-----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, NAGRI7/89R/dZzTfynHJ1sQM8q0uFZOjZYezoC5nUYWPthj/sMHKzFkqW8XYYXiG l8cF2kAubwfUDAf7NV12LA== 0000912057-99-005281.txt : 19991115 0000912057-99-005281.hdr.sgml : 19991115 ACCESSION NUMBER: 0000912057-99-005281 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 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: 10-Q SEC ACT: SEC FILE NUMBER: 000-26274 FILM NUMBER: 99749532 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 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 - -------------------------------------------------------------------------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 1999 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 0-26274 - -------------------------------------------------------------------------------- INTEGRATED MEASUREMENT SYSTEMS, INC. (Exact name of registrant as specified in its charter) OREGON 93-0840631 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 9525 S.W. GEMINI DRIVE, BEAVERTON, OR 97008 (Address of principal executive offices) (zip code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (503) 626-7117 - -------------------------------------------------------------------------------- NO CHANGE Former name, former address, and former fiscal year, if changed since last report Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- At October 20, 1999, there were 7,536,323 shares of Integrated Measurement Systems, Inc. common stock, $0.01 par value, outstanding. (Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.) INTEGRATED MEASUREMENT SYSTEMS, INC. INDEX TO FORM 10-Q
PART 1 FINANCIAL INFORMATION PAGE NUMBER - ----------------------------------- ----------- Item 1. Financial Statements Consolidated Statements of Operations for the three months and nine months ended September 30, 1999 and 1998 3 Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998 4 Consolidated Statements of Cash Flows for the nine months ended September 30, 1999 and 1998 5 Notes to the Financial Statements 6-7 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 8-13 Item 3. Quantitative and Qualitative Disclosures About Market Risk. 13 PART II OTHER INFORMATION - ------------------------------- Item 2. Changes in Securities. 14 Item 6. Exhibits and Reports on Form 8-K. 14 SIGNATURES 15 - ----------
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS INTEGRATED MEASUREMENT SYSTEMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, 1999 1998 1999 1998 ---- ---- ---- ---- SALES: Systems $ 11,598 $ 6,310 $ 28,505 $ 16,117 Software 1,058 961 3,999 3,458 Service 2,239 2,202 6,775 6,797 ---------- --------- ---------- -------- NET SALES 14,895 9,473 39,279 26,372 ---------- --------- ---------- -------- COST OF SALES: Systems 4,313 4,339 11,045 7,679 Software 247 153 621 560 Service 1,116 1,055 3,333 2,971 ---------- --------- ---------- -------- TOTAL COST OF SALES 5,676 5,547 14,999 11,210 ---------- --------- ---------- -------- GROSS MARGIN 9,219 3,926 24,280 15,162 OPERATING EXPENSES: Research, development and engineering 2,170 1,607 6,202 5,057 Selling, general and administrative 4,940 4,515 14,016 12,767 Merger & restructuring -- 1,508 -- 1,508 ---------- --------- ---------- -------- Total operating expenses 7,110 7,630 20,218 19,332 ---------- --------- ---------- -------- OPERATING INCOME (LOSS) 2,109 (3,704) 4,062 (4,170) Other income, net 258 216 454 618 ---------- --------- ---------- -------- Income (loss) before income taxes 2,367 (3,488) 4,516 (3,552) Provision for (benefit from) income taxes 757 (138) 1,445 (162) --------- ---------- ---------- --------- NET INCOME (LOSS) $ 1,610 $ (3,350) $ 3,071 $ (3,390) =========- ========== ========== ========= BASIC EARNINGS (LOSS) PER SHARE $ 0.21 $ (0.45) $ 0.41 $ (0.45) ========== ========= ========== ======== DILUTED EARNINGS (LOSS) PER SHARE $ 0.20 $ (0.45) $ 0.39 $ (0.45) ========== ========= ========== ======== Weighted average number of common shares outstanding for basic earnings per share 7,502 7,483 7,470 7,519 Incremental shares from assumed conversions of employee stock options 647 -- 494 -- ---------- --------- ---------- -------- Adjusted weighted average shares for diluted earnings per share. 8,149 7,483 7,964 7,519 ========== ========= ========== ========
SEE ACCOMPANYING NOTES TO UNAUDITED FINANCIAL STATEMENTS. 3 INTEGRATED MEASUREMENT SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except per share data)
As of As of September 30, December 31, 1999 1998 ---- ---- (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 3,489 $ 3,379 Short-term investments 13,516 7,630 Trade receivables, less allowance for doubtful accounts of $265 and $413 14,416 13,977 Inventories, net 14,320 14,943 Deferred income taxes 78 1,453 Prepaid expenses and other current assets 3,131 2,381 --------- -------- Total current assets 48,950 43,763 PROPERTY, PLANT AND EQUIPMENT, NET 10,934 11,063 SERVICE SPARE PARTS, NET 3,043 3,692 SOFTWARE DEVELOPMENT COSTS, NET 3,853 3,457 DEFERRED INCOME TAXES 219 219 OTHER ASSETS, NET 920 1,220 --------- -------- Total assets $ 67,919 $ 63,414 ========= ======== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 1,565 $ 1,828 Payable to Cadence, net 598 506 Accrued compensation 1,477 1,718 Accrued warranty 964 296 Deferred revenue 2,625 2,008 Other current liabilities 1,086 1,408 Income taxes payable 370 197 Capital lease obligations - current 254 394 --------- -------- Total current liabilities 8,939 8,355 CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION 251 363 DEFERRED COMPENSATION 1,417 1,154 SHAREHOLDERS' EQUITY: Preferred stock, $.01 par value, authorized 10,000,000 shares; none issued and outstanding - - Common stock, $.01 par value, authorized 15,000,000 shares; issued and outstanding 7,533,033 and 7,425,951 75 74 Additional paid-in capital 40,176 39,478 Retained earnings 17,061 13,990 --------- -------- Total shareholders' equity 57,312 53,542 --------- -------- Total liabilities and shareholders' equity $ 67,919 $ 63,414 ========= ========
SEE ACCOMPANYING NOTES TO UNAUDITED FINANCIAL STATEMENTS. 4 INTEGRATED MEASUREMENT SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Nine Months Ended September 30, 1999 1998 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 3,071 $ (3,390) Adjustments to reconcile net income to cash provided by (used in) operating activities: Acquired in-process research and development -- 861 Depreciation and amortization 4,277 3,089 Provision for deferred income taxes 1,375 (150) Deferred compensation 263 122 Net change in payable to or receivable from Cadence 92 760 Increase in trade receivables (439) (2,403) Decrease (increase) in inventories 623 (3,501) (Decrease) increase in prepaid expenses and other current assets (748) 149 Net change in income taxes payable or receivable 173 (152) (Decrease) increase in accounts payable and accrued liabilities (159) 226 Increase (decrease) in deferred revenue 617 (10) -------- -------- Net cash provided by (used in) operating activities 9,145 (4,399) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of PerformIC -- (1,060) Purchases of short-term investments (8,008) (5,840) Sales of short-term investments 2,122 6,665 Purchases of equipment and service spare parts (2,195) (4,693) Software development costs (1,401) (1,778) -------- -------- Net cash used in investing activities (9,482) (6,706) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments under capital leases (252) (136) Proceeds from employee stock plans 699 469 Repurchase of common stock -- (1,117) -------- -------- Net cash provided by (used in) financing activities 447 (784) -------- -------- Net increase (decrease) in cash and cash equivalents 110 (11,889) Beginning cash and cash equivalents balance 3,379 17,464 -------- -------- Ending cash and cash equivalents balance $ 3,489 $ 5,575 ======== ======== SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES: Purchase of assets through capital lease $ -- $ 33 ======== ======== OTHER SUPPLEMENTAL CASH FLOW DISCLOSURES: Income taxes refunded (paid) $ 102 $ (110) ======== ======== Interest paid $ (36) $ (19) ======== ========
SEE ACCOMPANYING NOTES TO UNAUDITED FINANCIAL STATEMENTS. 5 INTEGRATED MEASUREMENT SYSTEMS, INC. NOTES TO THE FINANCIAL STATEMENTS (In thousands, except share data) (Unaudited) (1) BASIS OF PRESENTATION The interim financial statements included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the management of the Company believes that the disclosures are adequate to make the information presented not misleading. Interim financial statements are by necessity somewhat tentative; judgments are used to estimate interim amounts for items that are normally determinable only on an annual basis. The financial information as of December 31, 1998 is derived from the Company's audited financial statements. The interim period information presented herein includes normally recurring adjustments which are, in the opinion of the management of the Company, only necessary for a fair statement of the results of the respective interim periods. Results of operations for interim periods are not necessarily indicative of results to be expected for an entire year. (2) INVENTORIES Inventories, consisting principally of computer hardware, electronic sub-assemblies and test equipment, are valued at the lower of cost (first-in, first-out) or market. Costs used for inventory valuation purposes include material, labor and manufacturing overhead.
September 30, December 31, 1999 1998 ---- ---- Raw materials. . . . . . . . . . . . . . . . . . . $ 8,108 $ 9,265 Work-in-progress . . . . . . . . . . . . . . . . . 2,721 2,608 Finished goods . . . . . . . . . . . . . . . . . 3,491 3,070 --------- --------- $ 14,320 $ 14,943 ========= =========
(3) EARNINGS PER SHARE Earnings per share amounts presented in the accompanying Statements of Income have been calculated in accordance with Statement of Accounting Standards No. 128, "Earnings per Share." Following is a summary of outstanding common stock options not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market price of the common stock.
1999 1998 ---- ---- Three months ended September 30,. . . . . . . . . . . . . . . 30,750 1,759,112 Nine months ended September 30, . . . . . . . . . . . . . . . . 72,638 1,759,112
6 (4) SEGMENT DISCLOSURES Disclosures about the Company's business segments, as required by SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," are as follows: FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999
VALIDATION VIRTUAL TEST CONSOLIDATED SYSTEMS -------------- -------------- ---------------- Segment net sales $ 14,626 $ 269 $ 14,895 Segment operating income (loss) $ 2,962 $ (853) $ 2,109
FOR THE THREE MONTHS ENDED SEPTEMBER 30 , 1998
VALIDATION VIRTUAL TEST CONSOLIDATED SYSTEMS -------------- -------------- ---------------- Segment net sales $ 8,665 $ 808 $ 9,473 Segment operating loss $ (3,378) $ (326) $ (3,704)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
VALIDATION VIRTUAL TEST CONSOLIDATED SYSTEMS -------------- -------------- ---------------- Segment net sales $ 37,094 $ 2,185 $ 39,279 Segment operating income (loss) $ 5,289 $ (1,227) $ 4,062
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
VALIDATION VIRTUAL TEST CONSOLIDATED SYSTEMS -------------- -------------- ---------------- Segment net sales $ 23,385 $ 2,987 $ 26,372 Segment operating loss $ (3,505) $ (665) $ (4,170)
5) NEW ACCOUNTING PRONOUNCEMENT In June 1999, the FASB issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 137). SFAS 137 is an amendment to Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS 137 establishes accounting and reporting standards for all derivative instruments. SFAS 137 is effective for fiscal years beginning after June 15, 2000. The Company does not currently have any derivative instruments and, accordingly, does not expect the adoption of SFAS 137 to have an impact on its financial position or results of operations. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (All numerical references are in thousands, except for percentages and per share data) THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S FINANCIAL STATEMENTS AND THE NOTES THERETO INCLUDED ELSEWHERE IN THIS QUARTERLY REPORT, AS WELL AS THE COMPANY'S FINANCIAL STATEMENTS AND THE NOTES THERETO, AND THE MANAGEMENT DISCUSSION AND ANALYSIS PRESENTED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998. THIS QUARTERLY REPORT, INCLUDING THE FOLLOWING DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTAINS CERTAIN STATEMENTS, TREND ANALYSIS AND OTHER INFORMATION THAT CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, AS AMENDED, WHICH MAY INVOLVE RISKS AND UNCERTAINTIES. SUCH FORWARD LOOKING STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO, STATEMENTS INCLUDING THE WORDS "ANTICIPATE," "BELIEVE," "PLAN," "ESTIMATE," "EXPECT," "INTEND" AND OTHER SIMILAR EXPRESSIONS. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN DUE TO NUMEROUS FACTORS INCLUDING, BUT NOT LIMITED TO, THOSE DISCUSSED IN THE FOLLOWING DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, AS WELL AS THOSE DISCUSSED ELSEWHERE HEREIN AND IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998, AND THE COMPANY'S QUARTERLY REPORTS ON FORM 10-Q FOR THE PERIODS ENDED MARCH 31 AND JUNE 30, 1999. RESULTS OF OPERATIONS NET SALES Net sales is comprised of engineering validation systems sales, software sales (including validation systems software and Virtual Test Software) and service sales, which consists primarily of revenue derived from maintenance and consulting contracts. Net sales of $14,895 for the three months ended September 30, 1999 reflected an increase of $5,422 or 57% from the third quarter of 1998. The increase in net sales can be attributed to continuing strength in the semiconductor industry and customer satisfaction with the Vanguard product. The validation system product mix for third quarter 1999 sales included five Vanguard digital systems, three Orion Memory systems and two mixed-signal systems. In addition, sales of older generation ATS and XTS digital validation systems amounted to $3,000. Sales in North America amounted to 64% of net sales and international sales amounted to 36% of net sales in the third quarter of 1999 compared to 49% and 51%, respectively, during the same period in 1998. Sales to Intel amounted to 58% of net sales for the third quarter of 1999, compared to 7% in the same period of 1998. Net sales for the nine months ended September 30, 1999 were $39,279 compared to $26,372 for same period in 1998, an increase of $12,907 or 49%. Sales to Intel accounted for 53% of net sales for the nine months ended September 30, 1999, largely due to demand for the Vanguard digital validation systems. GROSS MARGIN The Company's gross margin increased to $9,219 or 62% of net sales in the third quarter of 1999, compared to $3,926 or 41% of net sales for the same period of 1998. This improvement was a direct result of the increase in net sales discussed above, combined with the impact of charges related to the acquisition of PerformIC in the amount of $2,041 recorded by the Company as part of Systems Cost of Sales in the third quarter of 1998. The gross margin percentage of net sales for the third quarter of 1999 remained essentially flat compared to the second quarter of 1999. A shortfall in Virtual Test software revenue, continuing provisions for warranty costs (due to an increase in standard warranty terms from 90 days to one year), and sales of lower-margin older generation systems resulted in gross margins below the prior year level, excluding non-recurring charges. Overall gross margin percent is expected to remain near the current level during the fourth quarter of 1999. For the nine months ended September 30, 1999 gross margin increased to $24,280 or 62% of net sales compared to 8 $15,162 or 58% of net sales for the same period in 1998, reflecting the same factors discussed above. OPERATING EXPENSES Research, development and engineering (R&D) expenses increased to $2,170 for the three months ended September 30, 1999 from $1,607 for the third quarter of 1998. R&D expenses amounted to 15% of net sales in the three months ended September 30, 1999, compared to 17% in the three months ended September 30, 1998. The increase in the dollar amount of R&D expenses reflects the Company's investment in the development of the new Orion memory validation system products. Capitalized software development costs and related amortization were $477 and $298 respectively for the third quarter of 1999, compared to $675 and $192, respectively, for the same period in 1998. The net increase in capitalized software was $179 for the three months ending September 30, 1999 compared with $483 for the same period last year. For the nine months ended September 30, 1999, R&D expenses increased to $6,202 from $5,057 for the same period in 1998 due to the ongoing development of the Orion memory test validation system. As a percentage of net sales R&D expenses were 16% for the nine months ended September 30, 1999 and 19% for the same period in 1998. The decrease in R&D expenses as a percentage of net sales both for the quarter and year-to-date were directly attributable to the increase in net sales discussed above. Capitalized software development costs and amortization were $1,401 and $1,006, respectively, for the nine months ended September 30, 1999, compared with $1,778 and $556, respectively, for the like period in 1998. Selling, general and administrative (SG&A) expenses of $4,940 for the third quarter of 1999 increased by $425 over the same quarter in 1998. As a percentage of net sales, SG&A expenses decreased to 33% in the three months ended September 30, 1999 from 48% in the three months ended September 30, 1998. The increase in the dollar amount of SG&A expenses primarily reflects payment of sales commissions on higher sales volumes. For the nine months ended September 30, 1999 and 1998, SG&A expenses were $14,016 and $12,767 respectively. As a percentage of net sales, SG&A expenses decreased to 36% for the nine months ended September 30, 1999 compared to 48% for the same period in 1998. The decrease in SG&A expenses as a percent of net sales resulted directly from the increase in net sales discussed above. During the third quarter of 1998, the Company implemented a restructuring plan, including a reduction in the Company's worldwide employee headcount by approximately 5%, the termination of certain international distributor agreements, and the establishment of direct sales operations in Europe and Asia. The merger and restructuring charge of $1,508 consisted of payments in connection with the termination of distributors, costs to set up direct international operations as a result of the termination of a support agreement with Cadence, employee severance, and associated legal and consulting costs, combined with a one-time charge for in-process research and development of $861 incurred in connection with the acquisition of PerformIC. OTHER INCOME, NET Other income, net, increased to $258 in the three months ended September 30, 1999 from $216 in the quarter ended September 30, 1998 reflecting foreign exchange gains resulting from the translation of foreign denominated receivables into U.S. dollars. Year to date other income, net was $454 for 1999 and $618 for 1998. The decrease was due primarily to reductions in investment income due to lower average cash and short-term investment balances. INCOME TAXES The Company's effective tax rate was 32% for the nine months ended September 30, 1999 and 4% for the same period in 1998. The Company's income tax position includes the effects of available tax benefits in certain countries where the Company does business, benefits for available net operating loss carryforwards, and tax 9 expense for subsidiaries with pre-tax income. The Company's effective tax rate is sensitive to the geographic and product mix of the Company's net sales, and therefore could be higher or lower in the future depending upon actual net sales realized. NET INCOME As a result of the various factors discussed above, net income for the first nine months of 1999 increased to $3,071 or $0.39 per diluted share compared to a loss of $3,390 or $0.45 per share for the corresponding period in 1998. 10 FUTURE OPERATING RESULTS Results of operations for the periods discussed above should not be considered indicative of the results to be expected in any future period, and fluctuations in operating results may also result in fluctuations in the market price of the Company's common stock. Like most high technology and high growth companies, the Company faces certain business risks that could have adverse effects on the Company's results of operations. Sales of the Company's products to Intel and a limited number of other customers are expected to continue to account for a high percentage of net sales over the foreseeable future. Any sudden reduction or loss of orders from Intel or any other major customer would have a material adverse effect on the Company's financial condition and results of operations. Like most high technology and high growth companies, the Company faces certain other business risks that could have adverse effects on the Company's results of operations, including, but not limited to the following: The Company is dependent on high-dollar customer orders, deriving a substantial portion of its net sales from the sale of engineering validation systems which typically range in price from $0.3 million to over $2.0 million per unit. A substantial amount of the Company's net sales are typically realized in the last few days of each quarter. During 1998, the Company's quarterly net sales were negatively impacted by customer decisions to delay or cancel plans to place orders for the Company's products in the last few days of the quarter. The timing and sales price of a single order can have a significant impact on the Company's net sales and results of operations for a particular period. The Company's net sales and results of operations may be negatively impacted if an order is received too late in a given period to permit product shipment during that period. A significant portion of the Company's operating expenses is relatively fixed and planned expenditures are based, in part, on anticipated orders. In addition, the need for continued expenditures for research, development and engineering makes it difficult to reduce expenses in a particular quarter if the Company's sales goals for that quarter are not met. The inability to reduce the Company's expenses quickly enough to compensate for any revenue shortfall would magnify the adverse impact of any revenue shortfall on the Company's results of operations. The Company purchases some key components from sole or single source vendors, for which alternative sources are not readily available. A few of these suppliers are small independent companies and could expose the Company to increased risk of temporary shortages for certain key components. The Company's future operating results and financial condition are also subject to influences driven by rapid technological changes, a highly competitive industry, a lengthy sales cycle, and the cyclical nature of general economic conditions. Future operating results will depend on many factors, including demand for the Company's products, the introduction of new products by the Company and by its competitors, industry acceptance of Virtual Test software, the level and timing of available shippable orders and backlog, the duration and severity of the economic downturn in Asia, and the business risks discussed above. There can be no assurance that the Company's net sales will grow or that such growth will be sustained in future periods or that the Company will remain profitable in any future period. YEAR 2000 The Company has developed its Year 2000 Readiness Plan including steps to review, test and implement corrective measures for the Company's products and information systems. In addition, the Company has identified its most critical vendors and suppliers, and continues to collect sufficient information from each of them to monitor their Year 2000 readiness. To-date, the Company has completed testing of its currently offered products. Based on these tests, the Company believes them to be free of any problems associated with the Year 2000. The Company has tested selected earlier-version products for Year 2000 readiness, and believes them to be free of any problems associated with the Year 2000. The Company will continue to selectively perform Year 2000 readiness testing on specific customer 11 configurations as requested. Based upon testing to-date, the Company does not believe additional product testing will result in the discovery of any materially adverse Year 2000 readiness issues. The Company has completed review of its Year 2000 readiness with respect to its information systems. The review has not identified any significant information systems Year 2000 issues beyond those that will be corrected through implementation of planned systems upgrades. Vendors for the Company's information systems have represented those systems, with the planned upgrades, to be Year 2000 compliant. The Company has completed Year 2000 Readiness testing and upgrades of the Company's information systems as planned. The Company estimates the costs in 1998, including payments to third parties and estimates of internal costs, for developing and implementing its Year 2000 readiness plan were less than $200,000. The Company expects additional implementation costs in 1999 to be less than $300,000. Costs incurred for the nine month period ending September 30, 1999 were less than $150,000. The Company has not developed a most reasonably likely worst case scenario. However, it is developing contingency plans in the event mission-critical third-party vendors or other significant third parties fail to adequately address Year 2000 issues. Such plans principally involve identifying alternative vendors or, in the extreme, adding inventory safety stocks. There can be no assurance that any such plans will fully mitigate any such failures or problems. The Company continues to monitor its mission-critical third party vendors Year 2000 readiness status and believes they have achieved or will achieve Year 2000 readiness by December 31, 1999. In addition, there are mission-critical third parties, such as utilities, transportation and telecommunication companies where alternative arrangements or sources are limited or unavailable. LIQUIDITY AND CAPITAL RESOURCES As of September 30, 1999, the Company's principal sources of liquidity consisted of cash and short-term investments of approximately $17.0 million, and funds available under an unused existing bank line of credit of $10.0 million. Cash and short-term investments increased by $6.0 million from December 31, 1998. The Company's operating activities generated cash during the nine months ended September 30, 1999 of $9.1 million, compared to using cash of $4.4 million for the same period last year. This improvement in operating cash flows was primarily attributable to improved operating results and to the Company's asset management programs aimed at increasing turnover of accounts receivable and inventories and a smoother revenue flow. During the third quarter of 1999, 46% of revenue came in July and August, compared with 15% of revenue in the first two months of the quarter ended March 31, 1999 and 40% of revenue in the first two months of the quarter ended June 30, 1999. A significant portion of the receivables associated with July and August revenue was collected before September 30, 1999. The Company's trade receivables increased to $14.4 million at September 30, 1999 from $14.0 million at December 31, 1998, as a result of an increase in quarterly net sales from the fourth quarter of 1998 to the third quarter of 1999 of $4.6 million, mostly offset by the impact of a smoother revenue flow discussed above. Days sales outstanding in trade receivables were 88 days at September 30, 1999, compared to 122 days at December 31, 1998. Inventories decreased to $14.3 million at September 30, 1999 from $14.9 million at December 31, 1998, as a result of increased sales volume combined with focused inventory reduction programs. Deferred revenue increased to $2.6 million at September 30, 1999 compared to $2.0 million at December 31, 1998, due to timing of renewals and billings associated with customer maintenance contracts. During the nine months ended September 30, 1999, the Company continued to invest in equipment and capitalized software development costs. Purchases of equipment and service spare parts amounted to $2.2 million, while capitalization of software development costs amounted to $1.4 million. The Company believes that cash on hand, short-term investments, and cash generated from operations, as well as cash available from the Company's existing $10.0 million short-term line of credit, will be sufficient to meet the 12 Company's working capital and other cash requirements for at least the next twelve months. Management is continually evaluating opportunities to develop and introduce new products, and to acquire complementary businesses or technologies. At present, the Company has no understandings, commitments or agreements with respect to any such opportunities. Any transactions resulting from such opportunities, if consummated, may necessitate funding from other sources. There can be no assurance that such funding will be available or that, if available, such funding will be obtainable on terms favorable to the company. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's exposure to market risk for changes in interest rates relate primarily to its investment portfolio. The Company mitigates its risk by diversifying its investments among high credit quality securities in accordance with the Company's investment policy. Interest expense is affected by the general level of U.S. interest rates and/or LIBOR. Increases in interest expense resulting from an increase in interest rates would be offset by a corresponding increase in interest earned on the Company's investments. The Euro is the functional currency of the Company's subsidiaries in France, Germany and Switzerland. The Yen is the functional currency of the Company's subsidiary in Japan. The Company does maintain cash balances denominated in currencies other than the U.S. Dollar in order to meet minimum operating requirements of its foreign subsidiaries. The Company plans to begin utilizing hedging instruments to mitigate fluctuations in currency exchange rates during the fourth quarter of 1999. 13 PART II OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES During the quarter ended September 30, 1999, the Company made no sales of securities that were not registered under the Securities Act of 1933. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 10. (a) Exhibits (exhibit reference numbers refer to Item 601 of Regulation S-K) 27. Financial Data Schedule (b) Reports on Form 8-K: No reports on Form 8-K were filed during the quarter ended September 30, 1999. 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on November 12, 1999. INTEGRATED MEASUREMENT SYSTEMS, INC. (Registrant) /s/ Fred Hall ------------------------------------- Fred Hall Chief Financial Officer (on behalf of the Registrant and as Principal Financial Officer) 15 EX-27 2 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE INCOME STATEMENT FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1999, AND THE BALANCE SHEET AS OF SEPTEMBER 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 3,489 13,516 14,681 265 14,320 48,950 25,252 14,318 67,919 8,939 251 0 0 75 57,237 67,919 32,504 39,279 11,666 14,999 20,218 0 36 4,516 1,445 3,071 0 0 0 3,071 .41 .39
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