-----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, LYPsC9pHaabAlslbCf2DNEZuhSk6R50S+Sh0FHZTr2LxAIpFH/J5D1jA4WimQc2r C4N+nSZTGIKln3ovZ5+xNA== 0001047469-98-041267.txt : 19981118 0001047469-98-041267.hdr.sgml : 19981118 ACCESSION NUMBER: 0001047469-98-041267 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 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: 98752104 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, 1998 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, former address, and former fiscal year, if changed since last report Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __X____ No ________ At October 31, 1998, there were 7,425,816 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, 1998 and 1997 ................... 3 Consolidated Balance Sheets as of September 30, 1998 and December 31, 1997 ............................................... 4 Consolidated Statements of Cash Flows for the nine months ended September 30, 1998 and 1997 ............................... 5 Notes to the Financial Statements ................................ 6-8 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition .................. 9-14 PART II OTHER INFORMATION Item 2. Changes in Securities. ........................................... 15 Item 6. Exhibits and Reports on Form 8-K. ................................ 15 SIGNATURES ....................................................................... 16
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, 1998 1997 1998 1997 SALES: Systems .................................. $ 6,310 $ 8,215 $ 16,117 $ 25,302 Software ................................. 961 853 3,458 2,600 Service .................................. 2,202 2,999 6,797 8,471 Net sales ............................. 9,473 12,067 26,372 36,373 COST OF SALES: Systems .................................. 4,339 3,068 7,679 9,532 Software ................................. 153 56 560 155 Service .................................. 1,055 903 2,971 2,770 Total cost of sales ................... 5,547 4,027 11,210 12,457 Gross margin .......................... 3,926 8,040 15,162 23,916 OPERATING EXPENSES: Research, development and engineering .... 1,607 1,806 5,057 5,408 Selling, general and administrative ...... 4,515 4,163 12,767 12,281 Merger & restructuring ................... 1,508 -- 1,508 -- Total operating expenses .............. 7,630 5,969 19,332 17,689 Operating income (loss) ............... (3,704) 2,071 (4,170) 6,227 Other income, net .......................... 216 229 618 723 Income (loss) before income taxes .......... (3,488) 2,300 (3,552) 6,950 Provision for (benefit from) income taxes .. (138) 782 (162) 2,433 Net income (loss) $ .................. (3,350) $ 1,518 $ (3,390) $ 4,517 Basic earnings (loss) per share $ .......... (0.45) $ 0.20 $ (0.45) $ 0.61 Diluted earnings (loss) per share .......... $ (0.45) $ 0.20 $ (0.45) $ 0.59 Weighted average number of common shares outstanding for basic earnings per share 7,483 7,492 7,519 7,347 Incremental shares from assumed conversions of employee stock options ................ 0 285 0 322 Adjusted weighted average shares for diluted earnings per share ....................... 7,483 7,777 7,519 7,669
See accompanying notes to unaudited financial statements Integrated Measurement Systems, Inc. and Subsidiaries Consolidated Balance Sheets (In thousands, except per share data)
As of As of September 30, December 31, 1998 1997 (Unaudited) ASSETS Current assets: Cash and cash equivalents .................................... $ 5,575 $17,464 Short-term investments ....................................... 7,546 8,371 Trade receivables, less allowance for doubtful accounts of $502 and $577 ..................................... 12,985 10,582 Receivable from Cadence, net ................................. -- 219 Inventories, net ............................................. 15,017 11,311 Income taxes receivable ...................................... 488 336 Deferred income taxes ........................................ 2,288 1,637 Prepaid expenses and other current assets .................... 2,279 2,428 ------- ------- Total current assets ................................. 46,178 52,348 Property, plant and equipment, net ........................... 9,647 7,418 Service spare parts, net ..................................... 3,674 3,395 Other assets, net ............................................ 4,086 2,362 ------- ------- Total assets ......................................... $63,585 $65,523 ------- ------- ------- ------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable ............................................. $ 2,372 $ 2,321 Payable to Cadence, net ...................................... 541 -- Accrued compensation ......................................... 1,341 1,354 Accrued warranty ............................................. 248 442 Deferred revenue ............................................. 1,842 1,852 Other current liabilities .................................... 1,025 475 Capital lease obligations - current .......................... 335 181 ------- ------- Total current liabilities .................................... 7,704 6,625 Deferred income taxes ........................................ 984 483 Capital lease obligations, net of current portion ............ 468 152 Deferred compensation ........................................ 952 830 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 7,430,816 and 7,521,393 ....... 74 75 Additional paid-in capital ................................... 39,472 40,037 Retained earnings ............................................ 13,931 17,321 ------- ------- Total shareholders' equity ........................... 53,477 57,433 ------- ------- Total liabilities and shareholders' equity ........... $63,585 $65,523 ------- ------- ------- -------
See accompanying notes to unaudited financial statements. Integrated Measurement Systems, Inc. and Subsidiaries Consolidated Statements of Cash Flows (In thousands) (Unaudited)
Nine Months Ended September 30, 1998 1997 Cash flows from operating activities: Net income .................................................... $ (3,390) $ 4,517 Adjustments to reconcile net income to cash (used in) provided by operating activities: Acquired in-process research and development ............... 861 -- Depreciation and amortization .............................. 3,089 2,882 Provision for deferred income taxes ........................ (150) (147) Capital contribution from Cadence .......................... -- 284 Deferred compensation ...................................... 122 197 Net change in payable to or receivable from Cadence ........... 760 2,524 Increase in trade receivables ................................. (2,403) (1,418) Increase in inventories ....................................... (3,501) (2,396) Increase (decrease) in prepaid expenses and other current assets ................................................ 149 (711) Net change in income taxes payable or receivable .............. (152) 1,304 Increase (decrease) in accounts payable and accrued liabilities 226 (983) (Decrease) increase in deferred revenue ....................... (10) 97 -------- -------- Net cash (used in) provided by operating activities ........... (4,399) 6,150 -------- -------- Cash flows from investing activities: Acquisition of PerformIC ...................................... (1,060) -- Purchases of short-term investments ........................... (5,840) (11,311) Sales of short-term investments ............................... 6,665 -- Purchases of equipment and software ........................... (3,911) (2,779) Purchases of service spare parts .............................. (782) (1,047) Software development costs .................................... (1,778) (720) -------- -------- Net cash used in investing activities ......................... (6,706) (15,857) -------- -------- Cash flows from financing activities: Principal payments under capital leases ....................... (136) (206) Net proceeds from public stock offering ....................... -- 13,367 Proceeds from employee stock plans ............................ 469 834 Repurchase of common stock .................................... (1,117) -- -------- -------- Net cash (used in) provided by financing activities ........... (784) 13,995 -------- -------- Net (decrease) increase in cash and cash equivalents .......... (11,889) 4,288 Beginning cash and cash equivalents balance ................... 17,464 9,545 -------- -------- Ending cash and cash equivalents balance ...................... $ 5,575 $ 13,833 -------- -------- -------- -------- Supplemental Schedule of Non-cash Financing Activities: Purchase of assets through capital lease ...................... $ 33 $ 59 Tax benefit from Cadence and IMS stock options ................ $ -- $ 1,873 Other Supplemental Cash Flow disclosures: Income taxes paid ............................................. $ 110 $ 1,275 Interest paid ................................................. $ 19 $ 33
See accompanying notes to unaudited financial statements. Integrated Measurement Systems, Inc. Notes to the Financial Statements (In thousands, except share data) (Unaudited) (1) Recent Events On September 3, 1998, the Company acquired all of the assets of PerformIC for a cash price of $1,435 of which $1,060 has been paid. The remaining $375 will be paid in accordance with the terms of the acquisition agreement between now and September 3, 1999. PerformIC, located in Dresden, Germany, is a developer of technologies aimed at addressing the engineering test needs of memory manufacturers. The transaction was accounted for as a purchase. In connection with the purchase price allocation, the Company allocated a portion of the purchase price to acquired in-process research and development. At that time, the development of these products had not reached technological feasibility and the technology was believed to have no alternative future use. In accordance with generally accepted accounting principals, a one-time charge for in-process research and development of $861 has been reflected in the accompanying Consolidated Statements of Operations as merger and restructuring costs. In addition, royalties will be payable on future revenues derived from the acquired technology for up to five years from the date of acquisition. The nature of efforts required to develop the purchased in-process technology into commercially viable products principally relate to the completion of all planning, designing, prototyping, verification and testing activities that are necessary to establish that the products can be produced to meet its design specifications, including functions, features and technical performance requirements. The Company currently believes that the research and development efforts will result in commercially feasible products in the next 12 months at an estimated cost of approximately $1.5 million. Pro forma combined income statement data for the periods ended September 30, 1998 and 1997 was not materially different from results presented in the accompanying Consolidated Statements of Operations. 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 restructuring charge of $2,688 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, writedowns of inventory made obsolete by the acquisition of PerformIC, and associated legal and consulting costs. Charges affecting inventories of $2,041 have been classified in Systems Cost of Sales in the accompanying Statements of Operations. The remainder of the restructuring expenses were recorded as merger and restructuring expense in operating expenses. The following is an analysis of the restructuring charge and reserves at September 30, 1998:
Inventory write-downs $2,041 Employee severance 81 Distributor termination costs & other 566 ------ $2,688 ------ ------
Approximately $400 of the restructuring costs have not been paid and are included in other current liabilities in the accompanying Balance Sheets as of September 30, 1998. (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, 1998 1997 Raw materials ............... $10,010 $ 5,780 Work-in-progress ............ 2,926 4,037 Finished goods .............. 2,081 1,494 ------- ------- $15,017 $11,311 ------- ------- ------- -------
(3) New Accounting Pronouncements In July 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income." The statement is effective for the Company's fiscal year ending December 31, 1998. SFAS 130 sets standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Comprehensive income is the total of net income and all other non-owner changes in equity. The only non-owner changes in equity recorded by the Company have been unrealized holding gains/losses on short-term investment securities classified as available-for-sale under SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities," and foreign currency translation adjustment resulting from translation of subsidiary financial statements into US dollars from the local currencies in which the subsidiary financial statements are maintained. These adjustments were not material, and therefore have not been reported separately in the accompanying financial statements. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 establishes accounting and reporting standards for all derivative instruments. SFAS 133 is effective for fiscal years beginning after June 15, 1999. The Company does not have any derivative instruments and, accordingly, the adoption of SFAS 133 has had no impact on the Company's financial position or results of operations. (4) 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, 1997 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. Certain reclassifications have been made to prior year amounts to conform to the current year presentation. (5) Earnings per Share Earnings per share amounts presented in the accompanying Statements of Operations 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 would have been anti-dilutive.
1998 1997 Three months ended September 30, ...... 1,759,112 31,950 Nine months ended September 30, ....... 1,759,112 17,950
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (All numerical references are in thousands, except for percentages and 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, 1997. This Quarterly Report, including the following discussion and analysis of financial condition and results of operations, contains certain statements, trend analyses and other information that constitute "forward-looking statements" within the meaning 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 in such forward looking statements 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, 1997. RECENT EVENTS On September 3, 1998, the Company acquired all of the assets of PerformIC for a cash price of $1,435 of which $1,060 has been paid. The remaining $375 will be paid in accordance with the terms of the acquisition agreement between now and September 3, 1999. PerformIC, located in Dresden, Germany, is a developer of technologies aimed at addressing the engineering test needs of memory manufacturers. The transaction was accounted for as a purchase. In connection with the purchase price allocation, the Company allocated a portion of the purchase price to acquired in-process research and development. At that time, the development of these products had not reached technological feasibility and the technology was believed to have no alternative future use. In accordance with generally accepted accounting principals, a one-time charge for in-process research and development of $861 has been reflected in the accompanying Consolidated Statements of Operations as merger and restructuring costs. In addition, royalties will be payable on future revenues derived from the acquired technology for up to five years from the date of acquisition. The nature of efforts required to develop the purchased in-process technology into commercially viable products principally relate to the completion of all planning, designing, prototyping, verification and testing activities that are necessary to establish that the products can be produced to meet its design specifications, including functions, features and technical performance requirements. The Company currently believes that the research and development efforts will result in commercially feasible products in the next 12 months at an estimated cost of approximately $1.5 million. Pro forma combined income statement data for the periods ended September 30, 1998 and 1997 was not materially different from results presented in the accompanying Consolidated Statements of Operations. 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 restructuring charge of $2,688 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, writedowns of inventory made obsolete by the acquisition of PerformIC, and associated legal and consulting costs. Charges affecting inventories of $2,041 have been classified in Systems Cost of Sales in the accompanying Consolidated Statements of Operations. The remainder of the restructuring expenses were recorded as merger and restructuring expense in operating expenses. RESULTS OF OPERATIONS Three Months Ended September 30, 1998 and 1997 Net Sales Net sales of $9,473 for the three-month period ended September 30, 1998 reflected a decrease of $2,594 or 21% from the third quarter of 1997. The decline in net sales reflects a slowdown in capital spending for the Company's prototype verification systems by certain of the Company's customers during the third quarter of 1998, as compared to net sales in the third quarter of 1997. For the third quarter of 1998, one customer accounted for 11% of net sales. During the third quarter of 1997, two other customers accounted for 34% and 12% of net sales, respectively. Sales to the Company's customers in international markets improved significantly, accounting for $4,847 or 51% of net sales during the third quarter of 1998, compared to $3,184 or 26% of net sales in the third quarter of 1997. Systems sales decreased $1,905 or 23% in the third quarter of 1998, as compared to the third quarter of 1997, primarily due to the slowdown in capital spending cited above. Software sales increased $108 or 13% in the three months ended September 30, 1998, from the same period in 1997, due primarily to increased sales of Virtual Test Software products. Sales of services declined $797 or 27% during the third quarter of 1998 from the third quarter of 1997, predominantly because certain Virtual Test consulting services contracts were completed during the latter part of 1997. In July 1998, the Company announced the first of a new family of advanced prototype verification systems, designated ElectraTM, for mixed-signal IC design verification, characterization, yield enhancement and failure analysis. In October 1998, the Company announced the availability of Vanguard-TM-, its new 500 MHz prototype verification system for complex high-speed digital integrated circuits. Actual net sales to be realized in future periods from these new products are subject to many risks, including those discussed below under "Future Operating Results." Gross Margin The Company's gross margin of $3,926 in the third quarter of 1998 decreased $4,114 or 51% from $8,040 for the same period of 1997. Contributing to this decline were charges to Systems Costs of Sales of $2,041 resulting from the acquisition and restructuring activities discussed above. The remaining reduction in gross margin resulted primarily from the shortfall in net sales previously mentioned. As a percentage of net sales, gross margin, excluding the acquisition and restructuring charges discussed above, was 63% of net sales for the third quarter of 1998, compared to 67% for the third quarter of 1997. The drop in gross margin percentage resulted primarily from increased service cost of sales, while sales of services was lower. Operating Expenses Research, development and engineering (R&D) expenses amounted to $1,607 for the three months ended September 30, 1998, compared to $1,806 for the same period in 1997. R&D expenses amounted to 17% of net sales in the three months ended September 30, 1998, compared to 15% in the three months ended September 30, 1997. The increase in R&D spending as a percent of net sales was attributable to the decline in net sales relative to prior year levels discussed above. Capitalization of software development costs amounted to $675 during the third quarter of 1998, compared to $362 during the third quarter of 1997, reflecting significant investment in software technology to be included in future new products currently under development. Spending for research and development is expected to increase beginning in the fourth quarter of 1998, as a direct result of the acquisition of the technology and assets of PerformIC discussed above. Selling, general and administrative expenses of $4,515 for the third quarter of 1998 increased $352 or 8% from $4,163 in the third quarter of 1997. As a percentage of net sales, selling, general and administrative expense increased to 48% in the three months ended September 30, 1998 from 35% in the three months ended September 30, 1997. The increase in selling, general and administrative expenses as a percent of net sales reflects the decrease in net sales discussed above, combined with the impact of more expensive commissions to international distributors during the third quarter of 1998 as a result of the increase in international sales discussed above. Spending for selling, general and administrative expenses is expected to increase beginning in the fourth quarter of 1998, as a direct result of the PerformIC acquisition discussed above. Other Income, net Other income, net decreased slightly to $216 in the three months ended September 30, 1998, from $229 in the quarter ended September 30, 1997, due primarily to reduced earnings on lower average cash and short-term investment balances. Income Taxes The Company's effective tax rate was 4% for the three-month period ended September 30, 1998 and 34% for the three months ended September 30, 1997. The lower effective tax rate for the third quarter of 1998 reflects the effect of losses in certain international tax jurisdictions, combined with the recording of a valuation allowance against a portion of the anticipated net operating loss carryforward arising during 1998. This lower tax rate is anticipated to continue through the end of 1998. In future years, the tax rate is currently anticipated to be between 30% and 34%, depending primarily upon the geographic mix of the Company's sales in future periods. Net Income As a result of the various factors discussed above, the diluted net loss per share of $0.45 for the third quarter of 1998 compared to diluted net income per share of $0.20 in the same period of 1997. Exclusive of the third quarter 1998 charges discussed above relating to the acquisition and restructuring activities discussed above, the Company would have realized diluted earnings per share of $0.01 during the third quarter of 1998. Nine Months Ended September 30, 1998 and 1997 Net Sales Net sales of $26,372 for the nine-month period ended September 30, 1998 reflected a decrease of $10,001 or 27% from the first nine months of 1997. The decline in net sales reflects the continued slowdown in capital spending for the Company's Test Station systems by the Company's customers during the first nine months of 1998, as compared to the similar period in 1997. Many of the Company's semiconductor manufacturing customers have reduced, delayed or frozen capital spending during the first nine months of 1998 due to overall industry economic conditions. For the first nine months of 1998, the Company's largest customer accounted for 17% of net sales, compared to 26% for the same period in 1997. Systems sales decreased $9,185 or 36% in the nine months ended September 30, 1998, as compared to the nine months ended September 30, 1997, primarily due to the slowdown in customer capital spending cited above. Software sales increased $858 or 33% in the first nine months of 1998, from the same period in 1997, due primarily to an increase sales of Virtual Test Software products. Sales of services declined $1,674 or 20% during the first nine months of 1998 from the first nine months of 1997, due primarily to the completion of certain Virtual Test consulting services contracts during the latter part of 1997. Gross Margin The Company's gross margin of $15,162 in the first nine months of 1998 decreased 37% from $23,916 for the same period of 1997, as a direct result of the decrease in net sales discussed above and the acquisition and restructuring charges recorded in System Cost of Sales discussed earlier. Without these charges, the Company's gross margin would have decreased 28% during the nine months ended September 30, 1998, as compared to the similar period in 1997. As a percentage of net sales, gross margin, excluding acquisition and restructuring related charges, decreased to 65% of net sales for the first nine months of 1998, from 66% of net sales for the first nine months of 1997. Higher gross margin from sales of prototype verification systems nearly offset reduced gross margin from sales of services. Operating Expenses Research, development and engineering (R&D) expenses amounted to $5,057 for the nine months ended September 30, 1998, compared to $5,408 for the same period in 1997. R&D expenses amounted to 19% of net sales in the nine months ended September 30, 1998, compared to 15% in the nine months ended September 30, 1997. The increase in R&D spending as a percent of net sales was attributable to decline in net sales relative to prior year levels discussed above. In addition, capitalization of software development costs increased during the first nine months of 1998 to $1,778, compared to $720 during the similar period in 1997, reflecting significant investment in software technology to be included in products currently under development. The increase in software capitalization was partially offset by higher costs associated with headcount increases required to implement the Company's plans for development of new systems and software products. Selling, general and administrative expenses of $12,767 for the first nine months of 1998 increased $486 or 4% from $12,281 in the first nine months of 1997, as a result of investments in the Company's distribution infrastructure, combined with increased commissions to international distributors. As a percentage of net sales, selling, general and administrative expense increased to 48% in the nine months ended September 30, 1998 from 34% in the nine months ended September 30, 1997. The increase in selling, general and administrative expenses as a percent of net sales reflects the decrease in net sales discussed above, as well as higher commissions to international distributors. Other Income, net Other income, net, decreased to $618 in the nine months ended September 30, 1998, from $723 in the nine months ended September 30, 1997, primarily due to the impact of lower pre-tax returns from investments in non-taxable municipal debt obligations, combined with slightly lower average cash and short-term investment balances during 1998. Income Taxes The Company's effective tax rate was 5% for the nine-month period ended September 30, 1998 and 35% for the nine months ended September 30, 1997. The lower effective tax rate for 1998 reflects the effect of losses in certain international tax jurisdictions, combined with the recording of a valuation allowance against a portion of the anticipated net operating loss carryforward arising during 1998. This lower tax rate is anticipated to continue through the end of 1998. In future years, the tax rate is currently anticipated to be between 30% and 34%, depending primarily upon the geographic mix of the Company's sales in future periods. Net Income As a result of the various factors discussed above, the diluted net loss per share of $0.45 for the first nine months of 1998 compared to diluted net income per share of $0.59 in the same period of 1997. Exclusive of the third quarter 1998 charges discussed above relating to the acquisition and restructuring activities discussed above, the Company would have essentially broken even for the first nine months of 1998. Future Operating Results Like most high technology companies, the Company faces certain business risks that could have material adverse effects on the Company's results of operations, including, but not limited to the following. Sales of the Company's products to a limited number of customers are expected to continue to account for a significant percentage of net sales over the foreseeable future. Any significant reduction or loss of orders from any major customer 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 Company is dependent on high-dollar customer orders, deriving a substantial portion of its net sales from the sale of prototype verification systems which typically range in price from $0.2 to $2.0 million per unit. A substantial portion of the Company's net sales is typically realized in the last few weeks of each quarter. As a result, the timing of the receipt and shipment of a single order can have a material impact on the Company's net sales and results of operations for a particular quarter. Therefore, 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. Most 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 other influences, including those driven by rapid technological changes, operating in a highly competitive and cyclical industry, a lengthy sales cycle, foreign currency fluctuations, and changes in 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 return to profitability in the near future. 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. Year 2000 The Company is in the process of assessing its Year 2000 (Y2K) issues. The Company's plan for assessing Y2K readiness includes 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 is requesting sufficient information from each of them to assess their Y2K readiness. To-date, the Company has completed an initial review of its current products and believes them to be free of any problems associated with the year 2000. However, testing of these current products, and of earlier-version products sold to customers, has not yet been completed. The Company is currently in the process of formulating specific plans for product testing, and plans to conduct such testing during the next several quarters. The Company is also in the process of assessing its Y2K readiness with respect to its information systems. Initial reviews have not identified any significant information systems Y2K issues beyond those which will be corrected through implementation of previously planned systems upgrades. Plans for testing of the Company's information systems are currently being developed. Until the Company completes previously planned upgrades to its information systems, testing of the Company's products and information systems, and assessment of the Y2K readiness of the Company's critical vendors and suppliers, the costs to address the Company's Year 2000 readiness cannot be determined with certainty. Failure to identify and/or adequately address any significant Y2K issue with respect to the Company's products, information systems or vendors and suppliers could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the Company has not yet determined a most reasonably likely worst case scenario relating to Y2K readiness, and has not commenced development of a contingency plan to address such worst case scenario. At this time, no assurance can be given that the Company will incur no adverse effects resulting from such Y2K issues, and that such effect will not be material to the Company's business, results of operations, or financial condition. LIQUIDITY AND CAPITAL RESOURCES As of September 30, 1998, the Company's principal sources of liquidity consisted of cash and short-term investments of approximately $13.1 million, and funds available under an existing bank line of credit of $10.0 million. To-date there have been no borrowings against the Company's bank line of credit. The Company's operating activities used cash during the nine months ended September 30, 1998 of $4.4 million, compared to providing cash of $6.2 million for the same period last year. This change was primarily attributable to lower collections from customers resulting from lower net sales and extended payment terms, combined with increases in inventories associated with new product introductions in the second half of 1998. The Company's trade receivables have increased to $13.0 million from $10.6 million since December 31, 1997, reflecting the effect of extended payment terms granted to certain customers and distributors, primarily in Asia. Inventories have grown by $3.5 million during the first nine months of 1998, reflecting the production of Test Station systems manufactured, but not shipped as a result of the reduction in net sales discussed above, as well as purchases of materials for new Test Station products planned for introduction later in 1998. During the first nine months of 1998, the Company invested $6.5 million in equipment, purchased software, service spare parts and software development costs, as necessary to develop, distribute and service new and existing Test Station and Virtual Test products. During the third quarter of 1998, the Company made payments of approximately $1.1 million for the acquisition of the technology and assets of PerformIC. During the second quarter of 1998, the Company announced that it intends to repurchase up to 500,000 shares of its currently outstanding common stock over the next 12 months in open market and negotiated transactions. This repurchase program authorizes the repurchase of shares in increments in accordance with SEC regulations and Board of Directors' guidance. As of September 30, 1998, this program had resulted in the repurchase of 145,500 shares at a total cost of $1.1 million. This program will continue in future periods, subject to continued authorization by the Board of Directors. 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 Company's working capital and other cash requirements for at least the next twelve months. 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 understandings, commitments or agreements with respect to any such opportunities other than the PerformIC acquisition discussed above. 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, 1998, 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) 10. Purchase Agreement between Integrated Measurement Systems S.A. and Dr. Hans-Martin Muhlhoff (Perform IC) 27. Financial Data Schedule (b) Reports on Form 8-K: No reports on Form 8-K were filed during the quarter ended September 30, 1998. 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 16, 1998. INTEGRATED MEASUREMENT SYSTEMS, INC. (Registrant) /s/ KEITH BARNES ----------------------------------- Keith Barnes President and Chief Executive Officer (on behalf of the Registrant) /s/ FRED HALL ----------------------------------- Fred Hall Chief Financial Officer (as Principal Financial Officer) EX-10.0 2 EXHIBIT 10.0 Purchase Agreement between Integrated Measurement Systems Europe S.A. and Dr. Hans-Martin Muhlhoff (PerformIC) PURCHASE AGREEMENT between Integrated Measurement Systems Europe S.A. Jambe Ducommun 6 a CH-2400 Le Locle in the following referred to as "Purchaser" and Dr. Hans-Martin Muhlhoff Meissner Str. 13 01462 Niederwartha in the following referred to as "Vendor" Vendor developed certain technologies and products as described in Exhibit A (in the following referred to as "PerformIC memory tester") and is developing certain related technologies; and Purchaser desires to acquire the PerformIC memory tester and the said technology. Now, therefore, in consideration of the letter of intent, Purchaser and Vendor hereby agree on the following purchase agreement ("Agreement"): SUBJECT OF THE CONTRACT 1.1. The Vendor sells and assigns to the Purchaser the exclusive rights to the PerformIC memory tester described in Exhibit A, including the source code, know how, intellectual property rights and the related documentation. 1.2. The vendor sells and assigns to the Purchaser all additional technologies, in particular the Rambus test technology, and other products developed as per Closing Date, including the source code, know how, intellectual property rights and the related documentation. 1.3. The Vendor sells to the Purchaser two PerformIC systems and the assets as listed separately in Exhibit B and all assets aquired in the course of business until Closing Date (in the following commonly referred to as "assets"). Transfer of Title The parties agree herewith on the transfer of titles and rights on Closing Date. TRANSFER OF DOCUMENTS for manufacturing of the Tester The Vendor submits to the Purchaser on Closing Date all written scientific or technical documents, tabulations, experimental reports, drawing and plans as well as the systems and prototypes (in the following referred to as "Documents"), which enables Purchaser to manufacture the PerformIC memory tester and which are listed in Exhibit C or which are additional written, constucted etc. until Closing Date. 4. Closing Date Closing Date will be the 3rd of September 1998. 5. PURCHASE PRICE 5.1. The purchase price for the PerformIC memory tester, the PerformIC systems and additional technologies including Rambus test technology shall be USD 1,025,000.- payable in three instalments. The first instalment in the amount of USD 400,000.- shall be payable within 7 days after signature of the Agreement. The second instalment in the amount of USD 500,000.- shall be payable on Closing Date. The third instalment in the amount of USD 125,000.- shall be payable at the end of 1998, but not prior to the complete transfer and acceptance of the sold technologies, including the Rambus test technology. In addition Purchaser will pay a commission of 5 % of the net price (end user price) to the Vendor for any PerformIC systems (Exhibit A) sold by Purchaser or related companies up to a period of three years from Closing Date. Furthermore Purchaser will pay a commission of 2.5 % of the net price (end user price) to the Vendor for any product based on the Rambus test technology sold by Purchaser or related companies up to a period of five years from Closing Date. The commission shall be due quarterly at the end of each quarter following customer acceptance of the system. Any commission has to be paid in USD. 5.2. The purchase price for the assets shall be USD 250,000.-. The purchase price shall be payable on Closing Date, but not prior to delivery and acceptance by the Purchaser. 5.3. All payments are payable plus statutory VAT, if applicable. 6. WARRANTY 6.1. Warranty related to section 1 para. 1 and 2 Vendor warrants that Vendor is the owner of all rights, title, and interest in and to the PerformIC memory tester and the sold technology or has appropriate licensing rights; in particular the use of the PerformIC memory tester does not infringe patents, copyrights or other intellectual property rights of third parties and that there are no claims, disputes, or proceedings pending or anticipated which affect either the rights granted to Purchaser hereunder or the warranties and representation made to Purchaser hereunder. The Documents (section 3) are complete and correct. The Vendor is liable for the technical utility and completeness of the Documents. The documents will enable Purchaser to apply for the respective patents. 6.2. Warranty related to the PerformIC systems and the assets For the purchase of the two PerformIC systems and the assets the statutory liability (Sections 459 ff German Civil Code) shall apply. 6.3. Warranty related to Vendor's Employees Apart from the persons named in Exhibit D, Vendor's employs no employees or freelancers of any kind (e.g. workers released from their duties, freelance staff). The information stated in the Exhibit referring to employment contracts, in particular remuneration, is correct and complete. The information presented in the Annexes specified, consisting of data material to assessments in the field of labor law, and hence, in particular, the person's date of birth, date of appointment, payment on an individual contract basis, and fringe benefits, is correct and complete. In so far as it is known, correct and complete information has been supplied of special characteristics (e.g. the condition of being severely handicapped). No Commitments for pensions and retirement benefits have been made. No profit-sharing agreements have been made except for those mentioned in Exhibit D. All payroll taxes and social security contributions are paid in time. 6.4. General warranties All assets referred to in this Agreement are the unrestricted property of the Vendor, are free of third-party rights, and are subject to no restrictions on disposal. The Vendor represents that the sold assets are not his sole or nearly sole property (Section 419 German Civil Code) and the restriction of Section 1365 German Civil Code does not apply. 7. LIABILITY In case of breach of this Agreement, particulary of warranties as included in this Agreement a reduction of the purchase price, or a claim for damages can be asserted exclusively. The amount of the damages or of reduction of the price will correspond to the amount that is necessary in order to bring about the state of correctness that meets the assurance, warranty, or guarantee given; i.e. the expense incurred by the Purchaser in bringing about the state corresponding to the Agreement or that is incurred due to the fact that the state corresponding to the Agreement cannot be brought about, whether in full or in part, temporarily or permanently, is the expense that has to be refunded . Guarantee claims can only be enforced under the condition that they exceed the sum of DM 10,000.- in aggregate; if this is exceeded, however, then they can be enforced for the full amount. With the exception of claims due to fraudulent misrepresentation, claims based on warranties shall subject to a limitation period of 5 years. 8. CONFIDENTIALITY Each party shall hold in confidence all materials or information disclosed to it in confidence hereunder ("Confidential Information") which is marked as confidential or proprietary, or if disclosed verbally, reduced to writing and marked confidential within thirty (30) days after the date of disclosure. Confidential Information shall also include any new product information or the results of any benchmark or similar tests on the Development Software conducted by Vendor or divulged by Vendor to Purchaser. Each party agrees to take precautions to prevent any unauthorised disclosure or use of Confidential Information consistent with precautions used to protect such party's own confidential information, but in no event less than reasonable care. The obligations of the parties hereunder shall not apply to any materials or information that is or becomes a part of the public domain through no act or omission of the receiving party or which is independently developed by the receiving party. 9. EMPLOYEES The Vendor shall support Purchaser or one of its subsidiaries to hire the four engineers currently working for the Vendor. Their compensation will be at the prevailing level in Dresden for comparable jobs. 10. FILING OF PATENT APPLICATIONS The Vendor shall support Purchaser to file patent applications for the sold technology after Closing Date as soon as possible. On request of the Purchaser the Vendor has to file the patent applications in his own name and transfer the patent and all related documents royalty-free to Purchaser. Any costs and fees for the registration and the assignment will be borne by Purchaser. 11. NON - COMPETITION CLAUSE 11.1. The Vendor shall be refrain from undertaking activities in the area of business, whether directly or indirectly, in a professional or any other fashion, on his own account or on that of third parties, and from acquiring a company that carries out business transactions in this area of business (competitive company), and from holding stakes in or supporting such a company in any other fashion; an exception to this will be the acquisition purely for capital investment purposes of competitive company shares quoted on the stock exchange. An "area of business" as defined in these provisions is any activity concerned with the subject of the contract (section 1) or with development of hardware and software for engineering test stations. Nor, for the duration of the prohibition of competition, may Vendor publish any of the know how in the area of business or make it accessible to third parties in any other fashion unless Purchaser has given his prior consent in writing. 11.2. The prohibitition of competition shall be effective for a term of three years. It shall commence with Closing Date. 11.3. In geographical terms, the prohibitition of competition shall apply to all countries to which Purchaser or related companies makes direct deliveries, and in particular, Germany, Austria, Switzerland, and the Czech Republic. 11.4. In the event of the prohibition of competition being violated, Section 113 HGB (German Commercial Code) shall apply accordingly. 12. MISCELLANEOUS 12.1 No Assignment. Vendor may not transfer or assign any of the rights arising from the Agreement without the prior written consent of Purchaser. 12.2. Notices. Any notice required under this Agreement shall be given in writing and shall be deemed effective upon delivery to the party to whom addressed by (i) express courier upon written verification of actual receipt or (ii) facsimile upon confirmation receipt generated by the sending device, with an original to follow in contractual matter within a week. All notices shall be sent to the applicable address on the cover page hereof to such other address as the parties may designate in writing. 12.3. Governing Law. This Agreement shall be governed and interpreted by the laws of Germany. 12.4. Force Majeure. Neither party shall be liable hereunder by reason of any failure or delay in the performance of its obligations hereunder (except for the payment of money) on account of strikes, shortages, failure of suppliers, riots, insurrection, fires, floods, storms, earthquakes, acts of God, war, governmental action, labour conditions, or any other cause which is beyond the reasonable control of such party. 12.5. Entire Agreement. If any portion of this Agreement is determined to be or becomes unenforceable or illegal, such portion shall be deemed eliminated and the remainder of this Agreement shall remain in effect. The parties shall replace the invalid provision(s) with other provision(s) in such way that the economic result intended by the parties will be maintained. The same applies for any eventual gap in this Agreement. No waiver of any breach of this Agreement shall be effective unless in writing, nor shall any breach constitute a waiver of any subsequent breach of any provision of this Agreement. This Agreement contains the entire agreement and understanding between the parties with respect to the subject matter hereof, and supersedes all prior agreements, negotiations, proposals and communications between the parties. 12.6. The Effective Date of this Agreement shall be the last executed date. 13. ARBITRATION All disputes arising out of or in connection with the present agreement, including any questions regarding its existence, validity or termination, shall be finally settled by binding arbitration acording to the Arbitration-Agreement, signed in a separate deed. Beaverton, Oregon, May 19, 1998 / s / Sar Ramadan Purchaser Dresden, Germany, May 19, 1998 / s / Dr. Hans-Martin Muhlhoff Vendor Annex to Purchase Agreement: The Purchaser is informed that the Vendor received a grant of the Sachsische Staatsministerium fur Wirtschaft und Arbeit in the amount of DM 478.997,- (Zuwendungsbescheid vom 9.12.1994). According to the conditions Vendor is only entitled to dispose the Subject of the contract with prior written approval of Sachsische Staatsministerium fur Wirtschaft und Arbeit. Both parties are mutually obliged to obtain such an approval. Contrary to section 5 para. 1 of the Agreement Purchaser may withhold USD 250.000,- of the second instalment until 14 days after the approval of Sachsische Staatsministerium fur Wirtschaft und Arbeit, but not longer than 3rd of September 1999. If and to the extend the Vendor has to pay back the grant of the Sachsische Staatsministerium fur Wirtschaft und Arbeit in the amount of DM 478.997,-, the Purchaser shall reimburse the Vendor one half of the repayment. In any case the total value of the claim under sentence 1 shall be limited to DM 239.498. Beaverton, Oregon, May 19, 1998 /s/ Sar Ramadan Purchaser Dresden, Germany, May 19, 1998 /s/ Dr. Hans-Martin Muhlhoff Vendor EX-27 3 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE INCOME STATEMENT FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1998, AND THE BALANCE SHEET AS OF SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 5,575 7,546 13,487 502 15,017 46,178 21,374 11,727 63,585 7,704 468 0 0 74 53,403 63,585 19,575 26,372 8,239 11,210 19,332 0 19 (3,552) (162) (3,390) 0 0 0 (3,390) (.45) (.45)
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