SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/X/ Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 1998 or
/ / Transaction report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period
from ____________________ to ________________________
Commission file number: 0-22529
-------
inTEST Corporation
- -----------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 22-2370659
- --------------------------------- -----------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
or incorporation or organization)
2 Pin Oak Lane, Cherry Hill, NJ 08003
- --------------------------------------- ----------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: 609-424-6886
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
par value $0.01 per share.
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 / /
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant computed by reference to the closing price
of such stock on March 22, 1999 or $45,752,238 as quoted on the Nasdaq
National Market system.
The number of shares outstanding of the Registrant's Common Stock, as of
March 22, 1999 is 6,536,034.
Documents incorporated by reference. Portions of the Registrant's 1999
Definitive Proxy Statement to be filed pursuant to Regulation 14A in
connection with the 1999 annual meeting of stockholders of the Registrant are
incorporated by reference into Part III of this Annual Report on Form 10-K.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss. 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. / /
inTEST Corporation
Annual Report on Form 10-K
INDEX
Part I: Page
- ------- ----
Item 1: Business 3
Item 2: Properties 11
Item 3: Legal Proceedings 11
Item 4: Submission of Matters to a Vote of Security Holders 12
Part II:
- -------
Item 5: Market for Registrant's Common Equity and Related
Stockholder Matters 12
Item 6: Selected Financial Data 14
Item 7: Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 7A: Quantitative and Qualitative Disclosures About
Market Risk 20
Item 8: Financial Statements and Supplementary Data 21
Item 9: Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 21
Part III: (Incorporated by reference to Proxy Statement)
- --------
Item 10: Directors and Executive Officers 21
Item 11: Executive Compensation 21
Item 12: Security Ownership of Certain Beneficial Owners and
Management 21
Item 13: Certain Relationships and Related Transactions 21
Part IV:
- -------
Item 14: Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 21
Signatures 23
Index to Exhibits 24
Index to Consolidated Financial Statements and Consolidated
Financial Statement Schedule 25
2
inTEST Corporation
Annual Report on Form 10-K
PART I:
- ------
Item 1: BUSINESS
INTRODUCTION AND GENERAL DEVELOPMENT OF BUSINESS
inTEST Corporation (the "Company") is a leading independent designer,
manufacturer and marketer of interface solutions products which are used with
automatic test equipment ("ATE") by semiconductor manufacturers during the
testing of wafers and packaged devices. Its proprietary products include test
head manipulators, docking hardware and tester interfaces. The Company also
designs and markets related ATE interface products including high performance
sockets, interface boards and probing assemblies. The Company's products are
designed to improve the utilization and cost-effectiveness of ATE during the
testing of linear, digital and mixed signal integrated circuits ("ICs"). Since
its organization in 1981, the Company has developed and continues to support
over 4,600 products and has been granted over 13 U.S. patents for its
technology.
The Company has grown its business and expanded its product lines
primarily through internal product development. The development of the
Company's manipulator technology in early 1982, with its innovative floating
head design and six degrees of motion freedom, served as the foundation for the
growth of the Company's manipulator business. The subsequent development of
the Company's docking hardware technology later in 1982, which provides plug-
compatibility for test heads with multiple brands of probers and handlers,
established what management believes has become the de facto standard for
docking hardware in the industry today. The Company has also grown though the
strategic acquisition of TestDesign Corporation ("TestDesign")(now, inTEST
Sunnyvale Corp.) in August 1998, which enabled the Company to expand its
product line to include tester interfaces.
The Company maintains design, manufacturing and service facilities in New
Jersey and California, as well as service and technical support offices in
Texas, Arizona and Oregon to serve U.S. markets for its products. The Company
also maintains a design, manufacturing and service facility in the U.K. to
serve the European market and design, service and technical support offices in
Singapore and Japan to serve the Asia-Pacific market. Most of the Company's
facilities are located in proximity to major semiconductor manufacturing
centers. The Company's focus on high quality products and innovative
proprietary technologies has enabled it to establish strong relationships with
leading worldwide semiconductor manufacturers. In 1998, the Company's top ten
customers included Hewlett Packard, Lucent Technologies, Motorola, NEC, SGS
Thomson and Texas Instruments.
The Company believes it is a leader in providing high quality
semiconductor testing interface products. The Company's goal is to enhance its
leadership position and increase its domestic and international market share.
The Company's strategies to achieve its goal include (i) developing
technologically superior products for semiconductor interface solutions, (ii)
maintaining strong customer relationships, (iii) expanding its global presence,
and (iv) pursuing acquisitions of businesses, technologies or products that are
complementary to the Company's current product offerings.
INDUSTRY OVERVIEW
The IC market is a high volume, high growth market characterized by rapid
technological change. The testing of wafers and packaged devices is an
integral and necessary step during their design and manufacture. Each IC is
tested at least twice during the manufacturing process to ensure the functional
and electrical performance of the ICs prior to shipment. The increasing
complexity of wafers and packaged devices, as manifested by larger wafers,
higher speeds, growing pin counts, smaller packaged devices and greater levels
of integration has changed the design, architecture and complexity of ATE used
during the testing of such devices. The combination of the long-term growth in
demand for ICs coupled with the rapid technological changes in their designs
and the required production capacity to meet this demand drives the market for
ATE and the Company's products.
3
After wafer fabrication, each IC on a wafer is automatically positioned
under a probing assembly by a prober where the individual ICs on the wafer are
tested (the "front-end test"). During front-end testing, the tester transmits
electrical signals to the wafer and analyzes the signals upon their return.
The testing of ICs in wafer form is important to avoid incurring the
significant expense of assembling and packaging ICs that do not meet the
manufacturers' specifications. After device packaging, devices are
individually fed by the handler to an environmentally controlled test socket
where the IC is again tested (the "back-end test"). After back-end testing,
the handler sorts the devices according to test performance. Manipulators
facilitate the movement of a test head to a prober or handler, and "docking"
describes the function of connecting a test head to a prober or handler with
mechanically engineered hardware.
Until the early 1970s, testers were designed with the interface circuits
(also referred to as the pin electronics) mounted inside the tester's mainframe
cabinet. The pin electronics were connected to the prober's probing assembly
or to the handler's test socket via an electrical cable, typically five to ten
feet long. As devices became faster, more complex and more precise, signal
distortion inherent with the use of such cables resulted in degraded test
results. Although certain devices are still tested in this manner, such
devices tend to be used in older, less technologically advanced applications.
During the 1970s, tester manufacturers responded by moving the pin
electronics from the tester's mainframe cabinet to an independent test head,
which could be directly mated with a prober or handler, thereby eliminating the
problems associated with using cables as the connection between the tester's
pin electronics and the prober or handler. Direct mating of the test head pin
electronics to the prober's probing assembly or to the handler's test socket
was accomplished by mounting the test head directly to the prober or handler
with a pivot-mechanism manipulator resembling a waffle iron. Such a
combination resulted in the test head being "dedicated" to only one prober or
one handler.
Dedicated manipulators are of greatest value in ATE systems in which the
test head is infrequently disconnected and re-connected to and from one prober
or handler to another prober or handler. Consequently, dedicated manipulators
are used (i) primarily at front-end test, where large, homogeneous lots of
wafers are tested for long, uninterrupted periods of time, and (ii) at back-end
test, where high volume, commodity devices such as DRAMs, are tested in large
lots. However, back-end non-commodity devices, such as microcontrollers and
telecommunications devices, generally are tested in smaller lots due to varying
package types and test specifications, thereby requiring frequent handler
changes.
In 1980, free-standing manipulators were introduced to minimize ATE
downtime and increase device testing throughput. Such manipulators used hand-
ranked lead screws to position a test head to a prober or handler. These early
manipulators were only marginally better than the waffle-iron design and did
not significantly improve ATE utilization due to the lack of motion freedom
necessary for successful docking.
Users of these early manipulators attempted to precisely align fragile pin
electronics to test sockets and probing assemblies without docking hardware.
Lack of proper docking hardware often causes deterioration and damage to the
interface boards, test sockets or probing assemblies. Such damage can lead to
compromised or inaccurate test results and the rejection of good wafers or
devices (yield loss), or, more costly, the acceptance of unsatisfactory wafers
or devices (quality error). In addition, successfully connecting a test head
held by a free-standing manipulator to a prober or handler without docking
hardware is difficult and time-consuming. The Company's docking hardware and
free-standing universal manipulators are designed to improve the utilization of
ATE, particularly ATE employed in back-end non-commodity flexible testing
environments, by facilitating the quick, easy and safe changeover of test heads
to probers and handlers.
4
The Company's docking hardware products mechanically control the intimate
interface between the test head's interface board and the prober's probing
assembly or handler's test socket. As a result, fragile interface boards, test
sockets or probing assemblies are protected from damage during docking. The
Company's docking hardware allows semiconductor manufacturers to achieve cost
savings by (i) improving ATE utilization, (ii) improving the accuracy and
integrity of test results and (iii) reducing the need to repair or replace
expensive ATE interface products. The Company's docking hardware can be
designed for use with substantially all makes and models of test heads, probers
and handlers, and can usually be designed to allow all the ATE on a test floor
to be mechanically plug-compatible. Plug-compatibility simplifies the docking
procedures, allowing for increased flexibility and utilization of test heads,
probers and handlers on a test floor.
The Company's free-standing universal manipulators are designed to be used
in either a dedicated or a flexible test environment. In addition, the
Company's manipulators have been engineered to hold test heads in what seeks to
replicate a "zero gravity" free space. As a result, an operator using no more
than 22 pounds of force can reposition the test head by grasping it in his or
her hands and gently moving the test head into position to dock with a prober
or handler. Test heads currently in use weigh up to approximately 900 pounds
and measure up to a cubic yard in volume. A test head held in the Company's
free-standing universal manipulator and equipped with the Company's docking
hardware can be easily, quickly and safely docked to any handler. After
testing a particular production lot of devices, the test head can quickly and
easily be disconnected and docked to another handler for testing either a
subsequent lot of the same packaged device or to test a different device.
PRODUCTS
Substantially all of the Company's products are customized for use with
particular ATE and, in the case of docking hardware, also to achieve plug-
compatibility among particular combinations of ATE. The Company's docking
hardware, manipulators, tester interfaces and related ATE interface products
are designed for use with more than 175 test heads, 30 probers and 300
handlers, all of which are mechanically unique makes and models. The Company
has designed and continues to support more than 4,600 products, any of which
can be manufactured upon request.
Manipulator Products
in2 Test Head Positioner: The in2 Test Head Positioner ("in2") is a
universal manipulator which can be designed to hold any test head. A universal
manipulator enables the test head to be repositioned for alternate use with any
one of several probers or handlers on a test floor. The in2 is distinguished
from universal manipulators manufactured by competitors by its innovative,
floating-head design. The design of the in2 allows a test head to be held in
an effectively weightless state, moved up or down, right or left, forward or
backward and rotated around each axis (six degrees of motion freedom) by an
operator using no more than 22 pounds of force. Consequently, an operator can
manually reposition the test head by grasping it in his or her hands and gently
moving the test head into position to dock with the prober or handler. This
same design feature allows the operator to dock the test interface board (which
is used to connect the test head's pin electronics to the probing assembly on a
prober or to the test socket on a handler) with near zero electrical length
between the pin electronics and the probing assembly or the test socket, while
protecting the fragile electrical contacts from inadvertent damage during the
docking action.
The Company manufactures six styles of the in2, all of which are available
in eight different load-rated sizes. The styles include one tumble mode style
and five cable pivot style manipulators. Each style provides a distinct
combination of performance characteristics suited to different customer
applications. A tumble mode positioner might be specified for various reasons
including test head form factor, compatibility with in-line automation, cable
support simplicity or cost minimization. Reasons for specifying a cable
5
pivot positioner could include providing improved handling characteristics
necessary for larger test heads, the ability to handle test heads with short
mainframe-to-test head cables or the necessity to position the test head close
to the floor. In addition, the Company designs telescopic cable supports to be
used with its cable pivot manipulators; these cable supports minimize bending
and twisting stress to mainframe-to-test head cables, which can be delicate yet
weigh several hundred pounds. The in2 ranges in price from approximately
$12,000 to $100,000 depending upon load capacity, manipulator style and the
type of cable management.
Test Head Hoist: In July 1996, the Company introduced a new, fully-
automatic, electrically-powered and microprocessor-controlled dedicated
manipulator called the Test Head Hoist ("THH"). The patented, overhead design
of the THH series manipulator uses a powered scissor mechanism to raise and
lower a test head to a prober or a top docking handler. This design enables a
THH to dock very large test heads (weight tested to 1,000 pounds) within .005".
Although the Company has had no sales of the THH series manipulator to date,
the Company believes that the THH series of manipulators will be attractive to
semiconductor manufacturers for testing 300 mm wafers and packaged memory
devices. The Company's THH is the only fully-automatic manipulator which
enables a test head to be automatically docked to a prober or handler with the
push of one button. The Company believes that the THH enables semiconductor
manufacturers to increase floor space utilization of their ATE test systems by
25% to 40% over that achieved by waffle-iron style dedicated manipulators or
universal manipulators because a THH series manipulator has a virtually zero
"footprint." During 1998, the Company completed a redesign of the THH which
included a simplification of its internal electronics which reduced its
manufacture cost. The Company does not expect significant sales of the THH
manipulators until demand for 300mm wafers reach levels warranting significant
investment in new testing equipment by semiconductor manufacturers. All costs
associated with the development of the THH have been expensed.
Docking Hardware and ATE Interface Products
The Company's docking hardware is designed for use with floating-head
universal manipulators, which are used when maximum mobility and inter-
changeability of handlers between test heads is required. The Company's
docking hardware provides the mechanical control to safely connect, with near
zero electrical length, the test interface board with either the probing
assembly on a prober or the test socket on a handler. A simple cam action
docks and locks the test head to the prober or handler so that the two become a
single mechanism which prohibits motion of the test head relative to the prober
or handler. This minimizes deterioration of the interface boards, test sockets
and probing assemblies caused by the constant vibration characteristic of the
operation of all probers and handlers. The Company's docking hardware allows
an operator to manually align the probing assembly or test socket to within
.005" with respect to the interface board on the test head.
The Company offers six standard four-cam families and three standard
three-cam families with load ratings of 200, 400 and 600 pounds. The Company's
docking families are primarily distinguished from one another by the number of
docking cams and guide pins, the load rating and the size of test head
interface boards that can be used with each particular family of docking
hardware. The Company's docking hardware products range in price from
approximately $2,000 to $12,000.
The Company's docking hardware products are distinguished from those
offered by ATE manufacturer competitors by the ability of the Company's
products to make multiple competing brands of test heads plug-compatible with
multiple brands of probers and handlers used by a semiconductor manufacturer by
only changing interface boards. Creating such plug-compatibility requires
detailed information about competing ATE that would generally not be available
to a competing ATE manufacturer. Plug-compatibility permits non-commodity
semiconductor manufacturers to reduce the changeover time required to undock a
test head from one handler and dock it to another handler between production
lots or when changing the device type being tested.
6
In addition, the Company designs and sells a variety of related ATE
interface products including high performance test sockets, interface boards,
probing assemblies and other products. The Company custom designs all docking
hardware and related ATE interface products for the specific combinations of
test heads and probers or handlers used by its customers.
Tester Interface Products
The Company entered the tester interface business through the acquisition
of TestDesign in August 1998, a company engaged primarily in the design,
manufacture and sale of tester interface equipment. A tester interface
securely connects the tester to the wafer prober or device handler and is used
to carry signals from the tester to the device under test. A tester interface
typically consists of custom mechanical docking hardware such as a lock ring
and insert ring, as well as two intricate multi-layer printed circuit boards
connected by either a system of cables or spring loaded pogo contact pins.
Tester interfaces range from small, single board, cable type interfaces for
less complex systems to high speed, high frequency, digital or mixed signal
interfaces used in testing more complex IC's. One end of the tester interface
connects to the tester and the other to either a probe card fixture mounted on
a prober or a test socket mounted to a handler for packaged device testing. In
each case, the reliability of the test is highly dependent on maintaining the
integrity of the signal between the tester and the device being tested.
Every tester interface is custom designed for its application. The
Company's tester interface products carry signals from the tester to the probe
card or test socket and return signals to the tester from the device. The
Company's tester interface products are designed to optimize the integrity of
the transmitted signal data through the reduction of channel cross-talk, and
the matching of delay times and impedance, thereby increasing the accuracy of
the test data. Because the Company's tester interfaces enable the tester to
provide reliable yield data by allowing for clear signal transmission, its
interfaces can also be cost saving devices. The Company's tester interface
products also feature ease of mechanical installation and ready access to the
probe card or test socket during device testing. The Company offers over 200
different types of overhead and cable tester interfaces that range in price
from $6,000 to $46,000 depending upon the type of application and the
complexity of the device to be tested.
MARKETS AND CUSTOMERS
The Company markets its products globally to semiconductor manufacturers
and, to a lesser extent, ATE manufacturers on an OEM basis. The Company
believes that it sells to most major semiconductor manufacturers in the world.
The Company's universal manipulators and docking hardware are primarily used
during back-end testing of non-commodity packaged devices. The Company's
tester interfaces are used in either front-end or back-end testing of non-
commodity packaged devices. Such devices include linear, digital and mixed
signal ICs (such as microprocessors, digital signal processing chips, ASICs and
non-commodity memory devices) and primarily have applications in the
automotive, computer, consumer products and telecommunications industries.
The Company believes its sales of manipulators, docking hardware and
tester interfaces are a function of the general level of capital expenditures
by semiconductor manufacturers. In addition, the Company's sales of docking
hardware generally are driven by changes in device designs or test methods,
industry-wide volume of device testing, sales of new handlers and, to a lesser
extent, sales of new test heads. In the past, sales of the Company's docking
hardware generally have been strong when spending for test heads was low.
During such times, the Company believes that semiconductor manufacturers seek
to improve the utilization, performance and efficiency of existing ATE by
purchasing docking hardware. The Company's sales of manipulators generally
follow purchases of test heads by the Company's semiconductor manufacturer
customers. The Company's sales of tester interfaces are driven both by new
tester sales and by upgrades of existing test fixturing to accommodate the
increased performance demands of new IC devices. The Company believes its
sales of related ATE interface products primarily depend upon operating
expenditures of the Company's semiconductor manufacturer customers.
7
Both North American and European semiconductor manufacturers have located
most of their back-end factories in Southeast Asia. The front-end wafer
fabrication plants of U.S. semiconductor manufacturers are primarily in the
U.S. Likewise, European, Taiwanese, South Korean and Japanese semiconductor
manufacturers primarily have located their wafer fabs in their respective
countries. The Company's sales to Japanese semiconductor manufacturers
primarily consist of tester interfaces, test sockets and interface boards.
Sales of docking hardware and universal manipulators have been limited in Japan
and South Korea because manufacturers in these countries emphasize mass-
produced products such as memory devices and other commodity devices.
Commodity devices are typically tested using dedicated manipulators rather than
universal manipulators with docking hardware.
As part of the Company's strategy to be domiciled in its major markets,
the Company established inTEST LTD in the U.K. in 1985, inTEST KK in Japan in
1987 and inTEST PTE in Singapore in 1990. inTEST LTD designs, manufactures and
markets the Company's products principally in the European market. inTEST KK
was established to be a liaison office with Japanese ATE manufacturers and to
market inTEST products in Japan. In addition, inTEST KK initiated the
Company's business of designing and marketing related ATE interface products.
inTEST PTE designs, markets and provides technical support to customers in
Southeast Asia, and it intends to commence manufacturing operations in
Singapore in the future.
The Company has maintained long term relationships with substantially all
ATE manufacturers. The Company believes its relations with such manufacturers
are good and have been additionally strengthened due to the fact that the
Company does not compete with such manufacturers for testers, probers and
handlers. The Company believes that maintaining such relationships is
essential to its ability to provide plug-compatible ATE interface solutions.
The Company's largest customers include Hewlett Packard, Lucent
Technologies, Motorola, NEC, SGS Thomson, and Texas Instruments among
semiconductor manufacturers, and Analog Devices, Credence Systems, LTX, and
Teradyne among ATE manufacturers. Sales to the Company's top ten customers
accounted for 76%, 72% and 70% of the Company's revenues in 1998, 1997 and
1996, respectively. Sales to Lucent Technologies accounted for 16%, 11% and
16%; sales to Motorola accounted for 13%, 5% and 7%; sales to Texas Instruments
accounted for 11%, 7% and 5% and sales to Analog Devices accounted for 7%, 11%
and 6% of the Company's revenues in 1998, 1997 and 1996, respectively.
MANUFACTURING AND SUPPLY
The Company's principal manufacturing operations consist of assembly and
testing at its facilities in New Jersey, California and in the U.K. By
maintaining manufacturing facilities and technical support in geographic
markets where its semiconductor manufacturer customers are located, the Company
believes that it is able to respond more quickly and accurately to its
customers needs.
The Company assembles its manipulator products, docking hardware and
tester interfaces and certain of its probing assemblies from a combination of
standard components and fabricated custom parts which have been manufactured to
the Company's specifications by either third party manufacturers or the
Company's fabrication operation in California. The Company's related ATE
interface products, such as test sockets, interface boards and other of its
probing assemblies, are also manufactured to the Company's specifications by
third party manufacturers. The Company's policy is to use the highest quality
raw materials and components in its products. The primary raw materials used
in fabricated parts are various grades of aluminum and steel, in interface
boards are fiberglass and copper, in tester interfaces are pogo pins and in
test sockets are plastic and copper, all of which are widely available.
Substantially all components are purchased from multiple suppliers. Certain
raw materials and components are purchased from single suppliers, however, the
Company believes that all materials and components are available in adequate
amounts from other sources.
8
In New Jersey and California, the Company controls the quality of raw
materials, fabricated parts and components by conducting incoming inspections
using sophisticated measurement equipment, including a coordinate measuring
machine in New Jersey, to ensure that products with critical dimensions meet
the Company's specifications. In the U.K., the Company relies on its suppliers
for inspecting the quality of fabricated parts. The Company intends to buy a
coordinate measuring machine for inTEST LTD by the second quarter of 1999.
The Company's policy is to inspect all products at various stages prior to
shipment. The Company's inspection standards have been designed to comply with
applicable MIL specifications and ANSI standards. The Company is preparing a
quality manual to comply with such specifications and standards in anticipation
of applying for ISO 9001 certification.
SALES AND DISTRIBUTION
In North America, the Company sells to semiconductor manufacturers
principally through independent, commissioned sales representatives and to ATE
manufacturers through Company account managers. North American sales
representatives also coordinate product installation and support with the
Company's technical staff and participate in trade shows. Technical support is
provided to the Company's North American customers and independent sales
representatives by Company employees based in Cherry Hill, New Jersey,
Sunnyvale, California, Austin, Texas, Chandler, Arizona and Beaverton, Oregon.
In Europe, the Company sells to semiconductor and ATE manufacturers
through Company account managers. In Japan, the Company sells to semiconductor
and ATE manufacturers through Company account managers. In China, Hong Kong,
Malaysia, the Philippines, Singapore, South Korea, Taiwan and Thailand, the
Company sells through independent sales representatives. International sales
representatives are responsible for sales, installation, support and trade show
participation in their geographic market areas.
Company account managers are responsible for a portfolio of customer
accounts and for managing certain independent sales representatives. In
addition, Company account managers are responsible for applications
engineering, custom product design, pricing, quotations, proposals and
transaction negotiations.
COMPETITION
The Company's competitors include independent manufacturers of
manipulators, docking hardware, tester interfaces and related ATE interface
products, designers and manufacturers of ATE and, to a lesser extent,
semiconductor manufacturers' in-house ATE interface groups. The Company
principally competes on the basis of product performance and functionality,
product reliability, customer service, applications support, price and timely
product delivery.
The independent manufacturers of docking hardware and manipulators which
compete with the Company include Reid-Ashman Manufacturing of the U.S.,
Microhandling of Germany and Shang Sheng of Taiwan, each of which manufactures
docking hardware and manipulators. The manufacturers of ATE which compete with
the Company in the sale of docking hardware and universal manipulators include
Credence Systems, LTX, Schlumberger and Teradyne. Such manufacturers of ATE
may be both competitors and customers of the Company. The independent
manufacturers of tester interfaces which compete with the Company include
Cerprobe Corporation, Synergetix, a division of IDI, and Xandex Corporation.
The manufacturers of ATE which compete with the Company in the sale of tester
interfaces include Credence Systems, Electroglas, LTX and Teradyne. In
addition, in the sale of related ATE interface products there are approximately
20 manufacturers of interface boards, four manufacturers of high performance
test sockets and eight manufacturers of probing assemblies.
PATENTS AND OTHER PROPRIETARY RIGHTS
The Company currently holds 13 U.S. patents and 66 foreign patents and
has pending four U.S. patent applications and more than 34 foreign
applications that cover various aspects of its technology. The Company's
policy is to protect its technology by filing patent applications for the
technologies that the Company considers important to its business. The Company
first filed for patent protection in the U.S. for its docking hardware and the
9
in2 test head manipulator in 1982, less than one year after the formation of
the Company. The Company's U.S. issued patents will expire at various times
beginning in 2002 and extending through 2015. There can be no assurance that
additional patents will be issued on the Company's pending and future
applications, or that any patents now or hereafter owned by the Company will
afford protection against competitors that develop similar technology or
products. There are no pending lawsuits or claims against the Company
regarding infringement of any existing patents or other intellectual property
rights of others.
The Company also relies on trade secrets and unpatentable know-how to
protect its proprietary rights. It is the Company's policy to require, as a
condition of permanent employment, that all employees of the Company agree to
assign to the Company all rights to inventions or other discoveries relating
to the Company business made while employed by the Company. In addition, all
employees agree not to disclose any information regarding the Company which is
private or confidential.
On November 18, 1998, the Company and its subsidiary inTEST IP Corp.
(which holds title to all Company intellectual property) filed suit against a
competitor for infringement of a United States patent held by the Company (the
"815 Patent"). The invention disclosed and claimed in the 815 Patent is
directed to a system for positioning and docking a heavy electronic test head
of a test system with respect to an electronic device handler. The system is
used in the automatic testing of ICs and other electronic devices. The Company
sells products covered by the 815 Patent worldwide.
As alleged in the complaint, the competitor began manufacturing, offering
to sell, and selling products as early as 1991 that, without license, infringe
claims of the 815 Patent. The parties have been discussing possible settlement
of the dispute since the Company first became aware of the infringement in
1991. Discussions were abated at the end of 1995 so that the United States
Patent and Trademark Office (the "PTO") could reexamine the 815 Patent. On
April 7, 1998, the PTO completed the reexamination and affirmed the
patentability of the nine claims in the patent with minor, technical,
clarifying changes. Thereafter, the parties resumed settlement negotiations,
however, to date such negotiations have been unsuccessful.
The complaint asks the court to enjoin the competitor from further acts of
infringement, including the acts of manufacturing, using, offering for sale,
selling and importing positioner systems that embody the invention claimed in
the 815 Patent. The complaint also asks the court to award the Company
damages, including the Company's lost profits. Alleging that the competitor's
infringement is and has been deliberate, willful, and wanton, with knowledge of
the Company's patent rights, the complaint asks the court to award increased
damages up to three times the amount assessed. The complaint also seeks an
award of interest, costs and reasonable attorney fees. All legal fees incurred
in connection with this matter have been expensed.
BACKLOG
At December 31, 1998, the Company's backlog of unfilled orders for all
products was approximately $3.4 million compared with approximately $6.2
million at December 31, 1997. The Company's backlog includes customer purchase
orders which have been accepted by the Company, substantially all of which the
Company expects to deliver in the current fiscal year. While backlog is
calculated on the basis of firm purchase orders, no assurance can be given that
customers will purchase the Company's products subject to such orders or that
customers will not accelerate or postpone currently scheduled delivery dates.
As a result, the Company's backlog at a particular date is not necessarily
indicative of sales for any future period.
SEASONALITY
The Company's business is not seasonal, therefore year-over-year quarterly
comparisons of the Company's results of operations may not be as meaningful as
sequential quarterly comparisons which tend to reflect the cyclical activity of
the semiconductor industry as a whole. Quarterly fluctuations in expenses are
either related directly to sales activity and volume or tend to be a function
of personnel costs and the timing of expenses incurred throughout a year. See
10
Note 16 of Notes to Consolidated Financial Statements for a presentation of
the Company's quarterly results for each of the last two years.
EMPLOYEES
At December 31, 1998, the Company had 111 employees, including 48 in
customer operations, 46 in manufacturing operations and 17 in administration.
Substantially all of the Company's key employees are highly skilled and trained
technical personnel, and new technical employees are required to attend an in-
house training program. None of the Company's employees are represented by a
labor union, and the Company has never experienced a work stoppage. The
Company believes that its employee relations are excellent.
ADDITIONAL FACTORS
The Company's operating results are substantially dependent on the level
of activity and capital expenditures of semiconductor manufacturers. The
semiconductor industry is highly cyclical and, from time to time, has
experienced periods of excess capacity which have had severely detrimental
effects on the industry's demand for ATE. There can be no assurance that the
Company's business and results of operations will not be materially adversely
affected by downturns in the semiconductor industry generally, or by downturns
or reductions in capital equipment investment in any one or more particular
market segments of the semiconductor industry in which the Company
participates.
In addition to the factors described in this Report, the Company's
operating results could be affected in the future, by other factors, including,
without limitation: changes in business conditions and the economy, generally;
the ability of the Company to obtain patent protection and enforce its patent
rights for existing and developing proprietary technologies; the ability of the
Company to integrate successfully businesses, technologies or products which it
may acquire; the effect of the loss of, or reduction in orders from, a major
customer; and competition from other manufacturers of test head manipulators,
docking hardware, tester interfaces and related ATE interface products.
Item 2: Properties
The Company's headquarters are located in Cherry Hill, New Jersey in
28,630 square feet of office and manufacturing space leased pursuant to a
seven-year lease which expires in 2003. In August 1997, the Company leased an
additional 11,082 square feet of warehouse and manufacturing space near its
headquarters in Cherry Hill pursuant to a lease which is coterminous with that
of its headquarters. The Company's has three facilities in Sunnyvale,
California: the manufacturing and office space occupies approximately 8,000
square feet pursuant to a 17 month lease which expires in 1999; the machine
shop occupies 1,109 square feet pursuant to a two year lease which expires in
1999; and additional office and warehouse space which occupies 1,900 square
feet leased pursuant to a five year lease which expires in 2001. The Company
has sublet 1,200 square feet of the additional office and warehouse space
pursuant to a lease which is coterminous with the Company's lease. The
Company's facility in the U.K. is located in Thame in 4,600 square feet of
office and manufacturing space leased pursuant to an 8-year lease which expires
in December 2005. In Singapore, the Company occupies 3,077 square feet of
office and manufacturing space leased pursuant to a four-year lease which
expires in 2000 subject to a two-year renewal option. In Kichijoji, Japan, the
Company occupies approximately 1,200 square feet of office space pursuant to an
agreement which is cancelable on reasonable notice by either party. The
Company believes that its headquarters and other existing facilities are
adequate to meet its current and foreseeable future needs.
Item 3: Legal Proceedings
On November 18, 1998, the Company and its subsidiary inTEST IP Corp.
(which holds title to all Company intellectual property) filed suit in the
Federal District Court in Washington, D.C. against Reid-Ashman Manufacturing,
Inc. and its President and CEO, Mr. Steven J. Reid (the "Defendant") for
infringement of a United States patent held by the Company (the "815 Patent").
The invention disclosed and claimed in the 815 Patent is directed to a system
for positioning and docking a heavy electronic test head
11
of a test system with respect to an electronic device handler. The system is
used in the automatic testing of IC's and other electronic devices. The
Company sells products covered by the 815 Patent worldwide.
As alleged in the complaint, the Defendant began manufacturing, offering
to sell, and selling products as early as 1991 that, without license, infringe
claims of the 815 Patent. The parties have been discussing possible settlement
of the dispute since the Company first became aware of the Defendant's
infringement in 1991. Discussions were abated at the end of 1995 so that the
United States Patent and Trademark Office (the "PTO") could reexamine the 815
Patent. On April 7, 1998, the PTO completed the reexamination and affirmed the
patentability of the nine claims in the patent with minor, technical,
clarifying changes. Thereafter, the parties resumed settlement negotiations,
however, to date such negotiations have been unsuccessful.
The complaint asks the court to enjoin the competitor from further acts of
infringement, including the acts of manufacturing, using, offering for sale,
selling and importing positioner systems that embody the invention claimed in
the 815 Patent. The complaint also asks the court to award the Company
damages, including the Company's lost profits. Alleging that the Defendant's
infringement is and has been deliberate, willful, and wanton, with knowledge of
the Company's patent rights, the complaint asks the court to award increased
damages up to three times the amount assessed. The complaint also seeks an
award of interest, costs and reasonable attorney fees. All legal fees incurred
in connection with this matter have been expensed.
Item 4: Submission of Matters to a Vote of Security Holders
Not Applicable
Part II:
- -------
Item 5: Market for Registrant's Common Equity and Related Stockholder
Matters
(a) The Company's common stock trades on the Nasdaq National Market
system ("NNMS") under the symbol "INTT". The common stock was
first traded on the NNMS on June 17, 1997, concurrent with the initial
public offering, (the "Offering") of the Company's common stock.
The table below sets forth the high and low closing prices of the
Company's common stock during the fiscal periods indicated:
High Low
------ -----
Fiscal Year Ended December 31, 1998:
First Quarter $10.25 $6.25
Second Quarter 8.94 6.00
Third Quarter 6.00 4.00
Fourth Quarter 9.44 4.00
Fiscal Year Ended December 31, 1997:
First Quarter Not Listed
Second Quarter 9.63 7.50
Third Quarter 18.75 8.00
Fourth Quarter 18.25 5.00
As of March 22, 1999, there were approximately 1,000 holders of record
of the Company's common stock.
The Company has not paid any dividends on its common stock subsequent
to the Offering, other than amounts representing the Company's
12
previously taxed but undistributed S corporation earnings through the
date of termination of the S corporation election in connection with
the Offering.
The Company does not anticipate paying cash dividends in the
foreseeable future, but intends to retain any future earnings for
reinvestment in the operation and expansion of the Company's business.
Payment of future dividends, if any, will be at the discretion of the
Company's Board of Directors after taking into account various
factors, including the Company's financial condition, operating
results, current and anticipated cash needs and plans for expansion.
(b) Use of Proceeds from Offering:
On June 17, 1997, the Company's Registration Statement on Form S-1
covering the Offering of 2,275,000 shares of the Company's Common Stock,
Commission file number 333-26457, was declared effective. The Offering
closed on June 20, 1997, managed by Janney Montgomery Scott Inc. and
Needham & Company, Inc. as representatives of the several underwriters
named in the Registration Statement (the "Underwriters").
Of the 2,275,000 shares sold pursuant to the Offering, 1,820,000 shares
were sold by the Company and 455,000 were sold by certain selling
stockholders (the "Selling Stockholders"). In addition, the Underwriters
exercised an over-allotment option to purchase an additional 341,250
shares of the Company's Common Stock from the Selling Shareholders. The
total purchase price to the public for the shares offered and sold by the
Company and the Selling Shareholders was $13,650,000 and $5,971,875,
respectively.
The amount of expenses incurred for the Company's account in connection
with the Offering are as follows:
Underwriting discounts and commissions: $1,023,750
Finders fees: None
Expenses paid to or for the Underwriters 16,650
Other expenses: 954,758
----------
Total expenses $1,995,158
==========
All of the foregoing expenses were direct or indirect payments to persons
other than (i) directors, officers or their associates; (ii) persons
owning ten percent (10%) or more of the Company's Common Stock; or (iii)
affiliates of the Company.
The net proceeds of the Offering to the Company (after deducting the
foregoing expenses) was $11,654,842. From the effective date of the
Registration Statement, the net proceeds have been used for the following
purposes:
Construction of plant, building and facilities $ -
Purchase and installation of machinery and equipment 298,346
Purchase of real estate -
Acquisition of businesses 4,825,000
Repayment of indebtedness 388,098
Working capital 599,725
Temporary investments, including cash & cash equivalents 4,942,908
Other purposes (for which at least $100,000 has been used) including:
Payment of final S corporation distribution 600,765
-----------
Total $11,654,842
===========
13
In connection with the termination of the Company's status as an S
corporation, the Company used $601,000 of the net proceeds to pay a
portion of the $4.3 million final distribution of previously taxed but
undistributed earnings of the Company.
All of the foregoing payments with the exception of the final S
corporation distribution were direct or indirect payments to persons other
than (i) directors, officers or their associates; (ii) persons owning ten
percent (10%) or more of the Company's Common Stock; or (iii) affiliates
of the Company.
Item 6: Selected Financial Data
The following table contains certain selected consolidated financial
data of the Company and is qualified by the more detailed Consolidated
Financial Statements and Notes thereto included elsewhere in this Annual
Report on Form 10-K and should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
And the other financial information included in this Annual Report on
Form 10-K.
Years Ended December 31,
--------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- ------
(in thousands, except share data)
Consolidated Statement of Earnings Data:
Net revenues. . . . . . . . . . . . . . . . $19,075 $20,746 $18,582 $14,442 $9,287
Gross margin. . . . . . . . . . . . . . . . 10,673 12,938 11,827 9,251 5,150
Operating income. . . . . . . . . . . . . . 2,518 6,187 5,616 4,037 1,289
Net earnings. . . . . . . . . . . . . . . . 1,927 4,332 4,646 3,252 817
Earnings per share (1997 and 1996 information
is pro forma):
Basic. . . . . . . . . . . . . . . . . .31 .74 .83
Diluted. . . . . . . . . . . . . . . . .31 .73 .83
Weighted average shares outstanding (1997
and 1996 information is pro forma):
Basic. . . . . . . . . . . . . . . . . 6,170 5,068 4,091
Diluted. . . . . . . . . . . . . . . . 6,186 5,092 4,091
As of December 31,
--------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- ------
(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents . . . . . . . . . $ 8,468 $12,035 $ 3,692 $ 1,919 $1,336
Working capital . . . . . . . . . . . . . . 13,312 14,655 4,377 4,201 2,944
Total assets. . . . . . . . . . . . . . . . 23,218 19,945 7,716 6,352 4,624
Long term debt. . . . . . . . . . . . . . . - - 155 - -
Total stockholders' equity. . . . . . . . . 21,226 16,557 4,587 4,048 2,765
14
Item 7: Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
- ---------------------
Overview
- --------
The Company designs, manufactures and markets docking hardware, test head
manipulators and tester interfaces, which are used with automatic test
equipment ("ATE") by semiconductor manufacturers during the testing of wafers
and packaged devices. The Company also designs and markets related ATE
interface products including high performance test sockets, interface boards
and probing assemblies. The Company's products are designed to improve the
utilization and cost-effectiveness of ATE (including testers, wafer probers and
device handlers) during the testing of linear, digital and mixed signal
integrated circuits ("ICs").
The Company's revenues are substantially dependent upon the demand for ATE
by semiconductor manufacturers and, therefore, fluctuate generally as a result
of the cyclicality in the semiconductor manufacturing industry. The Company
believes that purchases of the Company's docking hardware, manipulators and
tester interfaces are typically made from its customers' capital expenditure
budgets, while related ATE interface products, which must be replaced
periodically, are typically made from its customers' operating budgets.
During the last three years, the demand for ATE by the semiconductor
industry has exhibited a high degree of cyclicality. 1996 represented a year
of sequential quarterly declines in orders for and sales of the Company's
products due to a reduced level of semiconductor manufacturing activity which
caused cutbacks in semiconductor manufacturers' capital expenditure budgets.
1997 marked a turnaround in the semiconductor industry which was evidenced by
a renewal in demand for ATE and related equipment which resulted in sequential
quarterly increases in orders for and sales of the Company's products.
1998, like 1996, represented a year of sequential quarterly declines in
orders for and sales of the Company's products, however, to a more significant
degree. In early 1998 worldwide demand for ICs fell dramatically due to
excess inventory of older IC designs, and slower transition to new IC designs
resulting generally from softening worldwide demand for end user products. In
addition, the economic downturns in many world economies, especially those in
Southeast Asia and Japan, exacerbated the semiconductor industry downturn. The
combination of these conditions contributed to a reduced demand for products
manufactured by semiconductor manufacturers, which in turn significantly
reduced their need for new or additional ATE equipment. The Company's
financial performance was negatively impacted by these industry conditions.
Net sales fell from $6.0 million in the fourth quarter of 1997 to $3.8 million
in the fourth quarter of 1998. The reduced demand for ATE is reflected in the
Company's backlog, which was $3.4 million at December 31, 1998 compared to $6.2
million at December 31, 1997. In early 1999, the Company has seen a
significant increase in the level of orders for its products over the last
quarter of 1998, however, the Company is cautious about the level of revenues
and net income for the first two quarters of 1999 due to the continued
uncertainty in the semiconductor industry.
On June 20, 1997, the Company completed an initial public offering of
2.275 million common shares through which the Company issued 1.82 million new
shares of common stock (the "Offering"). Prior to the Offering the Company was
an S corporation, and the net earnings of the Company were taxed as income to
the Company's stockholders for Federal and certain New Jersey state income tax
purposes. The Company terminated its status as an S corporation prior to the
closing of the Offering and is subject to Federal and additional state income
taxes for periods after such termination.
15
On August 3, 1998, the Company acquired all of the outstanding capital
stock of TestDesign Corporation ("TestDesign"), a privately held California
corporation (the "Acquisition"). TestDesign is engaged in the design and
manufacture of tester interfaces used by the semiconductor industry. The
purchase price was $4.4 million in cash and 625,000 shares of the Company's
common stock (subject to certain adjustments).
1998 Compared to 1997
- ---------------------
Revenues. Revenues were $19.1 million for 1998 compared to $20.7 million
for 1997, a decrease of $1.7 million or 8%. The decline in revenues from the
prior year is the result of the aforementioned severe downturn that the ATE
industry experienced during 1998 offset, in part, by the revenues of TestDesign
from its acquisition in August 1998 through year end.
Gross Margin. Gross margin declined to 56% for 1998 from 62% in 1997.
The reduction in gross margin was primarily the result of the additional fixed
costs of manufacturing of TestDesign which were impacted unfavorably by the
significantly reduced revenue levels during the year. In addition, material
costs as a percentage of sales increased over the comparable prior period due
to an increase in the level of sales of certain products with a greater
component material cost in 1998 compared to 1997.
Selling Expense. Selling expense was $3.3 million for 1998 compared to
$2.8 for 1997, an increase of $557,000 or 20%. The increase was attributable
to several factors including the additional salary and commission expenses of
TestDesign and increased travel expenses incurred in connection with the
Company's sales activities, higher levels of warranty expenses and increased
advertising expenditures.
Research and Development Expense. Research and development expense was
$1.9 million for 1998 compared to $1.7 million for 1997, an increase of
$197,000 or 11%. The increase was primarily attributable to the additional
salary expense of TestDesign coupled with a growth in the number of engineering
and technical staff offset in part by reductions in spending on research and
development materials and travel expenses in 1998 as compared to 1997.
General and Administrative Expense. General and administrative expense
was $2.9 million in 1998 compared to $2.2 million in 1997, an increase of
$650,000 or 29%. The increase was primarily attributable to the additional
salary and other administrative costs of TestDesign. Also contributing to the
increase in 1998 were the amortization of goodwill resulting from the
Acquisition, additional administrative staff, increases in professional fees,
and the increase in amortization of certain prepaid expenses.
Income Tax Expense. Income tax expense decreased to $1.1 million for 1998
from $2.1 million in 1997, a decrease of $991,000 or 47%. The Company's
effective tax rate was 36% for 1998 compared to 32% in 1997. The increase in
the effective tax rate was caused by the accrual of Federal income tax on the
Company's earnings due to the change of tax status from S corporation to C
corporation in June 1997, offset in part by the implementation of tax favorable
corporate structures and a lower percentage of earnings attributable to the
Company's Japanese subsidiary in 1998 as compared to 1997.
1997 Compared to 1996
- ---------------------
Revenues. Revenues were a record $20.7 million for 1997 compared to $18.6
million for 1996, an increase of $2.1 million or 11%. The year-to-year
increase was primarily due to higher levels of shipments of the Company's
products during the fourth quarter of 1997 compared to the same period in 1996,
which reflects the higher level of manufacturing activity in the semiconductor
industry in 1997 as compared to 1996. The Company did not increase sales
prices significantly in 1997. The Company believes that the increase in
revenues was from the sales of products used in the testing of mixed signal
16
devices and digital devices (such as microprocessors and microcontrollers) and
numerous other devices used in the automotive, computer, telecommunications and
other industries.
Gross Margin. Gross margin declined to 62% for 1997 from 64% in 1996.
The reduction in gross margin was primarily attributable to a significant
increase in the level of sales to ATE manufacturers, which increased from
approximately 21% of sales in 1996 to approximately 34% in 1997. In addition,
the Company experienced an increase in its fixed operations costs in 1997, due
to higher occupancy costs associated with the larger New Jersey manufacturing
facility which was leased in August 1996. The decline in gross margin was
partially offset by reduced incremental material costs due to volume discounts
received in the last two quarters of 1997.
Selling Expense. Selling expense was $2.8 million for 1997 compared to
$2.5 million for 1996, an increase of $318,000 or 13%. The increase was
primarily attributable to higher salary and benefit expenses resulting from the
allocation of additional personnel costs to selling expense and, to a lesser
extent, salary increases for existing personnel. The increase in selling
expense also reflects an increase in advertising and promotional expenses over
the comparable prior period. In addition, commission expense increased in 1997
over the level incurred in 1996 due to an increase in the level of commissioned
sales to semiconductor manufacturers. These increases were offset by a
reduction in travel and other expenses.
Research and Development Expense. Research and development expense was
$1.7 million for 1997 compared to $1.9 million for 1996, a decrease of $191,000
or 10%. The decline was primarily attributable to reduced levels of spending
on research and development materials in 1997 compared to 1996, and, to a
lesser extent, to the aforementioned allocation of certain personnel costs to
selling expense.
General and Administrative Expense. General and administrative expense
was $2.2 million for 1997 compared to $1.8 million for 1996, an increase of
$413,000 or 23%. The increase was primarily attributable to the additional
costs associated with shareholder and investor relations and increased
expenditures for outside directors' fees and professional fees incurred as a
public company. Other factors contributing to the increase in 1997 were the
amortization of goodwill resulting from the acquisition of the minority
interests in the Company's three foreign subsidiaries in connection with the
offering and salary increases of administrative staff.
Income Tax Expense. Income tax expense increased to $2.1 million from
$858,000 for 1996, an increase of $1.2 million or 144%. The Company's
effective tax rate was 32% for 1997 compared to 15% in 1996. The increase in
the effective tax rate was caused by the accrual of Federal income tax on the
Company's earnings due to the change of tax status from S corporation to C
corporation in June 1997 and, to a lesser extent, a greater percentage of
earnings before income taxes and minority interest attributable to the
Company's Japanese subsidiary.
Liquidity and Capital Resources
- -------------------------------
Net cash provided by operations for 1998 was $1.6 million. The following
discussion of changes in working capital is exclusive of changes in working
capital resulting from the TestDesign acquisition. Accounts receivable
decreased $1.7 million from December 31, 1997 to December 31, 1998 due to the
sequential quarterly reductions in sales levels during 1998. Inventories
remained relatively constant during the year. Refundable domestic and foreign
income taxes increased $658,000 as a result of lower levels of earnings than
were originally forecasted at the time estimated tax payments were made. Other
current assets decreased by $32,000 because of the amortization of prepaid
expenses. Accounts payable decreased $315,000 due to lower production levels
resulting from the industry slowdown. Accrued expenses decreased $244,000
primarily as a result of the timing of payments of previously accrued expenses.
Domestic and foreign income taxes payable decreased $1.3 million as a result of
the payment of previously accrued Federal, state and foreign income taxes on
earnings.
17
Purchases of machinery, equipment and leasehold improvements were $261,000
for 1998. The Company plans to spend approximately $300,000 during the second
quarter of 1999 to renovate and expand its UK manufacturing facility and
purchase a coordinate measuring machine for this facility.
At December 31, 1998, the Company had no outstanding long or short-term
debt. During 1998, the Company repaid $215,000 on a non-interest bearing note
related to the acquisition of TestDesign.
The Company realized net cash proceeds of $11.7 million (after payment of
direct expenses of the Offering) from the sale of 1.82 million newly issued
shares in the Offering in June 1997. The proceeds from the Offering are being
used for working capital, general corporate purposes and possible acquisitions
of businesses, technologies or products complementary to the Company's
business.
On August 3, 1998, the Company acquired all of the outstanding capital
stock of TestDesign Corporation ("TestDesign"), a privately held California
corporation (the "Acquisition"). The purchase price was $4.4 million in cash
and 625,000 shares of the Company's common stock (subject to certain
adjustments). The acquisition of TestDesign, which was accounted for using the
purchase method, resulted in goodwill of $5.8 million, which is being amortized
over a period of 15 years. In addition, the Company incurred transactions
costs of approximately $425,000 in connection with the Acquisition. The
Company funded the cash portion of the purchase price from its cash on hand.
At December 31, 1998, the Company's cash and cash equivalents included $4.9
million of temporary investments attributable to the Offering.
The Company believes that existing cash and cash equivalents, its $1.5
million unused line of credit and the anticipated net cash provided from
operations in 1999 will be sufficient to satisfy the Company's cash
requirements including those of its new subsidiary for the foreseeable future.
However, additional acquisitions may require additional equity or debt
financing to meet working capital requirements or capital expenditure needs.
Although the Company, as an S corporation, historically paid cash dividends to
its stockholders, the Company does not anticipate that it will pay dividends in
the foreseeable future.
Year 2000
- ---------
The Year 2000 issue is the result of computer programs being written using
two digits rather than four digits to define the applicable year. Computer
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, a temporary inability to
process transactions, send invoices, or engage in normal business activities.
Currently, the Company has a program in process to analyze potentially
affected business and process systems and replace or correct all non-compliant
critical business and process systems that it will require in the new
millennium. Prior to the acquisition of TestDesign, the Company had completed
its review and testing of its then existing systems and determined that they
were Year 2000 compliant. The Company has identified those systems of
TestDesign that are not yet Year 2000 compliant and has begun converting them
to systems which are Year 2000 compliant. The Company has substantially
completed the system modifications at TestDesign and anticipates that all of
its systems will be Year 2000 compliant by mid-1999.
The products that the Company has sold and currently sells are not date-
sensitive, and therefore the Company believes its product related Year 2000
exposures are low.
In conjunction with the Company's Year 2000 effort, all suppliers that are
critical to the function of the Company are being surveyed to insure readiness
and non-disruption to the Company's supply chain. The Company relies on
subcontractors for fabrication and certain other processes performed on its
18
products and utilizes third-party network equipment and software products which
may or may not be Year 2000 compliant. In addition, the Company relies on
utility and telecommunications suppliers to operate its businesses worldwide.
The Company has sent questionnaires to these critical suppliers to determine
the extent to which the Company's operations are exposed to failure from Year
2000 issues. The Company has received responses from over 85% of its domestic
suppliers and is still awaiting responses from most of its foreign suppliers.
The Company intends to replace any critical raw materials and fabrication
suppliers which cannot demonstrate Year 2000 compliance before the end of the
third quarter of 1999. There can be no assurance that the Company will be
successful in its efforts to identify and resolve any Year 2000 issues
involving its suppliers or to continue receiving products and services from
these suppliers if Year 2000 problems were to materialize. The failure to
resolve these issues could result in the shut-down of some or all of the
Company's operations, which would have a material adverse effect on the
Company.
The total expense of the Company's Year 2000 effort is currently estimated
at less than $100,000, for the identification and remediation of any Year 2000
problems related to the Company's internal systems. If required modifications
to existing software and hardware are not made, or are not completed in a
timely manner, the Year 2000 could have a material impact on the operations of
the Company. There can be no assurance that the costs to remediate any Year
2000 problems which may be identified in the future will not exceed the
Company's current estimate or that the Company will be able to resolve these
issues in a timely manner. The expenses of the Year 2000 project are being
funded through operating cash flows.
The Company does not currently have any information concerning Year 2000
compliance of its customers. If any of the Company's significant customers and
suppliers do not successfully and in a timely manner achieve Year 2000
compliance, and as a result of such non-compliance such customers operations
are disrupted, shut-down or otherwise impacted, the Company's business or
operations could be adversely affected. There can be no assurance that another
company's failure to ensure Year 2000 capability would not have an adverse
effect on the Company.
The Company has not developed a comprehensive contingency plan to address
situations which it believes to be beyond its control (i.e. such as utilities
and telecommunications). There can be no assurance that the Company will be
able to develop a contingency plan that will adequately address such issues
that may arise in the Year 2000. The failure of the Company to successfully
resolve such issues could result in a shut-down of some or all of the Company's
operations, which could have a material adverse effect on the Company.
Exposure to International Operations
- ------------------------------------
Revenues generated by the Company's foreign subsidiaries were 34%, 34% and
43% of consolidated revenues for the years ended December 31, 1998, 1997 and
1996, respectively. The Company anticipates that revenues generated by the
Company's foreign subsidiaries will continue to account for a significant
portion of consolidated revenues in the foreseeable future. These revenues
generated by the Company's foreign subsidiaries will continue to be subject to
certain risks, including changes in regulatory requirements, tariffs and other
barriers, political and economic instability, an outbreak of hostilities,
foreign currency exchange rate fluctuations, potentially adverse tax
consequences and the possibility of difficulty in accounts receivable
collection. The Company cannot predict whether quotas, duties, taxes or other
charges or restrictions will be implemented by the United States or any other
country upon the importation or exportation of the Company's products in the
future. Any of these factors or the adoption of restrictive policies could
have a material adverse effect on the Company business, financial condition or
results of operations.
Revenues denominated in foreign currencies were 24%, 27% and 35% of
consolidated revenues for the years ended December 31, 1998, 1997 and 1996,
respectively. Although the Company operates its business such that a
significant portion of its product costs are denominated in the same currency
19
that the associated sales are made in, there can be no assurance that the
Company will not be adversely impacted in the future due to its exposure to
foreign operations. Revenues denominated in currencies other than U.S.
dollars expose the Company to currency fluctuations, which can adversely effect
results of operations. During the year ended December 31, 1998, the Company
experienced foreign currency transaction gains of $47,000 while during the
years ended December 31, 1997 and 1996, the Company experienced foreign
exchange transaction losses of $63,000 and $31,000, respectively. The
currency exchange translation gain in 1998 is primarily the result of the
strengthening of the Japanese Yen against the U.S. dollar during 1998.
The portion of the Company's consolidated revenues derived from sales to
the Asia Pacific region were 25%, 28% and 26% for the years ended December 31,
1998, 1997 and 1996, respectively. Countries in the Asia Pacific region,
including Japan, have experienced economic instability resulting in weaknesses
in their currency, banking and equity markets. Although the current economic
instability in the Asia Pacific region has not materially adversely affected
the Company's order backlog, balance sheet, or results of operations to date,
there can be no assurance that continued economic instability will not in the
future have a material adverse affect on demand for the Company's products and
its consolidated results of operations.
Cautionary Statement Regarding Forward Looking Statements
- ---------------------------------------------------------
This Report contains certain statements of a forward-looking nature
relating to future events, such as statements regarding the Company's plans and
strategies or future financial performance. Such statements can be identified
by the use of forward-looking terminology such as "believes," "expects,"
"may," "will," "should" or "anticipates" or the negative thereof or other
variations thereon or comparable terminology, or by discussions of strategy
that involve risks and uncertainties. Investors and prospective investors are
cautioned that such statements are only projections and that actual events or
results may differ materially from those expressed in any such forward-looking
statements. In addition to the factors described in this Report, the Company's
actual consolidated quarterly or annual operating results have been affected in
the past, or could be affected in the future, by additional factors, including,
without limitation: changes in business conditions and the economy, generally;
the ability of the Company to obtain patent protection, and enforce its patent
rights, for existing and developing proprietary technologies; the ability of
the Company to integrate successfully businesses, technologies or products
which it may acquire; the effect of the loss of, or reduction in orders from, a
major customer; and competition from other manufacturers of docking hardware,
test head manipulators, tester interfaces and related ATE interface products.
Item 7A: Quantitative and Qualitative Disclosure About Market Risk
The Company is exposed to currency exchange rate risk in the normal course
of its business. The Company employs risk management strategies including the
use of forward exchange rate contracts to manage this exposure. The Company's
objective in managing currency exchange risk is to minimize the impact of
significant currency exchange rate fluctuations primarily in the Japanese Yen.
The Company's Japanese operations expose its earnings to change in currency
exchange rates because it's Japanese subsidiary makes its sales in Japanese Yen
and purchases its sales inventory in U.S. dollars. Forward exchange rate
contracts are used to establish a fixed conversion rate between the Japanese
Yen and the U.S. dollar so that the level of the Company's gross margin from
sales in Japan is not negatively impacted from significant movements in the
Japanese Yen to U.S. dollar exchange rate. The Company purchases forward
exchange rate contracts on a monthly basis in the amounts necessary to pay the
U.S. dollar denominated obligations of its Japanese subsidiary. As of December
31, 1998, there were no forward exchange rate contracts outstanding.
It is the Company's policy to enter into forward exchange rate contracts
only to the extent necessary to achieve the desired objectives of management in
limiting the Company's exposure to significant fluctuations in currency
exchange rates. The Company does not hedge all of its currency exchange rate
risk exposures in a manner that would completely eliminate the impact of
20
changes in currency exchange rates on its net income. The Company does not
expect that its results of operations or liquidity will be materially affected
by these risk management activities.
The notional amounts of the Company's forward exchange rate contracts are
used only to satisfy current payments to material vendors to be exchanged and
are not a measure of the Company's credit risk or its future cash requirements.
Exchange risk related to forward exchange rate contracts is limited to movement
in the exchange rates that would provide a more favorable exchange rate than
that locked in the forward contract and forward contract amounts purchased in
excess of the amount needed by the Company to satisfy its obligations. The
Company manages that rate risk by limiting the size of the forward contracts
purchased to the known amount of obligations due and not purchasing forward
contracts with settlement dates beyond 30 days. The Company believes that the
risk of loss due to exchange rate fluctuations is remote and that any losses
would not be material to its financial condition or results of operations.
Item 8: Financial Statements and Supplementary Data
Financial Statements are set forth in this report beginning
at page F-1
Item 9: Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None
Part III:
- --------
Item 10: Directors and Executive Officers
The information called for by this item is incorporated by reference to
the Company's Proxy Statement for its 1999 annual meeting of stockholders which
will be filed prior to April 30, 1999.
Item 11: Executive Compensation
The information called for by this item is incorporated by reference to
the Company's Proxy Statement for its 1999 annual meeting of stockholders which
will be filed prior to April 30, 1999.
Item 12: Security Ownership of Certain Beneficial Owners and Management
The information called for by this item is incorporated by reference to
the Company's Proxy Statement for its 1999 annual meeting of stockholders which
will be filed prior to April 30, 1999.
Item 13: Certain Relationships and Related Transactions
The information called for by this item is incorporated by reference to
the Company's Proxy Statement for its 1999 annual meeting of stockholders which
will be filed prior to April 30, 1999.
Item 14: Exhibits, Financial Statement Schedules
(a) The documents filed as part of this Annual Report on Form 10-K are:
(i) The Company's consolidated financial statements and notes
thereto as well as the applicable reports of the independent
certified public accountants are included in Part II, Item 8
of this Annual Report on Form 10-K.
(ii) The following consolidated financial statement schedule should
be read in conjunction with the consolidated financial
statements set forth in Part II, Item 8 of this Annual Report
on Form 10-K:
Schedule II - Valuation and Qualifying Accounts
21
(iii) The exhibits required by Item 601 of Regulation S-K are
included under Item 14(c) of this Annual Report on Form 10-K.
(b) Reports on Form 8-K
On October 2, 1998, the Company filed an amendment to its Form 8-K
filed on August 5, 1998. The Amended Form 8-K contained the
financial statements required by Item 7 of Form 8-K relating to the
Company's acquisition of TestDesign Corporation.
(c) Exhibits required by Item 601 of Regulation S-K:
Exhibit Number Description of Exhibit
3.1 Certificate of Incorporation.
3.2 Bylaws of the Company
10.1 Amended and Restated Loan Agreement, dated June 30,
1996, between inTEST Corporation and PNC Bank,
National Association. (Amended effective as of June
30, 1998 pursuant to an Amendment to Loan Documents
dated October 5, 1998 which is filed as Exhibit 10.11
to this Report)
10.2 Lease Agreement, dated February 11, 1996, between
First Industrial L.P. (formerly Cherry Hill Industrial
Sites, Inc.) and the Company.
10.3 Lease, dated August 5, 1996, between KIP Properties
and the Company.
10.4 Tenancy Agreement, dated April 18, 1996, between
Alambon Tools Private Limited and inTEST PTE.
10.5 1997 Stock Plan.
10.6 Consulting Agreement, dated April 1, 1997, between
the Company and Stuart F. Daniels, Ph.D.
10.7 Lease Agreement, dated August 22, 1997, between First
Industrial L.P (formerly Cherry Hill Industrial Sites,
Inc.) and the Company.
10.8 Lease Agreement between inTEST Limited and Alan
Breck Robertson and Mavis Robertson dated March 3,
1998.
10.9 Lease, dated January 16, 1998 between Tasman Associates
and inTEST Sunnyvale (as successor by merger with
TestDesign Corporation) and First Amendment signed
February 24, 1999.
10.10 Lease, dated June 12, 1998, between A. Bogomilsky and
inTEST Sunnyvale (as successor by merger with
TestDesign Corporation.
10.11 Amendment to Loan Documents dated October 5, 1998,
amending the loan agreement filed as Exhibit 10.1 to
this Report.
21 Subsidiaries of the Company.
23 Consent of KPMG LLP.
24 Financial Data Schedule.
22
Signatures:
Pursuant to the requirements of Section 13 or 15(d) 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.
inTEST Corporation
By: /s/ Robert E. Matthiessen
--------------------------------------
Robert E. Matthiessen
President and Chief Executive Officer
Pursuant to the requirements of Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
/s/ Alyn R. Holt March 26, 1999
- ------------------------------------------- ----------------
Alyn R. Holt, Chairman
/s/ Robert E. Matthiessen March 26, 1999
- ------------------------------------------- ----------------
Robert E. Matthiessen, President,
Chief Executive Officer and Director
(principal executive officer)
/s/ Douglas W. Smith March 26, 1999
- ------------------------------------------- ----------------
Douglas W. Smith, Executive Vice President,
Chief Operating Officer and Director
/s/ Daniel J. Graham March 26, 1999
- ------------------------------------------- ----------------
Daniel J. Graham, Vice Chairman, Senior
Vice President
/s/ Hugh T. Regan, Jr. March 26, 1999
- ------------------------------------------- ----------------
Hugh T. Regan, Jr., Treasurer and
Chief Financial Officer
(principal financial officer)
/s/ Hugh T. Regan, Sr. March 26, 1999
- ------------------------------------------- ----------------
Hugh T. Regan, Sr., Secretary
/s/ Richard O. Endres March 26, 1999
- ------------------------------------------- ----------------
Richard O. Endres, Director
/s/ Stuart F. Daniels March 26, 1999
- ------------------------------------------- ----------------
Stuart F. Daniels, Ph.D., Director
/s/ Gregory W. Slayton March 26, 1999
- ------------------------------------------- ----------------
Gregory W. Slayton, Director
23
Index to Exhibits
3.1 Certificate of Incorporation.*
3.2 Bylaws of the Company.*
10.1 Amended and Restated Loan Agreement, dated June 30, 1996,
between inTEST Corporation and PNC Bank, National
Association. (Amended effective June 30, 1998 pursuant to
an Amendment to Loan Documents dated October 5, 1998 which
is filed as Exhibit 10.11 to this Report)*
10.2 Lease, dated February 11, 1996, between First Industrial
L.P. (formerly Cherry Hill Industrial Sites, Inc.) and the
Company.*
10.3 Lease, dated August 5, 1996, between KIP Properties and
the Company.*
10.4 Tenancy Agreement, dated April 18, 1996, between Alambon
Tools Private Limited and inTEST PTE.*
10.5 1997 Stock Plan.**
10.6 Consulting Agreement, dated April 1, 1997, between the
Company and Stuart F. Daniels, Ph.D.*
10.7 Lease Agreement dated August 22, 1997, between First
Industrial L.P. (formerly Cherry Hill Industrial Sites,
Inc.) and the Company.***
10.8 Lease Agreement between inTEST Limited and Alan Breck
Robertson and Mavis Robertson dated March 3, 1998.****
10.9 Lease, dated January 16, 1998, between Tasman Associates and
inTEST Sunnyvale (as successor by merger with TestDesign
Corporation) and First Amendment signed February 24, 1999.
10.10 Lease, dated June 12, 1998, between A. Bogomilsky and
inTEST Sunnyvale (as successor by merger with TestDesign
Corporation).
10.11 Amendment to Loan Documents dated October 5, 1998, amending
the loan agreement filed as Exhibit 10.1 to this Report.
21 Subsidiaries of the Company.
23 Consent of KPMG LLP.
27 Financial Data Schedule.
* Previously filed by the Company as an exhibit to the Company's
Registration Statement on Form S-1, Registration Statement No.
333-26457.
** Previously filed by the Company as an exhibit to the Company's
Registration Statement on Form S-8, Registration Statement No.
333-44059.
*** Previously filed by the Company as an exhibit to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
1997.
**** Previously filed by the Company as an exhibit to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1997.
24
inTEST CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
Page
CONSOLIDATED FINANCIAL STATEMENTS:
Independent Auditors' Report F- 1
Consolidated Balance Sheets as of December 31, 1998 and 1997 F- 2
Consolidated Statements of Earnings for the years ended
December 31, 1998, 1997 and 1996 F- 3
Consolidated Statements of Comprehensive Earnings for the
years ended December 31, 1998, 1997 and 1996 F- 4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1998, 1997 and 1996 F- 5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 F- 6
Notes to Consolidated Financial Statements F- 7
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE:
Schedule II - Valuation and Qualifying Accounts F-27
25
Independent Auditors' Report
The Board of Directors and Stockholders
inTEST Corporation
We have audited the accompanying consolidated balance sheets of inTEST
Corporation and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of earnings, comprehensive earnings, stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1998. In connection with our audits of the consolidated financial
statements, we also have audited the consolidated financial statement schedule
of valuation and qualifying accounts as of and for the three years ended
December 31, 1998. These consolidated financial statements and consolidated
financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and consolidated financial statement schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of inTEST Corporation
and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles. Also in our opinion, the related consolidated financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
KPMG LLP
Philadelphia, Pennsylvania
February 19, 1999
F - 1
inTEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31,
----------------------
1998 1997
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 8,468 $ 12,035
Trade accounts and notes receivable, net of allowance for
doubtful accounts of $168 and $144, respectively 3,275 4,058
Inventories 2,521 1,649
Deferred tax asset 245 165
Refundable domestic and foreign income taxes 658 -
Other current assets 137 136
-------- --------
Total current assets 15,304 18,043
-------- --------
Machinery and equipment:
Machinery and equipment 1,690 1,129
Leasehold improvements 223 179
-------- --------
1,913 1,308
Less: accumulated depreciation (1,078) (831)
-------- --------
Net machinery and equipment 835 477
-------- --------
Other assets 195 136
Goodwill 6,884 1,289
-------- --------
Total assets $ 23,218 $ 19,945
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 969 $ 1,142
Accrued expenses 1,023 955
Domestic and foreign income taxes payable - 1,291
-------- --------
Total current liabilities 1,992 3,388
-------- --------
Commitments
Stockholders' equity:
Preferred stock, $0.01 par value; 5,000,000 shares authorized;
no shares issued or outstanding - -
Common stock, $0.01 par value; 20,000,000 shares authorized;
6,536,034 and 5,911,034 shares issued and outstanding, respectively 65 59
Additional paid-in capital 16,647 13,981
Retained earnings 4,570 2,643
Accumulated other comprehensive expense (56) (126)
-------- --------
Total stockholders' equity 21,226 16,557
-------- --------
Total liabilities and stockholders' equity $ 23,218 $ 19,945
======== ========
See accompanying Notes to Consolidated Financial Statements.
F - 2
inTEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except share data)
Years Ended December 31,
-------------------------------
1998 1997 1996
------- ------- -------
Net revenues $19,075 $20,746 $18,582
Cost of revenues 8,402 7,808 6,755
------- ------- -------
Gross margin 10,673 12,938 11,827
------- ------- -------
Operating expenses:
Selling expense 3,346 2,789 2,471
Research and development expense 1,934 1,737 1,928
General and administrative expense 2,875 2,225 1,812
------- ------- -------
Total operating expenses 8,155 6,751 6,211
------- ------- -------
Operating income 2,518 6,187 5,616
------- ------- -------
Other income (expense):
Interest income 455 349 147
Interest expense (3) (15) (11)
Other 56 (74) (35)
------- ------- -------
Total other income 508 260 101
------- ------- -------
Earnings before income taxes and minority interest 3,026 6,447 5,717
------- ------- -------
Income tax expense 1,099 2,090 858
------- ------- -------
Earnings before minority interest 1,927 4,357 4,859
Minority interest - (25) (213)
------- ------- -------
Net earnings $ 1,927 $ 4,332 $ 4,646
======= ======= =======
Pro forma information (unaudited)(Note 3)
Pro forma earnings before income taxes $ 6,407 $ 5,627
Pro forma income taxes 2,680 2,251
Pro forma net earnings 3,726 3,376
Earnings per share (1997 and 1996 information is pro forma):
Basic $ 0.31 $ 0.74 $ 0.83
Diluted 0.31 0.73 0.83
Weighted average shares outstanding (1997 and 1996 information
is pro forma):
Basic 6,169,596 5,068,349 4,091,034
Diluted 6,186,460 5,092,490 4,091,034
See accompanying Notes to Consolidated Financial Statements.
F - 3
inTEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(In thousands, except share data)
Years Ended December 31,
-------------------------------
1998 1997 1996
------- ------- -------
Net earnings $ 1,927 $ 4,332 $ 4,646
Foreign currency translation adjustments 70 (153) (21)
------- ------- -------
Comprehensive earnings $ 1,997 $ 4,179 $ 4,625
======= ======= =======
See accompanying Notes to Consolidated Financial Statements.
F - 4
inTEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
Accumulated
Common Stock Additional Other Total
------------------- Paid-In Retained Comprehensive Stockholders'
Shares Amount Capital Earnings Earnings(Expense) Equity
--------- ------- ---------- -------- ---------------- -------------
Balance, January 1, 1996 3,790,591 $ 38 $ 689 $ 3,273 $ 48 $ 4,048
Dividends-$1.08 per share - - - (4,086) - (4,086)
Net earnings - - - 4,646 - 4,646
Other comprehensive expense - - - - (21) (21)
--------- ------- -------- -------- ------ --------
Balance, December 31, 1996 3,790,591 38 689 3,833 27 4,587
Dividends-$1.46 per share - - - (5,522) - (5,522)
Net earnings - - - 4,332 - 4,332
Acquisition of minority interest 300,443 3 1,655 - - 1,658
Issuance of common stock in
connection with Offering, net 1,820,000 18 11,637 - - 11,655
Other comprehensive expense - - - - (153) (153)
--------- ------- -------- -------- ------ --------
Balance, December 31, 1997 5,911,034 59 13,981 2,643 (126) 16,557
Net earnings - - - 1,927 - 1,927
Issuance of common stock in
connection with Acquisition 625,000 6 2,666 - - 2,672
Other comprehensive earnings - - - - 70 70
--------- ------- -------- -------- ------ --------
Balance, December 31, 1998 6,536,034 $ 65 $ 16,647 $ 4,570 $ (56) $ 21,226
========= ======= ======== ======== ====== ========
See accompanying Notes to Consolidated Financial Statements.
F - 5
inTEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except share data)
Years Ended December 31,
-----------------------------
1998 1997 1996
------- ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 1,927 $ 4,332 $ 4,646
Adjustments to reconcile net earnings to net cash:
Depreciation and amortization 491 217 109
Deferred taxes (79) (165) -
Foreign exchange (gain) loss 17 (62) 31
Allowance for bad debts (32) 49 51
Minority interest - 25 213
Changes in assets and liabilities, net of effects of Acquisition:
Trade accounts and notes receivable, net 1,747 (2,226) 925
Inventories 10 (352) (66)
Refundable domestic and state income taxes (658) - -
Other current assets 32 (71) (61)
Accounts payable (315) 659 (235)
Domestic and foreign income tax payable (1,333) 845 (118)
Dividends payable - (973) -
Accrued expenses (244) 331 50
------- ------- -------
Net cash provided by operating activities 1,563 2,609 5,535
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of business, net of cash acquired (4,629) - -
Purchase of machinery and equipment (261) (70) (554)
Other long-term asset (42) (54) (65)
------- ------- -------
Net cash used in investing activities (4,932) (124) (619)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid - (5,541) (3,339)
Net principal debt borrowings (repayments) (215) (189) 189
Net proceeds from public offering - 11,655 -
------- ------- -------
Net cash provided by (used in) financing activities (215) 5,925 (3,150)
------- ------- -------
Effects of exchange rates on cash 17 (67) 7
------- ------- -------
Net cash provided by (used in) all activities (3,567) 8,343 1,773
Cash and cash equivalents at beginning of period 12,035 3,692 1,919
------- ------- -------
Cash and cash equivalents at end of period $ 8,468 $12,035 $ 3,692
======= ======= =======
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES
Details of Acquisition:
Fair value of assets acquired net of cash acquired $ 2,003
Liabilities assumed (549)
Common stock issued (2,672)
Goodwill resulting from Acquisition 5,847
-------
Net cash paid for Acquisition $ 4,629
=======
Cash payments made for:
Domestic and foreign income taxes $ 3,210 $ 1,366 $ 977
Interest 3 14 11
See accompanying Notes to Consolidated Financial Statements.
F - 6
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
(1) NATURE OF OPERATIONS
inTEST Corporation (the "Company") designs, manufactures and markets
docking hardware, test head manipulators and tester interfaces used by
semiconductor manufacturers during the testing of wafers and packaged
devices. The Company also designs and markets related automatic test
equipment interface products.
The consolidated entity is comprised of inTEST Corporation (parent) and
seven 100% owned subsidiaries: inTEST Limited (Thame, UK), inTEST
Kabushiki Kaisha (Kichijoji, Japan), inTEST PTE, Limited (Singapore),
inTEST Sunnyvale Corp. (Delaware) (acquired in the third quarter of 1998
- see Note 4), inTEST Investments, Inc. (a Delaware holding company),
inTEST IP Corp. (a Delaware holding company) and inTEST Licensing Corp.
(a Delaware holding company).
The Company manufactures its products in the U.S. and the U.K. Marketing
and support activities are conducted worldwide from the Company's
facilities in the U.S., U.K., Japan and Singapore.
On June 20, 1997, the Company completed an initial public offering of
2.275 million common shares through which the Company issued 1.82 million
new shares of common stock (the "Offering"). Simultaneous with the
closing of the Offering, the Company acquired the 21% minority interests
in each of its three foreign subsidiaries in exchange for an aggregate of
300,443 shares of the Company's common stock (the "Exchange"). Prior to
the Offering the Company owned 79% of each of the three foreign
subsidiaries.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
---------------------
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated upon consolidation. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Reclassification
----------------
Certain prior year amounts have been reclassified to conform with the
current year presentation.
Cash and Cash Equivalents
-------------------------
Short-term investments, which have maturities of three months or less
when purchased, are considered to be cash equivalents and are carried at
cost, which approximates market value.
F - 7
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Notes Receivable
----------------
Notes receivable are due from trade customers in Japan, and have original
maturities of less than four months. The notes are non-interest bearing.
Notes receivable were $524 and $784 at December 31, 1998 and 1997,
respectively.
Bad Debts
---------
The Company grants credit to customers and generally requires no
collateral. To minimize its risk, the Company performs ongoing credit
evaluations of its customers financial condition. Bad debt expense
(recoveries) was $(5), $61 and $52 for the years ended December 31, 1998,
1997 and 1996, respectively.
Inventories
-----------
Inventories are stated at the lower of cost or market. Cost is
determined under the first-in first-out (FIFO) method.
Machinery and Equipment
-----------------------
Machinery and equipment are stated at cost. Depreciation is based upon
the estimated useful life of the assets using the straight line method.
The estimated useful lives range from three to seven years. Leasehold
improvements are recorded at cost and amortized over the shorter of the
lease term or the estimated useful life of the asset. Total depreciation
expense was $238, $175 and $112 for the years ended December 31, 1998,
1997 and 1996, respectively. Expenditures for maintenance and repairs
are charged to operations as incurred.
Intangibles
-----------
Goodwill resulting from the acquisition of the minority interests in the
Company's three foreign subsidiaries and the acquisition of TestDesign is
amortized on a straight line basis over 15 years. Total amortization
expense for the years ended December 31, 1998, 1997 and 1996 was $252,
$49 and $-0-, respectively. The Company assesses the potential
impairment of its intangible assets based on anticipated undiscounted
cash flows from operations. At December 31, 1998, no impairment was
indicated.
F - 8
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
------------
Just prior to the closing of the Offering, the Company terminated its
status as an S corporation for Federal tax purposes and in the State of
New Jersey. As an S corporation, any Federal and certain New Jersey
state income tax liabilities were those of the former S corporation
stockholders, not of the Company. All tax liabilities on income earned
subsequent to the revocation of the S corporation election are
liabilities of the Company. The Company is taxed in foreign countries
and for activity in certain states. The Company accounts for income
taxes in accordance with the Statement of Financial Accounting Standard
("SFAS") No. 109, Accounting for Income Taxes.
Net Earnings Per Common Share
-----------------------------
Net earnings per common share is computed in accordance with SFAS No.
128, Earnings per Share. Basic earnings per share is computed by
dividing net earnings by the weighted average number of common shares
outstanding during each year. Diluted earnings per share is computed by
dividing net earnings by the weighted average number of common and common
share equivalents outstanding during each year. Common share equivalents
include stock options using the treasury stock method.
A reconciliation of weighted average shares outstanding - basic to
weighted average shares outstanding - diluted appears below:
Years Ended December 31,
-----------------------------------
1998 1997 1996
--------- --------- ---------
Weighted average shares outstanding-basic 6,169,596 5,068,349 4,091,034
Potentially dilutive securities:
Employee stock options 16,864 24,141 -
--------- --------- ---------
Weighted average shares outstanding-diluted 6,186,460 5,092,490 4,091,034
========= ========= =========
As discussed in Note 3, pro forma earnings per share information for the
years ended December 31, 1997 and 1996 includes certain adjustments to
reflect results as if (i) the Company had been taxed as a C corporation
for all of 1996 and 1997 and (ii) the acquisition of the minority
interests in the Company's three foreign subsidiaries had occurred
January 1, 1996.
F - 9
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition
-------------------
Revenue from sales of products are recognized upon shipment to customers.
Research and Development
------------------------
Research and development costs are expensed as incurred.
Product Warranties
------------------
The Company generally provides product warranties and records estimated
warranty expense at the time of sale based upon historical claims
experience.
Stock Based Compensation
------------------------
SFAS No. 123, Accounting for Stock-Based Compensation was adopted by the
Company effective with adoption of its 1997 Stock Plan. As permitted by
SFAS No. 123, the Company has elected to continue to follow Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees
("APB 25") in accounting for its stock option plans. Under APB 25, the
Company does not recognize compensation expense on the issuance of its
stock options because the option terms are fixed and the exercise price
equals the market price of the underlying stock on the grant date.
Foreign Currency
----------------
The accounts of the foreign subsidiaries are translated in accordance
with the SFAS No. 52, Foreign Currency Translation, which requires that
assets and liabilities of international operations be translated using
the exchange rate in effect at the balance sheet date. The results of
operations are translated using an average exchange rate for the period.
The effects of rate fluctuations in translating assets and liabilities of
international operations into U.S. dollars are accumulated and reflected
as other comprehensive earnings or expense in the consolidated statements
of stockholders' equity. Transaction gains or losses are included in net
earnings.
Financial Instruments
---------------------
The Company's financial instruments, principally accounts and notes
receivable and accounts payable, are carried at cost which approximates
fair value, due to the short maturities of the accounts.
F - 10
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
New Accounting Pronouncements
-----------------------------
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, Disclosures About Segments of an Enterprise and Related Information.
This Statement established standards for reporting information about
operating segments in annual financial statements and requires selected
information about operating segments in interim financial reports issued
to shareholders. It also establishes standards for related disclosure
about products and services, geographic areas and major customers. The
Company adopted this Statement for the year ended December 31, 1998, as
required (see Note 5).
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use. This Statement requires
that certain costs related to the development or purchase of internal
software be capitalized and amortized over the estimated useful life of
the software. This Statement also requires that costs related to the
preliminary project stage and the post implementation/operation stage of
an internal use computer software development project be expensed as
incurred. The Company plans to adopt this Statement in the first quarter
of 1999, as required. The adoption of this Statement is not expected to
have a material affect on the results of operations, financial condition
or long-term liquidity of the Company.
(3) PRO FORMA STATEMENT OF EARNINGS INFORMATION (Unaudited)
The Company terminated its status as an S corporation just prior to the
closing of the Offering, described in Note 1, and is subject to Federal
and additional state income taxes for periods after such termination.
Accordingly, for informational purposes, the following pro forma
information for the years ended December 31, 1997 and 1996, respectively,
is presented to show pro forma earnings on an after-tax basis, assuming
the Company had been taxed as a C corporation since January 1, 1996. The
difference between the Federal statutory income tax rate and the pro
forma income tax rate is as follows:
Years Ended
December 31,
----------------------
1997 1996
---- ----
Federal statutory tax rate 34% 34%
State income taxes, net of Federal benefit 4 3
Foreign income taxes 4 3
Non-deductible goodwill amortization 1 1
Research credits (1) (1)
-- --
Pro forma income tax rate 42% 40%
== ==
F - 11
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
(3) PRO FORMA STATEMENT OF EARNINGS INFORMATION (Unaudited)(Continued)
Set forth below are pro forma results of the Company's operations for the
years ended December 31, 1997 and 1996. These pro forma results reflect
adjustments for:
(i) the aforementioned change in method of computing taxes; and
(ii) the amortization of goodwill resulting from the acquisition of
minority interests in the Company's three foreign subsidiaries, net
of the elimination of the minority interests charge reflected in
the historical financial statements, as if the Exchange (as
described in Note 1) had occurred on January 1, 1996. The goodwill
resulting from the Exchange, which totaled $1.3 million, is being
amortized over 15 years.
Years Ended December 31,
------------------------
1997 1996
-------- --------
Pro forma earnings before income taxes $ 6,407 $ 5,627
Pro forma income taxes 2,680 2,251
Pro forma net earnings 3,726 3,376
Pro forma net earnings per common share - basic $ 0.74 $ 0.83
Pro forma weighted average common shares outstanding -
basic 5,068,349 4,091,034
Pro forma net earnings per common share - diluted $ 0.73 $ 0.83
Pro forma weighted average common and common share
equivalents outstanding - diluted 5,092,490 4,091,034
Pro forma net earnings per common share - basic was calculated by
dividing pro forma net earnings by the pro forma weighted average number
of common shares outstanding during the period calculated as if the
Exchange had occurred on January 1, 1996.
Pro forma net earnings per common share - diluted was calculated by
dividing pro forma net earnings by the pro forma weighted average number
of shares of common and common share equivalents outstanding during the
period calculated as if the Exchange had occurred on January 1, 1996.
F - 12
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
(4) ACQUISITION
On August 3, 1998, the Company acquired all of the outstanding capital
stock of TestDesign Corporation ("TestDesign"), a privately held
California corporation (the "Acquisition"). Subsequent to the
Acquisition, the Company changed the name of TestDesign to inTEST
Sunnyvale Corp. TestDesign is engaged in the design and manufacture of
tester interfaces used by the semiconductor industry. The purchase price
was $4.4 million in cash and 625,000 shares of the Company's Common Stock
(subject to certain adjustments). An escrow held by a third party escrow
agent of $1.0 million of the cash portion of the purchase price was
established at closing. If the Company is entitled to indemnification
pursuant to the terms of its agreement with the Seller, such claims will
be paid first from any funds held in escrow. The escrowed funds will
remain in escrow until July 31, 2000, unless any indemnity claims are
then pending, in which case an amount equal to the amount of such pending
claims will be retained in escrow until resolution of the claims.
Although the Company's Common Stock had a market price of $4.75 per share
on the closing date of the transaction, all of the 625,000 shares issued
in connection with the Acquisition are subject to legal restrictions on
transfer and have been valued at a 10% discount to the market price of
the shares. In addition, the Company incurred transaction costs of
approximately $425,000 in completing the Acquisition. The following is
an allocation of the purchase price:
Cash payment $ 4,400
Transaction costs 425
625,000 common shares at $4.28 2,672
-------
7,497
Estimated fair value of identifiable assets
acquired net of liabilities assumed 1,650
-------
Goodwill to be amortized over 15 years $ 5,847
=======
The Acquisition has been accounted for as a purchase and the results
of operations of the acquired business have been included in the
Company's consolidated financial statements since the date of the
Acquisition. The following unaudited pro forma information presents
F - 13
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
(4) ACQUISITION (Continued)
a summary of consolidated results of operations for the Company and
TestDesign as if the Acquisition had occurred on January 1, 1997 (the
1997 amounts also reflect the pro forma adjustments described in Note 3):
Years Ended December 31,
-------------------------
1998 1997
-------- --------
Pro forma net revenues $ 23,335 $ 29,689
Pro forma earnings before income taxes 2,892 6,440
Pro forma income taxes 1,081 2,698
Pro forma net earnings 1,811 3,742
Pro forma net earnings per common share - basic $ 0.28 $ 0.66
Pro forma weighted average common shares
outstanding - basic 6,536,034 5,693,349
Pro forma net earnings per common share - diluted $ 0.28 $ 0.65
Pro forma weighted average common and common
share equivalents outstanding - diluted 6,548,519 5,717,490
(5) SEGMENT INFORMATION
The various products the Company designs, manufactures and markets, which
include docking hardware, test head manipulators and tester interfaces,
are considered by management to be a single product segment. Included in
this segment are products the Company designs and markets that are
manufactured by third parties, which include high performance test
sockets, interface boards and probing assemblies. The Company operates
its business worldwide and divides the world into three geographic
segments: North America, Asia-Pacific and Europe. The North America
segment includes the Company's manufacturing, design and service
facilities in New Jersey, and California; the Asia-Pacific segment
includes the Company's design and service facilities in Singapore and
Japan; and the Europe segment includes the Company's manufacturing,
F - 14
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
(5) SEGMENT INFORMATION (Continued)
design and service facility in the UK. Each segment sells Company
designed and manufactured products, while products produced by third
party manufacturers are primarily distributed by the Company's Asia-
Pacific segment. All three segments sell to semiconductor manufacturers
and automatic test equipment manufacturers. The North America segment
sells through company account managers and independent sales
representatives; the Asia-Pacific segment sells through company account
managers and independent sales representatives; and the Europe segment
sells through company account managers.
Intercompany pricing between segments is either a multiple of cost for
component parts used in manufacturing or a percentage discount from list
price for finished goods sold to non-manufacturing segments. The Company
acquired TestDesign in August 1998 and has included it in the North
America segment.
Years Ended December 31,
-------------------------------
1998 1997 1996
------- ------- -------
Revenues from unaffiliated customers:
North America $12,637 $13,608 $10,614
Asia - Pacific 4,727 5,743 4,860
Europe 1,711 1,395 3,108
------- ------- -------
$19,075 $20,746 $18,582
======= ======= =======
Affiliate sales or transfer from:
North America $ 943 $ 768 $ 1,321
Asia - Pacific - - -
Europe 378 500 54
------- ------- -------
$ 1,321 $ 1,268 $ 1,375
======= ======= =======
Depreciation/amortization:
North America $ 413 $ 127 $ 22
Asia - Pacific 53 69 63
Europe 24 28 27
------- ------- -------
$ 490 $ 224 $ 112
======= ======= =======
Operating income:
North America $ 1,705 $ 5,067 $ 3,815
Asia - Pacific 299 651 432
Europe 514 469 1,369
------- ------- -------
$ 2,518 $ 6,187 $ 5,616
======= ======= =======
F - 15
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
(5) SEGMENT INFORMATION (Continued)
Years Ended December 31,
-------------------------------
1998 1997 1996
------- ------- -------
Earnings before income taxes:
North America $ 2,100 $ 5,356 $ 3,916
Asia - Pacific 379 606 415
Europe 547 485 1,386
------- ------- -------
$ 3,026 $ 6,447 $ 5,717
======= ======= =======
Income tax expense:
North America $ 747 $ 1,517 $ 134
Asia - Pacific 263 463 343
Europe 89 110 381
------- ------- -------
$ 1,099 $ 2,090 $ 858
======= ======= =======
Net earnings:
North America $ 1,353 $ 3,839 $ 3,781
Asia - Pacific 116 131 20
Europe 458 362 845
------- ------- -------
$ 1,927 $ 4,332 $ 4,646
======= ======= =======
Identifiable assets:
North America $20,226 $16,177 $ 5,408
Asia - Pacific 1,706 2,679 1,409
Europe 1,286 1,089 899
------- ------- -------
$23,218 $19,945 $ 7,716
======= ======= =======
Substantially all interest income is generated by the North America
segment. Export sales from the Company's domestic manufacturing
facilities (New Jersey and California) totaled $4,380, $2,042 and $3,486
during the years ended December 31, 1998, 1997 and 1996, respectively.
During the years ended December 31, 1998, 1997 and 1996 the Company had
sales to Japan of $2,932, $4,277 and $3,376, respectively.
(6) MAJOR CUSTOMERS
The Company's customers are in the semiconductor industry. During 1998,
1997 and 1996 the Company had sales to certain customers which exceeded
10% of the Company's consolidated revenues. Those sales were as follows:
F - 16
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
(6) MAJOR CUSTOMERS (Continued)
Customer 1998 1997 1996
---------------------------------------------------------------------------------
A (North America, Asia-Pacific) 16% 11% 16%
B (North America, Asia-Pacific) 13 5 7
C (North America, Asia-Pacific, Europe) 11 7 5
D (North America, Asia-Pacific, Europe) 7 11 6
-- -- --
Total 47% 34% 34%
== == ==
Additionally, at December 31, 1998, these four customers accounted for
36% of trade receivables.
(7) INVENTORIES
Inventories held at December 31, were comprised of the following:
1998 1997
------ ------
Raw materials $1,097 $ 364
Work in process 1,305 1,044
Finished goods 339 360
Reserve for obsolete inventory (220) (119)
------ ------
$2,521 $1,649
====== ======
(8) LINE OF CREDIT
The Company has a $1.5 million line of credit. Borrowings under this
line of credit are principally used for working capital purposes.
Borrowings on the line of credit bear interest at prime rate, which is
payable monthly on any outstanding balance. The Company is required to
maintain a $50 compensating balance at the bank which granted the line of
credit. The credit line expires on June 29, 1999. At December 31, 1998,
there were no borrowings outstanding.
(9) STOCK OPTION PLAN
The 1997 Stock Plan (the "Plan") provides for the granting of either
incentive stock options or non-qualified stock options to purchase shares
of the Company's common stock and for other stock-based awards to key
employees and directors responsible for the direction and management of
the Company and to non-employee consultants. The Plan consists of two
parts: the Non-Qualified Plan (administered by the Board of Directors
F - 17
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
(9) STOCK OPTION PLAN (Continued)
of the Company) and the Key Employee Plan (administered by the
Compensation Committee of the Board of Directors of the Company). The
Company has reserved 500,000 shares of common stock for issuance upon
exercise of options or stock awards under the Plan.
No option may be granted with an exercise period in excess of ten years
from date of grant. Generally, incentive stock options will be granted
with an exercise price equal to the fair market value on the date of
grant; the exercise price of non-qualified stock options will be
determined by either the Board of Directors or the Compensation Committee
of the Board of Directors.
Had compensation costs for the Company's stock-based compensation plans
been determined consistent with FAS 123, the Company's net earnings and
net earnings per share for the years ended December 31, 1998 and 1997,
would have been reduced to the unaudited pro forma amounts indicated
below:
1998 1997
------- -------
Net earnings:
As reported (pro forma for 1997) $ 1,927 $ 3,726
Pro forma $ 1,790 $ 3,643
Net earnings per share - basic:
As reported (pro forma for 1997) $ 0.31 $ 0.74
Pro forma $ 0.29 $ 0.72
The fair value for stock options granted in 1998 and 1997 was estimated
at the date of grant using the Black-Scholes option pricing model with
the following weighted average assumptions for 1998 and 1997:
1998 1997
------- -------
Risk-free interest rate 5.65% 5.67%
Dividend yield 0.00% 0.00%
Expected common stock market price
volatility factor 0.82 0.65
Weighted average expected life of
stock options 5 years 5 years
The per share weighted average fair value of stock options issued by
the Company in 1998 and 1997 was $3.92 and $4.61, respectively.
F - 18
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
(9) STOCK OPTION PLAN (Continued)
The options which have been issued vest 20% one year from date of grant
and 20% in each of the succeeding four years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. As the Company's stock options have
characteristics significantly different from those of traded options, and
as changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
stock options.
The following table summarizes the stock option activity for the periods
ended December 31, 1998 and 1997:
Weighted
Average
Number Exercise
of Shares Price
--------- --------
Options outstanding, January 1, 1997 - -
Granted 160,000 $7.72
Exercised - -
Canceled (9,000) 7.50
------- -----
Options outstanding, December 31, 1997 151,000 $7.73
(none exercisable) ======= =====
Granted 150,000 $4.25
Exercised - -
Canceled (10,000) 6.00
------- -----
Options outstanding, December 31, 1998 291,000 $5.10
(28,200 exercisable) ======= =====
On June 30, 1998, the Company modified 131,000 options originally
exercisable at $7.50 per share and 10,000 options originally exercisable
at $11.00 per share to reduce the exercise price of such options to $6.00
per share.
F - 19
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
(9) STOCK OPTION PLAN (Continued)
The following table summarizes information about stock options
outstanding at December 31, 1998:
Weighted Weighted
Average Average
Weighted Exercise Exercise
Range of Number Average Price of Number Price of
Exercise Outstanding Maximum Remaining Outstanding Exercisable Exercisable
Prices at 12/31/98 Life Life Options at 12/31/98 Options
-------- ----------- -------- --------- ----------- ----------- -----------
$ 6.00 141,000 10 years 8.5 years $ 6.00 28,200 $ 6.00
$ 4.25 150,000 10 years 9.6 years $ 4.25 - N/A
(10) COMMITMENTS
The Company leases its offices, warehouse facilities, automobiles and
certain equipment under noncancellable operating leases which expire at
various dates through 2005. Total rental expense for the years ended
December 31, 1998, 1997 and 1996 was $536, $442 and $422, respectively.
The aggregate minimum rental commitments under the noncancellable
operating leases in effect at December 31, 1998, are as follows:
1999 $ 541
2000 $ 318
2001 $ 281
2002 $ 262
2003 $ 153
Thereafter $ 70
(11) INCOME TAXES
As discussed in Notes 2 and 3, prior to the Offering the Company had
elected S corporation status for Federal and state of New Jersey tax
purposes, and therefore, was not directly subject to Federal and certain
New Jersey income taxes. Immediately prior to the Offering, the Company
terminated its status as an S corporation and is now subject to Federal
and additional state income taxes. In addition, the Company is taxed in
foreign countries and for activity in certain states. For Federal, state
and foreign jurisdictions in which the Company is subject to taxation,
the temporary differences that give rise to deferred tax assets and
liabilities were not significant at December 31, 1996. The cumulative
amount of undistributed earnings of foreign subsidiaries for which U.S.
income taxes have not been provided was approximately $1.9 million at
December 31, 1998. Management intends to repatriate a portion of the
earnings of its foreign subsidiaries during 1999. The estimated tax
effect of distributing such earnings is expected to be offset by
available foreign tax credits.
F - 20
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
(11) INCOME TAXES (Continued)
Earnings before income taxes were as follows:
Years Ended December 31,
--------------------------
1998 1997 1996
------ ------ ------
Domestic $2,100 $5,356 $3,916
Foreign 926 1,091 1,801
------ ------ ------
$3,026 $6,447 $5,717
====== ====== ======
Income tax expense was as follows:
Years Ended December 31,
--------------------------
1998 1997 1996
------ ------ ------
Current:
Domestic - Federal $ 772 $1,379 $ -
Domestic - state 54 303 134
Foreign 352 573 724
------ ------ ------
1,178 2,255 858
------ ------ ------
Deferred:
Domestic - Federal (54) (147) -
Domestic - state (25) (18) -
------ ------ ------
(79) (165) -
------ ------ ------
Income tax expense $1,099 $2,090 $ 858
====== ====== ======
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The
following is a summary of the significant components of the Company's
deferred tax assets and liabilities as of December 31, 1998 and 1997:
F - 21
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
(11) INCOME TAXES (Continued)
1998 1997
----- -----
Deferred Tax Assets:
Accrued vacation pay $ 91 $ 69
Allowance for doubtful accounts 60 47
Inventories (principally due to obsolescence reserve) 107 42
Accrued warranty 17 9
Excess foreign tax credit carryforward - 17
Capital loss carryforward 90 -
Other (5) 5
----- -----
360 189
Valuation allowance (90) (17)
----- -----
Deferred tax assets 270 172
----- -----
Deferred Tax Liabilities:
Accrued royalty income (25) (7)
----- -----
Net deferred tax asset $ 245 $ 165
===== =====
Based on the Company's history of prior operating earnings, and its
expectation of the future, management believes that taxable income will
more likely than not be sufficient to realize the net deferred tax assets
of $245 at December 31, 1998. A valuation allowance of $90 was
established in 1998 to offset the domestic capital loss carryforward. A
valuation allowance of $17 was established in 1997 to offset the foreign
tax credit carryforward, which was realized in 1998.
An analysis of the effective tax rate on earnings and a reconciliation
from the expected statutory rate are as follows:
Years Ended December 31,
---------------------------
1998 1997 1996
------ ------ -------
Expected income tax provision at U.S.
Statutory rate $1,029 $2,192 $ 1,944
State taxes, net of Federal benefit 19 188 134
Increase (decrease) in tax from:
Non-deductible goodwill 86 17 -
Foreign income tax rate differences 12 219 133
Tax exempt interest (80) - -
S corporation earnings not subject to
Federal taxation - (549) (1,353)
Other 33 23 -
------ ------ -------
Income tax expense $1,099 $2,090 $ 858
====== ====== =======
F - 22
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
(12) EMPLOYEE BENEFIT PLANS
In 1996, the Company instituted a defined contribution 401(k) plan for
its employees who work in the U.S. All permanent employees of inTEST
Corporation and inTEST Sunnyvale Corp. who are at least 18 years of age
and have completed six months of service with the Company are eligible to
participate in the plan. Under the plan, the Company matches employee
contributions dollar for dollar up to 10% of the employee's annual
compensation up to $5. In addition, the Company may match employee
contributions dollar for dollar for amounts exceeding 10% up to 15% of
the employee's annual compensation to a maximum of $5. Employer
contributions vest over a six-year period. The Company contributed $157,
$129 and $71 to the plan for the years ended December 31, 1998, 1997 and
1996, respectively.
TestDesign adopted a defined contribution 401(k) plan for its employees
in July 1994. All permanent employees who are at least 18 years of age
and have completed six months of service with TestDesign are eligible to
participate in the plan. Under the plan, TestDesign matches employee
contributions equal to 25% of an employee's contributions up to 5% of
gross salary. Matching contributions for the plan were $6 from the date
of the Acquisition through December 31, 1998. In addition, the plan
allows TestDesign to make discretionary matching contributions up to 6.5%
of an employee's gross salary for the year based upon TestDesign's
profitability. There were no discretionary matching contributions made
from the date of the Acquisition through December 31, 1998. Effective
October 1, 1998, all TestDesign permanent employees who were at least 18
years of age and had completed six months of service were offered
enrollment in the Company's 401(k) plan, and employee contributions and
employer matching contributions into the TestDesign plan ceased. The
Company is currently in the process of terminating the TestDesign plan at
which time the former participants will have the option of rolling their
assets into the Company's plan.
The Company sponsored a noncontributory pension plan for an employee of
its U.K. subsidiary until July 1998, when that employee retired from the
Company. The Company has no other defined contribution or defined
benefit plans.
F - 23
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
(13) ACCRUED EXPENSES
Accrued expenses consists of the following:
December 31,
--------------------
1998 1997
------ ------
Accrued vacation $ 236 $ 181
Accrued commissions 206 285
Accrued directors fees 109 -
Accrued wages 106 81
Customer deposits 100 200
Accrued professional fees 78 68
Accrued warranty 45 25
Accrued shareholder relations 42 50
Accrued other 101 65
------ ------
$1,023 $ 955
====== ======
(14) RELATED PARTY TRANSACTIONS
The Company paid consulting fees to one individual who is a member of the
Board of Directors of the parent company which totaled $56 and $17 during
the years ended December 31, 1998 and 1997, respectively. There were no
consulting fees paid to related parties during the year ended December
31, 1996.
During 1998, in connection with the Acquisition of TestDesign, the
Company repaid $215 on a note due to a firm ("PRIM") controlled by
Douglas W. Smith, Executive Vice President and Chief Operating Officer of
the Company. This note, which did not bear interest or have a maturity
date, evidenced borrowings that TestDesign had made from PRIM prior to
the Acquisition. In addition, subject to the terms of a consulting
agreement between TestDesign and Gregory W. Slayton, a current board
member of the Company, the Company paid directly to Mr. Slayton, on
behalf of TestDesign, $170,000 in cash and 31,250 shares of the Company's
common stock. These payments are included in the merger consideration
and are accounted for as described in Note 4.
The Company's foreign subsidiaries paid directors' fees to several
individuals who are members of management of the parent company which
totaled $104, $177 and $192 during the years ended December 31, 1998,
1997 and 1996, respectively.
At December 31, 1998 and 1997 there were $49 and $75 of foreign
directors' fees payable to members of management of the parent company.
There were no amounts outstanding in prior years.
F - 24
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
(15) LEGAL PROCEEDINGS
On November 18, 1998, the Company and its subsidiary inTEST IP Corp.
(which holds title to all Company intellectual property) filed suit
against a competitor for infringement of a United States patent held by
the Company (the "815 Patent").
The invention disclosed and claimed in the 815 Patent is directed to a
system for positioning and docking a heavy electronic test head of a test
system with respect to an electronic device handler. The system is used
in the automatic testing of integrated circuits and other electronic
devices. The Company sells products covered by the 815 Patent worldwide.
As alleged in the complaint, the competitor began manufacturing, offering
to sell, and selling products as early as 1991 that, without license,
infringe claims of the 815 Patent. The parties have been discussing
possible settlement of the dispute since the Company first became aware
of the infringement in 1991. Discussions were abated at the end of
1995 so that the United States Patent and Trademark Office (the
"PTO") could reexamine the 815 Patent. On April 7, 1998, the PTO
completed the reexamination and affirmed the patentability of the nine
claims in the patent with minor, technical, clarifying changes.
Thereafter, the parties resumed settlement negotiations, however, to date
such negotiations have been unsuccessful.
The complaint asks the court to enjoin the competitor from further acts
of infringement, including the acts of manufacturing, using, offering for
sale, selling and importing positioner systems that embody the invention
claimed in the 815 Patent. The complaint also asks the court to award
the Company damages, including the Company's lost profits. Alleging that
the competitor's infringement is and has been deliberate, willful, and
wanton, with knowledge of the Company's patent rights, the complaint asks
the court to award increased damages up to three times the amount
assessed. The complaint also seeks an award of interest, costs and
reasonable attorney fees.
All legal fees incurred in connection with this matter have been
expensed. In the opinion of management, the ultimate disposition of this
matter will not have a material adverse effect on the Company's financial
position, results of operations or liquidity.
(16) QUARTERLY CONSOLIDATED FINANCIAL DATA (Unaudited)
The following tables present certain unaudited consolidated quarterly
financial information for each of the eight quarters ended December 31,
1998. In the opinion of the Company's management, this quarterly
information has been prepared on the same basis as the Consolidated
Financial Statements and includes all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the information
for the periods presented. The results of operations for any quarter are
not necessarily indicative of results for the full year or for any future
period.
F - 25
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
(16) QUARTERLY CONSOLIDATED FINANCIAL DATA (Unaudited)
The Company's business is not seasonal, therefore year-over-year
quarterly comparisons of the Company's results of operations may not be
as meaningful as the sequential quarterly comparisons set forth below
which tend to reflect the cyclical activity of the semiconductor industry
as a whole. Quarterly fluctuations in expenses either are related
directly to sales activity and volume, or tend to be a function of
personnel costs and the timing of expenses incurred throughout the year.
Quarters Ended
---------------------------------------------
3/31/98 6/30/98 9/30/98 12/31/98 Total
--------- --------- --------- --------- ---------
Net revenues $ 5,626 $ 5,163 $ 4,449 $ 3,837 $ 19,075
Gross margin 3,426 3,029 2,331 1,887 10,673
Earnings (loss) before income tax expense 1,822 1,458 360 (614) 3,026
Income tax expense 668 550 133 (252) 1,099
Net earnings (loss) 1,154 908 227 (362) 1,927
Net earnings (loss) per share - basic $ 0.20 $ 0.15 $ 0.04 $(0.06) $ 0.31
Weighted average shares outstanding -
basic 5,911,034 5,911,034 6,311,849 6,536,034 6,169,596
Net earnings (loss) per share - diluted $ 0.19 $ 0.15 $ 0.04 $(0.06) $ 0.31
Weighted average common and common share
equivalents outstanding - diluted 5,924,949 5,918,809 6,317,578 6,575,910 6,186,460
Other comprehensive earnings (expense) $ (42) $ (19) $ 19 $ 112 $ 70
Quarters Ended
---------------------------------------------
3/31/97 6/30/97 9/30/97 12/31/97 Total
--------- --------- --------- --------- ---------
Net revenues $ 3,887 $ 4,619 $ 6,212 $ 6,028 $ 20,746
Gross margin 2,285 2,784 3,893 3,976 12,938
Pro form earnings before income tax
expense 1,000 1,321 2,190 1,896 6,407
Pro forma income tax expense 462 578 924 716 2,680
Pro forma net earnings 538 743 1,266 1,180 3,726
Pro forma net earnings per share-basic $ 0.13 $ 0.18 $ 0.21 $ 0.20 $ 0.74
Pro forma weighted average shares
outstanding - basic 4,091,034 4,331,034 5,911,034 5,911,034 5,068,349
Pro forma net earnings per share-diluted $ 0.13 $ 0.17 $ 0.21 $ 0.20 $ 0.73
Pro forma weighted average common and
common share equivalents outstanding-
diluted 4,091,034 4,332,242 5,966,413 5,950,235 5,092,490
Other comprehensive earnings (expense) $ (61) $ 51 $ (65) $ (78) $ (153)
F - 26
inTEST CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance Additions
at Acquisition -------------------- Balance at
Beginning of Other End of
of Period TestDesign Expense Deductions Period
--------- ----------- ------- ---------- ----------
Year Ended December 31, 1996
Bad debt reserve $ 45 $ - $ 52 $ 1 $ 96
Inventory obsolescence reserve - - 56 56 -
Warranty reserve - - 196 171 25
Year Ended December 31, 1997
Bad debt reserve 96 - 61 13 144
Inventory obsolescence reserve - - 178 59 119
Warranty reserve 25 - 147 147 25
Year Ended December 31, 1998
Bad debt reserve 144 54 (5) 25 168
Inventory obsolescence reserve 119 38 193 130 220
Warranty reserve 25 20 202 202 45
F - 27