-----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, NAb9gRZi8fJWl7VgxXC866osd/FRdeiU1hZrN61w0tWY+7W+t3iGfOkN9MhyUP/Y w4+CDWx8lnJ2jp7ilCBq5g== 0001047469-99-032298.txt : 19990817 0001047469-99-032298.hdr.sgml : 19990817 ACCESSION NUMBER: 0001047469-99-032298 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 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: 99691300 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 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 JUNE 30, 1999 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 0-26274 - -------------------------------------------------------------------------------- INTEGRATED MEASUREMENT SYSTEMS, INC. (Exact name of registrant as specified in its charter) OREGON 93-0840631 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 9525 S.W. GEMINI DRIVE, BEAVERTON, OR 97008 (Address of principal executive offices) (zip code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (503) 626-7117 - -------------------------------------------------------------------------------- NO CHANGE Former name, former address, and former fiscal year, if changed since last report Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- At July 27, 1999, there were 7,465,825 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 Statements of Operations for the three months and six months ended June 30, 1999 and 1998. 4 Balance Sheets as of June 30, 1999 and December 31, 1998. 5 Statements of Cash Flows for the six months ended June 30, 1999 and 1998. 7 Notes to the Financial Statements. 8-9 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition. 10-14 Item 3. Quantitative and Qualitative Disclosures About Market Risk. 14 PART II OTHER INFORMATION Item 2. Changes in Securities. 15 Item 4. Submission of Matters to a Vote of Security Holders. 15 Item 6. Exhibits and Reports on Form 8-K. 15 SIGNATURES 17
2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS INTEGRATED MEASUREMENT SYSTEMS, INC. STATEMENTS OF OPERATIONS (In thousands, except net income per share) (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 ---- ---- ---- ---- SALES: Systems $ 9,359 $ 4,849 $ 16,907 $ 9,807 Software 1,578 1,202 2,941 2,497 Service 2,226 2,356 4,537 4,595 --------- --------- --------- -------- NET SALES 13,163 8,407 24,385 16,899 --------- --------- --------- -------- COST OF SALES: Systems 3,458 1,611 6,732 3,340 Software 223 262 375 407 Service 1,212 945 2,217 1,916 --------- --------- --------- -------- TOTAL COST OF SALES 4,893 2,818 9,324 5,663 --------- --------- --------- -------- GROSS MARGIN 8,270 5,589 15,061 11,236 OPERATING EXPENSES: Research, development and engineering 2,104 1,706 4,032 3,450 Selling, general and administrative 4,743 4,203 9,076 8,252 --------- --------- --------- -------- Total operating expenses 6,847 5,909 13,108 11,702 --------- --------- --------- -------- OPERATING INCOME (LOSS) 1,423 (320) 1,953 (466) Other income, net 68 184 196 402 --------- --------- --------- -------- Income (loss) before income taxes 1,491 (136) 2,149 (64) Provision for (benefit from) income taxes 464 (48) 688 (24) --------- ---------- --------- --------- NET INCOME (LOSS) $ 1,027 $ (88) $ 1,461 $ (40) ========= ========== ========= ========= BASIC EARNINGS (LOSS) PER SHARE $ 0.14 $ (0.01) $ 0.20 $ (0.01) ========= ========= ========= ======== DILUTED EARNINGS (LOSS) PER SHARE $ 0.13 $ (0.01) $ 0.19 $ (0.01) ========= ========= ========= ======== Weighted average number of common shares outstanding for basic earnings per share 7,461 7,541 7,455 7,537 Incremental shares from assumed conversions of employee stock options 532 -- 419 -- --------- --------- --------- ----- Adjusted weighted average shares for diluted earnings per share. 7,993 7,541 7,874 7,537 ========= ========= ========= ========
SEE ACCOMPANYING NOTES TO UNAUDITED FINANCIAL STATEMENTS. 4 INTEGRATED MEASUREMENT SYSTEMS, INC. AND SUBSIDIARIES BALANCE SHEETS (In thousands, except per share data)
As of As of June 30, December 31, 1999 1998 ---- ---- (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 4,731 $ 3,379 Short-term investments 9,656 7,630 Trade receivables, less allowance for doubtful accounts of $267 and $413 12,689 13,977 Inventories, net 15,190 14,943 Deferred income taxes 1,453 1,453 Prepaid expenses and other current assets 2,851 2,381 --------- -------- Total current assets 46,570 43,763 PROPERTY, PLANT AND EQUIPMENT, NET 11,436 11,063 SERVICE SPARE PARTS, NET 3,177 3,692 SOFTWARE DEVELOPMENT COSTS, NET 3,674 3,457 DEFERRED INCOME TAXES 219 219 OTHER ASSETS, NET 1,039 1,220 --------- -------- Total assets $ 66,115 $ 63,414 ========= ======== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 1,754 $ 1,828 Payable to Cadence, net 433 506 Accrued compensation 1,574 1,718 Accrued warranty 659 296 Deferred revenue 2,224 2,008 Other current liabilities 1,505 1,408 Income taxes payable 989 197 Capital lease obligations - current 293 394 --------- -------- Total current liabilities 9,431 8,355 CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION 289 363 DEFERRED COMPENSATION 1,234 1,154 SHAREHOLDERS' EQUITY: Preferred stock, $.01 par value, authorized 10,000,000 shares; none issued and outstanding - - Common stock, $.01 par value, authorized 15,000,000 shares; issued and outstanding 7,461,754 and 7,425,951 75 74 Additional paid-in capital 39,635 39,478 Retained earnings 15,451 13,990 --------- -------- Total shareholders' equity 55,161 53,542 --------- -------- Total liabilities and shareholders' equity $ 66,115 $ 63,414 ========= ========
5 SEE ACCOMPANYING NOTES TO UNAUDITED FINANCIAL STATEMENTS. 6 INTEGRATED MEASUREMENT SYSTEMS, INC. AND SUBSIDIARIES STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Six Months Ended June 30, 1999 1998 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 1,461 $ (40) Adjustments to reconcile net income to cash provided by (used in) operating activities: Depreciation and amortization 2,790 2,044 Provision for deferred income taxes -- 104 Deferred compensation 80 218 Decrease (increase) in trade receivables 1,287 (493) Increase in inventories (247) (3,741) Increase in other current assets (470) (387) Increase in deferred revenue 216 618 Decrease in accounts payable and accrued liabilities 961 463 ---------- --------- Net cash provided by (used in) operating activities 6,078 (1,214) ---------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Sale of short-term investments 2,122 -- Purchases of short-term investments (4,148) (5,840) Purchases of equipment & service spare parts (1,759) (3,385) Software development costs (924) (1,103) ---------- --------- Net cash used in investing activities (4,709) (10,328) ---------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments under capital leases (176) (76) Proceeds from employee stock plans 159 139 ---------- --------- Net cash (used in) provided by financing activities (17) 63 ---------- --------- Net increase (decrease) in cash and cash equivalents 1,352 (11,479) Beginning cash and cash equivalents balance 3,379 17,464 ---------- ---------- Ending cash and cash equivalents balance $ 4,731 $ 5,985 ========== ========== SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES: Tax benefit from Cadence and IMS stock options $ -- $ 1,135 ========== ========== OTHER SUPPLEMENTAL CASH FLOW DISCLOSURES: Income taxes refunded (paid) $ 102 $ (107) =========== ========== Interest paid $ (26) $ (13) =========== ==========
SEE ACCOMPANYING NOTES TO UNAUDITED FINANCIAL STATEMENTS. 7 INTEGRATED MEASUREMENT SYSTEMS, INC. NOTES TO THE FINANCIAL STATEMENTS (In thousands, except share data) (Unaudited) (1) BASIS OF PRESENTATION The interim financial statements included herein have been prepared, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the management of the Company believes that the disclosures are adequate to make the information presented not misleading. Interim financial statements are by necessity somewhat tentative; judgments are used to estimate interim amounts for items that are normally determinable only on an annual basis. The financial information as of December 31, 1998 is derived from the Company's audited financial statements. The interim period information presented herein includes normally recurring adjustments, which are, in the opinion of the management of the Company, only necessary for a fair statement of the results of the respective interim periods. Results of operations for interim periods are not necessarily indicative of results to be expected for an entire year. (2) INVENTORIES Inventories, consisting principally of computer hardware, electronic sub-assemblies and test equipment, are valued at the lower of cost (first-in, first-out) or market. Costs used for inventory valuation purposes include material, labor and manufacturing overhead.
June 30, December 31, 1999 1998 ---- ---- Raw materials....................................... $ 8,827 $ 9,265 Work-in-progress.................................... 2,525 2,608 Finished goods...................................... 3,838 3,070 --------- --------- $ 15,190 $ 14,943 ========= =========
(3) EARNINGS PER SHARE Earnings per share amounts presented in the accompanying Statements of Income have been calculated in accordance with Statement of Accounting Standards No. 128, "Earnings per Share." Following is a summary of outstanding common stock options not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market price of the common stock.
1999 1998 ---- ---- Three months ended June 30,......................... 64,430 1,539,842 Six months ended June 30,........................... 181,030 1,539,842
8 (4) SEGMENT DISCLOSURES Disclosures about the Company's business segments, as required by SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," are as follows: FOR THE THREE MONTHS ENDED JUNE 30, 1999
VALIDATION SYSTEMS VIRTUAL TEST CONSOLIDATED ------------------ ------------ ------------- Segment net sales $ 12,210 $ 953 $ 13,163 Segment operating income (loss) $ 1,683 $ (260) $ 1,423
FOR THE THREE MONTHS ENDED JUNE 30 , 1998
VALIDATION SYSTEMS VIRTUAL TEST CONSOLIDATED ------------------ ------------ ------------ Segment net sales $ 7,384 $ 1,023 $ 8,407 Segment operating loss $ (30) $ (290) $ (320)
FOR THE SIX MONTHS ENDED JUNE 30, 1999
VALIDATION SYSTEMS VIRTUAL TEST CONSOLIDATED ------------------ ------------ ------------ Segment net sales $ 22,469 $ 1,916 $ 24,385 Segment operating income (loss) $ 2,327 $ (374) $ 1,953
FOR THE SIX MONTHS ENDED JUNE 30, 1998
VALIDATION SYSTEMS VIRTUAL TEST CONSOLIDATED ------------------ ------------ ------------ Segment net sales $ 14,720 $ 2,179 $ 16,899 Segment operating loss $ (127) $ (339) $ (466)
(5) NEW ACCOUNTING PRONOUNCEMENTS In June 1999, the FASB issued Statement of Financial Accountng Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 137). SFAS 137 is an amendment to Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS 137 establishes accounting and reporting standards for all derivative instruments. SFAS 137 is effective for fiscal years beginning after June 15, 2000. The Company does not currently have any derivative instruments and, accordingly, does not expect the adoption of SFAS 137 to have an impact on its financial position or results of operations. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (All numerical references are in thousands, except for percentages and per share data) THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S FINANCIAL STATEMENTS AND THE NOTES THERETO INCLUDED ELSEWHERE IN THIS QUARTERLY REPORT, AS WELL AS THE COMPANY'S FINANCIAL STATEMENTS AND THE NOTES THERETO, AND THE MANAGEMENT DISCUSSION AND ANALYSIS PRESENTED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998. THIS QUARTERLY REPORT, INCLUDING THE FOLLOWING DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTAINS CERTAIN STATEMENTS, TREND ANALYSIS AND OTHER INFORMATION THAT CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, AS AMENDED, WHICH MAY INVOLVE RISKS AND UNCERTAINTIES. SUCH FORWARD LOOKING STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO, STATEMENTS INCLUDING THE WORDS "ANTICIPATE," "BELIEVE," "PLAN," "ESTIMATE," "EXPECT," "INTEND" AND OTHER SIMILAR EXPRESSIONS. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HEREIN DUE TO NUMEROUS FACTORS INCLUDING, BUT NOT LIMITED TO, THOSE DISCUSSED IN THE FOLLOWING DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, AS WELL AS THOSE DISCUSSED ELSEWHERE HEREIN AND IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998, AND THE COMPANY'S FORM 10-Q FOR THE PERIOD END MARCH 31, 1999. RESULTS OF OPERATIONS NET SALES Net sales is comprised of engineering validation systems sales, software sales (including validation systems software and Virtual Test Software) and service sales, which consists primarily of revenue derived from maintenance and consulting contracts. Net sales of $13,163 for the three months ended June 30, 1999 reflected an increase of $4,756 or 57% from the second quarter of 1998. The improvement in net sales, both for the quarter and year-to-date, reflects increased capital spending by several of the Company's semiconductor customers driving growth in each of the validation system product families. Digital and mixed signal validation systems revenues increased over the second quarter of 1998 by 76% and 75% respectively and the Orion Memory validation system made its first contribution to revenue in the second quarter of 1999. Sales in North America increased by 11% to 81% of net sales and international sales declined by 11% to 19% of net sales in the second quarter of 1999 compared to the same period in 1998. Net sales for the six months ended June 30, 1999 were $24,385 compared to $16,899 for same period in 1998, an increase of $7,486 or 44%. Sales to Intel accounted for 50% of net sales for the six months ended June 30, 1999, largely due to demand for the new Vanguard digital validation systems. Sales to National Semiconductor were 11% of net sales for the first half of 1999. GROSS MARGIN The Company's gross margin of $8,270 in the second quarter of 1999 represents an increase of 48% from $5,589 for the same period of 1998, as a direct result of the increase in net sales discussed above. As a percentage of net sales, gross margin decreased to 62.8% for the three months ended June 30, 1999 from 66.5% for the three months ended June 30, 1998. The year-to-year decrease in gross margin percent was due to several factors. The Company sold more mixed signal systems in 1999 than in 1998, which have lower gross margins because of significant third party content. Sales of higher margin Virtual Test software were a smaller proportion of total net sales, and the provisions for warranty costs (due to an increase in standard warranty terms from 90 days to one year) and inventory obsolescence were higher. Gross margin for the second quarter of 1999 improved more than 2 percentage points from the first quarter of 1999, reflecting the increase in sales volume from the newer, stronger margin Vanguard and Orion systems. The gross margin percentage may improve slightly in future quarters as the higher margin Vanguard and Orion products increase as a percentage of total sales. 10 For the six months ended June 30, 1999 gross margin increased by $3,825 or 34% from the same period in 1998. As a percentage of net sales, gross margin decreased to 61.8% for the period from 66.5% for the six months ended June 30, 1998, reflecting the same factors discussed above. OPERATING EXPENSES Research, development and engineering (R&D) expenses increased to $2,104 for the three months ended June 30, 1999 from $1,706 for the second quarter of 1998. R&D expenses amounted to 16% of net sales in the three months ended June 30, 1999, compared to 20% in the three months ended June 30, 1998. The increase in the dollar amount of R&D expenses reflects the Company's investment in the development of the new Orion memory validation system product. Capitalized software development costs and amortization were $470 and $340 respectively for the second quarter of 1999 compared to $576 and $173 for the same period in 1998. The net increase in capitalized software was $130 for the three months ending June 30, 1999 compared with $403 for the same period last year. For the six months ended June 30, 1999, R&D expenses increased to $4,032 from $3,450 for the same period in 1998. As a percentage of net sales R&D expenses were 17% for the six months ended June 30, 1999 and 20% for the same period in 1998. The decrease in R&D expenses as a percentage of net sales both for the quarter and year-to-date were directly attributable to the increase in net sales discussed above. Capitalized software development costs and amortization were $924 and $707 respectively for the six months ended June 30, 1999 compared with $1,103 and $364 for the like period in 1998. Selling, general and administrative (SG&A) expenses of $4,743 for the first quarter of 1999 were 13% higher than the same quarter in 1998. As a percentage of net sales, SG&A expenses decreased to 36% in the three months ended June 30, 1999 from 50% in the three months ended June 30, 1998. The increase in the dollar amount of SG&A expenses reflect annual salary increases implemented in April 1999, payment of employee performance bonuses which were not earned in 1998, and sales commissions on higher sales volumes. For the six months ended June 30, 1999 and 1998, SG&A expenses were $9,076 and $8,252 respectively. As a percentage of net sales, SG&A expenses decreased to 37% for the six months ended June 30, 1999 compared to 49% for the same period in 1998. The decrease in SG&A expenses as a percent of net sales resulted directly from the increase in net sales discussed above. OTHER INCOME, NET Other income, net, decreased to $68 in the three months ended June 30, 1999 from $184 in the quarter ended June 30, 1998 and to $196 from $402 for the respective six month periods. The decreases were due to lower average cash and short-term investment balances and to a $60 expense resulting from the translation of foreign denominated receivables into US dollars. INCOME TAXES The Company's effective tax rate was 32% for the six months ended June 30, 1999 and 35% for the same period in 1998. The Company's income tax position includes the effects of available tax benefits in certain countries where the Company does business, benefits for available net operating loss carryforwards, and tax expense for subsidiaries with pre-tax income. The Company's effective tax rate is sensitive to the geographic and product mix of the Company's net sales, and therefore could be higher or lower in the future depending upon actual net sales realized. NET INCOME 11 As a result of the various factors discussed above, net income for the first half of 1999 increased to $1,461 or $0.19 per diluted share compared to a loss of $40 or $0.01 per share for the corresponding period in 1998. FUTURE OPERATING RESULTS Results of operations for the periods discussed above should not be considered indicative of the results to be expected in any future period, and fluctuations in operating results may also result in fluctuations in the market price of the Company's common stock. Like most high technology and high growth companies, the Company faces certain business risks that could have adverse effects on the Company's results of operations. Sales of the Company's products to Intel and a limited number of other customers are expected to continue to account for a high percentage of net sales over the foreseeable future. Any sudden reduction or loss of orders from Intel or any other major customer would have a material adverse effect on the Company's financial condition and results of operations. Like most high technology and high growth companies, the Company faces certain other business risks that could have adverse effects on the Company's results of operations, including, but not limited to the following: The Company is dependent on high-dollar customer orders, deriving a substantial portion of its net sales from the sale of engineering validation systems which typically range in price from $0.3 million to over $2.0 million per unit. A substantial amount of the Company's net sales are typically realized in the last few days of each quarter. During 1998, the Company's quarterly net sales were negatively impacted by customer decisions to delay or cancel plans to place orders for the Company's products in the last few days of the quarter. The timing and sales price of a single order can have a significant impact on the Company's net sales and results of operations for a particular period. The Company's net sales and results of operations may be negatively impacted if an order is received too late in a given period to permit product shipment during that period. A significant portion of the Company's operating expenses is relatively fixed and planned expenditures are based, in part, on anticipated orders. In addition, the need for continued expenditures for research, development and engineering makes it difficult to reduce expenses in a particular quarter if the Company's sales goals for that quarter are not met. The inability to reduce the Company's expenses quickly enough to compensate for any revenue shortfall would magnify the adverse impact of any revenue shortfall on the Company's results of operations. The Company purchases some key components from sole or single source vendors, for which alternative sources are not readily available. A few of these suppliers are small independent companies and could expose the Company to increased risk of temporary shortages for certain key components. The Company's future operating results and financial condition are also subject to influences driven by rapid technological changes, a highly competitive industry, a lengthy sales cycle, and the cyclical nature of general economic conditions. Future operating results will depend on many factors, including demand for the Company's products, the introduction of new products by the Company and by its competitors, industry acceptance of Virtual Test software, the level and timing of available shippable orders and backlog, the duration and severity of the economic downturn in Asia, and the business risks discussed above. There can be no assurance that the Company's net sales will grow or that such growth will be sustained in future periods or that the Company will remain profitable in any future period. 12 YEAR 2000 The Company has developed its Year 2000 Readiness Plan including steps to review, test and implement corrective measures for the Company's products and information systems. In addition, the Company has identified its most critical vendors and suppliers, and is collecting sufficient information from each of them to monitor their Year 2000 readiness. To-date, the Company has completed testing of its currently offered products. Based on these tests, the Company believes them to be free of any problems associated with the Year 2000. The Company has tested selected earlier-version products for Year 2000 readiness, and believes them to be free of any problems associated with the Year 2000. The Company will continue to selectively perform Year 2000 readiness testing on specific customer configurations as requested during the next several quarters. Based upon testing to-date, the Company does not believe additional product testing will result in the discovery of any materially adverse Year 2000 readiness issues. The Company has completed review of its Year 2000 readiness with respect to its information systems. The review has not identified any significant information systems Year 2000 issues beyond those that will be corrected through implementation of planned systems upgrades. Vendors for the Company's information systems have represented those systems, with the planned upgrades, to be Year 2000 compliant. The Company has completed Year 2000 Readiness testing on the majority of the Company's information systems as planned. The balance of testing and upgrades are on schedule to be completed by September 30, 1999. The Company estimates the costs in 1998, including payments to third parties and estimates of internal costs, for developing and implementing its Year 2000 readiness plan were less than $200,000. The Company expects additional implementation costs in 1999 to be less than $300,000. Costs incurred for the six month period ending June 30, 1999 were less than $50,000. The Company has not developed a most reasonably likely worst case scenario. However, it is developing contingency plans in the event mission-critical third-party vendors or other significant third parties fail to adequately address Year 2000 issues. Such plans principally involve identifying alternative vendors or, in the extreme, adding inventory safety stocks. There can be no assurance that any such plans will fully mitigate any such failures or problems. In addition, there are mission-critical third parties, such as utilities, transportation and telecommunication companies where alternative arrangements or sources are limited or unavailable. LIQUIDITY AND CAPITAL RESOURCES As of June 30, 1999, the Company's principal sources of liquidity consisted of cash and short-term investments of approximately $14.4 million, and funds available under an existing bank line of credit of $10.0 million. Cash and short-term investments increased by $3.4 million from December 31, 1998. The Company's operating activities generated cash during the six months ended June 30, 1999 of $6.1 million, compared to using cash of $1.2 million for the same period last year. This improvement in operating cash flows was primarily attributable to improved operating results and to the Company's asset management programs aimed at increasing turnover of accounts receivable and inventories and a smoother revenue flow. Over 40% of second quarter revenue came in April and May compared with 15% in the first two months of the quarter ending March 31, 1999. A large percentage of the April and May revenue was collected before June 30, 1999. 13 The Company's trade receivables decreased to $12.7 million at June 30, 1999 from $14.0 million at December 31, 1998, as a result of improved cash collection efforts combined with a smoother revenue flow. Inventories increased to $15.2 million at June 30, 1999 from $14.9 million at December 31, 1998. Declines in mainline inventories, as a result of focused inventory reduction programs, were offset by an increase in the refurbished inventory pool. Deferred revenue increased to $2.2 million at June 30, 1999 compared to $2.0 million at December 31, 1998. This increase reflects the normal seasonal increase in renewals of annual maintenance contracts by customers in the first quarter of 1999. During the first half of 1999, the Company continued to invest in equipment and capitalized software development costs. Purchases of equipment and service spare parts amounted to $1,759, while capitalization of software development costs amounted to $924. 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. Management is continually evaluating opportunities to develop and introduce new products, and to acquire complementary businesses or technologies. At present, the Company has no understandings, commitments or agreements with respect to any such opportunities. Any transactions resulting from such opportunities, if consummated, may necessitate funding from other sources. There can be no assurance that such funding will be available or that, if available, such funding will be obtainable on terms favorable to the company. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS The Company's exposure to market risk for changes in interest rates relate primarily to its investment portfolio. The Company mitigates its risk by diversifying its investments among high credit quality securities in accordance with the Company's investment policy. Interest expense is affected by the general level of U.S. interest rates and/or LIBOR. Increases in interest expense resulting from an increase in interest rates would be offset by a corresponding increase in interest earned on the Company's investments. The Euro is the functional currency of the Company's subsidiaries in France, Germany and Switzerland. The Yen is the functional currency of the Company's subsidiary in Japan. The Company does not currently hedge certain balance sheet exposures and intercompany balances against future movements in foreign exchange rates. The Company does maintain cash balances denominated in currencies other than the U.S. Dollar in order to meet minimum operating requirements of its foreign subsidiaries. During the second quarter in 1999 the US dollar strengthened against the Euro and Yen which resulted in an expense of $60 on the translation of foreign denominated receivables. The Company plans to begin utilizing hedging instruments to mitigate fluctuations in currency exchange rates, as cash flows become more predictable. 14 PART II OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES During the quarter ended June 30, 1999, the Company made no sales of securities that were not registered under the Securities Act of 1933. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Annual Meeting of Stockholders held May 4, 1999, the stockholders of the Company approved the following matters: 1. The nominees for directors listed below were elected directors of the Company, each to a three-year term and until their successors are duly elected and qualified:
ELECTION OF DIRECTORS FOR OPPOSED ABSTAINED Thomas R. Franz 6,742,590 0 738,356 Paul A. Gary 6,743,190 0 737,756 James E. Solomon 6,743,190 0 737,756
2. A proposal for the approval of an amendment to the Company's 1995 Stock Incentive Plan (the 1995 Plan) increasing from 1,995,000 shares to 2,215,000 shares the number of shares of Common Stock that are reserved for issuance under the 1995 Plan was approved by a vote of 4,909,184 for, 2,566,587 opposed and 5,475 abstained. 3. A proposal for the ratification of the selection of Arthur Andersen LLP as independent public accountants for the fiscal year ending December 31, 1999 was approved by a vote of 7,467,146 for, 13,100 opposed and 700 abstained. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits (exhibit reference numbers refer to Item 601 of Regulation S-K) 27. Financial Data Schedule (b) Reports on Form 8-K: No report on Form 8-K was filed during the quarter ended June 30, 1999. 15 16 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 August 16, 1999. INTEGRATED MEASUREMENT SYSTEMS, INC. (Registrant) ------------------------------------ Fred Hall Chief Financial Officer (on behalf of the Registrant and as Principal Financial Officer) 17 EX-27 2 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FORM THE INCOME STATEMENT FOR THE SIX- MONTHPERIOD ENDED JUNE 30, 1999, AND THE BALANCE SHEET AS OF JUNE 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 4,731 9,656 12,956 267 15,190 46,570 24,964 13,528 66,115 9,431 289 0 0 75 55,086 66,115 19,848 24,385 7,107 9,324 13,108 0 26 2,149 688 1,461 0 0 0 1,461 0.20 0.19
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