-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, G6saP4KOBB1oM9aOdu2Vzmf0NYmAlad8N5q93qDNHPNLM5n3V5xjEuEvlvbcJMBe gSpHlZo36wbLJd6UiVD61Q== 0000912057-97-001846.txt : 19970128 0000912057-97-001846.hdr.sgml : 19970128 ACCESSION NUMBER: 0000912057-97-001846 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 19970127 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTEGRATED MEASUREMENT SYSTEMS INC /OR/ CENTRAL INDEX KEY: 0000945441 STANDARD INDUSTRIAL CLASSIFICATION: INSTRUMENTS FOR MEAS & TESTING OF ELECTRICITY & ELEC SIGNALS [3825] IRS NUMBER: 930840631 STATE OF INCORPORATION: OR FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-20495 FILM NUMBER: 97511627 BUSINESS ADDRESS: STREET 1: 9525 SW GEMINI DR CITY: BEAVERTON STATE: OR ZIP: 97008 BUSINESS PHONE: 5036267117 MAIL ADDRESS: STREET 1: 9525 SW GEMINI DR CITY: BEAVERTON STATE: OR ZIP: 97008 S-1 1 S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 27, 1997 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ INTEGRATED MEASUREMENT SYSTEMS, INC. (Exact name of registrant as specified in charter) OREGON 3825 93-0840631 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification Number)
9525 S.W. GEMINI DRIVE, BEAVERTON, OREGON 97008 (503) 626-7117 (Address, including zip code and telephone number, including area code, of registrant's principal executive offices) KEITH L. BARNES PRESIDENT AND CHIEF EXECUTIVE OFFICER INTEGRATED MEASUREMENT SYSTEMS, INC. 9525 S.W. GEMINI DRIVE, BEAVERTON, OREGON 97008 (503) 626-7117 (Name, address, including zip code and telephone number, including area code, of agent for service) -------------------------- WITH COPIES TO: WILLIAM C. CAMPBELL, Esq. MARK A. BERTELSEN, Esq. STEPHEN M. GOING, Esq. RICHARD J. HART, Esq. Ater Wynne Hewitt Dodson & Skerritt, LLP BETSEY SUE, Esq. 222 S.W. Columbia, Suite 1800 Wilson Sonsini Goodrich & Rosati Portland, Oregon 97201 Professional Corporation (503) 226-1191 650 Page Mill Road Palo Alto, California 94304 (415) 493-9300
-------------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE. -------------------------- If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / ________ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / ________ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box: / / -------------------------- CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM AGGREGATE TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE OFFERING PRICE AMOUNT OF SECURITIES TO BE REGISTERED BE REGISTERED (1) PER SHARE (2) (1)(2) REGISTRATION FEE Common Stock, $.01 par value.......... 1,725,000 shares $20.00 $34,500,000 $10,455
(1) Includes 225,000 shares subject to the Underwriters' over-allotment option. (2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(c) based on the average of the high and low prices reported on the Nasdaq National Market on January 24, 1997. -------------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. PROSPECTUS (SUBJECT TO COMPLETION) ISSUED JANUARY 27, 1997 1,500,000 SHARES [LOGO] INTEGRATED MEASUREMENT SYSTEMS, INC. COMMON STOCK --------------------- OF THE 1,500,000 SHARES OF COMMON STOCK OFFERED HEREBY, 675,000 SHARES ARE BEING SOLD BY THE COMPANY AND 825,000 SHARES ARE BEING SOLD BY THE SELLING SHAREHOLDER. SEE "PRINCIPAL AND SELLING SHAREHOLDERS." THE COMPANY WILL NOT RECEIVE ANY OF THE PROCEEDS FROM THE SALE OF SHARES BY THE SELLING SHAREHOLDER. THE COMPANY'S COMMON STOCK IS LISTED ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "IMSC." ON JANUARY 24, 1997, THE LAST REPORTED SALE PRICE FOR THE COMPANY'S COMMON STOCK AS REPORTED ON THE NASDAQ NATIONAL MARKET WAS $20 1/2 PER SHARE. SEE "PRICE RANGE OF COMMON STOCK." ------------------------------ THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING ON PAGE 6 HEREOF. --------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ PRICE $ A SHARE ------------------------
UNDERWRITING PROCEEDS TO PRICE TO DISCOUNTS AND PROCEEDS TO SELLING PUBLIC COMMISSIONS (1) COMPANY (2) SHAREHOLDER ------------------ ------------------ ------------------ ------------------ PER SHARE........................... $ $ $ $ TOTAL (3)........................... $ $ $ $
- ------------------------------ (1) THE COMPANY AND THE SELLING SHAREHOLDER HAVE AGREED TO INDEMNIFY THE UNDERWRITERS AGAINST CERTAIN LIABILITIES, INCLUDING LIABILITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED. (2) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY ESTIMATED AT $325,000. (3) THE COMPANY AND THE SELLING SHAREHOLDER HAVE GRANTED TO THE UNDERWRITERS AN OPTION, EXERCISABLE WITHIN 30 DAYS OF THE DATE HEREOF, TO PURCHASE UP TO AN AGGREGATE OF 225,000 ADDITIONAL SHARES AT THE PRICE TO PUBLIC LESS UNDERWRITING DISCOUNTS AND COMMISSIONS FOR THE PURPOSE OF COVERING OVER-ALLOTMENTS, IF ANY. IF THE UNDERWRITERS EXERCISE SUCH OPTION IN FULL, THE TOTAL PRICE TO PUBLIC, UNDERWRITING DISCOUNTS AND COMMISSIONS, PROCEEDS TO COMPANY AND PROCEEDS TO SELLING SHAREHOLDER WILL BE $ , $ , $ AND $ , RESPECTIVELY. SEE "UNDERWRITERS." ------------------------------ THE SHARES ARE OFFERED, SUBJECT TO PRIOR SALE, WHEN, AS AND IF ACCEPTED BY THE UNDERWRITERS NAMED HEREIN AND SUBJECT TO APPROVAL OF CERTAIN LEGAL MATTERS BY WILSON SONSINI GOODRICH & ROSATI, COUNSEL FOR THE UNDERWRITERS. IT IS EXPECTED THAT DELIVERY OF THE SHARES WILL BE MADE ON OR ABOUT , 1997 AT THE OFFICE OF MORGAN STANLEY & CO. INCORPORATED, NEW YORK, N.Y., AGAINST PAYMENT THEREFOR IN IMMEDIATELY AVAILABLE FUNDS. ------------------------ MORGAN STANLEY & CO. INCORPORATED COWEN & COMPANY SOUNDVIEW FINANCIAL GROUP, INC. , 1997 INTEGRATED MEASUREMENT SYSTEMS TEST STATIONS AND TEST SOFTWARE PROVIDE ENGINEERING TEST SOLUTIONS THE ATS FT TEST STATION VERIFIES AND CHARACTERIZES COMPLEX DIGITAL ELECTRONIC DEVICES. [PHOTOS/ART] (1) ATS FT STATION PICTURE The picture portrays two engineers reviewing test results on IMS Flexible Timing Test Station (ATS FT). The picture shows the test station with the test fixture, that contains the device-under-test, on top. The CRT shows the test results in graphic form. (2) DANTES VIRTUAL TEST SCHEMATIC The Schematic illustrates several Virtual Test Software functions. It depicts the test capture and documentation capabilities of Dantes, as well as test simulation and test fixture design features. DANTES VIRTUAL TEST SOFTWARE SIMULATES TEST, FACILITATES TEST FIXTURE DESIGN AND DOCUMENTS THE TEST PROCESS BEFORE PROTOTYPE PRODUCTION. ------------------------ IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK OF THE COMPANY ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10b-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITERS." PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND THE FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. THE COMPANY Integrated Measurement Systems, Inc. ("IMS" or the "Company") designs, manufactures, markets and services a family of versatile, high-performance engineering Test Stations and test software used to test and measure complex electronic devices. In addition, the Company develops, markets and supports a separate line of Virtual Test Software supporting a variety of production testers and simulators that permits design and test engineers to accelerate test program development and to conduct simulated tests of electronic device designs prior to the fabrication of a prototype of the actual device. The Company's products enable its customers to shorten time-to-market, enhance accuracy of design, reduce both the time required to test and the cost of testing the customers' devices and provide reliable and prompt feedback to both design and test engineers. Customers use the Company's products to test complex digital and mixed-signal devices such as microprocessors, microcontrollers, application specific integrated circuits and multi-chip modules. Successful implementation of the Company's strategy to bridge the gap between electronic design automation ("EDA"), on the front end of the integrated circuit development process, and automated test equipment ("ATE"), on the back end of such process, will require continuing product innovation, growth in market share, creating and maintaining strategic relationships, maintaining a high level of customer service and expanding product distribution. The Company markets and supports its products worldwide through a network of direct sales force personnel, independent distributors and dedicated sales agents employed by Cadence Design Systems, Inc. ("Cadence"). The Company has sold over 950 Test Stations to customers in the semiconductor, aerospace, automotive, computer, consumer electronics, datacommunications, medical electronics, network computing, telecommunications and other industries. Based on 1996 net sales, the Company's top five customers are: Intel Corp., Advanced Micro Devices Inc., Tokyo Electron Limited (the Company's distributor in Japan), Rockwell International Corporation and SGS-THOMSON Microelectronics N.V. These five customers represented 57% of net sales for 1996, while 43% of net sales for 1996 came from customers individually accounting for less than 3% of net sales. The Company completed its initial public offering of Common Stock on July 21, 1995 at a price of $11 per share. The Company is currently a majority-owned subsidiary of Cadence and, upon completion of this Offering, Cadence will continue to own approximately 39% of the Company's outstanding Common Stock (37% if the Underwriters' over-allotment option is exercised in full). THE OFFERING Common Stock offered.............................. 1,500,000 shares, including 675,000 shares by the Company and 825,000 shares by the Selling Shareholder Common Stock to be outstanding after the 7,401,257 shares (1)(2) offering.......................................... Use of proceeds................................... For working capital and general corporate purposes. See "Use of Proceeds." Nasdaq National Market symbol..................... IMSC
SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, ------------------------------- 1994 1995 1996 --------- --------- --------- STATEMENT OF INCOME DATA: Net sales........................................................................... $ 30,052 $ 41,093 $ 50,837 Gross margin........................................................................ 17,617 25,327 32,699 Operating income.................................................................... 2,981 5,469 9,495 Net income.......................................................................... 1,910 3,535 6,166 Net income per share (3)............................................................ $ 0.30 $ 0.53 $ 0.88 Weighted average number of common and common equivalent shares outstanding (3)...... 6,366 6,685 7,003
DECEMBER 31, 1996 ---------------------------- ACTUAL AS ADJUSTED(1)(4) --------- ----------------- BALANCE SHEET DATA: Cash and cash equivalents............................................................ $ 9,545 $ 22,262 Total assets......................................................................... 44,314 57,031 Capital lease obligations, net of current portion.................................... 278 278 Shareholders' equity (5)............................................................. 34,859 47,576
- -------------------------- (1) Assumes the Underwriters' over-allotment option is not exercised. See "Underwriters." (2) Based on 6,726,257 shares outstanding as of December 31, 1996. Excludes (i) 861,608 shares of Common Stock issuable upon exercise of outstanding options as of December 31, 1996 at a weighted average exercise price of $10.97, of which 241,698 were then exercisable, (ii) 1,229,776 shares reserved for issuance under the Company's 1995 Stock Incentive Plan and 1995 Stock Option Plan for Nonemployee Directors, and (iii) 231,359 shares reserved for issuance under the Company's 1995 Employee Stock Purchase Plan. (3) For an explanation of the determination of the number of shares used in computing net income per share, see Note 2 of Notes to the Financial Statements. (4) Adjusted to give effect to the sale by the Company of 675,000 shares of Common Stock offered hereby at an assumed public offering price of $20 1/2, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by the Company. See "Use of Proceeds" and "Capitalization." (5) The Company has never declared a cash dividend. See "Dividend Policy." 3 NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, BY THE SELLING SHAREHOLDER OR BY ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES BY ANY PERSON IN ANY JURISDICTION WHERE SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCE CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. ------------------------ TABLE OF CONTENTS
PAGE ----- Prospectus Summary......................................................................................... 3 The Company................................................................................................ 5 Risk Factors............................................................................................... 6 Use of Proceeds............................................................................................ 14 Dividend Policy............................................................................................ 14 Price Range of Common Stock................................................................................ 14 Capitalization............................................................................................. 15 Selected Financial Data.................................................................................... 16 Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 17 Business................................................................................................... 25 Management................................................................................................. 40 Certain Transactions....................................................................................... 50 Principal and Selling Shareholders......................................................................... 53 Description of Capital Stock............................................................................... 55 Shares Eligible for Future Sale............................................................................ 57 Underwriters............................................................................................... 59 Legal Matters.............................................................................................. 60 Experts.................................................................................................... 60 Additional Information..................................................................................... 60 Index to Financial Statements.............................................................................. F-1
------------------------ Test Station Software, Virtual Test Software, ATS FT Test Station, Time Navigator Software, MSTS Test Station, ATS Blazer Test Station, Logic Master XL Test Station, MCM Test Station, Mixed-Signal Test Station, IMS Test Environment, IMS TestVIEW, IMS-LINK, ATE-Link, Dantes and STL are trademarks of the Company. IMS and the IMS logo are registered trademarks of the Company. This Prospectus also includes trademarks and tradenames of companies other than Integrated Measurement Systems, Inc. ------------------------ EXCEPT AS OTHERWISE NOTED HEREIN, ALL INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED. SEE "UNDERWRITERS." 4 THE COMPANY Integrated Measurement Systems, Inc. ("IMS" or the "Company") designs, manufactures, markets and services a family of versatile, high performance engineering test stations and related test software ("Test Stations") used to test and measure complex electronic devices. In addition, the Company develops, markets and supports a separate line of virtual test software ("Virtual Test Software") supporting a variety of production testers and simulators that permits design and test engineers to accelerate test program development and to conduct simulated tests of electronic device designs prior to the fabrication of a prototype of the actual device. The Company's products enable its customers to shorten time-to-market, enhance accuracy of design, reduce both the time required to test and the cost of testing the customers' devices and provide reliable and prompt feedback to both design and test engineers. Customers use the Company's products to test complex digital and mixed-signal devices such as microprocessors, microcontrollers and other logic integrated circuits ("ICs"), application specific integrated circuits ("ASICs") and multi-chip modules ("MCMs"). Since ICs, ASICs and MCMs have become more complex and competition to develop the newest and most powerful designs has become more intense, demand has increased for technologically advanced design, test and manufacturing products that can reduce development and production time and cost and shorten time-to-market for next generation technologies. At the front end of this process, electronic design automation ("EDA") technology has made significant strides in solving design problems by enabling design engineers to develop more accurate, complex and reliable designs, at a much faster pace. On the back end, automated test equipment ("ATE") permits testing of physical devices on the manufacturing floor with high speed and accuracy. The steps between design and production include verifying and characterizing the physical devices in the engineering lab (generally referred to as "engineering test"). The engineering test process represents a substantial part of the entire development cycle for microprocessors, microcontrollers, custom ICs, ASICs and MCMs. Anomalies found within the circuits at this stage can be identified and redesigned, reducing the likelihood that production devices will contain hidden flaws and improving production yields. Minimal hidden flaws and higher yield can translate into the elimination or reduction of product recalls and updates and reduced cost per device. The Company's Test Stations provide cost-effective, easy to use, versatile and interactive systems for engineering verification and characterization, while the Company's Virtual Test Software provides a solution to the problems inherent in developing test programs, designing test fixtures, simulating test processes and documenting the process prior to the fabrication of physical prototypes. IMS works with leading ATE vendors to provide complete Virtual Test Software solutions for integration between design and test and to accelerate test program development. The Company's strategy is to bridge the gap between EDA and ATE and, in particular, to design, develop, manufacture and market innovative, cost-effective, high performance Test Stations and software to increase productivity, accelerate time-to-market for new products and reduce the cost of testing. The key elements of the Company's strategy include providing product innovation, expanding market share, creating and maintaining strategic relationships, maintaining a high level of customer service and expanding product distribution. In marketing its products, the Company targets leading semiconductor and electronic systems companies worldwide. To compete successfully for those markets, IMS bases its marketing strategy on providing complete solutions consisting of products, training, on-site service and support and active customer involvement in the Company's product design and specification process. The Company markets and supports its products worldwide through a network of direct sales force personnel, independent distributors and dedicated agents employed by Cadence Design Systems, Inc. ("Cadence"). Since its inception, the Company has sold over 950 Test Stations to customers in the semiconductor, aerospace, automotive, computer, consumer electronics, datacommunications, medical electronics, network computing, telecommunications and other industries. Based on 1996 net sales, the Company's top five customers are: Intel Corp. ("Intel"), Advanced Micro Devices Inc. ("Advanced Micro Devices"), Tokyo Electron Limited (the Company's distributor in Japan), Rockwell International Corporation ("Rockwell") and SGS - THOMSON Microelectronics N.V. ("SGS - THOMSON"). These five customers represented 57% of net sales for 1996, while 43% of net sales for 1996 came from customers individually accounting for less than 3% of net sales. The Company is currently a 55% owned subsidiary of Cadence. Upon completion of this offering, Cadence will continue to own approximately 39% of the Company's outstanding Common Stock (37% if the Underwriters' over-allotment option is exercised in full). The Company was incorporated in Oregon in 1983. The Company operated as an independent entity until it was acquired by Valid Logic, Inc. ("Valid Logic") in 1989. In 1991, the Company became a wholly-owned subsidiary of Cadence as a result of the merger of Valid Logic with Cadence. Both Cadence and Valid Logic operated the Company as a separate subsidiary. On July 21, 1995, the Company completed an initial public offering of Common Stock, in which 375,000 shares were sold by the Company, and 2,615,000 shares were sold by Cadence, at a price of $11 per share. The Company's executive offices are located at 9525 S.W. Gemini Drive, Beaverton, Oregon 97008, and its telephone number is (503) 626-7117. 5 RISK FACTORS PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS IN ADDITION TO THE OTHER INFORMATION PRESENTED IN THIS PROSPECTUS. THIS PROSPECTUS CONTAINS CERTAIN INFORMATION AND TREND ANALYSIS THAT CONSTITUTE "FORWARD-LOOKING STATEMENTS" AS DEFINED IN SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, WHICH 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 MAY DIFFER MATERIALLY FROM THE RESULTS DESCRIBED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE FOLLOWING RISK FACTORS AND ELSEWHERE IN THIS PROSPECTUS INCLUDING IN MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. FLUCTUATIONS IN OPERATING RESULTS. The Company's results of operations have fluctuated and may continue to fluctuate from period to period, depending on a number of factors including the receipt, timing and shipment of significant orders, the volume and mix of products sold to the Company's customers, the timing of new product introductions, the timing of expenditures in anticipation of future sales, the length of sales cycles and the cyclical nature of high technology industries. The Company derives a substantial portion of its net sales from the sale of Test Stations which typically range in price from $200,000 to $1.2 million per unit and may be priced as high as $1.8 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 the Company's net sales and results of operations for a particular period. In addition, the Company's product sales have fluctuated based on seasonal factors, such as customers' capital budget approval cycles in the first calendar quarter and holidays in Europe and the U.S. during the third calendar quarter, among other factors. As a result, the Company has historically experienced relative declines in product sales for the first and third quarters and relative increases in product sales for the second and fourth quarters. The Company expects that seasonal fluctuations will continue to affect the Company's results of operations in future periods. A significant portion of the Company's operating expenses are relatively fixed in nature, and planned expenditures are based in part on anticipated orders. As a result, the Company may be unable to reduce such expenses in a particular period if the Company's sales 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 the Company's results of operations. In addition, announcements by the Company or its competitors of new products and technologies may cause customers to defer purchases of the Company's existing systems, which could have a material adverse effect on the Company's results of operations. Results of operations in any period should not be considered indicative of the results to be expected for any future period, and fluctuations in operating results may also result in significant fluctuations in the market price of the Company's Common Stock. There can be no assurance that the Company will remain profitable in any future period. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." UNCERTAINTY OF TIMING OF PRODUCT SALES. The Company has traditionally configured Test Stations according to specific customer requirements. During 1996, customers required increasingly large, complex configurations, resulting in longer production cycles. In addition, the timing of customer orders for many high technology companies is typically weighted towards the end of each calendar quarter. As a result, a substantial portion of the Company's net sales are typically realized during the last few weeks of each quarter. The portion of net sales realized during the last month of each quarter during 1996 ranged from 43% to 75% of quarterly net sales, as compared to a range of 44% to 59% of quarterly net sales for each quarter of 1995. As a result, the timing of the receipt and shipment, and the magnitude of the sales price of a single order can have a significant impact on the Company's net sales and results of operations for a particular quarter and the Company's quarterly net sales and results of operations may be negatively impacted if an order is received too late in a given quarter to permit product shipment and the recognition of revenue during that quarter. 6 CUSTOMER CONCENTRATION. A small number of customers accounts for a significant percentage of the Company's sales volume and net sales. The loss of a major customer or a reduction in orders by any such customer, including a reduction due to market or competitive conditions, would have a material adverse effect on the Company's business, financial condition and results of operations. Moreover, the Company's future success will depend in part upon its ability to obtain orders from new customers, as well as the financial condition and success of its customers and the general economy. Based on 1996 net sales, the Company's top five customers are: Intel, Advanced Micro Devices, Tokyo Electron Limited (the Company's distributor in Japan), Rockwell and SGS - THOMSON. These five customers represented 57% of net sales for 1996, while 43% of net sales came from customers individually accounting for less than 3% of net sales. For the years ended December 31, 1994, 1995 and 1996, sales to the Company's top five customers in such years represented 43%, 53% and 57% of net sales, respectively. In addition, sales to Intel represented approximately 22%, 30% and 36% of the Company's net sales, for the years ended December 31, 1994, 1995 and 1996, respectively. Furthermore, in any given quarter net sales to any one of the Company's customers may represent a greater percentage of quarterly net sales than historically recorded for the annual periods noted above. No other customer or distributor accounted for more than 10% of the Company's net sales during the periods indicated. The Company expects that a limited number of customers will continue to account for a high percentage of the Company's net sales for the foreseeable future. See "Business -- Markets and Customers." DEPENDENCE ON SINGLE AND SOLE SOURCE SUPPLIERS. The Company purchases many key components from sole or single source vendors for which alternative sources are not currently available. The inability to develop alternative sources for these single or sole source components or to obtain sufficient quantities of these components could result in delays or reductions in product shipments which would adversely affect the Company's business, financial condition and results of operations. In the event of a reduction or interruption of supply, a significant amount of time, in some cases as much as twelve to twenty-four months, could be required before the Company would begin receiving adequate supplies from such alternative suppliers. In such event, the Company's operating results would be materially adversely affected. In addition, the manufacture of certain of these single or sole source components is extremely complex, and the Company's reliance on the suppliers of these components exposes the Company to potential production difficulties and quality variations, which could negatively impact cost and timely delivery of the Company's Test Stations. For example, the Company depends on a sole sourced custom integrated circuit in one of its Test Stations. In 1994, significant portions of new deliveries of this part did not meet specifications, thereby resulting in Test Stations being unable to detect failures when operating at speeds below 10 MHz. Recently, the Company experienced late delivery of IC components used in the driver module of certain of its Test Stations. In addition, the limits within which these components operated required the Company to change its product specifications for those Test Stations. The Company has thus far avoided any material adverse impact on the timing of customer deliveries for its Test Stations resulting from such supply problems. However, no assurance can be given that supply problems will not recur or, if such problems do recur, that satisfactory solutions would be available. Any prolonged inability to obtain adequate amounts of fully functional components or any other circumstances that would require the Company to seek alternative sources of supply could have a material adverse effect on the Company's business, financial condition and results of operations and relationships with its customers. See "Business -- Manufacturing." TECHNOLOGICAL CHANGE; IMPORTANCE OF TIMELY PRODUCT INTRODUCTION. The market for electronic design and test equipment is characterized by rapid technological change requiring significant expenditures for new product introductions and enhancements to existing products. The Company's ability to remain competitive in this market will depend in significant part upon its ability to successfully develop and introduce new products and enhancements on a timely and cost-effective basis that keep pace with technological developments, evolving industry standards and methodologies, and the increasingly sophisticated needs of the Company's customers. The success of the Company in developing new and enhanced products depends upon a variety of factors, including, but not limited to, its continued ability to adequately fund new product developments, timely and efficiently complete product designs, timely and efficiently implement manufacturing and assembly processes, as well as product performance and acceptance at customer locations. Because commitments to develop new products generally must be made well in advance of sales, 7 new product decisions must anticipate both future demand and the availability of technology to satisfy such demand. Further technological advances, such as the successful introduction by competitors of alternatives to Test Stations or Virtual Test Software, may cause a decline in the demand for and sales of the Company's products. There can be no assurance that the Company will be successful in developing and marketing new products and product enhancements that respond to technological change, evolving industry standards and changing customer requirements; that the Company will not experience difficulties that could delay or prevent the successful development, introduction and marketing of these products; or that its new products and product enhancements will adequately meet the requirements of the marketplace and achieve market acceptance. In particular, the Company's Virtual Test Software alternative to traditional methods of developing test programs for the testing of complex electronic devices on expensive test equipment has not yet achieved widespread market acceptance. In addition, since the original technology underlying Virtual Test Software was first developed by Cadence, expansion of the market will depend on the Company's ability to successfully market services and provide upgrades to its Virtual Test Software, which predominately operates in conjunction with Cadence software tools. Failure of the Company, for technological or other reasons, to develop and introduce new products and product enhancements in a timely and cost-effective manner would have a material adverse effect on the Company's business, financial condition and results of operations. The introduction of products embodying new technologies or changes in industry standards or customer requirements could render the Company's existing products obsolete and unmarketable. There can be no assurance that the announcement of new product offerings or changes in existing product standards will not cause customers to defer purchases of existing Company products, which could adversely affect the Company's results of operations. DEPENDENCE ON THIRD PARTY MANUFACTURERS. The Company relies on a limited number of independent manufacturers, some of which are small, privately held companies, to provide certain components and assemblies made to the Company's specifications and used in the Company's products. In the event that the Company's subcontractors were to experience financial, operational, production or quality assurance difficulties or a catastrophic event that resulted in a reduction or interruption in supply to the Company, the Company's operating results would be materially adversely affected until the Company was able to establish sufficient manufacturing supply from alternative sources. There can be no assurance that alternative manufacturing sources will be able to meet the Company's future requirements or that existing or alternative sources will continue to be available to the Company at favorable prices. See "Business -- Manufacturing." FUTURE CAPITAL NEEDS. Development and manufacture of new Test Stations, enhancements to existing Test Stations and the further development of Virtual Test Software require a substantial investment of funds. The Company expects to require additional capital to fund its working capital needs and expansion of facilities. Additional funds may also be required to satisfy the Company's cash requirements for future generations of products. Possible fluctuations in operating results of the Company may delay the funding of some new products. Such a delay may have a material adverse impact on future operating and financial results. Following the completion of this offering, the Company may be unable to obtain financing on favorable terms due to the change in its relationship with Cadence. See "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Certain Transactions." UNCERTAINTIES WITH RESPECT TO INDEPENDENT CORPORATE STATUS. The Company was independent from its inception in 1983 to February 1989, when it was acquired by Valid Logic. As a subsidiary of Valid Logic, the timing of the Company's new product development and introductions was substantially influenced by the capital needs of Valid Logic, and those decisions affected the Company's financial performance. In 1991, Valid Logic merged with Cadence, and the Company became a wholly-owned subsidiary of Cadence. Cadence currently owns 55% of the Company's outstanding Common Stock. Following this offering, Cadence will continue to own approximately 39% of the Company's Common Stock (37% if the Underwriters' over-allotment option is exercised in full). Due to its ownership history, the Company's operating history during prior periods cannot necessarily be regarded as indicative of the Company's prospects as a fully independent company. For example, the Company may no longer be able to rely on or benefit from its relationship with Cadence to obtain credit or favorable terms of purchase from suppliers. Following the consummation of this offering, the Company will continue to be responsible for the services 8 that were provided by Cadence prior to the Company's initial public offering in July 1995, including legal, tax, risk management and distribution services in a number of markets. In addition, the Company will continue to rely on certain Cadence services provided under Joint Sales Agency and Amended Corporate Services Agreements. For example, the Company currently sells and supports its products in Europe, Israel and Taiwan through 15 Cadence employees located in Cadence facilities and who act as dedicated agents of the Company under the terms of the Amended Corporate Services Agreement. There can be no assurance that the Company will retain the services of such dedicated agents for the term of the Amended Corporate Services Agreement or that replacement personnel could be retained on a timely basis, if at all. The loss of such personnel and the failure to attract and retain replacement employees, or the costs associated with hiring new sales personnel and providing adequate facilities and benefits to such employees would likely have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that the transition to a more independent corporate status will not adversely affect the Company's business, financial condition or results of operations. In addition, the Company's ability to work cooperatively with companies in related industries can be expected to change, to the extent such other companies recognize the change in the Company's relationship with Cadence. The Company could find it more difficult to recruit skilled people or obtain customers to whom the Company's status as a subsidiary of Cadence has been important. No assurance can be given that such factors will not have a material adverse affect on the Company's business, financial condition or results of operations in future periods. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Certain Transactions." HIGHLY COMPETITIVE INDUSTRY. The electronic design and test industries are intensely competitive. The Company faces substantial competition from manufacturers located throughout the world. Certain of the Company's competitors, including, but not limited to, Hewlett-Packard and Teradyne, have substantially greater financial, technical and marketing resources, greater name recognition and a larger installed customer base than the Company. New product introductions or product announcements by the Company's competitors could cause a decline in sales or loss of market acceptance of the Company's existing or future products. Moreover, increased competitive pressure could lead to intensified price-based competition, which could have a material adverse effect on the Company's business, financial condition and results of operations. The Company experiences competition in the verification segment of its business principally from Hewlett-Packard. In the characterization segment of its business, the Company competes with a number of other test companies, including certain ATE companies. In addition, no assurance can be given that other companies, including Cadence, which retains rights to the original technology underlying the Virtual Test Software purchased by the Company, and other EDA companies, will not enter into the Virtual Test Software business. The Company believes that, in order to remain competitive, significant financial investments in new product development and customer service and support will be required. There can be no assurance that the Company will be able to access the necessary financing or to compete successfully in the future. See "Business -- Competition." PRODUCTION AND CUSTOMER ACCEPTANCE OF PRODUCTS. Significant delays have occurred in the past between the Company's introduction of a new system and the commencement by the Company of volume production of such system. No assurance can be given that difficulties will not arise in the future with respect to the introduction and production of the Company's products and that delays in such processes would not adversely affect the Company's business, financial condition and results of operations. The Company believes that continued market acceptance of its current generation Test Stations, and acceptance of its future generation Test Stations, as well as of its Virtual Test Software, are of critical importance to its future financial results. To the extent that these products are not introduced in a timely manner or do not achieve significant sales due to lack of customer acceptance, or if the Company is unable to correct any technical or other difficulties associated with these products or produce the volume of products necessary to satisfy customer demand, or if the introduction and production of its products fails for any other reason, the Company's business, financial condition and results of operations would be materially adversely affected. See "Business -- Research and Development" and " -- Competition." 9 DEPENDENCE ON KEY PERSONNEL. The Company's future operating results depend in significant part upon the continued services of its key technical and senior management personnel. The Company's future operating results also depend in part upon its ability to attract and retain qualified management, technical and sales and support personnel for its operations. Competition for such personnel is intense, and the Company may find it difficult to attract key talent in a timely and efficient manner. Many of the Company's employees continue to hold previously issued options to acquire Cadence Common Stock, which are subject to vesting under Cadence's stock option plans. However, no new Cadence options will be issued to the Company's employees. The loss of any key employee, the failure of any key employee to perform in his or her current position or the Company's inability to attract and retain skilled employees, as needed, could materially adversely affect the Company's business, financial condition and results of operations. See "Business -- Employees" and "Management -- Stock Option Plans -- Cadence Options." PROPRIETARY RIGHTS. The Company's success is heavily dependent upon its proprietary technology. The Company does not currently have any patents and historically has relied principally on trade secret and copyright law to protect its technology. The Company's policy has been to enter into nondisclosure/ confidentiality agreements with its employees, and it generally enters into agreements with third parties that likewise limit access to and distribution of its proprietary information. There can be no assurance that the steps taken by the Company will provide adequate protection of its technology or that competitors will not be able to develop similar or functionally equivalent technology. In the future, the Company may receive notice of claims of infringement of other parties' proprietary rights and there can be no assurance that infringement or invalidity claims (or claims for indemnification resulting from infringement claims against third parties, such as customers) will not be asserted against the Company or that any such assertions will not have a material adverse affect on the Company's business, financial condition or results of operations. Several of the Company's customers have informed the Company that they have received letters from Jerome H. Lemelson alleging that certain equipment used in the manufacture of electronic devices infringes certain patents issued to Mr. Lemelson relating to electronic manufacturing technologies. Such customers may seek indemnification from the Company for any damages and expenses resulting from this matter. If any Company equipment is found to infringe a patent, a court may grant an injunction to prevent making, selling or using the equipment in the United States. In addition, the Company recently received a letter from MTS Systems Corporation demanding that the Company cease using the letters "MTS" to identify its Test Stations, alleging that such use infringed upon MTS Systems' trademark. The Company intends to discontinue using such letters to indentify Test Stations. The Company plans to begin using the letters "MSTS" to identify its Mixed-Signal Test Stations. MTS Systems Corporation has not conceded that the use of the initials "MSTS" will not infringe its trademark. The Company cannot predict the outcome of these or any similar claims or the effect of such claims upon the Company, and there can be no assurance that any such litigation or claim would not have a material adverse effect on the Company's business, financial condition or results of operations. Irrespective of the validity or the success of such claims, the Company could incur significant costs with respect to the defense thereof which could have a material adverse effect on the Company's business, financial condition or results of operations. If any claims or actions are asserted against the Company, the Company may seek to obtain a license of such third party's intellectual property rights. There can be no assurance, however, that under such circumstances, a license would be available under reasonable terms or at all. The Company hires employees who have previously been employed by competitors of the Company, and hires contractors who have previously performed work for competitors of the Company. Some of these competitors include companies with whom the Company has in the past held detailed business discussions, including in-depth due diligence. The Company's policy with respect to such employees and contractors is to assure that they do not work in areas directly equivalent to their former employment for the express duration of any post-employment covenants that such employees and contractors may have with their previous employer, and in general, to require all its employees to adhere to confidentiality obligations owed to their previous employers. There can be no assurance that such policies will be sufficient to prevent claims from being asserted against the Company by previous employers of Company employees or consultants, or that such claims would not ultimately prove successful. Such claims, if made, could have a material adverse effect on the Company's business, financial condition and results of operations. 10 GENERAL ECONOMIC AND MARKET CONDITIONS; CYCLICALITY. The industries in which the Company competes and the markets that it serves are highly cyclical. During recent years, segments of these industries, including the semiconductor, aerospace, automotive, computer, consumer electronics, datacommunications, medical electronics, network computing 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. The Company's operations may in the future experience substantial fluctuations from period to period as a consequence of such industry patterns, general economic conditions affecting the timing of significant orders from customers and other factors affecting capital spending. There can be no assurance that such factors will not have a material adverse effect on the Company's business, financial condition or results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." LENGTHY SALES CYCLE. Sales of the Company's products depend in significant part upon the decision of companies in technology industries to develop and manufacture new electronic devices or to increase manufacturing capacity. As a result, sales of the Company's Test Stations and Virtual Test Software are subject to a variety of factors outside the Company's control, such as general economic downturns. In addition, the decision to purchase the Company's products generally involves a significant commitment of capital, with the attendant delays frequently associated with significant capital expenditures. For these and other reasons, sales of the Company's systems have lengthy sales cycles during which the Company may expend substantial funds and management effort to secure a sale. This subjects the Company to a number of significant risks, including fluctuations in operating results, over which the Company has little control. INTERNATIONAL SALES. International sales accounted for approximately 40%, 32% and 26% of the Company's net sales for the years ended December 31, 1994, 1995 and 1996, respectively, and the Company expects that international sales will continue to account for a significant portion of its net sales in future periods. International sales are subject to certain inherent risks including tariffs, embargoes and other barriers, difficulties in staffing and managing foreign sales and service operations, difficulties in managing distributors, potentially adverse tax consequences, the possibility of difficulty in collecting accounts receivable and potential foreign currency fluctuations. In addition, the Company relies on dedicated agents employed by Cadence for sales in certain international markets. See "Business -- Marketing and Distribution." The Company is also subject to risks associated with legislation and regulations relating to the import or export of high technology products. The implementation or revision of such restrictions may occur without notice to the Company and may have a material adverse impact on the Company's ability to market and sell its products in foreign countries. The export of the Company's products to certain countries is limited by law. The Company cannot predict whether quotas, duties, taxes or other charges or restrictions upon the importation or exportation of the Company's products in the future will be implemented or changed by the United States or any other country. Fluctuations in currency exchange rates could cause the Company's products to become relatively more expensive to customers in a particular country, leading to a reduction in sales or profitability in that country. Furthermore, future international activity may result in higher proportion of foreign currency denominated sales, and in such event gains and losses on the conversion to U.S. dollars arising from international operations may contribute to fluctuations in the Company's results of operations. In addition, international sales typically are adversely affected in the third quarter of each year as many customers and end-users reduce their business activities during the summer months. There can be no assurance that any of these factors will not have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." POSSIBLE VOLATILITY OF STOCK PRICE. The Company's Common Stock has experienced significant price volatility and such volatility may occur in the future, particularly as a result of announcements of developments related to the Company's business, fluctuations in the Company's results of operations and general conditions in the electronic design and test industries, the semiconductor industry or the economy. In addition, in recent years the equity markets in general, and the market for shares of small capitalization 11 stocks in particular, have experienced extreme price fluctuations, which have often been unrelated to the operating performance of affected companies. Such fluctuations could adversely affect the market price of the Company's Common Stock. See "Price Range of Common Stock" and "Underwriters." CONCENTRATION OF STOCK OWNERSHIP. Following the completion of this offering, Cadence will beneficially own approximately 39% (37% assuming the Underwriters' over-allotment option is exercised in full) of the outstanding shares of Common Stock of the Company. Cadence will continue to have considerable representation on the Company's Board of Directors and will continue to have significant influence on the Company's direction. See "Management -- Directors, Executive Officers and Key Employees," "Certain Transactions" and "Principal and Selling Shareholders." DILUTION. Investors participating in this offering will incur immediate and substantial dilution in the net tangible book value of their shares of Common Stock in the amount of approximately $14.31 per share, at an assumed public offering price of $20 1/2 per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by the Company. Additional dilution will occur upon the exercise of outstanding stock options. EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS. Certain provisions of the Company's Restated Articles of Incorporation ("Restated Articles"), Restated Bylaws ("Restated Bylaws") and the Oregon Business Corporation Act will effectively make it more difficult for a third party to acquire control of the Company through either a tender offer or a proxy contest for the election of directors. The Oregon Control Share Act and the Business Combination Act limit the ability of parties who acquire a significant amount of voting stock to exercise control of the Company. In addition, the Company's Restated Articles and Restated Bylaws contain provisions which (i) classify the Board of Directors into three classes, with one class being elected each year, (ii) provide that directors may be removed by shareholders only for cause and only upon the vote of 75% of the votes then entitled to be cast for the election of directors and (iii) permit the Board to establish the rights, preferences and privileges of, and to issue, preferred stock without shareholders' approval. These provisions may have the effect of lengthening the time required for a person to acquire control of the Company through a proxy contest or the election of a majority of the Board of Directors and may deter efforts to obtain control of the Company. See "Description of Capital Stock -- Common Stock" and "-- Oregon Control Share and Business Combination Statutes; Certain Provisions of Restated Articles." ABSENCE OF DIVIDENDS. The Company has not declared or paid dividends on its Common Stock, except for the declaration of a non-cash dividend for the purpose of settling intercompany accounts with Cadence. The Company does not anticipate paying cash dividends with respect to the Common Stock in the foreseeable future. See "Dividend Policy." SHARES ELIGIBLE FOR FUTURE SALE. Sales of the Company's Common Stock in the public market after this offering could adversely affect the market price of the Company's Common Stock. Upon completion of this offering, the Company will have approximately 7,401,257 shares of Common Stock outstanding, of which approximately 4,517,257 shares (approximately 4,742,257 if the Underwriters' over-allotment option is exercised in full) will be freely transferable without restriction or registration under the Securities Act of 1933, as amended (the "Securities Act"), unless such shares are held by "affiliates" of the Company, as that term is defined in Rule 144 under the Securities Act. Upon completion of this offering, Cadence will continue to hold approximately 2,884,000 shares (2,759,000 shares if the Underwriters' over-allotment option is exercised in full), and will be eligible to sell these shares in the public market pursuant to Rule 144, subject to certain contractual restrictions on resale, including lock-up agreements under which the Company, officers and directors of the Company and the Selling Shareholder have agreed, subject to certain exceptions, not to sell or otherwise dispose of any of their shares for a period of 90 days after the date of this Prospectus. However, Morgan Stanley & Co. Incorporated may, in its sole discretion, at any time without notice, release all or any portion of the shares subject to lock-up agreements. In addition, Cadence will have certain rights with respect to registration of such shares of Common Stock for sale to the public. Sales of Common Stock by Cadence in the public market, or the availability of such shares for sale, could adversely affect the market price of the Common Stock. In addition, approximately 982,108 shares are issuable upon exercise of outstanding options granted under the Company's stock option plans as of the date of this 12 prospectus. The Company has filed Registration Statements on Form S-8 covering an aggregate of 1,500,000 shares of Common Stock reserved for issuance under its stock option plans, permitting the resale of such shares issued upon the exercise of such options in the public market without restriction under the Securities Act. In addition, on January 23, 1997, the Company's Board of Directors approved an amendment to its 1995 Stock Incentive Plan to reserve an additional 600,000 shares of Common Stock for issuance under such Plan. This amendment remains subject to shareholder approval. Upon approval of the proposed amendment by the Company's shareholders, the Company intends to register such additional shares on Form S-8. The Company has also filed a Registration Statement on Form S-8 covering 250,000 shares that have been reserved for issuance under its 1995 Employee Stock Purchase Plan permitting the resale of such shares in the public market without restriction under the Securities Act. See "Management -- Stock Option Plans," "-- 1995 Employee Stock Purchase Plan," "Description of Capital Stock -- Registration Rights" and "Shares Eligible for Future Sale." 13 USE OF PROCEEDS The net proceeds to the Company from the sale of the 675,000 shares of Common Stock offered by the Company hereby (at an assumed public offering price of $20 1/2 per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by the Company) are estimated to be approximately $12.7 million (approximately $14.6 million assuming the Underwriters' over-allotment option is exercised in full). The Company will not receive any proceeds from the sale of Common Stock by the Selling Shareholder. The principal purposes of this offering are to increase the Company's equity capital, which is a competitive factor in the semiconductor equipment industry, expand the public market for the Common Stock and to facilitate future access to public equity markets. The Company intends to use approximately $5 million of the net proceeds from this offering to fund capital equipment purchases and facilities expansion. The Company intends to use the remainder of the net proceeds from this offering for working capital and for general corporate purposes. The Company routinely evaluates potential acquisitions of businesses, products and technologies that would complement or expand the Company's business. The Company may use a portion of the net proceeds from this offering for one or more such transactions; however, it currently has no commitments or agreements with respect to such transactions. Pending the above uses, the Company intends to invest the net proceeds from this offering in short-term investment grade, interest-bearing securities. DIVIDEND POLICY The Company has never declared or paid cash dividends on its Common Stock. On March 31, 1995, the Company declared a $1.0 million non-cash dividend to Cadence for the purpose of settling intercompany accounts. The Company currently intends to retain the earnings from its operations for use in the operation and expansion of its business and does not anticipate paying cash dividends with respect to the Common Stock in the forseeable future. The payment of any future dividends will be determined by the Board of Directors in light of then current conditions, including the Company's earnings and financial condition. PRICE RANGE OF COMMON STOCK The Company's Common Stock is traded publicly on the Nasdaq National Market under the symbol "IMSC." The Company completed its initial public offering of Common Stock on July 21, 1995, at a price of $11 per share. The following table sets forth, for the periods indicated, the high and low bid prices for the Company's Common Stock as reported by the Nasdaq National Market.
HIGH LOW ---------- ---------- FISCAL 1995 Third Quarter (from July 21, 1995)..................................... $ 163/8 $ 123/8 Fourth Quarter......................................................... 151/2 115/8 FISCAL 1996 First Quarter.......................................................... 163/4 121/2 Second Quarter......................................................... 271/2 155/8 Third Quarter.......................................................... 251/2 11 Fourth Quarter......................................................... 21 143/4 FISCAL 1997 First Quarter (through January 24, 1997)............................... 231/2 17
On January 24, 1997, the last reported sale price for the Company's Common Stock as reported by the Nasdaq National Market was $20 1/2 per share. As of January 15, 1997, there were approximately 1,330 shareholders who held beneficial interests in shares of Common Stock registered in nominee names of banks and brokerage houses. 14 CAPITALIZATION The following table sets forth the capitalization of the Company as of December 31, 1996 and as adjusted to give effect to the sale of the 675,000 shares of Common Stock offered by the Company hereby at an assumed public offering price of $20 1/2 per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by the Company, and the application of the estimated net proceeds therefrom.
DECEMBER 31, 1996 ---------------------- ACTUAL AS ADJUSTED --------- ----------- (IN THOUSANDS EXCEPT SHARE AMOUNTS) Capital lease obligations, net of current portion (1)..................................... $ 278 $ 278 --------- ----------- Shareholders' equity: Preferred stock, par value $.01, 10,000,000 shares authorized, no shares issued and outstanding, actual and as adjusted.................................................... -- -- Common stock, par value $.01, 15,000,000 shares authorized, 6,726,257 shares issued and outstanding, actual; 7,401,257 shares issued and outstanding, as adjusted (2).......... 67 74 Additional paid-in capital.............................................................. 22,676 35,386 Retained earnings....................................................................... 12,116 12,116 --------- ----------- Total shareholders' equity............................................................ 34,859 47,576 --------- ----------- Total capitalization.................................................................. $ 35,137 $ 47,854 --------- ----------- --------- -----------
- ------------------------ (1) See Note 3 of Notes to the Financial Statements. (2) Excludes 861,608 shares of Common Stock issuable upon exercise of outstanding options as of December 31, 1996 at a weighted average exercise price of $10.97 per share, of which 241,698 were then exercisable. 15 SELECTED FINANCIAL DATA The statement of income data presented below for each of the three years ended December 31, 1994, 1995 and 1996 and the balance sheet data as of December 31, 1995 and 1996 are derived from the financial statements of the Company, which are included elsewhere in this Prospectus and have been audited by Arthur Andersen LLP, independent public accountants, whose report thereon also is included herein. The statement of income data for the years ended December 31, 1992 and 1993 and the balance sheet data as of December 31, 1992, 1993 and 1994 are derived from financial statements not included in this Prospectus and have been audited by Arthur Andersen LLP. The results of operations presented below are not necessarily indicative of results to be expected for any future period. The Company has never declared a cash dividend. The selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Financial Statements and Notes thereto included elsewhere in this Prospectus.
YEAR ENDED DECEMBER 31, ----------------------------------------------------- 1992 1993 1994 1995 1996 --------- --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF INCOME DATA: Product sales.................................................. $ 19,221 $ 19,357 $ 23,981 $ 33,076 $ 40,244 Service and other sales........................................ 3,154 3,760 6,071 8,017 10,593 --------- --------- --------- --------- --------- Net sales.................................................. 22,375 23,117 30,052 41,093 50,837 Cost of product sales.......................................... 8,677 8,616 10,090 12,827 14,203 Cost of service and other sales................................ 1,556 1,599 2,345 2,939 3,935 --------- --------- --------- --------- --------- Total cost of sales........................................ 10,233 10,215 12,435 15,766 18,138 --------- --------- --------- --------- --------- Gross margin................................................... 12,142 12,902 17,617 25,327 32,699 Operating expenses: Research, development and engineering................................................. 3,117 3,130 3,664 6,177 7,796 Selling, general and administrative.......................... 7,776 9,610 10,972 13,681 15,408 --------- --------- --------- --------- --------- Total operating expenses................................... 10,893 12,740 14,636 19,858 23,204 --------- --------- --------- --------- --------- Operating income............................................... 1,249 162 2,981 5,469 9,495 Other income, net.............................................. 130 71 114 319 217 --------- --------- --------- --------- --------- Income before income taxes..................................... 1,379 233 3,095 5,788 9,712 Provision for income taxes..................................... 539 102 1,185 2,253 3,546 --------- --------- --------- --------- --------- Net income..................................................... $ 840 $ 131 $ 1,910 $ 3,535 $ 6,166 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Net income per share (1)....................................... $ 0.13 $ 0.02 $ 0.30 $ 0.53 $ 0.88 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Weighted average number of common and common equivalent shares outstanding (1)............................................... 6,366 6,366 6,366 6,685 7,003 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- DECEMBER 31, ----------------------------------------------------- 1992 1993 1994 1995 1996 --------- --------- --------- --------- --------- (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents...................................... $ 1,872 $ 1,290 $ 4,384 $ 8,930 $ 9,545 Working capital................................................ 9,270 8,347 10,903 17,771 25,280 Total assets................................................... 18,065 18,565 22,662 35,184 44,314 Capital lease obligations, net of current portion.............. -- 109 83 54 278 Shareholders' equity........................................... 14,601 15,104 18,269 26,484 34,859
- -------------------------- (1) For an explanation of a determination of the number of shares used in computing net income per share, see Note 2 of Notes to the Financial Statements. 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH SELECTED FINANCIAL DATA AND THE COMPANY'S FINANCIAL STATEMENTS AND THE NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS. THIS PROSPECTUS, 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" AS DEFINED IN SECTION 27A OF THE SECURITIES ACT OF 1933, 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 CAUTIONARY STATEMENTS MADE IN THIS PROSPECTUS SHOULD BE READ AS BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR IN THIS PROSPECTUS. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN DUE TO NUMEROUS FACTORS INCLUDING THOSE DISCUSSED IN "RISK FACTORS," AS WELL AS THOSE DISCUSSED ELSEWHERE HEREIN. OVERVIEW The Company was founded in 1983 to design and develop engineering Test Stations to test and measure complex electronic devices at the prototype stage. The Company was acquired by Cadence in 1991 as a result of the merger of Valid Logic into Cadence, in a transaction accounted for as a pooling. Cadence has operated the Company as a separate subsidiary. In July 1995, the Company successfully completed an initial public offering of common stock, yielding net proceeds to the Company and Cadence of $3.3 million and $26.6 million, respectively. Cadence currently owns 55.1% of the outstanding common stock of the Company, with the remaining 44.9% publicly owned. The Company has been profitable for each of the last nine years and has financed its business activities during that period principally through cash generated from its own operations. The Company's net sales have increased over the last three years at an annual compound rate of 30%. This sales growth, combined with more moderate percentage growth in cost of sales and operating expenses, has resulted in net income of $1.9 million, $3.5 million, and $6.2 million for 1994, 1995, and 1996, respectively. The increase in net sales has resulted from the Company's design and development of new products and enhancements of existing products, the growth of the complex device market which the Company serves, and successful penetration by the Company into foreign markets. During the last three years, the Company has generated most of its revenue from sales of its XL, ATS, ATS Blazer, FT and MSTS Test Station product families and related software. In 1994, the Company began generating revenue from the sale of Virtual Test Software and related services. For the years ended December 31, 1995 and 1996, and for the fourth quarter of 1996, Virtual Test Software accounted for 4.6%, 8.6% and 11.1% of the Company's net sales, respectively. Introduced during the fourth quarter of 1995, the Company's ATS FT Test Station generated 16.2% and 27.1% of 1995 and 1996 annual net sales, respectively. The Company also generates revenue from selling maintenance contracts, installation, consulting services, training and refurbishment services. Future operating results will depend on many factors, including demand for the Company's products; receipt, timing and shipment of orders; the introduction of new products by the Company and by its competitors; the Company's ability to operate independently from Cadence; and industry acceptance of Virtual Test Software. Results of operations for the periods discussed here 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. 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. Following this offering, Cadence will continue to provide certain services to the Company pursuant to an Amended Corporate Services Agreement. Under this agreement, Cadence provides dedicated agents to sell and support the Company's products in Germany, England, France, Israel and Taiwan. In addition, Cadence will provide the Company with office space and related services in several locations in the United States until June 1, 1999, unless terminated earlier under the terms of such agreement. Furthermore, 17 although the Company may establish its own foreign sales subsidiaries, until those subsidiaries are established, the Company will continue to sell its products in Europe, Israel and Taiwan through dedicated sales agents employed by subsidiaries of Cadence. The Company pays Cadence the cost of Cadence's expense (plus an agency fee) for Cadence's employees who fulfill the dedicated agent functions of the Company and related overhead under the Amended Corporate Services Agreement. See "Business -- Employees" and "Certain Transactions -- Agreements with Cadence." RESULTS OF OPERATIONS The following table sets forth for the periods indicated selected items of the Company's statements of income as a percentage of its net sales:
YEAR ENDED DECEMBER 31, ------------------------------------- 1994 1995 1996 ----------- ----------- ----------- Product sales..................................................................... 79.8% 80.5% 79.2% Service and other sales........................................................... 20.2 19.5 20.8 ----- ----- ----- Net sales..................................................................... 100.0 100.0 100.0 ----- ----- ----- Cost of product sales............................................................. 33.6 31.2 27.9 Cost of service and other sales................................................... 7.8 7.2 7.8 ----- ----- ----- Total cost of sales........................................................... 41.4 38.4 35.7 ----- ----- ----- Gross margin...................................................................... 58.6 61.6 64.3 Operating expenses: Research, development and engineering........................................... 12.2 15.0 15.3 Selling, general and administrative............................................. 36.5 33.3 30.3 ----- ----- ----- Total operating expenses...................................................... 48.7 48.3 45.6 ----- ----- ----- Operating income.................................................................. 9.9 13.3 18.7 Other income, net................................................................. 0.4 0.8 0.4 ----- ----- ----- Income before income taxes........................................................ 10.3 14.1 19.1 Provision for income taxes........................................................ 3.9 5.5 7.0 ----- ----- ----- Net income........................................................................ 6.4% 8.6% 12.1% ----- ----- ----- ----- ----- -----
YEARS ENDED DECEMBER 31, 1996 AND 1995 NET SALES. Net sales is comprised of product sales (including sales of Test Stations, Test Station software and Virtual Test Software) and service and other sales, consisting primarily of revenue derived from maintenance contracts. Net sales increased 23.7% from $41.1 million in the year ended December 31, 1995 to $50.8 million in the year ended December 31, 1996. The increase in net sales was due primarily to an increase in product sales of 21.7% from $33.1 million in the year ended December 31, 1995 to $40.2 million in the year ended December 31, 1996, reflecting the late 1995 introduction of the Company's ATS FT Test Stations, which contributed 27.1% of net sales during 1996, continued contributions from the Company's ATS Blazer and XL Test Station products and a 117.9% increase in sales of Virtual Test Software. Service and other sales increased 32.1% from $8.0 million for the year ended December 31, 1995 to $10.6 million for the year ended December 31, 1996, due principally to growth in sales of Virtual Test Software related services. Combined sales of Virtual Test Software product and Virtual Test Software related services grew to 8.6% of net sales during the year 1996, compared to 4.6% in 1995. International sales, as a percentage of the Company's net sales, declined from 32% for the year ended December 31, 1995 to 26% for the year ended December 31, 1996 due primarily to general economic weakness in Europe, Japan and Korea. COST OF SALES. Cost of sales consists of material, labor, manufacturing and service overhead as well as amortization of capitalized software development costs. Total cost of sales increased 15.0% from $15.8 million in the year ended December 31, 1995 to $18.1 million in the year ended December 31, 1996. Product cost of sales increased 10.7% from $12.8 million for the year 1995 to $14.2 million for 1996, primarily due to higher sales volume, partially offset by benefits from lower costs of materials and manufacturing efficiencies. 18 Service and other cost of sales increased 33.9% from $2.9 million in the year 1995 to $3.9 million in 1996, due primarily to a one-time $327,000 charge in the first quarter of 1996 for the Company's change in accounting for spare parts and increased labor costs associated with expanding customer service center, training and Virtual Test Software related services. GROSS MARGIN. The Company's gross margin increased 29.1% from $25.3 million in the year ended December 31, 1995 to $32.7 million in the year ended December 31, 1996. As a percentage of net sales, gross margin increased from 61.6% for the year ended December 31, 1995 to 64.3% for the year ended December 31, 1996. Product gross margin, as a percent of related sales, increased from 61.2% for the year 1995, to 64.7% for 1996. The increase in product gross margin resulted from an increase in sales of higher margin ATS FT Test Stations and Virtual Test Software products during 1996. Service and other gross margin, as a percent of related sales, declined from 63.3% for 1995, to 62.9% for 1996, due primarily to the charge to cost of service and other sales related to the change in accounting method for spare parts, partially offset by higher gross margin associated with increased sales of Virtual Test Software related services. RESEARCH, DEVELOPMENT AND ENGINEERING. Research, development and engineering expenses consist primarily of employee costs, cost of material consumed, depreciation of equipment and engineering related costs. Research, development and engineering expenses increased 26.2% from $6.2 million for the year ended December 31, 1995 to $7.8 million for the year ended December 31, 1996. As a percentage of net sales, research, development and engineering expenses increased from 15.0% in the year ended December 31, 1995 to 15.3% in the year ended December 31, 1996. The increase was principally attributable to increased expenditures on enhancements to the Company's existing products and the development of future generation hardware and software products. The Company anticipates that research, development and engineering expenses will continue to increase in dollar amount in the future reflecting the Company's strategy to invest in new products and existing product enhancements. The Company has capitalized certain software development costs relating to these activities, in compliance with SFAS No. 86, in the amounts of $1.0 million and $715,000 in 1995 and 1996, respectively. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses include salaries and commissions of sales personnel, marketing expenses and general administrative expenses. Selling, general and administrative expenses increased 12.6% from $13.7 million for the year ended December 31, 1995 to $15.4 million for the year ended December 31, 1996. The increase was principally attributable to higher commissions associated with higher sales volume and increased investment in the various selling and marketing functions. As a percentage of net sales, selling, general and administrative expenses decreased from 33.3% in the year ended December 31, 1995 to 30.3% in the year ended December 31, 1996 as a result of control over increases in selling, general and administrative expenses as net sales increased. The Company anticipates that selling, general and administrative expenses will increase as a percentage of net sales as well as in dollar amount in the future. The Company expects to recognize additional compensation expense of approximately $500,000 in the fiscal year 1997 as a result of payments made by Cadence to certain Company employees in respect of Cadence stock options held by such employees. See "Management--Stock Option Plans--Cadence Options." OTHER INCOME, NET. Other income includes interest income, interest expense and gain and loss on sale of assets. Other income, net decreased from $319,000 in the year ended December 31, 1995 to $217,000 in the year ended December 31, 1996 due to the write-off of expenses associated with the Company's withdrawn 1996 secondary public stock offering, partially offset by interest generated on higher average cash and cash equivalent balances. INCOME TAXES. The Company's effective rate for Federal and state taxes was 38.9% for the year ended December 31, 1995 and 36.5% for the year ended December 31, 1996. The change in effective tax rates from 1995 to 1996 was primarily due to the generation of research and development tax credits during 1996. 19 YEARS ENDED DECEMBER 31, 1995 AND 1994 NET SALES. Net sales increased 36.7% from $30.1 million in 1994 to $41.1 million in 1995. This was principally due to an increase in product sales of 37.9% from $24.0 million in 1994 to $33.1 million in 1995. The increase in product sales during 1995 was due principally to higher sales volume for the Company's Test Station and Virtual Test Software products, and also resulted in part from the Company's first shipments of the new ATS FT Test Stations during the fourth quarter of 1995. Service and other sales increased 32.1% from $6.1 million in 1994 to $8.0 million in 1995, reflecting growth in the Company's Test Station installed base and Virtual Test Software related services. International sales, as a percentage of the Company's net sales, declined from 40% for the year ended December 31, 1994 to 32% for the year ended December 31, 1995 due to slower sales growth in Europe and Asia than in the United States. COST OF SALES. Total cost of sales increased 26.8% from $12.4 million in 1994 to $15.8 million in 1995. Product cost of sales increased 27.1% from $10.1 million in 1994 to $12.8 million in 1995, primarily due to higher sales volume and sales of higher cost ATS Blazer and FT Test Stations. Service and other cost of sales increased 25.3% from $2.3 million in 1994 to $2.9 million in 1995. The increase in service and other cost of sales resulted from higher costs associated with supporting a larger installed base of the Company's Test Stations. GROSS MARGIN. Gross margin increased 43.8% from $17.6 million in 1994 to $25.3 million in 1995, and, as a percentage of net sales, from 58.6% in 1994 to 61.6% in 1995. Product gross margin, as a percent of sales, increased from 57.9% in 1994 to 61.2% in 1995, reflecting the benefit of increased sales volume on relatively fixed manufacturing overhead, and increased sales of higher-margin Test Stations and software products. Service and other gross margin improved, as a percent of sales, from 61.4% in 1994 to 63.3% in 1995 as the result of enhanced cost efficiencies in the service segment as service and other sales increased. RESEARCH, DEVELOPMENT AND ENGINEERING. Research, development and engineering expenses increased 68.6% from $3.7 million in 1994 to $6.2 million in 1995. This increase in the dollar amount of research, development and engineering expenses reflected the additional hiring of research and development engineers necessary to execute the Company's strategy to enhance research and development efforts to remain ahead of technology advances and to develop future generation Test Stations and the Virtual Test Software products. As a percentage of net sales, research, development and engineering expenses increased from 12.2% in 1994 to 15.0% in 1995. The Company has capitalized certain software development costs relating to these activities, in compliance with SFAS No. 86, in the amounts of approximately $1.1 million and $1.0 million in 1994 and 1995, respectively. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses increased 24.7% from $11.0 million in 1994 to $13.7 million in 1995, primarily as a result of higher commission expenses associated with increased sales volume as well as increased staffing in the software sales force. Selling, general and administrative expenses as a percentage of net sales were 36.5% and 33.3% in 1994 and 1995, respectively, reflecting slower growth in expenses than in net sales. OTHER INCOME, NET. Other income increased from $114,000 in 1994 to $319,000 in 1995, as a result of interest earnings on higher average cash and cash equivalent balances. INCOME TAXES. The Company's effective tax rate was 38.3% and 38.9% for the years ended December 31, 1994 and 1995, respectively. The change in effective tax rates from 1994 to 1995 was primarily due to changes in the relative significance of certain non-deductible expenses and changes in effective rates for state income taxes. 20 QUARTERLY RESULTS OF OPERATIONS The following tables set forth certain unaudited quarterly financial information for each of the Company's last eight fiscal quarters and as a percentage of the Company's total net sales represented by each line item in such unaudited quarterly financial information. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the information are set forth herein. Results of operations for the periods presented below 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.
THREE MONTHS ENDED -------------------------------------------------------------------------- 3/31/95 6/30/95 9/30/95 12/31/95 3/31/96(1) 6/30/96 ----------- ----------- ----------- ----------- ----------- --------- STATEMENT OF INCOME DATA: (IN THOUSANDS) Product sales.................................... $ 7,304 $ 8,078 $ 8,642 $ 9,052 $ 9,170 $ 10,072 Service and other sales.......................... 1,780 1,771 1,854 2,612 2,745 2,540 ----------- ----------- ----------- ----------- ----------- --------- Net sales.................................... 9,084 9,849 10,496 11,664 11,915 12,612 Cost of product sales............................ 2,949 3,236 3,197 3,445 3,213 3,632 Cost of service and other sales.................. 689 627 729 894 1,195 876 ----------- ----------- ----------- ----------- ----------- --------- Total cost of sales.......................... 3,638 3,863 3,926 4,339 4,408 4,508 ----------- ----------- ----------- ----------- ----------- --------- Gross margin..................................... 5,446 5,986 6,570 7,325 7,507 8,104 Operating expenses: Research, development and engineering.......... 1,309 1,409 1,557 1,902 1,988 1,929 Selling, general and administrative............ 3,172 3,388 3,621 3,500 3,448 3,856 ----------- ----------- ----------- ----------- ----------- --------- Total operating expenses..................... 4,481 4,797 5,178 5,402 5,436 5,785 ----------- ----------- ----------- ----------- ----------- --------- Operating income................................. 965 1,189 1,392 1,923 2,071 2,319 Other income (expense), net...................... 51 62 135 71 101 (64) ----------- ----------- ----------- ----------- ----------- --------- Income before income taxes....................... 1,016 1,251 1,527 1,994 2,172 2,255 Provision for income taxes....................... 389 480 586 798 826 857 ----------- ----------- ----------- ----------- ----------- --------- Net income....................................... $ 627 $ 771 $ 941 $ 1,196 $ 1,346 $ 1,398 ----------- ----------- ----------- ----------- ----------- --------- ----------- ----------- ----------- ----------- ----------- --------- 9/30/96 12/31/96 --------- ----------- STATEMENT OF INCOME DATA: Product sales.................................... $ 10,183 $ 10,819 Service and other sales.......................... 2,554 2,754 --------- ----------- Net sales.................................... 12,737 13,573 Cost of product sales............................ 3,515 3,843 Cost of service and other sales.................. 932 932 --------- ----------- Total cost of sales.......................... 4,447 4,775 --------- ----------- Gross margin..................................... 8,290 8,798 Operating expenses: Research, development and engineering.......... 1,750 2,129 Selling, general and administrative............ 4,158 3,946 --------- ----------- Total operating expenses..................... 5,908 6,075 --------- ----------- Operating income................................. 2,382 2,723 Other income (expense), net...................... 98 82 --------- ----------- Income before income taxes....................... 2,480 2,805 Provision for income taxes....................... 843 1,020 --------- ----------- Net income....................................... $ 1,637 $ 1,785 --------- ----------- --------- -----------
THREE MONTHS ENDED ------------------------------------------------------------------------ 3/31/95 6/30/95 9/30/95 12/31/95 3/31/96(1) 6/30/96 ----------- ----------- --------- ----------- ----------- --------- AS A PERCENTAGE OF NET SALES: Product sales................................... 80.4% 82.0% 82.3% 77.6% 77.0% 79.9% Service and other sales......................... 19.6 18.0 17.7 22.4 23.0 20.1 ----------- ----------- --------- ----------- ----------- --------- Net sales................................... 100.0 100.0 100.0 100.0 100.0 100.0 Cost of product sales........................... 32.5 32.8 30.5 29.5 27.0 28.8 Cost of service and other sales................. 7.6 6.4 6.9 7.7 10.0 6.9 ----------- ----------- --------- ----------- ----------- --------- Total cost of sales......................... 40.1 39.2 37.4 37.2 37.0 35.7 ----------- ----------- --------- ----------- ----------- --------- Gross margin.................................... 59.9 60.8 62.6 62.8 63.0 64.3 Operating expenses: Research, development and engineering......... 14.4 14.3 14.8 16.3 16.7 15.3 Selling, general and administrative........... 34.9 34.4 34.5 30.0 28.9 30.6 ----------- ----------- --------- ----------- ----------- --------- Total operating expenses.................... 49.3 48.7 49.3 46.3 45.6 45.9 ----------- ----------- --------- ----------- ----------- --------- Operating income................................ 10.6 12.1 13.3 16.5 17.4 18.4 Other income (expense), net..................... 0.6 0.6 1.3 0.6 0.8 (0.5) ----------- ----------- --------- ----------- ----------- --------- Income before income taxes...................... 11.2 12.7 14.6 17.1 18.2 17.9 Provision for income taxes...................... 4.3 4.9 5.6 6.8 6.9 6.8 ----------- ----------- --------- ----------- ----------- --------- Net income...................................... 6.9% 7.8% 9.0% 10.3% 11.3% 11.1% ----------- ----------- --------- ----------- ----------- --------- ----------- ----------- --------- ----------- ----------- --------- 9/30/96 12/31/96 --------- ----------- AS A PERCENTAGE OF NET SALES: Product sales................................... 79.9% 79.7% Service and other sales......................... 20.1 20.3 --------- ----------- Net sales................................... 100.0 100.0 Cost of product sales........................... 27.6 28.3 Cost of service and other sales................. 7.3 6.9 --------- ----------- Total cost of sales......................... 34.9 35.2 --------- ----------- Gross margin.................................... 65.1 64.8 Operating expenses: Research, development and engineering......... 13.7 15.7 Selling, general and administrative........... 32.7 29.0 --------- ----------- Total operating expenses.................... 46.4 44.7 --------- ----------- Operating income................................ 18.7 20.1 Other income (expense), net..................... 0.8 0.6 --------- ----------- Income before income taxes...................... 19.5 20.7 Provision for income taxes...................... 6.6 7.5 --------- ----------- Net income...................................... 12.9% 13.2% --------- ----------- --------- -----------
- ------------------------------ (1) Results include a cumulative charge to Cost of service and other sales of $327,000 related to the Company's change in accounting method for spare parts inventory. 21 The Company's net sales were higher in each of the four quarters of 1996 than in the corresponding quarter in the previous year, reflecting increased sales of Virtual Test Software and the Company's ATS FT Test Station, which was introduced in October 1995. The increase in service and other sales from an average of 19.5% of net sales in 1995 to an average of 20.8% of net sales for 1996, reflects higher sales of Virtual Test Software related services. In addition, the Company's gross margin improved as a percentage of sales from 59.9% in the first quarter of 1995 to 64.8% in the fourth quarter of 1996. Gross margins as a percentage of net sales have increased due to higher sales volumes, certain operational efficiencies and an increased percentage of software sales which generally have higher gross margin than the Company's hardware products. While the Company's research, development and engineering expenses have increased in dollar amount during 1995 and 1996, reflecting the hiring of additional personnel and other expenses relating to new product development and enhancement of existing products, such expenditures have remained relatively constant as a percentage of net sales. The reduction in selling, general and administrative expense, as a percentage of net sales, from an average of 33.3% in 1995 to an average of 30.3% in 1996, reflects controls over the rate of spending in this area. The reduction in selling, general and administrative expense, as a percentage of net sales, is not expected to be sustained in future periods as the Company intends to invest in sales and marketing expenditures with respect to certain market segments. Historically, net sales have been seasonally slower in the first and third calendar quarters of each year, as a result of customers' budget approval cycles during the first quarter and as many customers and end-users, particularly outside of the United States, reduce their business activities during the summer months. FORWARD LOOKING STATEMENTS All statements, trend analysis and other information contained in this Prospectus relative to future size or degree of penetration of markets for the Company's products, the Company's growth rate and trends in net sales, gross margin and anticipated expense levels, as well as other statements including words such as "anticipate," "believe," "plan," "estimate," "expect," "intend" and other similar expressions, constitute "forward looking statements" as defined in Section 27A of the Securities Act of 1933, as amended. These forward looking statements are subject to the business and economic risks the Company faces and the Company's actual results of operations may differ materially from those contained in the forward looking statements. For a more detailed discussion of these and other business risks, see "Risk Factors." 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. The Company derives a substantial portion of its revenue from the sale of Test Stations which typically range in price from $200,000 to $1.2 million per unit and may be priced as high as $1.8 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 the Company's net sales and results of operations for a particular period. A significant portion of the Company's operating expenses are relatively fixed in nature and planned expenditures are based, in part, on anticipated orders. In addition, the need for continued expenditures for research, development and engineering makes it difficult to reduce expenses in a particular quarter if the Company's sales goals for that quarter are not met. The inability to reduce the Company's expenses quickly enough to compensate for any revenue shortfall would magnify the adverse impact of such revenue shortfall on the Company's results of operations. In addition, the Company's future operating results and financial condition are subject to influences driven by rapid technological changes, a highly competitive industry, a lengthy sales cycle, and the cyclical nature of general economic conditions. A substantial portion of the Company's net sales are typically realized in the last few weeks of each quarter. The portion of net sales realized during the last month of each quarter during 1996 ranged from 43% to 75% of quarterly net sales, as compared to a range of 44% to 59% of quarterly net sales for each quarter of 1995. As a result, the timing of the receipt and shipment, and the magnitude of the sales price, of a single order can have a significant impact on the Company's net sales and results of operations for a 22 particular quarter and the Company's quarterly net sales and results of operations may be negatively impacted if an order is received too late in a given quarter to permit product shipment and the recognition of revenue during that quarter. For the years ended December 31, 1994, 1995 and 1996, sales to Intel represented approximately 22.4%, 30.2%, and 36.4% of the Company's net sales, respectively. No other customer accounted for in excess of 10% of the Company's net sales in 1994, 1995, or 1996. The Company's five largest customers based on 1996 net sales are Intel, Advanced Micro Devices, Tokyo Electron Limited (the Company's distributor in Japan), Rockwell and SGS - THOMSON. Sales of the Company's products to a limited number of customers are expected to continue to account for a high percentage of net sales. The loss of a major customer or any reduction in orders by such customers would have a material adverse effect on the Company's financial condition and results of operations. The Company purchases some key components from sole or single source vendors for which alternative sources are not currently available. The inability to develop alternative sources for single or sole source components or to obtain sufficient quantities of these components could result in delays or reductions in product shipments which would adversely effect the Company's financial condition and results of operations. The Company has thus far avoided any material adverse impact on its results of operations resulting from such risks. No assurance can be given that such risks will not affect the Company's financial position or results of operations in the future. LIQUIDITY AND CAPITAL RESOURCES As of December 31, 1996, the Company's principal sources of liquidity consisted of cash and cash equivalents of approximately $9.5 million, and funds available under an existing bank line of credit of $10.0 million. Since 1988, the Company has relied on cash generated from operations as its principal source of liquidity and has not relied on Cadence for working capital. OPERATING ACTIVITIES. The Company's net cash from operating activities includes cash received from customers, payments to suppliers, payments to employees and interest received and paid. Net cash generated from operating activities amounted to $6.3 million, $5.0 million and $6.0 million for 1994, 1995, and 1996, respectively. Cash received from customers amounted to $29.6 million, $37.0 million and $48.0 million for 1994, 1995 and 1996, respectively. Combined payments to suppliers and employees for 1994, 1995 and 1996 were $22.8 million, $31.1 million and $40.5 million, respectively. The period-to-period increases in cash from customers and payments to suppliers and employees are directly related to the increase in net sales and expenses associated with those sales. The Company's trade receivables, inventories and accounts payable have fluctuated from period to period as a result of the timing of shipments, cash collections and inventory receipts near period end. The size and timing of a single customer shipment or collection can have a significant impact on trade receivables and inventories. Trade receivables increased from $8.1 million at December 31, 1995 to $11.4 million at December 31, 1996, reflecting an increase in the Company's net sales in, as well as in the portion of net sales realized in the final month of, the fourth quarter of 1996 as compared to the fourth quarter of 1995. Inventories increased from $5.8 million at December 31, 1995 to $7.9 million at December 31, 1996, primarily due to additional parts inventories required to produce the Company's FT and MSTS Test Station products and increases in safety stock for certain critical components. As a result of cash flows from operating activities, combined with the proceeds of the Company's initial public offering in 1995 of $3.3 million, the Company has increased its cash and cash equivalent balances from $1.3 million at December 31, 1993 to $9.5 million at December 31, 1996. INVESTING ACTIVITIES. Capital equipment expenditures of $1.7 million, $1.9 million, and $3.3 million in 1994, 1995, and 1996, respectively, were primarily for computers, software, demonstration equipment and engineering equipment used in the Company's operations. Expenditures to increase the Company's service spare parts pool were $295,000, $600,000 and $1.1 million for 1994, 1995 and 1996, respectively. The higher level of spare parts additions during 1996 reflects the stocking of parts for servicing the Company's new ATS FT Test Station product line. In addition, the Company capitalized certain expenses associated with software development costs of $1.1 million, $1.0 million and $715,000 for 1994, 1995 and 1996, respectively. 23 FINANCING ACTIVITIES. In 1994 and 1996, net cash used in financing activities was $168,000 and $12,000, respectively. In 1995, net cash provided by financing activities amounted to $3.0 million, primarily from the $3.3 million in net proceeds received in the Company's initial public offering. Cash used for payments of certain capital leases obtained by the Company for computers and equipment used in operations was $168,000, $254,000 and $300,000 for 1994, 1995 and 1996, respectively. In 1995 and 1996, the Company received $3,000 and $288,000 from the issuance of stock to employees under stock option and stock purchase plans. During 1995 and 1996, the Company also realized reductions in current income tax liabilities of $2.3 million and $1.9 million, respectively, resulting from the benefit of tax deductions of employee gains upon exercise of Cadence stock options. The tax benefit of the stock option deduction is reflected as an increase in additional paid-in capital in the accompanying Statements of Shareholders' Equity. The employee gains are not expenses of the Company for financial reporting purposes, and the exercise of Cadence stock options does not increase the number of shares of Company Common Stock outstanding. The tax benefits realized from the stock option deduction will decrease in the future as employee holdings of Cadence stock options declines due to option exercises and cancellations. The timing and magnitude of this decrease in tax benefits is uncertain as the number of employee stock options which are exercised, and the amount of gains realized upon exercise, will be determined by fluctuations in the market value of Cadence Common Stock. Such future decreases in the tax benefits from the stock option deduction will increase the amount of the Company's income tax payments and will, consequently, reduce the Company's net cash flows from operating activities. At the end of 1995, the Company secured a $10.0 million revolving line of credit with U.S. National Bank of Oregon, which is available for general corporate purposes when needed. Under the agreement, the Company can borrow, with interest at the bank's prime lending rate, or if lower, at certain margins above banker's acceptance or interbank offering rates. There have been no borrowings against the line of credit to date. The term of the current credit line agreement ends April 30, 1997. It is management's intent to renew the agreement at that time. The Company believes that the proceeds from this offering, together with existing funds, funds expected to be generated by operating activities, and the available line of credit, will satisfy the Company's anticipated working capital and other general corporate purposes through at least the next twelve months. The Company currently has no significant capital commitments other than commitments under facility operating leases and vendor contracts for development services, consulting services and parts. The Company may from time to time consider the acquisition of complementary businesses, products or technologies. The Company presently has no significant understandings, commitments or agreements with respect to any such acquisitions. Any such transactions, if consummated, may use a portion of the Company's working capital or require the issuance of additional equity. 24 BUSINESS The Company designs, manufactures, markets and services a family of versatile, high-performance engineering Test Stations and test software used to test and measure complex electronic devices. In addition, the Company develops, markets and supports a separate line of Virtual Test Software supporting a variety of production testers and simulators that permits design and test engineers to accelerate test program development and to conduct simulated tests of electronic device designs prior to the fabrication of the prototype of the actual device. The Company's products enable its customers to shorten time-to-market, enhance accuracy of design, reduce both the time required to test and the cost of testing the customers' devices and provide reliable and prompt feedback to both design and test engineers. Customers use the Company's products to test complex digital and mixed-signal devices such as microprocessors, microcontrollers, integrated circuits, application specific integrated circuits and multi-chip modules. The Company markets and supports its products worldwide through a network of direct sales force personnel, independent distributors and dedicated sales personnel employed by affiliated companies. The Company has sold over 950 Test Stations to customers in the semiconductor, aerospace, automotive, computer, consumer electronics, datacommunications, medical electronics, network computing, telecommunications and other industries. Based on 1996 net sales, the Company's top five customers are: Intel, Advanced Micro Devices, Tokyo Electron Limited (the Company's distributor in Japan), Rockwell and SGS-THOMSON. These five customers represented 57% of net sales for 1996, while 43% of net sales came from customers individually accounting for less than 3% of net sales. INDUSTRY BACKGROUND Continuous improvements in integrated circuit process and design technologies have led to design and production of more complex and more reliable devices at a lower cost per function. As performance and complexity have increased and cost per function has decreased, the use of integrated circuits has expanded beyond their original primary applications in computer systems to applications such as telecommunication systems, automotive products, consumer goods and industrial automation and control systems. In addition, system users and designers have demanded systems with more functionality, higher performance, greater reliability, shorter design cycle times and lower costs. These demands have resulted in increased integrated circuit content as a percentage of system cost. The process of designing and manufacturing integrated circuits is complex and capital-intensive, involving stages of design, prototype manufacture, verification and characterization of the prototypes, device manufacture and production test. These stages have intricate dependencies, as illustrated on the following chart: PROCESS FLOW FROM DESIGN TO PRODUCTION TEST PROCESS FLOW FROM DESIGN TO PRODUCTION TEST -- SCHEMATIC The schematic illustrates the process flow from design to production test: (1) Starting with a box representing the Design phase which starts with the aid of Electronic Design Automation Software (2) Moving to a box representing the Prototype Manufacturing phase where prototype fabrication of the IC takes place (3) Moving to a box representing the Engineering test phase which is segmented in two processes (a) Verification where the Engineering Test Station checks the prototype to ensure design conformity and functional performance (b) Characterization where the Engineering Test Station checks the timing, electrical and environmental limits (4) Transferring to a box representing Device Manufacturing where the ICs are produced in quantity. (5) Ending with a box representing Production Test where the final quality assurance and performance sorting takes place. The graphic illustrates that the information resulting from this process at the engineering test and production phases is fed back to the design phase. 25 Each stage in this process has come under pressure as integrated circuits have increased in complexity, density and speed. Density of microprocessors has increased from tens of thousands to millions of transistors. The speed with which a given integrated circuit can process data has likewise increased dramatically. Line widths in new generation integrated circuits have decreased from 5 microns to line widths approaching 0.25 micron, as more circuits are packed into the same area. In addition, the number of channels through which data may be entered or extracted (the "pin count") has increased from single digits thirty years ago to as many as one thousand pins in chips being developed today. These developments have occurred in an environment of decreasing cost and shorter development cycles. The vast increase in complexity, speed and capability of today's integrated circuits, and the ability to build them in very tight time-to-market windows, has been supported and made possible by several generations of technology at the critical stages of the process: design; engineering test; manufacture and production test. DESIGN. At the design stage, several generations and many improvements in EDA software have allowed design engineers to work with integrated circuit designs at increasingly higher levels of abstraction, permitting such engineers to design significantly more complex integrated circuits in less time. PROTOTYPE MANUFACTURE. After the integrated circuit has been designed, prototypes are manufactured, allowing the design and test engineers to evaluate the performance of the integrated circuit before committing to volume production. ENGINEERING TEST. At the engineering test stage -- where prototype integrated circuits are verified and characterized -- successive generations of Test Stations have significantly reduced the time and expense required to develop, debug and perform prototype tests, and have greatly enhanced the ability of test engineers to exchange data with both their design engineering and production engineering counterparts. Prototype verification Test Stations are used by design or test engineering groups to verify design conformance or analyze failures of complex electronic device prototypes. Characterization Test Stations are used to establish performance specifications for an integrated circuit design, including timing, electrical characteristics and operation under varied environmental conditions, such as heat and vibration. MANUFACTURING. A host of advances in semiconductor manufacturing process technology have made possible the fabrication of devices that have roughly doubled in complexity, speed and power approximately every two years for the past twenty years, while per-unit costs have declined. The impact of evolving process technologies has been apparent at both the prototype and production stages. PRODUCTION TEST. The demand for automated, high throughput test equipment to test production parts has led to the development of several successive generations of automated test equipment. ATE machines have contributed to the decrease of device production time by achieving very high throughput testing of complex devices. To date, the integrated circuit design process has been serial and iterative - -- design must be complete before prototypes can be built; prototypes must be built before they can be tested; and prototypes must be production-ready before production test software can be written, debugged and refined. Production test software takes significant time to develop and debug. Until a physical part exists, it cannot be determined whether a test has been properly designed, or whether the part has been designed so it can be tested. Even then, test failures can raise the question of whether the prototype is flawed, or the test has an error. The problem is compounded when a device has been designed in a way that some or all of its functionality cannot effectively be tested which, when discovered, requires the addition of another iteration into the design and development cycle. Semiconductor design and test engineers initially used "instrument clusters" - -- combinations of oscilloscopes, probes, meters, signal generators, analyzers and other standard electrical engineering tools -- to test prototype integrated circuits. For tests that could not be done using such tool sets, such as specialized tests where complex test vectors and precise timing were critical, these engineers turned to ATE machines designed for volume production testing to verify and characterize prototypes. However, as integrated circuits became more complex, the combination of instrument clusters and ATE was not a satisfactory solution for 26 the engineering test problem. Instrument clusters alone did not have the capability to thoroughly and adequately test increasingly complex prototypes at the engineering test stage. ATE machines, which are very effective at high-throughput testing, provide only pass/fail information, and do not have the flexibility or versatility to efficiently test whether and within what limits a given part works, or efficiently analyze why it fails to work. For engineering test, it is more important to be able to change test vectors, reprogram the tester, debug the test program, and adjust all the variables of the test easily, routinely and quickly than it is to rapidly test a large volume of one part in a short time. In addition, fabless integrated circuit designers often do not have access to ATE machines for use in engineering test, and the in-house development of specialized test equipment for purposes of verification and characterization is costly and time-consuming. THE IMS SOLUTION The Company's Test Stations give test engineers a flexible, powerful, cost-effective way to verify and characterize prototype integrated circuits. Each IMS Test Station integrates the functions of a variety of individual test instruments into a single unit that offers increased verification and characterization performance at a significant cost savings over ATE systems. The IMS Test Stations stimulate the device under test by sending defined signals to it and then measuring the actual output and comparing it with the expected output. The IMS Test Stations perform these functions at real-time device operating speeds. Using the Company's products, design and test engineers can identify failures, assess areas of concern, run rapid diagnostic sequences to pinpoint the cause(s) of failure, and identify changes needed to correct design errors or weaknesses, such as timing problems. Each IMS Test Station is designed to work with industry standard computers to receive and execute test commands and report the results of test procedures. Each IMS Test Station can also be linked to widely used EDA software tools, including those offered by Cadence, Mentor Graphics, Synopsys and others. The result is a reduction of the overall time required for verification and characterization, more timely feedback to design engineers and hence lower cost of design, reduced time-to-market and increased competitiveness for the companies designing today's increasingly complex integrated circuits. IMS TEST SOLUTIONS BRIDGE THE GAP FROM DESIGN TO PRODUCTION TEST [L] IMS TEST SOLUTIONS BRIDGE THE CAP FROM DESIGN TO PRODUCTION TEST -- SCHEMATIC The Schematic illustrates how Virtual Test Software connects the design phase of electronic devices to the production phase. The Schematic illustrates the process flow from design to production: (1) Starting with a box labeled Design (2) Moving to a box labeled Prototype Manufacturing (3) Moving next to a box labeled Engineering Test which is subdivided to a) Verifications (Sub-box) b) Characterization (Sub-box) (4) Transferring to a box labeled Device Manufacturing (5) Ending with a box labeled Production Test (6) The Schematic shows a rectangle labled Virtual Test which underlies the whole process and which illustrates that Virtual Test receives input from the Design Box and connects it to both the Engineering Test Box and the Production Test Box 27 The Company's Virtual Test Software accelerates test program development, and allows simulation of the device to be tested on a simulation of the ATE equipment and the test fixture for the device, at the design stage and prior to the production of a prototype. Virtual Test Software thus allows the test engineer to develop and debug the test software for the intended ATE system, and to test for certain design flaws in the device (including testing to insure that the device being designed is itself capable of being tested) before the device is ever cast in silicon. Virtual Test Software reduces time to market and test cost in two ways. First, it reduces the number of iterations between design and test by allowing test engineers to develop and debug much of their ATE test program and the test fixture before the device design has been committed to prototype or production manufacturing. Second, Virtual Test minimizes the need to use expensive and scarce ATE resources to develop and debug test programs, allowing the ATE System to be used to find manufacturing defects, its primary use. Accordingly, Virtual Test Software both reduces the time for the test phases of the development cycle and allows the test phases to overlap the design and prototype manufacture phase, thus breaking through the constraint previously represented by the need for a physical device, and allowing concurrent engineering for faster time-to-market. IMS STRATEGY Since its founding in 1983, the Company's objective has been to become a leading provider of engineering test solutions that enable design and test engineers to effectively and efficiently evaluate and test new complex electronic circuits. To achieve this objective, the Company has focused on using its core technology to design, develop, manufacture and market innovative, cost-effective, high performance Test Stations and software to increase productivity, shorten time-to-market for new products and reduce the cost of test. The key elements of the Company's strategy are set forth below. PROVIDE PRODUCT INNOVATION. The Company intends to continue its focus on the engineering test marketplace by enhancing its existing Test Station product line and introducing new Test Station families that are cost-effective, highly interactive, easy to use and that pass data effectively between EDA and ATE products and by continuing to introduce enhancements to its Virtual Test Software and related software products. EXPAND MARKET SHARE. Based on the number of Company systems installed worldwide, the Company is a leading supplier of products in the prototype verification market. The Company intends to leverage that position to increase its penetration of the characterization market. Due to the Company's knowledge of the technologies underlying both design and test, the Company believes it can maintain its leadership position in the market for test development and simulation (Virtual Test), and intends to devote resources to developing that market. The Company believes it can also expand its market share by providing solutions that further bridge the gap between EDA and ATE tools. CREATE AND MAINTAIN STRATEGIC RELATIONSHIPS. The Company seeks to enhance its market position by establishing and maintaining strategic relationships with both EDA and ATE vendors. The Company's relationship with Cadence has provided the Company with access to technological advances in EDA software as well as Cadence's broad customer base. The Company has close working relationships with several leading ATE vendors, including its strategic relationships with Credence, LTX, Teradyne and Hewlett-Packard, which have enhanced market acceptance of Virtual Test Software. The Company intends to maintain its current strategic relationships and establish new strategic alliances with additional EDA and ATE vendors to further strengthen its competitive position. MAINTAIN HIGH LEVEL OF CUSTOMER SERVICE. The Company believes that a high level of customer service and support is critical to the adoption and successful utilization of engineering test technology. By continuing to work closely with its customers to solve engineering test problems, the Company expects to develop subsequent generations of Test Stations and Virtual Test Software products that address the needs of test engineers in the rapidly changing integrated circuit markets and to use its expertise in interfacing with high performance EDA and ATE tools. EXPAND WORLDWIDE PRODUCT DISTRIBUTION. The Company seeks to expand its product distribution through ongoing investments in direct sales and through its relationships with key distributors. The 28 Company intends to build upon established distributor relationships in foreign markets where partnering adds market leverage and in other markets where investment in direct sales has not yet been warranted, and to continue its relationship with Cadence to distribute its products in certain foreign markets. PRODUCTS IMS TEST STATION PRODUCTS The Company's Test Stations perform a number of functions in bridging the gap from EDA to ATE. At the beginning of the process, design engineering data, including EDA simulation data, is converted into data compatible with the Company's Test Station, thus bridging the gap between design software and verification. The IMS Test Station software enables data conversion from all popular simulation products including Verilog, VHDL, Quicksim and others. During the design verification phase, the user performs tests which verify whether the circuit conforms to the design specifications. The engineer looks for fundamental manufacturing process errors or design errors by matching the previously converted EDA simulation against the actual prototype. Failure to adequately verify design functionality can lead to costly design alterations prior to product release. At the next stage of the process, the characterization phase, the circuit is subjected to various tests which are intended to define the limits of the device over several variables, including, but not limited to, temperature ranges, electrical characteristics and clock and data operating speeds. Failure to adequately test performance capabilities at this stage can result in a final product that fails to meet the market requirements of electronic system manufacturers. The value of many ICs increases as the devices operate at higher speeds. For example, a 200 MHz microprocessor will sell for more than a 133 MHz microprocessor. The Company's Test Stations can help identify the areas of the design or fabrication process that are limiting the operating speed of the IC. These areas can then be corrected to increase the speed of the device and, as a result, the device's selling price. When a failure is found during any phase, Test Station failure analysis tools can assist the test engineer in probing the device to determine the nature of the anomaly. Once a logical failure is identified, the physical location on the circuit can be determined. A laser can then be used to penetrate the device's passivation layers and single or multiple probes may be inserted at the excavated site for physical probing. After the fault has been analyzed, the device design can be corrected. The Company complies with fixturing conventions which facilitates compatibility with ATE equipment. Compatible design between the Company's Test Stations and ATE systems enables rapid movement of devices from the engineering test environment to production test. The Company currently offers four families of IMS Test Stations under the names ATS FT, MSTS, ATS Blazer and Logic Master XL. Each family includes multiple mainframe options and a choice of configurable modules. The Company's Test Stations are designed and configured to match varying customer requirements. Generally, they differ from one another as to the maximum clock speed and data rates (from 40 MHz to 400 MHz), pincount of the device to be tested (from 16 pins to 896 or more pins), device technology (digital, mixed-signal, MCM), flexibility in the number and variety of applications (verification, characterization, failure analysis, etc.) and price. Test Stations typically range in price from $200,000 to $1.2 million, though high-pin-count mixed-signal device systems can sell for as much as $1.8 million, depending on configuration and intended application. ATS FT TEST STATION (DIGITAL). The ATS FT (Flexible Timing) Test Stations are used to perform in depth timing analysis of complex ICs such as ASICs, microprocessors, and digital signal processors (DSPs). The Company's ATS FT Test Stations include Time Navigator Software which enables users to rapidly diagnose timing problems which may exist in complex digital designs. The ATS FT is available in a variety of pincount configurations and with clock rates up to 400 MHz. The ATS FT's distinguishing characteristic is its ability to vary timing to the device in each device clock cycle. This capability allows the ATS FT to perform critical timing path analysis on the user's device. The ATS FT can also include mixed-signal test, scan and direct current parametric test capabilities. 29 MSTS TEST STATION (MIXED-SIGNAL). The Mixed-Signal Test Stations (MSTS) provides all of the digital test capabilities of the ATS FT or ATS Blazer Test Stations, plus analog test capabilities required for testing certain multimedia, data communications, telecommunications, automotive, consumer and medical devices and multi-chip modules (MCMs). The MSTS provides a low noise environment for interfacing both VXI and GPIB instrumentation to the device under test. A common software programming language allows easy control over both the digital and analog capabilities of the system. The Company began commercial shipments of the MSTS Test Station in the fourth quarter of calendar 1996. ATS BLAZER TEST STATION (DIGITAL). The ATS Blazer provides performance and interactivity for rapid prototype verification, characterization, quality assurance and failure analysis. The ATS Blazer family provides the performance characteristics required for testing advanced devices, including complex ASICs, MCMs and CISC and RISC microprocessors. With a choice of modules (200 MHz, 125 MHz or 100 MHz data speed), a choice of mainframes, optional scan modules (up to 32 M scan data per scan channel) and optional Memory Test capability, the ATS Blazer can be configured for cost-effective performance for specific target devices. The system Parametric Measurement Unit ("PMU") provides high performance DC stimulus and measurement at any system pin. All ATS Blazer data modules provide per-pin timing adjustment. Standard memory depth per pin is 64K/128K, with options of 4M/8M. Memory can be upgraded in the field. Test sequencing tools and throughput-enhancing features also make the ATS Blazer suitable for high pin-count, high performance wafer sorting. LOGIC MASTER XL TEST STATION (DIGITAL). The Logic Master XL family is a cost-effective alternative for testing complex devices which do not demand the performance of the ATS Blazer. A Logic Master XL Test Station can be configured with modules operating at 100 MHz, 60 MHz, or 40 MHz data rates, with up to 448 input/output pins. Since the input and output may be split, a maximum system can support 896 data pins, consisting of 448 input and 448 output pins. Optional scan modules can be added to the Test Station. The system PMU provides high performance DC stimulus and measurement at any system pin. Generally, the Company expects future generations of Test Stations to support increasing pin counts, faster data and clock rates and more exacting data collection and feedback requirements. The following table summarizes the Company's current Test Station product offerings. TEST STATION SYSTEM PRODUCTS
PRODUCT FAMILY APPLICATIONS SERVED KEY FEATURES ATS FT Test Stations Verification, 200/125 MHz Data (Digital) Characterization, 400 MHz Clocks Critical Timing IEEE 1149.1 Scan Module Analysis, Failure Analysis, Yield Enhancement MSTS Test Stations Verification, Same digital capabilities as the (Mixed-signal) Characterization, ATS FT or ATS Blazer Test Stations Critical Timing GPIB/VXI Instumentation Interface Analysis, Low noise environment Failure Analysis, Yield Enhancement ATS Blazer Test Stations Verification, 200/125/100 MHz (Digital) Characterization, IEEE Scan Module Failure Analysis, Memory Test Module Yield Enhancement Logic Master XL Test Verification 100/60/40 MHz Stations Up to 896 pins (448 Input/448 (Digital) Output) IEEE Scan Module
30 TEST STATION SOFTWARE PRODUCTS The Company has developed significant Test Station software products which are either embedded in the Company's Test Stations or sold as separate add-on software products. The Test Station software constitutes an important component of the overall system product content and value. These software packages provide optimal operation in various applications, including interactive device verification, fully automated device characterization, and EDA and ATE system linkages. A key advantage of the IMS products is the interactive ease of use provided by the software. Whereas production ATE systems require dedicated Test Engineers to program the systems, IMS systems are developed for use by design and product engineers. This ease of use allows the engineers to be more productive and to decrease product time-to-market. IMS TEST ENVIRONMENT. This software product provides an interactive screen interface environment for viewing and controlling all Test Station parameters. This screen interface allows the test designer or test engineer to change the values on the screen and easily establish new conditions to be implemented on the device under test. IMS Test Environment also provides multi-variable plotting capabilities (Shmoo) and a comprehensive library of support routines (Test LITE) that speed high level language development using ANSI C. IMS TESTVIEW. This software product provides efficient programming, with a large library of support routines for data processing and additional test instrumentation. Built on LabVIEW from National Instruments for Sun workstations, TestVIEW provides the advantages of a graphical user interface and also executes rapidly, since the programs are compiled. IMS-LINK AND ATE-LINK. This software product links the engineering test phase of integrated circuit development and the EDA and ATE phases. IMS-Link provides automated EDA simulation output translation to IMS Test Station format. ATE-Link automates the translation of IMS Test Station output to be format usable by ATE systems. The Company's Test Stations can be interfaced to a network, allowing the Test Station access to other resources on the network, and allowing multiple workstations on the network to have access to the Test Station. Using various software tools available from the Company or from third-party vendors, users can import and export test data to and from the EDA environment. In addition, test information can be exported for use on ATE systems. 31 The following table summarizes the Company's current Test Station software product offerings. TEST STATION SOFTWARE PRODUCTS
PRODUCT CAPABILITY IMS Test Environment Interactive debug environment for verification Intuitive, easy-to-learn Flexible Shmoo plot capability Library of C routines for turnkey characterization programs (Test LITE) IMS TestVIEW Graphical test environment Supports GPIB and VXI instrument control Supports verification, characterization and failure analysis Supports digital and mixed-signal device technologies Integrates software in IMS Test LITE or ANSI C IMS-Link Off-line facility for test preparation and rule checking Linkage between EDA tools and IMS Test Stations Graphical front end to conversion process Translates pattern data from Verilog and other popular simulators Generates IMS Test Station setup files ATE-Link Works with WaveBridge, PBridge or VBridge software to convert IMS Test Station files to ATE patterns and timing files Converts IMS Test Station files into Waveform Generation Language (WGL) or Standard Event Format (SEF ASCII)
VIRTUAL TEST SOFTWARE While EDA tools have helped improve designer productivity, little has been done to provide test development engineers with software productivity tools. As a result, test development times have increased while design time has been reduced. To address this trend, the Company has made a major commitment to providing a set of software tools for test engineers. These tools, called Virtual Test Software, allow the test engineer to accelerate the generation of a test program, simulate the test environment, develop the test fixture and document the entire test process. These tools are run on a UNIX workstation rather than on an expensive ATE system. This software can be used to simulate the ATE environment and eliminate the need to use ATE machines for debugging test programs, and allows test engineers to develop test programs in parallel with the design, prototype manufacturing and engineering test processes. With Virtual Test Software tools, test engineers begin test development work before device design is completed. Through the use of tester modeling and simulation, both the test itself and the testability of the design can be verified on a workstation before first silicon deliveries. DANTES. The Company believes that the Dantes product is currently the only commercially available Virtual Test Software product supporting a broad range of ATE systems. Dantes provides graphical test capture, automated test fixture design, layout and analysis, test program simulation and document generation for most phases of the test process. In addition, Dantes provides an interface with ATE machines by allowing ATE code generation and ATE emulator interface. Dantes currently operates in conjunction with Cadence EDA software and certain ATE machines manufactured by Advantest, Credence, Hewlett-Packard, LTX, Teradyne and Yokogawa. The Company plans to expand its interfaces to work with software produced by other EDA vendors and ATE machines produced by other manufacturers. Recently, the Company has released Dantes version 2.0, supporting a Final Test Schematic (FTS) environment which enables users to build and view a complete top down test for an integrated circuit, and to partition test simulation into smaller segments. It also allows interactive test simulation for performing "what-if" analysis. The Dantes product was originally developed by Cadence and purchased by the Company in 1994. See "Certain Transactions." 32 SIMULATION AND TEST LANGUAGE (STL). The STL product provides a Virtual Test solution for digital applications. The STL product compiles data for simulation or for a functional test program and permits test engineers to compare simulation results with normative test data. The following table sets forth the Company's Virtual Test Software product offerings. VIRTUAL TEST SOFTWARE PRODUCTS
PRODUCT APPLICATION CAPABILITY Dantes Mixed-signal Graphic test capture Integrated tester rule checking Automated test fixture design, layout, analysis Test program simulation Automated ATE code generation ATE emulator interface Documentation generation Simulation and Test Digital High level language stimulus generation Language (STL) Compilation for simulation or functional test program Compare simulation results with expected data
Although Virtual Test Software is a relatively new methodology, revenues for this product line have grown to 9% and 11% of the Company's net sales for the year ended December 31, 1996 and for the fourth quarter of fiscal 1996, respectively. The Company believes that its Virtual Test Software provides a significant advantage to semiconductor designers in shortening time-to-market and in reducing development cost. However, no assurance can be given that the Company will be successful in marketing its Virtual Test Software or that its Virtual Test Software will adequately meet the requirements of the marketplace and achieve rapid market acceptance. The success of the Company in developing new and enhanced products depends upon a variety of factors, including, but not limited to, its continued ability to adequately fund new product developments, timely and efficient completion of product design, timely and efficient implementation of manufacturing and assembly processes and product performance and acceptance at customer locations. There can be no assurance that the Company will be successful in developing and marketing new products and product enhancements that respond to technological change, evolving industry standards and changing customer requirements; that the Company will not experience difficulties that could delay or prevent the successful development, introduction and marketing of these products; or that its new products and product enhancement will adequately meet the requirements of the marketplace and achieve market acceptance. In particular, the Company's Virtual Test Software alternative to traditional methods of developing the test programs for testing complex electronic devices on expensive test equipment has not yet achieved widespread market acceptance. See "Risk Factors -- Technological Change; Importance of Timely Product Introduction." CUSTOMER SUPPORT AND SERVICE To be competitive, the Company believes it must provide a high level of support and service. Support and service accounted for 21% of the Company's net sales for the fiscal year ended December 31, 1996. The Company maintains and supports products sold directly in the United States with the Company's service and support personnel. The Company's international distributors and dedicated international sales agents generally provide maintenance and support to their customers. In addition, Cadence acts as a sales agent for the Company's Virtual Test Software in which capacity it provides "first call" support to its own customers. The Company offers a toll-free technical support hotline to customers and distributors. Support engineers answer the technical support calls and generally provide same-day responses to questions that cannot be 33 resolved during the initial call. When necessary, however, support engineers are dispatched to the customer's facility. In addition, the Company provides refurbishment services to customers who purchase used Test Stations. The Company maintains a rapid response program which is designed to quickly respond to customer support issues. Many of the Company's customers currently have support agreements with the Company. The Company ranked first in 1993, 1994 and 1995 among test equipment companies in customer satisfaction and quality in the test equipment market according to VLSI Research, Inc. The Company's general warranty period ranges from three months to one year for its Test Stations. During such warranty period, the Company will repair or replace failed components. The Company generally warrants its software products for three months. During such warranty period, the Company will investigate all reported problems and will endeavor to provide a solution. Warranty costs have not been significant to date, but no assurance can be given that such costs will not increase in the future or that any such increase would not have a material adverse effect on the Company's financial condition and results of operations. Many of the Company's customers enter into maintenance agreements with the Company which become effective upon the expiration of the warranty period. TECHNOLOGY The Company has used a variety of proprietary hardware and software technologies to design its Test Stations. The Company's proprietary hardware technology includes, among other things, full-custom gallium arsenide integrated circuits, semi-custom ECL integrated circuits, semi-custom CMOS integrated circuits, mixed-signal hybrid assemblies, MCMs and high-speed printed circuit boards, all of which are manufactured to the Company's specifications by third parties. These technologies provide fast data conversions from simulator formats to Test Station formats, complex high speed verification and characterization capabilities, and support an interactive user environment that allows the Company's customers to debug complex circuits. The Company's proprietary software technology provides highly refined capability to convert all generally used simulation data to Test Station formats, and to enable rapid interactive debug capability for the Company's customers. The Company's products can exchange data with the EDA design environments sold by Cadence, Mentor Graphics, Synopsys and ViewLogic and with the ATE environments of Credence and Teradyne. The Company's proprietary Virtual Test Software provides an innovative solution to manufacturing test program development, fixture development and test simulation prior to production of the prototype. MARKETS AND CUSTOMERS The Company's products serve design, product and test engineers in the semiconductor, aerospace, automotive, computer, consumer electronics, datacommunication, medical electronics, multimedia, network computing, telecommunications and other industries. The Company's marketing strategy has been to target its sales efforts in the research and development and production engineering departments of major corporations in those industries. The Company seeks a broad base of customers in a variety of industries to reduce the effect of the cyclical nature of any one industry. For the years ended December 31, 1994, 1995 and 1996, sales to Intel represented approximately 22%, 30% and 36% of the Company's net sales, respectively. No other customer accounted for more than 10% of the Company's net sales in 1994, 1995, or 1996. The Company's five largest customers based on 1996 net sales are Intel, Advanced Micro Devices, Tokyo Electron Limited, Rockwell and SGS-THOMSON. For the years ended December 31, 1994, 1995 and 1996, sales to the Company's top five customers represented 43%, 53% and 57% of net sales, respectively. ENGINEERING TEST STATION MARKET. The Company's engineering Test Stations are part of the Logic Test and Mixed-Signal Test markets, which are the largest segments of the overall semiconductor ATE market. These markets are broken into two major sectors, Engineering Test and Production Test. The Company's Test Stations are primarily used in Engineering Test applications for prototype verification and characterization. 34 PRODUCTION MARKET. Production ATE Systems are used after production manufacturing to find defective parts or to sort for performance characteristics. Production ATE systems typically require high throughput, timing accuracy and timing flexibility. Production ATE systems are typically the most expensive test systems used. The production ATE market is highly competitive and under pricing pressures as lower cost ATE systems enter the market. VIRTUAL TEST MARKET. The Company believes semiconductor companies will continue to seek ways to improve test engineering productivity and ATE capital utilization and will, therefore, allocate funds from their test engineering budgets or ATE capital budgets to purchase the Company's Virtual Test Software. In addition, Virtual Test Software may be used with the existing installed based of ATE equipment as well as newly purchased equipment. While all semiconductor companies can potentially use Virtual Test Software to reduce time-to-market and save development cost, it is important to recognize that both the methodology and product are new and the market is therefore difficult to quantify. The loss of a major customer or any reduction in orders by such customers, including reductions due to market or competitive conditions, would have a material adverse effect on the Company's business, financial condition and results of operations. Moreover, the Company's future success will depend in part upon its ability to obtain orders from new customers, as well as the financial condition and success of its customers and the general economy. See "Risk Factors -- Customer Concentration" and Note 10 of Notes to the Financial Statements. MANUFACTURING OPERATIONS The Company's Test Stations are complex and are used by the Company's customers in critical projects which demand a high level of quality and reliability. The Company invests significant resources to assure the high quality and reliability of its Test Stations and is committed to providing a high level of service to its customers in the event of malfunction to minimize downtime. The Company's manufacturing operations primarily consist of order administration, materials planning, procurement, final assembly, quality control of materials, components and subassemblies, final systems integration and extensive calibration and testing. The Company uses a manufacturing control computer system to monitor orders, as well as purchasing, inventory, production and manufacturing costs. The Company currently uses several independent third-party vendors to manufacture its subassemblies and semiconductor components, including circuit boards, integrated circuits and integrated circuits packaging, cable assembly and mechanical parts. External manufacturing is performed to the Company's specifications with technical support from the Company. If any of the Company's third-party vendors were to experience financial, operational, production or quality assurance difficulties or a catastrophic event that resulted in a reduction or interruption in supply to the Company, the Company's operating results would be materially adversely affected until the Company was able to establish sufficient manufacturing supply from alternative sources. While to date suitable third party manufacturing capacity has been available, there can be no assurance that such manufacturers will be able to meet the Company's future requirements or that such services will continue to be available to the Company at favorable prices. See "Risk Factors -- Dependence on Third Party Manufacturers." The Company believes it has developed a strong vendor base, purchasing components and subassemblies both from national distributors and directly from vendors' factories. Some of the subassembly vendors are small, local companies to which IMS represents substantial volume. The components used in the Company's products consist of standard parts available from a multitude of vendors, along with a number of proprietary items available only from sole or single source suppliers. The Company has supply commitments from a limited number of its vendors and generally purchases components on a purchase order basis as opposed to entering into long-term volume agreements. The Company seeks to limit the risk of supply disruptions through close relationships with vendors and through a 35 safety stock program that provides a reserve supply of critical components that will give the Company time to develop a second source supplier in a timely fashion in the event of a supply disruption. However, no assurance can be given that these efforts will prove successful in all cases. Currently, the Company purchases a number of critical parts from sole source suppliers for which alternative sources are not available. The Company's reliance on a sole or a limited group of suppliers and on outside subcontractors involves several risks, including a potential inability to obtain an adequate supply of required components and reduced control over pricing and timely delivery of components. The Company has generally been able to obtain adequate supplies of components in a timely manner from current vendors, or, when necessary to meet production needs, from alternate vendors. However, the Company has occasionally experienced component supply, quality or third party assembly problems. For example, the Company depends on a sole sourced custom integrated circuit in one of its Test Stations. In 1994, a significant portion of new deliveries of this part did not meet specifications, thereby resulting in Test Stations being unable to detect failures when operating at speeds below 10 MHz. Recently, the Company experienced late delivery of IC components used in the driver module of certain of its Test Stations. In addition, the limits within which these components operated required the Company to change its product specifications for those Test Stations. The Company has thus far been able to avoid any material adverse impact on timing of customer deliveries for its Test Stations resulting from problems of this type. However, no assurance can be given that supply problems will not recur and, if such problems do recur, that these strategies will be effective in every case. Any prolonged inability to obtain adequate supplies of quality components or any other circumstances that would require the Company to seek alternative sources of supply could have a material adverse effect on the Company's business, financial condition and results of operations and could damage the Company's relationships with its customers. MARKETING AND DISTRIBUTION The Company markets its products domestically through a direct sales force which, as of December 31, 1996, consisted of 53 direct sales and applications engineering professionals, sales managers and sales support personnel. The direct sales force has primary responsibility for developing orders, coordinating distribution, providing demonstrations and providing applications support. The Company employs skilled applications and service engineers and technically proficient sales people capable of serving the sophisticated needs of prospective customers' engineering staffs as part of the customer support process. The sales force is managed from the Company's headquarters in Beaverton, Oregon and its three regional offices in Irvine and Santa Clara, California; and Boston, Massachusetts. The Company markets its products internationally through independent distributors managed by the Company and through dedicated agents employed by Cadence subsidiaries in England, France, Germany and Israel. The Company also sells through independent distributors in Scandinavia and Italy. The Company may choose to establish foreign sales subsidiaries to conduct its foreign sales operations in some locations, and may take over distribution directly from Cadence in some jurisdictions. In Asia, the Company sells through dedicated employees of Cadence subsidiaries in Taiwan and through distributors in Japan, the People's Republic of China, the Philippines, Hong Kong, Malaysia/Singapore and Korea. International sales accounted for approximately 40%, 32% and 26% of the Company's net sales for the years ended December 31, 1994, 1995 and 1996, respectively. The Company's foreign sales and service operations are subject to risks inherent in foreign operations, including unexpected changes in regulatory requirements, exchange rates, tariffs or other barriers and potentially negative tax consequences. In addition, in certain jurisdictions, there is a risk of reduced protection for the Company's copyrights, trademarks and trade secrets. See Note 10 of Notes to the Financial Statements. The Company exhibits at trade shows to promote existing products and to introduce new products, and participates in technical forums to exchange marketing and product information with its vendors and customers. The Company also uses advertising in trade journals, technical articles, direct mail and telephone solicitations to build interest in the Company and its products. The Company provides extensive training for its sales representatives and distributors and supports its representatives and distributors with marketing tools, including sales brochures, demonstration test equipment and promotional product literature. 36 RESEARCH AND DEVELOPMENT The electronic design and test equipment market is subject to rapid technological change and new product introductions. The Company's ability to remain competitive in this market will depend in significant part upon its ability to continue to successfully develop and introduce new products and enhancements on a timely and cost-effective basis. There can be no assurance that the Company will be successful in developing and marketing new products and product enhancements that respond to technological change, evolving industry standards and changing customer requirements, that the Company will not experience difficulties that could delay or prevent the successful development, introduction and marketing of these products, or that its new products and product enhancements will adequately meet the requirements of the marketplace and achieve market acceptance. The selection of new capabilities for existing products and of specifications for new product lines is driven in significant part by strong communication links with customers. Accordingly, maintaining those communication links is a significant strategic necessity for the Company. The Company's ongoing research and development efforts include the enhancement of current generation Test Stations and Virtual Test Software and the ongoing development of future generation products. The Company has historically devoted the great majority of its research and development efforts to the design and development of engineering Test Stations and related hardware and software technologies. Its Virtual Test Software technology was originally developed by Cadence and was purchased by the Company. The Company is currently developing additional software products for its Virtual Test product line and expects to devote considerable internal research and development efforts to this product line in the future. Research and development expenditures for 1994, 1995 and 1996 were $3.7 million, $6.2 million and $7.8 million, respectively. The Company's research and development efforts with respect to both hardware and software are handled by the Company's research and development department. The ratio of software engineers to hardware engineers is approximately four to one. COMPETITION The design and test equipment market is highly competitive. Although the Company believes that it has a competitive advantage in the verification market due to the high performance and cost effectiveness of its products, the Company anticipates that technical advancement in the industry generally could lead to increased competition in the future. The Company believes that the principal competitive factors in the verification and characterization markets are product performance and reliability, price, ease of use, marketing and distribution capability, service and support and the supplier's reputation and financial stability. The Company believes that it competes favorably with respect to all principal competitive factors and that it is particularly strong in the areas of product performance, ease of use, low cost and service and support. The Company currently competes with a number of other verification and characterization equipment manufacturers. Some of these manufacturers, such as Hewlett-Packard, Teradyne and Tektronix have greater financial, marketing, manufacturing and technological resources than the Company. New product introductions or product announcements by the Company's competitors could cause a decline in sales or loss of market acceptance of the Company's existing products. Moreover, increased competitive pressure could lead to intensified price-based competition, which could have a material adverse effect on the Company's business, financial condition and results of operations. The Company believes that its long-term success will depend largely on its ability to identify design and test needs ahead of its competitors and develop products which respond to those needs in a timely manner. In addition, no assurance can be given that other companies, including Cadence, which retains certain rights to the Virtual Test Software technology, and other EDA companies, will not develop methodologies and products that are competitive with the Company's Virtual Test Software business. The Company also believes that to remain competitive, it will require significant financial resources in order to invest in new product development and to maintain a worldwide customer service and support network. There can be no assurance that the Company will be able to compete successfully in the future. See "Risk Factors -- Highly Competitive Industry." 37 BACKLOG The Company schedules production of its Test Stations based upon order backlog and order forecast. The Company includes in its backlog only those customer orders for systems and services for which it has accepted purchase orders and assigned shipment or performance dates within the following twelve months. The majority of the Company's orders, however, are subject to cancellation or rescheduling by the customer with limited or no penalties. Accordingly, the Company's backlog at any particular date may not necessarily be representative of actual sales for any succeeding period due to orders received for systems to be shipped in the same quarter, possible changes in system delivery schedules, cancellations of orders and potential delays in system shipments. PROPRIETARY RIGHTS The Company does not currently have any patents and historically has relied principally on trade secret and copyright law to protect its technology. The Company believes that, because of the rapid pace of technological change in the data communications and telecommunications industries, the legal intellectual property protection for its products is a less significant factor in the Company's success than the knowledge, abilities and experience of the Company's employees, the frequency of its product enhancements, the effectiveness of its marketing activities and the timeliness and quality of its support services. The Company's policy has been to enter into nondisclosure/confidentiality agreements with all employees, and it generally enters into agreements with vendors and others that likewise limit access to and distribution of its proprietary information. There can be no assurance that the steps taken by the Company will provide adequate protection of its technology or that competitors will not be able to develop similar or functionally equivalent technology. In the future, the Company may receive notice of claims of infringement of other parties' proprietary rights and there can be no assurance that infringement or invalidity claims (or claims for indemnification resulting from infringement claims against third parties, such as customers) will not be asserted against the Company or that any such assertions will not have a material adverse affect on the Company's business, financial condition and results of operations. If any claims or actions are asserted against the Company, the Company may seek to obtain a license of such third party's intellectual property rights. There can be no assurance, however, that under such circumstances, a license would be available under reasonable terms or at all. See "Risk Factors -- Proprietary Rights." The Company also licenses and/ or holds marketing rights to certain software, to which the copyright is owned by other parties including Cadence. See "Certain Transactions." EMPLOYEES At December 31, 1996, the Company had 251 employees, including 71 in marketing and sales, 76 in manufacturing and service, 73 in research, development and engineering and 31 in administration and finance. The Company believes that its future success will depend on its continued ability to attract and retain highly qualified technical, management and marketing personnel. The Company's employees are not subject to a collective bargaining unit and the Company believes that its employee relations are very good. The Company also currently sells and supports its products in Europe, Israel and Taiwan through Cadence employees located in Cadence facilities and who act as dedicated agents of the Company under the terms of the Corporate Services Agreement. These Cadence employees sell and support the Company's products on a full-time basis and coordinate their efforts with the Company's manufacturing facility in the United States. The Company pays to Cadence the full cost of Cadence's expense (plus an agency fee) for Cadence's employees who will fulfill dedicated agent functions of the Company in certain markets under the terms of a Corporate Services Agreement between the Company and Cadence. There can be no assurance that the Company will retain the services of such agents for the term of the Corporate Services Agreement or that replacement personnel could be retained on a timely basis, if at all. The loss of such personnel and the failure to attract and retain replacement employees, or the costs associated with hiring new sales personnel and providing adequate facilities and benefits to such employees would likely have a material adverse effect on the Company's business, financial condition and results of operations. See "Certain Transactions." PROPERTIES The Company's executive offices, as well as its principal manufacturing, engineering and marketing operations, are located in a leased building of approximately 75,000 square feet in Beaverton, Oregon. The 38 lease expires on December 31, 1998. The Company believes the space will be adequate through that period and, if required, suitable space is available nearby. The Company also leases a total of approximately 7,500 square feet of office space in which regional sales offices are located. Under the Amended Corporate Services Agreement between Cadence and the Company, Cadence has agreed to provide office space and associated office support for certain Company personnel located in the United States and a number of foreign countries. See "Certain Transactions -- Agreements with Cadence." 39 MANAGEMENT The following table sets forth certain information with respect to the executive officers and directors of the Company.
NAME AGE POSITION - --------------------------------------------- --- ------------------------------------------------------------ OFFICERS Keith L. Barnes.............................. 45 President, Chief Executive Officer and Director Sar Ramadan.................................. 53 Chief Financial Officer, Secretary and Treasurer Mark Allison................................. 40 Vice President, Marketing W. Barry Baril............................... 44 Vice President, Engineering David L. Brinker............................. 45 General Manager, Test Software Division James P. Fraine.............................. 41 Vice President, Sales Donald E. Grant.............................. 55 Vice President, Operations Gwyn Harvey.................................. 43 Director of Human Resources Kenneth R. Lindsay........................... 52 Vice President, Asia Operations NONEMPLOYEE DIRECTORS H. Raymond Bingham (1)....................... 51 Chairman of the Board C. Scott Gibson (1)(2)....................... 44 Director, Audit Committee Chairman James M. Hurd (1)(2)......................... 48 Director James E. Solomon............................. 60 Director
- ------------------------ (1) Member of Audit Committee. (2) Member of Compensation Committee. OFFICERS Mr. Barnes has been the Company's Chief Executive Officer since May 1995, the Company's President since April 1991 and became a director of the Company in 1989. From 1989 to 1991, Mr. Barnes was the Company's General Manager. Mr. Barnes is a member of the Board of Trustees for the Oregon Graduate Institute of Science and Technology. Mr. Barnes is Chairman Ex-officio of the American Electronics Association, Oregon Council, and was a member of the Board of Directors of the American Electronics Association in 1993. Mr.Barnes is a director of Data I/O Corporation, a public company that provides programming and handling equipment for design and manufacture of programmable integrated circuits. Mr. Ramadan joined the Company in 1993 as Chief Financial Officer, and was elected Secretary and Treasurer in 1995. Prior to joining IMS, Mr. Ramadan held the positions of Finance Director and Chief Accounting Officer of Mentor Graphics Corp., a supplier of EDA software, from 1987 to 1993. In addition, he was Vice President of Finance for CAD/CAM Resources Inc., between 1985 and 1987, and Vice President Group Controller at Computervision Corporation, a computer aided mechanical design business, from 1979 to 1985. Mr. Allison joined the Company in November 1995 as Vice President of Marketing. Prior to joining the Company, Mr. Allison was Director of Memory Marketing for Credence Corporation during 1995 and Director of Marketing for Megatest Corporation, from 1985 to 1995. Both companies are ATE manufacturers. Mr. Baril is a founder of the Company, and has been the Vice President of Engineering since the Company's inception in 1983. Previously, Mr.Baril was Engineering Group Manager for the Logic Analyzer Division of Tektronix, a high technology company, for one year, Hybrid Circuit Project Manager and Group Leader for three years in Tektronix labs, and a Hybrid Circuit Project Leader and Design Engineer for four years at Burr Brown, an analog integrated circuit company. Mr. Brinker joined the Company in December 1996 as General Manager, Test Software Division. Prior to joining the Company, Mr. Brinker was President and Chief Executive Officer of TView, Inc., a multimedia hardware company. From 1994 to July 1996, Mr. Brinker was the Chief Financial Officer of Summit Design 40 Systems, a supplier of EDA software. Between 1986 and 1994, Mr. Brinker held a variety of positions with Mentor Graphics, a supplier of EDA software, including Vice President of Worldwide Sales, Vice President of International Sales and Vice President of Asia. Mr. Fraine joined the Company in 1994 as Vice President of Sales. Prior to joining the Company, he was the National Sales Manager at Teradyne, Inc., an ATE company, from 1989 to 1994 and held the position of Account Manager at GenRad, Inc. from 1976 to 1986. In addition, Mr. Fraine has held several sales and marketing positions at STS/Axiom Technology, Inc., a mixed-signal test equipment company. Mr. Grant joined the Company in 1989 as Vice President of Operations. Prior to joining the Company, Mr. Grant was Director of Manufacturing at Protocol Systems, a medical device manufacturer, from 1986 to 1989 and Director of Operations at Kentrox Industries from 1983 to 1986. Mr. Grant held various manufacturing positions with Hewlett Packard from 1972 to 1983. Ms. Harvey joined the Company in 1987 as Director of Human Resources. Prior to joining the Company, Ms. Harvey worked in a variety of human resources positions with Metheus Corporation, Computervision Corporation, Metheus-Computervision, Inc., Sierracin-EOI and Fairchild, a Schlumberger Company. Mr. Lindsay is a founder of the Company, and has served as Vice President of Asia Operations since 1992, Asian Business Manager from 1989 to 1992 and Vice President and Director of Marketing from 1983 to 1989. Prior to joining the Company, Mr. Lindsay was world wide Marketing Manager for the Semiconductor Test Systems Division of Tektronix, and held other marketing, management, and engineering positions at Tektronix. NONEMPLOYEE DIRECTORS Mr. Bingham has been a director of the Company since July 1993 and Chairman of the Board since May 1995. Mr. Bingham joined Cadence in June 1993 as Executive Vice President and Chief Financial Officer. From June 1985 to May 1993, he served as Executive Vice President and Chief Financial Officer of Red Lion Hotels and Inns, which owns and operates a chain of hotels. Mr. Bingham serves as a director of Sunstone Investors Inc. Mr. Gibson has served as a director of the Company since May 1995. Mr. Gibson co-founded Sequent Computer Systems, Inc., a computer system supplier, in 1983 and served as Sequent's President from 1988 through March 1992. Mr. Gibson serves as Chairman of the Board of Directors of Adaptive Solutions, Inc., and a director of Inference Corp., RadiSys Corporation and TriQuint Semiconductor, Inc. Mr. Gibson also serves as a Vice Chairman of the Oregon Graduate Institute of Science and Technology and as a director of several privately held technology companies. Mr. Hurd has served as a director of the Company since May 1995. Mr. Hurd co-founded Planar Systems, Inc., a publicly traded manufacturer of high performance information displays and has served as its President and Chief Executive Officer since 1983. Mr. Hurd is also a director of Planar Systems, Inc. Mr. Hurd is a member of the Board of Trustees for the Oregon Graduate Institute of Science and Technology. Mr. Solomon has served as a director of the Company since April 1995. Mr. Solomon currently serves as President and Chief Executive Officer of XULU Entertainment, Inc. Mr. Solomon served as Senior Vice President and Chief Technology Officer for Cadence from February 1994 to May 1996. Mr. Solomon has served as Senior Vice President of Cadence's Analog Division from January 1993 to February 1994 and as President of Cadence's Analog Division from December 1988 to January 1993. Mr. Solomon also served as Co-Chairman of the Board of Directors of Cadence from May 1988 until May 1989. Mr. Solomon is also the Chairman of the Board of Smart Machines, Inc., and XULU Entertainment, Inc., private companies. The Company's directors are divided into three classes and serve for three year terms, with one class being elected by the shareholders each year. The terms of the current directors will expire as follows: Mr. Bingham in 1997, Messrs. Barnes and Gibson in 1998 and Messrs. Solomon and Hurd in 1999. The members of the Audit Committee currently are Messrs. Gibson, Hurd and Bingham. The position on the 41 Company's Board of Directors vacated by Delbert W. Yocam will be filled at the Company's 1997 Annual Meeting. The Audit Committee reviews the scope of the independent annual audit, the independent public accountants' letter to the Board of Directors concerning the effectiveness of the Company's internal financial and accounting controls and the Board of Directors' response to that letter, if deemed necessary. The Board of Directors also has appointed a Compensation Committee which reviews executive compensation and establishes executive compensation levels and also administers the Company's stock option plans and the 1995 Employee Stock Purchase Plan. During the fiscal year ended December 31, 1996, the Compensation Committee held sixteen meetings. The members of the Compensation Committee currently are Messrs. Hurd and Gibson. Article V of the Company's Restated Articles of Incorporation, (the "Restated Articles"), provides that the Company's directors may be removed only for cause, and only at a meeting called expressly for that purpose by a vote of 75% of the votes then entitled to be cast for the election of directors. Executive officers of the Company are appointed by the Board of Directors and serve at the discretion of the Board. DIRECTOR COMPENSATION The members of the Company's Board of Directors are reimbursed for out-of-pocket and travel expenses incurred in attending Board meetings. The Company's Chairman of the Board receives an annual retainer of $18,000 and each nonemployee member of the Board of Directors, other than the Chairman, receives an annual retainer of $12,000. In addition, each nonemployee director receives $1,000 for each Board meeting attended and $1,000 for each meeting of a committee of the Board attended. Under the Company's 1995 Stock Option Plan for Nonemployee Directors, each person who is a nonemployee director receives certain stock options. See "-- 1995 Stock Option Plan for Nonemployee Directors." 42 EXECUTIVE COMPENSATION The following table provides certain summary information concerning compensation for the fiscal years ended December 31, 1994, 1995 and 1996 of the Company's Chief Executive Officer and each of the four other most highly compensated executive officers of the Company (collectively, the "named executive officers"), for the fiscal year ended December 31, 1996. SUMMARY COMPENSATION TABLE
LONG-TERM ANNUAL COMPENSATION COMPENSATION ------------------------------------------------ ------------- OTHER ANNUAL STOCK OPTIONS ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION GRANTED COMPENSATION - -------------------------------------------- --------- ---------- ---------- ------------- ------------- ------------- Keith L. Barnes............................. 1994 $ 185,000 $ 58,366 $ 7,115(1) 157,500(2) $ 7,493(3) President and Chief Executive Officer 1995 195,000 98,886 11,538(1) 84,000 7,654(3) 1996 200,000 139,250 12,939(4) 120,000 6,000(5) Sar Ramadan................................. 1994 104,813 20,528 -- 33,750(2) 920(6) Chief Financial Officer 1995 112,250 32,246 -- 47,000 2,223(6) 1996 127,744 41,909 -- 10,000 2,130(6) W. Barry Baril.............................. 1994 108,760 30,831 -- 33,750(2) 1,579(6) Vice President, Engineering 1995 113,440 31,149 4,423(1) 70,000 361(6) 1996 122,500 37,699 -- 10,000 1,407(6) Marvin S. Wolfson(7)........................ 1994 124,080 37,626 -- -- 404(6) Former General Manager, Test 1995 124,080 28,265 -- 31,000 404(6) Software Division 1996 124,080 28,705 -- 5,000 404(6) Don Grant................................... 1994 97,207 16,166 -- 33,750(2) 832(6) Vice President, Operations 1995 102,302 25,705 4,000(1) 47,000 891(6) 1996 116,000 31,844 -- 10,000 2,604(6) Mark Allison................................ 1994 -- -- -- -- -- Vice President, Marketing 1995 10,195 -- -- 26,000 19(6) 1996 112,000 27,473 -- -- 38,506(8)
- ------------------------ (1) Reflects a cash payment in lieu of vacation. (2) Reflects options to purchase shares of Cadence Common Stock (after giving effect to 3-for-2 stock splits of the outstanding shares of Cadence effective October 16, 1995 and May 16, 1996.) (3) Represents automobile allowance and Company payments of additional insurance premiums. (4) Represents Company reimbursements for organization dues and Company payments of additional insurance premiums. (5) Represents automobile allowance. (6) Represents Company payments of additional insurance premiums. (7) Mr. Wolfson ceased to be an executive of the Company immediately prior to the Company's fiscal year end. (8) Represents relocation reimbursement and Company payments of additional insurance premiums. 43 OPTION GRANT TABLE The following table sets forth certain information concerning options granted to the named executive officers during the year ended December 31, 1996 under the Company's 1995 Stock Option Plan. OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF NUMBER OF PERCENT OF STOCK PRICE SECURITIES TOTAL OPTIONS APPRECIATION FOR UNDERLYING GRANTED TO EXERCISE OPTION TERM(3) OPTIONS EMPLOYEES IN PRICE PER EXPIRATION ------------------------ NAME GRANTED(1) FISCAL 1996 SHARE(2) DATE 5% 10% - ------------------------------------- ----------- ----------------- ----------- ----------- ---------- ------------ Keith L. Barnes...................... 120,000 27% $ 13.25 3/8/06 $ 999,942 $ 2,534,051 Sar Ramadan.......................... 10,000 2 12.75 2/7/06 80,184 203,202 W. Barry Baril....................... 10,000 2 12.75 2/7/06 80,184 203,202 Marvin S. Wolfson.................... 5,000 1 12.75 2/7/06 40,092 101,601 Don Grant............................ 10,000 2 12.75 2/7/06 80,184 23,202 Mark Allison......................... -- -- -- -- -- --
- ------------------------ (1) Options granted become exercisable starting with the end of the month of the grant date, with 1/48th of the total number of options granted becoming exercisable at that time and with an additional 1/48th of such options becoming exercisable each month thereafter, with a total four-year vesting period. (2) Options were granted at an exercise price equal to the fair market value of the Company's Common Stock at the time of grant. (3) The potential realizable value is calculated based upon the term of the option at its time of grant (10 years) and is calculated by assuming that the stock price on the date of grant appreciates at the indicated annual rate compounded annually for the entire term of the option and that the option is exercised and sold on the last day of its term for the appreciated price. The 5% and 10% assumed rates of appreciation are derived from the rules of the Securities and Exchange Commission and do not represent the Company's estimates or projection of the future Common Stock price. There can be no assurance that the Common Stock will appreciate at any particular rate or at all in future years. OPTION EXERCISES AND HOLDING The following table sets forth certain information with respect to the named executive officers concerning the exercise of options granted under the Company's 1995 Stock Incentive Plan during the year ended December 31, 1996, and the value of unexercised options held as of December 31, 1996.
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS SHARES OPTIONS AT FY-END(1) AT FY-END(1)(2) ACQUIRED ON VALUE -------------------------- -------------------------- NAME EXERCISE(1) REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - --------------------------------- ----------- ----------- ----------- ------------- ----------- ------------- Keith L. Barnes.................. -- -- 47,506 156,494 $ 362,227 $ 878,274 Sar Ramadan...................... -- -- 21,877 35,123 184,417 278,958 W. Barry Baril................... -- -- 31,456 48,544 269,431 398,069 Marvin S. Wolfson................ -- -- 14,063 21,937 119,939 178,311 Don Grant........................ -- -- 21,877 35,123 184,417 278,958 Mark Allison..................... -- -- 7,057 18,943 32,639 87,611
- ------------------------ (1) The above table excludes information regarding exercises and the year-end value of options to acquire shares of Common Stock of Cadence (the Company's majority shareholder) granted prior to the Company's initial public offering and in years prior to 1995. Cadence offers its employees a stock option program, including employees employed by subsidiaries of Cadence. Prior to contemplation of the Company's initial public offering, Cadence offered options to acquire Common Stock of Cadence to Company employees and officers under the stock option program. All of the options to acquire 44 Common Stock of Valid Logic held by Company employees as of the 1991 merger of Cadence and Valid Logic, of which the Company was then a subsidiary, were exchanged for options to acquire shares of Common Stock of Cadence. The options to acquire Common Stock of Cadence have been vesting since Cadence's merger with Valid Logic. No options to acquire Common Stock of Cadence were granted in 1996 to any officers of the Company. In 1996, Company employees, including officers, exercised 196,627 options to acquire Common Stock of Cadence and realized gains of approximately $5,556,000. Of these 196,627 options exercised, officers of the Company exercised options for 92,732 shares of Cadence Common Stock and realized gains of approximately $2,490,000. The named executive officers accounted for gains of approximately $2,051,000. Gains from the exercise and sale of Cadence options do not impact the Company's expenses or results of operations. Furthermore, such options do not enter into the calculation of the Company's outstanding shares nor its earnings per share calculations. The Shares Acquired on Exercise, Value Realized, Number of Securities Underlying Unexercised Options at FY-End (Exercisable/Unexercisable) and Value of Unexercised In-the-Money Options at FY-End (Exercisable/Unexercisable) with respect to the Cadence options held by the named executive officers is as follows: Mr. Barnes -- 23,732, $655,843, 3,765, 26,252, $125,265 and $873,426; Mr. Ramadan -- 14,060, $393,841, 2,344, 16,408, $77,196 and $534,314; Mr. Baril -- 13,750, $420,711, 51, 11,392, $1,684 and $377,158; Mr. Wolfson -- 5,500, $198,458, 5,435, 0, $190,338 and $0; Mr. Grant -- 11,498, $381,651, 2,109, 10,548, $69,641, and $348,304; Mr. Allison -- 0, $0, 0, 0, $0, $0. (2) Amounts reflected are based upon the market value of the underlying securities at fiscal year end minus the exercise price. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Compensation Committee of the Board of Directors consists of two persons, neither of whom has been or is an officer or an employee of the Company. STOCK OPTION PLANS 1995 STOCK INCENTIVE PLAN The Company's 1995 Stock Incentive Plan (the "1995 Plan"), which was approved by the Company's sole shareholder on May 11, 1995, provides for grants of both "incentive stock options" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") and "non-qualified stock options" which are not qualified for treatment under Section 422 of the Code, and for direct stock grants and sales to employees or consultants of the Company. The purposes of the 1995 Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentives to the employees and consultants of the Company and to promote the Company's business. The 1995 Plan is administered by the Compensation Committee of the Board of Directors. The term of each option granted under the 1995 Plan will generally be ten years from the date of grant, or such shorter period as may be established at the time of the grant. An option granted under the 1995 Plan may be exercised at such times and under such conditions as determined by the Compensation Committee. If a person who has been granted an option ceases to be an employee or consultant of the Company, such person may exercise that option only during the exercise period established by the Compensation Committee at the time the options were granted, which shall not exceed 90 days after the date of termination, and only to the extent that the option was exercisable on the date of termination. If a person who has been granted an option ceases to be an employee or consultant as a result of such person's total and permanent disability, such person may exercise that option at any time within twelve months after the date of termination, but only to the extent that the option was exercisable on the date of termination. No option granted under the 1995 Plan is transferable other than at death, and each option is exercisable during the life of the optionee only by the optionee. In the event of the death of a person who has received an option, the option generally may be exercised by a person who acquired the option by bequest or inheritance during the twelve month period after the date of death, to the extent that such option was exercisable at the date of death. 45 The exercise price of incentive stock options granted under the 1995 Plan may not be less than the fair market value of a share of Common Stock on the last market trading day prior to the date of grant of the option. Non-qualified stock options may not be granted for less than 85% of fair market value and options granted to greater than 10% shareholders may not be granted for less than 110% of fair market value. The consideration to be paid upon exercise of an option, including the method of payment, will be determined by the Compensation Committee and may consist entirely of cash, check, shares of Common Stock or any combination of such methods of payment as permitted by the Compensation Committee. Certain options authorized to be granted under the 1995 Plan are intended to qualify as incentive stock options for federal income tax purposes. Under federal income tax law currently in effect, the optionee will recognize no income upon grant or upon a proper exercise of an incentive stock option. If an employee exercises an incentive stock option and does not dispose of any of the option shares within two years following the date of grant and within one year following the date of exercise, then any gain realized upon subsequent disposition of the shares will be treated as income from the sale or exchange of a capital asset. If an employee disposes of shares acquired upon exercise of an incentive stock option before the expiration or either the one-year holding period or the two-year waiting period, any amount realized will be taxable as ordinary compensation income in the year of such disqualifying disposition to the extent that the lesser of the fair market value of the shares on the exercise date or the fair market value of the shares on the date of disposition exceeds the exercise price. The Company will not be allowed any deduction for federal income tax purposes at either the time of the grant or exercise of an incentive stock option. Upon any disqualifying disposition by an employee, the Company will be entitled to a deduction to the extent the employee realized ordinary income. Certain options authorized to be granted under the 1995 Plan will be treated as non-qualified stock options for federal income tax purposes. Under federal income tax law presently in effect, no income is realized by the grantee of a non-qualified stock option pursuant to the 1995 Plan until the option is exercised. At the time of exercise of a non-qualified stock option, the optionee will realize ordinary compensation income, and the Company will be entitled to a deduction, in the amount by which the market value of the shares subject to the option at the time of exercise exceeds the exercise price. The Company's deduction is conditioned upon withholding on the income amount. Upon the sale of shares acquired upon exercise of a non-qualified stock option, the excess of the amount realized from the sale over the market value of the shares on the date of exercise will be taxable. The 1995 Plan will continue in effect until May 2005, unless earlier terminated by the Board of Directors, but such termination will not affect the terms of any options outstanding at that time. The Board of Directors may amend, terminate or suspend the 1995 Plan at any time, provided that no amendment regarding amount, price or timing of the grants may be made more than once every six months, other than to conform with changes in certain requirements of the Securities Exchange Act of 1934 and Internal Revenue Code. Amendments that would materially increase the number of shares that may be issued, materially modify the requirements as to eligibility for 1995 Plan participation, or materially increase the benefits to 1995 Plan participants must be approved by a vote of the Company's shareholders. Set forth below is information as to the number of options to purchase Company Common Stock that have been granted under the 1995 Plan to the persons and groups identified in the table as of December 31, 1996. The closing price of the Common Stock on the Nasdaq National Market was $20 1/2 on January 24, 1997. The Company has reserved 1,250,000 shares of Common Stock for issuance under the 1995 Plan. On January 23, 1996, the Company's Board of Directors approved an amendment to the 1995 Plan to reserve an additional 600,000 shares of Common Stock for issuance under the 1995 Plan. This amendment remains subject to shareholder approval. During 1996, options to purchase 442,200 shares of Common Stock were granted to the Company's employees under the 1995 Plan at exercise prices ranging from $12.50 to $24.00, which represent the closing market price on the last trading day prior to date of the option grants. Also during 1996, the Company repriced certain incentive stock options granted to non-officer employees. Employees holding certain options were offered the opportunity to elect to have their options cancelled and reissued at prices lower than the original exercise prices. A total of 82,825 new options were granted with 46 exercise prices equal to the then current market price of $12.50. These regranted options vest ratably over four years from the grant date. From January 1, 1997 through the date hereof, the Company's named executive officers were granted options under the 1995 Plan as follows: Mr. Barnes -- 0; Mr. Ramadan -- 40,000; Mr. Baril -- 10,000; Mr. Wolfson -- 0; Mr. Grant -- 30,000; and Mr. Allison -- 9,000. 1995 STOCK OPTION PLAN FOR NONEMPLOYEE DIRECTORS Nonemployee members of the Board of Directors participate in the Company's 1995 Stock Option Plan for Nonemployee Directors (the "1995 Nonemployee Director Plan"), which was adopted to promote the interests of the Company and its shareholders by strengthening the Company's ability to attract and retain experienced and knowledgeable nonemployee directors by enhancing their incentive to work on behalf of the Company and its shareholders and to encourage them to acquire an increased proprietary interest in the Company. Under the 1995 Nonemployee Director Plan, a 10,000 share stock option is granted to each new nonemployee director at the time such person is first elected or appointed to the Board. In addition, each nonemployee director receives an option to purchase 3,000 shares of Common Stock annually after each annual meeting of shareholders. Set forth below is a summary of the material terms of the 1995 Nonemployee Director Plan. Each option expires ten years from the date of its grant. Outstanding options will expire earlier if an optionee terminates service as a director before the end of the ten year term. If an optionee terminates service as a director for any reason other than retirement, total disability or death, the option will automatically expire 90 days after the date of termination. If an optionee dies or terminates service due to retirement or total disability, the options then outstanding will expire one year after the date of death or termination or on the stated expiration date, whichever is earlier. Options are not assignable and may not be transferred other than by will or the laws of descent and distribution. The exercise price of options granted under the 1995 Nonemployee Director Plan may not be less than the fair market value of a share of Common Stock on the date of grant of the option. Payment of the option exercise price may be in cash or, to the extent permitted by the Compensation Committee, by delivery of previously owned Company stock having a fair market value equal to the option exercise or a combination of cash and stock. The Compensation Committee may also permit "cashless" option exercises by allowing optionees to surrender portions of their options in payment for the stock to be received. All options granted under the 1995 Nonemployee Director Plan are non-qualified -- not intended to qualify under Section 422 of the Code. No gain will be recognized by the optionee at the time of a grant. Generally, at exercise, ordinary income will be recognized by the optionee in an amount equal to the difference between the option exercise price and the fair market value of the shares on the date of exercise, and the Company will receive a tax deduction for the same amount. At the time the optionee disposes of the shares, the appreciation or depreciation of the shares since the option was exercised will be treated as either a short or long term capital gain, depending on how long the shares have been held. The 1995 Nonemployee Director Plan continues in effect until terminated by the Board of Directors or by shareholders but such termination will not affect the terms of any options outstanding at that time. The Board of Directors may amend, terminate or suspend the 1995 Nonemployee Director Plan at any time, provided that no amendment regarding amount, price or timing of the grants may be made more than once every six months other than to conform with changes in certain Internal Revenue Code requirements. Amendments that would materially increase the number of shares that may be issued, materially modify the requirements as to eligibility of the 1995 Nonemployee Director Plan participation, or materially increase the benefits to the 1995 Nonemployee Director Plan participants must be approved by shareholders. The number of options which may be granted under the 1995 Nonemployee Director Plan in fiscal year 1995 may not exceed 60,000 and any subsequent fiscal year may not exceed 18,000, subject to stock splits and similar events. Options that are forfeited or terminated will again be available for grant. During 1996, options to purchase 3,000 shares of Common Stock were granted to each of the Company's five nonemployee Directors. 47 CADENCE OPTIONS Many employees of the Company continue to hold options to purchase Common Stock of Cadence granted under Cadence's 1987 and 1993 Stock Option Plans. Options under Cadence's 1987 Stock Option Plan continue to vest as long as the Company is a majority owned subsidiary of Cadence or the employee provides consulting services to Cadence. Options granted under the Cadence 1993 Stock Option Plan continue to vest as long as Cadence is a shareholder of the Company. The Amended Stockholder Agreement between the Company and Cadence provides that with respect to options granted under the 1987 Stock Option Plan, Cadence will retain certain Company employees as consultants and allow the continuation of vesting of options held by such consultants until fully vested. The balance of Company employees who are holders of such options will be compensated, in the form of cash for the in-the-money value of unvested stock options. Such payout will be contingent upon each employee's continued employment with the Company for the remaining unvested period related to these stock options. Compensation will be paid to the employees, over the remaining vesting period, in the amount equal to the difference between the option price and the fair market value, as defined, of Cadence Common Stock on the date of the cancellation of these stock options. 1995 EMPLOYEE STOCK PURCHASE PLAN On December 15, 1995, the Board of Directors adopted, and on May 6, 1996 the shareholders approved, the Company's 1995 Employee Stock Purchase Plan (the "ESPP"). The Company has reserved 250,000 shares of Common Stock for issuance under the ESPP. The purpose of the ESPP is to provide a convenient and practical means by which employees may participate in stock ownership of the Company. The Board of Directors believes that the opportunity to acquire a proprietary interest in the success of the Company through the acquisition of shares of Common Stock pursuant to the ESPP is an important aspect of the Company's ability to attract and retain highly qualified and motivated employees. The following is a summary of the basic terms and provisions of the ESPP. The ESPP is administered by the Compensation Committee of the Board of Directors. The Compensation Committee has the power to make and interpret all rules and regulations it deems necessary to administer the ESPP and has broad authority to amend the ESPP, subject to certain amendments requiring shareholder approval. All regular employees of the Company and its subsidiaries, including the Company's officers, are eligible to participate in the ESPP if they: (i) have been customarily employed by the Company more than five months in any calendar year, and (ii) are employed in a position with regular hours of more than twenty hours per week. Eligible employees may elect to contribute from 1% to 10% of their cash compensation during each pay period. The ESPP provides for two annual six-month offering periods, beginning on February 1 and August 1 of each year (the "Enrollment Dates"). During the offering periods, participants accumulate funds in an account via payroll deduction. At the end of each six-month offering period, the purchase price is determined and the accumulated funds are used to automatically purchase shares of Common Stock. The purchase price per share is equal to 85% of the lower of the fair market value of the Common Stock (a) on the Enrollment Date of the offering period or (b) the date of purchase. Unless a participant files a withdrawal notice before the beginning of the next offering period, such participant will automatically be re-enrolled for the next offering period. Neither payroll deductions credited to a participant's account nor any rights with regard to the purchase of shares under the ESPP may be assigned, transferred, pledged or otherwise disposed of in any way by the participant. Upon termination of a participant's employment for any reason the payroll deductions credited to the participant's account will be returned to the participant. As of December 31, 1996, there were 231 employees of the Company eligible to participate in the ESPP and 102 employees participating. The ESPP is intended to qualify as an "employee stock purchase plan" within the meaning of Section 423 of the Code. Under the Code, no taxable income is recognized by the participant with respect to shares purchased under the ESPP either at the time of enrollment or at any purchase date within an offering period. 48 If the participant disposes of shares purchased pursuant to the ESPP more than two years from the Enrollment Date and more than one year from the date on which the shares were purchased, the participant will recognize ordinary income equal to the lesser of (i) the excess of the fair market value of the shares at the time of disposition over the purchase price, or (ii) 15% of the fair market value of the shares on the Enrollment Date. Any gain on the disposition in excess of the amount treated as ordinary income will be capital gain. The Company is not entitled to take a deduction for the amount of the discount in circumstances indicated above. If the participant disposes of shares purchased pursuant to the ESPP within two years after the Enrollment Date or within one year after the purchase date, the employee will recognize ordinary income on the excess of the fair market value of the stock on the purchase date over the purchase price. Any difference between the sale price of the shares and the fair market value on the purchase date will be capital gain or loss. The Company is entitled to a deduction from income equal to the amount the employee is required to report as ordinary compensation income. The federal income tax rules relating to employee stock purchase plans qualifying under Section 423 of the Code are complex. Therefore, the foregoing outline is intended to summarize only certain major federal income tax rules concerning qualified employee stock purchase plans. EXECUTIVE DEFERRED COMPENSATION PLAN On July 1, 1996, the Company implemented an Executive Deferred Compensation Plan (the "Deferred Compensation Plan") for the purpose of providing eligible executives and employees with a program for deferring compensation earned during employment. Under the terms of the Deferred Compensation Plan, eligible executives and employees of the Company may make voluntary contributions to the Plan as a percentage of compensation, but such percentage may not exceed the limitations stated in the Deferred Compensation Plan. The voluntary contributions are invested in a variety of investment funds for the intended use of paying plan benefits when participating executives and employees become eligible to receive such benefits under the terms of the Deferred Compensation Plan. These investments have been included in Other Assets in the accompanying balance sheets. The Company currently does not match executive or employee contributions and does not intend to do so in the forseeable future. EMPLOYMENT CONTRACTS The Company has entered into Employment Agreements with each of the named executive officers. Each such Employment Agreement is terminable by either party. If the executive officer resigns voluntarily or is properly terminated for cause, all pay and benefits under the agreement will cease as of the date of such resignation or termination. If the executive officer is terminated other than for cause (including the voluntary resignation by an officer upon a breach by the Company of its obligations to the executive officer), the executive officer would receive all base salary, commissions and bonuses earned through the date of termination plus a payment equal to all accumulated but unused vacation and sick leave. In addition, the officer would be entitled to continued vesting of options (or alternatively be paid the in-the-money value of such options), certain benefits, and payment of base salary for a severance period, which is two years in the case of Mr. Barnes, 18 months in the case of Mr. Ramadan and six months for each other executive officer. By agreement with Cadence, Cadence would also accelerate any Cadence options that the executive officer may hold which would, by their original vesting schedule, vest on or before July 1, 1997. If there is a change in control of the Company, then the vesting schedule of the Company options held by the named executive officers would accelerate so that all such options would be immediately exercisable, and all Cadence options that would have vested by July 1, 1997 (or the in-the-money value) would also be paid. The Company has entered into a separation agreement with Marvin S. Wolfson, the Company's former General Manager, Test Software Division. Under this agreement, Mr. Wolfson will remain an employee of the Company at his current salary and benefits through June 1997. From July through December 1997, Mr. Wolfson will remain a consultant of the Company and would be compensated for consulting services as rendered. 49 CERTAIN TRANSACTIONS The following is a description of certain transactions and relationships entered into or existing within the past three years between the Company and Cadence. HISTORICAL TRANSACTIONS In certain foreign markets, primarily Europe, the Company invoices its customers through Cadence subsidiaries. The Company reimburses Cadence through the intercompany account for the cost of the Company's dedicated sales agents in these markets plus an agency fee due to the fact that these dedicated sales agents are employees of Cadence subsidiaries and are located in Cadence facilities. During the last three fiscal years ended December 31, 1996, the amount of such reimbursements equaled $1,240,000, $2,260,000 and $2,223,000, respectively. The dedicated sales agents, who are employees of Cadence subsidiaries, sell and support Company products on a full-time basis and coordinate their efforts with the Company's manufacturing facility in the United States. In addition, Cadence provides selling, service and production support related to the Company's Virtual Test Software and charges the Company for the cost of such services. These costs, which have been charged to the Company, equaled $410,000, $211,000 and $287,000 for the fiscal years ended December 31, 1994, 1995 and 1996, respectively, and have been reflected in the Financial Statements included elsewhere in this Prospectus. For the fiscal years ended December 31, 1995 and 1996, Cadence charged the Company approximately $227,000 and $98,000, respectively, for utilization of certain domestic sales offices, general liability insurance and other services. Prior to 1995, Cadence had not charged the Company, but the estimated costs equaled $191,000 for the fiscal year ended December 31, 1994. These amounts have been reflected in the Financial Statements included elsewhere in this Prospectus. Under Cadence corporate policy, interest is charged on past due intercompany balances. Interest is charged beginning the first day of the fourth month after the charge originated. The rate is computed using the applicable fed funds rate compounded semi-annually. For the year ended December 31, 1994, the Company paid Cadence $20,000 for net interest on past due intercompany balances. For the years ended December 31, 1995 and 1996, there was no net interest on past due intercompany balances. On March 31, 1995, the Company declared a $1.0 million non-cash dividend to Cadence for the purpose of settling intercompany accounts. Other than the transactions described above and certain income tax matters, the Company has operated substantially independently of Cadence. Although the Company has experienced substantial independence as a subsidiary of Cadence, its operating history while a wholly-owned or majority-owned subsidiary of Cadence cannot necessarily be regarded as indicative of the Company's prospects as a fully independent company. In December, 1996, the Company sold a mixed-signal Test Station to Cadence for a purchase price of approximately $1,260,000. AGREEMENTS WITH CADENCE In managing the intercompany relationship between them, the Company and Cadence have entered into several agreements for the purpose of defining their ongoing relationship. These agreements were reached while the Company was a wholly-owned subsidiary of Cadence and certain of these agreements were amended during May 1996. Such agreements should not be regarded as the result of arm's length negotiations between independent parties. There can be no assurance that such agreements, or the transactions provided for therein, have been or will be effected on terms at least as favorable to the Company as could have been obtained from unaffiliated third parties. Management believes that these agreements, had they been in place on a historical basis, would not have resulted in any material change in the Company's historical financial condition or results of operations. 50 The Company and Cadence entered into an Asset Transfer Agreement effective as of June 30, 1994, under which the Company acquired the Dantes technology from Cadence for a purchase price of $55,000. Under this Agreement, the Company acquired all of Cadence's right, title and interest in and to the Dantes technology and all related intellectual property rights; however, Cadence retained a perpetual, worldwide royalty-free right to use, modify, create derivative works based upon, market, distribute and sublicense the transferred assets in the form delivered by Cadence. Prior to June 30, 1999, Cadence is not permitted to transfer its retained rights, except in connection with a business combination involving Cadence or any Cadence subsidiary, nor is it permitted to use the transferred assets to create products equivalent to Dantes before June 30, 1999. Cadence and the Company are parties to a Joint Sales Agreement dated as of June 30, 1994, which was amended as of April 1, 1995 and May 20, 1996. This agreement provides that each company's sales force may sell certain defined software products of the other. The agreement covers Company's software products, including Dantes and STL, and those Cadence products needed for the operation of Dantes and STL. The agreement provides for cooperative sales and customer support for each party from the other, Cadence's continued manufacture of the Company's software products, and fees generally equal to 10 percent of net sales of the software for such services to be paid reciprocally. The agreement operates on a worldwide basis, and extends to Cadence's subsidiaries and any future subsidiaries formed by either company. The term of this agreement expires June 30, 1998, and it is renewable by mutual agreement of the parties. Cadence and the Company are parties to an Amended Corporate Services Agreement under which Cadence provides certain services and support to the Company. The agreement provides for Cadence to act as the Company's agent in Germany, England, France, Israel and Taiwan. Under the agreement Cadence provides dedicated agents who are employees of Cadence or Cadence subsidiaries that sell and support Company products on a full-time basis and coordinate their efforts with the Company's manufacturing facility in the United States. The agreement requires the Company to pay Cadence an agency fee with respect to the dedicated agents, and provides further that the Company owns the intellectual property such dedicated agents create. All of these dedicated agents are located in countries outside the United States. In addition, the Amended Corporate Services Agreement grants the Company the option to acquire insurance coverage through Cadence policies and to hire the dedicated agents if the Company elects to commence operations where such dedicated agent is located. The Amended Corporate Services Agreement will expire on June 1, 1999, provided that after June 1, 1997 Cadence may terminate its obligations with respect to the provision of particular facilities on 180 days advance notice to the Company. Cadence and the Company are parties to a Tax Sharing Agreement that provides for the allocation between Cadence and the Company of all responsibilities, liabilities and benefits relating to taxes paid or payable by either Cadence or the Company for all taxable periods, whether beginning before, on, or after the Company's July 21, 1995, initial public offering. Prior to the initial public offering, the Company was included in the consolidated tax returns of Cadence. The Company's share of Cadence's consolidated income tax liability for the period before the initial public offering was determined on a separate company basis computed under Internal Revenue Code guidelines and was $1,160,000 and $381,000 for the year ended December 31, 1994, and the three months ended March 31, 1995, respectively. The Company estimates that there is no additional obligation to Cadence for the period from April 1, 1995 to the date of the initial public offering. In lieu of payment by the Company to Cadence of this separate Company liability, Cadence has contributed such annual tax obligations to the Company's capital. Any adjustments (for example, pursuant to an Internal Revenue Service audit) discovered during the post-offering period, but relating to the pre-offering period, will be settled between the Company and Cadence in cash. Subsequent to the Company's initial public offering, the Company is responsible for filing its own income tax returns. The Company and Cadence are parties to a Shareholder Agreement that limits the ability of Cadence to sell and vote the Common Stock owned by it under certain circumstances. The Shareholder Agreement provides that in connection with any sale or series of sales of Common Stock by Cadence to a single purchaser or related group of purchasers of in excess of 10% of the outstanding shares of Common Stock in a private transaction exempt from the registration provisions of the Securities Act (i) the outstanding shares of Common Stock will not be sold at a price in excess of the average closing price of the Common Stock during 51 the ten business days preceding the date of the notice required by clause (iii) below; (ii) that the purchaser will be required to agree in writing not to institute or participate in any business combination or other transaction that will result in the purchase or exchange of the shares of Common Stock owned by the remaining shareholders of the Company, provided that this restriction will not apply to a transaction approved by a majority of such remaining shareholders; and (iii) the transaction will not be consummated before the fifteenth business day after receipt by the Company of notice of the proposed transaction, including a description of the principal terms thereof. Except as otherwise expressly provided, the restrictions on the ability of Cadence to sell Common Stock terminate when Cadence ceases to own 35% or more of the outstanding shares of Common Stock. The Shareholder Agreement also provides that (i) except with respect to the election or removal of directors and voting on any "Significant Event," including any amendment to the Company's articles of incorporation or bylaws, disposition of the Company, recapitalization, liquidation or other action presented for a vote of shareholders, which Cadence determines to be materially adverse to Cadence's interests and which is out of the ordinary course of business of the Company, Cadence will vote its shares of Common Stock in accordance with the recommendations of the Board of Directors in at least the same proportion as the shares held by all other shareholders are voted, (ii) all of the shares of Common Stock owned by Cadence will be represented in person or by proxy at all meetings of shareholders of the Company and (iii) Cadence will not solicit proxies with respect to the Common Stock. The restrictions on the ability of Cadence to vote its shares of Common Stock will terminate on the earlier of the date that Cadence ceases to own 35% or more of the outstanding shares of Common Stock or such date as Cadence's stock ownership decreases to a level where Cadence ceases to be able to elect a majority of the Board of Directors, and therefore such restrictions are expected to terminate upon the consummation of this offering. The Shareholder Agreement also provides that Cadence is entitled to certain rights with respect to the registration of its shares of Common Stock under the Securities Act. The Company and Cadence have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act. See "Description of Capital Stock -- Registration Rights." 52 PRINCIPAL AND SELLING SHAREHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock as of January 15, 1997, and such beneficial ownership as adjusted to reflect the sale of 675,000 shares by the Company and 825,000 shares by the Selling Shareholder pursuant to this Prospectus, by (i) each person known by the Company to own beneficially more than five percent of the outstanding shares of Common Stock, (ii) each director of the Company, (iii) each of the named executive officers, (iv) all officers and directors of the Company as a group and (v) the Selling Shareholder. Unless otherwise indicated below, to the knowledge of the Company, all persons listed below have sole voting and investment power with respect to their shares of Common Stock, except to the extent authority is shared by spouses under applicable law.
SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED PRIOR TO OWNED AFTER OFFERING (1)(2) SHARES TO OFFERING (1) (2) (3) DIRECTORS, NAMED EXECUTIVE OFFICERS AND 5% --------------------- BE SOLD IN --------------------- SHAREHOLDERS NUMBER PERCENT OFFERING NUMBER PERCENT - --------------------------------------------------- ---------- --------- ----------- ---------- --------- Cadence Design Systems, Inc. ..................... 3,709,000 55.1% 825,000 2,884,000 39.0% 2655 Seely Road Building 5, MS 5B2 San Jose, CA 95134 Kopp Investment Advisors, Inc. (4) ............... 702,550 10.4% -- 702,550 9.5% LeRoy C. Kopp 6600 France Avenue South Suite 672 Edina, MN 55435 Keith L. Barnes.................................... 58,893 * -- 58,893 * Sar Ramadan........................................ 27,479 * -- 27,479 * W. Barry Baril..................................... 35,622 * -- 35,622 * Marvin S. Wolfson.................................. 15,563 * -- 15,563 * Donald E. Grant.................................... 25,675 * -- 25,675 * Mark Allison....................................... 8,509 * -- 8,509 H. Raymond Bingham................................. 8,666 * -- 8,666 * C. Scott Gibson.................................... 10,766 * -- 10,766 * James M. Hurd...................................... 6,666 * -- 6,666 * James E. Solomon................................... 6,666 * -- 6,666 * All Officers and Directors as a Group (13 persons)...................................... 219,928 3.2% -- 219,928 2.9%
- ------------------------ * Less than one percent of the outstanding Common Stock. (1) Beneficial ownership is determined in accordance with rules of the SEC, and includes voting power and investment power with respect to shares. Shares that a person has the right to acquire beneficial ownership of within 60 days from January 15, 1997, including shares issuable upon the exercise of outstanding stock options that are currently exercisable or become exercisable within 60 days from January 15, 1997, are considered outstanding for the purpose of calculating the percentage of Common Stock owned by such person, but not for the purpose of calculating the percentage of Common Stock owned by any other person. The number of shares which persons have the right to acquire within 60 days of January 15, 1997 is as follows: Messrs. Bingham, Gibson, Hurd, and Solomon -- 6,666; Mr. Barnes -- 53,506; Mr. Ramadan -- 25,921; Mr. Baril -- 35,622; Mr. Wolfson -- 15,563; Mr. Grant -- 25,675; Mr. Allison -- 8,509; all Executive Officers and Directors as a group -- 206,030. 53 (2) Excludes, with respect to each of the following principal and selling shareholders, the number of shares issuable upon the exercise of options that are not currently exercisable and do not become exercisable within 60 days of January 15, 1997 as follows: Messrs. Bingham, Gibson, Hurd and Solomon -- 6,334; Mr. Barnes -- 150,494; Mr. Ramadan -- 71,078; Mr. Baril -- 55,002; Mr. Wolfson -- 20,437; Mr. Grant -- 61,623; Mr. Allison -- 26,491; all Executive Officers and Directors as a group -- 497,793. (3) Assumes no exercise of the Underwriters' over-allotment option, which grants the Underwriters the option to purchase an additional 100,000 shares of Common Stock from the Company and 125,000 shares of Common Stock held by the Selling Shareholder. (4) This information as to beneficial ownership is based on a schedule 13G filed by Kopp Investment Advisors, Inc. on behalf of itself, LeRoy C. Kopp and the Caring and Sharing Foundation. Kopp Investment Advisors, Inc. had sole voting power over 55,000 shares and shared dispositive power over 682,000 shares; LeRoy C. Kopp had sole voting power over 55,000 shares, shared voting power over 20,000 shares and shared dispositive power over 702,550 shares; The Caring and Sharing Foundation had sole voting power and sole dispositive power over 20,000 shares. The schedule 13G states that the parties disclaim beneficial ownership of 702,550 shares which are held in a representative or fiduciary capacity. 54 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company consists of 15,000,000 shares of Common Stock, par value $.01, and 10,000,000 shares of Preferred Stock, par value $.01 per share. The following summary description of the Company's capital stock does not purport to be complete and is qualified in its entirety by the provisions of the Company's Restated Articles of Incorporation and Restated Bylaws, which have been filed as exhibits to the Registration Statement of which this Prospectus is a part. COMMON STOCK After this offering, approximately 7,401,257 shares of Common Stock will be outstanding. Holders of Common Stock are entitled to receive such dividends as may from time to time be declared by the Board of Directors of the Company out of funds legally available therefor. Holders of Common Stock are entitled to one vote per share on all matters on which the holders of Common Stock are entitled to vote and do not have any cumulative voting rights. Holders of Common Stock have no preemptive, conversion, redemption or sinking fund rights. In the event of a liquidation, dissolution or winding up of the Company, holders of Common Stock are entitled to share equally and ratably in the assets of the Company, if any, remaining after the payment of all debts and liabilities of the Company and the liquidation preference of any outstanding class or series of Preferred Stock. The outstanding shares of Common Stock are, and the shares of Common Stock offered by the Company hereby when issued will be, fully paid and nonassessable. The rights, preferences and privileges of holders of Common Stock are subject to any series of Preferred Stock which the Company may issue in the future as described below. PREFERRED STOCK The Company is authorized to issue up to 10,000,000 shares of Preferred Stock. The Board of Directors has the authority to issue Preferred Stock in one or more series and to fix the number of shares constituting any such series, the voting powers, designations, preferences and relative, participating, optional or other special rights and qualifications, limitations or restrictions thereof, including the dividend rights, dividend rate, terms of redemption, redemption price or prices, conversion and voting rights and liquidation preferences of the shares constituting any series, without any further vote or action by the shareholders of the Company. The issuance of Preferred Stock by the Board of Directors could adversely effect the rights of holders of Common Stock. For example, issuance of Preferred Stock could result in a series of securities outstanding that would have preference over the Common Stock with respect to dividends and in liquidation, and that could (upon conversion or otherwise) enjoy all of the rights appurtenant to the Common Stock. The authority possessed by the Board of Directors to issue Preferred Stock could potentially be used to discourage attempts by others to obtain control of the Company through merger, tender offer, proxy or consent solicitation or otherwise by making such attempts more difficult or more costly to achieve. The Board of Directors may issue Preferred Stock without shareholder approval and with voting rights that could adversely affect the voting power of holders of Common Stock. There are no agreements or understandings for the issuance of Preferred Stock, and the Board of Directors has no present intention of issuing any shares of Preferred Stock. OREGON CONTROL SHARE AND BUSINESS COMBINATION STATUTES; CERTAIN PROVISIONS OF RESTATED ARTICLES The Company is subject to the Oregon Control Share Act (OBCA Sections 60.801-60.816) (the "Control Share Act"). The Control Share Act generally provides that a person (the "Acquiring Person") who acquires voting stock of an Oregon corporation in a transaction which results in such Acquiring Person holding more than 20%, 33 1/3% or 50% of the total voting power of such corporation (a "Control Share Acquisition") cannot vote the shares it acquires in the Control Share Acquisition ("control shares") unless voting rights are accorded to such control shares by the holders of a majority of the outstanding voting shares, excluding the control shares held by the Acquiring Person and shares held by the Company's officers and inside directors ("interested shares"), and by the holders of a majority of the outstanding voting shares, including interested shares. The foregoing vote would be required at the time an Acquiring Person's holdings exceed 20% of the total voting power of a company, and again at the time the Acquiring Person's holdings 55 exceed 33 1/3% and 50%. The term "Acquiring Person" is broadly defined to include persons acting as a group. A transaction in which voting power is acquired solely by receipt of an immediately revocable proxy does not constitute a "Control Share Acquisition." The Acquiring Person may, but is not required to, submit to the Company an "Acquiring Person Statement" setting forth certain information about the Acquiring Person and its plans for acquiring the Company's stock. The Acquiring Person Statement may also request that the Company call a special meeting of shareholders to determine whether the control shares will be allowed to retain voting rights. If the Acquiring Person does not request a special meeting of shareholders, the issue of voting rights of control shares will be considered at the next annual meeting or special meeting of shareholders that is held more than 60 days after the date of the Control Share Acquisition. If the Acquiring Person's control shares are accorded voting rights and represent a majority or more of all voting power, shareholders who do not vote in favor of the restoration of such voting rights will have the right to receive the appraised "fair value" of their shares, which may not be less than the highest price paid per share by the Acquiring Person for the control shares. The Company is subject to the Oregon Business Combination Act (OBCA Sections 60.825-60.845) (the "Business Combination Act"). The Business Combination Act generally provides that in the event a person or entity acquires 15% or more of the voting stock of an Oregon corporation (an "Interested Shareholder"), the corporation and the Interested Shareholder, or any affiliated entity, may not engage in certain business combination transactions for a period of three years following the date the person became an Interested Shareholder. Business combination transactions for this purpose include (a) a merger or plan of share exchange, (b) any sale, lease, mortgage or other disposition of the assets of the corporation where the assets have an aggregate market value equal to 10% or more of the aggregate market value of the corporation's assets or outstanding capital stock and (c) certain transactions that result in the issuance of capital stock of the corporation to the Interested Shareholder. These restrictions do not apply if (i) the Interested Shareholder, as a result of the transaction in which such person became an Interested Shareholder, owns at least 85% of the outstanding voting stock of the corporation (disregarding shares owned by directors who are also officers, and certain employee benefit plans), (ii) the Board of Directors approves the share acquisition or business combination before the Interested Shareholder acquired 15% or more of the corporation's voting stock, or (iii) the Board of Directors and the holders of at least two-thirds of the outstanding voting stock of the corporation (disregarding shares owned by the Interested Shareholder) approve the transaction after the Interested Shareholder acquires 15% or more of the corporation's voting stock. The Control Share Act and the Business Combination Act may have the effect of encouraging any potential acquiror to negotiate with the Company's Board of Directors and will also discourage certain potential acquirors unwilling to comply with its provisions. The Company's Restated Articles and Bylaws contain provisions which (i) classify the Board of Directors into three classes as nearly equal in number as possible, each of which, after an interim arrangement, will serve for three years with one class being elected each year (the "Classified Board Provisions") and (ii) provide that directors may be removed by shareholders only for cause and only upon the vote of 75% of the votes then entitled to be cast for the election of directors. The Classified Board Provisions and the availability of Preferred Stock for issuance without shareholder approval may have the effect of lengthening the time required for a person to acquire control of the Company through a proxy contest or the election of a majority of the Board of Directors and may deter any potential unfriendly offers or other efforts to obtain control of the Company. This could deprive the Company's shareholders of opportunities to realize a premium for their Common Stock and could make removal of incumbent directors more difficult. At the same time, these provisions may have the effect of inducing any persons seeking control of the Company to negotiate terms acceptable to the Board of Directors. In addition, the provisions of the Restated Articles regarding removal of directors will make the removal of any director more difficult even if such removal is believed by the shareholders to be in their best interests. Since these provisions make the removal of directors more difficult, they increase the likelihood that incumbent directors will retain their positions and, since the Board has the power to retain and discharge management, could perpetuate incumbent management. 56 REGISTRATION RIGHTS AGREEMENT The Company and Cadence are parties to a Shareholder Agreement providing Cadence with certain registration rights. In the event that the Company proposes to register any of its securities under the Securities Act, Cadence is entitled to notice of such registration and is entitled to include its shares of Common Stock in such registration, subject to certain marketing and other limitations. Cadence also has the right to require the Company, on no more than three occasions, to file a registration statement under the Securities Act in order to register its shares of Common Stock. Cadence may also require the Company to file a Form S-3 registration with respect to its shares of Common Stock. The Company may, under certain circumstances, defer such registration, and the underwriters involved in such registrations have the right, subject to certain limitations, to limit the number of shares included in such registrations. TRANSFER AGENT AND REGISTRAR The Transfer Agent and registrar for the Common Stock is ChaseMellon Shareholder Services, Seattle, Washington. SHARES ELIGIBLE FOR FUTURE SALE Future sales of substantial amounts of Common Stock in the public market could adversely affect prevailing market prices. Upon completion of this offering, the Company will have approximately 7,401,257 shares of Common Stock outstanding, of which approximately 4,517,257 shares (approximately 4,742,257 shares if the over-allotment option is exercised in full) will be freely tradeable without restriction or further registration under the Securities Act except for shares purchased by an existing "affiliate" of the Company, as that term is defined under the Securities Act ("Affiliates"), which resales will be subject to the resale limitations of Rule 144 promulgated under the Securities Act. Upon completion of this offering, Cadence will continue to hold 2,884,000 shares (2,759,000 shares if the Underwriters' over-allotment option is exercised in full), and will be eligible to sell these shares in the public market pursuant to Rule 144, subject to certain contractual restrictions on resale. In addition, approximately 982,108 shares are issuable upon exercise of outstanding options as of the date of this Prospectus. The Company has filed a Registration Statement on Form S-8 covering an aggregate of 1,500,000 shares of Common Stock reserved for issuance under its stock option plans permitting the resale of shares issued upon the exercise of such options in the public market without restriction. On January 23, 1997, the Company's Board of Directors approved an amendment to its 1995 Stock Incentive Plan to reserve an additional 600,000 shares of Common Stock for issuance under such Plan. This amendment remains subject to shareholder approval. Upon approval of the proposed amendment by the Company's shareholders, the Company intends to register such additional shares on Form S-8. The Company has also filed a Registration Statement on Form S-8 covering 250,000 shares that have been reserved for issuance under its 1995 Employee Stock Purchase Plan permitting the resale of such shares in the public market without restrictions under the Securities Act. Sales of shares in the public market, or the availability of such shares for sale, could adversely affect the market price of the Common Stock. In general, under Rule 144 as currently in effect, a person (or persons whose shares are aggregated) who has beneficially owned "restricted securities" within the meaning of Rule 144 ("Restricted Shares") for at least two years, including persons who may be deemed "affiliates" of the Company, would be entitled to sell within any three month period a number of shares that does not exceed the greater of 1% of the number of shares of Common Stock then outstanding (which will equal approximately 74,013 shares immediately after the offering) or the average weekly trading volume of the Common Stock on all exchanges and/or reported through the automated quotation system of a registered securities association during the four calendar weeks preceding the date on which notice of the sale is filed with the Securities and Exchange Commission. Such sales are also subject to certain manner of sale provisions, notice requirements and the availability of current public information about the Company. In addition, a person (or persons whose shares are aggregated) who is not and is not deemed to have been an affiliate of the Company at any time during the 90 calendar days preceding a sale, and who has beneficially owned for at least three years the shares proposed to be sold, would be entitled to sell such shares under Rule 144 as currently in effect without regard to the volume limitations described above. The Company is unable to estimate accurately the number of Restricted 57 Shares that ultimately will be sold under the foregoing rules because the number of shares will depend in part on the market price for the Common Stock, the circumstances of the sellers and other factors. Subject to certain exceptions, the Company, the Selling Shareholder and the directors and officers of the Company have agreed for a period of 90 days after the date of this Prospectus, without the prior written consent of Morgan Stanley & Co. Incorporated, they will not (1) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of Common stock or any securities convertible into or exercisable or exchangeable for Common Stock or (2), directly or indirectly, enter into any swap or similar agreement that transfers, in whole or in part, the economic risk of ownership of the Common Stock. Morgan Stanley & Co. Incorporated may, in its sole discretion, at any time without notice, release all or any portion of the securities subject to lock-up agreements. Restricted Shares also may be sold pursuant to a registration statement filed by the Company under the Securities Act in the future or another exemption from registration that might be available without compliance with the requirements of Rule 144. Cadence and the Company are parties to a Shareholder Agreement providing Cadence with certain registration rights covering shares of Common Stock that are owned by Cadence. Pursuant to such Shareholder Agreement, Cadence has the right, subject to certain terms and conditions, to require the Company to register its shares of Common Stock under the Securities Act for offer and sale to the public (including by way of an underwritten public offering). Exercise of these registration rights by Cadence could result in the distribution of substantial amounts of Common Stock, including distributions in underwritten public offerings. See "Description of Capital Stock -- Registration Rights Agreement." The Company can make no prediction as to the effect, if any, that sales of shares of Common Stock, or the availability of such shares for sale, will have on the market price prevailing from time to time. Nevertheless, sales of substantial amounts of Common Stock in the public market (including shares issued upon the exercise of options that may be granted pursuant to any employee stock option or other equity plan of the Company), or the perception that such sales may occur, could adversely affect prevailing market prices for the Common Stock. 58 UNDERWRITERS Under the terms and subject to conditions contained in an Underwriting Agreement dated the date hereof, the Underwriters named below, for whom Morgan Stanley & Co. Incorporated, Cowen & Company and SoundView Financial Group, Inc. are serving as the Representatives, have severally agreed to purchase, and the Company and the Selling Shareholder have agreed to sell to the Underwriters, the respective number of shares of Common Stock set forth opposite their respective names below:
NUMBER OF NAME SHARES - ----------------------------------------------------------------------------------------- ---------- Morgan Stanley & Co. Incorporated........................................................ Cowen & Company.......................................................................... SoundView Financial Group, Inc........................................................... ---------- Total................................................................................ 1,500,000 ---------- ----------
The Underwriting Agreement provides that the obligations of the several Underwriters to pay for and accept delivery of the shares of Common Stock offered hereby are subject to the approval of certain legal matters by counsel, and to certain other conditions, including the conditions that no stop order suspending the effectiveness of the Registration Statement is in effect and no proceedings for such purpose are pending before or threatened by the Securities and Exchange Commission and that there has been no material adverse change or any development involving a prospective material adverse change in the business, financial condition or results of operations of the Company from that set forth in the Registration Statement. The Underwriters are obligated to take and pay for all of the shares of Common stock offered hereby (other than those covered by the over-allotment option described below) if any such shares are taken. The Underwriters initially propose to offer part of the shares of Common Stock offered hereby directly to the public at the public offering price set forth on the cover page hereof and part to certain dealers at a price which represents a concession not in excess of $ per share under the public offering price. Any Underwriter may allow, and such dealers may reallow, a concession not in excess of $ a share to other Underwriters or to certain other dealers. The Company and the Selling Shareholder have granted to the Underwriters an option, exercisable for 30 days from the date of this Prospectus, to purchase up to an additional 225,000 shares of Common Stock at the public offering price set forth on the cover page hereof, less underwriting discounts and commissions. The Underwriters may exercise such option solely for the purpose of covering over-allotments, if any, incurred in the sale of shares of Common Stock offered hereby. In connection with this offering, certain Underwriters and selling group members (if any) or their respective affiliates who are qualified registered market makers on the Nasdaq National Market may engage in passive market making transactions in the Common Stock on the Nasdaq National Market in accordance with Rule 10b-6A under the Securities Exchange Act of 1934 during the two business day period before 59 commencement of offers or sales of Common Stock. The passive market making transactions must comply with applicable price and volume limits and be identified as such. In general, a passive market maker may display its bid at a price not in excess of the highest independent bid for the security; if all independent bids are lowered below the passive market maker's bid, however, such bid must then be lowered when certain purchase limits are exceeded. Net purchases by a passive market maker on each day are generally limited to a specified percentage of the passive market making average daily trading volume in the Common Stock during a price period and must be discontinued when such limit is reached. Passive market making may stabilize the market price of the Common Stock at a level above that which might otherwise prevail and, if commenced, may be discontinued at any time. The Company, the Selling Shareholder and the Underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act of 1933, as amended. Subject to certain exceptions, the Company and the Selling Shareholder each have agreed in the Underwriting Agreement that it will not for a period of 90 days after the date of this Prospectus, without the prior written consent of Morgan Stanley & Co. Incorporated, (1) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of any shares of, directly or indirectly, Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or (2) directly or indirectly enter into any swap or similar agreement that transfers, in whole or in part, the economic risk of ownership of the Common Stock. See "Shares Eligible for Future Sale" for a description of certain arrangements by which all directors and executive officers of the Company have agreed not to sell or otherwise dispose of Common Stock of the Company for a period of 90 days after the date of this Prospectus, without the prior written consent of Morgan Stanley & Co. Incorporated. LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon for the Company by Ater Wynne Hewitt Dodson & Skerritt, LLP, Portland, Oregon. Certain legal matters in connection with the offering will be passed upon for the Underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. EXPERTS The financial statements and related schedule of the Company as of December 31, 1995 and 1996 and for each of the years in the three-year period ended December 31, 1996 included in this Prospectus and elsewhere in the Registration Statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports, with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said reports. ADDITIONAL INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934 (the "Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). Reports, proxy statements and other information filed by the Company may be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at certain of its regional offices located at Seven World Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission also maintains a site on the World Wide Web that contains reports, proxy and information statements, and other information regarding registrants that file electronically with the Commission. The address of such site is http://www.sec.gov. The Common Stock of the Company is quoted on the Nasdaq National Market. Reports and other information concerning the Company may be inspected at the National Association of Securities Dealers, Inc., 1735 K Street, Washington, D.C. 60 A Registration Statement on Form S-1, including amendments thereto, relating to the Common Stock offered hereby has been filed by the Company with the Securities and Exchange Commission, Washington, D.C. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. Statements contained in this Prospectus as to the contents of any contract or other document referred to are not necessarily complete and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement. Each such statement is qualified in all respects by such reference to such exhibit. For further information with respect to the Company and the Common Stock offered hereby, reference is made to such Registration Statement and the exhibits and schedules filed as a part of the Registration Statement. A copy of the Registration Statement, including Exhibits and schedules thereto may be inspected without charge at the public reference facilities maintained by the Commission at 450 Fifth Street, NW, Judiciary Plaza, Washington D.C. 20549, and copies of all or any part thereof may be obtained from the Commission upon the payment of certain fees prescribed by the Commission. 61 INTEGRATED MEASUREMENT SYSTEMS, INC. INDEX TO THE FINANCIAL STATEMENTS
PAGE ---- Report of Independent Public Accountants.................................. F-2 Balance Sheets............................................................ F-3 Statements of Income...................................................... F-4 Statements of Shareholders' Equity........................................ F-5 Statements of Cash Flows.................................................. F-6 Notes to the Financial Statements......................................... F-7
F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of Integrated Measurement Systems, Inc.: We have audited the accompanying balance sheets of Integrated Measurement Systems, Inc. (an Oregon corporation) as of December 31, 1995 and 1996, and the related statements of income, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based upon our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Integrated Measurement Systems, Inc. as of December 31, 1995 and 1996, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1996 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Portland, Oregon, January 24, 1997 F-2 INTEGRATED MEASUREMENT SYSTEMS, INC. BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS) ASSETS
DECEMBER 31, -------------------- 1995 1996 --------- --------- Current assets: Cash and cash equivalents................................................................. $ 8,930 $ 9,545 Trade receivables, less allowance for doubtful accounts of $338 and $489.................. 8,117 11,352 Receivable from Cadence, net.............................................................. 1,094 2,125 Inventories............................................................................... 5,830 7,940 Deferred income taxes..................................................................... 1,420 1,690 Prepaid expenses and other current assets................................................. 735 1,118 --------- --------- Total current assets.................................................................... 26,126 33,770 Property, plant and equipment, net.......................................................... 5,178 5,924 Service spare parts, net.................................................................... 2,223 2,567 Software development costs, net............................................................. 1,573 1,446 Other assets, net........................................................................... 84 607 --------- --------- Total assets............................................................................ $ 35,184 $ 44,314 --------- --------- --------- --------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.......................................................................... $ 2,660 $ 2,251 Accrued compensation...................................................................... 1,629 2,036 Accrued warranty.......................................................................... 801 500 Deferred revenue.......................................................................... 2,291 1,727 Income taxes payable...................................................................... -- 979 Other current liabilities................................................................. 810 750 Capital lease obligations -- current...................................................... 164 247 --------- --------- Total current liabilities............................................................... 8,355 8,490 Deferred income taxes....................................................................... 291 417 Capital lease obligations, net of current portion........................................... 54 278 Deferred compensation....................................................................... -- 270 Commitments 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; 6,699,803 and 6,726,257 issued and outstanding.......................................................................... 67 67 Additional paid-in capital................................................................ 20,467 22,676 Retained earnings......................................................................... 5,950 12,116 --------- --------- Total shareholders' equity.............................................................. 26,484 34,859 --------- --------- Total liabilities and shareholders' equity.............................................. $ 35,184 $ 44,314 --------- --------- --------- ---------
The accompanying notes are an integral part of these financial statements. F-3 INTEGRATED MEASUREMENT SYSTEMS, INC. STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, ------------------------------- 1994 1995 1996 --------- --------- --------- Product sales.................................................................... $ 23,981 $ 33,076 $ 40,244 Service and other sales.......................................................... 6,071 8,017 10,593 --------- --------- --------- Net sales...................................................................... 30,052 41,093 50,837 Cost of product sales............................................................ 10,090 12,827 14,203 Cost of service and other sales.................................................. 2,345 2,939 3,935 --------- --------- --------- Total cost of sales............................................................ 12,435 15,766 18,138 --------- --------- --------- Gross margin................................................................... 17,617 25,327 32,699 Operating expenses: Research, development and engineering.......................................... 3,664 6,177 7,796 Selling, general and administrative............................................ 10,972 13,681 15,408 --------- --------- --------- Total operating expenses..................................................... 14,636 19,858 23,204 --------- --------- --------- Operating income............................................................. 2,981 5,469 9,495 Other income, net................................................................ 142 349 250 Interest expense................................................................. (28) (30) (33) --------- --------- --------- Income before income taxes....................................................... 3,095 5,788 9,712 Provision for income taxes....................................................... 1,185 2,253 3,546 --------- --------- --------- Net income..................................................................... $ 1,910 $ 3,535 $ 6,166 --------- --------- --------- --------- --------- --------- Net income per share............................................................. $ 0.30 $ 0.53 $ 0.88 --------- --------- --------- --------- --------- --------- Weighted average number of common and common equivalent shares outstanding....... 6,366 6,685 7,003 --------- --------- --------- --------- --------- ---------
The accompanying notes are an integral part of these financial statements. F-4 INTEGRATED MEASUREMENT SYSTEMS, INC. STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS)
COMMON STOCK ADDITIONAL TOTAL ------------------------ PAID-IN RETAINED SHAREHOLDERS' SHARES AMOUNT CAPITAL EARNINGS EQUITY ----------- ----------- ----------- ----------- ------------- Balance, December 31, 1993................................ 6,324 $ 63 $ 13,509 $ 1,532 $ 15,104 Contributed capital..................................... -- -- 1,255 -- 1,255 Net income.............................................. -- -- -- 1,910 1,910 ----- --- ----------- ----------- ------------- Balance, December 31, 1994................................ 6,324 63 14,764 3,442 18,269 Contributed capital..................................... -- -- 177 -- 177 Net proceeds from initial public offering............... 375 4 3,253 -- 3,257 Stock issued under employee stock option plans.......... 1 -- 3 -- 3 Dividend to Cadence..................................... -- -- -- (1,027) (1,027) Tax benefit from Cadence stock option transactions by IMS employees.......................................... -- -- 2,270 -- 2,270 Net income.............................................. -- -- -- 3,535 3,535 ----- --- ----------- ----------- ------------- Balance, December 31, 1995................................ 6,700 67 20,467 5,950 26,484 Stock issued under employee stock plans................. 26 -- 288 -- 288 Tax benefit from Cadence stock option transactions by IMS employees.......................................... -- -- 1,921 -- 1,921 Net income.............................................. -- -- -- 6,166 6,166 ----- --- ----------- ----------- ------------- Balance, December 31, 1996................................ 6,726 $ 67 $ 22,676 $ 12,116 $ 34,859 ----- --- ----------- ----------- ------------- ----- --- ----------- ----------- -------------
The accompanying notes are an integral part of these financial statements. F-5 INTEGRATED MEASUREMENT SYSTEMS, INC. STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, ---------------------------------- 1994 1995 1996 ---------- ---------- ---------- Cash flows from operating activities: Cash received from customers................................................ $ 29,565 $ 36,994 $ 47,958 Interest received........................................................... 203 320 428 Payments to suppliers....................................................... (13,030) (16,986) (22,782) Payments to employees....................................................... (9,792) (14,082) (17,717) Income taxes paid........................................................... -- (495) (629) Other taxes paid............................................................ (575) (733) (1,257) Interest paid............................................................... (28) (30) (33) ---------- ---------- ---------- Net cash provided by operating activities................................. 6,343 4,988 5,968 ---------- ---------- ---------- Cash flows from investing activities: Purchases of equipment and software......................................... (1,724) (1,874) (3,299) Purchases of service spare parts............................................ (295) (600) (1,057) Software development costs.................................................. (1,062) (974) (715) Purchases of long-term investments.......................................... -- -- (270) ---------- ---------- ---------- Net cash used in investing activities..................................... (3,081) (3,448) (5,341) ---------- ---------- ---------- Cash flows from financing activities: Principal payments under capital leases..................................... (168) (254) (300) Net proceeds from initial public offering................................... -- 3,257 -- Proceeds from employee stock plans.......................................... -- 3 288 ---------- ---------- ---------- Net cash provided by (used in) financing activities....................... (168) 3,006 (12) ---------- ---------- ---------- Net increase in cash and cash equivalents................................. 3,094 4,546 615 Cash and cash equivalents at beginning of year................................ 1,290 4,384 8,930 ---------- ---------- ---------- Cash and cash equivalents at end of year...................................... $ 4,384 $ 8,930 $ 9,545 ---------- ---------- ---------- ---------- ---------- ---------- Reconciliation of net income to net cash provided by operating activities: Net income.................................................................. $ 1,910 $ 3,535 $ 6,166 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization............................................. 2,300 3,071 3,492 Contributed capital....................................................... 1,255 177 -- Provision (benefit) for deferred income taxes............................. 25 (763) (144) Increase in deferred compensation......................................... -- -- 270 Net change in receivable from Cadence....................................... (1,985) (373) (1,031) (Increase) decrease in trade receivables.................................... 1,119 (3,693) (3,235) (Increase) decrease in inventories.......................................... 670 (2,606) (2,110) (Increase) decrease in prepaid expenses and other current assets............ 28 (485) (383) Decrease in notes receivable................................................ 235 -- -- Increase in income taxes payable............................................ -- -- 2,900 Increase in accounts payable and accrued expenses........................... 507 4,963 607 Increase (decrease) in deferred revenue..................................... 279 1,162 (564) ---------- ---------- ---------- Net cash provided by operating activities..................................... $ 6,343 $ 4,988 $ 5,968 ---------- ---------- ---------- ---------- ---------- ---------- Supplemental schedule of noncash financing activities: Purchases of assets through capital leases.................................. $ 244 $ 181 $ 607 Tax benefit from Cadence stock option transactions by IMS employees.................................................................. $ -- $ 2,270 $ 1,921 Noncash dividend to Cadence................................................. $ -- $ 1,027 $ --
The accompanying notes are an integral part of these financial statements. F-6 INTEGRATED MEASUREMENT SYSTEMS, INC. NOTES TO THE FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) 1. COMPANY BACKGROUND AND INITIAL PUBLIC OFFERING: Integrated Measurement Systems, Inc. (the Company or IMS) commenced operations in August 1983. The Company was independent until acquired by Valid Logic in 1989. In 1991, Valid Logic merged with Cadence Design Systems, Inc. (Cadence) in a transaction accounted for as a pooling. From that time until July 21, 1995, the Company was a wholly owned subsidiary of Cadence. On July 21, 1995, the Company successfully completed an initial public offering of common stock. A total of 2,990,000 shares were sold at a price of $11 per share. Of these, 375,000 shares were sold by the Company, and 2,615,000 were sold by Cadence. The net proceeds to the Company from this offering, after deduction of expenses directly related to the offering, were $3.3 million, while net proceeds to Cadence amounted to approximately $26.6 million. At December 31, 1996, Cadence owned 55% of the outstanding common stock of the Company, with the remaining 45% publicly owned. The Company is engaged in designing, developing, manufacturing, marketing and servicing high-performance engineering Test Stations and test software to test and measure the performance of complex electronic devices. In addition, the Company develops, markets and supports a line of Virtual Test Software that permits design and test engineers to automate test program development and to conduct simulated tests of electronic device designs prior to the fabrication of a prototype of the actual device. Virtual Test Software and related services accounted for approximately 5% of net sales for both of the years ended December 31, 1994 and 1995 and 9% of net sales for the year ended December 31, 1996. The Company markets and supports its products worldwide through a network of direct sales force personnel, independent distributors and dedicated agents employed by Cadence in international locations. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: USE OF ESTIMATES The preparation of financial statements in conformance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. REVENUE RECOGNITION The Company generally recognizes revenue from product sales and software licenses as the product ships and there are no significant obligations remaining. Contract service and support revenues that are 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. PRODUCT WARRANTY The Company provides a warranty for its products and establishes an estimated accrual at the time of sale considered adequate to cover warranty costs during the warranty period. CASH AND CASH EQUIVALENTS The Company classifies all highly liquid investments purchased with an original maturity of three months or less as cash equivalents. The Company invests with high credit quality financial institutions which bear minimal credit risk. F-7 INTEGRATED MEASUREMENT SYSTEMS, INC. NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) INVENTORIES Inventories, consisting principally of computer hardware, electronic sub-assemblies and test equipment, are valued at standard costs which approximate the lower of cost (first-in, first-out) or market. Costs used for inventory valuation purposes include material, labor and manufacturing overhead.
DECEMBER 31, -------------------- 1995 1996 --------- --------- Raw materials........................................................................ $ 2,613 $ 4,098 Work-in-progress..................................................................... 2,945 2,912 Finished goods....................................................................... 272 930 --------- --------- Total inventories.................................................................. $ 5,830 $ 7,940 --------- --------- --------- ---------
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is stated at cost and consists principally of computer equipment, furniture and leasehold improvements. Depreciation of computer equipment and furniture is computed principally on a straight-line basis over the estimated useful lives of the assets, generally three to five years. Leasehold improvements are amortized on a straight-line basis over the lesser of the term of the lease, or the estimated useful lives of the improvements.
DECEMBER 31, -------------------- 1995 1996 --------- --------- Leasehold improvements............................................................ $ 200 $ 313 Computer equipment and furniture.................................................. 13,053 14,756 --------- --------- 13,253 15,069 Less accumulated depreciation..................................................... (8,075) (9,145) --------- --------- Net property, plant and equipment............................................... $ 5,178 $ 5,924 --------- --------- --------- ---------
SERVICE SPARE PARTS Service spare parts consist of electronic components which are used to service Test Stations for which the Company has entered into equipment maintenance agreements with customers. Subsequent to December 31, 1995, the Company reclassified its service spare parts from inventory to non-current assets to more accurately reflect the use of such parts in the Company's service business. These assets are not held for sale, diminish in value in a reasonably predictable manner, and therefore are subject to depreciation. Beginning January 1, 1996, depreciation of the Company's service spare parts is being computed on a straight-line basis over the estimated useful lives of the assets, generally eight years, and charged to Cost of Service and Other Sales. Prior to 1996, the Company charged normally recurring adjustments necessary to present inventory at its estimated net realizable value to Cost of Service and Other Sales. In order to reflect this change, the Company recorded a charge to Cost of Service and Other Sales of $327 during the first quarter of 1996, representing the cumulative difference in financial statement carrying value between the F-8 INTEGRATED MEASUREMENT SYSTEMS, INC. NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) depreciated cost under the new accounting method at January 1, 1996 and the net inventory carrying value of the service spare parts assets at December 31, 1995. Cost and accumulated depreciation of service spare parts are as follows:
DECEMBER 31, -------------------- 1995 1996 --------- --------- Service spare parts, at cost......................................................... $ 2,675 $ 3,732 Less accumulated depreciation........................................................ (452) (1,165) --------- --------- Net service spare parts............................................................ $ 2,223 $ 2,567 --------- --------- --------- ---------
RESEARCH, DEVELOPMENT AND ENGINEERING COSTS Research, development and engineering costs are expensed as incurred. SOFTWARE DEVELOPMENT COSTS The Company capitalizes certain software development costs incurred once technological and economic feasibility of the product has been demonstrated. These capitalized costs are amortized over the estimated economic life of the related product, generally three years, computed principally on a straight-line basis. Amortization is included in Cost of Product Sales in the accompanying Statements of Income. The Company capitalized software development costs amounting to $1,062, $974 and $715 in 1994, 1995 and 1996, respectively. Related amortization expense of $625, $1,277 and $842 was recorded in 1994, 1995 and 1996, respectively.
DECEMBER 31, -------------------- 1995 1996 --------- --------- Software development costs........................................................... $ 4,516 $ 5,231 Less accumulated amortization........................................................ (2,943) (3,785) --------- --------- Net software development costs..................................................... $ 1,573 $ 1,446 --------- --------- --------- ---------
INCOME TAXES The Company accounts for income taxes under the asset and liability method as defined by the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes". Under this method, deferred income taxes are recognized for the future tax consequences attributable to temporary differences between the financial statement and tax balances of existing assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS 109, the effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. STOCK-BASED COMPENSATION PLANS The Company accounts for its stock-based plans under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). In 1996, the Company adopted the disclosure provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). F-9 INTEGRATED MEASUREMENT SYSTEMS, INC. NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE Net income per share is computed using the weighted average number of common and dilutive common equivalent shares (stock options) assumed to be outstanding during the period, using the treasury stock method. The Company's stock options which were granted during the twelve-month period prior to its initial public offering have been considered outstanding for all periods presented. RECLASSIFICATIONS Certain reclassifications have been made in the accompanying financial statements for 1994 and 1995 to conform with the 1996 presentation. 3. CAPITAL LEASE OBLIGATIONS: The Company leases certain equipment under capital lease agreements. All lease obligations are secured by the related asset. A schedule of future minimum lease payments under capital lease agreements as of December 31, 1996 is as follows: 1997................................................................. $ 240 1998................................................................. 169 1999................................................................. 175 --------- Total minimum payments............................................... 584 Amount representing interest......................................... (59) --------- Present value of future minimum lease payments....................... 525 Less current portion............................................... (247) --------- Long-term capital lease obligation................................... $ 278 --------- ---------
4. COMMITMENTS: The Company leases its facilities and certain equipment under operating leases that expire from 1998 to 2001. The approximate minimum lease payments under these operating leases at December 31, 1996 are as follows: 1997................................................................ $ 1,081 1998................................................................ 1,046 1999................................................................ 118 2000................................................................ 90 2001................................................................ 60
Rent expense was approximately $875, $1,111 and $1,189 for the years ended December 31, 1994, 1995 and 1996, respectively. 5. LINE OF CREDIT: In December 1995, the Company secured a revolving line of credit with a bank allowing maximum borrowings of $10,000. The Company can borrow, with interest at the bank's prime lending rate, or if lower, at certain margins above bankers' acceptance on interbank offering rates. There have been no borrowings against the line of credit to date. Certain financial covenants are included in this agreement, which the Company was in compliance with at December 31, 1996. The line of credit is renewable April 30, 1997. 6. EMPLOYEE SAVINGS PLANS: The Company has a profit sharing plan and trust that qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Under the terms of the plan, the employees of the Company may make voluntary contributions to the plan as a percentage of compensation, but not in excess of the F-10 INTEGRATED MEASUREMENT SYSTEMS, INC. NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) 6. EMPLOYEE SAVINGS PLANS: (CONTINUED) maximum allowed under the Code. Employees become eligible to participate in the plan upon completion of six months of continuous employment and having attained the age of 21. The Company currently does not match employee contributions and does not intend to do so in the future. On July 1, 1996, the Company implemented an Executive Deferred Compensation Plan (the "Plan") for the purpose of providing eligible executives and employees with a program for deferring compensation earned during employment. The Plan is intended to constitute an unfunded deferred compensation arrangement for the benefit of a select group of management or highly compensated employees of the Company. Under the terms of the Plan, eligible executives and employees of the Company may make voluntary contributions to the Plan as a percentage of compensation, but not in excess of limitations stated in the Plan. The Company has invested these voluntary contributions in a variety of investment funds for the intended use of paying plan benefits when participating executives and employees become eligible to receive such benefits under the terms of the Plan. These investments have been included in Other Assets in the accompanying Balance Sheets. The Company currently does not match executive or employee contributions and does not intend to do so in the near future. 7. EMPLOYEE AND DIRECTOR STOCK PLANS: On May 10, 1995, the Company's Board of Directors approved the adoption of the 1995 Stock Incentive Plan (the 1995 Plan) pursuant to which 1,250,000 shares of the Company's Common Stock have been reserved for issuance. Subsequent to December 31, 1996, the Company's Board of Directors approved an amendment to reserve an additional 600,000 shares of Common Stock for issuance under the 1995 Plan. This amendment remains subject to shareholder approval. Under the 1995 Plan, incentive stock options may be granted to selected employees. Options under the 1995 Plan vest ratably over a four-year period from the date of grant, expire ten years from the date of grant, and are exercisable at prices generally not less than the fair market value at the grant date. During 1996, the Company cancelled and reissued certain incentive stock options granted to non-officer employees. The reissued options were granted at fair market value on the date of reissuance and have been reflected in the following table as cancellations and new grants. These options vest ratably over four years from the date of the reissuance. On May 10, 1995, the Board of Directors approved the adoption of the 1995 Stock Option Plan for Nonemployee Directors (the "Nonemployee Director Plan") pursuant to which 250,000 shares of the Company's Common Stock have been reserved for issuance. The Nonemployee Director Plan covers directors who are not employees of the Company. The Nonemployee Director Plan allows for the automatic grant of 10,000 options upon becoming a director and 3,000 options annually thereafter. Grants to-date have been made at fair market value on the date of grant. These options vest ratably over three years from the date of grant. Since consummation of the Company's initial public offering, 65,000 stock options were awarded under the Nonemployee Director Plan. On May 6, 1996, the shareholders approved the adoption of the 1995 Employee Stock Purchase Plan (the "ESPP") pursuant to which 250,000 shares of the Company's Common Stock have been reserved for issuance to participating employees, of which 18,641 shares have been issued as of December 31, 1996. Each eligible employee may elect to contribute up to 10 percent of their cash compensation during each pay period. The ESPP provides for two semi-annual offering periods, beginning February 1 and August 1 of each year. During the offering periods, participants accumulate funds in an account via payroll deduction. At the end of each six-month offering period, the purchase price is determined and the accumulated funds are used to automatically purchase shares of the Company's Common Stock. The purchase price per share is equal to 85 percent of the lower of the fair market value of the Common Stock (a) on the Enrollment Date of the offering period or (b) on the date of the purchase. F-11 INTEGRATED MEASUREMENT SYSTEMS, INC. NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) 7. EMPLOYEE AND DIRECTOR STOCK PLANS: (CONTINUED) During 1995, the Financial Accounting Standards Board issued SFAS 123 which defines a fair value based method of accounting for an employee stock option or similar equity instrument and encourages all entities to adopt that method of accounting for all of their employee stock compensation plans. However, it also allows an entity to continue to measure compensation cost for those plans using the method of accounting prescribed in APB 25. Entities electing to remain with the accounting in APB 25 must make pro forma disclosures of net income and, if presented, earnings per share, as if the fair value based method of accounting defined in the Statement had been applied. The Company has elected to account for its stock-based compensation plan under APB 25. However, the Company has computed, for pro forma disclosure purposes, the value of all options granted during 1995 and 1996 using the Black-Scholes option-pricing model as prescribed by SFAS 123, using the following weighted average assumptions for grants in 1995 and 1996: Risk-free interest rate............................................ 6% Expected dividend yield............................................ 0% Expected life...................................................... 4 years Expected volatility................................................ 61%
The total value of options granted during 1995 and 1996 would be amortized on a pro forma basis over the vesting period of the options. Options generally vest equally over four years. If the Company had accounted for these plans in accordance with SFAS 123, the Company's net income and net income per share would have decreased as reflected in the following pro forma amounts:
YEAR ENDED DECEMBER 31, -------------------- 1995 1996 --------- --------- Net income: As reported.............................................................. $ 3,535 $ 6,166 Pro forma................................................................ $ 3,194 $ 5,092 Net income per share: As reported.............................................................. $ 0.53 $ 0.88 Pro forma................................................................ $ 0.49 $ 0.74
F-12 INTEGRATED MEASUREMENT SYSTEMS, INC. NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) 7. EMPLOYEE AND DIRECTOR STOCK PLANS: (CONTINUED) The Company has not and does not currently contemplate any plans to issue equity instruments other than options to purchase Common Stock of the Company. Options are issued with an exercise price equal to the price of the closing trade on the Nasdaq National Market on the date of issuance. A summary of the status of the Company's stock option plans and changes are presented in the following table.
YEAR ENDED DECEMBER 31, ---------------------------------------------- 1995 1996 ---------------------- ---------------------- WTD. AVG. WTD. AVG. SHARES EX. PRICE SHARES EX. PRICE --------- ----------- --------- ----------- Options outstanding at beginning of year.......... -- -- 534,264 $ 9.36 Granted........................................... 542,250 9.36 442,200 14.57 Exercised......................................... 803 8.50 7,813 9.38 Cancelled......................................... 7,183 9.05 107,043 17.91 --------- ----- --------- ----------- Options outstanding at end of year................ 534,264 $ 9.36 861,608 $ 10.97 --------- ----- --------- ----------- --------- ----- --------- ----------- Exercisable at end of year........................ 78,433 $ 8.85 241,698 $ 9.81 --------- ----- --------- ----------- --------- ----- --------- ----------- Shares issued under the ESPP...................... -- -- 18,641 $ 11.26 --------- ----- --------- ----------- --------- ----- --------- ----------- Weighted average fair value of options granted.... -- $4.88 -- $6.85 Weighted average fair value of shares issued under the ESPP......................................... -- -- -- $3.87
The following table sets forth the exercise price range, number of shares outstanding at December 31, 1996, weighted average remaining contractual life, weighted average exercise price, number of exercisable shares and weighted average exercise price of exercisable options by groups of similar price and grant date:
OPTIONS OUTSTANDING ------------------------------------------- OPTIONS EXERCISABLE WEIGHTED -------------------------- AVERAGE WEIGHTED WEIGHTED OUTSTANDING REMAINING AVERAGE AVERAGE SHARES AT CONTRACTUAL EXERCISE EXERCISABLE EXERCISE EXERCISE PRICE RANGE 12/31/96 LIFE (YEARS) PRICE OPTIONS PRICE - ----------------------- ----------- --------------- ------------- ----------- ------------- $ 8.50-$ 8.50 380,387 8.36 $ 8.50 156,973 $ 8.50 $10.00-$12.38 59,761 8.46 $ 10.24 29.294 $ 10.13 $12.50-$12.50 162,832 9.37 $ 12.50 16,345 $ 12.50 $12.75-$13.13 90,750 9.05 $ 12.80 18,583 $ 12.75 $13.25-$24.00 167,878 9.21 $ 14.36 20,503 $ 14.51
As of December 31, 1996, employees of the Company also held approximately 334,949 Cadence stock options, under the original terms of their issuance. These options were granted to IMS employees by Cadence prior to 1995 (see Note 1). Upon exercise of Cadence options, proceeds equal to the option exercise price pass to Cadence, and there is no impact on the number of shares of Company stock outstanding. Certain unvested Cadence stock options held by Company employees will be cancelled as a result of any offering that reduces Cadence's Common Stock ownership in the Company to below certain percentages as specified in the Cadence Stock Option Plans. Cadence will compensate such employees in the form of cash for the value of these unvested stock options. Such pay out will be contingent upon each employees continued employment with the Company for the remaining unvested period related to these options. F-13 INTEGRATED MEASUREMENT SYSTEMS, INC. NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) 7. EMPLOYEE AND DIRECTOR STOCK PLANS: (CONTINUED) Compensation expense, equal to the difference of the option price and the fair market value, as defined, of Cadence's Common Stock on the date of cancellation of these options, will be reflected as a charge in the Company's Statements of Income over the remaining vesting period. 8. INCOME TAXES: The accompanying Statements of Income present the Company's income tax expense computed on a separate return basis. The taxable income of the Company was included in the Cadence consolidated income tax returns through July 20, 1995. The Company has been filing independent income tax returns since July 21, 1995, the date of the Company's initial public offering. Income tax liabilities through March 31, 1995, have been settled with Cadence. The settlement with Cadence is reflected as contributed capital in the accompanying Statements of Shareholders' Equity. Income tax liabilities for the period April 1 through July 20, 1995 were settled with Cadence in cash. The provision (benefit) for income taxes is as follows:
YEAR ENDED DECEMBER 31, ------------------------------- 1994 1995 1996 --------- --------- --------- Current: Federal.................................................................. $ 934 $ 2,529 $ 3,098 State.................................................................... 226 487 592 --------- --------- --------- 1,160 3,016 3,690 Deferred................................................................... 25 (763) (144) --------- --------- --------- Total.................................................................... $ 1,185 $ 2,253 $ 3,546 --------- --------- --------- --------- --------- ---------
The effective tax rate differs from the Federal statutory rate as follows:
YEAR ENDED DECEMBER 31, ------------------------------- 1994 1995 1996 --------- --------- --------- Federal statutory tax rate.................................................... 34.0% 34.0% 34.0% State taxes, net of Federal tax effect........................................ 4.4 4.1 4.1 Research and development tax credits.......................................... -- -- (1.9) Other, net.................................................................... (0.1) 0.8 0.3 --- --- --- Total....................................................................... 38.3% 38.9% 36.5% --- --- --- --- --- ---
F-14 INTEGRATED MEASUREMENT SYSTEMS, INC. NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) 8. INCOME TAXES: (CONTINUED) The net deferred tax asset consists of the following tax effects relating to temporary differences:
DECEMBER 31, -------------------- 1995 1996 --------- --------- Deferred tax assets: Inventory valuation................................................................ $ 641 $ 723 Accrued vacation and other compensation............................................ 209 444 Book in excess of tax depreciation................................................. 194 86 Allowance for doubtful accounts.................................................... 129 168 Accrued warranty................................................................... 398 187 Research and development credit carryforward....................................... -- 222 Other.............................................................................. 158 54 --------- --------- 1,729 1,884 Deferred tax liabilities: Service spare parts valuation...................................................... -- (69) Software development costs......................................................... (600) (542) --------- --------- (600) (611) --------- --------- Net deferred tax asset............................................................. $ 1,129 $ 1,273 --------- --------- --------- ---------
The Company's research and development credit carryforwards can be used to reduce future federal and state income tax liabilities and expire in 2004. For the years ended December 31, 1995 and 1996, income taxes payable have been reduced by $2,270 and $1,921, respectively, for the tax benefit from tax deduction of employee gains upon exercise of Cadence stock options. The tax benefit of the stock option deduction is reflected as an increase in Additional Paid-in Capital in the accompanying Statements of Shareholders' Equity. The employee gains are generally not expenses of the Company for financial reporting purposes, and the exercise of these stock options does not increase the number of shares of Company Common Stock outstanding. 9. TRANSACTIONS WITH CADENCE: In certain foreign markets, primarily Europe, Cadence employees act as sales agents for the Company. Cadence is reimbursed its cost plus a fee by the Company through intercompany accounts for related costs incurred on the Company's behalf. Cadence provides selling, service and production support related to the Company's Virtual Test Software. These expenses have been reflected in the accompanying Statements of Income based on contractual agreements with Cadence, which reflect estimated costs required to provide such support. Cadence provides facilities for certain domestic Company sales personnel. Intercompany charges for utilization of these facilities have been reflected in the accompanying Statements of Income as Selling, General and Administrative expense. Certain corporate services such as treasury, tax, legal and risk management have been handled by Cadence in the past and were not significant. The Company has managed these activities independently since the initial public offering. For the years 1994, 1995 and 1996, the costs of the above services provided by Cadence totaled $1,883, $2,698 and $2,608, respectively. F-15 INTEGRATED MEASUREMENT SYSTEMS, INC. NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS) 9. TRANSACTIONS WITH CADENCE: (CONTINUED) In December 1996, the Company sold a mixed-signal Test Station to Cadence for a purchase price of approximately $1,260. On March 31, 1995, the Company's Board of Directors approved a non-cash dividend to Cadence in the amount of $1,027 which was the intercompany outstanding balance due from Cadence at March 31, 1995. This dividend has been reflected in the accompanying Statements of Shareholders' Equity. It is the intent of Cadence and the Company to settle all intercompany activity subsequent to March 31, 1995 in cash. 10. GEOGRAPHIC AND CUSTOMER INFORMATION: The Company sells to customers located throughout the United States, Asia-Pacific and Europe. Credit evaluations of its customers' financial conditions are performed periodically, and the Company generally does not require collateral from its customers. The Company maintains reserves for potential credit losses and such losses have been both immaterial and within management's expectations. In 1994, 1995, and 1996, one customer accounted for 22 percent, 30 percent and 36 percent of net sales, respectively. The concentrations of credit risk with respect to trade receivables are, in management's opinion, considered minimal due to the size and financial stability of the Company's customers. Export sales represent sales to the Company's customers throughout Asia-Pacific and Europe. Sales by customer geographic region, generally denominated in U.S. dollars, were:
YEAR ENDED DECEMBER 31, ------------------------------- 1994 1995 1996 --------- --------- --------- United States.......................................................... $ 18,132 $ 27,854 $ 37,591 Asia-Pacific........................................................... 7,755 8,403 8,999 Europe................................................................. 3,982 4,656 3,790 Other.................................................................. 183 180 457 --------- --------- --------- Total................................................................ $ 30,052 $ 41,093 $ 50,837 --------- --------- --------- --------- --------- ---------
Like most high technology, high growth companies, IMS faces certain business risks which may impact the Company's results of operations. For further discussion of such risks, see Management's Discussion and Analysis of Financial Condition and Results of Operations. F-16 [LOGO] TEST STATIONS IMS Time TestVIEW Navigator Graphical Test identifies Environment timing errors provides for fast program development ATS Blazer Test Stations provide high performance engineering test capability IMS-Link Shmoo Plots accepts design provide graphic data from EDA display of test databases results
TEST SOFTWARE Dantes Virtual Test software supports the design, development simulation and debugging of mixed-signal test programs (1) IMS TEST STATIONS The pictures portray: (A) Three different models of ATS Blazer Test Stations (center). Around this picture are four screen views of IMS software as follows (B) TIME NAVIGATOR which facilitates identifying IC timing errors (upper left-hand corner) (C) TEST VIEW which is a test environment that provides for graphical test program development (upper right-hand corner) (D) SHMOO PLOTS which provides graphic display of multivariable test results (lower right-hand corner) (E) IMS-LINK which accepts design data from electronic design automation data bases (lower left-hand corner) (2) TEST SOFTWARE The picture shows a screen shot of Dantes Virtual Test Software which supports, the design and debugging of mixed-signal test programs. [LOGO] PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the costs and expenses, other than underwriting discounts and commissions, expected to be incurred by the Registrant in connection with the offering described in this Registration Statement. All amounts, except the SEC registration fee, the NASD filing fee and the NASDAQ National Market System listing fee are estimates. SEC Registration Fee............................................. $ 10,455 NASD Filing Fee.................................................. 3,950 NASDAQ Listing Fee............................................... 15,500 Printing and Engraving Expenses.................................. 70,000* Accounting Fees and Expenses..................................... 25,000* Legal Fees and Expenses.......................................... 60,000* Blue Sky Fees and Expenses (including fees of Counsel)........... 3,000* Transfer Agent and Registrar Fees................................ 3,000* Director and Officer Liability Insurance......................... 90,000* Miscellaneous Expenses........................................... 44,095* --------- Total........................................................ $325,000* --------- ---------
- ------------------------ *Estimate. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. As an Oregon corporation the Company is subject to the Oregon Business Corporation Act ("OBCA") and the exculpation from liability and indemnification provisions contained therein. Pursuant to Section 60.047(2)(d) of the OBCA, Article IV of the Company's Restated Articles of Incorporation (the "Articles") eliminates the liability of the Company's directors to the Company or its shareholders, except for any liability related to breach of the duty of loyalty, actions not in good faith and certain other liabilities. Section 60.387 et seq. of the OBCA allows corporations to indemnify their directors and officers against liability where the director or officer has acted in good faith and with a reasonable belief that actions taken were in the best interests of the corporation or at least not adverse to the corporation's best interests and, if in a criminal proceeding, the individual had no reasonable cause to believe the conduct in question was unlawful. Under the OBCA, corporations may not indemnify against liability in connection with a claim by or in the right of the corporation but may indemnify against the reasonable expenses associated with such claims. Corporations may not indemnify against breaches of the duty of loyalty. The OBCA provides for mandatory indemnification of directors against all reasonable expenses incurred in the successful defense of any claim made or threatened whether or not such claim was by or in the right of the corporation. Finally, a court may order indemnification if it determines that the director or officer is fairly and reasonably entitled to indemnification in view of all the relevant circumstances whether or not the director or officer met the good faith and reasonable belief standards of conduct set out in the statute. The OBCA also provides that the statutory indemnification provisions are not deemed exclusive of any other rights to which directors or officers may be entitled under a corporation's articles of incorporation or bylaws, any agreement, general or specific action of the board of directors, vote of shareholders or otherwise. The Articles require the Company to indemnify its directors and officers to the fullest extent not prohibited by law. In addition, the Company has entered into indemnity agreements with each executive officer of the Company and each member of the Company's Board of Directors. These indemnity agreements provide for indemnification of the indemnitee to the fullest extent allowed by law. II-1 ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. Within the last three years, the Company has sold securities without registration under the Securities Act of 1933, as amended (the "Act"), in the transactions and in reliance on the exemptions from registration described below. During the period from May 10, 1995 through October 8, 1996, the effective date of the Company's Registration Statements on Form S-8 relating to its option plans, the Company has issued options to purchase an aggregate of shares of Common Stock and has sold an aggregate of shares of Common Stock for an aggregate purchase price of $ , in each case pursuant to the Company's 1995 Stock Incentive Plan and the 1995 Stock Option Plan for Nonemployee Directors and in reliance on Rule 701 promulgated under the Act. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits
NUMBER DESCRIPTION - ----------- -------------------------------------------------------------------------------------------------------- 1.1 Form of Underwriting Agreement 3.1 Restated Articles of Incorporation of Integrated Measurement Systems, Inc.* 3.2 Restated Bylaws of Integrated Measurement Systems, Inc.* 5.1 Opinion of Ater Wynne Hewitt Dodson & Skerritt as to the legality of the securities being registered 10.1 Form of Indemnity Agreement between Integrated Measurement Systems, Inc. and each of its executive officers and directors* 10.2 1995 Stock Incentive Plan* 10.3 1995 Stock Option Plan for Nonemployee Directors* 10.4 Form of Employment Agreement between Integrated Measurement Systems, Inc. and each of its executive officers (with the terms relating to each executive officer attached as Exhibit A thereto)* 10.5 Stockholder Agreement between Integrated Measurement Systems, Inc. and Cadence Design Systems, Inc.* 10.6 Shareholder Agreement between Integrated Measurement Systems, Inc. and Cadence Design Systems, Inc.* 10.7 Asset Transfer Agreement between Integrated Measurement Systems, Inc. and Cadence Design Systems, Inc.* 10.8 Corporate Services Agreement between Integrated Measurement Systems, Inc. and Cadence Design Systems, Inc.* 10.9 Tax Sharing Agreement between Integrated Measurement Systems, Inc. and Cadence Design Systems, Inc.* 10.10 Lease Agreement between Integrated Measurement Systems, Inc. and Beaverton-Richmond Tech Properties, a Joint Venture, as amended by Amendment One and Amendment Two* 10.11 Line of Credit Agreement between Integrated Measurement Systems, Inc. and U.S. Bank of Oregon+ 10.12 Integrated Measurement Systems, Inc. 1995 Employee Stock Purchase Plan.+ 10.13 Employment Agreement dated March 16, 1996 between Integrated Measurement Systems, Inc. and Keith L. Barnes++ 10.14 Employment Agreement dated March 16, 1996 between Integrated Measurement Systems, Inc. and Sar Ramadan.++ 10.15 Amended Stockholder Agreement between Integrated Measurement Systems, Inc. and Cadence Design Systems, Inc. 10.16 Amended Corporate Services Agreement between Integrated Measurement Systems, Inc. and Cadence Design Systems, Inc. 10.17 Second Amendment to Joint Sales Agency Agreement between Cadence Design Systems, Inc. and Integrated Measurement Systems, Inc.
II-2
NUMBER DESCRIPTION - ----------- -------------------------------------------------------------------------------------------------------- 10.18 Employment Agreement dated December 31, 1996 between Integrated Measurement Systems, Inc. and David Brinker. 10.19 Integrated Measurement Systems, Inc. Executive Deferred Compensation Plan.+++ 10.20 Separation letter agreement between Integrated Measurement Systems, Inc. and Marvin Wolfson 16.1 Letter of Arthur Andersen LLP regarding change in accounting principles.++ 23.1 Consent of Ater Wynne Hewitt Dodson & Skerritt (included in legal opinion filed as Exhibit 5.1) 23.2 Consent of Arthur Andersen LLP 24.1 Powers of Attorney (included on signature page on II-4) 27.1 Financial Data Schedule
- ------------------------ * Incorporated by reference to the Company's Registration Statement on Form S-1 (Registration No. 33-92408). + Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1995. ++ Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996. +++ Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996. (b) Financial Statement Schedules ITEM 17. UNDERTAKINGS. (a) The undersigned registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. (b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (c) The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Amendment to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Beaverton, State of Oregon, on the 24th day of January, 1997. INTEGRATED MEASUREMENT SYSTEMS, INC. By: /s/ KEITH L. BARNES --------------------------------------- Keith L. Barnes PRESIDENT AND CHIEF EXECUTIVE OFFICER POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Keith L. Barnes and Sar Ramadan and each of them singly, as true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities to sign the Registration Statement filed herewith and any or all amendments to said Registration Statement (including post-effective amendments and new registration statements pursuant to Rule 462 or otherwise), and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission granting unto said attorneys-in-fact and agents and full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the foregoing, as full to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or his substitute, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Amendment to Registration Statement has been duly signed by the following persons in the capacities indicated on January 24, 1997.
SIGNATURE TITLE - ------------------------------------------------ --------------------------------------- /s/ KEITH L. BARNES -------------------------------------- President, Chief Executive Officer and Keith L. Barnes Director (Principal Executive Officer) /s/ SAR RAMADAN -------------------------------------- Chief Financial Officer (Principal Sar Ramadan Financial and Accounting Officer) /s/ H. RAYMOND BINGHAM -------------------------------------- Chairman of the Board H. Raymond Bingham /s/ C. SCOTT GIBSON -------------------------------------- Director C. Scott Gibson /s/ JAMES M. HURD -------------------------------------- Director James M. Hurd /s/ JAMES E. SOLOMON -------------------------------------- Director James E. Solomon
II-4 INTEGRATED MEASUREMENT SYSTEMS, INC. VALUATION AND QUALIFYING ACCOUNTS SCHEDULE II (IN THOUSANDS)
ADDITIONS BALANCE AT CHARGED TO BEGINNING OF COSTS AND BALANCE AT END DESCRIPTION PERIOD EXPENSES DEDUCTIONS OF PERIOD - ------------------------------------------------------------ --------------- ------------- ------------- --------------- Year Ended December 31, 1994: Allowance for doubtful accounts........................... $ 147 $ 69 $ (34) $ 182 Year Ended December 31, 1995: Allowance for doubtful accounts........................... 182 220 (64) 338 Year Ended December 31, 1996 Allowance for doubtful accounts........................... 338 151 -- 489
S-1 EX-1.1 2 EXHIBIT 1.1 1,500,000 Shares INTEGRATED MEASUREMENT SYSTEMS, INC. Common Stock, $.01 par value UNDERWRITING AGREEMENT February __, 1997 February __, 1997 Morgan Stanley & Co. Incorporated Cowen & Company SoundView Financial Group, Inc. c/o Morgan Stanley & Co. Incorporated 1585 Broadway New York, New York 10036 Dear Sirs: Integrated Measurement Systems, Inc., an Oregon corporation (the "Company"), and Cadence Design Systems, Inc. ("Cadence"), a Delaware Corporation and a majority stockholder of the Company, propose to issue and sell to the several Underwriters named in Schedule I hereto (the "Underwriters"), an aggregate of 1,500,000 shares of the common stock, $.01 par value, of the Company (the "Firm Shares"), of which 675,000 shares are to be issued and sold by the Company and 825,000 shares are to be sold by Cadence. In addition, the Company and Cadence propose to sell to the Underwriters not more than an additional 225,000 shares of the Company's common stock, $.01 per value (the "Additional Shares"), of which 100,000 shares are to be issued and sold by the Company and 125,000 shares are to be sold by Cadence, if and to the extent that you, as Managers of the offering, shall have determined to exercise, on behalf of the Underwriters, the right to purchase such shares of common stock granted to the Underwriters in Article III hereof. In the event that the Underwriters exercise their option with respect to less than the total number of Additional Shares which may be purchased by them, then the Underwriters shall purchase such Additional Shares from the Company and Cadence in proportion, as near as practicable, to the number of total Additional Shares sold by each of them, as set forth above. The Firm Shares and the Additional Shares are hereinafter collectively referred to as the Shares. The shares of common stock, $.01 par value, of the Company to be outstanding after giving effect to the sales contemplated hereby are hereinafter referred to as the Common Stock. The Company and Cadence are hereinafter sometimes collectively referred to as the Sellers. The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement, including a prospectus, relating to the Shares. The registration statement as amended at the time it becomes effective, including the information (if any) deemed to be part of the registration statement at the time of effectiveness pursuant to Rule 430A under the Securities Act of 1933, as amended (the "Securities Act"), is hereinafter referred to as the "Registration Statement;" the prospectus in the form first used to confirm sales of Shares is hereinafter referred to as the "Prospectus." If the Company files a registration statement to register a portion of the Shares and relies on Rule 462(b) under the Securities Act for such registration statement to become effective upon filing with the Commission (the "Rule 462 Registration Statement"), then any reference to the "Registration Statement" shall be deemed to refer to both the registration statement referred to above (Commission File No. 333- ) and the Rule 462 Registration Statement, in each case as amended from time to time. I. A. The Company and Cadence, jointly and severally, represent and warrant to each of the Underwriters that: (i) The Registration Statement has become effective, no stop order suspending the effectiveness of the Registration Statement is in effect, and no proceedings for such purpose are pending before or threatened by the Commission. (ii) (I) Each document filed pursuant to the Exchange Act complied when so filed in all material respects with the Securities Exchange Act of 1934, as amended (the "Exchange Act") and the applicable rules and regulations of the Commission thereunder; (II) each part of the Registration Statement, when such part became effective, did not contain and each such part, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (III) the Registration Statement and the Prospectus comply and, as amended or supplemented, if applicable, will comply in all material respects with the Securities Act and the applicable rules and regulations of the Commission thereunder and (IV) the Prospectus does not contain and, as amended or supplemented, if applicable, will not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that the representations and warranties set forth in this paragraph I.A (ii) do not apply to statements or omissions in the Registration Statement or the Prospectus based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through you expressly for use therein. (iii) The Company has been duly incorporated, and is an active corporation under the laws of the State of Oregon, has the corporate power and authority to own its property and to conduct its business as described in the Prospectus and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the Company. (iv) The Shares to be sold by the Company have been duly authorized, and, when issued and delivered in accordance with the terms of this Agreement, will be validly issued, fully paid and non-assessable, and the issuance of such Shares will not be subject to any preemptive or similar rights. (v) This Agreement has been duly authorized, executed and delivered by the Company and is a valid and binding agreement of the Company. (vi) There has not occurred any material adverse change, or any development involving a prospective material adverse change, in the condition, financial or otherwise, or in the earnings, business or operations of the Company and the Subsidiary (as hereinafter defined), taken as a whole, from that set forth in the Prospectus. (vii) There are no legal or governmental proceedings pending or threatened to which the Company or the Subsidiary is a party or to which any of the properties of the Company or the Subsidiary is subject that are required to be described in the Registration Statement or the Prospectus and are not so described or any statutes, -2- regulations, contracts or other documents that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not described or filed as required. (viii) Each preliminary prospectus filed as part of the registration statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 or Rule 462 under the Securities Act, complied when so filed in all material respects with the Securities Act and the rules and regulations of the Commission thereunder. (ix) Each of the Company and the Subsidiary maintains a system of internal accounting controls sufficient to provide reasonable assurance that (1) transactions are executed in accordance with management's general or specific authorization; (2) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (3) access to assets is permitted only in accordance with management's general or specific authorization; and (4) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. The representations and warranties of Cadence set forth in paragraphs (ii), (iii), (vi), (vii) and (ix) are made on the basis that, after due inquiry, Cadence has no knowledge of or reasonable grounds to believe in the existence of any facts which would make such representations and warranties untrue, incomplete or incorrect. B. The Company represents and warrants to each of the Underwriters that: (i) The execution and delivery by the Company of, and the performance by the Company of its obligations under, this Agreement will not contravene any provision of applicable law or the articles of incorporation or bylaws of the Company or the Subsidiary or any agreement or other instrument binding upon the Company or the Subsidiary that is material to the Company and the Subsidiary, taken as a whole, or any judgment, order or decree of any governmental body, agency or court having jurisdiction over the Company or the Subsidiary, and no consent, approval, authorization or order of or qualification with any governmental body or agency is required for the performance by the Company of its obligations under this Agreement, except such as may be required by the securities or Blue Sky laws of the various states in connection with the offer and sale of the Shares. (ii) Integrated Measurement Systems FSC, Inc., a Guam corporation (the "Subsidiary"), has been duly incorporated, is validly existing as a corporation in good standing under the laws of Guam, has the corporate power and authority to own its property and to conduct its business as described in the Prospectus and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the Company and the Subsidiary, taken as a whole. All of the issued shares of capital stock of the Subsidiary of the Company have been duly and validly authorized and issued, are fully paid and non-assessable, and owned directly by the Company, free and clear of all liens, encumbrances, equities or claims. The Subsidiary is not required to be set forth in Exhibit 21 to the Registration Statement and the Company does not own, directly or indirectly, an interest in any other corporation, partnership, business, trust or other entity required to be set forth in Exhibit 21 to the Registration Statement. (iii) Each of the Company and the Subsidiary has all necessary consents, authorizations, approvals, orders, certificates and permits of and from, and has made all declarations and filings with, all federal, state, -3- local and other governmental authorities, all self-regulatory organizations and all courts and other tribunals, to own, lease, license and use its properties and assets and to conduct its business in the manner described in the Prospectus, except to the extent that the failure to obtain or file would not have a material adverse effect on the Company and the Subsidiary, taken as a whole. (iv) The shares of Common Stock (including the Shares to be sold by Cadence) outstanding prior to the issuance of the Shares to be sold by the Company have been duly authorized and are validly issued, fully paid and non-assessable. (v) The authorized capital stock of the Company conforms as to legal matters to the description thereof contained in the Prospectus. (vi) Each of the Company and the Subsidiary (i) is in compliance with any and all applicable foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants (collectively, "Environmental Laws"), (II) has received all permits, licenses or other approvals required of it under applicable Environmental Laws to conduct its business and (III) is in compliance with all terms and conditions of any such permit, license or approval, except where such noncompliance with Environmental Laws, failure to receive required permits, licenses or other approvals or failure to comply with the terms and conditions of such permits, licenses or approvals would not, singly or in the aggregate, have a material adverse effect on the Company and the Subsidiary, taken as a whole. (vii) The costs and liabilities associated with Environmental Laws (including, without limitation, any capital or operating expenditures required for clean-up, closure of properties or compliance with Environmental Laws or any permit, license or approval, any related constraints on operating activities and any potential liabilities to third parties) would not, singly or in the aggregate, reasonably be expected to have a material adverse effect on the Company and the Subsidiary, taken as a whole. (viii) Each of the Company and the Subsidiary owns or possesses adequate licenses or other rights to use all patents, copyrights, trademarks, service marks, trade names, maskwork rights, technology and know-how necessary (in any material respect) to conduct its business in the manner described in the Prospectus and, except as disclosed in the Prospectus, neither the Company nor the Subsidiary have received any notice of infringement or conflict with (and neither the Company nor the Subsidiary know of any infringement or conflict with) asserted rights of others with respect to any patents, copyrights, trademarks, service marks, trade names, maskwork rights, technology or know-how which could result in any material adverse effect upon the Company and the Subsidiary, taken as a whole; and, except as disclosed in the Prospectus, the discoveries, inventions, products or processes of the Company referred to in the Prospectus do not, to the knowledge of the Company or the Subsidiary, infringe or conflict with any right or patent of any third party, or any discovery, invention, product or process which is the subject of a patent application filed by any third party, known to the Company or the Subsidiary which could have a material adverse effect on the Company and the Subsidiary, taken as a whole. (ix) The Company is not and, after giving effect to the offering and sale of the Shares and the application of the proceeds thereof as described in the Prospectus will not be, an "investment company" as such term is defined in the Investment Company Act of 1940, as amended. -4- (x) There is no owner of any securities of the Company who has any rights, not effectively satisfied or waived, to require registration of any shares of capital stock of the Company in connection with the filing of the Registration Statement. (xi) As of the date the Registration Statement becomes effective, the Company's Common Stock will be listed on the Nasdaq National Market System. (xii) The Company has complied with all provisions of Section 517.075, Florida Statutes (Chapter 92-198, Laws of Florida), relating to issuers doing business with Cuba. II. Cadence represents and warrants to each of the Underwriters that: (i) it is duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware. (ii) To the best of its knowledge, that all the representations of the Company set forth in Section I.B are true and correct. (iii) This Agreement has been duly authorized, executed and delivered by Cadence and constitutes a valid and binding obligation upon Cadence. (iv) The execution and delivery by Cadence and the performance by Cadence of its obligations under, this Agreement and any lock-up agreement signed by Cadence relating to resale restrictions on the Company stock owned or held by Cadence ("Lock-Up Agreement"), will not contravene Cadence's certificate or articles of incorporation or by-laws, or any agreement or other instrument binding upon Cadence or any judgment, order or decree of any governmental body, agency or court having jurisdiction over Cadence, and no consent, approval, authorization or order of or qualification with any governmental body or agency is required for the performance by Cadence of its obligations under this Agreement the Lock-Up Agreement, except such as may be required by the securities or Blue Sky laws of the various states in connection with the offer and sale of the Shares. (v) Cadence has, and on the Closing Date will have, good and valid marketable title to the Shares to be sold by Cadence and the legal right and power, and all authorization and approval required by law, to enter into this Agreement and to sell, transfer and deliver the Shares to be sold by Cadence. (vi) The Shares to be sold by Cadence pursuant to this Agreement have been duly authorized and are validly issued, fully paid and non-assessable. (vii) Upon delivery of and payment for the Shares to be sold by Cadence pursuant to this Agreement, the Underwriters will receive good and valid title to such Shares free and clear of any security interests, claims, liens and other encumbrances. III. Each Seller, severally and not jointly, hereby agrees to sell to the several Underwriters, and each Underwriter, upon the basis of the representations and warranties herein contained, but subject to the conditions -5- hereinafter stated, agrees, severally and not jointly, to purchase from such Seller at $________ a share -- the purchase price -- the number of Firm Shares (subject to such adjustments to eliminate fractional shares as you may determine) that bears the same proportion to the number of Firm Shares to be sold by such Seller as the number of Firm Shares set forth in Schedule I hereto opposite the name of such Underwriter bears to the total number of Firm Shares. On the basis of the representations and warranties contained in this Agreement, and subject to its terms and conditions, the Company and Cadence hereby agree to sell to the Underwriters the Additional Shares, and the Underwriters shall have a one-time right to purchase, severally and not jointly, up to 225,000 Additional Shares at the purchase price. Additional Shares may be purchased as provided in Article V hereof solely for the purpose of covering over-allotments made in connection with the offering of the Firm Shares. If any Additional Shares are to be purchased, each Underwriter agrees, severally and not jointly, to purchase the number of Additional Shares (subject to such adjustments to eliminate fractional shares as you may determine) that bears the same proportion to the total number of Additional Shares to be purchased as the number of Firm Shares set forth in Schedule I hereto opposite the name of such Underwriter bears to the total number of Firm Shares. The Company hereby agrees that, without the prior written consent of Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will not, during the period ending 90 days after the date of the Prospectus, (1) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock, or (2) enter into any swap or similar arrangement that transfers, in whole or in part, the economic risk of ownership of the Common Stock, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise, other than (i) the Shares to be sold hereunder, (ii) any shares of such Common Stock sold by the Company upon the exercise of an option under the Company's stock option plans outstanding on the date hereof, (iii) any option to purchase Common Stock, and any shares of Common Stock sold by the Company upon the exercise of such options, granted under the Company's 1995 Stock Incentive Plan and the 1995 Stock Option Plan for Non-Employee Directors ,provided that, the holder of such option enters into a lock-up agreement similar to the agreement set forth in this paragraph for the period from the date of such grant until the date 90 days after the date of the Prospectus, and (iv) any shares of Common Stock issued and sold by the Company pursuant to the 1995 Employee Stock Purchase Plan. The Company hereby further agrees that during the period ending 90 days after the date of the Prospectus, it will not waive, amend or alter any lock up provision contained in any stock option agreement between the Company and any person without the prior written consent of Morgan Stanley & Co. Incorporated on behalf of the Underwriters. Cadence hereby agrees that, without the prior written consent of Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will not, during the period ending 90 days after the date of the Prospectus, (1) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock, or (2) enter into any swap or similar arrangement that transfers, in whole or in part, the economic risk -6- of ownership of the Common Stock, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. In addition, Cadence agrees that, without the prior written consent of Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will not, during the period ending 90 days after the date of the Prospectus, make any demand for or exercise any right with respect to, the registration of any shares of Common Stock or any security convertible into or exercisable or exchangeable for Common Stock. IV. The Sellers are advised by you that the Underwriters propose to make a public offering of their respective portions of the Shares as soon after the Registration Statement and this Agreement have become effective as in your judgment is advisable. The Sellers are further advised by you that the Shares are to be offered to the public initially at $____ a share (the public offering price) and to certain dealers selected by you at a price that represents a concession not in excess of $___ a share under the public offering price, and that any Underwriter may allow, and such dealers may reallow, a concession, not in excess of $____ a share, to any Underwriter or to certain other dealers. V. Payment for the Firm Shares shall be made in Federal or other funds immediately available in New York City against delivery of such Firm Shares for the respective accounts of the several Underwriters at 10:00 A.M., New York City time, on _________, or at such other time on the same or such other date, not later than _________, as shall be designated in writing by you. The time and date of each such payment are hereinafter referred to as the Closing Date. Payment for any Additional Shares shall be made in Federal or other funds immediately available in New York City against delivery of such Additional Shares for the respective accounts of the several Underwriters at 10:00 A.M., New York City time, on such date (which may be the same as the Closing Date but shall in no event be earlier than the Closing Date nor later than ten business days after the giving of the notice hereinafter referred to) as shall be designated in a written notice from you to the Company of your determination, on behalf of the Underwriters, to purchase a number, specified in said notice, of Additional Shares, or on such other date, in any event not later than ___________ as shall be designated in writing by you. The time and date of such payment are hereinafter referred to as the Option Closing Date. The notice of the determination to exercise the option to purchase Additional Shares and of the Option Closing Date may be given at any time within 30 days after the date of this Agreement. Certificates for the Firm Shares and Additional Shares shall be in definitive form and registered in such names and in such denominations as you shall request in writing not later than two full business days prior to the Closing Date or the Option Closing Date, as the case may be. The certificates evidencing the Firm Shares and Additional Shares shall be delivered to you on the Closing Date or the Option Closing Date, as the case may be, for the respective accounts of the several Underwriters, with any transfer taxes payable in -7- connection with the transfer of the Shares to the Underwriters duly paid, against payment of the purchase price therefor. VI. The obligations of the Sellers and the several obligations of the Underwriters hereunder are subject to the condition that the Registration Statement shall have become effective not later than the date hereof. The several obligations of the Underwriters hereunder are subject to the following further conditions: (a) Subsequent to the execution and delivery of this Agreement and prior to the Closing Date, there shall not have occurred any change, or any development involving a prospective change, in the condition, financial or otherwise, or in the earnings, business or operations, of the Company and the Subsidiary, taken as a whole, from that set forth in the Registration Statement, that, in your judgment, is material and adverse and that makes it, in your judgment, impracticable to market the Shares on the terms and in the manner contemplated in the Prospectus. (b) The Underwriters shall have received on the Closing Date a certificate, dated the Closing Date and signed by the chief executive officer and the chief financial officer of the Company, to the effect set forth in clause (a) above, and to the effect that the representations and warranties of the Company contained in this Agreement are true and correct as of the Closing Date and that the Company has complied with all of the agreements and satisfied all of the conditions on its part to be performed or satisfied hereunder on or before the Closing Date. The officers signing and delivering such certificate may rely upon the best of their knowledge as to proceedings threatened. (c) The Underwriters shall have received on the Closing Date a certificate, dated the Closing Date and signed by each of the chief executive officer and the chief financial officer of Cadence to the effect set forth in clause (a) above, and to the effect that the representations and warranties of Cadence contained in this Agreement are true and correct as of the Closing Date and that Cadence has complied with all of the agreements and satisfied all of the conditions on its part to be performed or satisfied hereunder on or before the Closing Date (the officers signing and delivering such certificate may rely upon the best of their knowledge as to proceedings threatened). (d) You shall have received on the Closing Date an opinion of Ater Wynne Hewitt Dodson & Skerritt, counsel for the Company, dated the Closing Date, to the effect that (i) the Company has been duly incorporated and is an active corporation under the laws of the State of Oregon, has the corporate power and authority to own its property and to conduct its business as described in the Prospectus and is duly qualified to transact business and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property requires such qualification, except to the extent that the failure to be so qualified or be in good standing would not have a material adverse effect on the Company; -8- (ii) based solely on such counsel's review of the stock records of the Subsidiary, the Company owns all of the shares of capital stock of the Subsidiary; (iii) the authorized capital stock of the Company conforms as to legal matters to the description thereof contained in the Prospectus; (iv) the shares of Common Stock (including the Shares to be sold by Cadence) outstanding prior to the issuance of the Shares to be sold by the Company have been duly authorized and are validly issued, fully paid and non-assessable; (v) the Shares to be sold by the Company have been duly authorized when issued and delivered in accordance with the terms of this Agreement, will be validly issued, fully paid and non-assessable, and the issuance of such Shares will not be subject to any statutory preemptive or, to such counsel's knowledge, similar rights; (vi) the Company has corporate power and authority to enter into this Agreement and to issue, sell and deliver to the Underwriters the Shares to be issued and sold by the Company and this Agreement has been duly authorized, executed and delivered by the Company; (vii) the execution and delivery by the Company of, and the performance by the Company of its obligations under, this Agreement will not contravene any provision of applicable law or the articles of incorporation or bylaws of the Company or, to the best of such counsel's knowledge, any agreement or other instrument binding upon the Company or the Subsidiary that is material to the Company and the Subsidiary, taken as a whole, or, to the best of such counsel's knowledge, any judgment, order or decree of any governmental body, agency or court having jurisdiction over the Company or the Subsidiary and no consent, approval, authorization or order of or qualification with any governmental body or agency is required for the performance by the Company of its obligations under this Agreement, except such as may be required by the securities or Blue Sky laws of the various states in connection with the offer and sale of the Shares or under the rules or regulations of the National Association of Securities Dealers (the "NASD") with respect to underwriting arrangements; (viii) the statements (1) in the Prospectus under the captions "Risk Factors -- Effect of Certain Anti-Takeover Provisions," "Risk Factors--Shares Eligible for Future Sale," "Management," "Certain Transactions--Description of Agreements with Cadence," "Description of Capital Stock," and "Shares Eligible for Future Sale," and (2) in the Registration Statement in Items 14 and 15, in each case insofar as such statements constitute summaries of the legal matters, documents or proceedings referred to therein, fairly present the information called for with respect to such legal matters, documents and proceedings and fairly summarize the matters referred to therein; (ix) after due inquiry, such counsel does not know of any legal, regulatory or governmental proceeding pending or threatened to which either the Company or the Subsidiary is a party or to which any of the properties of the Company or the Subsidiary is subject that are required to be described in the Registration Statement or the Prospectus and are not so described or of any statutes, regulations, contracts or other documents that are required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not described or filed as required; -9- (x) the Company is not and, after giving effect to the offering and the sale of the Shares and the application of the proceeds thereof as described in the Prospectus will not be, an "investment company" or an entity "controlled" by an "investment company," as such terms are defined in the Investment Company Act of 1940, as amended; (xi) to the best of such counsel's knowledge: (i) the Registration Statement has become effective under the Securities Act, no stop order proceedings with respect thereto have been instituted or are pending or threatened under the Securities Act; and (ii) any required filing of the Prospectus and any supplement thereto pursuant to Rule 424(b) of the rules and regulations has been made in the manner and within the time period required by such Rule 424(b); (xii) to such counsel's knowledge, each document filed pursuant to the Exchange Act (except for financial statements and schedules and other financial information derived therefrom included therein as to which such counsel need not express any opinion) complied when so filed as to form in all material respects with the Exchange Act and the applicable rules and regulations of the Commission thereunder, (xiii) such counsel is of the opinion that the Registration Statement and Prospectus (except for financial statements and schedules and other financial data included therein as to which such counsel need not express any opinion) comply as to form in all material respects with the Securities Act and the rules and regulations of the Commission thereunder, (2) believes that (except for financial statements and schedules and other financial data as to which such counsel need not express any belief) the Registration Statement and the prospectus included therein at the time the Registration Statement became effective did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (3) believes that (except for financial statements and schedules and other financial data as to which such counsel need not express any belief) the Prospectus does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; (e) You shall have received on the Closing Date an opinion of Cooley Godward LLP, counsel for Cadence, dated the Closing Date, to the effect that (i) Cadence has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware. (ii) this Agreement has been duly authorized, executed and delivered by Cadence; (iii) the execution and delivery by Cadence of, and the performance by Cadence of its obligations under, this Agreement will not contravene any provision of applicable law, or the certificate of incorporation or bylaws of Cadence or, to the best of such counsel's knowledge, any agreement or other instrument binding upon Cadence that is material Cadence or, to the best of such counsel's knowledge, any judgment, order or decree of any governmental body, agency or court having jurisdiction over Cadence where such judgment order or decree would have, singly or in the aggregate, -10- an material adverse effect on Cadence, and no consent, approval, authorization or order of or qualification with any governmental body or agency is required for the performance by Cadence of its obligations under this Agreement, except such as have been obtained or may be required by the securities or Blue Sky laws of the various states in connection with the offer and sale of the Shares or under the rules or regulations of the NASD with respect to underwriting arrangements; (iv) Cadence has the corporate power, and all authorization and approval required by law, to enter into this Agreement and to sell, transfer and deliver the Shares to be sold by Cadence; and, to such counsel's knowledge, Cadence has valid title to the Shares to be sold by it and such sale, transfer and delivery is not subject, to the best of our knowledge, to any right of first refusal or other contractual restriction and each of the certificates evidencing such Shares is in proper legal form; and (v) assuming the Underwriters purchase the Shares to be sold by Cadence for value, in good faith and without notice of any adverse claim, upon delivery of and payment for the Shares to be sold by Cadence pursuant to this Agreement, the Underwriters will receive valid title to such Shares free and clear of any security interests, claims, liens, equities and other encumbrances. (f) You shall have received on the Closing Date an opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation, counsel for the Underwriters, dated the Closing Date, covering the matters referred to in subparagraphs (v), (vi), (x) and (xiv) of paragraph (d) above and to the effect that the statements in the Prospectus under "Underwriters," insofar as such statements constitute a summary of this Agreement, fairly present the information called for with respect to such Agreement. With respect to subparagraph (xiv) of paragraph (d) above, Ater Wynne Hewitt Dodson & Skerritt and Wilson Sonsini Goodrich & Rosati may state that their opinion and belief are based upon their participation in the preparation of the Registration Statement and Prospectus and any amendments or supplements thereto and review and discussion of the contents thereof, but are without independent check or verification except as specified. The opinions of Ater Wynne Hewitt Dodson & Skerritt and Cooley Godward LLP described in paragraphs (d) and (e) above shall be rendered to you at the request of the Company or Cadence, as the case may be, and shall so state therein. (g) You shall have received, on each of the date hereof and the Closing Date, a letter dated the date hereof or the Closing Date, as the case may be, in form and substance satisfactory to you, from Arthur Andersen L.L.P., independent public accountants, containing statements and information of the type ordinarily included in accountants' "comfort letters" to underwriters with respect to the financial statements and certain financial information contained in the Registration Statement and the Prospectus. (h) The "lock-up" agreements between you and certain officers and directors of the Company relating to sales of shares of Common Stock of the Company or any securities convertible into or exercisable or exchangeable for such Common Stock, delivered to you on or before the date hereof, shall be in full force and effect on the Closing Date. (i) The shares of Common Stock of the Company are listed on the Nasdaq National Market System, and the shares of Common Stock to be sold hereby shall have been included as additional shares for listing with Nasdaq National Market System. -11- All the agreements, opinions, certificates and letters mentioned above or elsewhere in this Agreement shall be deemed in compliance with the provisions hereof only if Wilson Sonsini Goodrich & Rosati, counsel for the Underwriters, shall be reasonably satisfied that they comply in form and scope. The several obligations of the Underwriters to purchase Additional Shares hereunder are subject to the delivery to you on the Option Closing Date of such documents as you may reasonably request with respect to the good standing of the Company, the due authorization, issuance and sale of the Additional Shares and other matters related to the issuance and sale of the Additional Shares. VII. In further consideration of the agreements of the Underwriters herein contained, the Company covenants as follows: (a) To furnish to you, without charge, four (4) signed copies of the Registration Statement (including exhibits thereto) and for delivery to each other Underwriter a conformed copy of the Registration Statement (without exhibits thereto) and, during the period mentioned in paragraph (c) below, as many copies of the Prospectus and any supplements and amendments thereto or to the Registration Statement as you may reasonably request. In the case of the Prospectus, to furnish copies of the Prospectus in New York City, prior to 5:00 p.m., local time, on the business day following the date of this Agreement, in such quantities as you may reasonably request. (b) Before amending or supplementing the Registration Statement or the Prospectus, to furnish to you a copy of each such proposed amendment or supplement and to file no such proposed amendment or supplement to which you reasonably object. (c) If, during such period after the first date of the public offering of the Shares as in the opinion of your counsel the Prospectus is required by law to be delivered in connection with sales by an Underwriter or dealer, any event shall occur or condition exist as a result of which it is necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances when the Prospectus is delivered to a purchaser, not misleading, or if, in the opinion of your counsel, it is necessary to amend or supplement the Prospectus to comply with law, forthwith to prepare, file with the Commission and furnish, at its own expense, to the Underwriters and to the dealers (whose names and addresses you will furnish to the Company) to which Shares may have been sold by you on behalf of the Underwriters and to any other dealers upon request, either amendments or supplements to the Prospectus so that the statements in the Prospectus as so amended or supplemented will not, in the light of the circumstances when the Prospectus is delivered to a purchaser, be misleading or so that the Prospectus, as amended or supplemented, will comply with law. (d) To endeavor to qualify the Shares for offer and sale under the securities or Blue Sky laws of such jurisdictions as you shall reasonably request and to pay all expenses (including fees and disbursements of counsel) in connection with such qualification and in connection with any review of the offering of the Shares by the National Association of Securities Dealers, Inc; provided, however, that the Company shall not be required to qualify the Shares under the laws of any jurisdiction where the Company is not otherwise subject to suit if such qualification would constitute or require the consent of the Company to suit in such jurisdiction. -12- (e) To make generally available to the Company's security holders and to you as soon as practicable an earning statement covering the twelve-month period ending December 31, 1997 that satisfies the provisions of Section 11(a) of the Securities Act and the rules and regulations of the Commission thereunder. (f) The Company will comply with all registration, filing and reporting requirements of the Exchange Act, which may from time to time be applicable to the Company. VIII. Cadence agrees to pay or cause to be paid all taxes, if any, on the transfer and sale of the Shares being sold by Cadence and the fees and expenses of counsel retained by Cadence. The Company agrees to pay all costs and expenses incident to the performance of the obligations of Cadence and the Company under this Agreement (except as set forth above), including, but not limited to, all expenses incident to (i) the preparation and filing of the Registration Statement (including all exhibits thereto) and the Prospectus and all amendments and supplements thereto, (ii) the preparation, issuance and delivery of the Shares, including any transfer taxes payable in connection with the transfer and sale of the Shares to the Underwriters, (iii) the fees and disbursements of the Company's counsel and accountants, (iv) the qualification of the Shares under state securities or Blue Sky laws in accordance with the provisions of paragraph (d) of Article VII hereof, including filing fees and the fees and disbursements of counsel for the Underwriters in connection therewith and in connection with the preparation of any Blue Sky or Legal Investment Memoranda, (v) the printing and delivery to the Underwriters, in quantities as hereinabove stated, of copies of the Registration Statement (including all exhibits thereto) and all amendments thereto and of each preliminary prospectus and the Prospectus and any amendments or supplements thereto, (vi) the printing and delivery to the Underwriters of copies of any Blue Sky or Legal Investment Memoranda, (vii) the filing fees and expenses, if any, incurred with respect to any filing with the National Association of Securities Dealers, Inc., made in connection with the offering of the Shares, (viii) any expenses incurred by the Company in connection with a "road show" presentation to potential investors, (ix) the listing of the Common Stock on the Nasdaq National Market and (x) all document production charges and expenses of counsel to the Underwriters (but not including their fees for professional services) in connection with the preparation of this Agreement; PROVIDED, however, that Cadence agrees to pay or cause to be paid its pro rata share (based on the percentage which the number of Shares sold by Cadence bears to the total number of Shares sold) of all underwriting discounts and commissions. IX. The Company and Cadence, jointly and severally, agree to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of either Section 15 of the Securities Act or Section 20 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or is under common control with, or is controlled by, any Underwriter, from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereof, any preliminary prospectus or the Prospectus (as amended or supplemented if the -13- Company shall have furnished any amendments or supplements thereto), or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages or liabilities are caused by any such untrue statement or omission or alleged untrue statement or omission based upon information relating to any Underwriter furnished to the Company in writing by such Underwriter through you expressly for use therein; provided, however, that the foregoing indemnity agreement with respect to any preliminary prospectus shall not inure to the benefit of any Underwriter from whom the person asserting such losses, claims, damages or liabilities purchased Shares, or any person controlling such Underwriter, if a copy of the Prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of such Underwriter to such person, if required by law so to have been delivered, at or prior to the written confirmation of the sale of the shares to such person, and if the Prospectus (as so amended or supplemented) would have cured the defect giving rise to such loss, claim, damage or liability. The liability of Cadence under the indemnity agreement contained in this paragraph or for breach of its representations and warranties under Article I and Article II hereof shall be limited to an amount equal to 1.25 times the total proceeds to Cadence of the sale of the Firm Shares and Additional Shares, if applicable, sold by Cadence. Notwithstanding the foregoing, Cadence shall not be required to make any payment required by the provisions of this paragraph unless the parties indemnified under this paragraph have demanded payment from the Company and the Company has refused to make such payment or failed to make such payment in full within 30 days from the date of such demand. Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, Cadence, the directors of the Company, the officers of the Company who sign the Registration Statement and each person, if any, who controls the Company or Cadence within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred in connection with defending or investigating any such action or claim) caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereof, any preliminary prospectus or the Prospectus (as amended or supplemented if the Company shall have furnished any amendments or supplements thereto), or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but only with reference to information relating to such Underwriter furnished to the Company in writing by such Underwriter through you expressly for use in the Registration Statement, any preliminary prospectus, the Prospectus or any amendments or supplements thereto. In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to any of the two preceding paragraphs, such person (the "Indemnified Party") shall promptly notify the person against whom such indemnity may be sought (the "Indemnifying Party") in writing and the Indemnifying Party, upon request of the Indemnified Party, shall retain counsel reasonably satisfactory to the Indemnified Party to represent the Indemnified Party and any others the Indemnifying Party may designate in such proceeding and shall pay the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any Indemnified Party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party unless (i) the Indemnifying Party and the Indemnified Party shall have -14- mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the Indemnifying Party and the Indemnified Party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood that the Indemnifying Party shall not, in respect of the legal expenses of any Indemnified Party in connection with any proceeding or related proceedings in the same jurisdiction, be liable for (a) the fees and expenses of more than one separate firm (in addition to any local counsel) for all Underwriters and all persons, if any, who control any Underwriter within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, (b) the fees and expenses of more than one separate firm (in addition to any local counsel) for the Company, its directors, its officers who sign the Registration Statement and each person, if any, who controls the Company within the meaning of either such Section and (c) the fees and expenses of more than one separate firm (in addition to any local counsel) for Cadence and all persons, if any, who control Cadence within the meaning of either such Section, and that all such fees and expenses shall be reimbursed as they are incurred. In the case of any such separate firm for the Underwriters and such control persons of Underwriters, such firm shall be designated in writing by Morgan Stanley & Co. Incorporated. In the case of any such separate firm for the Company, and such directors, officers and control persons of the Company, such firm shall be designated in writing by the Company. In the case of any such separate firm for Cadence and such controlling persons of Cadence, such firm shall be designated in writing by Cadence. The Indemnifying Party shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the Indemnifying Party agrees to indemnify the Indemnified Party from and against any loss or liability by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time an Indemnified Party shall have requested an Indemnifying Party to reimburse the Indemnified Party for fees and expenses of counsel as contemplated by the second and third sentences of this paragraph, the Indemnifying Party agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 30 days after receipt by such Indemnifying Party of the aforesaid request and (ii) such Indemnifying Party shall not have reimbursed the Indemnified Party in accordance with such request prior to the date of such settlement. No Indemnifying Party shall, without the prior written consent of the Indemnified Party, effect any settlement of any pending or threatened proceeding in respect of which any Indemnified Party is or could have been a party and indemnity could have been sought hereunder by such Indemnified Party, unless such settlement includes an unconditional release of such Indemnified Party from all liability on claims that are the subject matter of such proceeding. If the indemnification provided for in the first or second paragraph of this Article IX is unavailable to an Indemnified Party or insufficient in respect of any losses, claims, damages or liabilities referred to therein, then each Indemnifying Party under such paragraph, in lieu of indemnifying such Indemnified Party thereunder, shall contribute to the amount paid or payable by such Indemnified Party as a result of such losses, claims, damages or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the Indemnifying Party or parties on the one hand and the Indemnified Party or parties on the other hand from the offering of the Shares or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Indemnifying Party or parties on the one hand and of the Indemnified Party or parties on the other hand in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable -15- considerations. The relative benefits received by the Sellers on the one hand and the Underwriters on the other hand in connection with the offering of the Shares shall be deemed to be in the same respective proportions as the net proceeds from the offering of the Shares (before deducting expenses) received by each Seller and the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover of the Prospectus, bear to the aggregate public offering price of the Shares. The relative fault of the Sellers on the one hand and the Underwriters on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Sellers or by the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Underwriters' respective obligations to contribute pursuant to this Article IX are several in proportion to the respective number of Shares they have purchased hereunder, and not joint. The Sellers and the Underwriters agree that it would not be just or equitable if contribution pursuant to this Article IX were determined by PRO RATA allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an indemnified party as a result of the losses, claims, damages and liabilities referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Article IX, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages that such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. Cadence shall not be required to contribute any amount in excess of the amount by which 1.25 times the total proceeds to Cadence of the sale of the Firm Shares and Additional Shares, if applicable, sold by Cadence, exceeds the amount of any damages which Cadence has otherwise been required to pay be reason of such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to in the immediately preceding paragraph and in no case shall Cadence be required to contribute any amounts under this paragraph or the immediately preceding paragraph which in the aggregate when taken together with any amounts paid by Cadence under the first paragraph of this Article IX exceeds 1.25 times the total proceeds to Cadence of the sale of the Firm Shares and Additional Shares, if applicable, sold by Cadence. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The remedies provided for in this Article IX are not exclusive and shall not limit any rights or remedies which may otherwise be available to any indemnified party at law or in equity. The indemnity and contribution provisions contained in this Article IX and the representations and warranties of the Company and Cadence contained in this Agreement shall remain operative and in full force and effect regardless of (i) any termination of this Agreement, (ii) any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter, Cadence or any person controlling Cadence, -16- or the Company, its officers or directors or any person controlling the Company and (iii) acceptance of and payment for any of the Shares. X. This Agreement shall be subject to termination, in your sole discretion, by notice given by you to the Company, if (a) after the execution and delivery of this Agreement and prior to the Closing Date (i) trading generally shall have been suspended or materially limited on or by, as the case may be, any of the New York Stock Exchange, the American Stock Exchange, the National Association of Securities Dealers, Inc., the Chicago Board of Options Exchange, the Chicago Mercantile Exchange or the Chicago Board of Trade, (ii) trading of any securities of the Company shall have been suspended on any exchange or in any over-the-counter market, (iii) a general moratorium on commercial banking activities in New York shall have been declared by either Federal or New York State authorities, or (iv) there shall have occurred any outbreak or escalation of hostilities or any change in financial markets or any calamity or crisis that, in your judgment, is material and adverse and (b) in the case of any of the events specified in clauses (a)(i) through (iv), such event singly or together with any other such event makes it, in your judgment, impracticable to market the Shares on the terms and in the manner contemplated in the Prospectus. XI. This Agreement shall become effective upon the later of (i) execution and delivery hereof by the parties hereto and (ii) release of notification of the effectiveness of the Registration Statement by the Commission. If, on the Closing Date or the Option Closing Date, as the case may be, any one or more of the Underwriters shall fail or refuse to purchase Shares that it or they have agreed to purchase hereunder on such date, and the aggregate number of Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase is not more than one-tenth of the aggregate number of the Shares to be purchased on such date, the other Underwriters shall be obligated severally in the proportions that the number of Firm Shares set forth opposite their respective names in Schedule I bears to the aggregate number of Firm Shares set forth opposite the names of all such non-defaulting Underwriters, or in such other proportions as you may specify, to purchase the Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase on such date; PROVIDED, however, that in no event shall the number of Shares that any Underwriter has agreed to purchase pursuant to Article III be increased pursuant to this Article XI by an amount in excess of one-ninth of such number of Shares without the written consent of such Underwriter. If, on the Closing Date or the Option Closing Date, as the case may be, any Underwriter or Underwriters shall fail or refuse to purchase Shares and the aggregate number of Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Shares to be purchased on such date, and arrangements satisfactory to you, the Company and Cadence for the purchase of such Shares are not made within 36 hours after such default, this Agreement shall terminate without liability on the part of any non-defaulting Underwriter, the Company or Cadence. In any such case either you or the relevant Sellers shall have the right to postpone the Closing Date or the Option Closing Date, as the case may be, but -17- in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement and in the Prospectus or in any other documents or arrangements may be effected. Any action taken under this paragraph shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. If this Agreement shall be terminated by the Underwriters, or any of them, because of any failure or refusal on the part of any Seller to comply with the terms or to fulfill any of the conditions of this Agreement, or if for any reason any Seller shall be unable to perform its obligations under this Agreement, the Sellers will reimburse the Underwriters or such Underwriters as have so terminated this Agreement with respect to themselves, severally, for all out-of-pocket expenses (including the fees and disbursements of their counsel) reasonably incurred by such Underwriters in connection with this Agreement or the offering contemplated hereunder. This Agreement may be signed in two or more counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. -18- This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York. Very truly yours, INTEGRATED MEASUREMENT SYSTEMS, INC. By: ------------------------------------- Keith L. Barnes President and Chief Executive Officer CADENCE DESIGN SYSTEMS, INC. By: ------------------------------------- H. Raymond Bingham Chief Financial Officer Accepted, February __, 1997 MORGAN STANLEY & CO. INCORPORATED COWEN & COMPANY SOUNDVIEW FINANCIAL GROUP, INC. Acting severally on behalf of themselves and the several Underwriters named herein. By: MORGAN STANLEY & CO. INCORPORATED By: ---------------------------------- Paul E. Chamberlain Principal -19- SCHEDULE I Number of Firm Shares to be Underwriter Purchased - --------------------------------- --------------------------- Morgan Stanley & Co. Incorporated [ ] Cowen & Company [ ] Soundview Financial Group, Inc. [ ] ------------ TOTAL. . . . . . . . . . . . . ------------ ------------ EX-5.1 3 EXHIBIT 5.1 EXHIBIT 5.1 ATER WYNNE HEWITT DODSON & SKERRITT, LLP 222 S.W. Columbia, Suite 1800 Portland, Oregon 97201 (503) 226-1191 (Phone) (503) 226-0079 (Fax) January 24, 1997 Board of Directors Integrated Measurement Systems, Inc. 9525 S.W. Gemini Drive Beaverton, OR 97008 In connection with the public offering of up to 1,725,000 shares of common stock, par value $0.01 per share (the "Common Stock"), of Integrated Measurement Systems,Inc., an Oregon corporation (the "Company"), under the Registration Statement on Form S-1 (the "Registration Statement") and the proposed sale of the Common Stock pursuant to the terms of an underwriting agreement (the "Underwriting Agreement") to be entered into by and among the Company, certain shareholders of the Company, and Morgan Stanley & Co. Incorporated, Cowen & Company and SoundView Financial Group, Inc., as representatives of the several underwriters, we have examined such corporate records, certificates of public officials and officers of the Company and other documents as we have considered necessary or proper for the purpose of this opinion. Based on the foregoing and having regard to legal issues which we deem relevant, it is our opinion that the shares of Common Stock to be sold pursuant to the Underwriting Agreement, when such shares have been delivered against payment therefor as contemplated by the Underwriting Agreement, will be validly issued, fully paid and non-assessable. We hereby consent to the filing of this opinion as an exhibit to the above-mentioned Registration Statement and to the reference to this firm under the caption "Legal Matters" in the prospectus constituting a part of the Registration Statement. In giving such consent, we do not hereby admit that we are in the category of persons whose consent is required to be filed pursuant to Section 7 of the Securities Act of 1933, as amended, or the rules thereunder. This opinion has been prepared solely for your use in connection with the Registration Statement and should not be quoted in whole or in part or otherwise be referred to, nor be relied upon by, nor be filed with or furnished to any governmental agency or other person or entity, except as otherwise provided in this paragraph, without the prior written consent of this firm. Very truly yours, /s/ Ater Wynne Hewitt Dodson & Skerritt, LLP ATER WYNNE HEWITT DODSON & SKERRITT, LLP EX-10.15 4 EXHIBIT 10.15 EXHIBIT 10.15 AMENDED STOCKHOLDER AGREEMENT This Amended Stockholder Agreement, dated May 20, 1996, supersedes and replaces the Stockholder Agreement dated May 10, 1995, by and between Integrated Measurement Systems, Inc., an Oregon corporation (the "Company" or "IMS") and Cadence Design Systems, Inc., a Delaware corporation (the "Stockholder" or "Cadence".) In consideration of the mutual promises and agreements hereinafter set forth, and for other valuable consideration, the Company and the Stockholder agree as follows: 1. HANDLING OUTSTANDING CADENCE OPTIONS HELD BY IMS EMPLOYEES. The Company and Stockholder acknowledge that, as of the date of this Agreement, there are issued and outstanding options for the purchase of Stockholder's common stock held by employees of the Company (the "Employee Cadence Options") granted under both Stockholder's 1987 Stock Incentive Plan (the "1987 Cadence Options") and Stockholder's 1993 Stock Incentive Plan (the "1993 Cadence Options.") The 1987 Cadence Options include both qualified Incentive Stock Options, and nonqualified stock options. The 1993 Cadence Options are all nonqualified stock options. 1.1 MODIFICATION OF EMPLOYMENT AGREEMENTS. Cadence consents to the modification of the commitments made in employment agreements entered into between IMS and certain of its key executives effective May 10, 1995, to conform those employment agreements to the covenants and commitments contained herein. 1.2 1993 CADENCE PLAN. Cadence warrants that its 1993 Stock Option Plan has been amended to provide continuing vesting under the plan, provided that Cadence continues to be a stockholder in a company that has employee participants in the plan. Cadence further warrants that it will continue to be a shareholder of IMS, with a minimum holding of at least 100 shares, until at least December 31, 1999. 1.3 PRESERVATION OF VALUE OF CADENCE OPTIONS BELOW THRESHOLDS. The parties recognize that if Cadence's percentage of ownership of IMS' outstanding stock drops below 50%, 1987 Cadence Options held by IMS employees will cease to vest. The parties wish to preserve the value of those stock options to the IMS employees, in ways that maximize the benefit to each of their shareholder groups that the options represent. The parties agree to achieve those goals as stated in the following sections: 1.4 CONSULTANTS. Cadence has determined that consulting services from the employees designated as "consultants" on the attached list would be useful to Cadence, and wishes to use their services in that capacity in a manner that does not interfere with their primary duties to IMS. Cadence therefore commits that, if Cadence's ownership of IMS issued and outstanding common stock drops below 50% at any time while 1987 Cadence Options remain unvested, Cadence will offer the IMS employees on the attached list the opportunity to consult with Cadence at least through the vesting term of their unvested 1987 Cadence Options or longer if useful to Cadence. 1.4.1 TERMS OF CONSULTANCY. The consulting agreements shall provide for consulting within the consultants' areas of expertise at such times as to not interfere with 1 - AMENDED STOCKHOLDER AGREEMENT their duties to IMS, on appropriate terms to be memorialized in a consulting agreement, while the consultants remain employees of IMS. 1.4.2 VESTING OF CADENCE OPTIONS FOR CONSULTANTS. The consulting agreements will further provide that the consultant's 1987 Cadence Options shall continue to vest for the period of that consultancy. Cadence further commits that 1987 Cadence Options vested as of the end date of that consultancy will remain exercisable for 30 days after that consultancy ends. 1.5 IN THE MONEY VALUE FOR NON-CONSULTANTS. The parties recognize that if Cadence's ownership percentage of IMS drops below 50% with respect to the 1987 plan, the potential arises for IMS employees who hold 1987 Cadence Options which have not then become exercisable under the particular plan, and who have not been given the opportunity to act as consultants to Cadence, to be unable to obtain the in-the-money value of those not yet exercisable options (the "Lapsed Options.") In recognition of the value IMS employees have, through their performance, brought to Cadence, Cadence hereby commits to pay the in-the-money value of the Lapsed Options that would become lost to IMS employees as a result of a change in Cadence's percentage ownership of IMS, as follows. 1.5.1 IN-THE-MONEY-VALUE. Cadence and IMS agree that the in-the-money-value for a given share of Cadence stock represented by a Lapsed Option (an "Option Share") shall be calculated at, and fixed as, the value represented by the difference (if positive) obtained by subtracting the option exercise price from the average of the daily closing trade price for Cadence stock for the twenty business days next preceeding the date on which Cadence's ownership dropped below the requisite threshold. 1.5.2 WHEN BECOMES DUE. The "in the money value" for each Option Share held by a non-consultant shall become due on the same date that the option giving rise to the Option Share would have become exercisable but for the change in ownership. That means, for example, that the in-the-money value would never become due with respect to Option Shares whose options would not have become exercisable because an employee resigned from or is terminated by the company. 1.5.3 WHEN PAYABLE. Cadence shall pay all accrued and due in-the-money-value within thirty days of the end of the calendar quarter in which the in-the-money value falls due, based on a schedule submitted by IMS, certified as true and correct by the Chief Financial Officer, to Cadence of all vested in-the-money value due to IMS employees. 1.6 INFORMATION FLOW. IMS shall inform Cadence's Stock Administration department immediately of the departure of any IMS employee holding Employee Cadence Options, and shall on request submit to Cadence a list of all remaining IMS employee holders of Employee Cadence Options. If IMS fails to give Notice concerning the termination of an IMS employee to Cadence within 15 days following termination, and as a result of that failure, the employee is able to exercise an option which by its terms should have expired, IMS shall reimburse Cadence for the difference between the exercise price and the market price of each exercised share, measured as of the date of exercise of the wrongfully exercised option. 2 - AMENDED STOCKHOLDER AGREEMENT 1.7 GOOD FAITH DECISIONS. In making decisions that may have the potential to result in Cadence's holdings in IMS slipping below the 50% level, and therefore triggering Cadence's obligations under this Section 1, IMS shall, in determining the economic viability of such choices, consider in good faith the cost to Cadence of that decision under this Section as if it is IMS' own cost. 2. ENTIRE AGREEMENT; MODIFICATION. This Agreement sets forth the entire agreement and understanding between the parties hereto with respect to the subject matter hereof, and merges and supersedes any and all prior discussions, agreements, and understandings between or among them with respect thereto, and no party shall be bound by any condition, definition, warranty or representation, other than those expressly set forth or provided for in this Agreement or in any document or instrument delivered pursuant to this Agreement, or as may be set forth in writing and signed by the party or parties to be bound thereby on or subsequent to the date hereof. This Agreement may not be changed or modified, except by an agreement in writing executed by the Company and the Stockholder. 3. GOVERNING LAW. This Agreement shall be governed by Oregon law (excluding the choice of law provisions). 4. COUNTERPARTS. This Agreement may be executed in one or more counterparts. 5. SEVERABILITY. If any term, provision, covenant or restriction contained in this Agreement is held by a court of competent jurisdiction to be invalid, void, or unenforceable, then the remainder of this Agreement shall remain operative and in full force and effect. If any provision contained in this Agreement is invalidated, the parties hereto will use their best efforts to adopt an appropriate substitute for the invalidated provision consistent with the intent of the parties. 6. BINDING EFFECT OF AGREEMENT. The terms of this Agreement shall be binding on and inure to the benefit of the parties hereto and their respective subsidiaries, parents or other affiliated entities, agents, attorneys, heirs, executors, successors, representatives and assigns. 7. NOTICES. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered by hand or certified or registered mail, return receipt requested, to the addresses set forth below the signatures of the respective parties hereto. In the case of communications to the Stockholder, a copy shall be delivered concurrently to H. Raymond Bingham, Executive Vice President, and to such other person or persons or to such other address or addresses as may be designated by Stockholder. In the case of communications to the Company, a copy shall be delivered concurrently to William C. Campbell, Ater Wynne Hewitt Dodson & Skerritt, 222 S.W. Columbia, Suite 1800, Portland, Oregon 97201 or to such other person or persons or to such other address or addresses as may be designated by IMS. 8. HEADINGS. The headings in the sections of this Agreement are inserted for convenience only and shall not constitute a part hereof. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. 3 - AMENDED STOCKHOLDER AGREEMENT INTEGRATED MEASUREMENT SYSTEMS, INC. By: /s/ Sar Ramadan ---------------------------------------------------- Sar Ramadan, Chief Financial Officer, Secretary and Treasurer CADENCE DESIGN SYSTEMS, INC. By: /s/ Stephen Y. Fong ---------------------------------------------------- Stephen Y. Fong, President of Finance and Treasurer 4 - AMENDED STOCKHOLDER AGREEMENT EX-10.16 5 EXHIBIT 10.16 EXHIBIT 10.16 AMENDED CORPORATE SERVICES AGREEMENT This Amended Corporate Services Agreement is entered into between Cadence Design Systems, Inc. (Cadence) and Integrated Measurement Systems, Inc. (IMS) this first day of May, 1996. The parties entered into a Corporate Services Agreement effective May 1, 1995. They now wish to modify and update that agreement, as shown here. The parties agree: 1. DEFINITIONS. 1.1 CADENCE AND IMS. "Cadence" and "IMS" as used herein shall refer to the parent companies, and wholly owned subsidiaries of either (except that for these purposes, IMS will not be regarded as a Cadence subsidiary.) 1.2 DEDICATED AGENT. An employee of Cadence is a "Dedicated Agent" during those periods with respect to which IMS is obligated to pay or has paid Cadence a fee equal to the Agent Fees as provided for in this Agreement. Numbers of Dedicated Agents in particular Cadence facilities as of the date of this agreement are listed on the attached Exhibit A. 2. AGENT SERVICES AND FEE. Cadence will supply the following services as agent for IMS, and IMS will pay Cadence an Agent Fee for Cadence's services hereunder, calculated as follows. 2.1 FEE COMPONENT FOR OFFICE SPACE AND ASSOCIATED SUPPORT. 2.1.1 PRINCIPLE. Cadence supplies office space and associated office support (telephones and faxes, parking, use of conference rooms, employee lounges, and the like) to IMS at a number of locations around the United States and (through Cadence wholly-owned subsidiaries) elsewhere in the world. IMS pays for that space and support at the price shown on Exhibit A, on an allocated charge per employee basis, as a part of its Agent Fee. 2.1.2 CHANGES. The parties may from time to time agree to add Dedicated Agents, or IMS personnel in those locations where IMS has direct business presence, at specific sites, and so increase the space needed, or to add sites; such changes will be reflected on revised "Exhibits A" to replace the original executed with this Agreement. Cadence shall not be obligated to lease or outfit additional space for IMS' benefit, however, and any additional space will be provided on a "space available" basis only. 2.1.3 COST AND FEE REVIEW. The parties will meet semiannually to review the fair market value of the office space and associated services at each location, and will adjust the Agent Fees shown on Exhibit A to reflect that fair market value. Page 1 -- Corporate Services Agreement 2.2 DEDICATED AGENTS. 2.2.1 FEE COMPONENT FOR AGENT COST. IMS shall pay Cadence, as part of its Agent Fee, an amount equal to the fully-loaded payroll cost for and discretionary expenses such as travel, materials and supplies, and communications incurred by each Dedicated Agent. That cost shall include any extraordinary hiring, termination, or transfer expenses Cadence experiences due to IMS or Cadence policy or the law of the particular jurisdictions, provided that the parties shall work in good faith to minimize such expenses to be charged to IMS. 2.2.2 CHANGES IN DEDICATED AGENTS. In countries outside the United States where Dedicated Agents are employed, IMS may periodically request that Cadence add, transfer, or terminate Dedicated Agents. During the term of this agreement, Cadence will add or subtract such Dedicated Agents for the applicable countries on thirty days' notice from IMS, or such longer period of time as may be required under Cadence policy or local law. However, IMS shall not add any new Dedicated Agents in any country in which IMS has chosen to establish its own business presence, either itself or through an IMS subsidiary. 2.2.3 INTELLECTUAL PROPERTY. Cadence acknowledges that the Agent Fee paid by IMS fully covers Cadence's costs with respect to the Dedicated Agents, and hereby commits to assign and does assign to IMS, free of claims by Cadence, all intellectual property developed by Dedicated Agents while they are or were Dedicated Agents, to the extent Cadence has rights to that intellectual property under applicable agreements with the Dedicated Agent pursuant to local law. Cadence will take such steps as may be necessary to document such assignment in order to preserve such rights, on request and at IMS' expense. Likewise, IMS will require that such Dedicated Agents, when retained by IMS will honor confidentiality obligations to Cadence and its customers. 3. INSURANCE. 3.1 OPTION TO PURCHASE COVERAGE THROUGH CADENCE. IMS may elect to purchase insurance coverage through Cadence insurance policies, to the extent and during the time those policies permit that coverage. 3.2 PROCEDURE. On request, Cadence will assist IMS to determine what insurance coverage IMS can acquire more cost-effectively through Cadence (as a part of Cadence policies) than independently. IMS shall by Notice inform Cadence of which coverages it wishes to purchase through Cadence, and which coverages purchased through Cadence it wishes to terminate. IMS' rights to become covered by, or exclude itself from coverage under, Cadence policies shall meet these conditions: 3.2.1 TERMS OF POLICY. IMS' Notice may request that IMS be added or deleted from Cadence policies only as of dates the policy itself permits for such modifications. 3.2.2 QUALIFICATION. IMS shall not be entitled to coverage under any Cadence policy as to which IMS does not qualify under the policy terms. Page 2 -- Corporate Services Agreement 3.3 COPIES OF POLICIES. Cadence shall, on request, provide IMS with copies of all applicable insurance coverages, and shall request companies writing such insurance to copy IMS with any policy changes affecting IMS. 3.4 COST. IMS shall reimburse Cadence the full incremental cost to Cadence of IMS' coverage under any existing Cadence policy. That incremental cost shall be billed to IMS as part of Cadence's Agent Fee for all non-US jurisdictions. 4. SETTLEMENT OF ACCOUNTS. 4.1 INVOICING. Cadence shall invoice IMS monthly for the services herein provided. Cadence shall bill for personnel costs under section 2.2 in the local currency of the country in which such costs were incurred. Cadence shall bill for the dollar-denominated amounts shown on Exhibit A in dollars or in the local currency at equivalent exchange rates, as Cadence determines. If it is more convenient administratively for Cadence to do so, Cadence may cause its separate operating companies and subsidiaries to invoice IMS directly for services they provide hereunder. 4.2 PAYMENT. Each party shall pay invoices properly tendered for any matter between them within thirty days of receipt of the invoice. Overdue unpaid invoices shall bear interest at 9% per year until paid. 5. DURATION. 5.1 MAXIMUM TERM. This Agreement will not last beyond June 1, 1999, unless expressly extended. 5.2 INTERIM TERMINATION. During the term of this agreement, IMS may elect to decline particular space, or to reduce its space requirements at particular locations, on thirty days' notice to Cadence, delivered both to Cadence's Notice address as shown on this agreement and to the particular office location where the space needs are being reduced. During the term of this agreement, IMS may also elect to transition particular Cadence Dedicated Agents to become IMS employees, subject to the rights of the employee as described above. Notice of such action shall be delivered both to Cadence at the Notice address shown on this agreement, and to the headquarters address of the particular Cadence subsidiary for whom the Dedicated Agent works. Cadence may elect to terminate some or all of its obligations hereunder on thirty days' Notice in the event IMS breaches a material obligation hereunder and such breach remains uncured for thirty days after Notice to IMS. After June 1, 1997 Cadence may elect to terminate its agreement with respect to particular facilities or subsidiaries on 180 days' Notice to IMS. 6. SOFTWARE. Cadence has issued software licenses and provides maintenance and updates for its suite of software products to IMS without charge, for IMS' own use in designing and supporting its own products. As of the date Cadence's ownership in IMS drops below 50%, in the absence of any other agreement Cadence will continue to permit IMS a no-charge license to its suite of design tools currently held by IMS, but will charge IMS for maintenance on those tools, at the rate Cadence charges its most favored strategic customers and technology partners. Page 3 -- Corporate Services Agreement 7. OTHER MATTERS. 7.1 NOTICE. "Notice" means notice given as described here. Notice will be given to IMS at 9525 S.W. Gemini Drive, Beaverton, Oregon 97008, ATTN: Chief Financial Officer. Notice will be given to Cadence at 2655 Seely Road, Building 5, MS 5B2, San Jose, Ca. 95134, ATTN: Chief Financial Officer. Notice may be given in any form that leaves a hard copy in the hands of the recipient. Each party can change its own Notice address and designated Notice recipient, by Notice. Notice shall be effective when actually received by the designated person. If sent certified or registered mail, postage prepaid, return receipt requested, notice is considered effective on the date the return receipt shows the notice was accepted, refused, or returned undeliverable. 7.2 SEVERABILITY. Each clause of this agreement is severable. If any clause is ruled void or unenforceable, the balance of the agreement shall nonetheless remain in effect. 7.3 NON-WAIVER. A waiver of one or more breaches of any clause of this agreement shall not act to waive any other breach, whether of the same or different clauses. 7.4 ASSIGNMENT. This agreement may not be assigned without the express written consent of each party, which consent will not be unreasonably withheld. 7.5 GOVERNING LAW. This agreement is governed by the laws of the state of California. Each party consents to service of process through the method prescribed for notice in this agreement. 7.6 INTEGRATION. This agreement is the complete agreement between the parties as of the date hereof with respect to Corporate Services, and supersedes all prior agreements, written or oral. It may be modified only in writing signed by the original parties hereto, or by their successors or superiors in office. INTEGRATED MEASUREMENT SYSTEMS, INC. CADENCE DESIGN SYSTEMS, INC. By: /s/ Sar Ramadan By: /s/ Stephen Y. Fong -------------------------------- -------------------------------- Print: Sar Ramadan Print: Stephen Y. Fong ----------------------------- ----------------------------- Title: Vice President of Finance, Title: Vice President of Finance Secretary & Treasurer & Treasurer ----------------------------- ----------------------------- Date: May 23, 1996 Date: May 23, 1996 ----------------------------- ----------------------------- Page 4 -- Corporate Services Agreement Exhibit A - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Cadence Dedicated Agents and Support Fees - -------------------------------------------------------------------------------- Location Dedicated Fee per Agent per 95 Total Fees Agents Month - -------------------------------------------------------------------------------- Cadence UK 5 Cost plus 650 $3,250 - -------------------------------------------------------------------------------- Cadence Germany 3 Cost plus 600 1,800 - -------------------------------------------------------------------------------- Cadence France 2 Cost plus 650 1,300 - -------------------------------------------------------------------------------- Cadence Israel 1 Cost plus 704 704 - -------------------------------------------------------------------------------- Cadence Taiwan 3 Cost plus 306 918 - -------------------------------------------------------------------------------- Arizona 2 Cost plus 457 914 - -------------------------------------------------------------------------------- California 9 Cost plus 500 4,500 - -------------------------------------------------------------------------------- Maryland 1 Cost plus 767 767 - -------------------------------------------------------------------------------- Massachusetts 7 Cost plus 262 1,834 - -------------------------------------------------------------------------------- Minnesota 2 Cost plus 731 1,462 - -------------------------------------------------------------------------------- Texas 2 Cost plus 705 1,410 - -------------------------------------------------------------------------------- TOTAL FEES PER MONTH: COST PLUS $ 18,859 - -------------------------------------------------------------------------------- TOTAL FEES PER YEAR: COST PLUS $226,308 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- "Cost" herein refers to Cadence's cost for the Dedicated Agent in question as described in Section 2.1. Page 5 -- Corporate Services Agreement EX-10.17 6 EXHIBIT 10.17 EXHIBIT 10.17 SECOND AMENDMENT TO JOINT SALES AGENCY AGREEMENT between Cadence Design Systems, Inc. and Integrated Measurement Systems, Inc. As of May 20, 1996, Cadence Design Systems, Inc. (Cadence) and Integrated Measurement Systems, Inc. (IMS) agree to extend the initial term of the Joint Sales Agency Agreement between the parties through June, 1998. Except as here provided, the Joint Sales Agreement between the parties dated June 30, 1994, and as amended effective April 1, 1995, remains in full force and effect. CADENCE DESIGN SYSTEMS, INC. INTEGRATED MEASUREMENT SYSTEMS, INC. By: /s/ Stephen Y. Fong By: /s/ Sar Ramadan --------------------------- --------------------------- Print: Stephen Y. Fong Print: Sar Ramadan ------------------------ ------------------------ Title: Vice President of Title: Vice President of Finance & Treasurer Finance, Secretary & Treasurer ------------------------ ------------------------ Page 1 -- Second Amendment to Joint Sales Agency Agreement EX-10.18 7 EXHIBIT 10.18 - -------------------------------------------------------------------------------- EMPLOYMENT AGREEMENT - -------------------------------------------------------------------------------- This Employment Agreement, dated December 31, 1996, by and between Integrated Measurement Systems, Inc., an Oregon corporation (hereinafter referred to as the "Company"), and David L. Brinker (hereinafter referred to as "Employee"). - -------------------------------------------------------------------------------- WITNESSETH - -------------------------------------------------------------------------------- WHEREAS, the Company wishes to employ Employee and Employee is desirous of being so employed; NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements herein contained, the parties hereto agree as follows: 1. The Company hereby employs Employee and Employee hereby accepts employment by the Company for the period beginning on December 31, 1996 (the "Employment Date"). The Company shall continue to employ Employee for such time as the Company is in need of, or desirous of, the services of Employee. It is distinctly understood between the parties hereto that the duration of employment is unspecified and rests solely in the discretion of the Company. 2. Employee shall perform such duties and functions and hold such positions as the Board of Directors of the Company shall from time to time determine and in the performance of his duties, comply with the policies of and be subject to the reasonable direction of the Board of Directors of the Company. Employee's initial title and functions shall be General Manager, Test Software Division. If requested by the Board of Directors of the Company, Employee shall serve as an employee of one or more subsidiaries of the Company (hereinafter sometimes termed, collectively, "subsidiary" or "subsidiaries") and shall, in the performance of such duties, comply with the policies of the Board of Directors of any subsidiary. 3. As compensation for the services to be rendered by Employee hereunder, including all services as an officer of the Company or of any subsidiary of the Company, the Company agrees to pay or cause to be paid to Employee, during the period of Employee's employment pursuant to paragraph 1 hereof, an annual salary of $130,000 payable twice monthly. The salary paid to Employee shall be reviewed yearly by the Board which shall take into account the productivity of the Company, available resources, the performance of Employee, the cost of living and other factors deemed relevant; however, the Board shall have no obligation to make any adjustments in the salary of the Employee. 4. Employee's primary duties shall be performed at the Company's offices in Washington County, Oregon, or in such other location as the Board of Directors reasonably designates. 5. Employee agrees to devote his entire working time, attention and energies to the performance of the business of the Company and of any of its subsidiaries by which he may be employed; and Employee shall not, directly or indirectly, alone or as a member of any partnership, or as an officer, director or employee of any other corporation, partnership or other organization, be actively engaged in or concerned with any other duties or pursuits which interfere with the performance of his duties hereunder, or which even if not interfering, may be inimical to or contrary to the best interest of the Company. 1 6. Employee agrees that the "Propietary Information and Inventions Agreement" annexed hereto and made a part hereof as Exhibit "A" to the Agreement and the "Policy Statement on Conflicts of Interest" annexed hereto and made a part hereof as Exhibit "B", shall both be deemed to be a part of this Employment Agreement. Employee further agrees that the termination or cessation of his employment or the expiration of this Employment Agreement shall not release him from any obligations contained in Exhibit "A". Employee shall at no time be entitled to any additional compensation for the services required by this paragraph or by Exhibits "A" or "B" but shall be reimbursed for his reasonable expenses in connection with securing patent protection and other similar rights for the Company in connection with Exhibit "A". 7. NONCOMPETITION. In consideration for and as an inducement to the Company's agreement to employ Employee hereunder, Employee agrees that: (a) He will not, so long as he is an employee or officer of the Company or any subsidiary, directly or indirectly, as owner, partner, joint venturer, stockholder, employee, broker, agent, principal, trustee, corporate officer, director, or licensor, or in any capacity whatsoever engage in, become financially interested in, be employed by, or have any connection with, any business engaged in the research, development, testing, design, manufacture, sale, lease, marketing, utilization, or exploitation of custom logic test systems and such other products as the Company may develop and other competitive products with those of the Company or the application thereof and products based thereon which are (x) logically equivalent to or, (y) substantially identical to or (z) an emulation of any equipment, technology, or the application thereof or products based thereon designed, marketed, announced, leased, or sold by the Company or any of its subsidiaries, in any geographic area where, during the time of his employment, the business of the Company or any of its subsidiaries is being or had been conducted in any manner whatsoever; provided, however, that the Employee may own any securities of any corporation or partnership which is engaged in such business and is publicly owned and traded but in an amount not to exceed at any one time one percent (1%) of any class of stock (or aggregate partnership interests) or securities of such company. (b) If Employee terminates his employment with the Company or if the Company terminates the Employee's employment, the Employee agrees that he shall at the option of the Company for two (2) additional years have the duty of advising and consulting on a part-time basis with the Company and its subsidiaries in response to request for such services, provided the Company notifies the Employee in writing within sixty (60) days after the termination of his employment that such services are desired, and in such event the restrictions contained in subparagraph 7(a) above shall be extended for such two additional years. The Company agrees that (1) such services shall be performed within the United States of America; (2) the Employee shall not be required to devote such of his time to such services as will interfere with the Employee obtaining principal employment by others, and (3) the Employee shall not be required to perform such services during usual vacation periods and reasonable periods of illness or other incapacitation. The Company shall pay the Employee for such services compensation at the annual rate of twenty-five percent (25%) of the salary payable to the Employee immediately prior to termination of his employment. Such compensation shall be payable in twenty-four (24) equal monthly installments. The Company shall, however, pay to the Employee compensation at the full annual rate of salary payable to the Employee immediately prior to termination of his employment commencing on the date of such termination and ending on the later of the expiration of the Company's option hereunder in the event it is not exercised (being sixty (60) days after such termination) or sixty (60) days after notification to the Employee of the Company's exercise of such option before the provisions of subparagraph 7(c) here of become operative. 2 (c) If after conscientious effort (which the Company may ask the Employee to establish to its reasonable satisfaction), during any period in which the Employee is retained as a consultant by the Company and consequently subject to the restrictions of subparagraph (a) of this paragraph 7, the Employee is unable primarily due to such restrictions to obtain a comparable position (taking into account the particular assigned duties and responsibilities of his employment with the Company) which, together with any termination payments or consulting fees then being paid to the Employee by the Company, shall be as remunerative as his monthly remuneration with the Company when his employment terminated (hereinafter his "remuneration"), then, the Company shall pay to the Employee monthly, as an additional consulting fee or otherwise, a sum (the "Guarantee") such that his then monthly remuneration shall be equal to not less than his remuneration at the time of his termination. The Employee shall notify the Company in writing within fifteen (15) days after any calendar month as to which he seeks the Guarantee hereunder. The Employee must establish the amount of such Guarantee sought to the Company's reasonable satisfaction, whereupon the Company shall promptly (and, in any event, within fifteen (15) days of receipt of his notification) pay to him the amount of the Guarantee so established. (d) In case any one or more of the terms contained in subparagraphs (a), (b) or (c) of this paragraph 7 shall for any reason be held invalid, illegal, or unenforceable, such invalidity, illegality, or unenforceability shall not affect any other terms herein, but such term shall be deemed deleted, and such deletion shall not affect the validity of the other terms of this paragraph 7. In addition, if any one or more of the terms contained in subparagraph (a), (b) or (c) of this paragraph 7 shall for any reason be held to be excessively broad with regard to time, duration, geographic scope or activity, that term shall be construed in a manner to enable it to be enforced to the extent compatible with applicable law. 8. The Company's obligation to issue warrants, options, or other securities to Employee under any existing or future plan or agreement is conditioned upon (1) his continued employment with the Company pursuant to this agreement at each such issuance date, and (2) no termination of his employment pursuant to paragraph 1 hereof having occurred. For the purpose of this paragraph 8, if Employee is advising or consulting with the Company and its subsidiaries, such activity shall not be deemed employment so as to entitle Employee to the issuance of warrants, options, or other securities or so as to prevent issued, but unexercised warrants, options, or other securities from lapsing. 9. The parties hereto agree that failure to comply with paragraph 7 Exhibits "A" and "B" of this Agreement cannot reasonably be adequately compensated in damages in an action at law, and breach of these provisions of this Agreement will cause the Company irreparable damage. Therefore, in addition to the other remedies which may be available to it, in law or in equity, the Company shall be entitled to injunctive relief without bond or other security with respect to the breach of either paragraph 7, Exhibit "A", or Exhibit "B", or any one or more of them. 10. Employee represents and warrants that on December 31, 1996, he is free to be employed by the Company upon the terms contained in the Agreement and that on December 31, 1996, there is no employment contract or restrictive covenants preventing full performance of his duties hereunder. 11. This Employment Agreement shall be binding upon the legal representatives, heirs, distributes, successors, and assigns of the parties hereto. It contains the entire agreement of the parties, and may not be changed orally, but only by a writing signed by the party against whom enforcement of any such a change is sought. It is agreed that a waiver by either party of a breach of any provision of this Employment Agreement shall not operate or be construed as a waiver of any subsequent breach by that same party. Any notice required by this Agreement shall be sent to the other party at the address set forth 3 at the beginning of this Agreement, or to such other address as a party supplies to the other party in writing. This Employmeny Agreement shall be governed by the laws of the State of Oregon applicable to agreements made and to be performed therein. This Employment Agreement supersedes all prior understandings and agreements between the parties relating to the subject matter encompassed herein. 12. The termination of Employee's employment hereunder shall not affect the enforceability of paragraph 6, paragraph 7, paragraph 8, paragraph 9, and Exhibits "A" and "B" hereof. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed the day and year first above written. INTEGRATED MEASUREMENT SYSTEMS, INC. By /s/ Gwyn Harney -------------------------------------- /s/ David L. Brinker, Employee ----------------------- 4 SCHEDULE A The following is a list of all inventions, discoveries or improvements relating to the Company's business which have been made by Employee prior to his/her employment with the Company. EMPLOYEE'S INITIALS (ONE LINE ONLY) DLB None - ----------------------------------- As listed below: - ----------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ACKNOWLEDGED INTEGRATED MEASUREMENT SYSTEMS, INC. BY: /s/ Gwyn Harney ------------------------------- DATED: 1-7-97 ---------------------------- 5 EXHIBIT A PROPRIETARY INFORMATION AND EMPLOYEE INVENTIONS AGREEMENT IT IS AGREED BETWEEN INTEGRATED MEASUREMENT SYSTEMS, INC., an Oregon corporation (hereinafter the "Company"), and David L. Brinker -------------------------- (hereinafter "Employee"), as follows: 1. EMPLOYMENT. The Company has hired Employee to work in the position of GENERAL MANAGER, TEST SOFTWARE DIVISION. Employee acknowledges that, as a part of his/her employment, he/she is expected to create inventions and/or ideas of value to the Company. 2. CONFIDENTIAL INFORMATION OF OTHERS. Employee does not have in his/her possession any confidential information or documents belonging to others, and will not use, disclose to the Company, or induce the Company to use, any such information or documents during his/her employment. Employee represents that his/her employment will not require him/her to violate any obligation to or confidence with another. 3. DEFINITION OF PROPRIETARY INFORMATION. As used herein, the term "Proprietary Information" refers to any and all information of a confidential, proprietary or secret nature which is or may be either applicable to, or related in any way to (i) the business, present or future, of the Company, (ii) the research and development or investigations of the Company, or (iii) the business of any customer of the Company. Proprietary Information includes, for example and without limitation, trade secrets, processes, formulas, data, algorithms, source code, object code, know-how, improvements, inventions, techniques, marketing plans and strategies, and information concerning customers or vendors. 4. PROPRIETARY INFORMATION TO BE KEPT IN CONFIDENCE. Employee acknowledges that the Proprietary Information is a special, valuable and unique asset of the Company, and Employee agrees at all times during the period of his/her employment and thereafter he/she will not directly or indirectly use the Proprietary Information other than in the course of performing duties as an employee of the Company, nor will Employee directly or indirectly disclose any Proprietary Information or anything relating thereto to any person or entity, except in the course of performing his/her duties as an employee of the Company and with the consent of the Company. Employee will abide by the Company's policies and regulations, as established from time to time, for the protection of its Proprietary Information. 6 5. OTHER EMPLOYMENT. Employee agrees that during the period of his/her employment by the Company, he/she will not, without the Company's prior written consent, directly or indirectly engage in any employment, consulting, or activity other than for the Company relating to any line of business in which the Company is now or at such time is engaged, or which would otherwise conflict with his/her employment obligations to the Company. 6. RETURN OF MATERIALS AT TERMINATION. In the event of any termination of his/her employment, whether or not for cause and whatever the reason, Employee will promptly deliver to the Company all documents, data, records and other information pertaining to his/her employment, and Employee shall not take with him/her any documents or data, or any reproduction or excerpt of any documents or data, containing or pertaining to any Proprietary Information. 7. DISCLOSURE TO COMPANY; INVENTIONS AS SOLE PROPERTY OF COMPANY. Employee agrees to promptly disclose in writing to the Company any and all inventions, discoveries, improvements, trade secrets, formulas, techniques, processes, manuscripts, writings and know-how, whether or not patentable and whether or not reduced to practice, conceived or learned by the Employee during the period of his/her employment, either alone or jointly with others which relate to or result from the actual or anticipated business, work, research or investigations of the Company, or which result, to any extent, from use of the Company's premises or property (the work being hereinafter collectively referred to as the "Inventions"). Employee hereby agrees to assign to the Company all of his/her entire right and interest in and to all the Inventions. Within 30 days following the Company's receipt of Employee's written disclosure of an Invention, Employee shall assign to the Company or any other entity designated by it all domestic and foreign rights pertaining to such Invention, and assist the Company in every way (at the Company's expense) to obtain and from time to time enforce patents or copyrights on such Invention in any and all countries. To that end, by way of illustration but not limitation, Employee will testify in any suit or other proceeding involving any of the Inventions, execute all documents which the Company reasonably determines to be necessary or convenient for use in applying for and obtaining patents or copyrights thereon and enforcing same, and execute all necessary assignments thereof to the Company or persons designated by it. Employee's obligation to assist the Company in obtaining and enforcing patents or copyrights for the Inventions shall continue beyond the termination of his/her employment, but the Company shall compensate Employee at a reasonable rate after such termination for the time actually spent by Employee at the Company's request on such assistance. 8. LIST OF PRIOR INVENTIONS. All inventions, if any, which Employee made prior to his/her employment by the Company are excluded from the scope of this Agreement. As a matter of record, Employee has set forth on Schedule A attached hereto a complete list of all inventions, discoveries, or improvements relating to the Company's business which have been made by Employee prior to his/her employment with the Company. Employee represents and convenants that such list is complete. 7 9. INJUNCTION. Employee agrees that it would be difficult to measure damage to the Company from any breach by Employee of the promises set forth in Paragraphs 4, 5, and 6 herein, and that injury to the Company from any such breach would be impossible to calculate, and that money damages would therefore be an inadequate remedy for any such breach. Accordingly, Employee agrees that if he/she shall breach any provision of Paragraphs 4, 5, or 6 or any of them, the Company shall be entitled, in addition to all other remedies it may have, to injunction or other appropriate orders to restrain any such breach by Employee without showing or proving any actual damage sustained by the Company. 10. GENERAL. (a) To the extent that any of the agreements set forth herein, or any word, phrase, clause, or sentence thereof shall be found to be illegal or unenforceable for any reason, such agreement, word, clause, phrase or sentence shall be modified or deleted in such a manner so as to make the agreement as modified legal and enforceable under applicable laws, and the balance of the agreements or parts thereof shall not be affected thereby, the balance being construed as severable and independent. (b) This Agreement shall be binding upon Employee and his/her heirs, executors, assigns, and administrators and shall inure to the benefit of the Company, its successors and assigns and any Subsidiary. (c) This Agreement shall be governed by the laws of the State of Oregon, which state shall have jurisdiction of the subject matter hereof. (d) This Agreement may be signed in two counterparts, each of which shall be deemed an original and which together shall constitute one instrument. (e) The use of the singular in this agreement includes the plural, as appropriate. (f) This Agreement represents the entire agreement between Employee and the Company with respect to the subject matter hereof, superseding all previous oral or written communications, representations or agreements. This agreement may be modified only by a duly authorized and executed writing. INTEGRATED MEASUREMENT SYSTEMS, INC.: By: /s/ Gwyn Harney ----------------------------- Title: Director, H R -------------------------- Date: 1-7-97 --------------------------- EMPLOYEE: Print Name: David L. Brinker CAUTION TO EMPLOYEE: --------------------- -------------------- THIS AGREEMENT AFFECTS IMPORTANT Signature: /s/ David L. Brinker RIGHTS. DO NOT SIGN UNLESS YOU ---------------------- HAVE READ IT CAREFULLY AND ARE SATISFIED THAT YOU UNDERSTAND Date: 12-23-96 IT COMPLETELY. --------------------------- ----------- 8 - -------------------------------------------------------------------------------- EXHIBIT B INTEGRATED MEASUREMENT SYSTEMS, INC. (THE "COMPANY") POLICY STATEMENT ON CONFLICTS OF INTEREST - -------------------------------------------------------------------------------- It is generally accepted as good business practice that employees disclose in detail any outside activities or interests which potentially may conflict or even appear to conflict with the Company's best interest. Accordingly, it is the policy of the Company to require such disclosure. While it is not possible to describe, or even anticipate all the circumstances and situations that might involve or even appear to involve conflict of interest, the following enumeration's of some such activities are given for illustration and without limitation: 1. Being connected directly or indirectly with any business (as owner, partner, officer, director, participant, licensee, consultant, shareholder, or as the recipient of wages, salary, bonus, fees, commissions, or other compensation of value) which sells, provides materials, supplies, equipment, facilities, or services to the Company or which is in direct or indirect competition with, or which is a customer of the Company. (Shares of stock in listed companies acquired as a part of a normal investment program may be excluded). 2. Giving or accepting gifts, entertainment, or any other personal favor or preferment to or from anyone with whom the Company has or is likely to have any business dealings, including an employee, prospective employee, customer, competitor, or vendor which go beyond common courtesies usually associated with accepted business practice. 3. Disclosing directly or indirectly any confidential information acquired by him or her in the course of his or her official duties or using such information to further his or her personal interests to the Company's disadvantage. 4. Acquiring directly or indirectly through ownership or lease, property, real estate, or facilities in which the Company has an active or potential interest. 5. Speculating or commercially dealing in the products (first quality, used, obsolete, or scrap) sold by the Company or in any used property (machinery, equipment, facilities, furniture, and fixtures) of the Company. I have read the Company's Policy Statement on Conflicts of Interest and affirm that to the best of my knowledge and belief, I am involved in no such situation with might create or appear to create a conflict of interest, except as explained fully and completely below. I further agree to report immediately any circumstances or situations arising in the future that might involve me or appear to involve me in a conflict of interest. NAME: /s/ David L. Brinker DATE: 12/23/96 --------------------------------------- ------------------------- 9 EX-10.20 8 EXHIBIT 10.20 Dear Marv: In anticipation and in consideration of an amicable and friendly separation, and in recognition of the work you have done here and the contributions you have made, we would like to propose modifying the severance terms described in your employment contract as follows. We will agree upon a transition period of one year. During that period, you will serve as a consultant to IMS, working in cooperation with and under the guidelines established by me or managers I designate. In that capacity, you will be on call as we need you (subject to reasonable scheduling constraints on your time as you line up other consulting work) for a smooth transition of all outstanding matters on which you have had a hand. You may be called upon also to assist with marketing, customer relations, technology integration, product development, or other matters. You will be free to seek and accept other work during this period, subject to the constraints described in Section 4.6 of your employment agreement. Your confidentiality obligations will continue to apply, of course, as will your commitments with respect to ownership of inventions that you develop or conceive while working on IMS matters during this period. During the first six months, when we anticipate we will need you with relative frequency, you will continue on the payroll of IMS, and continue to receive your benefits. Your stock options that would become exercisable through the end of June, 1997 will vest immediately, as your employment contract commits. But we will regard you as an employee during this period, to permit you to defer the date on which you would be required to exercise your Incentive Stock Options. That will give you an additional six months in which to exercise them. (As you realize, incentive stock options provide you with the ability to defer taxes until the sale of the stock itself, and provided you then have met the required holding periods for the stock following exercise, to pay taxes on the excess of the fair market value over the purchase price only at capital gains rates.) During the second six months, you will continue to serve as a consultant to IMS, subject again to scheduling constraints related to your work. During that time, you will be paid at the rate of $400 per day for any day you act as a consultant for us. In recognition of that commitment, we will permit your IMS stock options to continue to vest during that six months, though you recognize that the options that become exercisable first following the end of that six month period will be nonqualified stock options. You will have until three months following the end of the transition year to exercise the stock options that vest during the second half of the year. The only vesting condition for these options is that you continue as an "on call" consultant, and use good faith efforts to schedule time and to assist with any transition matters that arise. (On nonqualified stock options, you will owe taxes with respect to the difference between the exercise price and the market value on the date of exercise, and at exercise, you will need to pay to us amounts we are required to withhold from compensation due you under applicable statutes, if any. Please consult with Gwyn about what those amounts would be.) Except for a standard company press release about the change in management at IMS, each of us agree we will not discuss your termination as an employee and transition to consulting status with the press, or any party outside IMS itself (including as necessary IMS' advisors). You may of course speak with your own advisors as necessary. Marv, accepting this proposal will provide us with the framework for a smooth transition. By signing it, you give up any possibility of bringing claims against IMS (except of course for salary, benefits, bonus, and stock options due to you if for any reason we would fail to pay them), and you commit yourself to provide the help outlined above. Once you sign it, we will be committed to the additional severance benefits described. If this proposal meets with your approval, please sign it below and return a copy. Very truly yours, /s/ Keith L. Barnes Keith L. Barnes Proposal Accepted: /s/ Marvin Wolfson 1/22/97 - ----------------------------------------- Marvin Wolfson EX-23.1 9 EXHIBIT 23.1 EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports and to all references to our firm included in or made a part of this registration statement (No. 333- ). ARTHUR ANDERSEN LLP Portland, Oregon January 24, 1997 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors and Shareholders of Integrated Measurement Systems, Inc.: We have audited, in accordance with generally accepted auditing standards, the financial statements of Integrated Measurement Systems, Inc. included in this registration statement and have issued our report thereon dated January 24, 1997. Our audits were made for the purpose of forming an opinion on those statements taken as a whole. The Valuation and Qualifying accounts schedule is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Portland, Oregon January 24, 1997 EX-27 10 EXHIBIT 27 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 1996, AND THE BALANCE SHEET AS OF DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANICAL STATEMENTS 1000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 9,545 0 11,841 489 7,940 33,770 15,069 9,145 44,314 8,490 278 0 0 67 34,792 44,314 40,244 50,837 14,203 18,138 23,204 0 33 9,712 3,546 6,166 0 0 0 6,166 .88 .88
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