<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, 1999
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 Identification No.)
incorporation or organization)
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 20, 1999, there were 7,536,323 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, 1999 and 1998 3
Consolidated Balance Sheets as of September 30, 1999
and December 31, 1998 4
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1999 and 1998 5
Notes to the Financial Statements 6-7
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 8-13
Item 3. Quantitative and Qualitative Disclosures About
Market Risk. 13
PART II OTHER INFORMATION
- -------------------------------
Item 2. Changes in Securities. 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.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
SALES:
Systems $ 11,598 $ 6,310 $ 28,505 $ 16,117
Software 1,058 961 3,999 3,458
Service 2,239 2,202 6,775 6,797
---------- --------- ---------- --------
NET SALES 14,895 9,473 39,279 26,372
---------- --------- ---------- --------
COST OF SALES:
Systems 4,313 4,339 11,045 7,679
Software 247 153 621 560
Service 1,116 1,055 3,333 2,971
---------- --------- ---------- --------
TOTAL COST OF SALES 5,676 5,547 14,999 11,210
---------- --------- ---------- --------
GROSS MARGIN 9,219 3,926 24,280 15,162
OPERATING EXPENSES:
Research, development and engineering 2,170 1,607 6,202 5,057
Selling, general and administrative 4,940 4,515 14,016 12,767
Merger & restructuring -- 1,508 -- 1,508
---------- --------- ---------- --------
Total operating expenses 7,110 7,630 20,218 19,332
---------- --------- ---------- --------
OPERATING INCOME (LOSS) 2,109 (3,704) 4,062 (4,170)
Other income, net 258 216 454 618
---------- --------- ---------- --------
Income (loss) before income taxes 2,367 (3,488) 4,516 (3,552)
Provision for (benefit from) income taxes 757 (138) 1,445 (162)
--------- ---------- ---------- ---------
NET INCOME (LOSS) $ 1,610 $ (3,350) $ 3,071 $ (3,390)
=========- ========== ========== =========
BASIC EARNINGS (LOSS) PER SHARE $ 0.21 $ (0.45) $ 0.41 $ (0.45)
========== ========= ========== ========
DILUTED EARNINGS (LOSS) PER SHARE $ 0.20 $ (0.45) $ 0.39 $ (0.45)
========== ========= ========== ========
Weighted average number of common shares
outstanding for basic earnings per share 7,502 7,483 7,470 7,519
Incremental shares from assumed conversions
of employee stock options 647 -- 494 --
---------- --------- ---------- --------
Adjusted weighted average shares for diluted
earnings per share. 8,149 7,483 7,964 7,519
========== ========= ========== ========
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED FINANCIAL STATEMENTS.
3
<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,
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,489 $ 3,379
Short-term investments 13,516 7,630
Trade receivables, less allowance for doubtful accounts
of $265 and $413 14,416 13,977
Inventories, net 14,320 14,943
Deferred income taxes 78 1,453
Prepaid expenses and other current assets 3,131 2,381
--------- --------
Total current assets 48,950 43,763
PROPERTY, PLANT AND EQUIPMENT, NET 10,934 11,063
SERVICE SPARE PARTS, NET 3,043 3,692
SOFTWARE DEVELOPMENT COSTS, NET 3,853 3,457
DEFERRED INCOME TAXES 219 219
OTHER ASSETS, NET 920 1,220
--------- --------
Total assets $ 67,919 $ 63,414
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,565 $ 1,828
Payable to Cadence, net 598 506
Accrued compensation 1,477 1,718
Accrued warranty 964 296
Deferred revenue 2,625 2,008
Other current liabilities 1,086 1,408
Income taxes payable 370 197
Capital lease obligations - current 254 394
--------- --------
Total current liabilities 8,939 8,355
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION 251 363
DEFERRED COMPENSATION 1,417 1,154
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 7,533,033 and 7,425,951 75 74
Additional paid-in capital 40,176 39,478
Retained earnings 17,061 13,990
--------- --------
Total shareholders' equity 57,312 53,542
--------- --------
Total liabilities and shareholders' equity $ 67,919 $ 63,414
========= ========
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED FINANCIAL STATEMENTS.
4
<PAGE>
INTEGRATED MEASUREMENT SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,071 $ (3,390)
Adjustments to reconcile net income to
cash provided by (used in) operating activities:
Acquired in-process research and development -- 861
Depreciation and amortization 4,277 3,089
Provision for deferred income taxes 1,375 (150)
Deferred compensation 263 122
Net change in payable to or receivable from Cadence 92 760
Increase in trade receivables (439) (2,403)
Decrease (increase) in inventories 623 (3,501)
(Decrease) increase in prepaid expenses and other current assets (748) 149
Net change in income taxes payable or receivable 173 (152)
(Decrease) increase in accounts payable and accrued liabilities (159) 226
Increase (decrease) in deferred revenue 617 (10)
-------- --------
Net cash provided by (used in) operating activities 9,145 (4,399)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of PerformIC -- (1,060)
Purchases of short-term investments (8,008) (5,840)
Sales of short-term investments 2,122 6,665
Purchases of equipment and service spare parts (2,195) (4,693)
Software development costs (1,401) (1,778)
-------- --------
Net cash used in investing activities (9,482) (6,706)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital leases (252) (136)
Proceeds from employee stock plans 699 469
Repurchase of common stock -- (1,117)
-------- --------
Net cash provided by (used in) financing activities 447 (784)
-------- --------
Net increase (decrease) in cash and cash equivalents 110 (11,889)
Beginning cash and cash equivalents balance 3,379 17,464
-------- --------
Ending cash and cash equivalents balance $ 3,489 $ 5,575
======== ========
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Purchase of assets through capital lease $ -- $ 33
======== ========
OTHER SUPPLEMENTAL CASH FLOW DISCLOSURES:
Income taxes refunded (paid) $ 102 $ (110)
======== ========
Interest paid $ (36) $ (19)
======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED FINANCIAL STATEMENTS.
5
<PAGE>
INTEGRATED MEASUREMENT SYSTEMS, INC.
NOTES TO THE FINANCIAL STATEMENTS
(In thousands, except share data)
(Unaudited)
(1) 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, 1998 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.
(2) INVENTORIES
Inventories, consisting principally of computer hardware, electronic
sub-assemblies and test equipment, are valued at the lower of cost
(first-in, first-out) or market. Costs used for inventory valuation
purposes include material, labor and manufacturing overhead.
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Raw materials. . . . . . . . . . . . . . . . . . . $ 8,108 $ 9,265
Work-in-progress . . . . . . . . . . . . . . . . . 2,721 2,608
Finished goods . . . . . . . . . . . . . . . . . 3,491 3,070
--------- ---------
$ 14,320 $ 14,943
========= =========
</TABLE>
(3) EARNINGS PER SHARE
Earnings per share amounts presented in the accompanying Statements of
Income 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' exercise prices were
greater than the average market price of the common stock.
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Three months ended September 30,. . . . . . . . . . . . . . . 30,750 1,759,112
Nine months ended September 30, . . . . . . . . . . . . . . . . 72,638 1,759,112
</TABLE>
6
<PAGE>
(4) SEGMENT DISCLOSURES
Disclosures about the Company's business segments, as required by SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related
Information," are as follows:
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
VALIDATION VIRTUAL TEST CONSOLIDATED
SYSTEMS
-------------- -------------- ----------------
<S> <C> <C> <C>
Segment net sales $ 14,626 $ 269 $ 14,895
Segment operating income (loss) $ 2,962 $ (853) $ 2,109
</TABLE>
FOR THE THREE MONTHS ENDED SEPTEMBER 30 , 1998
<TABLE>
<CAPTION>
VALIDATION VIRTUAL TEST CONSOLIDATED
SYSTEMS
-------------- -------------- ----------------
<S> <C> <C> <C>
Segment net sales $ 8,665 $ 808 $ 9,473
Segment operating loss $ (3,378) $ (326) $ (3,704)
</TABLE>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
VALIDATION VIRTUAL TEST CONSOLIDATED
SYSTEMS
-------------- -------------- ----------------
<S> <C> <C> <C>
Segment net sales $ 37,094 $ 2,185 $ 39,279
Segment operating income (loss) $ 5,289 $ (1,227) $ 4,062
</TABLE>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
VALIDATION VIRTUAL TEST CONSOLIDATED
SYSTEMS
-------------- -------------- ----------------
<S> <C> <C> <C>
Segment net sales $ 23,385 $ 2,987 $ 26,372
Segment operating loss $ (3,505) $ (665) $ (4,170)
</TABLE>
5) NEW ACCOUNTING PRONOUNCEMENT
In June 1999, the FASB issued Statement of Financial Accounting
Standards No. 137, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 137). SFAS 137 is an amendment to Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS 137 establishes accounting
and reporting standards for all derivative instruments. SFAS 137 is
effective for fiscal years beginning after June 15, 2000. The Company
does not currently have any derivative instruments and, accordingly,
does not expect the adoption of SFAS 137 to have an impact on its
financial position or results of operations.
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 per 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, 1998.
THIS QUARTERLY REPORT, INCLUDING THE FOLLOWING DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTAINS CERTAIN STATEMENTS,
TREND ANALYSIS AND OTHER INFORMATION THAT CONSTITUTE "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995, AS AMENDED, WHICH MAY INVOLVE RISKS AND UNCERTAINTIES. SUCH
FORWARD LOOKING STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO, STATEMENTS
INCLUDING THE WORDS "ANTICIPATE," "BELIEVE," "PLAN," "ESTIMATE," "EXPECT,"
"INTEND" AND OTHER SIMILAR EXPRESSIONS. THE COMPANY'S ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN DUE TO NUMEROUS FACTORS
INCLUDING, BUT NOT LIMITED TO, THOSE DISCUSSED IN THE FOLLOWING DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, AS WELL AS
THOSE DISCUSSED ELSEWHERE HEREIN AND IN THE COMPANY'S ANNUAL REPORT ON FORM
10-K FOR THE YEAR ENDED DECEMBER 31, 1998, AND THE COMPANY'S QUARTERLY
REPORTS ON FORM 10-Q FOR THE PERIODS ENDED MARCH 31 AND JUNE 30, 1999.
RESULTS OF OPERATIONS
NET SALES
Net sales is comprised of engineering validation systems sales, software
sales (including validation systems software and Virtual Test Software) and
service sales, which consists primarily of revenue derived from maintenance
and consulting contracts.
Net sales of $14,895 for the three months ended September 30, 1999 reflected
an increase of $5,422 or 57% from the third quarter of 1998. The increase in
net sales can be attributed to continuing strength in the semiconductor
industry and customer satisfaction with the Vanguard product. The validation
system product mix for third quarter 1999 sales included five Vanguard
digital systems, three Orion Memory systems and two mixed-signal systems. In
addition, sales of older generation ATS and XTS digital validation systems
amounted to $3,000. Sales in North America amounted to 64% of net sales and
international sales amounted to 36% of net sales in the third quarter of 1999
compared to 49% and 51%, respectively, during the same period in 1998. Sales
to Intel amounted to 58% of net sales for the third quarter of 1999, compared
to 7% in the same period of 1998.
Net sales for the nine months ended September 30, 1999 were $39,279 compared
to $26,372 for same period in 1998, an increase of $12,907 or 49%. Sales to
Intel accounted for 53% of net sales for the nine months ended September 30,
1999, largely due to demand for the Vanguard digital validation systems.
GROSS MARGIN
The Company's gross margin increased to $9,219 or 62% of net sales in the
third quarter of 1999, compared to $3,926 or 41% of net sales for the same
period of 1998. This improvement was a direct result of the increase in net
sales discussed above, combined with the impact of charges related to the
acquisition of PerformIC in the amount of $2,041 recorded by the Company as
part of Systems Cost of Sales in the third quarter of 1998. The gross margin
percentage of net sales for the third quarter of 1999 remained essentially
flat compared to the second quarter of 1999. A shortfall in Virtual Test
software revenue, continuing provisions for warranty costs (due to an
increase in standard warranty terms from 90 days to one year), and sales of
lower-margin older generation systems resulted in gross margins below the
prior year level, excluding non-recurring charges. Overall gross margin
percent is expected to remain near the current level during the fourth
quarter of 1999.
For the nine months ended September 30, 1999 gross margin increased to $24,280
or 62% of net sales compared to
8
<PAGE>
$15,162 or 58% of net sales for the same period in 1998, reflecting the same
factors discussed above.
OPERATING EXPENSES
Research, development and engineering (R&D) expenses increased to $2,170 for
the three months ended September 30, 1999 from $1,607 for the third quarter
of 1998. R&D expenses amounted to 15% of net sales in the three months ended
September 30, 1999, compared to 17% in the three months ended September 30,
1998. The increase in the dollar amount of R&D expenses reflects the
Company's investment in the development of the new Orion memory validation
system products. Capitalized software development costs and related
amortization were $477 and $298 respectively for the third quarter of 1999,
compared to $675 and $192, respectively, for the same period in 1998. The net
increase in capitalized software was $179 for the three months ending
September 30, 1999 compared with $483 for the same period last year.
For the nine months ended September 30, 1999, R&D expenses increased to
$6,202 from $5,057 for the same period in 1998 due to the ongoing development
of the Orion memory test validation system. As a percentage of net sales R&D
expenses were 16% for the nine months ended September 30, 1999 and 19% for
the same period in 1998. The decrease in R&D expenses as a percentage of net
sales both for the quarter and year-to-date were directly attributable to the
increase in net sales discussed above. Capitalized software development costs
and amortization were $1,401 and $1,006, respectively, for the nine months
ended September 30, 1999, compared with $1,778 and $556, respectively, for
the like period in 1998.
Selling, general and administrative (SG&A) expenses of $4,940 for the third
quarter of 1999 increased by $425 over the same quarter in 1998. As a
percentage of net sales, SG&A expenses decreased to 33% in the three months
ended September 30, 1999 from 48% in the three months ended September 30,
1998. The increase in the dollar amount of SG&A expenses primarily reflects
payment of sales commissions on higher sales volumes.
For the nine months ended September 30, 1999 and 1998, SG&A expenses were
$14,016 and $12,767 respectively. As a percentage of net sales, SG&A expenses
decreased to 36% for the nine months ended September 30, 1999 compared to 48%
for the same period in 1998. The decrease in SG&A expenses as a percent of
net sales resulted directly from the increase in net sales discussed above.
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 merger and restructuring charge of $1,508 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, and associated legal and
consulting costs, combined with a one-time charge for in-process research and
development of $861 incurred in connection with the acquisition of PerformIC.
OTHER INCOME, NET
Other income, net, increased to $258 in the three months ended September 30,
1999 from $216 in the quarter ended September 30, 1998 reflecting foreign
exchange gains resulting from the translation of foreign denominated
receivables into U.S. dollars. Year to date other income, net was $454 for
1999 and $618 for 1998. The decrease was due primarily to reductions in
investment income due to lower average cash and short-term investment
balances.
INCOME TAXES
The Company's effective tax rate was 32% for the nine months ended September
30, 1999 and 4% for the same period in 1998. The Company's income tax
position includes the effects of available tax benefits in certain countries
where the Company does business, benefits for available net operating loss
carryforwards, and tax
9
<PAGE>
expense for subsidiaries with pre-tax income. The Company's effective tax
rate is sensitive to the geographic and product mix of the Company's net
sales, and therefore could be higher or lower in the future depending upon
actual net sales realized.
NET INCOME
As a result of the various factors discussed above, net income for the first
nine months of 1999 increased to $3,071 or $0.39 per diluted share compared
to a loss of $3,390 or $0.45 per share for the corresponding period in 1998.
10
<PAGE>
FUTURE OPERATING RESULTS
Results of operations for the periods discussed above should not be
considered indicative of the results to be expected in any future period, and
fluctuations in operating results may also result in fluctuations in the
market price of the Company's common stock. Like most high technology and
high growth companies, the Company faces certain business risks that could
have adverse effects on the Company's results of operations.
Sales of the Company's products to Intel and a limited number of other
customers are expected to continue to account for a high percentage of net
sales over the foreseeable future. Any sudden 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.
Like most high technology and high growth companies, the Company faces
certain other business risks that could have adverse effects on the Company's
results of operations, including, but not limited to the following:
The Company is dependent on high-dollar customer orders, deriving a
substantial portion of its net sales from the sale of engineering validation
systems which typically range in price from $0.3 million to over $2.0 million
per unit. A substantial amount of the Company's net sales are typically
realized in the last few days of each quarter. During 1998, the Company's
quarterly net sales were negatively impacted by customer decisions to delay
or cancel plans to place orders for the Company's products in the last few
days of the quarter. The timing and sales price of a single order can have a
significant impact on the Company's net sales and results of operations for a
particular period. The Company's net sales and results of operations may be
negatively impacted if an order is received too late in a given period to
permit product shipment during that period.
A significant portion of the Company's operating expenses is 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 any revenue shortfall on the
Company's results of operations.
The Company purchases some key components from sole or single source vendors,
for which alternative sources are not readily available. A few of these
suppliers are small independent companies and could expose the Company to
increased risk of temporary shortages for certain key components. The
Company's future operating results and financial condition are also subject
to influences driven by rapid technological changes, 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
remain profitable in any future period.
YEAR 2000
The Company has developed its Year 2000 Readiness Plan including 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 continues to collect sufficient
information from each of them to monitor their Year 2000 readiness.
To-date, the Company has completed testing of its currently offered products.
Based on these tests, the Company believes them to be free of any problems
associated with the Year 2000. The Company has tested selected
earlier-version products for Year 2000 readiness, and believes them to be
free of any problems associated with the Year 2000. The Company will continue
to selectively perform Year 2000 readiness testing on specific customer
11
<PAGE>
configurations as requested. Based upon testing to-date, the Company does not
believe additional product testing will result in the discovery of any
materially adverse Year 2000 readiness issues.
The Company has completed review of its Year 2000 readiness with respect to
its information systems. The review has not identified any significant
information systems Year 2000 issues beyond those that will be corrected
through implementation of planned systems upgrades. Vendors for the Company's
information systems have represented those systems, with the planned
upgrades, to be Year 2000 compliant. The Company has completed Year 2000
Readiness testing and upgrades of the Company's information systems as
planned.
The Company estimates the costs in 1998, including payments to third parties
and estimates of internal costs, for developing and implementing its Year
2000 readiness plan were less than $200,000. The Company expects additional
implementation costs in 1999 to be less than $300,000. Costs incurred for the
nine month period ending September 30, 1999 were less than $150,000.
The Company has not developed a most reasonably likely worst case scenario.
However, it is developing contingency plans in the event mission-critical
third-party vendors or other significant third parties fail to adequately
address Year 2000 issues. Such plans principally involve identifying
alternative vendors or, in the extreme, adding inventory safety stocks. There
can be no assurance that any such plans will fully mitigate any such failures
or problems. The Company continues to monitor its mission-critical third
party vendors Year 2000 readiness status and believes they have achieved or
will achieve Year 2000 readiness by December 31, 1999. In addition, there are
mission-critical third parties, such as utilities, transportation and
telecommunication companies where alternative arrangements or sources are
limited or unavailable.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, the Company's principal sources of liquidity
consisted of cash and short-term investments of approximately $17.0 million,
and funds available under an unused existing bank line of credit of $10.0
million. Cash and short-term investments increased by $6.0 million from
December 31, 1998.
The Company's operating activities generated cash during the nine months
ended September 30, 1999 of $9.1 million, compared to using cash of $4.4
million for the same period last year. This improvement in operating cash
flows was primarily attributable to improved operating results and to the
Company's asset management programs aimed at increasing turnover of accounts
receivable and inventories and a smoother revenue flow. During the third
quarter of 1999, 46% of revenue came in July and August, compared with 15% of
revenue in the first two months of the quarter ended March 31, 1999 and 40%
of revenue in the first two months of the quarter ended June 30, 1999. A
significant portion of the receivables associated with July and August
revenue was collected before September 30, 1999.
The Company's trade receivables increased to $14.4 million at September 30,
1999 from $14.0 million at December 31, 1998, as a result of an increase in
quarterly net sales from the fourth quarter of 1998 to the third quarter of
1999 of $4.6 million, mostly offset by the impact of a smoother revenue flow
discussed above. Days sales outstanding in trade receivables were 88 days at
September 30, 1999, compared to 122 days at December 31, 1998. Inventories
decreased to $14.3 million at September 30, 1999 from $14.9 million at
December 31, 1998, as a result of increased sales volume combined with
focused inventory reduction programs. Deferred revenue increased to $2.6
million at September 30, 1999 compared to $2.0 million at December 31, 1998,
due to timing of renewals and billings associated with customer maintenance
contracts.
During the nine months ended September 30, 1999, the Company continued to
invest in equipment and capitalized software development costs. Purchases of
equipment and service spare parts amounted to $2.2 million, while
capitalization of software development costs amounted to $1.4 million.
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
12
<PAGE>
Company's working capital and other cash requirements for at least the next
twelve months. 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. Any transactions resulting
from such opportunities, if consummated, may necessitate funding from other
sources. There can be no assurance that such funding will be available or
that, if available, such funding will be obtainable on terms favorable to the
company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk for changes in interest rates relate
primarily to its investment portfolio. The Company mitigates its risk by
diversifying its investments among high credit quality securities in
accordance with the Company's investment policy.
Interest expense is affected by the general level of U.S. interest rates
and/or LIBOR. Increases in interest expense resulting from an increase in
interest rates would be offset by a corresponding increase in interest earned
on the Company's investments.
The Euro is the functional currency of the Company's subsidiaries in France,
Germany and Switzerland. The Yen is the functional currency of the Company's
subsidiary in Japan. The Company does maintain cash balances denominated in
currencies other than the U.S. Dollar in order to meet minimum operating
requirements of its foreign subsidiaries. The Company plans to begin
utilizing hedging instruments to mitigate fluctuations in currency exchange
rates during the fourth quarter of 1999.
13
<PAGE>
PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
During the quarter ended September 30, 1999, 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
10. (a) Exhibits (exhibit reference numbers refer to Item 601 of
Regulation S-K)
27. Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter ended September
30, 1999.
14
<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 12, 1999.
INTEGRATED MEASUREMENT SYSTEMS, INC.
(Registrant)
/s/ Fred Hall
-------------------------------------
Fred Hall
Chief Financial Officer
(on behalf of the Registrant and as Principal
Financial Officer)
15
<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, 1999, AND THE BALANCE
SHEET AS OF SEPTEMBER 30, 1999, 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 3,489
<SECURITIES> 13,516
<RECEIVABLES> 14,681
<ALLOWANCES> 265
<INVENTORY> 14,320
<CURRENT-ASSETS> 48,950
<PP&E> 25,252
<DEPRECIATION> 14,318
<TOTAL-ASSETS> 67,919
<CURRENT-LIABILITIES> 8,939
<BONDS> 251
0
0
<COMMON> 75
<OTHER-SE> 57,237
<TOTAL-LIABILITY-AND-EQUITY> 67,919
<SALES> 32,504
<TOTAL-REVENUES> 39,279
<CGS> 11,666
<TOTAL-COSTS> 14,999
<OTHER-EXPENSES> 20,218
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 36
<INCOME-PRETAX> 4,516
<INCOME-TAX> 1,445
<INCOME-CONTINUING> 3,071
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,071
<EPS-BASIC> .41
<EPS-DILUTED> .39
</TABLE>
