<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JUNE 30,
2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-26274
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INTEGRATED MEASUREMENT SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
OREGON 93-0840631
(State or other jurisdiction of (I.R.S. Employer 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 July 31, 2000, there were 7,879,678 shares of Integrated Measurement Systems,
Inc. common stock, $0.01 par value, outstanding. (Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practicable date.)
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INTEGRATED MEASUREMENT SYSTEMS, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PART 1 FINANCIAL INFORMATION PAGE NUMBER
-----------
<S> <C>
Item 1. Financial Statements
Consolidated Statements of Income for the three months and six months
ended June 30, 2000 and 1999. 3
Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999. 4
Consolidated Statements of Cash Flows for the six months
ended June 30, 2000 and 1999. 5
Notes to the Financial Statements. 6-7
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition. 8-12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk. 12
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders. 13
Item 5. Other Information. 13
Item 6. Exhibits and Reports on Form 8-K. 13
SIGNATURES 14
</TABLE>
2
<PAGE>
INTEGRATED MEASUREMENT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except net income per share)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUE
Systems $ 13,289 $ 9,359 $ 24,870 $ 16,907
Software 1,524 1,578 3,252 2,941
Service 2,543 2,226 4,956 4,537
------------ ------------ ------------ ------------
Net revenue 17,356 13,163 33,078 24,385
------------ ------------ ------------ ------------
COST OF REVENUE:
Systems 5,451 3,458 10,311 6,732
Software 303 223 623 375
Service 1,122 1,212 2,188 2,217
------------ ------------ ------------ ------------
Total cost of revenue 6,876 4,893 13,122 9,324
------------ ------------ ------------ ------------
GROSS MARGIN 10,480 8,270 19,956 15,061
OPERATING EXPENSES:
Research, development and engineering 2,447 2,104 4,692 4,032
Selling, general and administrative 5,598 4,743 10,633 9,076
------------ ------------ ------------ ------------
Total operating expenses 8,045 6,847 15,325 13,108
------------ ------------ ------------ ------------
OPERATING INCOME 2,435 1,423 4,631 1,953
Other income, net 447 68 732 196
------------ ------------ ------------ ------------
Income before provision for income taxes 2,882 1,491 5,363 2,149
Provision for income taxes 922 464 1,716 688
------------ ------------ ------------ ------------
NET INCOME $ 1,960 $ 1,027 $ 3,647 $ 1,461
============ ============ ============ ============
BASIC EARNINGS PER SHARE $ 0.25 $ 0.14 $ 0.47 $ 0.20
============ ============ ============ ============
DILUTED EARNINGS PER SHARE $ 0.23 $ 0.13 $ 0.43 $ 0.19
============ ============ ============ ============
Weighted average number of common shares
outstanding for basic earnings per share 7,828 7,461 7,774 7,455
Incremental shares from assumed conversions
of employee stock options 701 532 805 419
------------ ------------ ------------ ------------
Adjusted weighted average shares for diluted
earnings per share 8,529 7,993 8,579 7,874
============ ============ ============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
3
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INTEGRATED MEASUREMENT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars In thousands, except per share data)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 23,018 $ 7,507
Short-term investments 8,571 15,117
Trade receivables, less allowance for doubtful accounts
of $107 and $257 14,239 13,956
Inventories, net 12,388 13,176
Deferred income taxes 2,662 2,662
Prepaid expenses and other current assets 4,199 3,453
----------------- -----------------
Total Current Assets 65,077 55,871
Property, Plant and Equipment, net 10,239 10,737
Service Spare Parts, net 3,191 2,986
Software Development Costs, net 3,772 3,915
Other Assets, net 662 915
----------------- -----------------
Total Assets $ 82,941 $ 74,424
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,827 $ 1,539
Accrued compensation 2,263 2,608
Accrued warranty 1,650 1,182
Deferred revenue 3,081 2,193
Other current liabilities 987 947
Income taxes payable 1,347 818
Capital lease obligations - current 154 149
----------------- -----------------
Total Current Liabilities 11,309 9,436
Deferred Income Taxes 1,390 1,390
Capital Lease Obligations, net of current portion 135 213
Deferred Compensation 1,701 1,565
Shareholders' Equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized;
none issued and outstanding - -
Common stock, $0.01 par value, 15,000,000 shares authorized;
7,874,756 and 7,588,600 shares issued and outstanding 79 76
Additional paid-in capital 45,109 42,173
Retained earnings 23,218 19,571
----------------- -----------------
Total Shareholders' Equity 68,406 61,820
----------------- -----------------
Total Liabilities and Shareholders' Equity $ 82,941 $ 74,424
================= =================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED BALANCE
SHEETS.
4
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INTEGRATED MEASUREMENT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
2000 1999
----------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,647 $ 1,461
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization 3,327 2,790
Deferred compensation 136 80
Tax benefit from Cadence and IMS stock options 771
(Increase) decrease in assets:
Trade receivables, net (283) 1,287
Inventories, net 788 (247)
Other current assets (815) (470)
Increase (decrease) in liabilities:
Deferred revenue 888 216
Accounts payable and accrued liabilities 480 961
Income taxes payable 529 -
----------------- -----------------
Net cash provided by operating activities 9,468 6,078
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of short-term investments 6,586 2,122
Purchases of short-term investments - (4,148)
Purchases of equipment and service spare parts (1,878) (1,759)
Software development costs capitalized (760) (924)
----------------- -----------------
Net cash provided by (used in) investing activities 3,948 (4,709)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital leases (73) (176)
Proceeds from employee stock plans 2,168 159
----------------- -----------------
Net cash provided by (used in) financing activities 2,095 (17)
----------------- -----------------
Net increase in cash and cash equivalents 15,511 1,352
Beginning cash and cash equivalents balance 7,507 3,379
----------------- -----------------
Ending cash and cash equivalents balance $ 23,018 $ 4,731
================= =================
OTHER SUPPLEMENTAL CASH FLOW DISCLOSURES:
Income taxes (paid) refunded $ (355) $ 102
================= =================
Interest paid $ (14) $ (26)
================= =================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
5
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INTEGRATED MEASUREMENT SYSTEMS, INC.
NOTES TO THE CONSOLIDATED 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, 1999 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,
2000 1999
---------------- ----------------
<S> <C> <C>
Raw materials $ 6,599 $ 7,443
Work-in-progress 3,121 2,184
Finished goods 2,668 3,549
---------------- ----------------
12,388 13,176
================ ================
</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." The following options to
purchase common stock were excluded from the computation of diluted
earnings per share because the options' exercise prices were greater
than the average market price of the common stock and the effect would
have been anti-dilutive.
<TABLE>
<CAPTION>
2000 1999
--------------- ---------------
<S> <C> <C>
Three months ended June 30 126,315 64,430
Six months ended June 30 32,277 181,030
</TABLE>
6
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(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, 2000
<TABLE>
<CAPTION>
Test Systems Virtual Test Consolidated
---------------- ---------------- ----------------
<S> <C> <C> <C>
Segment net revenue $ 16,521 $ 835 $ 17,356
Segment operating income (loss) $ 3,022 $ (587) $ 2,435
</TABLE>
FOR THE THREE MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
Test Systems Virtual Test Consolidated
---------------- ---------------- ----------------
<S> <C> <C> <C>
Segment net revenue $ 12,210 $ 953 $ 13,163
Segment operating income (loss) $ 1,683 $ (260) $ 1,423
</TABLE>
FOR THE SIX MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
Test Systems Virtual Test Consolidated
---------------- ---------------- ----------------
<S> <C> <C> <C>
Segment net revenue $ 31,299 $ 1,779 $ 33,078
Segment operating income (loss) $ 5,574 $ (943) $ 4,631
</TABLE>
FOR THE SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
Test Systems Virtual Test Consolidated
---------------- ---------------- ----------------
<S> <C> <C> <C>
Segment net revenue $ 22,469 $ 1,916 $ 24,385
Segment operating income (loss) $ 2,327 $ (374) $ 1,953
</TABLE>
(5) (5) REVENUE RECOGNITION
Revenue from systems sales and software licenses is generally
recognized as the product ships and when no significant obligations
remain. Contract service and support revenues billed in advance are
recorded as deferred revenue and recognized ratably over the
contractual period as the services and support are performed. Revenue
from other services, such as consulting and training, is recognized as
the related services are performed or when certain milestones are
achieved.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin, or SAB, No. 101 "Revenue Recognition in Financial
Statements." SAB 101 provides guidance for public companies on the
recognition, presentation and disclosure of revenue in their financial
statements. The semiconductor equipment industry and the accounting
profession are currently evaluating SAB 101 and the practical effects
of its implementation are still uncertain. We have historically
recognized revenue at the time our products are shipped which is the
predominant method used by companies in the semiconductor equipment
industry. SAB 101 would require that we recognize revenue at the time a
shipped product has been accepted by a customer. This change in our
revenue recognition policy would have to be reported as a change in
accounting principle effective January 1, 2000. Implementation of this
change has been deferred by the SEC to the fourth quarter of 2000. The
change would result in the restatement of our financial statements for
the quarter and six months ended June 30, 2000, to record a significant
non-operating charge against net income, as of the first day of the
period, reflecting the deferral of revenue for shipments of our
products previously reported as revenue in 1999 which had not been
accepted by customers as of December 31, 1999. This deferred revenue
would be recognized in the period in which formal customer acceptance
has been obtained. The revenue recognized for each of the previously
reported quarters during the year 2000 would be restated accordingly
and could result in revenue recognition occurring outside the quarter
in which product was shipped. While we are still evaluating the
implementation of SAB 101, we believe it will affect the timing and
predictability of ongoing revenue recognition and may require a portion
of our quarterly and annual revenue in 2000 and beyond to be deferred.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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, 1999. 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, 1999, AND THE
COMPANY'S FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 2000.
OVERVIEW
We were founded in 1983 to design and develop integrated circuit validation
systems to test and measure complex electronic devices at the prototype stage.
We were acquired by Valid Logic Systems, Incorporated in 1989 and then by
Cadence in 1991 as a result of the merger of Valid Logic into Cadence. We were
operated as a separate subsidiary of Cadence. In July 1995, we completed our
initial public offering of common stock and in February 1997, completed our
secondary public offering of our common stock. Cadence sold shares in each of
those offerings, and as of June 30, 2000, continues to own approximately 33% of
our common stock.
Our net revenue is comprised of validation systems revenue, software revenue,
including validation systems software and our virtual test software, and service
revenue, which consists primarily of revenue derived from maintenance and
consulting contracts. Revenue from validation systems sales and software
licenses is generally recognized as the product ships and when no significant
obligations remain. Contract service and support revenues billed in advance are
recorded as deferred revenue and recognized ratably over the contractual period
as the services and support are performed. Revenue from other services, such as
consulting and training, is recognized as the related services are performed or
when specified milestones are achieved.
In December 1999, the Securities and Exchange Commission (SEC) released Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance for public companies on the recognition,
presentation and disclosure of revenue in their financial statements. The
semiconductor equipment industry and the accounting profession are currently
evaluating SAB 101 and the practical effects of its implementation are still
uncertain. We have historically recognized revenue at the time our products are
shipped which is the predominant method used by companies in the semiconductor
equipment industry. SAB 101 would require us to recognize revenue at the time a
shipped product has been accepted by a customer. This change in our revenue
recognition policy would have to be reported as a change in accounting
principles effective January 1, 2000. Implementation of this change has been
deferred by the SEC to the fourth quarter of 2000. The change would result in
the restatement of our financial statements for the quarter and six months ended
June 30, 2000 to record a significant non-operating charge against net income,
as of the first day of the period, reflecting the deferral of revenue for
shipments of our products previously reported as revenue in 1999 which had not
been accepted by customers as of December 31, 1999. This deferred revenue would
be recognized in the period in which formal customer acceptance has been
obtained. The revenue recognized for each of the previously reported quarters
during the year 2000 would be restated accordingly and could result in revenue
recognition occurring outside the quarter in which product was shipped. While we
are still evaluating the implementation of SAB 101, we believe it will affect
the timing and predictability of ongoing revenue recognition and may require a
portion of our quarterly and annual revenue in 2000 and beyond to be deferred.
8
<PAGE>
We derive a substantial portion of our net revenue from the sale of validation
systems which typically range in price from $200,000 to $1.8 million per unit
and may be priced as high as $2.3 million for a single unit. As a result, the
receipt of a single order, and the timing of the receipt and shipment of a
single order can have a significant impact on our net revenue and results of
operations for a particular period. In addition, a substantial portion of our
net revenue can be realized during the last few weeks of each quarter. A
significant portion of our operating expenses is relatively fixed in nature, and
planned expenditures are based in part on anticipated orders. As a result, we
may be unable to reduce such expenses in a particular period if our revenue
goals for that period are not met. The inability to reduce spending quickly
enough to compensate for any revenue shortfall would magnify the adverse impact
of such revenue shortfall on our results of operations.
The industries in which we compete and the markets that we serve are highly
cyclical. During recent years, segments of these industries, including the
aerospace, automotive, computer, consumer electronics, data communications,
medical electronics, semiconductor and telecommunications industries, have
experienced significant economic downturns from time to time. The semiconductor
industry is particularly volatile due to rapid technological change, short
product life cycles, fluctuations in manufacturing capacity and pricing and
gross margin pressures. Our operations have in the past and may in the future
fluctuate substantially from period to period as a consequence of industry
patterns like these, or of general economic conditions affecting the timing of
significant orders from customers and other factors affecting capital spending.
RESULTS OF OPERATIONS
NET REVENUE
Net revenue increased 32% to $17.4 million for the three months ended June 30,
2000 from $13.2 million for the second quarter of 1999. Revenue from Intel
accounted for 51% of net revenue down from 55% during the same quarter last
year. Revenue from Level One accounted for 10% of net revenue for the three
months ended June 30, 2000. No other customer accounted for more than 10% of net
revenue during the quarters ended June 30, 2000 and 1999. International revenue
accounted for 16% of net revenue for the quarter ended June 30, 2000, as
compared to 19% for the same quarter in 1999.
Systems revenue increased $3.9 million, or 42%, to $13.3 million for the quarter
ended June 30, 2000 from $9.4 million for the quarter ended June 30, 1999. This
increase is primarily attributable to increased revenue from sales of the
Vanguard logic validation systems and Electra MX mixed-signal validation
systems, both for the quarter and year-to-date.
Software revenue was relatively flat at $1.5 million for the current quarter
ended June 30, 2000 as compared to $1.6 million for the same quarter in 1999.
Lower sales of Virtual Test software accounted for the slight decrease.
Service revenue increased to $2.5 million, or $14%, for the quarter ended June
30, 2000 as compared to $2.2 million for the quarter ended June 30, 1999. This
increase is partially attributable to increased Virtual Test maintenance revenue
as the installed base for that product grows and partially to older generation
products remaining under maintenance contracts longer than planned.
Net revenue for the six months ended June 30, 2000 were $33.1 million compared
to $24.4 million for the same period in 1999, an increase of $8.7 million or
36%. Revenue from Intel accounted for 48% of net revenue for the six months
ended June 30, 2000.
GROSS MARGIN
Gross margin was $10.5 million, or 60.4% of net revenue, in the second quarter
of 2000 and $8.3 million, or 62.8% of net revenue, for the same period of 1999.
As a percentage of net revenue the decrease in gross margin is attributable to
several factors: higher level of shipments of mixed signal products which have
lower gross margins because of significant third party content, net revenue from
higher-margin Virtual Test software representing a
9
<PAGE>
smaller proportion of total net revenue, higher manufacturing overhead,
increased provision for inventory obsolescence and warranty costs, and an
increase in the amortization of capitalized software development costs.
For the six months ended June 30, 2000 gross margin increased to $20.0 million
from $15.1 million for the six months ended June 30, 1999. As a percentage of
revenue, gross margin decreased to 60.3% for the period from 61.8% for the six
months ended June 30, 1999, reflecting the same factors discussed above.
OPERATING EXPENSES
Research, development and engineering (R&D) expenses consist of employee costs,
costs of materials consumed, depreciation of equipment and engineering related
costs net of capitalized software development costs. Net R&D expenses increased
to $2.4 million for the three months ended June 30, 2000 from $2.1 million for
the second quarter of 1999. Net R&D expenses amounted to 14% of net revenue in
the three months ended June 30, 2000, compared to 16% in the three months ended
June 30, 1999. The increase in the dollar amount of net R&D expenses reflects
our continued investment in the development of the new Orion memory validation
systems and a decrease in the amount of software development costs we
capitalized. Software development costs capitalized for the quarter ended June
30, 2000 were $0.4 million as compared to $0.5 million for the same quarter last
year. The amount of amortization of capitalized software development costs
(included in cost of revenue) for the quarter ended June 30, 2000 increased to
$0.4 million from $0.3 million for the same period last year.
For the six months ended June 30, 2000, net R&D expenses increased to $4.7
million from $4.0 million for the same period in 1999. As a percentage of net
revenue, net R&D expenses were 14% for the six months ended June 30, 2000 and
17% for the same period in 1999. The decrease in net R&D expenses as a
percentage of net revenue both for the quarter and year-to-date were directly
attributable to the increase in net revenue discussed above.
Selling, general and administrative (SG&A) expenses of $5.6 million for the
second quarter of 2000 increased 18% from $4.7 million in the same quarter of
1999. As a percentage of net revenue, SG&A expenses decreased to 32% in the
three months ended June 30, 2000 from 36% in the three months ended June 30,
1999. The increase in the dollar amount of SG&A expenses reflects normal annual
salary increases implemented in April 2000, increased sales commissions on
higher sales volumes, and investments in sales and marketing infrastructure.
For the six months ended June 30, 2000 and 1999, SG&A expenses were $10.6
million and $9.1 million respectively. As a percentage of net revenue, SG&A
expenses decreased to 32% for the six months ended June 30, 2000 compared to 37%
for the same period in 1999. The decrease in SG&A expenses as a percent of net
revenue for both the quarter and year-to-date resulted directly from the
increase in net revenue discussed above.
OTHER INCOME, NET
Other income, net, increased to $0.4 million for the three months ended June 30,
2000 from $0.1 million in the quarter ended June 30, 1999 and to $0.7 million
from $0.2 million for the respective six-month periods. The increases were
primarily due to higher average cash and investments balances and to a $0.1
million gain resulting from the translation of foreign denominated receivables
into US dollars.
INCOME TAXES
Our effective tax rate was 32% for the six-month periods ended June 30, 2000 and
1999. Our income tax position includes the effects of available tax benefits in
certain countries where we do business, benefits for available net operating
loss carryforwards, and tax expense for subsidiaries with pre-tax income. While
management currently anticipates our effective tax rate to be approximately 32%
for the year 2000, this rate is sensitive to the geographic and product mix of
our net revenue, and therefore could be higher or lower in the future depending
upon actual net revenue realized.
10
<PAGE>
NET INCOME
As a result of the various factors discussed above, net income for the first
half of 2000 increased to $3.6 million, or 11% of net revenue, and $0.43 per
diluted share compared to $1.5 million, or 6% of net revenue, and $0.19 per
diluted share for the six months ended June 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000, our principal sources of liquidity consisted of cash, cash
equivalents and short-term investments of approximately $31.6 million, and funds
available under an existing bank line of credit of $10.0 million. Cash, cash
equivalents and short-term investments increased by $9.0 million from December
31, 1999. Since 1988, we have relied on cash generated from operations and cash
raised through public stock offerings as our principal source of liquidity.
OPERATING ACTIVITIES
Cash generated from operating activities of $9.5 million increased by $3.4
million for the six month period ended June 30, 2000, from $6.1 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.
Trade receivables increased to $14.2 million at June 30, 2000 from $14.0 million
at December 31, 1999, primarily due to increased sales volume offset by improved
cash collection efforts (marked by a reduction in the days sales outstanding to
74 at June 30, 2000 from 109 at March 31, 2000). Inventories decreased to $12.4
million at June 30, 2000 from $13.2 million at December 31, 1999, as a result of
increased sales volume and focused inventory reduction programs. Deferred
revenue increased to $3.1 million at June 30, 2000 compared to $2.2 million at
December 31, 1999. This increase reflects the normal seasonal increase in
renewals of annual maintenance contracts by customers in the first quarter of
2000.
INVESTING ACTIVITIES
Investing activities provided net cash of $3.9 million for the six months ended
June 30, 2000 and used net cash of $4.7 million for the same period last year.
For the six months ended June 30, 2000, we converted $6.6 million of short-term
investments into cash equivalents, invested $1.4 million in capital
expenditures, $0.5 million in service spare parts and $0.8 million of software
development costs were capitalized.
FINANCING ACTIVITIES
Financing activities provided net cash of $2.1 million for the six-month period
ended June 30, 2000 as compared to using net cash of $17,000 for the comparable
period in 1999. This increase primarily resulted from proceeds generated from
the issuance of stock under our employee stock option and purchase plans
amounting to $2.2 million for the six months ended June 30, 2000 as compared to
$0.2 million for the same period a year ago.
We realized reductions in current income tax liabilities of $0.8 million in the
six months ended June 30, 2000, resulting from the benefit of tax deductions of
employee gains upon exercise of Cadence and our employee stock options. During
the same period in 1999 no such benefits were recorded. The compensation for tax
purposes associated with stock option exercises are typically not treated as
expense for financial reporting purposes, and the exercise of Cadence stock
options does not increase the number of shares of our common stock outstanding.
The tax benefits available from the stock option deduction may decrease in the
future as employee holdings of Cadence stock options decline due to option
exercises and cancellations. Additionally, the timing and magnitude of such
decrease in tax benefits, if realized, is uncertain as the number of employee
stock options which are exercised, and
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<PAGE>
the amount of gains realized upon exercise, will be determined by, among other
factors, fluctuations in the market values of Cadence common stock and our
common stock.
We have obtained a $10.0 million revolving line of credit with U.S. National
Bank of Oregon, which is available for general corporate purposes as needed.
Under the agreement, we can borrow, with interest at the bank's prime lending
rate, or if lower, at certain margins above bankers' acceptance or interbank
offering rates. There have been no borrowings against the line of credit to
date. The term of the agreement ends April 30, 2001.
We believe 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
INTEREST RATE RISK
Our exposure to market risk for changes in interest rates relate primarily to
our investment portfolio. We mitigate our risk by diversifying investments among
high credit quality securities in accordance with our investment policy. As of
June 30, 2000, our investment portfolio includes marketable debt securities of
$23.5 million. These securities are subject to interest rate risk, and will
decline in value if the interest rates increase. Due to the short duration of
our investment portfolio, an immediate 10 percent increase in interest rates
would not have a material effect on our financial condition or the results of
operations.
FOREIGN CURRENCY EXCHANGE RATE RISK
The Euro is the functional currency of our subsidiaries in France, Germany and
Switzerland. The Yen is the functional currency of our subsidiary in Japan. We
maintain cash balances denominated in currencies other than the U.S. Dollar in
order to meet minimum operating requirements of our foreign subsidiaries.
We have limited involvement with derivative financial instruments and do not use
them for trading purposes. Derivatives are used to manage well-defined foreign
currency risks. We enter into forward exchange contracts to hedge the value of
recorded short-term receivables and payables denominated in a foreign currency.
Accordingly, the impact of exchange rates on the forward contracts will be
substantially offset by the impact of such changes on the underlying
transactions. The effect of an immediate 10 percent change in exchange rates on
the forward exchange contracts and the underlying hedged positions denominated
in foreign currencies would not be material to our financial position or the
results of operation.
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PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders held May 16, 2000, 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>
H. Raymond Bingham 6,902,576 0 454,640
Milton R. Smith 6,902,736 0 454,480
Continuing Directors
--------------------
Keith L. Barnes
Thomas R. Franz
Paul A. Gary
C. Scott Gibson
James E. Solomon
</TABLE>
2. A proposal for the approval of an amendment to the Company's 1995 Stock
Incentive Plan (the 1995 Plan) increasing from 2,215,000 shares to
2,587,000 shares the number of shares of Common Stock that are reserved
for issuance under the 1995 Plan was approved by a vote of 3,566,460 for,
2,717,922 opposed, 2,855 abstained and 1,069,979 non-voted by brokers.
3. A proposal for the approval of an amendment to the Company's 1995
Employee Stock Purchase Plan (the 1995 ESPP) increasing from 250,000
shares to 450,000 shares the number of shares of Common Stock that are
reserved for issuance under the 1995 ESPP was approved by a vote of
5,372,467 for, 911,144 opposed, 3,626 abstained and 1,069,979 non-voted
by brokers.
4. A proposal for the ratification of the selection of Arthur Andersen LLP
as independent public accountants for the fiscal year ending December 31,
2000 was approved by a vote of 7,354,997 for, 1,115 opposed and 1,104
abstained.
ITEM 5. OTHER INFORMATION
The Chief Executive Officer, Chief Technology Officer, and Chief Financial
Officer are under a program whereby they intend to sell shares of their
in-the-money stock within a pre-determined range of shares of 20,000 to 50,000
shares, 5,000 to 10,000 shares, and 1,000 to 5,000 shares, respectively, on a
quarterly basis regardless of the market price.
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, 2000.
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 7, 2000.
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INTEGRATED MEASUREMENT SYSTEMS, INC.
(Registrant)
/s/ Fred Hall
-------------------------------------------
Fred Hall
Chief Financial Officer
(on behalf of the Registrant and as
Principal Financial Officer)
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