<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, 2000
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 October 31, 2000, there were 7,943,891 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> <C>
Item 1. Financial Statements
Consolidated Statements of Income for the three months and
nine months ended September 30, 2000 and 1999. 3
Consolidated Balance Sheets as of September 30, 2000
and December 31, 1999. 4
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2000 and 1999. 5
Notes to the Consolidated 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 5. Other Information. 14
Item 6. Exhibits and Reports on Form 8-K. 14
SIGNATURES 15
----------
</TABLE>
2
<PAGE>
INTEGRATED MEASUREMENT SYSTEMS, INC.
Consolidated Statements of Income
(In thousands, except net income per share)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUE
Systems $ 13,730 $ 11,598 $ 38,600 $ 28,505
Software 1,747 1,058 4,999 3,999
Service 2,471 2,239 7,427 6,775
------------ ------------ ------------ ------------
Net revenue 17,948 14,895 51,026 39,279
------------ ------------ ------------ ------------
COST OF REVENUE:
Systems 5,283 4,313 15,594 11,045
Software 338 247 960 621
Service 1,057 1,116 3,246 3,333
------------ ------------ ------------ ------------
Total cost of revenue 6,678 5,676 19,800 14,999
------------ ------------ ------------ ------------
GROSS MARGIN 11,270 9,219 31,226 24,280
OPERATING EXPENSES:
Research, development and engineering 2,596 2,170 7,288 6,202
Selling, general and administrative 5,892 4,940 16,525 14,016
------------ ------------ ------------ ------------
Total operating expenses 8,488 7,110 23,813 20,218
------------ ------------ ------------ ------------
OPERATING INCOME 2,782 2,109 7,413 4,062
Other income, net 399 258 1,131 454
------------ ------------ ------------ ------------
Income before provision for income taxes 3,181 2,367 8,544 4,516
Provision for income taxes 1,018 757 2,734 1,445
------------ ------------ ------------ ------------
NET INCOME $ 2,163 $ 1,610 $ 5,810 $ 3,071
============ ============ ============ ============
BASIC EARNINGS PER SHARE $ 0.27 $ 0.21 $ 0.74 $ 0.41
============ ============ ============ ============
DILUTED EARNINGS PER SHARE $ 0.25 $ 0.20 $ 0.68 $ 0.39
============ ============ ============ ============
Weighted average number of common shares
outstanding for basic earnings per share 7,892 7,502 7,813 7,470
Incremental shares from assumed conversions
of employee stock options 723 647 784 494
------------ ------------ ------------ ------------
Adjusted weighted average shares for diluted
earnings per share 8,615 8,149 8,597 7,964
============ ============ ============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
3
<PAGE>
INTEGRATED MEASUREMENT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars In thousands, except per share data)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
----------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 17,357 $ 7,507
Short-term investments 17,471 15,117
Trade receivables, less allowance for doubtful accounts
of $102 and $257 15,997 13,956
Inventories, net 12,477 13,176
Deferred income taxes 2,662 2,662
Prepaid expenses and other current assets 4,213 3,453
----------------- -----------------
Total Current Assets 70,177 55,871
Property, Plant and Equipment, net 9,993 10,737
Service Spare Parts, net 3,061 2,986
Software Development Costs, net 3,625 3,915
Other Assets, net 528 915
----------------- -----------------
Total Assets $ 87,384 $ 74,424
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 3,300 $ 1,539
Accrued compensation 2,433 2,608
Accrued warranty 1,800 1,182
Deferred revenue 3,453 2,193
Other current liabilities 1,524 947
Income taxes payable 184 818
Capital lease obligations - current 251 149
----------------- -----------------
Total Current Liabilities 12,945 9,436
Deferred Income Taxes 1,390 1,390
Capital Lease Obligations, net of current portion - 213
Deferred Compensation 1,800 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;
7,938,180 and 7,588,600 shares issued and outstanding 79 76
Additional paid-in capital 45,789 42,173
Retained earnings 25,381 19,571
----------------- -----------------
Total Shareholders' Equity 71,249 61,820
----------------- -----------------
Total Liabilities and Shareholders' Equity $ 87,384 $ 74,424
================= =================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
BALANCE SHEETS.
4
<PAGE>
INTEGRATED MEASUREMENT SYSTEMS, INC.
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
2000 1999
----------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,810 $ 3,071
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization 5,119 4,277
Deferred compensation 235 263
Provision for deferred income taxes - 1,375
Tax benefit from IMS stock options 1,198 -
(Increase) decrease in assets:
Trade receivables, net (2,041) (439)
Inventories, net 699 623
Other current assets (760) (748)
Increase (decrease) in liabilities:
Deferred revenue 1,260 617
Accounts payable and accrued liabilities 2,649 (67)
Income taxes payable (634) 173
----------------- -----------------
Net cash provided by operating activities 13,535 9,145
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of short-term investments 9,425 2,122
Purchases of short-term investments (11,779) (8,008)
Purchases of equipment and service spare parts (2,648) (2,195)
Software development costs capitalized (1,126) (1,401)
----------------- -----------------
Net cash used in investing activities (6,128) (9,482)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital leases (111) (252)
Proceeds from employee stock plans 2,554 699
----------------- -----------------
Net cash provided by financing activities 2,443 447
----------------- -----------------
Net increase in cash and cash equivalents 9,850 110
Beginning cash and cash equivalents balance 7,507 3,379
----------------- -----------------
Ending cash and cash equivalents balance $ 17,357 $ 3,489
================= =================
OTHER SUPPLEMENTAL CASH FLOW DISCLOSURES:
Income taxes (paid) refunded $ (2,132) $ 102
================= =================
Interest paid $ (19) $ (36)
================= =================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.
5
<PAGE>
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>
September 30, December 31,
2000 1999
---------------- ----------------
<S> <C> <C>
Raw materials $ 7,063 $ 7,443
Work-in-progress 2,904 2,184
Finished goods 2,510 3,549
---------------- ----------------
$ 12,477 $ 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>
Three months ended September 30 140,727 30,750
Nine months ended September 30 36,305 72,638
</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:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000
Test Systems Virtual Test Consolidated
---------------- ---------------- ----------------
<S> <C> <C> <C>
Segment net revenue $ 16,937 $ 1,011 $ 17,948
Segment operating income (loss) $ 3,117 $ (335) $ 2,782
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
Test Systems Virtual Test Consolidated
---------------- ---------------- ----------------
<S> <C> <C>
Segment net revenue $ 14,626 $ 269 $ 14,895
Segment operating income (loss) $ 2,962 $ (853) $ 2,109
</TABLE>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
Test Systems Virtual Test Consolidated
---------------- ---------------- ----------------
<S> <C> <C> <C>
Segment net revenue $ 48,236 $ 2,790 $ 51,026
Segment operating income (loss) $ 8,691 $ (1,278) $ 7,413
</TABLE>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Test Systems Virtual Test Consolidated
---------------- ---------------- ----------------
<S> <C> <C> <C>
Segment net revenue $ 37,094 $ 2,185 $ 39,279
Segment operating income (loss) $ 5,289 $ (1,227) $ 4,062
</TABLE>
(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. The Company has historically
recognized revenue at the time its products are shipped which is the
predominant method used by companies in the semiconductor equipment
industry. SAB 101 would generally require the Company to recognize
revenue at the time a shipped product has been accepted by a customer.
This change in the Company's 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
the Company's financial statements for the quarter and nine months
ended September 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 the Company's products previously
reported as revenue in 1999 which had not been accepted by customers as
of December 31, 1999. 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 the Company is still evaluating the
implementation of SAB 101, the Company believes it will affect the
timing and predictability of ongoing revenue recognition and may
require a portion of the Company's quarterly and annual revenue in 2000
and beyond to be deferred.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
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 RESULTS OF OPERATIONS AND FINANCIAL
CONDITION, 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 QUARTERLY REPORTS ON FORM 10-Q FOR THE PERIODS ENDED MARCH 31 AND JUNE
30, 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 (Valid Logic) in 1989 and
then by Cadence Design Systems (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 a secondary public offering of our common stock.
Cadence sold shares in each of those offerings, and as of September 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 generally 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 nine months
ended September 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. 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 are 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 20% to $17.9 million for the three months ended September
30, 2000 from $14.9 million for the third quarter of 1999. Revenue in North
America amounted to 66% of net revenue and international revenue amounted to 34%
of net revenue in the third quarter of 2000 compared to 64% and 36%,
respectively, during the same period in 1999. Revenue from Intel accounted for
51% of net revenue down from 58% during the same quarter last year. No other
customer accounted for more than 10% of net revenue during the quarters ended
September 30, 2000 and 1999.
Systems revenue increased $2.1 million, or 18%, to $13.7 million for the quarter
ended September 30, 2000 from $11.6 million for the quarter ended September 30,
1999. Sales of Vanguard logic validation systems, Electra MX mixed signal
validation systems and Orion memory validation systems accounted for the
increase in systems revenue, both for the quarter and year-to-date. The increase
resulted from continued strong demand for capital equipment within the
semiconductor industry.
Software revenue increased 65% to $1.7 million for the quarter ended
September 30, 2000 from $1.0 million for the quarter ended September 30,
1999. Higher sales of Virtual Test software accounted for the increase.
Service revenue increased 10% to $2.5 million for the quarter ended September
30, 2000 as compared to $2.2 million for the quarter ended September 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 nine months ended September 30, 2000 was $51.0 million
compared to $39.3 million for the same period in 1999, an increase of $11.7
million or 30%. Revenue from Intel accounted for 49% of net revenue for the nine
months ended September 30, 2000.
9
<PAGE>
GROSS MARGIN
Gross margin was $11.3 million, or 62.8% of net revenue, in the third quarter of
2000 and $9.2 million, or 61.9% of net revenue, for the same period of 1999. As
a percentage of net revenue, the increase in gross margin is directly
attributable to the increase in net revenue discussed above, primarily because
of the increase in higher-margin Vanguard logic validation systems and Virtual
Test software representing a larger proportion of total net revenue. To a lesser
extent, lower manufacturing overhead and other period costs also contributed to
this improvement.
For the nine months ended September 30, 2000 gross margin increased to $31.2
million from $24.3 million for the nine months ended September 30, 1999. As a
percentage of revenue, gross margin declined slightly to 61.2% for the period
compared to 61.8% for the nine months ended September 30, 1999.
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 $2.6 million for the three months ended September 30, 2000 from $2.2 million
in the third quarter of 1999. Net R&D expenses amounted to 14% of net revenue in
the three months ended September 30, 2000, compared to 15% in the three months
ended September 30, 1999. The increase in the dollar amount of net R&D expenses
reflects our continued investment in the development of the Orion memory
validation systems and a decrease in the amount of software development costs we
capitalized. Capitalized software development costs for the quarter ended
September 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 September
30, 2000 increased to $0.5 million from $0.3 million for the same period last
year.
For the nine months ended September 30, 2000, net R&D expenses increased to $7.3
million from $6.2 million for the same period in 1999. As a percentage of net
revenue, net R&D expenses were 14% for the nine months ended September 30, 2000
and 16% 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 was directly
attributable to the increase in net revenue discussed above.
Selling, general and administrative (SG&A) expenses of $5.9 million for the
third quarter of 2000 increased 19% from $4.9 million for the same period in
1999. As a percentage of net revenue, SG&A expenses in the three months ended
September 30, 2000 were 33% which was unchanged from the three months ended
September 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, investments in sales and marketing
infrastructure and increased distributor commissions on stronger European
revenue.
For the nine months ended September 30, 2000 and 1999, SG&A expenses were $16.5
million and $14.0 million, respectively. As a percentage of net revenue, SG&A
expenses decreased to 32% for the nine months ended September 30, 2000 as
compared to 36% for the same period in 1999. The decrease in SG&A expenses as a
percent of net revenue resulted directly from the increase in net revenue
discussed above.
OTHER INCOME, NET
Other income, net, increased to $0.4 million in the three months ended September
30, 2000 from $0.3 million in the quarter ended September 30, 1999 and to $1.1
million from $0.5 million for the respective nine-month periods. The increases
were primarily due to higher average cash and investments balances.
10
<PAGE>
INCOME TAXES
Our effective tax rate was 32% for the nine-month periods ended September 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 the amount and source of actual net revenue realized.
NET INCOME
As a result of the various factors discussed above, net income for the first
nine months of 2000 increased to $5.8 million, or 11% of net revenue, and $0.68
per diluted share compared to $3.1 million, or 8% of net revenue, and $0.39 per
diluted share for the corresponding period in 1999.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000, our principal sources of liquidity consisted of cash,
cash equivalents and short-term investments of approximately $34.8 million, and
funds available under an unused existing bank line of credit of $10.0 million.
Cash, cash equivalents and short-term investments increased by $12.2 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 $13.5 million increased by $4.4
million for the nine-month period ended September 30, 2000, from $9.1 million
for the same period last year. This improvement in operating cash flows was
primarily attributable to improved operating results and our asset management
programs aimed at increasing turnover of accounts receivable and inventories.
Trade receivables increased to $16.0 million at September 30, 2000 from $14.0
million at December 31, 1999, as a result of increased sales volume and a slight
increase in days sales outstanding to 80 days for the period ended September 30,
2000 as compared to 74 and 75 days sales outstanding for the periods ended June
30, 2000 and December 31, 1999 respectively. Inventories decreased to $12.5
million at September 30, 2000 from $13.2 million at December 31, 1999, as a
result of increased sales volume combined with focused inventory reduction
programs. Deferred revenue increased to $3.5 million at September 30, 2000 as
compared to $2.2 million at December 31, 1999, due to the timing of renewals and
billings associated with customer maintenance contracts.
INVESTING ACTIVITIES
Investing activities used net cash of $6.1 million for the nine months ended
September 30, 2000 and $9.5 million for the same period last year. For the nine
months ended September 30, 2000, we increased our short-term cash investments by
$2.4 million, invested $2.6 million in capital expenditures and service spare
parts and spent $1.1 million on software development costs.
FINANCING ACTIVITIES
Financing activities provided net cash of $2.4 million for the nine months ended
September 30, 2000 compared to $0.4 million for the same 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 $2.6 million for
the nine months ended September 30, 2000 as compared to $0.7 million for the
same period last year.
11
<PAGE>
We realized reductions in current income tax liabilities of $1.2 million in the
nine months ended September 30, 2000, resulting from the benefit of tax
deductions of employee gains upon exercise of 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. 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 the amount of gains realized upon
exercise, will be determined by, among other factors, fluctuations in the market
values of 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 our existing $10.0 million short-term
line of credit, will be sufficient to meet our 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, we have 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 us.
BUSINESS OUTLOOK
THE FOLLOWING STATEMENTS ARE BASED ON CURRENT EXPECTATIONS. THESE STATEMENTS ARE
FORWARD-LOOKING, AND ACTUAL RESULTS MAY DIFFER MATERIALLY.
- We currently believe we will achieve diluted earnings per share
between $0.31 and $0.33 for the fourth quarter of 2000, and between
$1.23 and $1.30 for the 2001 fiscal year. A sudden slowing of demand
would negatively impact these estimates.
- The above earnings estimates are based on the current revenue
recognition policies. Staff Accounting Bulletin No. 101 (SAB 101),
required to be implemented in the fourth calendar quarter of this year,
will generally change the point when revenue is recognized from
shipment to customer acceptance. This will have the effect of
deferring certain systems revenue to subsequent quarters.
- We expect the gross margin for Q4 to be between 62% and 63%,
approximately the same as reported this quarter. For 2001 we expect the
gross margin to be between 63% and 64%. The actual gross margin
percentage is volume and mix sensitive. Should revenues lag behind
expectations or should the mix differ from expectations, the gross
margin percentage may be negatively impacted.
- We expect the effective tax rate to continue to be 32% through the
fourth quarter. For 2001, we expect the effective rate to increase to
34%. If we fail to achieve our growth goals in Europe and Japan, the
effective tax rate could be negatively impacted.
- As a result of our recently announced share repurchase program, we
expect the weighted average shares outstanding to be approximately 8.6
million for the fourth quarter, and 8.5 million for 2001. We expect
other income for those two periods to be approximately $0.4 million and
$1.4 million respectively. Market conditions, share price and interest
rates all could have an impact on these estimates.
12
<PAGE>
Except for the historical information herein, the statements contained in this
Quarterly Report, and particularly in the Business Outlook above, are
forward-looking statements within the meaning of the Securities Litigation
Reform Act of 1995 which are based on current expectations, estimates and
projections about the Company's business, management's beliefs, and assumptions
made by management. These statements are not guarantees of future performance
and involve risks and uncertainties that are difficult to predict. Therefore,
actual outcomes and results may differ materially from what is expressed or
forecasted in such forward-looking statements due to numerous factors, including
those described above and the following: changes in demand for the Company's
products, product mix, the timing of customer orders and deliveries, high
concentration of revenue from a single customer, a disproportionate amount of
orders booked toward the end of any quarter, the impact of competitive products
and pricing, constraints on supplies of critical components, excess or shortage
of production capacity, actual purchases under agreements, difficulties
encountered in the integration of acquired businesses and other risks discussed
from time to time in the Company's Securities and Exchange Commission filings
and reports. In addition, such statements could be affected by general industry
and market conditions and growth rates, and general domestic and international
economic conditions. Such forward-looking statements speak only as of the date
on which they are made and the Company does not undertake any obligation to
update any forward-looking statement to reflect events or circumstances after
the date they are made.
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
September 30, 2000, our investment portfolio includes marketable debt securities
of $28.4 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.
13
<PAGE>
PART II OTHER INFORMATION
.
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 reports on Form 8-K were filed during the quarter ended
September 30, 2000.
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 13, 2000.
INTEGRATED MEASUREMENT SYSTEMS, INC.
(Registrant)
/s/ FRED HALL
------------------------------------
Fred Hall
Chief Financial Officer
(on behalf of the Registrant and as
Principal Financial Officer)
15
