<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 JUNE 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 (I.R.S. Employer Identification No.)
of 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 July 27, 1999, there were 7,465,825 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
Statements of Operations for the three months and six months
ended June 30, 1999 and 1998. 4
Balance Sheets as of June 30, 1999 and December 31, 1998. 5
Statements of Cash Flows for the six months
ended June 30, 1999 and 1998. 7
Notes to the Financial Statements. 8-9
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition. 10-14
Item 3. Quantitative and Qualitative Disclosures About
Market Risk. 14
PART II OTHER INFORMATION
Item 2. Changes in Securities. 15
Item 4. Submission of Matters to a Vote of Security Holders. 15
Item 6. Exhibits and Reports on Form 8-K. 15
SIGNATURES 17
</TABLE>
2
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3
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTEGRATED MEASUREMENT SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(In thousands, except net income per share)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
SALES:
Systems $ 9,359 $ 4,849 $ 16,907 $ 9,807
Software 1,578 1,202 2,941 2,497
Service 2,226 2,356 4,537 4,595
--------- --------- --------- --------
NET SALES 13,163 8,407 24,385 16,899
--------- --------- --------- --------
COST OF SALES:
Systems 3,458 1,611 6,732 3,340
Software 223 262 375 407
Service 1,212 945 2,217 1,916
--------- --------- --------- --------
TOTAL COST OF SALES 4,893 2,818 9,324 5,663
--------- --------- --------- --------
GROSS MARGIN 8,270 5,589 15,061 11,236
OPERATING EXPENSES:
Research, development and engineering 2,104 1,706 4,032 3,450
Selling, general and administrative 4,743 4,203 9,076 8,252
--------- --------- --------- --------
Total operating expenses 6,847 5,909 13,108 11,702
--------- --------- --------- --------
OPERATING INCOME (LOSS) 1,423 (320) 1,953 (466)
Other income, net 68 184 196 402
--------- --------- --------- --------
Income (loss) before income taxes 1,491 (136) 2,149 (64)
Provision for (benefit from) income taxes 464 (48) 688 (24)
--------- ---------- --------- ---------
NET INCOME (LOSS) $ 1,027 $ (88) $ 1,461 $ (40)
========= ========== ========= =========
BASIC EARNINGS (LOSS) PER SHARE $ 0.14 $ (0.01) $ 0.20 $ (0.01)
========= ========= ========= ========
DILUTED EARNINGS (LOSS) PER SHARE $ 0.13 $ (0.01) $ 0.19 $ (0.01)
========= ========= ========= ========
Weighted average number of common shares
outstanding for basic earnings per share 7,461 7,541 7,455 7,537
Incremental shares from assumed conversions
of employee stock options 532 -- 419 --
--------- --------- --------- -----
Adjusted weighted average shares for diluted
earnings per share. 7,993 7,541 7,874 7,537
========= ========= ========= ========
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED FINANCIAL STATEMENTS.
4
<PAGE>
INTEGRATED MEASUREMENT SYSTEMS, INC. AND SUBSIDIARIES
BALANCE SHEETS
(In thousands, except per share data)
<TABLE>
<CAPTION>
As of As of
June 30, December 31,
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,731 $ 3,379
Short-term investments 9,656 7,630
Trade receivables, less allowance for doubtful accounts
of $267 and $413 12,689 13,977
Inventories, net 15,190 14,943
Deferred income taxes 1,453 1,453
Prepaid expenses and other current assets 2,851 2,381
--------- --------
Total current assets 46,570 43,763
PROPERTY, PLANT AND EQUIPMENT, NET 11,436 11,063
SERVICE SPARE PARTS, NET 3,177 3,692
SOFTWARE DEVELOPMENT COSTS, NET 3,674 3,457
DEFERRED INCOME TAXES 219 219
OTHER ASSETS, NET 1,039 1,220
--------- --------
Total assets $ 66,115 $ 63,414
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,754 $ 1,828
Payable to Cadence, net 433 506
Accrued compensation 1,574 1,718
Accrued warranty 659 296
Deferred revenue 2,224 2,008
Other current liabilities 1,505 1,408
Income taxes payable 989 197
Capital lease obligations - current 293 394
--------- --------
Total current liabilities 9,431 8,355
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION 289 363
DEFERRED COMPENSATION 1,234 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 7,461,754 and 7,425,951 75 74
Additional paid-in capital 39,635 39,478
Retained earnings 15,451 13,990
--------- --------
Total shareholders' equity 55,161 53,542
--------- --------
Total liabilities and shareholders' equity $ 66,115 $ 63,414
========= ========
</TABLE>
5
<PAGE>
SEE ACCOMPANYING NOTES TO UNAUDITED FINANCIAL STATEMENTS.
6
<PAGE>
INTEGRATED MEASUREMENT SYSTEMS, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,461 $ (40)
Adjustments to reconcile net income to
cash provided by (used in) operating activities:
Depreciation and amortization 2,790 2,044
Provision for deferred income taxes -- 104
Deferred compensation 80 218
Decrease (increase) in trade receivables 1,287 (493)
Increase in inventories (247) (3,741)
Increase in other current assets (470) (387)
Increase in deferred revenue 216 618
Decrease in accounts payable and accrued liabilities 961 463
---------- ---------
Net cash provided by (used in) operating activities 6,078 (1,214)
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of short-term investments 2,122 --
Purchases of short-term investments (4,148) (5,840)
Purchases of equipment & service spare parts (1,759) (3,385)
Software development costs (924) (1,103)
---------- ---------
Net cash used in investing activities (4,709) (10,328)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital leases (176) (76)
Proceeds from employee stock plans 159 139
---------- ---------
Net cash (used in) provided by financing activities (17) 63
---------- ---------
Net increase (decrease) in cash and cash equivalents 1,352 (11,479)
Beginning cash and cash equivalents balance 3,379 17,464
---------- ----------
Ending cash and cash equivalents balance $ 4,731 $ 5,985
========== ==========
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Tax benefit from Cadence and IMS stock options $ -- $ 1,135
========== ==========
OTHER SUPPLEMENTAL CASH FLOW DISCLOSURES:
Income taxes refunded (paid) $ 102 $ (107)
=========== ==========
Interest paid $ (26) $ (13)
=========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED FINANCIAL STATEMENTS.
7
<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>
June 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Raw materials....................................... $ 8,827 $ 9,265
Work-in-progress.................................... 2,525 2,608
Finished goods...................................... 3,838 3,070
--------- ---------
$ 15,190 $ 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 June 30,......................... 64,430 1,539,842
Six months ended June 30,........................... 181,030 1,539,842
</TABLE>
8
<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 JUNE 30, 1999
<TABLE>
<CAPTION>
VALIDATION SYSTEMS VIRTUAL TEST CONSOLIDATED
------------------ ------------ -------------
<S> <C> <C> <C>
Segment net sales $ 12,210 $ 953 $ 13,163
Segment operating income (loss) $ 1,683 $ (260) $ 1,423
</TABLE>
FOR THE THREE MONTHS ENDED JUNE 30 , 1998
<TABLE>
<CAPTION>
VALIDATION SYSTEMS VIRTUAL TEST CONSOLIDATED
------------------ ------------ ------------
<S> <C> <C> <C>
Segment net sales $ 7,384 $ 1,023 $ 8,407
Segment operating loss $ (30) $ (290) $ (320)
</TABLE>
FOR THE SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
VALIDATION SYSTEMS VIRTUAL TEST CONSOLIDATED
------------------ ------------ ------------
<S> <C> <C> <C>
Segment net sales $ 22,469 $ 1,916 $ 24,385
Segment operating income (loss) $ 2,327 $ (374) $ 1,953
</TABLE>
FOR THE SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
VALIDATION SYSTEMS VIRTUAL TEST CONSOLIDATED
------------------ ------------ ------------
<S> <C> <C> <C>
Segment net sales $ 14,720 $ 2,179 $ 16,899
Segment operating loss $ (127) $ (339) $ (466)
</TABLE>
(5) NEW ACCOUNTING PRONOUNCEMENTS
In June 1999, the FASB issued Statement of Financial Accountng
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.
9
<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 FORM 10-Q FOR THE PERIOD END MARCH 31, 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 $13,163 for the three months ended June 30, 1999 reflected an
increase of $4,756 or 57% from the second quarter of 1998. The improvement in
net sales, both for the quarter and year-to-date, reflects increased capital
spending by several of the Company's semiconductor customers driving growth
in each of the validation system product families. Digital and mixed signal
validation systems revenues increased over the second quarter of 1998 by 76%
and 75% respectively and the Orion Memory validation system made its first
contribution to revenue in the second quarter of 1999. Sales in North America
increased by 11% to 81% of net sales and international sales declined by 11%
to 19% of net sales in the second quarter of 1999 compared to the same period
in 1998.
Net sales for the six months ended June 30, 1999 were $24,385 compared to
$16,899 for same period in 1998, an increase of $7,486 or 44%. Sales to Intel
accounted for 50% of net sales for the six months ended June 30, 1999,
largely due to demand for the new Vanguard digital validation systems. Sales
to National Semiconductor were 11% of net sales for the first half of 1999.
GROSS MARGIN
The Company's gross margin of $8,270 in the second quarter of 1999 represents
an increase of 48% from $5,589 for the same period of 1998, as a direct
result of the increase in net sales discussed above. As a percentage of net
sales, gross margin decreased to 62.8% for the three months ended June 30,
1999 from 66.5% for the three months ended June 30, 1998. The year-to-year
decrease in gross margin percent was due to several factors. The Company sold
more mixed signal systems in 1999 than in 1998, which have lower gross
margins because of significant third party content. Sales of higher margin
Virtual Test software were a smaller proportion of total net sales, and the
provisions for warranty costs (due to an increase in standard warranty terms
from 90 days to one year) and inventory obsolescence were higher. Gross
margin for the second quarter of 1999 improved more than 2 percentage points
from the first quarter of 1999, reflecting the increase in sales volume from
the newer, stronger margin Vanguard and Orion systems. The gross margin
percentage may improve slightly in future quarters as the higher margin
Vanguard and Orion products increase as a percentage of total sales.
10
<PAGE>
For the six months ended June 30, 1999 gross margin increased by $3,825 or
34% from the same period in 1998. As a percentage of net sales, gross margin
decreased to 61.8% for the period from 66.5% for the six months ended June
30, 1998, reflecting the same factors discussed above.
OPERATING EXPENSES
Research, development and engineering (R&D) expenses increased to $2,104 for
the three months ended June 30, 1999 from $1,706 for the second quarter of
1998. R&D expenses amounted to 16% of net sales in the three months ended
June 30, 1999, compared to 20% in the three months ended June 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
product. Capitalized software development costs and amortization were $470
and $340 respectively for the second quarter of 1999 compared to $576 and
$173 for the same period in 1998. The net increase in capitalized software
was $130 for the three months ending June 30, 1999 compared with $403 for the
same period last year.
For the six months ended June 30, 1999, R&D expenses increased to $4,032 from
$3,450 for the same period in 1998. As a percentage of net sales R&D expenses
were 17% for the six months ended June 30, 1999 and 20% 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
$924 and $707 respectively for the six months ended June 30, 1999 compared with
$1,103 and $364 for the like period in 1998.
Selling, general and administrative (SG&A) expenses of $4,743 for the first
quarter of 1999 were 13% higher than the same quarter in 1998. As a
percentage of net sales, SG&A expenses decreased to 36% in the three months
ended June 30, 1999 from 50% in the three months ended June 30, 1998. The
increase in the dollar amount of SG&A expenses reflect annual salary
increases implemented in April 1999, payment of employee performance bonuses
which were not earned in 1998, and sales commissions on higher sales volumes.
For the six months ended June 30, 1999 and 1998, SG&A expenses were $9,076 and
$8,252 respectively. As a percentage of net sales, SG&A expenses decreased to
37% for the six months ended June 30, 1999 compared to 49% 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.
OTHER INCOME, NET
Other income, net, decreased to $68 in the three months ended June 30, 1999 from
$184 in the quarter ended June 30, 1998 and to $196 from $402 for the respective
six month periods. The decreases were due to lower average cash and short-term
investment balances and to a $60 expense resulting from the translation of
foreign denominated receivables into US dollars.
INCOME TAXES
The Company's effective tax rate was 32% for the six months ended June 30, 1999
and 35% 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
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
11
<PAGE>
As a result of the various factors discussed above, net income for the first
half of 1999 increased to $1,461 or $0.19 per diluted share compared to a loss
of $40 or $0.01 per share for the corresponding period in 1998.
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.
12
<PAGE>
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 is collecting 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 configurations as requested
during the next several quarters. 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
on the majority of the Company's information systems as planned. The balance of
testing and upgrades are on schedule to be completed by September 30, 1999.
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
six month period ending June 30, 1999 were less than $50,000.
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.
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 June 30, 1999, the Company's principal sources of liquidity consisted of
cash and short-term investments of approximately $14.4 million, and funds
available under an existing bank line of credit of $10.0 million. Cash and
short-term investments increased by $3.4 million from December 31, 1998.
The Company's operating activities generated cash during the six months ended
June 30, 1999 of $6.1 million, compared to using cash of $1.2 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. Over 40% of second quarter revenue
came in April and May compared with 15% in the first two months of the
quarter ending March 31, 1999. A large percentage of the April and May
revenue was collected before June 30, 1999.
13
<PAGE>
The Company's trade receivables decreased to $12.7 million at June 30, 1999
from $14.0 million at December 31, 1998, as a result of improved cash
collection efforts combined with a smoother revenue flow. Inventories
increased to $15.2 million at June 30, 1999 from $14.9 million at December 31,
1998. Declines in mainline inventories, as a result of focused inventory
reduction programs, were offset by an increase in the refurbished inventory
pool. Deferred revenue increased to $2.2 million at June 30, 1999 compared to
$2.0 million at December 31, 1998. This increase reflects the normal seasonal
increase in renewals of annual maintenance contracts by customers in the
first quarter of 1999.
During the first half of 1999, the Company continued to invest in equipment and
capitalized software development costs. Purchases of equipment and service spare
parts amounted to $1,759, while capitalization of software development costs
amounted to $924.
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. 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
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
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 not currently hedge certain balance sheet
exposures and intercompany balances against future movements in foreign exchange
rates. 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. During the second quarter in 1999 the US dollar
strengthened against the Euro and Yen which resulted in an expense of $60 on the
translation of foreign denominated receivables. The Company plans to begin
utilizing hedging instruments to mitigate fluctuations in currency exchange
rates, as cash flows become more predictable.
14
<PAGE>
PART II OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
During the quarter ended June 30, 1999, the Company made no sales of
securities that were not registered under the Securities Act of 1933.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders held May 4, 1999, the
stockholders of the Company approved the following matters:
1. The nominees for directors listed below were elected directors
of the Company, each to a three-year term and until their
successors are duly elected and qualified:
<TABLE>
<CAPTION>
ELECTION OF DIRECTORS FOR OPPOSED ABSTAINED
<S> <C> <C> <C>
Thomas R. Franz 6,742,590 0 738,356
Paul A. Gary 6,743,190 0 737,756
James E. Solomon 6,743,190 0 737,756
</TABLE>
2. A proposal for the approval of an amendment to the Company's
1995 Stock Incentive Plan (the 1995 Plan) increasing from
1,995,000 shares to 2,215,000 shares the number of shares of
Common Stock that are reserved for issuance under the 1995 Plan
was approved by a vote of 4,909,184 for, 2,566,587 opposed and
5,475 abstained.
3. A proposal for the ratification of the selection of Arthur
Andersen LLP as independent public accountants for the fiscal
year ending December 31, 1999 was approved by a vote of
7,467,146 for, 13,100 opposed and 700 abstained.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits (exhibit reference numbers refer to Item 601 of Regulation S-K)
27. Financial Data Schedule
(b) Reports on Form 8-K:
No report on Form 8-K was filed during the quarter ended June 30, 1999.
15
<PAGE>
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on August 16, 1999.
INTEGRATED MEASUREMENT SYSTEMS, INC.
(Registrant)
------------------------------------
Fred Hall
Chief Financial Officer
(on behalf of the Registrant and as
Principal Financial Officer)
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FORM THE INCOME
STATEMENT FOR THE SIX- MONTHPERIOD ENDED JUNE 30, 1999, AND THE BALANCE SHEET AS
OF JUNE 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 4,731
<SECURITIES> 9,656
<RECEIVABLES> 12,956
<ALLOWANCES> 267
<INVENTORY> 15,190
<CURRENT-ASSETS> 46,570
<PP&E> 24,964
<DEPRECIATION> 13,528
<TOTAL-ASSETS> 66,115
<CURRENT-LIABILITIES> 9,431
<BONDS> 289
0
0
<COMMON> 75
<OTHER-SE> 55,086
<TOTAL-LIABILITY-AND-EQUITY> 66,115
<SALES> 19,848
<TOTAL-REVENUES> 24,385
<CGS> 7,107
<TOTAL-COSTS> 9,324
<OTHER-EXPENSES> 13,108
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26
<INCOME-PRETAX> 2,149
<INCOME-TAX> 688
<INCOME-CONTINUING> 1,461
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,461
<EPS-BASIC> 0.20
<EPS-DILUTED> 0.19
</TABLE>
