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 MARCH 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 0-26274
- -------------------------------------------------------------------------------
INTEGRATED MEASUREMENT SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
OREGON 93-0840631
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
9525 S.W. GEMINI DRIVE, BEAVERTON, OR 97008
(Address of principal executive offices) (zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (503) 626-7117
- -------------------------------------------------------------------------------
NO CHANGE
Former name, and former
fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
------- ----
At April 30, 1996, there were 6,700,542 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 Income for the three months
ended March 31, 1996 and 1995
Balance Sheets as of March 31, 1996 and December 31, 1995
Statements of Cash Flows for the three months
ended March 31, 1996 and 1995
Notes to the Financial Statements
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
SIGNATURES
2
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTEGRATED MEASUREMENTS SYSTEMS, INC.
STATEMENTS OF INCOME
(In thousands, except net income per share)
(Unaudited)
Three Months Ended
March 31,
1996 1995
---- ----
Product sales $ 9,170 $ 7,304
Service and other sales 2,745 1,780
-------- --------
Net sales 11,915 9,084
-------- --------
Cost of product sales 3,213 2,949
Cost of service and other sales 1,195 689
-------- --------
Total cost of sales 4,408 3,638
-------- --------
Gross margin 7,507 5,446
Operating expenses:
Research, development and engineering 1,988 1,309
Selling, general and administrative 3,448 3,172
-------- --------
Total operating expenses 5,436 4,481
-------- --------
Operating income 2,071 965
Other income, net 101 51
-------- --------
Income before income taxes 2,172 1,016
Provision for income taxes 826 389
-------- --------
Net income $ 1,346 $ 627
-------- --------
-------- --------
Net income per share $ 0.19 $ 0.10
-------- --------
-------- --------
Weighted average number of common and common
equivalent shares outstanding 6,922 6,366
-------- --------
-------- --------
SEE ACCOMPANYING NOTES TO UNAUDITED FINANCIAL STATEMENTS
3
INTEGRATED MEASUREMENT SYSTEMS, INC.
BALANCE SHEETS
(In thousands, except per share data)
As of As of
March 31, December 31,
1996 1995
---- ----
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 8,986 $ 8,930
Trade receivables, less allowance for doubtful accounts
of $340 and $338 9,359 8,117
Receivable from affiliate, net 870 1,094
Inventories, net 6,620 5,830
Deferred income taxes 1,237 1,237
Prepaid expenses and other current assets 734 735
--------- ---------
Total current assets 27,806 25,943
Property, plant and equipment, net 4,909 5,178
Service spare parts, net 1,835 2,223
Software development costs, net 1,676 1,657
--------- ---------
$ 36,226 $ 35,001
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,427 $ 2,660
Accrued compensation 1,855 1,629
Accrued warranty 753 801
Deferred revenue 1,850 2,291
Other current liabilities 522 810
Current tax liability 65 -
Capital lease obligations - current 153 164
--------- ---------
Total current liabilities 7,625 8,355
Deferred income taxes 108 108
Capital lease obligations, net of current portion 33 54
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 6,699,855 and 6,699,803 67 67
Additional paid-in capital 21,097 20,467
Retained earnings 7,296 5,950
--------- ---------
Total shareholders' equity 28,460 26,484
--------- ---------
$ 36,226 $ 35,001
--------- ---------
--------- ---------
SEE ACCOMPANYING NOTES TO UNAUDITED FINANCIAL STATEMENTS.
4
INTEGRATED MEASUREMENT SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Three Months Ended
March 31,
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers $ 11,293 $ 7,800
Payments to suppliers (5,230) (3,252)
Payments to employees (4,389) (3,243)
Income taxes paid (5) --
Other taxes paid (424) (110)
Interest received 110 61
Interest paid (14) (9)
-------- --------
Net cash provided by operating activities 1,341 1,247
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment (1,036) (211)
Additions to service spare parts (23) (150)
Software development costs (170) (179)
-------- --------
Net cash used in investing activities (1,229) (540)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital leases (60) (70)
Proceeds from employee stock option exercises 4 --
-------- --------
Net cash used in financing activities (56) (70)
-------- --------
Net increase in cash and cash equivalents 56 637
Beginning cash and cash equivalents balance 8,930 4,384
-------- --------
Ending cash and cash equivalents balance $ 8,986 $ 5,021
-------- --------
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,346 $ 627
Adjustments to reconcile net income to
cash provided by operating activities:
Depreciation and amortization 1,007 579
Contributed capital -- 177
Provision for deferred income taxes -- 8
Net change in payable to or receivable from affiliate 224 720
Increase in trade receivables (1,242) (891)
Increase in inventories (790) (665)
Decrease (increase) in prepaid expenses and other current assets 1 (219)
Increase in current tax liability 691 --
Increase in accounts payable and accrued liabilities 545 843
(Decrease) increase in deferred revenue (441) 68
-------- --------
Net cash provided by operating activities $ 1,341 $ 1,247
-------- --------
-------- --------
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Purchase of assets through capital lease $ 29 $ 174
-------- --------
-------- --------
Tax benefit from stock option transactions $ 626 $ --
-------- --------
-------- --------
Noncash dividend to Cadence $ -- $ 1,027
-------- --------
-------- --------
SEE ACCOMPANYING NOTES TO UNAUDITED FINANCIAL STATEMENTS.
5
INTEGRATED MEASUREMENT SYSTEMS, INC.
NOTES TO THE FINANCIAL STATEMENTS
(In thousands)
(Unaudited)
(1) BASIS OF PRESENTATION
The interim financial statements included herein have been prepared,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
such rules and regulations, although the management of the Company believes
that the disclosures are adequate to make the information presented not
misleading. Interim financial statements are by necessity somewhat
tentative; judgments are used to estimate interim amounts for items that
are normally determinable only on an annual basis. The financial
information as of December 31, 1995 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.
Net income per common and common equivalent share is calculated by dividing
net income by the weighted average number of common stock and common stock
equivalents outstanding during the period. Common stock equivalents are
calculated using the treasury stock method, and consist of dilutive shares
issuable upon the exercise of outstanding common stock options.
(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:
March 31, December 31,
1996 1995
---- ----
Raw Materials . . . . . . . . . . . . . . . $ 2,553 $ 2,613
Work-in-progress. . . . . . . . . . . . . . 3,393 2,945
Finished Goods. . . . . . . . . . . . . . . 674 272
------- -------
$ 6,620 $ 5,830
------- -------
------- -------
6
(3) SERVICE SPARE PARTS
The Company has reclassified its rotating service spare parts assets from
inventory to non-current assets in the accompanying Balance Sheets to more
accurately reflect the use of such parts in the Company's service business.
These assets are not held for sale, diminish in value in a reasonably
predictable manner, and therefore are subject to depreciation. Beginning
January 1, 1996, depreciation of the Company's spare parts is being
computed on a straight-line basis over the estimated useful lives of the
assets, generally eight years, and charged to Cost of Service and Other
Sales. Prior to 1996, the Company charged normally recurring adjustments
necessary to present inventory at its estimated net realizable value to
Cost of Service and Other Sales. In order to effect this change, the
Company has recorded a charge to Cost of Service and Other Sales of $327
during the first quarter of 1996, representing the cumulative difference in
financial statement carrying value between the depreciated cost under the
new accounting method at January 1, 1996 and the net inventory carrying
value of the spare parts assets at December 31, 1995. Cost and accumulated
depreciation of service spare parts are as follows:
March 31, December 31,
1996 1995
---- ----
Service spare parts, at cost $ 2,697 $ 2,675
Less accumulated depreciation (862) (452)
------- -------
Net service spare parts $ 1,835 $ 2,223
------- -------
------- -------
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(All numerical references are in thousands, except for percentages and per share
data)
RESULTS OF OPERATIONS
NET SALES
Net sales of $11,915 for the three-month period ended March 31, 1996 reflected
an increase of $2,831 or 31% from the first quarter of 1995.
The increase in net sales reflects the continued successful introduction of the
Company's new ATS FT Test Stations, which contributed 28% of net sales during
the first quarter of 1996, and continued strong contribution from the Company's
ATS Blazer Test Station products. In addition, sales of Virtual Test software
and related services grew to 8% of net sales during the quarter, compared to 5%
for the year 1995.
During the first quarter of 1996, the Company secured orders from several new
accounts for ATS Blazer and ATS FT Test Stations. Manufacturing, as well as
customer acceptance of the ATS FT Test Stations have gone as planned to-date.
The Company is targeting the new MTS FT Test Station product for the Data
Communications, Computer and Medical industries. First customer shipment of the
MTS FT is currently scheduled for the second quarter of 1996. Actual net sales
to be realized in future periods from these new products are subject to many
risks, as discussed below under "Forward Looking Statements."
The Company also added several new accounts to the Virtual Test software
customer base, and completed model development and distribution agreements with
LTX and Hewlett-Packard during the first quarter of 1996. Future sales growth
for Virtual Test and related services is subject to continued customer
acceptance of Virtual Test and other business risks, and cannot be assured.
Product and service sales to the Company's largest customer, Intel, increased
to 45% and 2% of net sales, respectively, during the first quarter of 1996,
compared to 30% and 2%, respectively, during the year 1995. This increase was
due to customer-requested acceleration of product deliveries during the first
quarter of 1996. Sales to Tokyo Electron Limited (the Company's largest
distributor) during the first quarter of 1996 amounted to 10% of net sales,
compared to 6% for the year 1995. Customers individually providing less than
10% of net sales generated the remaining 43% of the Company's net sales for
the first quarter of 1996.
GROSS MARGIN
The Company's gross margin of $7,507 in the first quarter of 1996 increased 38%
from $5,446 for the same period of 1995. As a percentage of net sales, gross
margin increased from 60% for the three months ended March 31, 1995 to 63% for
the three months ended March 31, 1996. The three percentage-point increase
reflects the benefits of higher revenues from Test Station sales over fixed
manufacturing overhead costs, as gross margins for the Company's Test Stations
grew to 64% for the first quarter of 1996, compared to 60% for the same period
of 1995. The Company's systems service business yielded gross margin of 49%
during the first three months of 1996, down from 59% during the first quarter of
1995, as cost efficiencies in the Company's service business were more than
offset by the impact of the cumulative depreciation adjustment of the Company's
service parts, as discussed in Note 3 to the Financial Statements. Gross
margins for the systems service business are expected to return to levels
slightly below historical levels in the future, due to the increased expense of
the service parts depreciation. Sales of the Company's Virtual Test software
and related services yielded gross margins of 84% during the first quarter of
1996, and are expected to provide upward support for the Company's future
overall gross margin percentage, if historical sales growth rates continue.
8
OPERATING EXPENSES
Research, development and engineering expenses increased 52% to $1,988 for the
three months ended March 31, 1996 from $1,309 for the first quarter of 1995.
Research, development and engineering expenses amounted to 17% of net sales in
the three months ended March 31, 1996, compared to 14% in the three months ended
March 31, 1995. The increase was principally attributable to increased
expenditures for the development of future generation hardware and software
products, as well as enhancements to the Company's existing products.
Selling, general and administrative expenses of $3,448 for the first quarter of
1996 increased 9% from $3,172 for the first quarter of 1995. The increase was
principally attributable to higher commissions associated with increased net
sales. As a percentage of net sales, selling, general and administrative
expense decreased from 35% in the three months ended March 31, 1995 to 29% in
the three months ended March 31, 1996 as a result of management's conscious
efforts to minimize headcount increases in selling and administrative functions
as net sales grow. This trend is not expected to continue, and the Company's
spending for selling, general and administrative expenses are expected to grow
in amount and as a percentage of net sales, reflecting planned headcount
increases required to execute the Company's strategies for growing Test Station
and Virtual Test sales volume.
OTHER INCOME
Other income, net, increased from $51 in the quarter ended March 31, 1995 to
$101 in the three months ended March 31, 1996, reflecting interest income
generated on higher cash balances.
INCOME TAXES
The Company's effective tax rate was 38% for each of the three-month periods
ended March 31, 1995 and March 31, 1996.
NET INCOME
As a result of the various factors discussed above, net income for the first
quarter of 1996 increased 115% to $1,346 or $0.19 per share compared to $627 or
$0.10 per share for the corresponding period in 1995.
FUTURE OPERATING RESULTS
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, and industry acceptance of Virtual Test software. 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated positive cash flows from operating activities for the
three months ended March 31, 1996 of $1,341 compared to $1,247 million for the
same period last year. This increase is the net result of higher collections
from customers as net sales increase, partially offset by higher payments to
suppliers and employees.
The Company's trade receivables have increased by $1,242 since December 31,
1995, reflecting the effect of higher sales volume, and extended payment terms
granted to selected customers. Inventories have grown by $790 during the first
quarter of 1996, to a level necessary to meet customer demands for the Company's
new and existing product lines. The increase in accounts payable since December
31, 1996 is driven by the increase in inventory purchases. The decrease in
deferred revenue is due to first quarter, 1996, achievement of milestones
necessary for revenue recognition on certain product deliveries initiated in
1995, partially offset by normal seasonal renewals of annual maintenance
contracts during the first quarter of 1996.
9
During the first quarter of 1996, the Company invested $1,036 in property, plant
and equipment, as necessary to develop and distribute new and enhanced Test
Station and Virtual Test products. Capitalization of software development costs
of $170 during the first quarter of 1996 was only slightly higher than related
amortization of $151. The Company began building out additional leased facility
space to meet the sales-driven demands for manufacturing and engineering
capacity during the first quarter of 1996. In addition, the Company is moving
forward with the implementation of new information systems for the
manufacturing, service and finance functions during 1996.
During the first quarter of 1996, the Company realized reductions in current tax
liabilities of $626 resulting from the benefit of tax deductions of employee
gains upon exercise of stock options of Cadence Design Systems, Inc. (Cadence),
the Company's majority shareholder. The noncash benefit of the stock option
deduction is reflected as an increase to Additional Paid-in Capital in the
accompanying Balance Sheets. The employee gains are not expenses of the Company
for financial reporting purposes, and the exercise of Cadence stock options does
not increase the number of shares of the Company's common stock outstanding.
The Company believes that cash on hand and cash generated from operations, as
well as cash available from the Company's existing $10.0 million short-term line
of credit, will be sufficient to meet the Company's working capital and other
cash requirements for at least the next twelve months. Company management is
continually evaluating opportunities to develop and introduce new products, and
to acquire complementary businesses or technologies. At present, the Company
has no significant understandings, commitments or agreements with respect to any
such opportunities. Any transactions resulting from such opportunities, if
consummated, may require the use of some of the Company's cash or necessitate
funding from other sources.
FORWARD LOOKING STATEMENTS
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.
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 a limited number of customers is
expected to continue to account for a significant percentage of net sales over
the foreseeable future. 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 Test Stations which typically range in
price from $0.2 to $1.2 million per unit and may be priced as high as $1.8
million for a single unit. In addition, the Company's future operating results
and financial condition are subject to influences driven by rapid technological
changes, a highly competitive industry, a lengthy sales cycle, and the cyclical
nature of general economic conditions.
The Company has thus far avoided any material adverse impact on its results of
operations resulting from such risks, and does not anticipate such an impact in
the near term. However, no assurance can be given that such risks will not
affect the Company's financial position or results of operations in the future.
Additionally, all statements in this Quarterly Report (Form 10-Q) relative to
future sales, gross margins, and expenses shall be considered to be "forward
looking statements" as defined by the Private Securities Reform Act of 1995.
These forward looking statements are subject to the above business and economic
risks the Company faces.
10
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits (exhibit reference numbers refer to Item 601 of Regulation S-
K)
10.a. Employment Contract - Keith Barnes, Chief Executive Officer
10.b. Employment Contract - Sar Ramadan, Chief Financial Officer
18. Letter regarding change in accounting principle
27. Financial Data Schedule
11
(b) No reports were filed on Form 8-K during the quarter for which this
report is filed.
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 May 11, 1996.
INTEGRATED MEASUREMENT SYSTEMS, INC.
(Registrant)
/s/
------------------------------
Sar Ramadan
Chief Financial Officer
12