Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
/X/ Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1997 or
/ / Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period
from _______________ to ____________________
Commission file number: 0-22529
-------
inTEST Corporation
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 22-2370659
- --------------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
2 Pin Oak Lane, Cherry Hill, NJ 08003
- ---------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 609-424-6886
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $0.01 per share.
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes /X/ No
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant computed by reference to the closing price of
such stock on March 16, 1998 of $27,698,998 as quoted on the Nasdaq National
Market system.
The number of shares outstanding of each of the Registrant's classes of common
stock, as of March 30, 1998 is 5,911,034.
Documents incorporated by reference. Portions of the Registrant's 1998
definitive Proxy Statement to be filed pursuant to Regulation 14A in
connection with the 1998 annual meeting of shareholders of the Registrant are
incorporated by reference into Part III of this Annual Report on Form 10-K.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. /X/
inTEST Corporation
Annual Report on Form 10-K
INDEX
Part I: Page
- ------
Item 1: Business
Item 2: Properties
Item 3: Legal Proceedings
Item 4: Submission of Matters to a Vote of Security Holders
Part II:
- -------
Item 5: Market for Registrant's Common Equity and Related
Stockholder Matters
Item 6: Selected Financial Data
Item 7: Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 7A: Quantitative and Qualitative Disclosures About Market Risk
Item 8: Financial Statements and Supplementary Data
Item 9: Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
Part III: [Incorporated by reference to Proxy Statement]
- --------
Item 10: Directors and Executive Officers
Item 11: Executive Compensation
Item 12: Security Ownership of Certain Beneficial Owners and Management
Item 13: Certain Relationships and Related Transactions
Part IV:
- -------
Item 14: Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Signatures
Index to Exhibits
inTEST Corporation
Annual Report on Form 10-K
Part I:
- -------
Item 1: Business
GENERAL
The Company designs, manufactures and markets docking hardware and
test head manipulators, which are used with automatic test equipment ("ATE")
by semiconductor manufacturers during the testing of wafers and packaged
devices. In addition, the Company designs and markets related ATE interface
products including high performance test sockets, interface boards and probing
assemblies. The Company's products are designed to improve the utilization and
cost-effectiveness of ATE (including testers, wafer probers and device
handlers) during the testing of linear, digital and mixed signal integrated
circuits. Since the Company's organization in 1981, it has developed and
continues to support over 4,600 products and has been granted 13 U.S. patents
for its technology.
INDUSTRY BACKGROUND
Testing is an integral and necessary step during the design and
manufacture of wafers and packaged devices. Each integrated circuit is tested
at least twice during the manufacturing process to ensure the functional and
electrical performance of the circuits prior to shipment to the device user.
First, after wafer fabrication, each circuit on a wafer is automatically
positioned under a probing assembly by a prober where the individual circuits
on the wafer are tested (the "front-end test"). Later, after device packaging,
devices are individually fed by the handler to an environmentally controlled
test socket where the device is again tested (the "back-end test").
Manipulators facilitate the movement of a test head to a prober or handler,
and "docking" describes the function of connecting a test head to a prober or
handler with mechanically engineered hardware.
Until the early 1970s, testers were designed with the interface
circuits (also referred to as the pin electronics) mounted inside the tester's
mainframe cabinet. The pin electronics were connected to the prober's probing
assembly or to the handler's test socket via an electrical cable, typically
five to ten feet long. As devices became faster, more complex and more
precise, signal distortion inherent with the use of such cables resulted in
degraded test results. Although certain devices are still tested in this
manner, such devices tend to be used in older, less technologically advanced
applications.
During the 1970s, tester manufacturers responded by moving the pin
electronics from the tester's mainframe cabinet to an independent test head,
which could be directly mated with a prober or handler, thereby eliminating
the problems associated with using cables as the connection between the
tester's pin electronics and the prober or handler. Direct mating of the test
head pin electronics to the prober's probing assembly or to the handler's test
socket was accomplished by mounting the test head directly to the prober or
handler with a pivot-mechanism manipulator resembling a waffle iron. Such a
combination resulted in the test head being "dedicated" to only one prober or
one handler.
Dedicated manipulators are of greatest value in ATE systems in which
the test head is infrequently disconnected and re-connected to and from one
prober or handler to another prober or handler. Consequently, dedicated
manipulators are used (i) primarily at front-end test, where large,
homogeneous lots of wafers are tested for long, uninterrupted periods of time,
and (ii) at back-end test, where high volume, commodity devices such as DRAMs
3
are tested in large lots. However, back-end non-commodity devices, such as
micro controllers and telecommunications devices, generally are tested in
smaller lots due to varying package types and test specifications, thereby
requiring frequent handler changes.
In 1980, free-standing manipulators were introduced to minimize ATE
downtime and increase device testing throughput. Such manipulators used
hand-cranked lead screws to position a test head to a prober or handler. These
early manipulators were only marginally better than the waffle-iron design and
did not significantly improve ATE utilization due to the lack of motion
freedom necessary for successful docking.
Users of these early manipulators attempted to precisely align
fragile pin electronics to test sockets and probing assemblies without docking
hardware. Lack of proper docking hardware often can cause deterioration and
damage to the interface boards, test sockets or probing assemblies. Such
damage can lead to compromised or inaccurate test results and the rejection of
good wafers or devices (yield loss), or, more costly, the acceptance of
unsatisfactory wafers or devices (quality error). In addition, successfully
connecting a test head held by a free-standing manipulator to a prober or
handler without docking hardware is difficult and time-consuming. The
Company's docking hardware and free-standing universal manipulators are
designed to improve the utilization of ATE, particularly ATE employed in
back-end non-commodity flexible testing environments, by facilitating the
quick, easy and safe changeover of test heads to probers and handlers.
The Company's docking hardware products mechanically control the
intimate interface between the test head's interface board and the prober's
probing assembly or handler's test socket. As a result, fragile interface
boards, test sockets or probing assemblies are protected from damage during
docking. The Company's docking hardware allows semiconductor manufacturers to
achieve cost savings by (i) improving ATE utilization, (ii) improving the
accuracy and integrity of test results and (iii) reducing the need to repair
or replace expensive ATE interface products. The Company's docking hardware
can be designed for use with substantially all makes and models of test heads,
probers and handlers, and can usually be designed to allow all the ATE on a
test floor to be mechanically plug-compatible. Plug-compatibility simplifies
the docking procedures, allowing for increased flexibility and utilization of
test heads, probers and handlers on a test floor.
The Company's free-standing universal manipulators are designed to be
used in either a dedicated or a flexible test environment. In addition, the
Company's manipulators have been engineered to hold test heads in what seeks
to replicate a "zero gravity" free space. As a result, an operator using no
more than 22 pounds of force can reposition the test head by grasping it in
his or her hands and gently moving the test head into position to dock with a
prober or handler. Test heads currently in use weigh up to approximately 900
pounds and measure up to a cubic yard in volume. A test head held in the
Company's free-standing universal manipulator and equipped with the Company's
docking hardware can be easily, quickly and safely docked to any handler.
After testing a particular production lot of devices, the test head can
quickly and easily be disconnected and docked to another handler for testing
either a subsequent lot of the same packaged device or to test a different
device.
PRODUCTS
Substantially all of the Company's products are customized for use
with particular ATE and, in the case of docking hardware, also to achieve
plug-compatibility among particular combinations of ATE. The Company's docking
hardware, manipulators and related ATE interface products are designed for use
with more than 175 test heads, 30 probers and 300 handlers, all of which are
mechanically unique makes and models. The Company has designed and continues
to support more than 4,600 products, any of which can be manufactured upon
request.
4
Docking Hardware and ATE Interface Products
The Company's docking hardware is designed for use with floating-head
universal manipulators, which are used when maximum mobility and
inter-changeability of handlers between test heads is required. The Company's
docking hardware provides the mechanical control to safely connect, with near
zero electrical length, the test interface board with either the probing
assembly on a prober or the test socket on a handler. A simple cam action
docks and locks the test head to the prober or handler so that the two become
a single mechanism which prohibits motion of the test head relative to the
prober or handler. This minimizes deterioration of the interface boards, test
sockets and probing assemblies caused by the constant vibration characteristic
of the operation of all probers and handlers. The Company's docking hardware
allows an operator to manually align the probing assembly or test socket to
within .005" with respect to the interface board on the test head.
The Company offers six standard four-cam families and three standard
three-cam families with load ratings of 200, 400 and 600 pounds. The Company's
docking families are primarily distinguished from one another by the number of
docking cams and guide pins, the load rating and the size of test head
interface boards that can be used with each particular family of docking
hardware. The Company's docking hardware products range in price from
approximately $2,000 to $12,000.
The Company's docking hardware products are distinguished from those
offered by ATE manufacturer competitors by the ability of the Company's
products to make multiple competing brands of test heads plug-compatible with
multiple brands of probers and handlers used by a semiconductor manufacturer
by only changing interface boards. Creating such plug- compatibility requires
detailed information about competing ATE that would generally not be available
to a competing ATE manufacturer. Plug-compatibility permits non-commodity
semiconductor manufacturers to reduce the changeover time required to un-dock
a test head from one handler and dock it to another handler between production
lots or when changing the device type being tested.
In addition, the Company designs and sells a variety of related ATE
interface products including high performance test sockets, interface boards,
probing assemblies and other products. The Company custom designs all docking
hardware and related ATE interface products for the specific combinations of
test heads and probers or handlers used by its customers.
Manipulator Products
in2 Test Head Positioner: The in2 Test Head Positioner ("in2") is a
universal manipulator which can be designed to hold any test head. A universal
manipulator enables the test head to be repositioned for alternate use with
any one of several probers or handlers on a test floor. The in2 is
distinguished from universal manipulators manufactured by competitors by its
innovative, floating-head design. The design of the in2 allows a test head to
be held in an effectively weightless state, moved up or down, right or left,
forward or backward and rotated around each axis (six degrees of motion
freedom) by an operator using no more than 22 pounds of force. Consequently,
an operator can manually reposition the test head by grasping it in his or her
hands and gently moving the test head into position to dock with the prober or
handler. This same design feature allows the operator to dock the test
interface board (which is used to connect the test head's pin electronics to
the probing assembly on a prober or to the test socket on a handler) with near
zero electrical length between the pin electronics and the probing assembly or
the test socket, while protecting the fragile electrical contacts from
inadvertent damage during the docking action.
5
The Company manufactures six styles of the in2, all of which are
available in eight different load-rated sizes. The styles include one tumble
mode style and five cable pivot style manipulators. Each style provides a
distinct combination of performance characteristics suited to different
customer applications. A tumble mode positioner might be specified for various
reasons including test head form factor, compatibility with in-line
automation, cable support simplicity or cost minimization. Reasons for
specifying a cable pivot positioner could include providing improved handling
characteristics necessary for larger test heads, the ability to handle test
heads with short mainframe-to-test head cables or the necessity to position
the test head close to the floor. In addition, the Company designs telescopic
cable supports to be used with its cable pivot manipulators; these cable
supports minimize bending and twisting stress to mainframe-to-test head
cables, which can be delicate yet weigh several hundred pounds. The in2 ranges
in price from approximately $12,000 to $100,000 depending upon load capacity,
manipulator style and the type of cable management.
Test Head Hoist: In July 1996, the Company introduced a new,
fully-automatic, electrically-powered and microprocessor-controlled dedicated
manipulator called the Test Head Hoist ("THH"). The patented, overhead design
of the THH series manipulator uses a powered scissor mechanism to raise and
lower a test head to a prober or a top docking handler. This design enables a
THH to dock very large test heads (weight tested to 1,000 pounds) within
.005". Although the Company has had no sales of the THH series manipulator to
date, the Company believes that the THH series of manipulators will be
attractive to semiconductor manufacturers for testing 300 mm wafers and
packaged memory devices. The Company's THH is the only fully-automatic
manipulator which enables a test head to be automatically docked to a prober
or handler with the push of one button. The Company believes that the THH
enables semiconductor manufacturers to increase floor space utilization of
their ATE test systems by 25% to 40% over that achieved by waffle-iron style
dedicated manipulators or universal manipulators because a THH series
manipulator has a virtually zero "footprint." The Company does not expect
significant sales of the THH manipulators before 2000. All costs associated
with the development of the THH have been expensed.
MARKETS AND CUSTOMERS
The Company markets its products globally to semiconductor
manufacturers and, to a lesser extent, ATE manufacturers on an OEM basis. The
Company believes that it sells to most major semiconductor manufacturers in
the world. The Company's docking hardware and universal manipulators are
primarily used during back-end testing of non-commodity packaged devices. Such
devices include linear, digital and mixed signal integrated circuits (such as
microprocessors, digital signal processing chips, ASICs and non-commodity
memory devices) and primarily have applications in the automotive, computer,
consumer products and telecommunications industries.
The Company believes its sales of docking hardware and manipulators
are a function of the general level of capital expenditures by semiconductor
manufacturers. In addition, the Company's sales of docking hardware generally
are driven by changes in device designs or test methods, industry-wide volume
of device testing, sales of new handlers and, to a lesser extent, sales of new
test heads. In the past, sales of the Company's docking hardware generally
have been strong when spending for test heads was low. During such times, the
Company believes that semiconductor manufacturers seek to improve the
utilization, performance and efficiency of existing ATE by purchasing docking
hardware. The Company's sales of manipulators generally follow purchases of
test heads by the Company's semiconductor manufacturer customers. The Company
believes its sales of related ATE interface products primarily depend upon
operating expenditures of the Company's semiconductor manufacturer customers.
6
Both North American and European semiconductor manufacturers have
located most of their back-end factories in Southeast Asia. The front-end
wafer fabrication plants of U.S. semiconductor manufacturers are primarily in
the U.S. Likewise, European, Taiwanese, South Korean and Japanese
semiconductor manufacturers primarily have located their wafer fabs in their
respective countries. The Company's sales to Japanese semiconductor
manufacturers primarily consist of test sockets and interface boards. Sales of
docking hardware and universal manipulators have been limited in Japan and
South Korea because manufacturers in these countries emphasize mass-produced
products such as memory devices and other commodity devices. Commodity devices
are typically tested using dedicated manipulators rather than universal
manipulators with docking hardware.
As part of the Company's strategy to be domiciled in its major
markets, the Company established inTEST LTD in the U.K. in 1985, inTEST KK in
Japan in 1987 and inTEST PTE in Singapore in 1990. inTEST LTD designs,
manufactures and markets the Company's products principally in the European
market. inTEST KK was established to be a liaison office with Japanese ATE
manufacturers and to market inTEST products in Japan. In addition, inTEST KK
initiated the Company's business of designing and marketing related ATE
interface products. inTEST PTE designs, markets and provides technical support
to customers in Southeast Asia, and it intends to commence manufacturing
operations in Singapore in 1998.
The Company has maintained long term relationships with substantially
all ATE manufacturers. The Company believes its relations with such
manufacturers are good and have been additionally strengthened due to the fact
that the Company does not compete with such manufacturers for testers, probers
and handlers. The Company believes that maintaining such relationships is
essential to its ability to provide plug-compatible ATE interface solutions.
The Company's largest customers include Lucent Technologies,
Motorola, SGS Thomson and Texas Instruments among semiconductor manufacturers,
and Analog Devices, LTX, Teradyne and Credence Systems among ATE
manufacturers. Sales to the Company's top ten customers accounted for 72%,
70%, and 73% of the Company's revenues in 1997, 1996 and 1995, respectively.
Sales to Lucent Technologies accounted for 11%, 16% and 16%, and sales to
Analog Devices accounted for 11%, 6% and 4%, of the Company's revenues in
1997, 1996 and 1995, respectively.
MANUFACTURING AND SUPPLY
The Company's principal manufacturing operations consist of assembly
and testing at its facilities in New Jersey and in the U.K. In 1998, the
Company plans to commence similar operations in its Singapore facility. By
maintaining manufacturing facilities and technical support in geographic
markets where its semiconductor manufacturer customers are located, the
Company believes that it is able to respond more quickly and accurately to its
customers needs
The Company assembles its docking hardware, manipulator products and
certain of its probing assemblies from a combination of standard components
and fabricated custom parts which have been manufactured to the Company's
specifications by third party manufacturers. The Company's related ATE
interface products, such as test sockets, interface boards and other of its
probing assemblies, are also manufactured to the Company's specifications by
third party manufacturers. The Company's policy is to use the highest quality
raw materials and components in its products. The primary raw materials used
in fabricated parts are various grades of aluminum and steel, in interface
boards are fiberglass and copper and in test sockets are plastic and copper,
all of which are widely available. Substantially all components are purchased
from multiple suppliers. Certain raw materials and components are purchased
from single suppliers. However, the Company believes that all materials and
components are available in adequate amounts from other sources.
7
In New Jersey, the Company controls the quality of raw materials,
fabricated parts and components by conducting incoming inspections using
sophisticated measurement equipment, including a coordinate measuring machine,
to ensure that products with critical dimensions meet the Company's
specifications. In the U.K., the Company relies upon its suppliers for
inspecting the quality of fabricated parts. The Company intends to buy a
coordinate measuring machine for inTEST LTD by the middle of 1998. The
Company's policy is to inspect all products at various stages prior to
shipment. The Company's inspection standards have been designed to comply with
applicable MIL specifications and ANSI standards. The Company is preparing a
quality manual to comply with such specifications and standards in
anticipation of applying for ISO 9001 certification.
SALES AND DISTRIBUTION
In North America, the Company sells to semiconductor manufacturers
principally through independent, commissioned sales representatives and to ATE
manufacturers through Company account managers. North American sales
representatives also coordinate product installation and support with the
Company's technical staff and participate in trade shows. Technical support is
provided to the Company's North American customers and independent sales
representatives by Company employees based in Cherry Hill, New Jersey,
Sunnyvale, California and Austin, Texas.
In Europe, the Company sells to semiconductor and ATE manufacturers
through Company account managers. In Japan, the Company sells to semiconductor
and ATE manufacturers through Company account managers. In China, Hong Kong,
Malaysia, the Philippines, Singapore, South Korea, Taiwan and Thailand, the
Company sells through independent sales representatives. International sales
representatives are responsible for sales, installation, support and trade
show participation in their geographic market areas.
Company account managers are responsible for a portfolio of customer
accounts and for managing certain independent sales representatives. In
addition, Company account managers are responsible for applications
engineering, custom product design, pricing, quotations, proposals and
transaction negotiations.
COMPETITION
The Company's competitors include independent manufacturers of
docking hardware, manipulators and related ATE interface products, designers
and manufacturers of ATE and, to a lesser extent, semiconductor manufacturers'
in-house ATE interface groups. The Company principally competes on the basis
of product performance and functionality, product reliability, customer
service, applications support, price and timely product delivery.
The independent manufacturers of docking hardware and manipulators
which compete with the Company include Reid-Ashman Manufacturing of the U.S.,
Microhandling of Germany and Shang Sheng of Taiwan, each of which manufactures
docking hardware and manipulators. The manufacturers of ATE which compete with
the Company in the sale of docking hardware and universal manipulators include
Credence Systems, LTX, Schlumberger and Teradyne. Such manufacturers of ATE
may be both competitors and customers of the Company. In addition, in the sale
of related ATE interface products there are approximately 20 manufacturers of
interface boards, four manufacturers of high performance test sockets and
eight manufacturers of probing assemblies.
8
PATENTS AND OTHER PROPRIETARY RIGHTS
The Company currently holds 13 U.S. patents and 64 foreign patents
and has pending two U.S. patent applications and more than 30 foreign
applications that cover various aspects of its technology. The Company's
policy is to protect its technology by filing patent applications for the
technologies that the Company considers important to its business. The Company
first filed for patent protection in the U.S. for its docking hardware and the
in2 test head manipulator in 1982, less than one year after the formation of
the Company. The Company's U.S. issued patents will expire at various times
beginning in 2002 and extending through 2015. There can be no assurance that
additional patents will be issued on the Company's pending and future
applications, or that any patents now or hereafter owned by the Company will
afford protection against competitors that develop similar technology or
products. There are no pending lawsuits or claims against the Company
regarding infringement of any existing patents or other intellectual property
rights of others.
The Company also relies on trade secrets and unpatentable knowhow to
protect its proprietary rights. It is the Company's policy to require, as a
condition of permanent employment, that all employees of the Company agree to
assign to the Company all rights to inventions or other discoveries relating
to the Company business made while employed by the Company. In addition, all
employees agree not to disclose any information regarding the Company which is
private or confidential.
The Company has notified one of its competitors that the Company
believes the competitor's products infringe on one of the Company's U.S.
patents. The competitor responded by alleging that certain claims of the
patent are invalid based on an earlier issued U.S. patent. The Company, in
order to strengthen its patent position, requested reexamination of its patent
by the U.S. Patent and Trademark Office (the "PTO") over that earlier issued
U.S. patent. The competitor thereafter also requested a reexamination of the
patent. A reexamination provides the PTO with an opportunity to reevaluate the
validity of the claims of a patent previously issued by the PTO. On February
9, 1998, the Company received notice that the PTO had concluded the
reexamination. The Company has since received a Notice of Intent To Issue
Reexamination Certificate. The Notice states "Examination has been terminated
in this reexamination proceeding and a Certificate [of reexamination] will be
issued in due course." The Notice included a statement of reasons for
patentability and/or confirmation. The Notice indicated that one claim had
been confirmed and several claims had been amended. The Company intends to
pursue an amicable arrangement with the competitor who requested reexamination
of the patent, and should that not be successful, the Company will pursue such
other enforcement actions it deems appropriate.
BACKLOG
At December 31, 1997, the Company's backlog of unfilled orders for
all products was approximately $6.2 million compared with approximately $1.8
million at December 31, 1996. The Company's backlog includes customer purchase
orders which have been accepted by the Company, substantially all of which the
Company expects to deliver in the current fiscal year. While backlog is
calculated on the basis of firm purchase orders, no assurance can be given
that customers will purchase the Company's products subject to such orders or
that customers will not accelerate or postpone currently scheduled delivery
dates. As a result, the Company's backlog at a particular date is not
necessarily indicative of sales for any future period.
9
SEASONALITY
The Company's business is not seasonal, therefore year-over-year
quarterly comparisons of the Company's results of operations may not be as
meaningful as sequential quarterly comparisons which tend to reflect the
cyclical activity of the semiconductor industry as a whole. Quarterly
fluctuations in expenses are either related directly to sales activity and
volume or tend to be a function of personnel costs and the timing of expenses
incurred throughout a year. See Note 14 of Notes to the Consolidated Financial
Statements.
EMPLOYEES
At December 31, 1997, the Company had 71 employees, including 32 in
customer operations, 25 in manufacturing operations and 14 in administration.
Substantially all of the Company's key employees are highly skilled and
trained technical personnel, and new technical employees are required to
attend an in-house training program. None of the Company's employees are
represented by a labor union, and the Company has never experienced a work
stoppage. The Company believes that its employee relations are excellent.
ADDITIONAL FACTORS
The Company's operating results are substantially dependent on the
level of activity and capital expenditures of semiconductor manufacturers. The
semiconductor industry is highly cyclical and, from time to time, has
experienced periods of excess capacity which have had severely detrimental
effects on the industry's demand for ATE. There can be no assurance that the
Company's business and results of operations will not be materially adversely
affected by downturns in the semiconductor industry generally, or by downturns
or reductions in capital equipment investment in any one or more particular
market segments of the semiconductor industry in which the Company
participates.
In addition to the factors described in this Report, the Company's
operating results could be affected in the future, by other factors,
including, without limitation: changes in business conditions and the economy,
generally; the ability of the Company to obtain patent protection, and enforce
its patent rights, for existing and developing proprietary technologies; the
ability of the Company to integrate successfully businesses, technologies or
products which it may acquire; the effect of the loss of, or reduction in
orders from, a major customer; and competition from other manufacturers of
docking hardware, test head manipulators and related ATE interface products.
Item 2: Properties
The Company's headquarters are located in Cherry Hill, New Jersey in
28,630 square feet of office and manufacturing space leased pursuant to a
seven-year lease which expires in 2003. In August 1997, the Company leased an
additional 11,082 square feet of warehouse and manufacturing space near its
headquarters in Cherry Hill pursuant to a lease which is coterminous with that
of its headquarters. The Company's facility in the U.K. is located in Thame in
4,600 square feet of office and manufacturing space leased pursuant to an
8-year lease which expires in December 2005. In Singapore, the Company
occupies 3,077 square feet of office and manufacturing space leased pursuant
to a four-year lease which expires in 2000 subject to a two-year renewal
option. In Kichijoji, Japan, the Company occupies approximately 1,200 square
feet of office space pursuant to an agreement which is cancelable on
reasonable notice by either party. In Sunnyvale, California, the Company
occupies 1,900 square feet of office and warehouse space leased pursuant to a
five-year lease which expires in 2001. The Company believes that its
headquarters and other existing facilities are adequate to meet its current
and foreseeable future needs.
10
Item 3: Legal Proceedings
None.
Item 4: Submission of Matters to a Vote of Security Holders
Not Applicable.
Part II:
- --------
Item 5: Market for Registrant's Common Equity and Related Stockholder Matters
(a) The Company's common shares commenced trading on the Nasdaq National
Market system ("NNMS") on June 17, 1997, the date the Company's initial public
offering (the "Offering") commenced. Shares are traded under the symbol
"INTT." The following table sets forth the high and low sales prices for the
Company's common shares as reported on the NNMS during the fiscal periods
indicated:
High Low
------------- -------------
Fiscal Year Ended December 31, 1997:
First Quarter Not Listed
Second Quarter (For period from 9.63 7.50
initial listing on June 17, 1997
through June 30, 1997)
Third Quarter 18.75 8.00
Fourth Quarter 18.25 5.00
As of February 28, 1998 there were approximately 2,000 holders of
record of the Company's common stock.
Prior to the Offering, the Company had elected S corporation status
for Federal and state of New Jersey tax purposes, and therefore, was not
directly subject to Federal and certain New Jersey income taxes. Immediately
prior to the Offering, the Company terminated its status as an S corporation
and is now subject to Federal and additional state income taxes. In addition,
the Company is taxed in foreign countries and for activity in certain states.
The Company has not paid any dividends on its common stock subsequent
to the termination of its S corporation status, other than for amounts
representing the Company's previously taxed but undistributed S corporation
earnings through the date of termination of the S corporation election which
were paid to the stockholders of record prior to the termination of such
election.
The Company does not anticipate paying cash dividends in the
foreseeable future, but intends to retain any future earnings for reinvestment
in the operation and expansion of the Company's business. Any determination to
pay cash dividends will be at the discretion of the Board of Directors and
will be dependent upon the Company's financial condition, results of
operations, capital requirements and such other factors as the Board of
Directors deems relevant.
11
(b) Use of Proceeds from Offering:
On June 17, 1997, the Company's Registration Statement on Form S-1
covering the Offering of 2,275,000 shares of the Company's Common Stock,
Commission file number 333- 26457, was declared effective. The Offering closed
on June 20, 1997, managed by Janney Montgomery Scott Inc. and Needham &
Company, Inc. as representatives of the several underwriters named in the
Registration Statement (the "Underwriters").
Of the 2,275,000 shares sold pursuant to the Offering, 1,820,000
shares were sold by the Company and 455,000 were sold by certain selling
stockholders (the "Selling Stockholders"). In addition, the Underwriters
exercised an over-allotment option to purchase an additional 341,250 shares of
the Company's Common Stock from the Selling Shareholders. The total purchase
price to the public for the shares offered and sold by the Company and the
Selling Shareholders was $13,650,000 and $5,971,875, respectively.
The amount of expenses incurred for the Company's account in
connection with the Offering are as follows:
Underwriting discounts and commissions: $1,023,750
Finders fees: None
Expenses paid to or for the Underwriters 16,650
Other expenses: 954,758
------------
Total expenses $1,995,158
============
All of the foregoing expenses were direct or indirect payments to
persons other than (i) directors, officers or their associates; (ii) persons
owning ten percent (10%) or more of the Company's Common Stock; or (iii)
affiliates of the Company.
The net proceeds of the Offering to the Company (after deducting the
foregoing expenses) was $11,654,842. From the effective date of the
Registration Statement, the net proceeds have been used for the following
purposes:
Construction of plant, building and facilities $ -
Purchase and installation of machinery and equipment 37,465
Purchase of real estate -
Acquisition of businesses -
Repayment of indebtedness 173,266
Working capital 599,725
Temporary investments, including cash & cash equivalents 10,243,621
Other purposes (for which at least $100,000 has been used)
including:
Payment of final S corporation distribution 600,765
-----------
Total $11,654,842
===========
In connection with the termination of the Company's status as an S
corporation, the Company used $601,000 of the net proceeds to pay a portion of
the $4.3 million final distribution of previously taxed but undistributed
earnings of the Company.
All of the foregoing payments with the exception of the final S
corporation distribution were direct or indirect payments to persons other
than (i) directors, officers or their associates; (ii) persons owning ten
percent (10%) or more of the Company's Common Stock; or (iii) affiliates of
the Company.
12
Item 6: Selected Financial Data
The following table contains certain selected consolidated financial
data of the Company and is qualified by the more detailed Consolidated
Financial Statements and Notes thereto included elsewhere in this Annual
Report on Form 10-K. Certain of the following financial information for the
five years ended December 31, 1997, has been derived from financial statements
audited by KPMG Peat Marwick LLP and has been reported upon by KPMG Peat
Marwick LLP to the extent set forth in their report included elsewhere in this
Annual Report on Form 10-K. The following data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the Consolidated Financial Statements and Notes thereto and
other financial information included elsewhere in this Annual Report on Form
10-K.
Years ended December 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(in thousands, except per share data)
Consolidated Statement of Earnings Data:
Revenues........................................ $20,746 $18,582 $14,442 $ 9,287 $ 8,875
Gross profit.................................... $12,938 $11,827 $ 9,251 $ 5,150 $ 5,415
Operating income................................ $ 6,187 $ 5,616 $ 4,037 $ 1,289 $ 1,767
Net earnings.................................... $ 4,332 $ 4,646 $ 3,252 $ 817 $ 1,464
Pro forma net earnings (1)...................... $ 3,726 $ 3,376
Pro forma net earnings per share - basic (1).... $.74 $.83
Pro forma net earnings per share - diluted (1) $.73 $.83
Pro forma weighted average shares outstanding - basic (1) 5,068,349 4,091,034
Pro forma weighted average shares outstanding - diluted(1) 5,092,490 4,091,034
December 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(in thousands, except per share data)
Consolidated Balance Sheet Data:
Cash and cash equivalents....................... $12,035 $ 3,692 $ 1,919 $ 1,336 $ 1,034
Working capital................................. 14,655 4,377 4,201 2,944 2,546
Total assets.................................... 19,945 7,716 6,352 4,624 3,675
Long term debt.................................. - 155 - - -
Total stockholders' equity...................... 16,557 4,587 4,048 2,765 2,448
- ---------
(1) Assumes the termination of the Company's S corporation status effective
January 1, 1996 and the completion of the Exchange (as further described
in Note 1 of the Notes to the Consolidated Financial Statements) on
January 1, 1996, and as a result reflects the amortization of goodwill
associated therewith and the absence of a charge for the minority
interest. See Note 3 of Notes to the Consolidated Financial Statements.
13
Item 7: Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
- ---------------------
Overview
- --------
The Company's revenues are substantially dependent upon the demand
for ATE by semiconductor manufacturers and, therefore, fluctuate generally as
a result of cyclicality in the semiconductor manufacturing industry. The
Company believes that purchases of the Company's docking hardware and
manipulators are typically made from its customers' capital expenditure
budgets, while related ATE interface products, which must be replaced
periodically, are typically made from its customers' operating budgets. When
semiconductor manufacturing activity generally slowed during much of 1996,
many semiconductor manufacturers reduced their capital expenditure budgets
and, correspondingly, postponed or canceled orders for ATE and related
equipment.
As a result, starting in the second quarter of 1996 through the
fourth quarter of 1996, orders for and sales of docking hardware and
manipulators declined substantially. During the same period, orders for and
sales of related ATE interface products also declined, but to a lesser extent.
Starting in the first quarter of 1997, orders for and sales of docking
hardware and manipulators began increasing from the sequential quarterly
declines experienced during 1996. The increase in order activity during 1997
is reflected in the growth in the Company's backlog, which increased from $1.8
million at December 31, 1996 to $6.2 million at December 31, 1997. Backlog
represents orders for the Company's products, but because there can be no
assurance that the Company's customers will purchase the products subject to
such orders, backlog is not necessarily indicative of sales for any future
period. The increase in order activity is due to renewed demand for ATE by
semiconductor manufacturers. During 1997, the Company's quarterly revenues
grew from $3.9 million in the first quarter to $6.0 million in the fourth
quarter, an increase of over 50%.
The Company sells to semiconductor manufacturers and ATE
manufacturers either through Company account managers or through independent
sales representatives. The mix of customers during any given period may affect
the Company's gross margin due to the difference in accounting for sales
discounts and commissions. Specifically, sales discounts, typical in sales by
Company account managers to ATE manufacturers worldwide, are a direct
reduction of revenue and have the effect of reducing gross margin. In
contrast, trade discounts offered on sales to semiconductor manufacturers,
while also a reduction in revenue, are generally lower than sales discounts to
ATE manufacturers and accordingly have less impact on gross margin.
Additionally, commissions paid to independent sales representatives on sales
to semiconductor manufacturers in North America and Southeast Asia are charged
to selling expense and do not affect gross margin. Consequently, the relative
mix of customers for the Company's products and the region of the world where
the sales are made have affected and will affect the Company's gross margin
and selling expense. Operating income, however, has not been materially
affected by the foregoing factors, because commissions paid to independent
sales representatives plus trade discounts on sales to semiconductor
manufacturers are approximately equal to the sales discounts given on sales to
ATE manufacturers.
14
1997 Compared to 1996
- ---------------------
Revenues. Revenues were a record $20.7 million for 1997 compared to
$18.6 million for 1996, an increase of $2.1 million or 11%. The year to year
increase was primarily due to higher levels of shipments of the Company's
products during the fourth quarter of 1997 compared to the same period in
1996, which reflects the higher level of manufacturing activity in the
semiconductor industry in 1997 as compared to 1996. The Company did not
increase sales prices significantly in 1997. The Company believes that the
increase in revenues was from the sales of products used in the testing of
mixed signal devices and digital devices (such as microprocessors and micro
controllers) and numerous other devices used in the automotive, computer,
telecommunications and other industries.
Gross Margin. Gross margin declined to 62% for 1997 from 64% in 1996.
The reduction in gross margin was primarily attributable to a significant
increase in the level of sales to ATE manufacturers, which increased from
approximately 21% of sales in 1996 to approximately 34% in 1997. In addition,
the Company experienced an increase in its fixed operations costs in 1997, due
to higher occupancy costs associated with the larger New Jersey manufacturing
facility which was leased in August 1996. The decline in gross margin was
partially offset by reduced incremental material costs due to volume discounts
received in the last two quarters of 1997.
Selling Expense. Selling expense was $2.8 million for 1997 compared
to $2.5 million for 1996, an increase of $0.3 million or 13%. The increase was
primarily attributable to higher salary and benefit expenses resulting from
the allocation of additional personnel costs to selling expense and, to a
lesser extent, salary increases for existing personnel. The increase in
selling expense also reflects an increase in advertising and promotional
expenses over the comparable prior period. In addition, commission expense
increased in 1997 over the level incurred in 1996 due to an increase in the
level of commissioned sales to semiconductor manufacturers. These increases
were offset by a reduction in travel and other expenses.
Research and Development Expense. Research and development expense
was $1.7 million for 1997 compared to $1.9 million for 1996, a decrease of
$0.2 million or 10%. The decline was primarily attributable to reduced levels
of spending on research and development materials in 1997 compared to 1996,
and, to a lesser extent, to the aforementioned allocation of certain personnel
costs to selling expense.
General and Administrative Expense. General and administrative
expense was $2.2 million for 1997 compared to $1.8 million for 1996, an
increase of $0.4 million or 23%. The increase was primarily attributable to
the additional costs associated with shareholder and investor relations and
increased expenditures for outside directors' fees and professional fees
incurred as a public company. Other factors contributing to the increase in
1997 were the amortization of goodwill resulting from the acquisition of the
minority interests in the Company's three foreign subsidiaries in connection
with the offering and salary increases of administrative staff.
Income Tax Expense. Income tax expense increased to $2.1 million from
$858,000 for 1996, an increase of $1.2 million or 144%. The Company's
effective tax rate was 32% for 1997 compared to 15% in 1996. The increase in
the effective tax rate was caused by the accrual of Federal income tax on the
Company's earnings due to the change of tax status from S corporation to C
corporation in June 1997 and, to a lesser extent, a greater percentage of
earnings before income taxes and minority interest being attributable to the
Company's Japanese subsidiary.
15
1996 Compared to 1995
- ---------------------
Revenues. Revenues were $18.6 million for 1996 compared to $14.4
million for 1995, an increase of $4.2 million or 29%. The increase was due to
the higher levels of shipments of the Company's products during the first nine
months of 1996, which were based on orders placed by semiconductor
manufacturers during late 1995 and early 1996. The Company did not increase
sales prices significantly in 1996. The Company believes that more than half
of the Company's increased revenues was from sales of products used in the
testing of mixed signal devices, and the balance was from sales of products
used in the testing of digital devices, such as microprocessors and micro
controllers, and numerous other devices used in the automotive, computer,
telecommunications and other industries.
Gross Margin. Gross margin remained constant at 64% for both 1996 and
1995. The percentage of the Company's revenues derived from sales to ATE
manufacturers increased by 8% in 1996 compared to 1995, which had the effect
of reducing gross margin for 1996. The reduction in gross margin was offset by
the improved absorption of fixed costs over the higher revenue base and
reduced incremental material costs due to volume discounts received in the
first two quarters of 1996.
Selling Expense. Selling expense was $2.5 million for 1996 compared
to $2.1 million for 1995, an increase of $0.4 million or 17%. The increase was
attributable to increased variable costs associated with higher sales activity
in 1996. Selling expense as a percentage of revenues decreased from 14.6% in
1995 to 13.3% in 1996 because of an increase in non-commissioned sales as a
percentage of revenues. Salaries associated with sales activities were the
same for 1996 as for 1995, as management elected not to expand its sales staff
in anticipation of third and fourth quarter reductions in capital expenditures
by semiconductor manufacturers.
Research and Development Expense. Research and development expense
was $1.9 million for both 1996 and 1995. Compensation expense incurred in
research and development activities for 1996 increased $0.2 million or 22%
over 1995 due to an increase in staffing levels and associated costs. The
increase was offset by a $0.2 million or 45% decrease in amounts spent for
materials.
General and Administrative Expense. General and administrative
expense was $1.8 million for 1996 compared to $1.2 million for 1995, an
increase of $0.6 million or 55%. The majority of the increase was attributable
to additional compensation and costs associated with newly hired staff in
accounting, MIS and finance functions and salary increases of other
administrative personnel.
Income Tax Expense. The Company's effective tax rate decreased
slightly in 1996 to 15% compared to 16% for 1995 due principally to a decrease
in the contribution of earnings before income taxes and minority interest from
the Company's foreign subsidiaries.
Liquidity and Capital Resources
- -------------------------------
On June 20, 1997, the Company completed an initial public offering of
2.275 million common shares through which the Company issued 1.82 million new
shares of common stock (the "Offering"). The Company realized net cash proceeds
of $11.7 million (after payment of direct expenses of the Offering) from the
Offering. These proceeds are expected to be used for working capital, general
corporate purposes and possible acquisitions of businesses, technologies or
products complementary to the Company's business.
Net cash provided by operations for 1997 was $2.6 million. Accounts
receivable increased $2.2 million from December 31, 1996 to December 31, 1997
due to increased sales generally and also due to an increase in the percentage
of consolidated sales by one of the Company's foreign subsidiaries where trade
practices require longer credit terms. Inventories increased $352,000 to
support higher levels of shipments of the Company's products in the second
half of 1997 and as a result of increased backlog at December 31, 1997.
Accounts payable and accrued expenses increased $659,000 and $331,000,
respectively, as a result of higher sales levels. Domestic and foreign income
taxes payable increased $845,000 primarily as a result of the accrual of
Federal income tax on earnings subsequent to the Offering and, to a lesser
extent, to a greater percentage of earnings before income taxes and minority
interest being attributable to the Company's Japanese subsidiary.
16
Purchases of machinery, equipment and leasehold improvements were
$70,000, $554,000 and $39,000 for the years ended December 31, 1997, 1996 and
1995, respectively. The Company plans to spend approximately $500,000 during
1998 to renovate and expand its UK manufacturing facility and purchase a
coordinate measuring machine for this facility.
At December 31, 1997, the Company had no outstanding long or
short-term debt. During 1997, the Company repaid the balance of a term loan.
At January 1, 1997, the outstanding balance of such term loan was $189,000.
In connection with the termination of the Company's status as an S
corporation, the Company paid dividends of $4.3 million to its former S
corporation shareholders which represented the final distribution of
previously taxed but undistributed retained earnings. The Company does not
anticipate paying cash dividends in the foreseeable future, but intends to
retain any future earnings for reinvestment in the operation and expansion of
the Company's business.
Simultaneous with the Offering, the Company acquired the 21% minority
interests in each of its three foreign subsidiaries in exchange for an
aggregate of 300,443 shares of the Company's common stock. This acquisition,
which was accounted for using the purchase method, created goodwill of
approximately $1.3 million, which is being amortized over a period of 15
years.
The Company believes that existing cash and cash equivalents, its
$1.5 million line of credit and the anticipated net cash provided from
operations will be sufficient to satisfy the Company's cash requirements for
the foreseeable future. However, if the Company were to make any acquisitions,
the Company may require additional equity or debt financing to meet working
capital requirements or capital expenditure needs.
The Company's computer systems are currently Year 2000 compliant. The
Company is currently evaluating the systems of its major suppliers for Year
2000 compliance.
Cautionary Statement Regarding Forward Looking Statements
- ---------------------------------------------------------
This Report contains certain statements of a forward-looking nature
relating to future events, such as statements regarding the Company's plans
and strategies or future financial performance. Such statements can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should" or "anticipates" or the negative thereof or
other variations thereon or comparable terminology, or by discussions of
strategy that involve risks and uncertainties. Investors and prospective
investors are cautioned that such statements are only projections and that
actual events or results may differ materially from those expressed in any
such forward-looking statements. In addition to the factors described in this
Report, the Company's actual consolidated quarterly or annual operating
results have been affected in the past, or could be affected in the future, by
additional factors, including, without limitation: changes in business
conditions and the economy, generally; the ability of the Company to obtain
patent protection, and enforce its patent rights, for existing and developing
proprietary technologies; the ability of the Company to integrate successfully
businesses, technologies or products which it may acquire; the effect of the
loss of, or reduction in orders from, a major customer; and competition from
other manufacturers of docking hardware, test head manipulators and related
ATE interface products.
17
Exposure to International Operations
- ------------------------------------
Revenues generated by the Company's foreign subsidiaries were 34%,
43% and 49% of consolidated revenues for the years ended December 31, 1997,
1996 and 1995, respectively. The Company anticipates that revenues generated
by the Company's foreign subsidiaries will continue to account for a
significant portion of consolidated revenues in the foreseeable future. These
revenues generated by the Company's foreign subsidiaries will continue to be
subject to certain risks, including changes in regulatory requirements,
tariffs and other barriers, political and economic instability, an outbreak of
hostilities, foreign currency exchange rate fluctuations, potentially adverse
tax consequences and the possibility of difficulty in accounts receivable
collection. The Company cannot predict whether quotas, duties, taxes or other
charges or restrictions will be implemented by the United States or any other
country upon the importation or exportation of the Company's products in the
future. Any of these factors or the adoption of restrictive policies could have
a material adverse effect on the Company business, financial condition or
results of operations.
Revenues denominated in foreign currencies were 27%, 35% and 33% of
consolidated revenues for the years ended December 31, 1997, 1996 and 1995,
respectively. Although the Company operates its business such that a
significant portion of its product costs are denominated in the same currency
that the associated sales are made in, there can be no assurance that the
Company will not be adversely impacted in the future due to its exposure to
foreign operations. Revenues denominated in currencies other than U.S. dollars
expose the Company to currency fluctuations, which can adversely effect
results of operations. During the years ended December 31, 1997, 1996 and
1995, the Company experienced foreign exchange transaction losses of $63,000,
$31,000 and $43,000, respectively. The increase in the currency exchange
translation losses in 1997 is primarily the result of the weakening of the
Japanese Yen against the U.S. dollar during 1997.
The portion of the Company's consolidated revenues derived from sales
to the Asia Pacific region were 28%, 26% and 34% for the years ended December
31, 1997, 1996 and 1995, respectively. Countries in the Asia Pacific region,
including Japan, have recently experienced economic instability resulting in
weaknesses in their currency, banking and equity markets. Although the current
economic instability in the Asia Pacific region has not materially adversely
affected the Company's order backlog, balance sheet, or results of operations
to date, there can be no assurance that continued economic instability will
not in the future have a material adverse affect on demand for the Company's
products and its consolidated results of operations.
Item 7A: Quantitative and Qualitative Disclosures About Market Risk
None
Item 8: Financial Statements and Supplementary Data
Financial Statements are set forth in this report beginning at page F-1
18
Item 9: Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
Part III:
- --------
Item 10: Directors and Executive Officers
The information called for by this item is incorporated by reference
to the Company's Proxy Statement for its 1998 annual meeting of stockholders
which will be filed prior to April 30, 1998.
Item 11: Executive Compensation
The information called for by this item is incorporated by reference
to the Company's Proxy Statement for its 1998 annual meeting of stockholders
which will be filed prior to April 30, 1998.
Item 12: Security Ownership of Certain Beneficial Owners and Management
The information called for by this item is incorporated by reference
to the Company's Proxy Statement for its 1998 annual meeting of stockholders
which will be filed prior to April 30, 1998.
Item 13: Certain Relationships and Related Transactions
The information called for by this item is incorporated by reference
to the Company's Proxy Statement for its 1998 annual meeting of stockholders
which will be filed prior to April 30, 1998.
Part IV:
- -------
Item 14: Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The documents filed as part of this Annual Report on Form 10-K are:
(i) The Company's consolidated financial statements and notes
thereto as well as the applicable reports of the independent
certified public accountants are included in Part II, Item 8
of this Annual Report on Form 10-K.
(ii) The following consolidated financial statement schedule
should be read in conjunction with the consolidated
financial statements set forth in Part II, Item 8 of this
Annual Report on Form 10-K:
Schedule II - Valuation and Qualifying Accounts
(iii) The exhibits required by Item 601 of Regulation S-K are
included under Item 14(c) of this Annual Report on Form
10-K.
19
(b) Reports on Form 8-K
None.
(c) Exhibits required by Item 601 of Regulation S-K:
Exhibit Number Description of Exhibit
3.1 Certificate of Incorporation.
3.2 Bylaws of the Company.
10.1 Amended and Restated Loan Agreement, dated June 30,
1996, between inTEST Corporation and PNC Bank,
National Association.
10.2 Lease, dated February 11, 1996, between Cherry Hill
Industrial Site, Inc. and the Company.
10.3 Lease, dated August 5, 1996, between KIP Properties
and the Company.
10.4 Lease, dated December 2, 1977, between Alan Breck
Robertson and Mavis Robertson and Robertson
Engineering (Thame) Limited ("U.K. Lease").
10.5 Assignment of U.K. Lease, dated January 28, 1986,
between Citycrown Engineering Limited and inTEST
LTD.
10.6 Tenancy Agreement, dated April 18, 1996, between
Alambon Tools Private Limited and inTEST PTE.
10.7 1997 Stock Plan.
10.8 Consulting Agreement, dated April 1, 1997, between
the Company and Stuart F. Daniels, Ph.D.
10.9 Lease Agreement between the Company and Cherry Hill
Industrial Sites, Inc. dated August 22, 1997.
10.10 Lease Agreement between inTEST Limited and Alan
Breck Robertson and Mavis Robertson dated March
3, 1998.
21 Subsidiaries of the Company.
23 Consent of KPMG Peat Marwick LLP.
27 Financial Data Schedule.
20
Signatures:
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
inTEST Corporation
By:____________________________
Alyn R. Holt
Chairman and Chief Executive Officer
Pursuant to the requirements of Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
_______________________________ ______________, 1998
Alyn R. Holt, Chairman and Chief
Executive Officer
(principal executive officer)
_______________________________ ______________, 1998
Robert E. Matthiessen, President,
Chief Operating Officer and Director
_______________________________ ______________, 1998
Daniel J. Graham, Senior Vice
President and Director
_______________________________ ______________, 1998
Hugh T. Regan, Jr., Chief Financial
Officer and Treasurer
(principal financial officer)
_______________________________ ______________, 1998
Hugh T. Regan, Sr., Secretary
_______________________________ ______________, 1998
Richard O. Endres, Director
_______________________________ ______________, 1998
Stuart F. Daniels, Ph.D., Director
21
Index to Exhibits
3.1 Certificate of Incorporation.*
3.2 Bylaws of the Company.*
10.1 Amended and Restated Loan Agreement, dated June 30,
1996, between inTEST Corporation and PNC Bank,
National Association.*
10.2 Lease, dated February 11, 1996, between Cherry Hill
Industrial Site, Inc. and the Company.*
10.3 Lease, dated August 5, 1996, between KIP Properties
and the Company.*
10.4 Lease, dated December 2, 1977, between Alan Breck
Robertson and Mavis Robertson and Robertson
Engineering (Thame) Limited ("U.K. Lease").*
10.5 Assignment of U.K. Lease, dated January 28, 1986,
between Citycrown Engineering Limited and inTEST
LTD.*
10.6 Tenancy Agreement, dated April 18, 1996, between
Alambon Tools Private Limited and inTEST PTE.*
10.7 1997 Stock Plan.**
10.8 Consulting Agreement, dated April 1, 1997, between
the Company and Stuart F. Daniels, Ph.D.**
10.9 Lease Agreement between the Company and Cherry Hill
Industrial Sites, Inc. dated August 22, 1997.***
10.10 Lease Agreement between inTEST Limited and Alan
Breck Robertson and Mavis Robertson dated March
3, 1998.
21 Subsidiaries of the Company.
23 Consent of KPMG Peat Marwick LLP.
27 Financial Data Schedule.
* Previously filed by the Company as an exhibit to the Company's Registration
Statement on Form S-1, Registration Statement No. 333-26457
** Previously filed by the Company as an exhibit to the Company's Registration
Statement on Form S-8, Registration Statement No. 333-44059
*** Previously filed by the Company as an exhibit to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1997
22
inTEST CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
Page
CONSOLIDATED FINANCIAL STATEMENTS:
Independent Auditors' Report-- KPMG Peat Marwick LLP F - 1
Consolidated Balance Sheets for the years ended December 31, 1997 and 1996 F - 2
Consolidated Statements of Earnings for the years ended December 31,
1997, 1996, and 1995 F - 3
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996, and 1995 F - 4
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995 F - 5
Notes to Consolidated Financial Statements F - 6
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE:
Schedule II -- Valuation and Qualifying Accounts F - 19
23
Independent Auditors' Report
The Board of Directors and Stockholders
inTEST Corporation:
We have audited the accompanying consolidated balance sheets of inTEST
Corporation and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of earnings, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1997. In
connection with our audit of these consolidated financial statements, we also
have audited the consolidated financial statement schedule as listed in the
accompanying index. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of inTEST
Corporation and subsidiaries as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
KPMG PEAT MARWICK LLP
Philadelphia, Pennsylvania
February 27, 1998
F - 1
inTEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31,
--------------------------------
1997 1996
----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents $12,035 $ 3,692
Trade accounts and notes receivable, net of allowance for doubtful accounts
of $144 at December 31, 1997 and $96 at December 31, 1996 4,058 1,953
Inventories 1,649 1,313
Deferred tax asset 165 -
Other current assets 136 70
----------- -----------
Total current assets 18,043 7,028
----------- -----------
Property and equipment:
Machinery and equipment 1,129 1,096
Leasehold improvements 179 173
----------- -----------
1,308 1,269
Less: accumulated depreciation (831) (676)
----------- -----------
Net property and equipment 477 593
----------- -----------
Other assets 136 95
Goodwill, net of accumulated amortization of $49 at December 31, 1997 1,289 -
----------- -----------
Total assets $19,945 $ 7,716
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ - $ 34
Accounts payable 1,142 574
Dividends payable - 973
Accrued expenses 955 595
Domestic and foreign income taxes payable 1,291 475
----------- -----------
Total current liabilities 3,388 2,651
----------- -----------
Long-term debt - 155
Minority interest - 323
Commitments (Note 9)
Stockholders' equity:
Preferred stock, $0.01 par value; 5,000,000 shares authorized;
no shares issued or outstanding - -
Common stock, $0.01 par value; 20,000,000 shares authorized;
5,911,034 shares issued and outstanding at December 31, 1997;
3,790,591 shares issued and outstanding at December 31, 1996 59 38
Additional paid-in capital 13,981 689
Retained earnings 2,643 3,833
Foreign currency translation adjustment (126) 27
----------- -----------
Total stockholders' equity 16,557 4,587
----------- -----------
Total liabilities and stockholders' equity $19,945 $ 7,716
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
F - 2
inTEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except share data)
Years Ended December 31,
-------------------------------------------------
1997 1996 1995
---------- ----------- ----------
Revenues $20,746 $18,582 $14,442
Cost of revenues 7,808 6,755 5,191
---------- ----------- ----------
Gross profit 12,938 11,827 9,251
---------- ----------- ----------
Operating expenses:
Selling expense 2,789 2,471 2,118
Research and development expense 1,737 1,928 1,930
General and administrative expense 2,225 1,812 1,166
---------- ----------- ----------
Total operating expenses 6,751 6,211 5,214
---------- ----------- ----------
Operating income 6,187 5,616 4,037
---------- ----------- ----------
Other income (expense):
Interest income 349 147 82
Interest expense (15) (11) -
Other (74) (35) (49)
---------- ----------- ----------
Total other income 260 101 33
---------- ----------- ----------
Earnings before income taxes and minority interest 6,447 5,717 4,070
---------- ----------- ----------
Income tax expense 2,090 858 637
---------- ----------- ----------
Earnings before minority interest 4,357 4,859 3,433
Minority interest (25) (213) (181)
---------- ----------- ----------
Net earnings $ 4,332 $ 4,646 $ 3,252
========== =========== ==========
Pro forma information (unaudited) (Note 3)
Pro forma earnings before income taxes $ 6,407 $ 5,627
Pro forma income taxes 2,680 2,251
Pro forma net earnings 3,726 3,376
Pro forma net earnings per share - basic $.74 $.83
Pro forma weighted average common shares
outstanding - basic 5,068,349 4,091,034
Pro forma net earnings per share - diluted $.73 $.83
Pro forma weighted average common and common
stock equivalent shares outstanding - diluted 5,092,490 4,091,034
See accompanying Notes to Consolidated Financial Statements.
F - 3
inTEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
Common Stock Foreign
----------------------- Additional Currency Total
Paid-in Retained Translation Stockholders'
Shares Amount Capital Earnings Adjustment Equity
----------- ------- ----------- ---------- ---------- ------------
Balance, January 1, 1995 3,728,275 $ 37 $ 644 $1,996 $ 88 $ 2,765
Dividends - - - (1,975) - (1,975)
Net earnings - - - 3,252 - 3,252
Shares issued as compensation for services 62,316 1 45 - - 46
Foreign currency translation adjustment - - - - (40) (40)
----------- ------- ----------- ---------- ---------- ------------
Balance, December 31, 1995 3,790,591 38 689 3,273 48 4,048
Dividends - - - (4,086) - (4,086)
Net earnings - - - 4,646 - 4,646
Foreign currency translation adjustment - - - - (21) (21)
----------- ------- ----------- ---------- ---------- ------------
Balance, December 31, 1996 3,790,591 38 689 3,833 27 4,587
Dividends - - - (5,522) - (5,522)
Net earnings - - - 4,332 - 4,332
Acquisition of minority interest 300,443 3 1,655 - - 1,658
Issuance of common stock, net 1,820,000 18 11,637 - - 11,655
Foreign currency translation adjustment - - - - (153) (153)
----------- ------- ----------- ---------- ---------- ------------
Balance, December 31, 1997 5,911,034 $ 59 $13,981 $ 2,643 $ (126) $16,557
=========== ======= =========== ========== ========== ============
See accompanying Notes to Consolidated Financial Statements.
F - 4
inTEST CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except share data)
Years Ended December 31,
----------------------------------------------
1997 1996 1995
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 4,332 $ 4,646 $ 3,252
---------- ---------- ----------
Adjustments to reconcile net earnings to net cash:
Depreciation and amortization 217 109 36
Deferred tax (165) - -
Foreign exchange gain (loss) (62) 31 43
Minority interest 25 213 181
Stock issued for services received - - 46
Changes in assets and liabilities:
Accounts and notes receivable (2,177) 966 (1,020)
Inventories (352) (66) (284)
Other current assets (71) (61) (46)
Accounts payable 659 (235) 342
Domestic and foreign income taxes payable 845 (118) 261
Dividends payable (973) - -
Accrued expenses 331 50 35
---------- ---------- ----------
Total adjustments (1,723) 889 (406)
---------- ---------- ----------
Net cash provided by operating activities 2,609 5,535 2,846
---------- ---------- ----------
CASH FLOWS USED IN INVESTING ACTIVITIES
Purchase of property and equipment (70) (554) (39)
Other long-term asset (54) (65) (101)
---------- ---------- ----------
Net cash used in investing activities (124) (619) (140)
---------- ---------- ----------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES
Dividends paid (5,541) (3,339) (1,976)
Net principal debt borrowing (repayment) (189) 189 (8)
Net proceeds from public offering 11,655 - -
---------- ---------- ----------
Net cash provided by (used in) financing activities 5,925 (3,150) (1,984)
---------- ---------- ----------
Effects of exchange rates on cash (67) 7 (139)
---------- ---------- ----------
Net cash provided by all activities 8,343 1,773 583
Cash and cash equivalents at beginning of period 3,692 1,919 1,336
---------- ---------- ----------
Cash and cash equivalents at end of period $12,035 $ 3,692 $ 1,919
========== ========== ==========
Cash payments made for:
Domestic and foreign income taxes $ 1,366 $ 977 $ 374
Interest 14 11 9
See also Note 3 for a description of a non-cash investing transaction
consummated during 1997.
See accompanying Notes to Consolidated Financial Statements.
F - 5
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except for share data)
(1) NATURE OF OPERATIONS
inTEST Corporation (the "Company") designs, manufactures and markets
docking hardware and test head manipulators used by semiconductor
manufacturers during the testing of wafers and packaged devices. The
Company also designs and markets related automatic test equipment
interface products.
The consolidated entity is comprised of inTEST Corporation (parent)
and six 100% owned subsidiaries: inTEST Limited (Thame, UK), inTEST
Kabushiki Kaisha (Kichijoji, Japan), inTEST PTE, Limited (Singapore),
inTEST Investments, Inc. (a Delaware holding company), inTEST IP
Corp. (a Delaware holding company) and inTEST Licensing Corp. (a
Delaware holding company). The three Delaware holding companies were
established in September 1997.
The Company manufactures its products in the U.S. and the U.K.
Marketing and support activities are conducted worldwide from the
Company's facilities in the U.S., U.K., Japan and Singapore.
On June 20, 1997, the Company completed an initial public offering of
2.275 million common shares through which the Company issued 1.82
million new shares of common stock (the "Offering"). Simultaneous
with the closing of the Offering, the Company acquired the 21%
minority interests in each of its three foreign subsidiaries in
exchange for an aggregate of 300,443 shares of the Company's common
stock (the "Exchange"). Prior to the Offering the Company owned 79%
of each of the three foreign subsidiaries. In addition, upon the
effective date of the Company's registration statement, the grant of
options to purchase a total of 150,000 shares of the Company's common
stock became effective. Such options are exercisable at a price of
$7.50 per share.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated upon
consolidation. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform with the
current year presentation.
F - 6
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except for share data)
Cash and Cash Equivalents
Short term investments, which have maturities of three months or less
when purchased, are considered to be cash equivalents and are carried
at cost, which approximates market value.
Notes Receivable
Notes receivable are due from trade customers in Japan, and have
original maturities of less than four months. The notes are
non-interest bearing. Notes receivable were $784 and $432 at
December 31, 1997 and 1996, respectively.
Bad Debts
The Company grants credit to customers and generally requires no
collateral. To minimize its risk, the Company performs ongoing credit
evaluations of its customers financial condition. Bad debt expense
was $61, $52 and $3 for the years ended December 31, 1997, 1996 and
1995, respectively.
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined under the first-in first-out (FIFO) method.
Property and Equipment
Machinery and equipment are stated at cost. Depreciation is based
upon the estimated useful life of the assets using the straight line
method. The estimated useful lives range from five to seven years.
Leasehold improvements are recorded at cost and amortized over the
shorter of the lease term or the estimated useful life of the asset.
Expenditures for maintenance and repairs are charged to operations as
incurred.
Intangibles
Goodwill resulting from the acquisition of the minority interests in
the Company's three foreign subsidiaries is amortized on a
straight line basis over 15 years. The Company assesses the potential
impairment of its intangible assets based on anticipated undiscounted
cash flows from operations. At December 31, 1997, no impairment was
indicated.
Income Taxes
Just prior to the closing of the Offering, the Company terminated its
status as an S corporation for Federal tax purposes and in the State
of New Jersey. As an S corporation, any Federal and certain New
Jersey state income tax liabilities were those of the former S
corporation stockholders, not of the Company. All tax liabilities on
income earned subsequent to the revocation of the S corporation
election are liabilities
F - 7
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except for share data)
of the Company. The Company is taxed in foreign countries and for
activity in certain states. The Company accounts for income taxes in
accordance with the Statement of Financial Accounting Standard No.
109, Accounting for Income Taxes.
Net Income Per Common Share
Net income per common share is computed in accordance with Statement
of Financial Accounting Standard No. 128, Earnings per Share. Basic
earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding during each year. Diluted
earnings per share is computed by dividing net income by the weighted
average number of common and common equivalent shares outstanding
during each year. Common share equivalents include stock options
using the treasury stock method.
As discussed in Note 3, pro forma earnings per share information for
1997 includes certain adjustments to reflect results as if the
Company had been taxed as a C corporation for all of 1997 and as if
the acquisition of the minority interests in the Company's three
foreign subsidiaries had occurred January 1, 1997.
Revenue Recognition
Revenue from sales of products are recognized upon shipment to
customers.
Research and Development
Research and development costs are expensed as incurred.
Product Warranties
The Company generally provides product warranties and records
estimated warranty expense at the time of sale based upon historical
claims experience.
Stock Based Compensation
Statement of Financial Accounting Standard No. 123, Accounting for
Stock-Based Compensation ("FAS 123") was adopted by the Company
effective with adoption of the 1997 Stock Plan. As permitted by FAS
123, the Company has elected to continue to follow Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees ("APB 25") in accounting for its stock option plans. Under
APB 25, the Company does not recognize compensation expense on the
issuance of its stock options because the option terms are fixed and
the exercise price equals the market price of the underlying stock on
the grant date.
Foreign Currency
The accounts of the foreign subsidiaries are translated in accordance
with the Statement of Financial Accounting Standard No. 52, Foreign
Currency Translation, which requires
F - 8
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except for share data)
that assets and liabilities of international operations be translated
using the exchange rate in effect at the balance sheet date. The
results of operations are translated using an average exchange rate
for the period. The effects of rate fluctuations in translating
assets and liabilities of international operations into U.S. dollars
are accumulated and reflected as a foreign currency translation
adjustment in the consolidated statements of stockholders' equity.
Transaction gains or losses are included in net earnings.
Financial Instruments
The Company's financial instruments, principally accounts and notes
receivable and accounts payable, are carried at cost which
approximates fair value.
New Accounting Pronouncements
In June 1997, the FASB issued SFAS 130, Reporting Comprehensive
Income. This Statement requires that all items that are required to
be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. The
Company plans to adopt this Statement on January 1, 1998, as
required. The adoption of this Statement will not affect results of
operations, financial condition, or long-term liquidity, but will
require the Company to classify items of other comprehensive income
in a financial statement and display the accumulated balance of other
comprehensive income separately in the equity section of the balance
sheet.
In June 1997, the FASB issued SFAS 131, Disclosures About Segments of
an Enterprise and Related Information. This Statement established
standards for reporting information about operating segments in
annual financial statements and requires selected information about
operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosure
about products and services, geographic areas and major customers.
The Company plans to adopt this Statement on January 1, 1998, as
required. The adoption of this Statement will not affect results of
operations, financial condition or long-term liquidity.
In February 1998, the FASB issued SFAS 132, Employers' Disclosures
about Pensions and Other Postretirement Benefits, which revises
current disclosure requirements for employers' pensions and other
retiree benefits. This new Statement does not change current
recognition or measurement accounting. As required, the Company will
adopt this new standard for its fiscal year ended December 31, 1998.
The adoption of this Statement will not have any impact on the
Company's financial position or results of operations.
(3) PRO FORMA STATEMENT OF EARNINGS INFORMATION (Unaudited)
The Company terminated its status as an S corporation just prior to
the closing of the Offering, described in Note 1, and is subject to
Federal and additional state income taxes for periods after such
termination.
F - 9
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except for share data)
Accordingly, for informational purposes, the following pro forma
information for the years ended December 31, 1997 and 1996,
respectively, is presented to show pro forma earnings on an after-tax
basis, assuming the Company had been taxed as a C corporation since
January 1, 1996. The difference between the Federal statutory income
tax rate and the pro forma income tax rate is as follows:
Years Ended December 31,
------------------------------------
1997 1996
--------------- ---------------
Federal statutory tax rate 34% 34%
State income taxes, net of Federal benefit 4 3
Foreign income taxes 4 3
Non-deductible goodwill amortization 1 1
Research credits (1) (1)
----- -----
Pro forma income tax rate 42% 40%
===== =====
Pro forma earnings before income taxes $6,407 $5,627
Pro forma income taxes 2,680 2,251
Pro forma net earnings 3,726 3,376
Pro forma net earnings per common share - basic $.74 $.83
Pro forma weighted average common shares
outstanding - basic 5,068,349 4,091,034
Pro forma net earnings per common share - diluted $.73 $.83
Pro forma weighted average common and common
stock equivalent shares outstanding - diluted 5,092,490 4,091,034
In addition, the pro forma results for the year ended December 31,
1997, also reflect goodwill amortization resulting from the
acquisition of minority interests in foreign subsidiaries, net of the
elimination of the minority interest charge reflected in the
historical financial statements, as if the Exchange had occurred on
January 1, 1996. The goodwill resulting from the Exchange, which
totaled $1.3 million, is being amortized over 15 years.
Pro forma net earnings per common share - basic was calculated by
dividing pro forma net earnings by the pro forma weighted average
number of common shares outstanding during the period calculated as
if the Exchange had occurred on January 1, 1996.
Pro forma net earnings per common share - diluted was calculated by
dividing pro forma net earnings by the pro forma weighted average
number of shares of common and common stock equivalent shares
outstanding during the period calculated as if the Exchange had
occurred on January 1, 1996.
(4) FOREIGN OPERATIONS
The Company operates in a single business segment. However, foreign
operations represent a significant portion of the Company's activity.
The following is a summary of operations by entities located within
the indicated geographic areas:
F - 10
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except for share data)
Years ended December 31,
---------------------------------
1997 1996 1995
------- ------- -------
Sales to unaffiliated customers:
North America $13,608 $10,614 $ 7,409
Asia - Pacific 5,743 4,860 4,862
United Kingdom 1,395 3,108 2,171
------- ------- -------
$20,746 $18,582 $14,442
======= ======= =======
Affiliate sales or transfer from:
North America $ 768 $ 1,321 $ 1,596
Asia - Pacific -- -- --
United Kingdom 500 54 451
------- ------- -------
$ 1,268 $ 1,375 $ 2,047
======= ======= =======
Operating profit:
North America $ 5,067 $ 3,815 $ 2,610
Asia - Pacific 651 432 612
United Kingdom 469 1,369 815
------- ------- -------
$ 6,187 $ 5,616 $ 4,037
======= ======= =======
Identifiable assets:
North America $16,177 $ 5,408 $ 3,327
Asia - Pacific 2,679 1,409 1,408
United Kingdom 1,089 899 1,617
------- ------- -------
$19,945 $ 7,716 $ 6,352
======= ======= =======
Amounts for the Far East consist of activities in the Company's
Singapore and Japan subsidiaries.
Export sales from the Company's New Jersey location totaled $2,042,
$3,486 and $2,777 during the years ended December 31, 1997, 1996 and
1995, respectively.
(5) CONCENTRATION OF CREDIT RISK
The Company's customers are in the semiconductor industry. During
1997, 1996 and 1995 the Company had sales to certain customers which
exceeded 10% of the Company's consolidated revenues. Those sales were
as follows:
Customer 1997 1996 1995
----------------------------------------------------------
A 11% 6% 4%
B 11 16 16
C 5 7 12
D 4 8 11
F - 11
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except for share data)
Additionally, at December 31, 1997, these four customers accounted
for 37% of trade receivables.
(6) INVENTORIES
Inventories held at December 31, were comprised of the following:
1997 1996
----------- -----------
Raw materials $ 364 $ 307
Work in process 1,044 781
Finished goods 360 225
Reserve for obsolete inventory (119) -
-------- --------
$ 1,649 $ 1,313
======== ========
(7) DEBT
In 1997, the Company repaid the $189 outstanding balance on a term
note. At December 31, 1997, there was no long term debt.
The Company has a $1,500 line of credit. Borrowings under this line
of credit are principally used for working capital purposes.
Borrowings on the line of credit bear interest at prime rate, which
is payable monthly on any outstanding balance. The Company is
required to maintain a $50 compensating balance at the bank which
granted the line of credit. The credit line expires on June 30, 1998.
At December 31, 1997, there were no borrowings outstanding.
(8) STOCK OPTION PLAN
The 1997 Stock Plan (the "Plan") provides for the granting of either
incentive stock options or non-qualified stock options to purchase
shares of the Company's common stock and for other stock-based awards
to key employees and directors responsible for the direction and
management of the Company and to non-employee consultants. The Plan
consists of two parts: the Non-Qualified Plan (administered by the
Board of Directors of the Company) and the Key Employee Plan
(administered by the Compensation Committee of the Board of Directors
of the Company). The Company has reserved 500,000 shares of common
stock for issuance upon exercise of options or stock awards under the
Plan.
No option may be granted with an exercise period in excess of ten
years from date of grant. Generally, incentive stock options will be
granted with an exercise price equal to the fair market value on the
date of grant; the exercise price of non-qualified stock options will
be determined by either the Board of Directors or the Compensation
Committee of the Board of Directors.
F - 12
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except for share data)
Had compensation costs for the Company's stock-based compensation
plans been determined consistent with FAS 123, the Company's net
income and net income per share for the year ended December 31, 1997,
would have been reduced to the unaudited pro forma amounts indicated
below:
1997
-----------
Net income:
As reported - pro forma $3,726
Pro forma $3,643
Net income per share:
As reported - pro forma $.74
Pro forma $.72
The fair value for stock options granted in 1997 was estimated at the
date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions for 1997: risk-free interest
rate of 5.67%; dividend yield of 0%; expected common stock market
price volatility factor of .65; and a weighted average expected life
of the stock options of 5 years. The weighted average value of
options granted in 1997 was $4.61. The options which have been issued
vest 20% one year from date of grant and 20% in each of the
succeeding four years.
These pro forma calculations only include effects of the options
granted in 1997. As such, the impacts are not necessarily indicative
of the effects on reported net income and net income per share of
future years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions
including the expected stock price volatility. As the Company's stock
options have characteristics significantly different from those of
traded options, and as changes in the subjective input assumptions
can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options.
The following table summarizes the transactions of the Company's Plan
for the period ended December 31, 1997:
F - 13
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except for share data)
Weighted
Average
Number Exercise
of Shares Price
------------- ---------------
Options outstanding, January 1, 1997 0 -
Granted 160,000 $7.72
Exercised 0 -
Canceled (9,000) 7.50
------------- -------
Options outstanding, December 31, 1997 151,000 $7.73
(0 exercisable) ============= =======
The following table summarizes information about stock options outstanding at
December 31, 1997:
Weighted Weighted
Average Average
Weighted Exercise Exercise
Range of Number Average Price of Number Price of
Exercise Outstanding Maximum Remaining Outstanding Exercisable Exercisable
Prices at 12/31/97 Life Life Options at 12/31/97 Options
- ----------- ------------ ----------- ------------ ------------- ------------ -------------
$ 7.50 141 10 years 9.5 years $ 7.50 0 N/A
$11.00 10 10 years 9.8 years $11.00 0 N/A
(9) COMMITMENTS
The Company leases its offices, warehouse facilities, automobiles and
certain equipment under noncancellable operating leases which expire
at various dates through 2005. Total rental expense for the years
ended December 31, 1997, 1996 and 1995 was $442, $422 and $388,
respectively. The aggregate minimum rental commitments under the
noncancellable operating leases in effect at December 31, 1997, are as
follows:
1998 $ 399
1999 $ 370
2000 $ 311
2001 $ 281
2002 $ 262
Thereafter $ 223
(10) INCOME TAXES
As discussed in Notes 2 and 3, prior to the Offering the Company had
elected S corporation status for Federal and state of New Jersey tax
purposes, and therefore, was not directly subject to Federal and
certain New Jersey income taxes. Immediately prior to the Offering,
the Company
F - 14
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except for share data)
terminated its status as an S corporation and is now subject to
Federal and additional state income taxes. In addition, the Company
is taxed in foreign countries and for activity in certain states. For
Federal, state and foreign jurisdictions in which the Company is
subject to taxation, the temporary differences that give rise to
deferred tax assets and liabilities were not significant at December
31, 1996 and 1995. The cumulative amount of undistributed earnings of
foreign subsidiaries for which U.S. income taxes have not been
provided was approximately $1,287 at December 31, 1997. The estimated
tax effect of distributing such earnings, net of estimated foreign
tax credits, is not anticipated to be material to the Company's
consolidated financial statements.
Earnings before income taxes were as follows:
Years Ended December 31,
-----------------------------------------------------
1997 1996 1995
----------- ----------- -----------
Domestic $ 5,348 $ 3,979 $ 2,651
Foreign 1,099 1,738 1,419
----------- ----------- -----------
$ 6,447 $ 5,717 $ 4,070
=========== =========== ===========
Income tax expense was as follows:
Years Ended December 31,
-----------------------------------------------------
1997 1996 1995
----------- ----------- -----------
Current:
Domestic - Federal $ 1,362 $ - $ -
Domestic - state 303 126 82
Foreign 590 732 555
----------- ----------- -----------
2,255 858 637
----------- ----------- -----------
Deferred:
Domestic - Federal (147) - -
Domestic - state (18) - -
----------- ----------- -----------
(165) - -
----------- ----------- -----------
Income tax expense $ 2,090 $ 858 $ 637
=========== =========== ===========
Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amount of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. The following is a summary of the significant components of
the Company's deferred tax assets and liabilities as of December 31,
1997:
F - 15
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except for share data)
1997
--------
Deferred Tax Assets:
Accrued vacation pay $ 69
Allowance for doubtful accounts 47
Inventories (principally due to obsolescence reserve) 42
Accrued warranty 9
Excess foreign tax credit carryforward 17
Other 5
--------
189
Valuation allowance (17)
--------
Deferred tax assets 172
--------
Deferred Tax Liabilities:
Accrued royalty income (7)
--------
Net deferred tax asset $ 165
========
Based on the Company's history of prior operating earnings, and its
expectation of the future, management believes that taxable income
will more likely than not be sufficient to realize the net deferred
tax assets of $165 at December 31, 1997. A valuation allowance of $17
was established in 1997 to offset the foreign tax credit
carryforward, the realization of which is dependent on sufficient
foreign source income. Deferred tax liabilities have not been
recognized on the undistributed earnings of the foreign subsidiaries
because it is management's intention to reinvest such undistributed
earnings outside the U.S.
An analysis of the effective tax rate on earnings and a
reconciliation from the expected statutory rate are as follows:
Years Ended December 31,
----------------------------------------------------
1997 1996 1995
----------- ----------- -----------
Expected income tax provision at U.S.
statutory rate $2,192 $1,944 $1,384
State taxes, net of Federal benefit 188 134 81
Increase (decrease) in tax from:
Non-deductible goodwill 17 - -
Foreign income tax rate differences 219 133 73
S corporation earnings not subject to federal
taxation (549) (1,353) (901)
Other 23 - -
----------- ----------- -----------
Income tax expense $ 2,090 $ 858 $ 637
=========== =========== ===========
F - 16
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except for share data)
(11) EMPLOYEE BENEFIT PLANS
In 1996, the Company instituted a defined contribution 401(k) plan
for its employees who work in the U.S. All permanent employees of the
parent company who are at least 18 years of age and have completed
six months of service with the Company are eligible to participate in
the plan. Under the plan, the Company matches employee contributions
dollar for dollar up to 10% of the employee's annual compensation up
to $5. In addition, the Company may match employee contributions
dollar for dollar for amounts exceeding 10% up to 15% of the
employee's annual compensation to a maximum of $5. Employer
contributions vest over a six-year period. The Company contributed
$129 and $71 to the plan for the years ended December 31, 1997 and
1996, respectively.
The Company sponsors a noncontributory pension plan for an employee
of its U.K. subsidiary. The Company has no other defined contribution
or defined benefit plans.
(12) ACCRUED EXPENSES
Accrued expenses consists of the following:
December 31,
-------------------------------
1997 1996
----------- -----------
Accrued commissions $285 $203
Customer deposits 200 73
Accrued vacation 181 101
Accrued wages 81 59
Accrued professional fees 68 48
Accrued shareholder relations 50 --
Accrued warranty 25 25
Accrued other 65 86
---- ----
$955 $595
==== ====
(13) RELATED PARTY TRANSACTIONS
The Company paid consulting fees to one individual who is a member of
the Board of Directors of the parent company which totaled $17 during
the year ended December 31, 1997. There were no consulting fees paid
to related parties during the years ended December 31, 1996 and 1995.
The Company's foreign subsidiaries paid directors' fees to several
individuals who are members of management of the parent company which
totaled $177, $192 and $151 during the years ended December 31, 1997,
1996 and 1995, respectively.
At December 31, 1997, there was $75 of foreign directors' fees payable
to members of management of the parent company. There were no amounts
outstanding in prior years.
F - 17
inTEST CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except for share data)
(14) UNAUDITED QUARTERLY CONSOLIDATED FINANCIAL DATA
The following tables present certain unaudited consolidated quarterly
financial information for each of the eight quarters ended December
31, 1997. In the opinion of the Company's management, this quarterly
information has been prepared on the same basis as the Consolidated
Financial Statements and includes all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the
information for the periods presented. The results of operations for
any quarter are not necessarily indicative of results for the full
year or for any future period.
The Company's business is not seasonal, therefore year-over-year
quarterly comparisons of the Company's results of operations may not
be as meaningful as the sequential quarterly comparisons set forth
below which tend to reflect the cyclical activity of the
semiconductor industry as a whole. Quarterly fluctuations in expenses
either are related directly to sales activity and volume, or tend to
be a function of personnel costs and the timing of expenses incurred
throughout the year.
Quarters Ended
----------------------------------------------------------
3/31/97 6/30/97 9/30/97 12/31/97 Total
---------- ---------- ---------- ---------- -----------
Net revenues $ 3,887 $ 4,619 $ 6,212 $ 6,028 $ 20,746
Gross profit 2,285 2,784 3,893 3,976 12,938
Pro forma earnings before
income taxes 1,000 1,321 2,190 1,896 6,407
Pro forma income taxes 462 578 924 716 2,680
Pro forma net earnings 538 743 1,266 1,180 3,726
Pro forma net earnings per share $.13 $.18 $.21 $.20 $.74
Pro forma weighted average
shares outstanding - basic 4,091,034 4,331,034 5,911,034 5,911,034 5,068,349
Quarters Ended
----------------------------------------------------------
3/31/96 6/30/96 9/30/96 12/31/96 Total
---------- ---------- ---------- ---------- -----------
Net revenues $ 6,089 $ 5,043 $ 4,780 $ 2,670 $18,582
Gross profit 4,233 3,311 2,930 1,353 11,827
Net earnings (loss) 2,257 1,435 1,258 (304) 4,646
F - 18
inTEST CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance Additions
at ----------------------------- Balance at
Beginning Other End of
of Period Expense Deductions Period
---------- ---------- ----------- ------------
Year Ended December 31, 1995
Bad debt reserve $ 71 $ 3 $ 29 $ 45
Inventory obsolescence reserve - 232 232 -
Warranty reserve - 163 163 -
Year Ended December 31, 1996
Bad debt reserve 45 52 1 96
Inventory obsolescence reserve - 56 56 -
Warranty reserve - 196 171 25
Year Ended December 31, 1997
Bad debt reserve 96 61 13 144
Inventory obsolescence reserve - 178 59 119
Warranty reserve 25 147 147 25
F - 19