems Costs of Sales of $2,041 resulting from the
acquisition and restructuring activities discussed above. The remaining
reduction in gross margin resulted primarily from the shortfall in net sales
previously mentioned. As a percentage of net sales, gross margin, excluding the
acquisition and restructuring charges discussed above, was 63% of net sales for
the third quarter of 1998, compared to 67% for the third quarter of 1997. The
drop in gross margin percentage resulted primarily from increased service
cost of sales, while sales of services was lower.
Operating Expenses
Research, development and engineering (R&D) expenses amounted to $1,607 for the
three months ended September 30, 1998, compared to $1,806 for the same period in
1997. R&D expenses amounted to 17% of net sales in the three months ended
September 30, 1998, compared to 15% in the three months ended September 30,
<PAGE>
1997. The increase in R&D spending as a percent of net sales was attributable
to the decline in net sales relative to prior year levels discussed above.
Capitalization of software development costs amounted to $675 during the
third quarter of 1998, compared to $362 during the third quarter of 1997,
reflecting significant investment in software technology to be included in
future new products currently under development. Spending for research and
development is expected to increase beginning in 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 $4,515 for the third quarter of
1998 increased $352 or 8% from $4,163 in the third quarter of 1997. As a
percentage of net sales, selling, general and administrative expense increased
to 48% in the three months ended September 30, 1998 from 35% in the three months
ended September 30, 1997. The increase in selling, general and administrative
expenses as a percent of net sales reflects the decrease in net sales discussed
above, combined with the impact of more expensive commissions to international
distributors during the third quarter of 1998 as a result of the increase in
international 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 slightly to $216 in the three months ended September
30, 1998, from $229 in the quarter ended September 30, 1997, due primarily to
reduced earnings on lower average cash and short-term investment balances.
Income Taxes
The Company's effective tax rate was 4% for the three-month period ended
September 30, 1998 and 34% for the three months ended September 30, 1997. The
lower effective tax rate for the third quarter of 1998 reflects the effect of
losses in certain international tax jurisdictions, combined with the
recording of a valuation allowance against a portion of the anticipated net
operating loss carryforward arising during 1998. This lower tax rate is
anticipated to continue through the end of 1998. In future years, the tax
rate is currently anticipated to be between 30% and 34%, depending primarily
upon the geographic mix of the Company's sales in future periods.
Net Income
As a result of the various factors discussed above, the diluted net loss per
share of $0.45 for the third quarter of 1998 compared to diluted net income per
share of $0.20 in the same period of 1997. Exclusive of the third quarter 1998
charges discussed above relating to the acquisition and restructuring activities
discussed above, the Company would have realized diluted earnings per share of
$0.01 during the third quarter of 1998.
Nine Months Ended September 30, 1998 and 1997
Net Sales
Net sales of $26,372 for the nine-month period ended September 30, 1998
reflected a decrease of $10,001 or 27% from the first nine months of 1997.
<PAGE>
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 nine months of 1998, as compared to the similar period in 1997. Many of
the Company's semiconductor manufacturing customers have reduced, delayed or
frozen capital spending during the first nine months of 1998 due to overall
industry economic conditions. For the first nine months of 1998, the
Company's largest customer accounted for 17% of net sales, compared to 26%
for the same period in 1997.
Systems sales decreased $9,185 or 36% in the nine months ended September 30,
1998, as compared to the nine months ended September 30, 1997, primarily due
to the slowdown in customer capital spending cited above. Software sales
increased $858 or 33% in the first nine months of 1998, from the same period
in 1997, due primarily to an increase sales of Virtual Test Software
products. Sales of services declined $1,674 or 20% during the first nine
months of 1998 from the first nine months 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 $15,162 in the first nine months of 1998
decreased 37% from $23,916 for the same period of 1997, as a direct result of
the decrease in net sales discussed above and the acquisition and
restructuring charges recorded in System Cost of Sales discussed earlier.
Without these charges, the Company's gross margin would have decreased 28%
during the nine months ended September 30, 1998, as compared to the similar
period in 1997. As a percentage of net sales, gross margin, excluding
acquisition and restructuring related charges, decreased to 65% of net sales
for the first nine months of 1998, from 66% of net sales for the first nine
months of 1997. Higher gross margin from sales of prototype verification
systems nearly offset reduced gross margin from sales of services.
Operating Expenses
Research, development and engineering (R&D) expenses amounted to $5,057 for
the nine months ended September 30, 1998, compared to $5,408 for the same
period in 1997. R&D expenses amounted to 19% of net sales in the nine months
ended September 30, 1998, compared to 15% in the nine months ended September
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 nine months of 1998 to $1,778, compared to $720 during the
similar period in 1997, reflecting significant investment in software
technology to be included in products currently under development. The
increase in software capitalization was 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 $12,767 for the first nine
months of 1998 increased $486 or 4% from $12,281 in the first nine months of
1997, as a result of investments in the Company's distribution
infrastructure, combined with increased commissions to international
distributors. As a percentage of net sales, selling, general and
administrative expense increased to 48% in the nine months ended September
30, 1998 from 34% in the nine months ended September 30, 1997. The increase
in selling, general and
<PAGE>
administrative expenses as a percent of net sales reflects the decrease in net
sales discussed above, as well as higher commissions to international
distributors.
Other Income, net
Other income, net, decreased to $618 in the nine months ended September 30,
1998, from $723 in the nine months ended September 30, 1997, primarily due to
the impact of lower pre-tax returns from investments in non-taxable municipal
debt obligations, combined with slightly lower average cash and short-term
investment balances during 1998.
Income Taxes
The Company's effective tax rate was 5% for the nine-month period ended
September 30, 1998 and 35% for the nine months ended September 30, 1997. The
lower effective tax rate for 1998 reflects the effect of losses in certain
international tax jurisdictions, combined with the recording of a valuation
allowance against a portion of the anticipated net operating loss
carryforward arising during 1998. This lower tax rate is anticipated to
continue through the end of 1998. In future years, the tax rate is currently
anticipated to be between 30% and 34%, depending primarily upon the
geographic mix of the Company's sales in future periods.
Net Income
As a result of the various factors discussed above, the diluted net loss per
share of $0.45 for the first nine months of 1998 compared to diluted net income
per share of $0.59 in the same period of 1997. Exclusive of the third quarter
1998 charges discussed above relating to the acquisition and restructuring
activities discussed above, the Company would have essentially broken even for
the first nine months of 1998.
Future Operating Results
Like most high technology companies, the Company faces certain business risks
that could have material 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 any 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 prototype
verification systems which typically range in price from $0.2 to $2.0 million
per 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.
<PAGE>
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 and cyclical
industry, a lengthy sales cycle, foreign currency fluctuations, and changes
in 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 readiness 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 readiness 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 readiness 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. In
addition, the Company has not yet determined a most reasonably likely worst
case scenario relating to Y2K readiness, and has not commenced development of
a contingency plan to address such worst case scenario. At this time, no
assurance can be given that the Company will incur no adverse effects
resulting from such Y2K
<PAGE>
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 September 30, 1998, the Company's principal sources of liquidity consisted
of cash and short-term investments of approximately $13.1 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.
The Company's operating activities used cash during the nine months ended
September 30, 1998 of $4.4 million, compared to providing cash of $6.2 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, combined with increases in inventories associated with new product
introductions in the second half of 1998.
The Company's trade receivables have increased to $13.0 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.
Inventories have grown by $3.5 million during the first nine months 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.
During the first nine months of 1998, the Company invested $6.5 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
made payments of approximately $1.1 million for the acquisition of the
technology and assets of PerformIC.
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
September 30, 1998, this program had resulted in the repurchase of 145,500
shares at a total cost of $1.1 million. This program will continue in future
periods, subject to continued authorization 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.
<PAGE>
PART II OTHER INFORMATION
Item 2. Changes in Securities
During the quarter ended September 30, 1998, the Company made no sales of
securities that were not registered under the Securities Act of 1933.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits (exhibit reference numbers refer to Item 601 of
Regulation S-K)
10. Purchase Agreement between Integrated Measurement Systems S.A. and
Dr. Hans-Martin Muhlhoff (Perform IC)
27. Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended September 30, 1998.
<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 November 16, 1998.
INTEGRATED MEASUREMENT SYSTEMS, INC.
(Registrant)
/s/ KEITH BARNES
-----------------------------------
Keith Barnes
President and Chief Executive Officer
(on behalf of the Registrant)
/s/ FRED HALL
-----------------------------------
Fred Hall
Chief Financial Officer
(as Principal Financial Officer)
<PAGE>
Purchase Agreement between Integrated Measurement Systems Europe S.A. and
Dr. Hans-Martin Muhlhoff (PerformIC)
PURCHASE AGREEMENT
between
Integrated Measurement Systems Europe S.A.
Jambe Ducommun 6 a
CH-2400 Le Locle
in the following referred to as "Purchaser"
and
Dr. Hans-Martin Muhlhoff
Meissner Str. 13
01462 Niederwartha
in the following referred to as "Vendor"
<PAGE>
Vendor developed certain technologies and products as described in Exhibit A (in
the following referred to as "PerformIC memory tester") and is developing
certain related technologies;
and
Purchaser desires to acquire the PerformIC memory tester and the said
technology.
Now, therefore, in consideration of the letter of intent, Purchaser and Vendor
hereby agree on the following purchase agreement ("Agreement"):
SUBJECT OF THE CONTRACT
1.1. The Vendor sells and assigns to the Purchaser the exclusive rights to the
PerformIC memory tester described in Exhibit A, including the source code, know
how, intellectual property rights and the related documentation.
1.2. The vendor sells and assigns to the Purchaser all additional technologies,
in particular the Rambus test technology, and other products developed as per
Closing Date, including the source code, know how, intellectual property rights
and the related documentation.
1.3. The Vendor sells to the Purchaser two PerformIC systems and the assets as
listed separately in Exhibit B and all assets aquired in the course of business
until Closing Date (in the following commonly referred to as "assets").
Transfer of Title
The parties agree herewith on the transfer of titles and rights on Closing Date.
<PAGE>
TRANSFER OF DOCUMENTS for manufacturing of the Tester
The Vendor submits to the Purchaser on Closing Date all written scientific or
technical documents, tabulations, experimental reports, drawing and plans as
well as the systems and prototypes (in the following referred to as
"Documents"), which enables Purchaser to manufacture the PerformIC memory tester
and which are listed in Exhibit C or which are additional written, constucted
etc. until Closing Date.
4. Closing Date
Closing Date will be the 3rd of September 1998.
5. PURCHASE PRICE
5.1. The purchase price for the PerformIC memory tester, the PerformIC systems
and additional technologies including Rambus test technology shall be USD
1,025,000.- payable in three instalments.
The first instalment in the amount of USD 400,000.- shall be payable within 7
days after signature of the Agreement. The second instalment in the amount of
USD 500,000.- shall be payable on Closing Date. The third instalment in the
amount of USD 125,000.- shall be payable at the end of 1998, but not prior to
the complete transfer and acceptance of the sold technologies, including the
Rambus test technology.
In addition Purchaser will pay a commission of 5 % of the net price (end user
price) to the Vendor for any PerformIC systems (Exhibit A) sold by Purchaser or
related companies up to a period of three years from Closing Date.
Furthermore Purchaser will pay a commission of 2.5 % of the net price (end user
price) to the Vendor for any product based on the Rambus test technology sold by
Purchaser or related companies up to a period of five years from Closing Date.
The commission shall be due quarterly at the end of each quarter following
customer acceptance of the system. Any commission has to be paid in USD.
5.2. The purchase price for the assets shall be USD 250,000.-. The purchase
price shall be payable on Closing Date, but not prior to delivery and acceptance
by the Purchaser.
5.3. All payments are payable plus statutory VAT, if applicable.
6. WARRANTY
6.1. Warranty related to section 1 para. 1 and 2
Vendor warrants that Vendor is the owner of all rights, title, and interest in
and to the PerformIC memory tester and the sold technology or has appropriate
licensing rights; in particular the use of the PerformIC memory tester does not
infringe patents, copyrights or other intellectual property rights of third
parties and that there are no claims, disputes, or proceedings pending or
<PAGE>
anticipated which affect either the rights granted to Purchaser hereunder or the
warranties and representation made to Purchaser hereunder.
The Documents (section 3) are complete and correct. The Vendor is liable
for the technical utility and completeness of the Documents. The documents will
enable Purchaser to apply for the respective patents.
6.2. Warranty related to the PerformIC systems and the assets
For the purchase of the two PerformIC systems and the assets the statutory
liability (Sections 459 ff German Civil Code) shall apply.
6.3. Warranty related to Vendor's Employees
Apart from the persons named in Exhibit D, Vendor's employs no employees or
freelancers of any kind (e.g. workers released from their duties, freelance
staff). The information stated in the Exhibit referring to employment contracts,
in particular remuneration, is correct and complete. The information presented
in the Annexes specified, consisting of data material to assessments in the
field of labor law, and hence, in particular, the person's date of birth, date
of appointment, payment on an individual contract basis, and fringe benefits,
is correct and complete. In so far as it is known, correct and complete
information has been supplied of special characteristics (e.g. the condition of
being severely handicapped).
No Commitments for pensions and retirement benefits have been made. No
profit-sharing agreements have been made except for those mentioned in Exhibit
D. All payroll taxes and social security contributions are paid in time.
6.4. General warranties
All assets referred to in this Agreement are the unrestricted property of the
Vendor, are free of third-party rights, and are subject to no restrictions on
disposal.
The Vendor represents that the sold assets are not his sole or nearly sole
property (Section 419 German Civil Code) and the restriction of Section 1365
German Civil Code does not apply.
7. LIABILITY
In case of breach of this Agreement, particulary of warranties as included in
this Agreement a reduction of the purchase price, or a claim for damages can be
asserted exclusively.
The amount of the damages or of reduction of the price will correspond to the
amount that is necessary in order to bring about the state of correctness that
meets the assurance, warranty, or guarantee given; i.e. the expense incurred by
the Purchaser in bringing about the state corresponding to the Agreement or that
is incurred due to the fact that the state corresponding to the Agreement cannot
be brought about, whether in full or in part, temporarily or permanently, is the
expense that has to be refunded .
Guarantee claims can only be enforced under the condition that they exceed the
sum of DM 10,000.- in aggregate; if this is exceeded, however, then they can be
enforced for the full amount.
<PAGE>
With the exception of claims due to fraudulent misrepresentation, claims based
on warranties shall subject to a limitation period of 5 years.
8. CONFIDENTIALITY
Each party shall hold in confidence all materials or information disclosed to it
in confidence hereunder ("Confidential Information") which is marked as
confidential or proprietary, or if disclosed verbally, reduced to writing and
marked confidential within thirty (30) days after the date of disclosure.
Confidential Information shall also include any new product information or the
results of any benchmark or similar tests on the Development Software conducted
by Vendor or divulged by Vendor to Purchaser. Each party agrees to take
precautions to prevent any unauthorised disclosure or use of Confidential
Information consistent with precautions used to protect such party's own
confidential information, but in no event less than reasonable care. The
obligations of the parties hereunder shall not apply to any materials or
information that is or becomes a part of the public domain through no act or
omission of the receiving party or which is independently developed by the
receiving party.
9. EMPLOYEES
The Vendor shall support Purchaser or one of its subsidiaries to hire the four
engineers currently working for the Vendor. Their compensation will be at the
prevailing level in Dresden for comparable jobs.
10. FILING OF PATENT APPLICATIONS
The Vendor shall support Purchaser to file patent applications for the sold
technology after Closing Date as soon as possible. On request of the Purchaser
the Vendor has to file the patent applications in his own name and transfer the
patent and all related documents royalty-free to Purchaser.
Any costs and fees for the registration and the assignment will be borne by
Purchaser.
<PAGE>
11. NON - COMPETITION CLAUSE
11.1. The Vendor shall be refrain from undertaking activities in the area of
business, whether directly or indirectly, in a professional or any other
fashion, on his own account or on that of third parties, and from acquiring a
company that carries out business transactions in this area of business
(competitive company), and from holding stakes in or supporting such a company
in any other fashion; an exception to this will be the acquisition purely for
capital investment purposes of competitive company shares quoted on the stock
exchange. An "area of business" as defined in these provisions is any activity
concerned with the subject of the contract (section 1) or with development of
hardware and software for engineering test stations. Nor, for the duration of
the prohibition of competition, may Vendor publish any of the know how in the
area of business or make it accessible to third parties in any other fashion
unless Purchaser has given his prior consent in writing.
11.2. The prohibitition of competition shall be effective for a term of three
years. It shall commence with Closing Date.
11.3. In geographical terms, the prohibitition of competition shall apply to
all countries to which Purchaser or related companies makes direct deliveries,
and in particular, Germany, Austria, Switzerland, and the Czech Republic.
11.4. In the event of the prohibition of competition being violated, Section
113 HGB (German Commercial Code) shall apply accordingly.
<PAGE>
12. MISCELLANEOUS
12.1 No Assignment. Vendor may not transfer or assign any of the rights arising
from the Agreement without the prior written consent of Purchaser.
12.2. Notices. Any notice required under this Agreement shall be given in
writing and shall be deemed effective upon delivery to the party to whom
addressed by (i) express courier upon written verification of actual receipt or
(ii) facsimile upon confirmation receipt generated by the sending device, with
an original to follow in contractual matter within a week. All notices shall be
sent to the applicable address on the cover page hereof to such other address as
the parties may designate in writing.
12.3. Governing Law. This Agreement shall be governed and interpreted by the
laws of Germany.
12.4. Force Majeure. Neither party shall be liable hereunder by reason of any
failure or delay in the performance of its obligations hereunder (except for the
payment of money) on account of strikes, shortages, failure of suppliers, riots,
insurrection, fires, floods, storms, earthquakes, acts of God, war, governmental
action, labour conditions, or any other cause which is beyond the reasonable
control of such party.
12.5. Entire Agreement. If any portion of this Agreement is determined to be or
becomes unenforceable or illegal, such portion shall be deemed eliminated and
the remainder of this Agreement shall remain in effect. The parties shall
replace the invalid provision(s) with other provision(s) in such way that the
economic result intended by the parties will be maintained. The same applies for
any eventual gap in this Agreement.
No waiver of any breach of this Agreement shall be effective unless in writing,
nor shall any breach constitute a waiver of any subsequent breach of any
provision of this Agreement. This Agreement contains the entire agreement and
understanding between the parties with respect to the subject matter hereof, and
supersedes all prior agreements, negotiations, proposals and communications
between the parties.
12.6. The Effective Date of this Agreement shall be the last executed date.
13. ARBITRATION
All disputes arising out of or in connection with the present agreement,
including any questions regarding its existence, validity or termination, shall
be finally settled by binding arbitration acording to the Arbitration-Agreement,
signed in a separate deed.
<PAGE>
Beaverton, Oregon, May 19, 1998
/ s / Sar Ramadan
Purchaser
Dresden, Germany, May 19, 1998
/ s / Dr. Hans-Martin Muhlhoff
Vendor
<PAGE>
Annex to Purchase Agreement:
The Purchaser is informed that the Vendor received a grant of the Sachsische
Staatsministerium fur Wirtschaft und Arbeit in the amount of DM 478.997,-
(Zuwendungsbescheid vom 9.12.1994). According to the conditions Vendor is only
entitled to dispose the Subject of the contract with prior written approval of
Sachsische Staatsministerium fur Wirtschaft und Arbeit. Both parties are
mutually obliged to obtain such an approval.
Contrary to section 5 para. 1 of the Agreement Purchaser may withhold USD
250.000,- of the second instalment until 14 days after the approval of
Sachsische Staatsministerium fur Wirtschaft und Arbeit, but not longer than 3rd
of September 1999.
If and to the extend the Vendor has to pay back the grant of the Sachsische
Staatsministerium fur Wirtschaft und Arbeit in the amount of DM 478.997,-, the
Purchaser shall reimburse the Vendor one half of the repayment. In any case the
total value of the claim under sentence 1 shall be limited to DM 239.498.
Beaverton, Oregon, May 19, 1998
/s/ Sar Ramadan
Purchaser
Dresden, Germany, May 19, 1998
/s/ Dr. Hans-Martin Muhlhoff
Vendor
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE INCOME
STATEMENT FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1998, AND THE BALANCE
SHEET AS OF SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 5,575
<SECURITIES> 7,546
<RECEIVABLES> 13,487
<ALLOWANCES> 502
<INVENTORY> 15,017
<CURRENT-ASSETS> 46,178
<PP&E> 21,374
<DEPRECIATION> 11,727
<TOTAL-ASSETS> 63,585
<CURRENT-LIABILITIES> 7,704
<BONDS> 468
0
0
<COMMON> 74
<OTHER-SE> 53,403
<TOTAL-LIABILITY-AND-EQUITY> 63,585
<SALES> 19,575
<TOTAL-REVENUES> 26,372
<CGS> 8,239
<TOTAL-COSTS> 11,210
<OTHER-EXPENSES> 19,332
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19
<INCOME-PRETAX> (3,552)
<INCOME-TAX> (162)
<INCOME-CONTINUING> (3,390)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,390)
<EPS-PRIMARY> (.45)
<EPS-DILUTED> (.45)
</TABLE>
