UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-26274
INTEGRATED MEASUREMENT SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
OREGON 93-0840631
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
9525 SW GEMINI DRIVE, BEAVERTON, OREGON 97008
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (503) 626-7117
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF CLASS
Common Stock, $.01 par value 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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K 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.
--------------
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was $55,875,457 on March 13, 1998, based upon the last price of the
Common Stock on that date reported in the NASDAQ National Market System. On
March 13, 1998, there were 7,541,130 shares of the Registrant's Common Stock
outstanding, including 2,785,772 held by affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
Document Part of Form 10-K into which incorporated
-------- -----------------------------------------
Portions of Proxy Statement dated April 6, 1998 Part III
INTEGRATED MEASUREMENT SYSTEMS, INC.
1997 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PAGE
PART I ----
Item 1. Business 3
Item 2. Properties 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
PART II
Item 5. Market for Registrants Common Equity and Related 8
Stockholder Matters
Item 6. Selected Financial Data 9
Item 7. Management's Discussion and Analysis of Results of 10
Operations and Financial Condition
Item 8. Financial Statements and Supplementary Data 16
Item 9. Changes in and Disagreements with Accountants on 16
Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of Registrant 17
Item 11. Executive Compensation 17
Item 12. Security Ownership of Certain Beneficial Owners and Management 17
Item 13. Certain Relationships and Related Transactions 17
PART IV
Item 14. Exhibits, Financial Statements Schedules, and Reports 17
on Form 8-K
2
PART I
ITEM 1. BUSINESS
GENERAL
Integrated Measurement Systems, Inc. (the Company) was incorporated in Oregon
in 1983. The Company operated as an independent entity until it was acquired
by Valid Logic, Inc. ("Valid Logic") in 1989. In 1991, the Company became a
wholly-owned subsidiary of Cadence Design Systems, Inc. ("Cadence") as a
result of the merger of Valid Logic with Cadence. Both Cadence and Valid
Logic operated the Company as a separate subsidiary. On July 21, 1995, the
Company successfully completed an initial public offering of common stock,
with 375,000 shares sold by the Company, and 2,615,000 shares sold by
Cadence. In February 1997, the Company completed a secondary public offering
of common stock, in which 700,000 shares were sold by the Company and 950,000
shares were sold by Cadence. As of December 31, 1997, Cadence owned
approximately 37% of the outstanding common stock of the Company. The
Company's common stock is traded on the NASDAQ National Market System under
the symbol IMSC.
PRODUCTS AND SERVICES
The Company designs, manufactures, markets and services a family of
versatile, high performance engineering Test Stations used to test and
measure complex electronic devices. In addition, the Company develops,
markets and supports a line of Virtual Test Software that permits design and
test engineers to automate test program development and to conduct simulated
tests of electronic device designs prior to the fabrication of the prototype
of the actual device. The Company's products enable its customers to shorten
time-to-market, enhance accuracy of design, reduce both the time required to
test and the cost of testing devices and provide reliable and prompt feedback
to both design and test engineers. Customers use the Company's products to
test complex digital and mixed-signal devices such as microprocessors,
application specific integrated circuits and multi-chip modules (MCM's).
IMS TEST STATION PRODUCTS
The Company's Test Stations play a variety of roles in bridging the gap
between electronic design automation (EDA) to automated test equipment (ATE).
At the beginning of the process, design engineering data, including EDA
simulation data, is converted into data compatible with the Company's Test
Station, thus bridging the gap between design software and verification. The
IMS Test Stations enable data conversion from popular simulation products
including Verilog, VHDL, Quicksim and others.
The IMS Test Stations stimulate the device under test by sending defined
signals to it and then measure the actual output and compare it with the
expected output. The IMS Test Stations perform these functions at real-time
device operating speeds. Using the Company's products, design and test
engineers can identify failures, assess areas of concern, run short
diagnostic sequences to pinpoint the cause(s) of failure, and identify
changes needed to correct design errors or weaknesses. IMS Test Stations are
designed to work with industry standard computers to receive and execute test
commands and report the results of test procedures. IMS Test Stations can
also be linked to widely used EDA software tools, including those offered by
Cadence, Mentor Graphics, Synopsys and others. The result is a reduction of
the overall time required for verification and characterization, more timely
feedback to design engineers and hence lower cost of design, reduced
time-to-market and increased competitiveness for the companies designing
today's increasingly complex integrated circuits.
The Company complies with industry standard fixturing conventions, which
facilitate compatibility with ATE equipment. Compatible design between the
Company's Test Stations and ATE systems enables rapid movement of devices
from the engineering test environment to production test.
3
The Company currently offers five families of IMS Test Stations under the names
ATS FT, MSTS, ATS Blazer, Logic Master XL, and XTS, the last of which was
introduced in 1997 and increases the number of active I/O pins on a device to be
tested to 576 pins. Each family includes multiple mainframe options and a
choice of configurable modules. The Company's Test Stations are designed and
configured to match varying customer requirements. Generally, they differ from
one another as to the maximum clock speed and data rates (from 40 MHz to 400
MHz), size of the device to be tested (from 16 to 896 or more total pins),
device technology (digital, mixed-signal, MCM), flexibility in the number and
variety of applications (verification, characterization, failure analysis,
etc.), and price. Test Stations typically range in price from $500,000 to
$1.2 million, though high-pin-count mixed-signal device systems can sell for as
much as $1.8 million (depending on configuration and intended application.)
TEST STATION SOFTWARE PRODUCTS
The Company has developed significant Test Station software products that are
either embedded in the Company's Test Stations or sold as separate add-on
software products. Whether embedded with the system or sold separately, the
Test Station software constitutes an important component of the overall
system product content and value. These software packages provide optimal
operation in various applications, including interactive device verification,
fully automated device characterization, and EDA and ATE system linkages.
The Company's Test Stations can be interfaced to a network, allowing the Test
Station access to other resources on the network, and allowing multiple
workstations on the network to have access to the Test Station. Using
various software tools available from the Company or from third-party
vendors, users can import and export test data to and from the EDA
environment. In addition, test information can be exported for use on
traditional ATE systems.
VIRTUAL TEST SOFTWARE
While EDA tools have helped improve designer productivity, little has been
done to provide test development engineers with software productivity tools.
As a result, test development times have increased while design time has been
reduced. To address this trend, the Company has made a major commitment to
providing a set of software tools for test engineers. These tools, called
Virtual Test Software, allow the test engineer to accelerate the generation
of a test program, simulate the test environment, develop the test fixture
and document the entire test process. These tools are run on a workstation
rather than on an expensive ATE system. This software can be used to
simulate the ATE environment and eliminate the need to use ATE machines for
debugging test programs, and allows test engineers to develop test programs
in parallel with the design, prototype manufacturing and engineering test
processes.
With the Company's Dantes Virtual Test Software tools, test engineers begin
test development work much earlier in the process, before device design is
completed. Through the use of tester modeling and simulation both the test
itself and the testability of the design can be verified on a workstation
before first silicon deliveries. The Company's TestDirect Virtual Test
Software, introduced in the first half of 1997, is a productivity tool for
mixed-signal test. TestDirect is a test pattern generation program that
provides test engineers with an automatic tool for generating ATE test
patterns from the designer's original test bench simulation environment. This
process shortens the overall product development cycle, increasing a
customer's revenue potential and improves their time-to-market
competitiveness. The IMS Digital VirtualTester is the first automated test
productivity software tool to provide a high-quality, cost-effective way to
verify and debug IC test patterns and timing on engineering workstations
without having to wait until first silicon and without using valuable ATE
time. Harnessing the power of EDA simulation and proprietary ATE data, the
Digital VirtualTester can reduce time-to-market costs by allowing engineers
to perform IC test development prior to silicon fabrication in a fault-free,
virtual test environment.
Although the market for Virtual Test Software is relatively difficult to
quantify, the Company believes that its Dantes, TestDirect, and Digital
VirtualTester software products and services provide a significant advantage
to semiconductor designers to reduce time to market and save development
cost. The Virtual Test software products currently operate in conjunction
with Cadence EDA software and certain ATE machines manufactured by Advantest,
Credence, Hewlett-Packard, LTX, and Teradyne. In 1997, revenues from the
sale of Virtual Test Software and related services comprised approximately
13% of the Company's net sales.
4
RESEARCH AND DEVELOPMENT
The electronic design and test equipment market is subject to rapid
technological change and new product introductions. The Company's ability to
remain competitive in this market will depend in significant part upon its
ability to continue to successfully develop and introduce new products and
enhancements to existing products on a timely and cost-effective basis.
There can be no assurance that the Company will be successful in developing
and marketing new products and product enhancements that respond to
technological change, evolving industry standards and changing customer
requirements; that the Company will not experience difficulties that could
delay or prevent the successful development, introduction and marketing of
these products; or that its new products and product enhancements will
adequately meet the requirements of the marketplace and achieve market
acceptance.
The Company has historically devoted the great majority of its research and
development efforts to the design and development of engineering Test
Stations and related hardware and software technologies. Certain of the
Company's Virtual Test Software technologies were originally developed by
Cadence employees and purchased by the Company. The Company is currently
developing additional software products for its Virtual Test product line and
expects to continue considerable internal research and development efforts to
this product line in the future.
The Company's research and development efforts are performed by the Company's
research and development department of approximately 77 employees.
MANUFACTURING OPERATIONS
The Company's test systems are complex and are used by the Company's
customers in critical projects that demand a high level of quality and
reliability. The Company invests significant resources to assure the high
quality and reliability of its test systems and is committed to providing a
high level of service to its customers in the event of malfunction to
minimize downtime. The Company's manufacturing operations primarily consist
of order administration, materials planning, procurement, final assembly,
quality control of materials, components and subassemblies, final systems
integration and extensive calibration and testing. The Company uses a
manufacturing control computer system to monitor orders, purchasing,
inventory, production and manufacturing costs.
The components used in the Company's products consist of standard parts
available from numerous vendors, along with a number of proprietary items
available only from sole or single source suppliers. The Company currently
uses several independent third-party vendors to manufacture its subassemblies
and semiconductor components, including circuit boards, integrated circuits
and integrated circuits packaging, cable assembly and mechanical parts.
External manufacturing is performed to the Company's specifications with
technical support from the Company. In the event that any of the Company's
third-party vendors, particularly its sole and single source vendors, were to
experience financial, operational, production or quality assurance
difficulties, or a catastrophic event that resulted in a reduction or
interruption in supply to the Company, the Company's operating results could
be materially adversely affected until the Company was able to establish
sufficient manufacturing supply from alternative sources. The Company has
partially mitigated this risk by securing $10 million of insurance coverage
against potential losses resulting from an insurable peril experienced by any
of the Company's suppliers. While to date suitable third party manufacturing
capacity has been available, there can be no assurance that such
manufacturers will be able to meet the Company's future requirements or that
such services will continue to be available to the Company at favorable
prices.
The Company believes it has developed a strong vendor base, purchasing
components and subassemblies both from national distributors and directly
from vendors' factories. Some of the subassembly vendors are small, local
companies to which IMS represents substantial volume.
Currently, the Company purchases a number of critical parts from sole source
suppliers for which alternative sources are not available. The Company's
reliance on a sole or a limited group of suppliers, some of which are small
independent companies, and on outside subcontractors involves several risks,
including a potential inability to obtain an adequate supply of required
components and reduced control over pricing and timely delivery of
components. The Company has generally been able to obtain adequate supplies
of components in a timely manner
5
from current vendors, or, when necessary to meet production needs, from
alternate vendors. The Company has thus far been able to avoid any material
adverse impact on timing of customer deliveries for its Test Stations.
However, no assurance can be given that supply problems will not occur or, if
such problems do occur, that the Company's solutions to these problems will
be effective in every case. Any prolonged inability to obtain adequate
supplies of quality components or any other circumstances that would require
the Company to seek alternative sources of supply could have a material
adverse effect on the Company's business, financial condition and results of
operations and could damage the Company's relationships with it customers.
MARKETING AND SALES
The Company markets its products domestically through a direct sales force
which has primary responsibility for developing orders, coordinating
distribution, providing demonstrations and providing applications support.
The Company employs skilled applications and service engineers and
technically proficient sales people capable of serving the sophisticated
needs of prospective customers' engineering staffs as part of the customer
support process. The sales force is managed from the Company's headquarters
in Beaverton, Oregon and its regional offices in Irvine and Santa Clara,
California; Boston, Massachusetts; Phoenix, Arizona; and Columbia, Maryland.
The Company markets its products in the European region through independent
distributors in Germany, Scandinavia and Israel, and through dedicated agents
employed by Cadence subsidiaries in England, France, and Germany. In Asia
the Company sells through dedicated agents employed by Cadence subsidiaries
in Taiwan and through distributors in Japan, the People's Republic of China,
Hong Kong, Malaysia/Singapore and Korea. The Company's foreign sales and
service operations are subject to risks inherent in foreign operations,
including unexpected changes in regulatory requirements, exchange rates,
tariffs or other barriers and potentially negative tax consequences. In
addition, in certain jurisdictions, there is a risk of reduced protection for
the Company's copyrights, trademarks and trade secrets. Additional
information regarding foreign sales is contained in Note 10 to the Financial
Statements contained in this Annual Report.
The Company uses advertising in trade journals, technical articles, exhibits
at trade shows, direct mail and telephone solicitations to build interest in
the Company and its products. The Company provides extensive training for its
sales representatives and distributors and supports its representatives and
distributors with marketing tools, including sales brochures, demonstration
test equipment and promotional product literature.
For the year ended December 31, 1997, 1996, and 1995, sales to Intel
represented approximately 27%, 36% and 30% of the Company's net sales,
respectively. No other customer accounted for more than 10% of the Company's
net sales in 1997, 1996 or 1995.
COMPETITION
The design and test equipment market is highly competitive. Although the
Company believes that it has a competitive advantage in the verification
market due to the high performance and cost effectiveness of its products,
the Company anticipates that technical advancement in the industry generally
could lead to increased competition in the future. In addition, although the
Company believes it is currently the only vendor offering a Virtual Test
Software solution, no assurance can be given that other vendors will not
offer competing products.
The Company believes that the principal competitive factors in the
verification and characterization markets are product performance and
reliability, price, ease of use, marketing and distribution capability,
service and support and the supplier's reputation and financial stability.
The Company believes that it competes favorably with respect to all principal
competitive factors and that it is particularly strong in the areas of
product performance, ease of use, low cost and service and support.
The Company currently competes with a number of other verification and
characterization equipment manufacturers. Some of these manufacturers, such
as Hewlett-Packard, Teradyne and Tektronix have significantly
6
greater financial, marketing, manufacturing and technological resources than
the Company. New product introductions or product announcements by the
Company's competitors could cause a decline in sales or loss of market
acceptance of the Company's existing products. Moreover, increased
competitive pressure could lead to intensified price-based competition, which
could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company believes that its long-term
success will depend largely on its ability to identify design and test needs
ahead of its competitors and develop products which respond to those needs in
a timely manner. In addition, no assurance can be given that other
companies, including Cadence, which retains rights to the original version of
the Dantes technology, and other EDA companies, will not develop
methodologies and products that are competitive with the Company's Virtual
Test Software business. The Company also believes that to remain
competitive, it will require significant financial resources in order to
invest in new product development and to maintain a worldwide customer
service and support network. There can be no assurance that the Company will
continue to compete successfully in the future.
CUSTOMER SUPPORT AND SERVICE
To be competitive, the Company believes it must provide a high level of
support and service. Support and service accounted for 24% of the Company's
net sales for the fiscal year ended December 31, 1997. The Company maintains
and supports products sold directly in the United States with the Company's
service and support personnel. The Company's international distributors and
dedicated international sales agents generally provide maintenance and
support to their customers. In addition, Cadence acts as a sales agent for
the Company's Virtual Test Software in which capacity it provides "first
call" support to its own customers. The Company offers a toll-free technical
support hotline to customers and distributors. Support engineers answer the
technical support calls and generally provide same-day responses to questions
that cannot be resolved during the initial call. When necessary, however,
support engineers are dispatched to the customer's facility.
The Company maintains a rapid response program which is designed to quickly
respond to customer support issues. Many of the Company's customers
currently have support agreements with the Company. The Company ranked first
in 1996, 1995, 1994 and 1993 in customer satisfaction and quality in the test
equipment market according to VLSI Research, Inc. The Company warrants its
Test Systems for three to twelve months. During such warranty period, the
Company will repair or replace failed components. The Company generally
warrants its software products for three months. During such warranty
period, the Company will investigate all reported problems and will endeavor
to provide a solution. Warranty costs have not been significant to date, but
no assurances can be given that such costs will not increase in the future or
that any such increase would not have a material adverse effect on the
Company's financial condition and results of operations.
EMPLOYEES
At December 31, 1997, the Company had 259 employees, including 69 in
marketing and sales, 81 in manufacturing and service, 77 in research,
development and engineering and 32 in administration and finance. The
Company also has 12 dedicated employees on the payroll of affiliated
companies which are international subsidiaries of Cadence. The Company
reimburses Cadence the full cost of the employees' expense to Cadence under
the terms of a Corporate Services Agreement between the Company and Cadence.
These employees work full time on the Company's business and report to and
are directly managed by the Company. See "Item 13. Certain Relationships
and Related Transactions." The Company believes that its future success will
depend on its continued ability to attract and retain highly qualified
technical, management and marketing personnel. The Company's employees are
not represented by a collective bargaining unit and the Company believes that
its employee relations are very good.
7
ITEM 2. PROPERTIES
The Company's executive offices, as well as its principal manufacturing,
engineering and marketing operations, are located in a leased building of
approximately 89,000 square feet in Beaverton, Oregon. The lease expires on
February 29, 2004. The Company believes the space will be adequate through that
period and, if required, suitable additional space is available nearby. The
Company also leases a total of approximately 7,300 square feet of office space
in which certain of its regional sales offices are located. Under a Corporate
Services Agreement between Cadence and the Company, Cadence has agreed to
provide office space and associated office support for certain Company personnel
located in the United States and a number of foreign countries.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to no material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders of the Company
during the fourth quarter of the fiscal year ended December 31, 1997.
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded publicly on the Nasdaq National Market
under the symbol "IMSC." The Company completed its initial public offering of
common stock on July 21, 1995, at a price of $11 per share. The following table
sets forth, for the periods indicated, the high and low bid prices for the
Company's common stock as reported by the Nasdaq National Market.
HIGH LOW
------- -------
FISCAL 1996
First Quarter............................. 16 3/4 12 1/2
Second Quarter............................ 27 1/2 15 5/8
Third Quarter............................. 25 1/2 11
Fourth Quarter............................ 21 14 3/4
FISCAL 1997
First Quarter............................. 23 1/2 14 3/4
Second Quarter............................ 17 3/4 12
Third Quarter............................. 18 1/16 10 3/4
Fourth Quarter............................ 20 15 1/4
As of March 13, 1998, there were approximately 1,990 shareholders who held
beneficial interests in shares of common stock registered in nominee names of
banks and brokerage houses. The Company has not paid any cash dividends on its
common stock, and it does not anticipate paying any cash dividends in the
foreseeable future.
During the quarter ended December 31, 1997, the Company made no sales of
securities that were not registered under the Securities Act of 1933.
8
ITEM 6. SELECTED FINANCIAL DATA
(In thousands, except per share amounts)
Year ended December 31,
-----------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
Statement of income data:
Net sales...................... $46,850 $50,837 $41,093 $30,052 $23,117
Gross margin %................. 65.5% 64.3% 61.6% 58.6% 55.8%
Operating income............... $7,073 $9,495 $5,469 $2,981 $162
Operating income %............. 15.1% 18.7% 13.3% 9.9% 0.7%
Net income..................... $5,205 $6,166 $3,535 $1,910 $131
Basic earnings per share....... $0.70 $0.92 $0.54 $0.30 $0.02
Diluted earnings per share..... $0.67 $0.88 $0.53 $0.30 $0.02
December 31,
-----------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
Balance sheet data:
Cash and cash equivalents...... $17,464 $9,545 $8,930 $4,384 $1,290
Short-term investments......... $8,371 -- -- -- --
Total assets................... $65,523 $44,314 $35,184 $22,662 $18,565
Long-term obligations,
net of current portion......... $152 $278 $54 $83 $109
Shareholders' equity........... $57,433 $34,859 $26,484 $18,269 $15,104
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Unless otherwise indicated, all numerical references are in thousands, except
percentages and share data.
The following discussion and analysis should be read in conjunction with
Selected Financial Data and the Company's Financial Statements and the Notes
thereto included elsewhere in this Annual Report. This Annual Report, including
the following discussion and analysis of financial condition and results of
operations, contains certain statements, trend analysis and other information
that constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995, as amended, which may involve risks
and uncertainties. Such forward looking statements include, but are not limited
to, statements including the words "anticipate," "believe," "plan," "estimate,"
"expect," "intend" and other similar expressions. The Company's actual results
could differ materially from those discussed herein due to numerous factors
including, but not limited to, those discussed in the following discussion and
analysis of financial condition and results of operations, as well as those
discussed elsewhere herein.
OVERVIEW
The Company was founded in 1983 to design and develop engineering Test
Stations to test and measure complex electronic devices at the prototype
stage. The Company was acquired by Valid Logic in 1989 and then by Cadence
in 1991 as a result of the merger of Valid Logic into Cadence. Cadence
operated the Company as a separate subsidiary.
In July 1995, the Company successfully completed an initial public offering
of common stock, yielding net proceeds to the Company and Cadence of $3.3
million and $26.6 million, respectively. At December 31, 1996, Cadence owned
approximately 55% of the outstanding common stock of the Company, with the
remaining 45% publicly owned. In February 1997, the Company completed a
secondary public offering of its common stock, including 700,000 shares
issued by the Company, and 950,000 sold by Cadence, yielding net proceeds to
the Company and Cadence of $13.4 million and $18.6 million, respectively.
Following the secondary public offering, Cadence continued to own
approximately 37% of the Company's common stock.
The Company has been profitable for each of the last ten years and has
financed its business activities during that period principally through cash
generated from its own operations. The Company's net sales increased from
1994 to 1996 at an annually compounded rate of 30%, reflecting the Company's
successful introduction of higher margin Test Station and Virtual Test
Software products during these periods. During 1997, net sales declined 7.8%
from 1996 as a result of the delay of orders anticipated from certain
customers for the Company's Test Station products into future periods. These
sales trends, combined with moderate growth in operating expenses, resulted
in net income of $5.2 million, $6.2 million, and $3.5 million for 1997, 1996,
and 1995, respectively.
During the last three years, the Company has generated the majority of its
revenue from sales of its XL, ATS, ATS Blazer, FT and MSTS Test Station
product families and related software. Virtual Test Software and related
services accounted for 12.6%, 8.6% and 4.6% of the Company's net sales during
1997, 1996 and 1995, respectively.
During the first quarter of 1997, the Company introduced TestDirect-TM-, a
new digital Virtual Test productivity software tool. TestDirect provides test
engineers with an automated tool for generating test patterns for automated
test equipment from the designer's original simulation process. This product
shortens the customers' overall product development cycle and improves
time-to-market. TestDirect contributed approximately 4% of net sales during
the second half of 1997. Also announced during the first quarter of 1997 was
the new XTS Test Station, which extends the pin count of the Company's ATS
Test Stations to a new high of 576 I/O pins. The XTS Test Station began
shipping in the third quarter of 1997 and contributed 8% of net sales for the
second half of 1997.
Future operating results will depend on many factors, including demand for
the Company's products; receipt, timing and shipment of major system orders;
the introduction of new products by the Company and by its competitors; the
Company's ability to operate independently from Cadence; and industry
acceptance of Virtual Test Software. Results of operations for the periods
discussed here should not be considered indicative of the results to be
expected
10
in any future period, and fluctuations in operating results may also result
in fluctuations in the market price of the Company's common stock. There can
be no assurance that the Company's net sales will grow or that such growth
will be sustained in future periods or that the Company will remain
profitable in any future period.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996
NET SALES. Net sales is comprised of product sales (including sales of Test
Stations, Test Station software and Virtual Test Software) and service and
other sales, which consists primarily of revenue derived from maintenance and
consulting contracts. Net sales decreased 7.8% from $50.8 million in the
year ended December 31, 1996 to $46.9 million in the year ended December 31,
1997. The decrease in net sales was primarily due to the delay of orders
anticipated from certain customers for the Company's Test Station products
into future periods. Product sales decreased 11.1% from $40.2 million in the
year ended December 31, 1996 to $35.8 million in the year ended December 31,
1997, reflecting the shortfall in Test Station product sales, which was
partially offset by a 76.4% increase in sales of Virtual Test Software
products. Service and other sales increased 4.5% from $10.6 million for the
year ended December 31, 1996 to $11.1 million for the year ended December 31,
1997, due principally to growth in sales of Virtual Test related services.
Combined sales of Virtual Test Software product and Virtual Test Software
related services grew to 12.6% of net sales during the year 1997, compared to
8.6% in 1996. International sales, as a percentage of the Company's net
sales, increased from 26.1% for the year ended December 31, 1996 to 34.3% for
the year ended December 31, 1997, due primarily to increased sales in Europe
and Asia, and relatively weaker performance in North America.
COST OF SALES. Cost of sales consists of material, labor, manufacturing and
service overhead as well as amortization of capitalized software development
costs. Total cost of sales decreased 10.9% from $18.1 million in the year
ended December 31, 1996 to $16.2 million in the year ended December 31, 1997.
Product cost of sales decreased 12.3% from $14.2 million for the year 1996
to $12.5 million for 1997, primarily due to lower product sales volume and
certain reductions in material costs. Service and other cost of sales
decreased 5.9% from $3.9 million in the year 1996 to $3.7 million in 1997,
due primarily to a non-recurring $327 charge in the first quarter of 1996 for
the Company's change in accounting for spare parts, partially offset by
increased labor costs associated with Virtual Test Software related services.
GROSS MARGIN. The Company's gross margin decreased 6.1% from $32.7 million
in the year ended December 31, 1996 to $30.7 million in the year ended
December 31, 1997. As a percentage of net sales, gross margin increased from
64.3% for the year ended December 31, 1996 to 65.5% for the year ended
December 31, 1997. Product gross margin, as a percent of related sales,
increased from 64.7% for the year 1996, to 65.2% for 1997. The increase in
product gross margin resulted from an increase in sales of Virtual Test
Software products during 1997, partially offset by a slight decline in gross
margin realized on sales of the Company's Test Station products. Service and
other gross margin, as a percent of related sales, increased from 62.9% for
1996 to 66.6% for 1997, due primarily to the non-recurring charge to cost of
service and other sales related to the change in accounting method for spare
parts in 1996.
RESEARCH, DEVELOPMENT AND ENGINEERING. Research, development and engineering
expenses consist primarily of employee costs, cost of material consumed,
depreciation of equipment and engineering related costs. Research,
development and engineering expenses decreased 5.3% from $7.8 million for the
year ended December 31, 1996 to $7.4 million for the year ended December 31,
1997. As a percentage of net sales, research, development and engineering
expenses increased from 15.3% in the year ended December 31, 1996 to 15.8% in
the year ended December 31, 1997. The decrease in reported research,
development and engineering expense was principally attributable to greater
capitalization of software development costs associated with development of
the Company's new products during 1997 while gross research, development and
engineering spending remained approximately flat from 1996 to 1997. The
Company plans to increase the dollar amount of research, development and
engineering in the future, if and when growth in net sales makes it prudent
to do so, reflecting the Company's strategy to invest in new products and
existing product enhancements. The Company has capitalized certain software
development costs relating to these activities, in compliance with SFAS No.
86, in the amounts of $1.1 million and $715 in 1997 and 1996,
11
respectively. Capitalization of software development costs was offset by
amortization of previously capitalized costs to product cost of sales in the
amount of $753 and $842 during 1997 and 1996, respectively.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses include salaries and commissions of sales, marketing and administrative
personnel, and other marketing and general administrative expenses. Selling,
general and administrative expenses increased 5.4% from $15.4 million for the
year ended December 31, 1996 to $16.2 million for the year ended December 31,
1997. The increase was principally attributable to higher commissions and
increased investment in the Company's selling function. As a percentage of net
sales, selling, general and administrative expenses increased from 30.3% in the
year ended December 31, 1996 to 34.6% in the year ended December 31, 1997 due to
the increase in selling, general and administrative expenses combined with the
impact of lower net sales discussed above. The Company anticipates that selling
and marketing expenses will increase in dollar amount in the future, as the
Company continues to expand its distribution infrastructure.
Following the Company's secondary stock offering in February 1997, Cadence's
ownership of the Company's common stock dropped below 50%, requiring the Company
to recognize additional compensation expense of approximately $313 during 1997,
as a result of payments made by Cadence to certain Company employees in respect
of Cadence stock options held by such employees.
OTHER INCOME, NET. Other income, net includes interest income, interest expense
and gain and loss on sale of assets. Other income, net increased from $217 in
the year ended December 31, 1996 to $932 in the year ended December 31, 1997.
The increase was due to interest income on higher average cash and investment
balances, combined with the impact of a one-time write-off of expenses
associated with the Company's withdrawn secondary public stock offering in June
1996, due to unfavorable capital market conditions at that time. Costs of the
Company's successful stock offering in February 1997 were charged as an offset
to the offering proceeds in Shareholders' Equity.
INCOME TAXES. The Company's effective rate for Federal and state taxes was
35.0% for the year ended December 31, 1997 and 36.5% for the year ended December
31, 1996. The change in effective tax rates from 1996 to 1997 was primarily due
to increased research and development tax credits during 1997.
YEARS ENDED DECEMBER 31, 1996 AND 1995
NET SALES. Net sales increased 23.7% from $41.1 million in the year ended
December 31, 1995 to $50.8 million in the year ended December 31, 1996. The
increase in net sales was primarily due to an increase in product sales of 21.7%
from $33.1 million in the year ended December 31, 1995 to $40.2 million in the
year ended December 31, 1996, reflecting the successful 1995 introduction of the
Company's ATS FT Test Stations, which contributed 27.1% of net sales during
1996, continued contributions from the Company's ATS Blazer and XL Test Station
products and a 117.9% increase in sales of Virtual Test Software. Service and
other sales increased 32.1% from $8.0 million for the year ended December 31,
1995 to $10.6 million for the year ended December 31, 1996, due principally to
growth in sales of Virtual Test Software related services. Combined sales of
Virtual Test Software product and Virtual Test Software related services grew to
8.6% of net sales during the year 1996, compared to 4.6% in 1995. International
sales, as a percentage of the Company's net sales, declined from 32% for the
year ended December 31, 1995 to 26% for the year ended December 31, 1996, due
primarily to general economic weakness and slowing down of customer capital
expenditures in Europe, Japan and Korea.
COST OF SALES. Total cost of sales increased 15.0% from $15.8 million in the
year ended December 31, 1995 to $18.1 million in the year ended December 31,
1996. Product cost of sales increased 10.7% from $12.8 million for the year
1995 to $14.2 million for 1996, primarily due to higher sales volume,
partially offset by benefits from lower costs of materials and manufacturing
efficiencies. Service and other cost of sales increased 33.9% from $2.9
million in the year 1995 to $3.9 million in 1996, due primarily to a one-time
$327 charge in the first quarter of 1996 for the Company's change in
accounting for spare parts, and increased labor costs associated with
expanding customer service center, training and Virtual Test Software related
services.
12
GROSS MARGIN. The Company's gross margin increased 29.1% from $25.3 million
in the year ended December 31, 1995 to $32.7 million in the year ended
December 31, 1996. As a percentage of net sales, gross margin increased from
61.6% for the year ended December 31, 1995 to 64.3% for the year ended
December 31, 1996. Product gross margin, as a percent of related sales,
increased from 61.2% for the year 1995, to 64.7% for 1996. The increase in
product gross margin resulted from an increase in sales of higher margin ATS
FT Test Stations and Virtual Test Software products during 1996. Service and
other gross margin, as a percent of related sales, declined slightly from
63.3% for 1995, to 62.9% for 1996, due primarily to a charge to cost of
service and other sales related to the change in accounting method for spare
parts, which resulted in additional depreciation expenses, partially offset
by higher gross margin associated with increased sales of Virtual Test
Software related services.
RESEARCH, DEVELOPMENT AND ENGINEERING. Research, development and engineering
expenses increased 26.2% from $6.2 million for the year ended December 31,
1995 to $7.8 million for the year ended December 31, 1996. As a percentage
of net sales, research, development and engineering expenses increased from
15.0% in the year ended December 31, 1995 to 15.3% in the year ended December
31, 1996. The increase was principally attributable to increased expenditures
on enhancements to the Company's existing products and the development of
future generation hardware and software products. The Company has
capitalized certain software development costs relating to these activities,
in compliance with SFAS No. 86, in the amounts of $715 and $1.0 million in
1996 and 1995, respectively. Capitalization of software development costs
was offset by amortization of previously capitalized costs to product cost of
sales in the amount of $842 and $1,277 during 1996 and 1995, respectively.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased 12.6% from $13.7 million for the year ended December 31,
1995 to $15.4 million for the year ended December 31, 1996. The increase was
principally attributable to higher commissions associated with higher sales
volume and increased investment in the various selling and marketing
functions. As a percentage of net sales, selling, general and administrative
expenses decreased from 33.3% in the year ended December 31, 1995 to 30.3% in
the year ended December 31, 1996 as a result of control over increases in
selling, general and administrative expenses as net sales grew.
OTHER INCOME, NET. Other income, net decreased from $319 in the year ended
December 31, 1995 to $217 in the year ended December 31, 1996 due to the
one-time write-off of expenses associated with the Company's withdrawn
secondary public stock offering in June 1996, due to unfavorable stock market
conditions at that time.
INCOME TAXES. The Company's effective rate for Federal and state taxes was
36.5% for the year ended December 31, 1996 and 38.9% for the year ended
December 31, 1995. The change in effective tax rates from 1995 to 1996 was
primarily due to the generation of research and development tax credits
during 1996.
FUTURE OPERATING RESULTS
Results of operations for the periods discussed above should not be
considered indicative of the results to be expected in any future period, and
fluctuations in operating results may also result in fluctuations in the
market price of the Company's common stock. Like most high technology and
high growth companies, the Company faces certain business risks that could
have adverse effects on the Company's results of operations.
For the years ended December 31, 1997, 1996 and 1995, sales to Intel
Corporation represented approximately 27.3%, 36.4%, and 30.2% of the
Company's net sales, respectively. No other customer accounted for more than
10% of the Company's net sales in 1997, 1996, or 1995. For 1997, 67.6% of
net sales came from customers individually accounting for less than 5% of net
sales. Sales of the Company's products to Intel and a limited number of
other customers are expected to continue to account for a high percentage of
net sales over the foreseeable future. Any sudden reduction or loss of
orders from Intel or any other major customer would have a material adverse
effect on the Company's financial condition and results of operations. Like
most high technology and high growth companies, the Company faces certain
business risks that could have adverse effects on the Company's results of
operations, including, but not limited to the following. The Company is
dependent on high-dollar customer orders, deriving a substantial portion of
its net sales from the sale of Test Stations which typically range in price
from $0.5 million to $1.2 million per unit and may be priced as high as $1.8
million for a single unit.
13
A substantial portion of the Company's net sales are typically realized in
the last few days of each quarter. As evidenced by the impact of the delays
of orders for the Company's Test Station products discussed above, the timing
of the receipt and shipment, and the magnitude of the sales price, of a
single order can have a significant impact on the Company's net sales and
results of operations for a particular quarter and the Company's quarterly
net sales and results of operations may be negatively impacted if an order is
received too late in a given quarter to permit product shipment and the
recognition of revenue during that quarter.
A significant portion of the Company's operating expenses are relatively
fixed and planned expenditures are based, in part, on anticipated orders. In
addition, the need for continued expenditures for research, development and
engineering makes it difficult to reduce expenses in a particular quarter if
the Company's sales goals for that quarter are not met. The inability to
reduce the Company's expenses quickly enough to compensate for any revenue
shortfall would magnify the adverse impact of any revenue shortfall on the
Company's results of operations.
The Company purchases some key components from sole or single source vendors,
for which alternative sources are not readily available. A few of these
suppliers are small independent companies and could expose the Company to
increased risk of delivery problems for certain key components. The
Company's future operating results and financial condition are also subject
to influences driven by rapid technological changes, a highly competitive
industry, a lengthy sales cycle, and the cyclical nature of general economic
conditions.
During 1997, approximately 23% the Company's net sales were to customers in
the Asia-Pacific region. These sales were predominantly to Asian locations
of U.S. based multinational companies, but also included sales to companies
headquartered in Japan, Korea, Taiwan, and Singapore. To-date, the Company
has not experienced any significant impact on net sales from the current
financial crisis in the Asia-Pacific region. There can be no assurance that
the Asia-Pacific financial crisis will not negatively impact the Company's
future net sales.
Based on a recent assessment, the Company believes that no material
modifications to its products are required to be Year 2000 compliant. The
Company is currently in the process of evaluating its information technology
infrastructure for Year 2000 compliance. The Company believes that Year 2000
compliance for its core operating and financial management applications will
be achieved as a result of upgrades to existing software already being
planned. As a result, the Company does not currently expect incremental
costs necessary to modify the Company's information technology infrastructure
to be Year 2000 compliant to have a material impact on the Company's results
of operations or financial position. The Company has efforts underway to
assess the Year 2000 compliance status of its significant suppliers and
customers. In the event that any of the Company's significant suppliers or
customers do not successfully and in a timely manner achieve Year 2000
compliance, the Company's business or operations could be adversely affected.
In addition, future operating results will depend on many factors, including
demand for the Company's products, the introduction of new products by the
Company and by its competitors, industry acceptance of Virtual Test software,
the level and timing of available shippable orders and backlog, and the
business risks discussed above. There can be no assurance that the Company's
net sales will grow or that such growth will be sustained in future periods
or that the Company will remain profitable in any future period.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, the Company's principal sources of liquidity
consisted of cash, cash equivalents and short-term investments of
approximately $25.8 million, and funds available under an existing bank line
of credit of $10.0 million. Since 1988, the Company has relied on cash
generated from operations as its principal source of liquidity and has not
relied on Cadence for working capital.
OPERATING ACTIVITIES. The Company's net cash from operating activities
includes cash received from customers, payments to suppliers, payments to
employees and interest received and paid. Net cash generated from operating
activities amounted to $9.2 million, $6.0 million and $5.0 million for 1997,
1996, and 1995, respectively. Cash
14
received from customers amounted to $50.7 million, $48.0 million and $37.0
million for 1997, 1996 and 1995, respectively. Combined payments to
suppliers and employees for 1997, 1996 and 1995 were $40.3 million, $40.5
million and $31.1 million, respectively. The period-to-period changes in
cash from customers and payments to suppliers and employees are directly
related to the changes in net sales and expenses associated with those sales.
The Company's trade receivables, inventories and accounts payable have
fluctuated from period to period as a result of the timing of shipments, cash
collections and inventory receipts near period end. The size and timing of a
single customer shipment or collection can have a significant impact on trade
receivables and inventories. Trade receivables decreased from $11.4 million
at December 31, 1996 to $10.6 million at December 31, 1997, reflecting the
fourth quarter 1997 delay in customer orders discussed above, partially
offset by the impact of extended payment terms granted to certain customers
and distributors during 1997, especially in the Asia-Pacific region. The
financial difficulties facing the Asia-Pacific region may cause these
receivables to age further in 1998. Inventories increased from $7.9 million
at December 31, 1996 to $11.3 million at December 31, 1997, primarily due to
additional parts inventories required to produce the Company's new products,
and the impact of the delay in orders experienced at the end of 1997. As a
result of cash flows from operating activities, combined with the proceeds of
the Company's secondary public offering in 1997 of $13.4 million, the Company
has increased its cash, cash equivalent and short-term investment balances
from $9.5 million at December 31, 1996 to $25.8 million at December 31, 1997.
INVESTING ACTIVITIES. Capital equipment expenditures of $4.1 million, $3.3
million, and $1.9 million in 1997, 1996, and 1995, respectively, were
primarily for computers, software, demonstration equipment and engineering
equipment used in the Company's operations. Expenditures to increase the
Company's service spare parts pool were $1.5 million, $1.1 million and $600
for 1997, 1996 and 1995, respectively. The increases in spare parts reflects
the stocking of parts for servicing the Company's new ATS FT, MSTS and XTS
Test Station product lines. In addition, the Company capitalized certain
expenses associated with software development costs of $1.1 million, $715 and
$1.0 million for 1997, 1996 and 1995, respectively. The Company has invested
amounts equal to compensation deferred by executive management under the
terms of the Company's non-qualified deferred compensation plan, in the
amounts of $372 and $270 for the years 1997 and 1996, respectively.
FINANCING ACTIVITIES. In 1997 and 1995, net cash provided by financing
activities was $14.2 million and $3.0 million, respectively. In 1996, net
cash used by financing activities amounted to $12. Cash provided by
financing activities during 1997 and 1995 was attributable to the proceeds
from the Company's secondary and initial public offerings of common stock,
respectively. Cash used for payments of certain capital leases obtained by
the Company for computers and equipment used in operations was $251, $300 and
$254 for 1997, 1996 and 1995, respectively. In 1997, 1996 and 1995, the
Company received $1.0 million, $288 and $3, respectively, from the issuance
of stock under employee stock option and stock purchase plans.
The Company realized reductions in current income tax liabilities of $2.7
million, $1.9 million and $2.3 million during 1997, 1996 and 1995,
respectively, resulting from the benefit of tax deductions of employee gains
upon exercise of Cadence stock options, and to a lesser extent from the
exercise of the Company's employee stock options. The tax benefit of the
stock option deduction is reflected as an increase in additional paid-in
capital in the accompanying Statements of Shareholders' Equity. The employee
gains are not expenses of the Company for financial reporting purposes, and
the exercise of Cadence stock options does not increase the number of shares
of Company common stock outstanding. The tax benefits realized from the
stock option deduction will decrease in the future as employee holdings of
Cadence stock options decline due to option exercises and cancellations. The
timing and magnitude of this decrease in tax benefits is uncertain as the
number of employee stock options which are exercised, and the amount of gains
realized upon exercise, will be determined by fluctuations in the market
value of Cadence common stock. Such future decreases in the tax benefits
from the stock option deduction will increase the amount of the Company's
income tax payments and will, consequently, reduce the Company's net cash
flows from operating activities.
At the end of 1995, the Company secured a $10.0 million revolving line of
credit with U.S. National Bank of Oregon, which is available for general
corporate purposes when needed. Under the agreement, the Company can borrow,
with interest at the bank's prime lending rate, or if lower, at certain
margins above banker's acceptance or interbank offering rates. There have
been no borrowings against the line of credit to date. The term of the
current credit line agreement ends April 30, 1998. It is management's intent
to renew the agreement at that time.
15
The Company believes that existing funds, funds expected to be generated by
operating activities, and the available line of credit, will satisfy the
Company's anticipated working capital and other general corporate purposes
through at least the next twelve months. The Company currently has no
significant capital commitments other than commitments under facility operating
leases and vendor contracts for development services, consulting services and
parts. The Company may from time to time consider the acquisition of
complementary businesses, products or technologies. The Company presently has
no significant understandings, commitments or agreements with respect to any
such acquisitions. Any such transactions, if consummated, may use a portion of
the Company's working capital or require the issuance of additional equity.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and schedule listed in Item 14(a)(1) and (2) are
included in this Report beginning on Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
16
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information required by Item 401 of Regulation S-K is included under the
captions "Election of Directors" and "Management" in the Company's Proxy
Statement dated April 6, 1998 and is incorporated herein by reference. The
information required by Item 405 of Regulation S-K is included under the
captions "Section 16(a) Beneficial Ownership Reporting Compliance" in the
Company's Proxy Statement dated April 6, 1998 and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included under the caption
"Executive Compensation" in the Company's Proxy Statement dated April 6, 1998
and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included under the caption "Stock Owned
by Management and Principal Shareholders" in the Company's Proxy Statement dated
April 6, 1998 and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included under the caption "Certain
Transactions and Relationships" in the Company's Proxy Statement dated April 6,
1998 and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
(1) Financial Statements and Supplementary Data
The documents and schedule listed below are filed as part of this
report on the pages indicated:
Page
----
Independent Auditors' Report F-1
Statements of Income F-2
Balance Sheets F-3
Statements of Shareholders' Equity F-4
Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-7
Selected Quarterly Financial Data F-17
17
(2) Financial Statement Schedules
The documents and schedule listed below are filed as part of this report on
the pages indicated:
PAGE
----
Schedule II -- Valuation and Qualifying Accounts F-18
Independent Auditors' Report on Financial Statements Schedule F-19
All other financial statement schedules have been omitted since they are
not required, not applicable or the information is included in the
consolidated financial statements or notes.
(3) Exhibits
Sequential
Page Number
-----------
3.1. Restated Articles of Incorporation of Integrated
Measurement Systems, Inc. Incorporated by reference
to Exhibit 3.1 of the Company's Registration
Statement on Form S-1 (Registration No. 33-92408)
3.2 Second Restated Bylaws of Integrated Measurement
Systems, Inc. Incorporated by reference to
Exhibit 3(ii) of the Company's Report on Form 8-K
filed March 26, 1998.
10.1. Form of Indemnity Agreement between Integrated
Measurement Systems, Inc. and each of its executive
officers and directors. Incorporated by reference
to Exhibit 10.1 of the Company's Registration
Statement on Form S-1 (Registration No. 33-92408)
10.2. 1995 Stock Incentive Plan. Incorporated by
reference to Exhibit 10.2 of the Company's
Registration Statement on Form S-1 (Registration No.
33-92408)
10.3. 1995 Stock Option Plan for Nonemployee Directors.
Incorporated by reference to Exhibit 10.3 of the
Company's Registration Statement on Form S-1
(Registration No. 33-92408)
10.4. Form of Employment Agreement between Integrated
Measurement Systems, Inc. and each of its executive
officers. Incorporated by reference to Exhibit 10.4
of the Company's Registration Statement on Form S-1
(Registration No. 33-92408)
10.5. Stockholder Agreement between Integrated Measurement
Systems, Inc. and Cadence Design Systems, Inc.
Incorporated by reference to Exhibit 10.5 of the
Company's Registration Statement on Form S-1
(Registration No. 33-92408)
10.6. Shareholder Agreement between Integrated Measurement
Systems, Inc. and Cadence Design Systems, Inc.
Incorporated by reference to Exhibit 10.6 of the
Company's Registration Statement on Form S-1
(Registration No. 33-92408)
10.7. Asset Transfer Agreement between Integrated
Measurement Systems, Inc. and Cadence Design
Systems, Inc. Incorporated by reference to Exhibit
10.7 of the Company's Registration Statement on Form
S-1 (Registration No. 33-92408)
10.8. Corporate Services Agreement between Integrated
Measurement Systems, Inc. and Cadence Design
Systems, Inc. Incorporated by reference to Exhibit
10.8 of the Company's Registration Statement on Form
S-1 (Registration No. 33-92408)
10.9. Tax Sharing Agreement between Integrated Measurement
Systems, Inc. and Cadence Design Systems, Inc.
Incorporated by reference to Exhibit 10.9 of the
Company's Registration Statement on Form S-1
(Registration No. 33-92408)
10.10. Lease Agreement between Integrated Measurement
Systems, Inc. and Beaverton-Richmond Tech
Properties, a Joint Venture, as amended by
18
Amendment One and Amendment Two. Incorporated by
reference to Exhibit 10.10 of the Company's Registration
Statement on Form S-1 (Registration No. 33-92408)
10.11. Line of Credit agreement with US Bank. Incorporated
by reference to Exhibit 10.11 of the Company's
Annual Report on Form 10-K for the year ended
December 31, 1995.
10.12. Integrated Measurement Systems, Inc. 1995 Employee
Stock Purchase Plan. Incorporated by reference to
Exhibit 10.12 of the Company's Annual Report on Form
10-K for the year ended December 31, 1995.
10.13. Employment Agreement dated March 16, 1996 between
Integrated Measurement Systems, Inc. and Keith L.
Barnes. Incorporated by reference to Exhibit 10.a
of the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1996.
10.14. Employment Agreement dated March 16, 1996 between
Integrated Measurement Systems, Inc. and Ramadan.
Incorporated by reference to Exhibit 10.b of the
Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996.
10.15. Amended Stockholder Agreement between Integrated
Measurement Systems, Inc. and Cadence Design
Systems, Inc. Incorporated by reference to Exhibit
10.15 of the Company's Registration Statement on
Form S-1 (Registration No. 333-20495)
10.16. Amended Corporate Services Agreement between
Integrated Measurement Systems, Inc. and Cadence
Design Systems, Inc. Incorporated by reference to
Exhibit 10.16 of the Company's Registration
Statement on Form S-1 (Registration No. 333-20495)
10.17. Second Amendment to Joint Sales Agency Agreement
between Integrated Measurement Systems, Inc. and
Cadence Design Systems, Inc. Incorporated by
reference to Exhibit 10.17 of the Company's
Registration Statement on Form S-1 (Registration No.
333-20495)
10.18. Employment Agreement dated December 31, 1996 between
Integrated Measurement Systems, Inc. and David
Brinker. Incorporated by reference to Exhibit 10.18
of the Company's Registration Statement on Form S-1
(Registration No. 333-20495)
10.19. Integrated Measurement Systems, Inc. Executive
Deferred Compensation Plan. Incorporated by
reference to Exhibit 10 of the Company's Quarterly
Report on Form 10-Q for the quarter ended September
30, 1996.
10.20. Separation letter agreement between Integrated
Measurement Systems, Inc. and Marvin Wolfson.
Incorporated by reference to Exhibit 10.20 of the
Company's Registration Statement on Form S-1
(Registration No. 333-20495)
10.21. Lease Agreement, dated September 22, 1997, between
Integrated Measurement Systems, Inc. and Spieker
Partners, LP, a limited partnership.*
10.22. Rights Agreement, dated as of March 25, 1998, between
Integrated Measurement Systems, Inc. and ChaseMellon
Shareholder Services, L.L.C. including the Articles of
Amendment creating the Series A Participating Preferred
Stock of Integrated Measurement Systems, Inc., the form
of Rights Certificate and the Summary of Rights
attached thereto as Exhibits A, B and C, respectively.
Incorporated by reference to Exhibit 4.1 of the Company's
Report on Form 8-K filed March 26, 1998
10.23. Amended and Restated Shareholder Agreement, dated as of
March 25, 1998, between Integrated Measurement Systems,
Inc. and Cadence Design Systems, Inc. Incorporated by
reference to Exhibit 4.2 of the Company's Report on
Form 8-K filed March 26, 1998.
16.1. Letter of Arthur Andersen LLP regarding change in
accounting principles. Incorporated by reference to
Exhibit 10.a of the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1996.
23.1. Consent of Arthur Andersen LLP*
27.1. Financial Data Schedule*
27.2. Financial Data Schedule (restated)*
27.3. Financial Data Schedule (restated)*
-------------------
* File Herewith
(b) Reports on Form 8-K
No report on Form 8-K was filed during the quarter ended December 31, 1997.
19
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, on the 30th day of March,
1998.
INTEGRATED MEASUREMENT SYSTEMS, INC.
By /s/ SAR RAMADAN
-----------------------------------------
Sar Ramadan
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated, on the 30th day of March, 1998.
Signature Title
/s/ KEITH L. BARNES President, Chief Executive Officer, and Director
- ------------------------- (Principal Executive Officer)
Keith L. Barnes
/s/ SAR RAMADAN Chief Financial Officer (Principal Financial
- ------------------------- and Accounting Officer)
Sar Ramadan
/s/ H. RAYMOND BINGHAM Chairman of the Board
- -------------------------
H. Raymond Bingham
/s/ C. SCOTT GIBSON Director
- -------------------------
C. Scott Gibson
/s/ JAMES E. SOLOMON Director
- -------------------------
James E. Solomon
/s/ JAMES M. HURD Director
- -------------------------
James M. Hurd
/s/ MILTON R. SMITH Director
- -------------------------
Milton R. Smith
20
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF INTEGRATED MEASUREMENT SYSTEMS,
INC.:
We have audited the accompanying balance sheets of Integrated Measurement
Systems, Inc. (an Oregon corporation) as of December 31, 1997 and 1996, and
the related statements of income, shareholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
upon 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 financial statements referred to above present fairly, in
all material respects, the financial position of Integrated Measurement
Systems, Inc. as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Portland, Oregon
January 21, 1998
F-1
STATEMENTS OF INCOME
(In thousands, except per share amounts)
Year ended December 31,
----------------------------------
1997 1996 1995
-------- -------- -------
Sales:
Product sales.......................... $35,777 $40,244 $33,076
Service and other sales................ 11,073 10,593 8,017
-------- -------- -------
Net sales......................... 46,850 50,837 41,093
Cost of sales:
Cost of product sales.................. 12,452 14,203 12,827
Cost of service and other sales........ 3,702 3,935 2,939
-------- -------- -------
Total cost of sales............... 16,154 18,138 15,766
-------- -------- -------
Gross margin...................... 30,696 32,699 25,327
Operating expenses:
Research, development and engineering.. 7,385 7,796 6,177
Selling, general and administrative.... 16,238 15,408 13,681
-------- -------- -------
Total operating expenses.......... 23,623 23,204 19,858
-------- -------- -------
Operating income.................. 7,073 9,495 5,469
Other income, net........................... 932 217 319
-------- -------- -------
Income before income taxes.................. 8,005 9,712 5,788
Provision for income taxes.................. 2,800 3,546 2,253
-------- -------- -------
Net income........................ $ 5,205 $ 6,166 $ 3,535
-------- -------- -------
-------- -------- -------
Basic earnings per share.................... $ 0.70 $ 0.92 $ 0.54
-------- -------- -------
-------- -------- -------
Diluted earnings per share.................. $ 0.67 $ 0.88 $ 0.53
-------- -------- -------
-------- -------- -------
Weighted average number of common
shares outstanding for basic
earnings per share..................... 7,388 6,710 6,492
Incremental shares from assumed
conversion of employee stock options... 360 293 170
-------- -------- -------
Adjusted weighted average shares
for diluted earnings per share......... 7,748 7,003 6,662
-------- -------- -------
-------- -------- -------
The accompanying notes are an integral part of these financial statements.
F-2
BALANCE SHEETS
(In thousands, except share amounts)
December 31,
---------------------
1997 1996
------- -------
ASSETS
Current assets:
Cash and cash equivalents........................ $17,464 $ 9,545
Short-term investments........................... 8,371 --
Trade receivables, less allowance for
doubtful accounts of $577 and $489.......... 10,582 11,352
Receivable from Cadence, net..................... 219 2,125
Inventories...................................... 11,311 7,940
Income taxes receivable.......................... 336 --
Deferred income taxes............................ 1,637 1,690
Prepaid expenses and other current assets........ 1,597 1,118
------- -------
Total current assets........................ 51,517 33,770
Property, plant and equipment, net.................... 7,418 5,924
Service spare parts, net.............................. 3,395 2,567
Software development costs, net....................... 1,763 1,446
Other assets, net..................................... 1,430 607
------- -------
Total assets................................ $65,523 $44,314
------- -------
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................. $ 2,321 $ 2,251
Accrued compensation............................. 1,354 2,036
Accrued warranty................................. 442 500
Deferred revenue................................. 1,852 1,727
Income taxes payable............................. -- 979
Other current liabilities........................ 475 750
Capital lease obligations - current.............. 181 247
------- -------
Total current liabilities................... 6,625 8,490
Deferred income taxes................................. 483 417
Capital lease obligations, net of current portion..... 152 278
Deferred compensation................................. 830 270
Commitments
Shareholders' equity:
Preferred stock, $.01 par value, authorized
10,000,000 shares;
none issued and outstanding................. -- --
Common stock, $.01 par value, authorized
15,000,000 shares; 7,521,393 and
6,726,257 issued and outstanding............ 75 67
Additional paid-in capital....................... 40,037 22,676
Retained earnings................................ 17,321 12,116
------- -------
Total shareholders' equity.................. 57,433 34,859
------- -------
Total liabilities and shareholders' equity.. $65,523 $44,314
------- -------
------- -------
The accompanying notes are an integral part of these financial statements.
F-3
STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
Additional Total
Common Stock Paid-in Retained Shareholders'
Shares Amount Capital Earnings Equity
------ ------ ---------- -------- -------------
Balance, December 31, 1994................ 6,324 $ 63 $14,764 $ 3,442 $18,269
Contributed capital.................. -- -- 177 -- 177
Net proceeds from initial public
offering........................ 375 4 3,253 -- 3,257
Stock issued under employee stock
option plans.................... 1 -- 3 -- 3
Dividend to Cadence.................. -- -- -- (1,027) (1,027)
Tax benefit from Cadence stock
options......................... -- -- 2,270 -- 2,270
Net income........................... -- -- -- 3,535 3,535
------ ------ ---------- -------- -------------
Balance, December 31, 1995................ 6,700 67 20,467 5,950 26,484
Stock issued under employee stock
plans........................... 26 -- 288 -- 288
Tax benefit from Cadence and IMS
stock options................... -- -- 1,921 -- 1,921
Net income........................... -- -- -- 6,166 6,166
------ ------ ---------- -------- -------------
Balance, December 31, 1996................ 6,726 67 22,676 12,116 34,859
Contributed capital.................. -- -- 313 -- 313
Net proceeds from secondary public
offering........................ 700 7 13,360 -- 13,367
Stock issued under employee stock
plans........................... 95 1 1,036 -- 1,037
Tax benefit from Cadence and IMS
stock options................... -- -- 2,652 -- 2,652
Net income........................... -- -- -- 5,205 5,205
------ ------ ---------- -------- -------------
Balance, December 31, 1997................ 7,521 $ 75 $40,037 $17,321 $57,433
------ ------ ---------- -------- -------------
------ ------ ---------- -------- -------------
The accompanying notes are an integral part of these financial statements.
F-4
STATEMENTS OF CASH FLOWS
(In thousands)
Year ended December 31,
--------------------------------
1997 1996 1995
-------- -------- --------
Cash flows from operating activities:
Cash received from customers.......... $ 50,725 $ 47,958 $ 36,994
Interest received..................... 1,097 428 320
Payments to suppliers................. (21,319) (22,782) (16,986)
Payments to employees................. (18,972) (17,717) (14,082)
Income taxes paid..................... (1,307) (629) (495)
Other taxes paid...................... (975) (1,257) (733)
Interest paid......................... (41) (33) (30)
-------- -------- --------
Net cash provided by operating
activities.................. 9,208 5,968 4,988
-------- -------- --------
Cash flows from investing activities:
Purchases of short-term investments... (11,392) -- --
Sale of short-term investments........ 3,021 -- --
Purchases of equipment and software... (4,128) (3,299) (1,874)
Purchases of service spare parts...... (1,501) (1,057) (600)
Software development costs............ (1,070) (715) (974)
Purchases of long-term investments.... (372) (270) --
-------- -------- --------
Net cash used in investing
activities.................. (15,442) (5,341) (3,448)
-------- -------- --------
Cash flows from financing activities:
Principal payments under
capital leases................... (251) (300) (254)
Net proceeds from public
stock offerings.................. 13,367 -- 3,257
Proceeds from employee stock plans.... 1,037 288 3
-------- -------- --------
Net cash provided by (used in)
financing activities........ 14,153 (12) 3,006
-------- -------- --------
Net increase in cash and cash
equivalents................. 7,919 615 4,546
Cash and cash equivalents at
beginning of year..................... 9,545 8,930 4,384
-------- -------- --------
Cash and cash equivalents at end of year... $ 17,464 $ 9,545 $ 8,930
-------- -------- --------
-------- -------- --------
Reconciliation of net income to net cash
provided by operating activities:
Net income............................ $ 5,205 $ 6,166 $ 3,535
Adjustments to reconcile net income to
cash provided by operating
activities:
Depreciation and amortization.... 4,001 3,492 3,071
Contributed capital.............. 313 -- 177
Provision (benefit) for
deferred income taxes....... 119 (144) (763)
Deferred compensation............ 372 270 --
Net change in receivable from Cadence. 1,906 (1,031) (373)
Decrease (increase) in trade
receivables...................... 770 (3,235) (3,693)
Increase in inventories............... (3,371) (2,110) (2,606)
Increase in prepaid expenses
and other current assets......... (479) (383) (485)
Net change in income taxes
payable or receivable............ 1,337 2,900 --
(Decrease) increase in accounts
payable and accrued expenses..... (1,090) 607 4,963
Increase (decrease) in deferred
revenue.......................... 125 (564) 1,162
-------- -------- --------
Net cash provided by operating activities.. $ 9,208 $ 5,968 $ 4,988
-------- -------- --------
-------- -------- --------
F-5
Year ended December 31,
--------------------------------
1997 1996 1995
-------- -------- --------
Supplemental schedule of noncash
financing activities:
Purchases of assets through
capital leases................... $ 59 $ 607 $ 181
Tax benefit from Cadence and
IMS stock options................ $2,652 $1,921 $2,270
Noncash dividend to Cadence........... $ -- $ -- $1,027
The accompanying notes are an integral part of these financial statements.
F-6
NOTES TO FINANCIAL STATEMENTS
(All numerical references in thousands, except percentages and share data)
1. COMPANY BACKGROUND AND INITIAL PUBLIC OFFERING:
Integrated Measurement Systems, Inc. (the Company or IMS) commenced
operations in August 1983. The Company was independent until acquired by
Valid Logic in 1989. In 1991, Valid Logic merged with Cadence Design
Systems, Inc. (Cadence) in a transaction accounted for as a pooling. From
that time until July 21, 1995, the Company was a wholly owned subsidiary of
Cadence.
In July 1995, the Company successfully completed an initial public offering
of common stock at a price of $11 per share. A total of 2,990,000 shares
were sold, consisting of 375,000 shares issued by the Company and 2,615,000
shares sold by Cadence. The net proceeds to the Company from this offering,
after deduction of directly related expenses, were $3.3 million, while net
proceeds to Cadence amounted to approximately $26.6 million. In February
1997, the Company issued 700,000 additional shares of common stock, and
Cadence sold 950,000 shares of the Company's common stock in a registered
public stock offering. Net proceeds to the Company amounted to $13.4
million. At December 31, 1997, Cadence owned 37% of the outstanding common
stock of the Company, with the remaining 63% publicly owned.
The Company is engaged in designing, developing, manufacturing, marketing and
servicing high-performance engineering Test Stations and test software to
test and measure the performance of complex electronic devices. In addition,
the Company develops, markets and supports a line of Virtual Test Software
that permits design and test engineers to automate test program development
and to conduct simulated tests of electronic device designs prior to the
fabrication of a prototype of the actual device. Virtual Test Software and
related services accounted for approximately 13%, 9% and 5% of net sales for
the years ended December 31, 1997, 1996 and 1995, respectively.
The Company markets and supports its products worldwide through a network of
direct sales force personnel, independent distributors and dedicated agents
employed by Cadence in international locations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USE OF ESTIMATES
The preparation of financial statements in conformance 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.
RECLASSIFICATIONS
Certain reclassifications have been made in the accompanying financial
statements for 1995 and 1996 to conform with the 1997 presentation.
REVENUE RECOGNITION
The Company generally recognizes revenue from product sales and software
licenses as the product ships and when no significant obligations remain.
Contract service and support revenues billed in advance are recorded as deferred
revenue and recognized ratably over the contractual period as the services and
support are performed. Revenue from other services, such as consulting and
training, is recognized as the related services are performed or when certain
milestones are achieved.
PRODUCT WARRANTY
The Company provides a warranty for its products and establishes an estimated
accrual at the time of sale considered adequate to cover warranty costs during
the warranty period.
F-7
CASH AND CASH EQUIVALENTS
The Company classifies all highly liquid investments purchased with an original
maturity of three months or less as cash equivalents. The carrying amount
approximates fair value because of the short maturity of these instruments. The
Company investments are placed with high credit-quality financial institutions
and bear minimal credit risk.
INVESTMENTS
The Company accounts for its investments in accordance with the Financial
Accounting Standards Board Statement No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" (SFAS 115). Under the provisions of
SFAS 115, the Company is required to classify and account for its security
investments as trading securities, securities available for sale or securities
held to maturity depending on the Company's intent to hold or trade the
securities at the time of purchase. The Company's short-term investments are
placed with high credit-quality financial institutions or in short-duration,
high quality debt securities. The Company limits the amount of credit exposure
in any one institution or type of investment instrument. As of December 31,
1997, the Company's short-term investments consisted of debt securities issued
by the states of the United States and political subdivisions of states, all
classified as available for sale. Debt securities available for sale are
carried on the balance sheet at fair market value, with the change in unrealized
gain or loss included in Shareholders' Equity. The unrealized gain on the
Company's investments in debt securities at December 31, 1997 was not material
and therefore is combined with Additional Paid-in Capital in the accompanying
Balance Sheets and Statements of Shareholders' Equity.
INVENTORIES
Inventories, consisting principally of computer hardware, electronic
sub-assemblies and test equipment, are valued at standard costs which
approximate the lower of cost (first-in, first-out) or market. Costs used for
inventory valuation purposes include material, labor and manufacturing overhead.
December 31,
-----------------------
1997 1996
------- ------
Raw materials.............. $ 5,780 $4,098
Work-in-progress........... 4,037 2,912
Finished goods............. 1,494 930
------- ------
Total inventories.......... $11,311 $7,940
------- ------
------- ------
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost and consists principally of
equipment, furniture and leasehold improvements. Depreciation of equipment and
furniture is computed principally on a straight-line basis over the estimated
useful lives of the assets, generally three to five years. Leasehold
improvements are amortized on a straight-line basis over the lesser of the term
of the lease, or the estimated useful lives of the improvements.
December 31,
-----------------------
1997 1996
------- -------
Leasehold improvements.................... $ 285 $ 313
Computer equipment and software........... 5,307 5,613
Manufacturing and test equipment.......... 4,293 3,363
Demonstration equipment................... 6,615 5,030
Office furniture and equipment............ 822 750
------- -------
17,322 15,069
Less accumulated depreciation............. (9,904) (9,145)
------- -------
F-8
Net property, plant and equipment......... $ 7,418 $ 5,924
------- -------
------- -------
SERVICE SPARE PARTS
Service spare parts consist of electronic components used to service Test
Stations for which the Company has entered into equipment maintenance agreements
with customers. Subsequent to December 31, 1995, the Company reclassified its
service spare parts from inventory to non-current assets to more accurately
reflect the use of such parts in the Company's service business. These assets
are not held for sale, diminish in value in a reasonably predictable manner, and
therefore are subject to depreciation. Beginning January 1, 1996, depreciation
of the Company's service spare parts is computed on a straight-line basis over
the estimated useful lives of the assets, generally eight years, and charged to
Cost of Service and Other Sales. Prior to 1996, the Company charged normally
recurring adjustments necessary to present inventory at its estimated net
realizable value to Cost of Service and Other Sales. In order to reflect this
change, the Company recorded a charge to Cost of Service and Other Sales of $327
during the first quarter of 1996, representing the cumulative difference in
financial statement carrying value between the depreciated cost under the new
accounting method at January 1, 1996 and the net inventory carrying value of the
service spare parts assets at December 31, 1995. Cost and accumulated
depreciation of service spare parts are as follows:
December 31,
-----------------------
1997 1996
------- -------
Service spare parts, at cost........... $ 5,233 $ 3,732
Less accumulated depreciation.......... (1,838) (1,165)
------- -------
Net service spare parts................ $ 3,395 $ 2,567
------- -------
------- -------
RESEARCH, DEVELOPMENT AND ENGINEERING COSTS
Research, development and engineering costs are expensed as incurred.
SOFTWARE DEVELOPMENT COSTS
The Company capitalizes certain software development costs incurred once
technological and economic feasibility of the product has been demonstrated.
These capitalized costs are amortized over the estimated economic life of the
related product, generally three years, computed principally on a straight-line
basis. Amortization is included in Cost of Product Sales in the accompanying
Statements of Income. The Company capitalized software development costs
amounting to $1,070, $715 and $974 in 1997, 1996 and 1995, respectively.
Related amortization expense of $753, $842 and $1,277 was recorded in 1997, 1996
and 1995, respectively.
December 31,
-----------------------
1997 1996
------- -------
Software development costs................ $ 6,301 $ 5,231
Less accumulated amortization............. (4,538) (3,785)
------- -------
Net software development costs............ $ 1,763 $ 1,446
------- -------
------- -------
INCOME TAXES
The Company accounts for income taxes under the asset and liability method as
defined by the provisions of Statement of Financial Accounting Standards (SFAS)
No. 109, "Accounting for Income Taxes". Under this method, deferred income
taxes are recognized for the future tax consequences attributable to temporary
differences between the financial statement and tax balances of existing assets
and liabilities. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Under
SFAS 109, the effect on deferred taxes of a change in tax rates is recognized
in income in the period that includes the enactment date.
F-9
STOCK-BASED COMPENSATION PLANS
The Company accounts for its stock-based plans under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25). The
Company has adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123).
EARNINGS PER SHARE
The Company calculates earnings per share in accordance with of Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128), which
became effective for financial statements for periods ending after December 15,
1997. Basic earnings per share are computed using the weighted average number of
common shares actually outstanding during the period. Diluted earnings per
share are computed by dividing net income by the weighted average number of
shares of common stock and common stock equivalents outstanding during the
period, calculated using the treasury stock method as defined in SFAS 128. The
Company's common stock equivalents consist of dilutive shares issuable upon the
exercise of outstanding common stock options. There are no differences in net
income used for basic and diluted earnings per share. Earnings per share
amounts presented in the accompanying Statements of Income for 1996 and 1995
have been adjusted to give effect to SFAS 128. Following is a summary of common
stock options outstanding but not included in the computation of diluted
earnings per share because the options' exercise price was greater than the
average market price of the common stock.
Year ended December 31,
--------------------------------------
1997 1996 1995
------- ------- ------
Number of options outstanding
with exercise price in
excess of average market
price........................ 33 26 7
Weighted average exercise price... $ 18.99 $ 19.18 $15.26
3. CAPITAL LEASE OBLIGATIONS:
The Company leases certain equipment under capital lease agreements, which are
secured by the related assets. A schedule of future minimum lease payments
under capital lease agreements as of December 31, 1997 is as follows:
1998............................................... $ 206
1999............................................... 162
-----
Total minimum payments............................. 368
Amount representing interest....................... (35)
-----
Present value of future minimum lease payments..... 333
Less current portion.......................... (181)
-----
Long-term capital lease obligation................. $ 152
-----
-----
F-10
4. COMMITMENTS:
The Company leases its facilities and certain equipment under operating leases
that expire from 1998 to 2004. The approximate minimum lease payments under
these operating leases at December 31, 1997 are as follows:
1998.................. $1,235
1999.................. 1,231
2000.................. 1,194
2001.................. 1,165
2002.................. 1,200
Thereafter............ 1,400
Rent expense was approximately $1,164, $1,189 and $1,111 for the years ended
December 31, 1997, 1996 and 1995, respectively.
5. LINE OF CREDIT:
In December 1995, the Company secured a revolving line of credit with a bank
allowing maximum borrowings of $10,000. The Company can borrow, with interest
at the bank's prime lending rate, or if lower, at certain margins above bankers'
acceptance on inter-bank offering rates. There have been no borrowings against
the line of credit to date. Certain financial covenants are included in this
agreement, which the Company was in compliance with at December 31, 1997. The
line of credit is renewable April 30, 1998.
6. EMPLOYEE SAVINGS PLANS:
The Company has a profit sharing plan and trust that qualifies as a deferred
salary arrangement under Section 401(k) of the Internal Revenue Code. Under the
terms of the plan, the employees of the Company may make voluntary contributions
to the plan as a percentage of compensation, but not in excess of the maximum
allowed under the Code. Employees become eligible to participate in the plan
upon completion of six months of continuous employment and having attained the
age of 21. The Company currently does not match employee contributions and does
not intend to do so in the future.
On July 1, 1996, the Company implemented an Executive Deferred Compensation
Plan (the "Plan") for the purpose of providing eligible employees with a
program for deferring compensation earned during employment. The Plan is
intended to constitute an unfunded deferred compensation arrangement for the
benefit of certain highly compensated employees of the Company. Under the
terms of the Plan, eligible employees of the Company may make voluntary
contributions to the Plan as a percentage of compensation, but not in excess
of limitations stated in the Plan. The Company has invested these voluntary
contributions in a variety of investment funds for the intended use of paying
plan benefits when participating employees become eligible to receive such
benefits under the terms of the Plan. These investments have been included in
Other Assets in the accompanying Balance Sheets. The Company currently does
not match employee contributions and does not intend to do so in the near
future.
7. EMPLOYEE AND DIRECTOR STOCK PLANS:
On May 10, 1995, the Company's Board of Directors approved the adoption of the
1995 Stock Incentive Plan (the 1995 Plan) pursuant to which 1,620,000 shares of
the Company's common stock have been reserved for issuance. Options under the
1995 Plan generally vest ratably over a four-year period from the date of grant,
expire ten years from the date of grant, and are exercisable at prices generally
not less than the fair market value at the grant date. During 1997 and 1996,
the Company cancelled and reissued certain incentive stock options granted to
employees. The reissued options
F-11
were granted at fair market value on the date of reissuance and have been
reflected in the table below as cancellations and new grants. These options
vest ratably over four years from the date of the reissuance.
On May 10, 1995, the Board of Directors approved the adoption of the 1995 Stock
Option Plan for Nonemployee Directors (the "Nonemployee Director Plan") pursuant
to which 250,000 shares of the Company's common stock have been reserved for
issuance. The Nonemployee Director Plan covers directors who are not employees
of the Company. The Nonemployee Director Plan allows for the automatic grant of
10,000 options upon becoming a director and 3,000 options annually thereafter.
To-date, grants have been made at fair market value on the date of grant. These
options vest ratably over three years from the date of grant. Since
consummation of the Company's initial public offering, 75,000 stock options were
awarded under the Nonemployee Director Plan.
On May 6, 1996, the shareholders approved the adoption of the 1995 Employee
Stock Purchase Plan (the "ESPP") pursuant to which 250,000 shares of the
Company's common stock have been reserved for issuance to participating
employees, of which 59,434 shares have been issued as of December 31, 1997.
Eligible employees may elect to contribute up to 10 percent of their cash
compensation during each pay period. The ESPP provides for two semiannual
offering periods, beginning February 1 and August 1 of each year. During the
offering periods, participants accumulate funds in an account via payroll
deduction. At the end of each six-month offering period, the purchase price is
determined and the accumulated funds are used to automatically purchase shares
of the Company's common stock. The purchase price per share is equal to 85
percent of the lower of the fair market value of the common stock (a) on the
Enrollment Date of the offering period or (b) on the date of the purchase.
During 1995, the Financial Accounting Standards Board issued SFAS 123 which
defines a fair value based method of accounting for an employee stock option or
similar equity instrument and encourages all entities to adopt that method of
accounting for all of their employee stock compensation plans. However, it also
allows an entity to continue to measure compensation cost for those plans using
the method of accounting prescribed in APB 25. Entities electing to remain with
the accounting in APB 25 must make pro forma disclosures of net income and, if
presented, earnings per share, as if the fair value based method of accounting
defined in the Statement had been applied.
The Company has elected to account for its stock-based compensation plans under
APB 25. However, the Company has computed, for pro forma disclosure purposes,
the value of all options granted and shares issued pursuant to the ESPP during
1997, 1996 and 1995 using the Black-Scholes option-pricing model as prescribed
by SFAS 123, using the following weighted average assumptions:
Year ended December 31,
--------------------------------------
1997 1996 1995
-------- -------- --------
Risk-free interest rate..... 6% 6% 6%
Expected dividend yield..... 0% 0% 0%
Expected life (years)....... 4 4 4
-------- -------- --------
Expected volatility......... 56% 61% 61%
The total value of options granted during 1997, 1996 and 1995 would be amortized
on a pro forma basis over the vesting period of the options. Options generally
vest equally over four years. If the Company had accounted for these plans in
accordance with SFAS 123, the Company's net income and net income per share
would have decreased as reflected in the following pro forma amounts:
Year ended December 31,
--------------------------------------
1997 1996 1995
------- ------- ------
Net income:
As reported................. $5,205 $6,166 $3,535
Pro forma................... $3,463 $5,092 $3,194
Basic earnings per share:
As reported................. $ 0.70 $ 0.92 $ 0.54
Pro forma................... $ 0.47 $ 0.76 $ 0.49
F-12
Diluted earnings per share:
As reported................. $ 0.67 $ 0.88 $ 0.53
Pro forma................... $ 0.46 $ 0.74 $ 0.49
The Company has not and does not currently contemplate any plans to issue equity
instruments other than options to purchase common stock of the Company. Options
are generally issued with an exercise price equal to the price of the closing
trade on the Nasdaq National Market on the date of issuance.
A summary of the status of the Company's stock option plans and changes are
presented in the following table:
Year ended December 31,
------------------------------------------------------------------
1997 1996 1995
-------------------- ------------------- ------------------
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Shares Ex. Price Shares Ex. Price Shares Ex. Price
--------- --------- -------- --------- ------- ---------
Options outstanding at beginning
of year........................ 861,608 $10.97 534,264 $ 9.36 -- $ --
Granted............................. 682,823 13.37 442,200 14.57 542,250 9.36
Exercised........................... (54,343) 9.64 (7,813) 9.38 (803) 8.50
Cancelled........................... (181,970) 16.87 (107,043) 17.91 (7,183) 9.05
--------- --------- -------- --------- ------- ---------
Options outstanding at end of year.. 1,308,118 $11.43 861,608 $10.97 534,264 $9.36
--------- --------- -------- --------- ------- ---------
--------- --------- -------- --------- ------- ---------
Exercisable at end of year.......... 430,107 $10.47 241,698 $ 9.81 78,433 $8.85
--------- --------- -------- --------- ------- ---------
--------- --------- -------- --------- ------- ---------
Shares issued under the ESPP........ 40,793 $11.86 18,641 $11.26 -- --
--------- --------- -------- --------- ------- ---------
--------- --------- -------- --------- ------- ---------
Weighted average fair value of
options granted................ -- $ 6.42 -- $ 6.85 -- $4.88
Weighted average fair value of
shares issued under the ESPP... -- $ 5.37 -- $ 3.87 -- --
The following table sets forth the exercise price range, number of shares
outstanding at December 31, 1997, weighted average remaining contractual life,
weighted average exercise price, number of exercisable shares and weighted
average exercise price of exercisable options by groups of similar price and
grant date:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- ------------------------------
Weighted
Average Weighted Weighted
Exercise Outstanding Remaining Average Average
Price shares Contractual Exercise Exercisable Exercise
Range at 12/31/97 Life (Years) Price Options Price
- ------------- ----------- ------------ -------- ----------- --------
$ 8.50-$ 8.50 341,971 7.36 $ 8.50 216,300 $ 8.50
$10.00-$11.75 528,990 9.33 $11.61 67,953 $10.81
$12.38-$12.75 218,223 8.26 $12.58 85,925 $12.60
$13.00-$24.00 218,934 8.61 $14.53 59,929 $14.13
As of December 31, 1997, employees of the Company also held approximately
256,386 Cadence stock options, under the original terms of their issuance.
These options were granted to IMS employees by Cadence prior to 1995 (see Note
1). Upon exercise of Cadence options, proceeds equal to the option exercise
price pass to Cadence, and there is no impact on the number of shares of Company
stock outstanding.
F-13
8. INCOME TAXES:
The accompanying Statements of Income present the Company's income tax
expense computed on a separate return basis. The taxable income of the
Company was included in the Cadence consolidated income tax returns through
July 20, 1995. The Company has been filing independent income tax returns
since July 21, 1995, the date of the Company's initial public offering.
Income tax liabilities through March 31, 1995 have been settled with Cadence.
The settlement with Cadence is reflected as contributed capital in the
accompanying Statements of Shareholders' Equity. Income tax liabilities for
the period April 1 through July 20, 1995 were settled with Cadence in cash.
The provision (benefit) for income taxes is as follows:
Year ended December 31,
-------------------------
1997 1996 1995
------ ------ ------
Current:
Federal........ $2,052 $3,098 $2,529
State.......... 629 592 487
------ ------ ------
2,681 3,690 3,016
Deferred........... 119 (144) (763)
------ ------ ------
Total.......... $2,800 $3,546 $2,253
------ ------ ------
------ ------ ------
The effective tax rate differs from the Federal statutory rate as follows:
Year ended December 31,
-------------------------
1997 1996 1995
------ ------ ------
Federal statutory tax rate.............. 34.0% 34.0% 34.0%
State taxes, net of Federal tax effect.. 4.4 4.1 4.1
Research and development tax credits.... (3.1) (1.9) --
Other, net.............................. (0.3) 0.3 0.8
------ ------ ------
Total................................ 35.0% 36.5% 38.9%
------ ------ ------
------ ------ ------
F-14
The net deferred tax asset consists of the following tax effects relating to
temporary differences:
December 31,
---------------
1997 1996
------ ------
Deferred tax assets:
Inventory valuation.............................. $ 966 $ 723
Accrued vacation and other compensation.......... 590 444
Book in excess of tax depreciation............... 110 86
Allowance for doubtful accounts.................. 202 168
Accrued warranty................................. 155 187
Research and development credit carryforward..... -- 222
Other............................................ -- 54
------ ------
2,023 1,884
------ ------
Deferred tax liabilities:
Service spare parts valuation.................... (238) (69)
Software development costs....................... (617) (542)
Other............................................ (14) --
------ ------
(869) (611)
------ ------
Net deferred tax asset........................... $1,154 $1,273
------ ------
------ ------
For the years ended December 31, 1997, 1996 and 1995, income taxes payable have
been reduced by $2,652, $1,921 and $2,270, respectively, for the tax benefit
from tax deduction of employee gains upon exercise of Cadence and IMS stock
options. The tax benefit of the stock option deduction is reflected as an
increase in Additional Paid-in Capital in the accompanying Statements of
Shareholders' Equity. The employee gains are generally not expenses of the
Company for financial reporting purposes, and the exercise of Cadence stock
options does not increase the number of shares of Company common stock
outstanding.
9. TRANSACTIONS WITH CADENCE:
In certain foreign markets, primarily Europe, Cadence employees act as sales
agents for the Company. The Company reimburses Cadence through intercompany
accounts for related costs incurred on the Company's behalf, plus an
administrative fee. Cadence provides selling, service and production support
related to the Company's Virtual Test Software. The Company has paid Cadence
based upon estimated costs to provide this support, and related expenses have
been reflected in the accompanying Statements of Income. Cadence provides
facilities for certain domestic Company sales personnel. Intercompany charges
for utilization of these facilities have been reflected in the accompanying
Statements of Income as Selling, General and Administrative expense. For the
years 1997, 1996 and 1995, the costs of the above services provided by Cadence
totaled $2,648, $2,608 and $2,698, respectively. In 1997 and 1996, the Company
sold a mixed-signal Test Station and related upgrades and peripherals to
Cadence, to be used by Cadence's design services group providing engineering
test services to their customers, for $1,329 and $1,260, respectively.
On March 31, 1995, the Company's Board of Directors approved a non-cash dividend
to Cadence in the amount of $1,027 which was the intercompany outstanding
balance due from Cadence at March 31, 1995. This dividend has been reflected in
the accompanying Statements of Shareholders' Equity. It is the intent of
Cadence and the Company to settle all intercompany activity subsequent to
March 31, 1995 in cash.
F-15
10. GEOGRAPHIC AND CUSTOMER INFORMATION
The Company sells to customers located throughout the United States,
Asia-Pacific and Europe. Credit evaluations of its customers' financial
conditions are performed periodically, and the Company generally does not
require collateral from its customers. The Company maintains reserves for
potential credit losses and such losses have been both immaterial and within
management's expectations.
In 1997, 1996, and 1995, one customer accounted for 27 percent, 36 percent and
30 percent of net sales, respectively. The Company is subject to credit risk
through trade receivables, which is minimized due to the size and financial
stability of the Company's customers. At December 31, 1997 trade receivables by
geographic region were:
United States.............................. $ 4,566
Asia-Pacific............................... 5,142
Europe..................................... 1,406
Other...................................... 45
-------
11,159
Less allowance for doubtful accounts....... (577)
-------
Trade receivables, net..................... $10,582
-------
-------
Export sales are made to the Company's customers throughout Asia-Pacific and
Europe. Sales by customer geographic region, generally denominated in U.S.
dollars, were:
Year ended December 31,
----------------------------
1997 1996 1995
------- ------- -------
United States $30,772 $37,591 $27,854
Asia-Pacific 10,990 8,999 8,403
Europe 4,842 3,790 4,656
Other 246 457 180
------- ------- -------
Total $46,850 $50,837 $41,093
------- ------- -------
------- ------- -------
The Company's export sales and trade receivables shown above for the
Asia-Pacific region relate primarily to Asian locations of U.S. based
multinational companies and other customers headquartered in Japan, Korea,
Taiwan, and Singapore. To-date, the Company has not experienced any
significant impact from the current financial crisis in the Asia-Pacific
region. There can be no assurance that the Asia-Pacific financial crisis
will not negatively impact the Company's future net sales or collection of
related trade receivables.
Like most high technology, high growth companies, IMS faces certain business
risks that may impact the Company's results of operations. For further
discussion of such risks, see Management's Discussion and Analysis of
Financial Condition and Results of Operations.
F-16
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(In thousands, except per share data)
Quarter ended
------------------------------------------------
March 31 June 30 September 30 December 31
------------------------------------------------
1997
Net sales $13,280 $11,026 $12,067 $10,477
Gross margin $ 8,602 $ 7,274 $ 8,040 $ 6,780
Operating income $ 2,683 $ 1,473 $ 2,071 $ 846
Net income $ 1,825 $ 1,174 $ 1,518 $ 688
Basic earnings per share $ 0.26 $ 0.16 $ 0.20 $ 0.09
Diluted earnings per share $ 0.25 $ 0.15 $ 0.20 $ 0.09
------------------------------------------------------------------------------
1996
Net sales $11,915 $12,612 $12,737 $13,573
Gross margin $ 7,507 $ 8,104 $ 8,290 $ 8,798
Operating income $ 2,071 $ 2,319 $ 2,382 $ 2,723
Net income $ 1,346 $ 1,398 $ 1,637 $ 1,785
Basic earnings per share $ 0.20 $ 0.21 $ 0.24 $ 0.27
Diluted earnings per share $ 0.20 $ 0.20 $ 0.23 $ 0.25
------------------------------------------------------------------------------
F-17
INTEGRATED MEASUREMENT SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
Additions
Charged to
Beginning Cost & Ending
Description Balance Expenses Deductions Balance
----------- --------- ---------- ---------- -------
Year ended December 31, 1995
Allowance for doubtful accounts $182 220 (64) $338
Year ended December 31, 1996
Allowance for doubtful accounts $338 151 -- $489
Year ended December 31, 1997
Allowance for doubtful accounts $489 150 (62) $577
F-18
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareholders of
Integrated Measurement Systems, Inc.:
We have audited, in accordance with generally accepted auditing standards, the
financial statements of Integrated Measurement Systems, Inc. included in the
1997 Form 10-K annual report and have issued our report thereon dated January
21, 1998. Our audits were made for the purpose of forming an opinion on those
statements taken as a whole. The Valuation and Qualifying accounts schedule is
the responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audits of the basic financial statements and,
in our opinion, fairly state in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Portland, Oregon
January 21, 1998
F-19