-----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, Dd96YanAuAW4sSpa3l5lgl/Kj8BvngLx5Nb3Rsd7ly/VNMcrXQ6IRpkv4rZIs7Ok gfwRkmx78GPilQPFIWa5ng== 0001047469-97-003986.txt : 19971114 0001047469-97-003986.hdr.sgml : 19971114 ACCESSION NUMBER: 0001047469-97-003986 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971112 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: 10-Q SEC ACT: SEC FILE NUMBER: 000-26274 FILM NUMBER: 97714001 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, 1997 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 incorporation or organization) Identification No.) 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, and former fiscal year, if changed since last report Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- -------- At October 31, 1997, there were 7,505,218 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 I FINANCIAL INFORMATION Page Number - -------------------------------- ----------- Item 1. Financial Statements Statements of Income for the three months and the nine months ended September 30, 1997 and 1996 Balance Sheets as of September 30, 1997 and December 31,1996 Statements of Cash Flows for the nine months ended September 30, 1997 and 1996 Notes to the Financial Statements Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition PART II OTHER INFORMATION - ---------------------------- Item 2. Changes in Securities. Item 6. Exhibits and Reports on Form 8-K. SIGNATURES - ---------- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS INTEGRATED MEASUREMENT SYSTEMS, INC. STATEMENTS OF INCOME (In thousands, except net income per share) (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 ---- ---- ---- ---- Product sales $ 9,068 $ 10,183 $ 27,902 $ 29,425 Service and other sales 2,999 2,554 8,471 7,839 ------ -------- -------- -------- Net sales 12,067 12,737 36,373 37,264 ------ -------- -------- -------- Cost of product sales 3,124 3,515 9,687 10,360 Cost of service and other sales 903 932 2,770 3,003 ------ -------- -------- -------- Total cost of sales 4,027 4,447 12,457 13,363 ------ -------- -------- -------- Gross margin 8,040 8,290 23,916 23,901 Operating expenses: Research, development and engineering 1,806 1,750 5,408 5,667 Selling, general and administrative 4,163 4,158 12,281 11,462 ------ -------- -------- -------- Total operating expenses 5,969 5,908 17,689 17,129 ------ -------- -------- -------- Operating income 2,071 2,382 6,227 6,772 Other income, net 229 98 723 135 ------ -------- -------- -------- Income before income taxes 2,300 2,480 6,950 6,907 Provision for income taxes 782 843 2,433 2,526 ------ -------- -------- -------- Net income $1,518 $ 1,637 $ 4,517 $ 4,381 ------ -------- -------- -------- ------ -------- -------- -------- Net income per share $ 0.19 $ 0.23 $ 0.59 $ 0.63 ------ -------- -------- -------- ------ -------- -------- -------- Weighted average number of common and common equivalent shares outstanding 7,863 6,975 7,717 6,972 ------ -------- -------- -------- ------ -------- -------- --------
SEE ACCOMPANYING NOTES TO UNAUDITED FINANCIAL STATEMENTS. INTEGRATED MEASUREMENT SYSTEMS, INC. BALANCE SHEETS (In thousands, except share data) September 30, December 31, 1997 1996 ---- ---- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 13,833 $ 9,545 Short-term investments 11,311 -- Trade receivables, less allowance for doubtful accounts of $629 and $489 12,770 11,352 Receivable from Cadence, net -- 2,125 Inventories 10,336 7,940 Deferred income taxes 1,966 1,690 Prepaid expenses and other current assets 1,631 1,118 --------- --------- Total current assets 51,847 33,770 Property, plant and equipment, net 6,868 5,924 Service spare parts, net 3,084 2,567 Software development costs, net 1,608 1,446 Other assets, net 1,230 607 --------- --------- $ 64,637 $ 44,314 --------- --------- --------- --------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 1,830 $ 2,251 Payable to Cadence, net 399 -- Accrued compensation 1,753 2,036 Accrued warranty 348 500 Deferred revenue 1,824 1,727 Accrued income taxes 410 979 Other current liabilities 761 750 Capital lease obligations - current 192 247 --------- --------- Total current liabilities 7,517 8,490 Deferred income taxes 546 417 Capital lease obligations, net of current portion 185 278 Deferred compensation 655 270 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 7,503,633 and 6,726,257 75 67 Additional paid-in capital 39,026 22,676 Retained earnings 16,633 12,116 --------- --------- Total shareholders' equity 55,734 34,859 --------- --------- Total liabilities and shareholders' equity $ 64,637 $ 44,314 --------- --------- --------- --------- SEE ACCOMPANYING NOTES TO UNAUDITED FINANCIAL STATEMENTS. INTEGRATED MEASUREMENT SYSTEMS, INC. STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Nine Months Ended September 30, 1997 1996 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Cash received from customers 37,634 $ 34,631 Interest received 839 318 Payments to suppliers (16,415) (16,728) Payments to employees (13,702) (12,874) Income taxes paid (1,275) (315) Other taxes paid (700) (887) Interest paid (33) (24) -------- -------- Net cash provided by operating activities 6,348 4,121 -------- -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of short-term investments (11,311) -- Purchases of equipment and software (2,779) (2,922) Additions to service spare parts (1,047) (870) Software development costs (720) (629) Purchases of long-term investments (198) (123) -------- -------- Net cash used in investing activities (16,055) (4,544) -------- -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments under capital leases (206) (208) Net proceeds from secondary offering 13,367 -- Proceeds from employee stock plans 834 233 -------- -------- Net cash provided by (used in) financing activities 13,995 25 -------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents 4,288 (398) Beginning cash and cash equivalents balance 9,545 8,930 -------- -------- Ending cash and cash equivalents balance $ 13,833 $ 8,532 -------- -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 4,517 $ 4,381 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,882 2,600 Provision for deferred income taxes (147) (473) Capital contribution from Cadence 284 -- Net change in payable to or receivable from Cadence 2,524 962 Increase in trade receivables (1,418) (3,757) Increase in inventories (2,396) (2,000) Increase in prepaid expenses and other current assets (513) (497) Increase in current tax liability 1,304 2,533 (Decrease) increase in accounts payable and accrued liabilities (983) 1,068 Increase in deferred compensation 197 122 Increase (decrease) in deferred revenue 97 (818) -------- -------- Net cash provided by operating activities $ 6,348 $ 4,121 -------- -------- -------- -------- SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES: Purchase of assets through capital lease $ 59 $ 302 -------- -------- -------- -------- Tax benefit from stock option transactions $ 1,873 $ 1,596 -------- -------- -------- -------- SEE ACCOMPANYING NOTES TO UNAUDITED FINANCIAL STATEMENTS. INTEGRATED MEASUREMENT SYSTEMS, INC. NOTES TO THE FINANCIAL STATEMENTS (In thousands) (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, 1996 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 standard costs which approximate the lower of cost (first-in, first-out) or market. Costs utilized for inventory valuation purposes include material, labor and manufacturing overhead. Inventories consists of the following: September 30, December 31, 1997 1996 ---- ---- Raw Materials . . . . . . . . . . $5,179 $4,098 Work-in-progress . . . . . . . . 4,864 2,912 Finished Goods. . . . . . . . . . 293 930 ------- ------ $10,336 $7,940 ------- ------ ------- ------ (3) EARNINGS PER SHARE Net income per common and common equivalent share, as presented on the accompanying Statements of Income is calculated by dividing net income by the weighted average number of common stock and common stock equivalents outstanding during the period, calculated using the treasury stock method in accordance with APB Opinion 15, "Earnings per Share." The Company's common stock equivalents consist of dilutive shares issuable upon the exercise of outstanding common stock options. In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings per Share," superseding Opinion 15. SFAS 128 requires the calculation and disclosure of Basic Earnings per Share and Diluted Earnings per Share, effective for both interim and annual periods ending after December 15, 1997. Basic earnings per share are computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share are computed by dividing net income by the weighted average number of shares of common stock and common stock equivalents outstanding during the period, calculated using the treasury stock method as defined in SFAS 128. In accordance with the provisions of SFAS No. 128, the Company is providing pro forma disclosure of the effects of this accounting change on reported earnings per share (EPS) data as follows: Three months ended Nine months ended September 30, September 30, 1997 1996 1997 1996 ---- ---- ---- ---- Primary EPS as reported. . . . $ 0.19 $ 0.23 $ 0.59 $ 0.63 Effect of SFAS No. 128 . . . . 0.01 0.01 0.02 0.02 ------ ------ ------ ------ Basic EPS as restated . . . . $ 0.20 $ 0.24 $ 0.61 $ 0.65 ------ ------ ------ ------ ------ ------ ------ ------ Primary EPS as reported. . . . $ 0.19 $ 0.23 $ 0.59 $ 0.63 Effect of SFAS No. 128 . . . . 0.01 -- -- -- ------ ------ ------ ------ Diluted EPS as restated . . . $ 0.20 $ 0.23 $ 0.59 $ 0.63 ------ ------ ------ ------ ------ ------ ------ ------ Weighted average common shares outstanding for Basic EPS . . 7,492 6,714 7,347 6,705 Common stock options issuable under treasury stock method. . 285 261 322 267 ------ ------ ------ ------ Weighted average common and common equivalent shares outstanding for Diluted EPS. . 7,777 6,975 7,669 6,972 ------ ------ ------ ------ ------ ------ ------ ------ 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, 1996. 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 SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT, 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, 1996. RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 NET SALES Net sales for the quarter ended September 30, 1997 totaled $12,067, a decrease of $670 or 5% from $12,737 for the third quarter of 1996. Compared to the second quarter of 1997, net sales increased $1,041 or 9% from $11,026. Product sales for the three-month period ended September 30, 1997 amounted to $9,068, which was $1,115 or 11% lower than product sales of $10,183 during the third quarter in 1996, but up $979 or 12% from the quarter ended June 30, 1997. As discussed in the Company's quarterly report for the quarter ended June 30, 1997, product sales decreased during the second quarter of 1997, reflecting the delay of purchasing decisions by a few of the Company's mixed-signal and digital Test Station customers. In response to the second quarter shortfall in product sales, management's emphasis during the third quarter of 1997 was focused on increasing the Company's backlog to the extent possible, in order to reduce the risk of future sales shortfalls. As a result, product sales continued to be less during the third quarter of 1997 than the comparable prior year period. Service and other sales for the third quarter of 1997 amounted to $2,999, up $445 or 17% from $2,554 during the third quarter of 1996. The increase in service and other sales resulted from higher maintenance contract revenue associated with an increase in the installed base of the Company's Test Station products, as well as from growth in sales of Virtual Test Software related services. Sales of Virtual Test Software and related services grew, in dollar terms, more than 50% during the third quarter of 1997, compared to the third quarter of 1996. Virtual Test contributed 13% of the Company's net sales for the three months ended September 30, 1997, compared to 8% for the same period in 1996. During the third quarter of 1997, the Company began shipping its new XTS Test Station, which was announced during the first quarter of 1997, extending the pin count of the Company's Test Stations to a new high of 576 I/O pins. The XTS Test Station contributed 6% of net sales for the three-month period ended September 30, 1997. Actual net sales to be realized in future periods from this new Test Station product are subject to many risks, including those discussed below under "Future Operating Results." Sales to the Company's largest customer, Intel, amounted to 34% of net sales during the third quarter of 1997, as compared to 28% of net sales during the third quarter of 1996. The Company's new distributor for Japan, Ya-Man Ltd., contributed 12% of net sales for the three-month period ended September 30, 1997. During the third quarter of 1996, 18% of net sales were to Advanced Micro Devices, Inc. Customers individually providing less than 10% of net sales generated the remaining 54% of the Company's net sales for the third quarters of both 1997 and 1996. GROSS MARGIN The Company's gross margin of $8,040 in the third quarter of 1997 decreased 3% from $8,290 for the same period of 1996, as a direct result of the revenue decrease discussed above. As a percentage of net sales, gross margin increased to 67% for the three months ended September 30, 1997 from 65% for the three months ended September 30, 1996. The two-percentage-point increase reflects the increase in the proportion of the sales mix of higher-margin Virtual Test software and related services during the third quarter of 1997, as compared to the third quarter of 1996, combined with improved gross margins for the Company's systems service business. The gross margins for the Company's Test Stations were 64% for both of the three-month periods ended September 30, 1997 and 1996. The Company's systems service business yielded gross margin of 67% and 62% during the third quarters of 1997 and 1996, respectively. Sales of the Company's Virtual Test software and related services yielded gross margins of 82% during the third quarters of 1997 and 1996. OPERATING EXPENSES Research, development and engineering expenses increased 3% to $1,806 for the three-month period ended September 30, 1997, from $1,750 for the third quarter of 1996. The increase was principally attributable to spending related to development of the Company's Virtual Test Software related products. Research, development and engineering expenses amounted to 15% of net sales in the quarter ended September 30, 1997, compared to 14% of net sales during the same period in 1996. The increase as a percentage of net sales reflects the increase in dollars spent, combined with the impact of lower net sales discussed above. Selling, general and administrative expenses of $4,163 for the third quarter of 1997 was essentially unchanged as compared to $4,158 for the third quarter of 1996, reflecting management's efforts to control these expenses. As a percentage of net sales, selling, general and administrative expense increased to 34% in the three months ended September 30, 1997, from 33% in the three months ended September 30, 1996. The increase in selling, general and administrative expenses, as a percent of net sales, was primarily due to the decrease in net sales discussed above. OTHER INCOME, NET Other income, net, amounted to $229 in the three months ended September 30, 1997, compared to other income, net of $98 in the quarter ended September 30, 1996. This improvement results primarily from increased interest income generated on higher cash and short-term investment balances resulting from the net proceeds of the Company's secondary public offering of common stock completed in February 1997, as well as cash generated by operating activities during the past year. INCOME TAXES The Company's effective tax rate was 34% for each of the three-month periods ended September 30, 1997 and 1996. The third quarter 1997 effective rate resulted from the application of a 35% effective tax rate against the Company's year-to-date income before income taxes, as compared to the year-to-date rate applied through the first nine months of 1996 of 36.6%. The reduction in the year-to-date effective tax rate reflects recognition of increased research and development credits anticipated for the 1997 tax year, combined with increased tax benefits expected to be realized from the Company's foreign sales corporation. NET INCOME As a result of the various factors discussed above, net income for the third quarter of 1997 decreased 7% to $1,518 or $0.19 per share compared to $1,637 or $0.23 per share for the corresponding period in 1996, but increased 29% from $1,174 or $0.15 per share for the quarter ended June 30, 1997. NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 NET SALES Net sales of $36,373 for the nine-month period ended September 30, 1997 reflected a decrease of $891 or 2% from the first nine months of 1996. The decrease in net sales for the first three quarters of 1997, compared to the same period of 1996, resulted directly from the second quarter 1997 delay of customer purchase decisions for the Company's Test Station products and the impact of management's efforts to build backlog during the third quarter of 1997, as discussed above. Sales of Virtual Test Software and related services grew, in dollar terms, approximately 51% during the first three quarters of 1997, compared to the first nine months of 1996, and generated 12% of the Company's net sales for the nine months ended September 30, 1997, compared to 8% for the same period in 1996. Sales from the Company's systems service business were roughly flat in the first nine months of 1997, as compared to the same period of 1996. During the first quarter of 1997, the Company introduced TestDirect-TM-, a new digital Virtual Test productivity software tool. TestDirect provides test engineers with an automated tool for generating test patterns for automated test equipment from the designer's original simulation environment. This process shortens the overall product development cycle and improves customers' time-to-market. Customer evaluations of a beta version TestDirect began during the first quarter, and continued during the second and third quarters of 1997. Full production release of TestDirect is currently targeted for the fourth quarter of 1997. Also introduced during the first quarter of 1997 was the new XTS Test Station, which extends the pin count of the Company's ATS Test Stations to a new high of 576 I/O pins. The first shipment of the XTS Test Station was made during the third quarter. During the second quarter of 1997, the Company announced the selection of Ya-Man Ltd., a Tokyo, Japan distributor of IC production and test systems as its sole distributor in Japan. Ya-Man will provide sales, marketing, applications engineering and customer service support for IMS' product line of engineering Test Stations, including the XL Family, ATS and XTS Advanced Digital Test Stations, and the MSTS Mixed-Signal Test Station. Actual net sales to be realized in future periods from these new products and new distributor relationship are subject to many risks, including those discussed below under "Future Operating Results." Sales to the Company's largest customer, Intel, amounted to 26% and 38% of net sales, respectively, during the first nine months of 1997 and 1996, respectively. The higher level of sales to Intel during 1996 reflected Intel's pent-up demand during 1996 for the Company's ATS FT Test Stations, which were introduced late in 1995. Customers individually providing less than 10% of net sales generated the remaining 74% and 62% of the Company's net sales for the first three quarters of 1997 and 1996, respectively. GROSS MARGIN The Company's gross margin of $23,916 in the first three quarters of 1997 was essentially unchanged from $23,901 for the same period of 1996. As a percentage of net sales, gross margin increased to 66% for the nine months ended September 30, 1997 from 64% for the nine months ended September 30, 1996. The increase reflects the increase in the proportion of the sales mix of higher-margin Virtual Test software and related services during the first three quarters of 1997 as compared to the first three quarters of 1996. The gross margins for the Company's Test Stations were 64% for the first three quarters of 1997 and 1996. The Company's systems service business yielded gross margin of 63% during the first nine months of 1997, up from 56% during the first half of 1996, reflecting the impact of the cumulative depreciation adjustment of the Company's service parts recorded during the first quarter of 1996. Sales of the Company's Virtual Test software and related services yielded gross margins of 82% and 81% during the first three quarters of 1997 and 1996, respectively. OPERATING EXPENSES Research, development and engineering expenses decreased 5% to $5,408 for the nine months ended September 30, 1997 from $5,667 for the first three quarters of 1996. Research, development and engineering expenses amounted to 15% of net sales in the nine-month periods ended September 30, 1997 and 1996, respectively. The decrease was principally attributable to non-recurring expenses for materials associated with development of certain of the Company's new and future products during the first nine months of 1996, partially offset by increased spending for development of the Company's Virtual Test Software products. Selling, general and administrative expenses of $12,281 for the first three quarters of 1997 increased 7% from $11,462 for the first three quarters of 1996. As a percentage of net sales, selling, general and administrative expense increased to 34% in the nine months ended September 30, 1997 from 31% in the nine months ended September 30, 1996. The increase in the absolute dollar amount of selling, general and administrative expenses reflects the impact of additional headcount in the Company's direct sales function for the Company's Test Station and Virtual Test Software products and services. In addition, selling, general and administrative expenses in the first nine months of 1997 were higher as a percent of net sales due to the decrease in net sales discussed above. OTHER INCOME, NET Other income, net, amounted to $723 in the nine months ended September 30, 1997, compared to $135 in the nine months ended September 30, 1996. This improvement reflects increased interest income generated on higher cash balances resulting from the net proceeds of the Company's secondary public offering of common stock completed in February 1997, as well as cash generated by operating activities during the past year. In addition, other income, net for the first three quarters of 1996 included the non-recurring write-off of expenses associated with the withdrawal of the Company's proposed public stock offering during the second quarter of 1996. INCOME TAXES The Company's effective tax rate was 35% for the nine-month period ended September 30, 1997 and 36.6% for the nine months ended September 30, 1996. The reduction in the effective tax rate reflects recognition of increased research and development credits anticipated for the 1997 tax year, combined with increased tax benefits expected to be realized from the Company's foreign sales corporation, and lower state income taxes. NET INCOME As a result of the various factors discussed above, net income for the first three quarters of 1997 increased 3% to $4,517 ($0.59 per share) compared to $4,381 ($0.63 per share) for the corresponding period in 1996. FUTURE OPERATING RESULTS As discussed in the Company's quarterly report for the period ended June 30, 1997, Company management has put into effect a plan for a methodical return to quarterly net sales and net income levels similar to historical results achieved by the Company prior to the second quarter of 1997. A key element of this plan is management's emphasis on increasing the Company's customer order backlog, in order to reduce the potential impact on the Company's results of operations associated with delays of customer orders similar to those experienced in the second quarter of 1997, and the other business risks discussed below. In the near term, management's focus on building backlog is expected to result in year-to-year growth rates for net sales and net income lower than the growth rates achieved by the Company during 1996 and the first quarter of 1997. 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, including, but not limited to the following. Sales of the Company's products to Intel are expected to continue to account for a significant percentage of net sales over the foreseeable future. Any sudden reduction or loss of orders from Intel could have a material adverse impact on the Company's business, 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. A few of these suppliers are small independent companies which could expose the Company to increased risks of delivery problems for certain key components. The Company is dependent on high-dollar customer orders, deriving a substantial portion of its net sales from the sale of Test Stations which typically range in price from $0.2 to $1.2 million per unit and may be priced as high as $1.8 million for a single unit. A substantial portion of the Company's net sales are typically realized in the last few weeks of each quarter. As evidenced by the impact of the second quarter 1997 delay of orders for the Company's Test Station products discussed above, 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. A significant portion of the Company's operating expenses are 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 such revenue shortfall on the Company's results of operations. 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, 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. Results of operations for the periods discussed above should not be considered indicative of the results to be expected for any future period, and fluctuations in the operating results may also result in fluctuations in the market price of the Company's common stock. As discussed above, the Company's results of operations were adversely impacted by the timing of the receipt and shipment of a few orders for the Company's Test Station products during the second quarter of 1997. No assurance can be given that this risk will not recur, or that other risks faced by the Company will not affect the Company's financial position or results of operations in future periods. LIQUIDITY AND CAPITAL RESOURCES As of September 30, 1997, the Company's principal sources of liquidity consisted of cash, cash equivalents and short-term investments of $25.1 million, and funds available under an existing bank line of credit of $10.0 million. The Company's net cash provided by operating activities increased to $6.3 million during the first nine months of 1997 from $4.1 million for the nine-month period ended September 30, 1996. Cash received from customers increased 9% from $34.6 million during the first three quarters of 1996 to $37.6 million during the first nine months of 1997. Combined payments to suppliers and employees increased 2% from $29.6 million during the first nine months of 1996 to $30.1 million for the first nine months of 1997. The increases in cash received from customers reflects the collection of amounts due from customers resulting from sales during the last quarter of 1996 and first quarter of 1997, which were higher than the net sales in the corresponding periods one year earlier. The increases in payments to suppliers and employees are directly related to increases in the Company's inventories and operating expenses. The Company's trade receivables and net receivables from Cadence decreased to a combined $12.8 million at September 30, 1997 from $13.5 million at December 31, 1996, reflecting the decrease in net sales discussed above, and the settlement of amounts due from Cadence late in the third quarter of 1997, which resulted in a net payable to Cadence at September 30, 1997. Inventories grew by $2.4 million during the first nine months of 1997, reflecting the introduction of the Company's MSTS and XTS Test Stations. The decrease in accounts payable and accrued liabilities since December 31, 1996, reflects lower inventory and capital equipment purchases during the third quarter of 1997, as compared to the fourth quarter of 1996. The increase in deferred revenue reflects the increase in systems maintenance agreements as the installed base of the Company's Test Station products grows. During the first nine months of 1997, the Company invested $2.8 million in property, plant and equipment as necessary to develop and distribute new and enhanced Test Station and Virtual Test products. Capitalization of software development costs amounted to $720 during the first three quarters of 1997, as compared to related amortization of $558. The Company completed a secondary public offering of its Common Stock in February 1997, yielding net proceeds, after payment of underwriting commissions and expenses associated with the offering, of $13.4 million. During the first nine months of 1997, the Company realized reductions in current tax liabilities of $1,873 resulting from the benefit of tax deductions of employee gains upon exercise of stock options. Of this amount, $1,757 resulted from the exercise of stock options of Cadence Design Systems, Inc. (Cadence), the Company's former majority shareholder. The remaining $116 resulted from the exercise of employee stock options for the purchase of the Company's Common Stock. The noncash benefit of the stock option deduction is reflected as an increase to Additional Paid-in Capital in the accompanying Balance Sheets. 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 the Company's Common Stock outstanding. The tax benefits realized from the stock option deduction are expected to decrease in the future as employee holdings of Cadence stock options decline 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 and the Company's common stock. Any possible 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. The Company believes that cash on hand and cash generated from operations, as well as cash available from the Company's existing $10.0 million short-term line of credit, will be sufficient to meet the Company's working capital and other cash requirements for at least the next twelve months. There are currently no borrowings against the short-term line of credit. Company management is continually evaluating opportunities to develop and introduce new products, and to acquire complementary businesses or technologies. At present, the Company has no significant understandings, commitments or agreements with respect to any such opportunities. Any transactions resulting from such opportunities, if consummated, may require the use of some of the Company's cash or necessitate funding from other sources. PART II OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES During the quarter ended September 30, 1997, 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 (a) Exhibits (exhibit reference numbers refer to Item 601 of Regulation S-K) 27. Financial Data Schedule (b) Reports on Form 8-K: One report on Form 8-K was filed on July 2, 1997, and is incorporated herein by reference. The contents of the report are summarized below: On July 2, 1997, Integrated Measurement Systems, Inc. announced that it expects the second quarter results will be below analysts' consensus expectations. 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 10, 1997. INTEGRATED MEASUREMENT SYSTEMS, INC. (Registrant) /s/ Sar Ramadan ----------------- Sar Ramadan On behalf of the Registrant, and as Principal Financial Officer EX-27 2 EXHIBIT 27 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE INCOME STATEMENT FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1997, AND THE BALANCE SHEET AS OF SPETEMBER 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 13,833 11,311 13,399 629 10,336 51,847 17,017 10,149 64,637 7,517 185 0 0 75 55,659 64,637 27,902 36,373 9,687 12,457 17,689 0 33 6,950 2,433 4,517 0 0 0 4,517 .59 .59
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