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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR FISCAL YEAR ENDED
FEBRUARY 28, 1996 OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-18268
INTEGRATED SYSTEMS, INC.
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CALIFORNIA 94-2658153
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
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3260 JAY STREET
SANTA CLARA, CALIFORNIA 95054-3309
(408) 980-1500
(ADDRESS, INCLUDING ZIP CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES
AND REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
As of February 28, 1996, the aggregate market value of the voting stock of
the Registrant held by non-affiliates of the Registrant was $320,684,760. The
aggregate market value was computed by reference to the closing price of the
common stock on the Nasdaq National Market on February 28, 1996.
As of February 28, 1996, there were 21,205,650 shares of Registrant's
common stock outstanding, as adjusted to reflect the two-for-one split of the
Registrant's Common Stock on April 5, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's definitive Proxy Statement for its Annual Meeting
of Shareholders to be held July 17, 1996 are incorporated by reference in Part
III hereof.
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INTEGRATED SYSTEMS, INC.
1996 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
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PAGE NO.
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Item 1. Business.................................................................. 1
Item 2. Properties................................................................ 17
Item 3. Legal Proceedings......................................................... 17
Item 4. Submission of Matters to a Vote of Security Holders....................... 17
Item 4a. Executive Officers of the Registrant...................................... 17
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder 20
Matters.................................................................
Item 6. Selected Financial Data................................................... 20
Item 7. Management's Discussion and Analysis of Financial Condition and Results of 22
Operations..............................................................
Item 8. Financial Statements and Supplementary Data............................... 28
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial 28
Disclosures.............................................................
PART III
Item 10. Directors and Executive Officers of the Registrant........................ 29
Item 11. Executive Compensation.................................................... 29
Item 12. Security Ownership of Certain Beneficial Owners and Management............ 29
Item 13. Certain Relationships and Related Transactions............................ 29
PART IV
Item 14. Exhibits, Financial Statements, Schedule, and Reports on Form 8-K......... 30
Signatures............................................................................ 50
Index to Exhibits..................................................................... 51
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PART I
ITEM 1. BUSINESS.
Integrated Systems designs, develops, markets and supports software
products for embedded microprocessor-based applications and also provides
related engineering services. Embedded microprocessors are used to add
functionality and intelligence to a variety of products and to operate as an
integral part of these products, generally without any direct human
intervention. The Company offers software that consists of a real-time operating
system and a series of modules and design tools that aid the development of
embedded applications. The Company's products are designed to enable users to
accelerate the design, development, debugging, implementation and maintenance of
embedded software. The Company's products and services reduce the expense
associated with embedded software and system development and enable customers to
develop systems that have greater functionality, enhanced performance, improved
reliability and ease of use. Integrated Systems markets and supports its
products and provides services on a worldwide basis to a variety of users in a
broad range of industries, including telecommunications and data communications,
automotive, multimedia and consumer and office and industrial automation.
Recently, the Company has introduced embedded operating software and design
tools for Internet applications.
INDUSTRY BACKGROUND
Embedded systems consist of a microprocessor and related software dedicated
to a specialized task or set of tasks and are found in many common products such
as telephones, automobiles, VCRs and facsimile machines. Many of these products
require real-time embedded systems that provide an immediate, predictable
response to unpredictable sequences of external events under severe deadlines.
For example, the embedded system that controls the engine in an automobile must
set airflow, fuel quantity, spark advance and other engine parameters for each
cycle within milliseconds based on engine speed, engine temperature, atmospheric
conditions and accelerator position in order to optimize fuel efficiency,
emissions control and responsiveness.
As more powerful microprocessors have become available and decreased in
price, the use of embedded systems are being used in or with a wider range of
applications. Today, embedded systems are found in telecommunications and data
communications products such as routers, access devices and switches; automotive
products such as engine controllers and anti-lock braking systems; multimedia
and consumer products such as digital video broadcast and security systems; and
office and industrial automation products such as printers, copiers and
point-of-sale terminals. Emerging embedded Internet applications for interactive
entertainment, network computers, remote maintenance and other areas may offer
significant new opportunities for embedded systems.
The development of applications software for embedded systems requires
software development tools and a real-time operating system. Real-time operating
systems and software development tools, including compilers, debuggers and
simulators, are used by developers to create applications software that enables
the embedded system to perform its required functions. Embedded systems are
increasingly based upon 32-bit microprocessors, which run significantly larger
and more sophisticated application software than embedded systems based upon
less powerful microprocessors. In addition, the cost of some 32-bit
microprocessors has decreased substantially to below $10, thereby opening new
markets for high-volume embedded applications that can now be cost justified. As
a result, 32-bit microprocessors represent the fastest growing segment of the
embedded microprocessor industry. The complexity and size of these new software
applications and the proliferation of multiple types of microprocessors require
a more substantial engineering effort, necessitating more sophisticated
development tools and real-time operating systems.
Developers of embedded systems are increasingly replacing internally
developed real-time operating systems with commercially available products as
organizations find in-house development and maintenance costly and a diversion
of core engineering resources. Also, developers of embedded systems often find
that in-
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house real-time operating systems developed for a single project are not easily
ported to other microprocessors or scalable for different applications within
the organization, which increases development time and cost. As a result,
organizations are seeking to improve engineering productivity by standardizing
on third-party software in order to eliminate software incompatibilities and
reduce training and support costs. With productivity becoming a more strategic
issue, selection of tools and real-time operating system technology is
increasingly being evaluated by senior managers for division or company-wide
deployment. The Company believes that more organizations will need to replace
in-house tools with commercial products and to standardize on integrated
enterprise-wide solutions that are highly reliable, easily customizable and
scalable so that they can be used for simple as well as complex applications.
INTEGRATED SYSTEMS' SOLUTION
Integrated Systems provides comprehensive solutions for the development of
highly reliable and sophisticated embedded microprocessor-based applications.
The Company offers operating software that consists of a real-time system, the
pSOSystem, and a series of modules and design tools. The Company's products are
designed to enable users to accelerate the design, development, debugging,
implementation and maintenance of embedded software and to develop systems that
have greater functionality, enhanced performance, improved reliability and ease
of use. The Company also offers a range of consulting services, including
product and system design, training in the use of the Company's products and
development of specialized application code or drivers for incorporation into
customers' applications. These services have allowed the Company to offer
customers complete designs based on the Company's products and have allowed more
rapid use of the Company's technology in customers' product designs. The
Company's solution is used in embedded applications in a broad range of
industries, including telecommunications and data communications, automotive,
multimedia and consumer and office and industrial automation. Recently, the
Company has introduced embedded operating software and design tools for Internet
applications. The solution offered by Integrated Systems provides the following
features and benefits:
High Reliability. The Company's pSOS+ operating system is highly reliable,
making it suitable for deeply embedded applications where human intervention to
remedy software operating problems is not feasible. High reliability reduces
maintenance costs and allows the Company's customers to develop sophisticated
mass market products based on Integrated Systems' solution.
Suitability For High Volume Applications. The Company offers a
full-featured high performance operating system with memory requirements as low
as 16 Kbytes. In addition, the Company's operating system is very efficient,
enabling the Company's customers to minimize hardware costs while increasing the
functionality of their application designs. The Company's solutions are suitable
for low-cost, high-volume applications because of their low memory and other
hardware requirements and for hand-held applications in which less complex
hardware conserves battery power.
Customability and Scalability. The Company's product architecture is
modular, scalable and readily customizable. As a result, the Company's solution
is used in a broad range of industries for a wide array of applications. In
addition, these product features enable the Company to enter new and emerging
markets rapidly. The Company endeavors to be first to market with support for
new applications and microprocessors.
Cross-Development Capabilities. To accelerate the application development
process, Integrated Systems offers a set of tools specifically designed for
embedded software development that fully supports object-oriented methodologies.
The Company's solution provides an integrated development environment ("IDE") to
which individual development tools can be connected. The Company's IDE includes
SNiFF+, which is an advanced, object-oriented environment for the development of
sophisticated applications. The Company offers comprehensive cross-development
capabilities that allow its development tools to operate on a personal computer
or workstation, while the embedded software runs on an embedded processor. The
Company offers MATRIXx, a high-level set of tools for modeling, simulation and
code generation from a graphical description of real-time control software
functionality.
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Application-Specific Modules. The Company offers various application
specific modules that run on top of the Company's operating system and that
allow the operating software to be more easily targeted to specific applications
without degrading performance of the operating system.
BUSINESS STRATEGY
The Company's objective is to maintain its leadership position in the
telecommunications and data communications, automotive, multimedia and consumer
and office and industrial automation markets, and leverage its experience in
embedded applications to enter new markets, such as embedded Internet
applications, in which the Company believes it can establish a leadership
position. To achieve these objectives, the Company is pursuing the following
business strategy:
Maintain Technology Leadership. The Company's extensive expertise in
embedded software development tools and real-time operating systems has enabled
it to be a technology leader in the embedded software development market. The
Company seeks to capitalize on this existing technology base to accelerate the
development of new products that leverage the features of its existing product
line. The Company intends to maintain its technological leadership through rapid
response to emerging opportunities and customer requirements by continuing to
make significant investments in research and development and continuing to
enhance the architecture of its development tools and operating software.
Offer Comprehensive Solutions. The Company's products and services offer a
comprehensive solution to users of embedded microprocessors. This approach
simplifies customers' purchasing decisions, eliminates the need for customers to
integrate products from multiple sources, improves customer support, accelerates
the integration of the Company's technology into customers' products and allows
the Company's products to be used effectively by less experienced engineers. The
Company expects to continue to expand and refine its solution through internal
development activities and strategic acquisitions.
Maintain Market Focus. While the Company's products and services are
suitable for a wide variety of applications and are sold to a broad range of
customers, the Company has focused its development and marketing efforts on the
telecommunications and data communications, automotive, multimedia and consumer
and office and industrial automation markets. The Company has developed a
complete suite of products to address these markets in order to achieve deeper
penetration, as well as to provide products that reduce the time and expense
associated with system development. The Company seeks to participate in the
rapid growth of low-cost, high-volume applications for embedded systems through
run-time license arrangements with its customers based on the number of products
sold that incorporate the Company's products.
Address Emerging Market Opportunities. From time to time, the Company
evaluates strategic opportunities and applies its technology to develop products
for new markets more quickly. The Company recently introduced design tools and
operating software products for the embedded Internet market based in part on
technology obtained through recent acquisitions. The Company believes its
products and services are suitable for emerging markets because its products are
scalable, reliable and rapidly reconfigurable.
Focus on Large Accounts. Integrated Systems markets its software products
and engineering services to large customers to encourage them to use the
Company's products in multiple designs. This strategy has made it possible for
certain large customers to standardize on the Company's products. In addition,
it allows the Company to learn from large customers about future requirements
that the Company may incorporate into its products and services.
Portability and Support for Widely-Used Embedded Microprocessors and Host
Platforms. The Company has expended significant resources to make its products
available on a broad range of host platforms and 32-bit embedded
microprocessors. This has allowed the Company to sell into a broad range of
markets. Because large companies use a range of host platforms and
microprocessors, it also makes it possible for large customers to standardize on
Integrated Systems' solution.
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PRODUCTS AND SERVICES
The Company offers three major families of products to support the embedded
software development market: real-time or embedded operating software, software
development tools and graphical design products.
Embedded Operating Software. Integrated Systems' embedded operating
software consists of the pSOS+ operating system and special purpose modules that
run on the pSOS+ operating system. The combination of real-time operating
software and development tools is marketed and licensed as pSOSystem. pSOS+ is a
priority-based, interrupt-oriented, multitasking operating system that is small
in size (requiring as little as 16 Kbytes of storage) and highly reliable and
efficient. Based on a scalable software component architecture, pSOS+ represents
a complete solution for advanced 32-bit embedded applications development and
run-time. The Company also offers a multiprocessing version, called pSOS+m, that
operates on tightly coupled or loosely coupled microprocessors. pSOS+ operating
system is currently available for the Motorola 68xxx, Intel x86 and i960, Power
PC, MIPS and Hitachi SH product families.
The special purpose modules that run on the pSOS+ operating system are used
to support development of pSOS+ application software, to debug embedded code and
to provide file support for embedded applications. The Company also offers X11
graphical user interface modules for embedded applications. In addition, the
Company offers a number of modules that address networking, telecommunications
and data communications, automotive, multimedia and consumer and embedded
Internet applications. These modules provide complete implementation of certain
aspects of the applications at which they are focused, which improves customers'
time to market and reliability. For example, the TCP/IP module offered by the
Company provides a complete implementation of the TCP/IP communication protocol.
Software Development Tools. The Company offers a broad line of tools to
support the development of embedded software applications. The Company's
development tools consist of an integrated development environment ("IDE"),
which provides sophisticated cross development frameworks, and individual tools
that are connected to these frameworks. The Company's IDE includes SNiFF+, which
is an advanced, object-oriented environment for the development of sophisticated
applications including the development of complex object-oriented desktop and
client-server applications. Individual tools offered by the Company include C
and C++ cross-compilers, source level debuggers, browsers, pSOS+ simulators and
profilers. The Company also offers a visual debugging and analysis tool called
ESp that graphically displays component configurations, memory stack usage and
errors, static and dynamic views of all kernel objects, user specified events
and CPU use graphs. The Company also offers IDE products and individual tools
that are licensed from third parties or that include technology licensed from
third parties. The Company's tools operate on Windows-based personal computers
and workstations manufactured by Sun Microsystems, Hewlett-Packard and IBM.
Graphical Design Products. The Company's graphical design product line,
called MATRIXx, includes control system engineering tools for analysis, design,
simulation and prototyping. Products and modules in the MATRIXx family include
the following:
--Xmath is a mathematically-based engineering analysis tool that
provides analysis capabilities, plot generation facilities and specialized
function libraries for control design, robust control, optimization,
digital signal processing, system identification and model reduction
applications.
--SystemBuild is a system modeling and simulation tool used to create
interactive, dynamic system models that include plant dynamics and
real-time software logic. SystemBuild includes a block diagram editor,
tools to create animated system simulations and state transition diagrams.
In addition, customers can order special purpose libraries for a variety of
needs, including fuzzy logic systems. The architecture of SystemBuild
allows the creation of application-specific libraries.
--AutoCode automatically generates programming code from SystemBuild
diagrams in the C or Ada languages. This accelerates application
development by relieving engineers of line-by-line programming and sharply
reducing programming errors committed as projects move from design analysis
to programming phrases.
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--DocumentIt software further accelerates the design process by
automatically incorporating information about a design into a documentation
format.
--RealSim Series prototyping tools complete the family by providing
the software and real-time computing hardware to verify an application in
its intended environment. C or Ada code generated in the AutoCode
environment automatically loads and runs on RealSim Series hardware.
Embedded Internet Products. In January 1996, the Company announced the
availability of pSOSystem modules directed at embedded Internet applications.
The first two modules offered by the Company in its Embedded Internet family are
Java support for pSOSystem, which allows developers to build Internet
applications on pSOSystem, and an HTTP server based on pSOS+, which allows the
Company's operating software to be used for embedded Internet servers. For
example, one of the Company's customers has recently demonstrated a network
management capability for global networks based on the Company's product
providing Java support for pSOSystem. The Company has also recently introduced a
SNiFF+ design environment for Java that enables the development of both embedded
and desktop Java-based Internet applications. The Company expects to announce
additional Embedded Internet products during 1996.
Engineering Services. In addition to the products described above, the
Company offers engineering services to its customers. The Company's engineering
services group helps customers design and implement specific solutions typically
using tools provided by the Company. The Company provides engineering services
to develop close relationships with key customers, to accelerate acceptance of
advanced tools in the industry, to demonstrate the effectiveness of the
products, to learn more about specific systems and customer's development needs
and to work with the Company's product development group to incorporate
appropriate features into new versions of products or into new modules or
libraries. Engineering services projects can last from a few weeks to several
years and are generally performed on a time and materials basis.
SALES AND SUPPORT
The Company markets its products primarily through a direct sales force
augmented by a telemarketing organization, distributors and sales
representatives. The Company believes that use of a direct sales force allows
the Company to influence customer purchasing decisions, to provide superior
support to its customers and to understand better evolving customer needs. The
Company has significantly expanded the number of markets where it uses a direct
sales force and expects to continue to do so in the future.
The Company's direct sales organization in North America operates through
14 United States sales offices and a recently-opened subsidiary in Canada.
Direct sales managers are typically supported by field application engineers
that are experts in the Company's technology and products. In addition, a small
telemarketing organization focuses on selling maintenance and renewal contracts,
licensing lower-priced products and licensing to universities.
Sales internationally are supported by a direct sales force that operates
from subsidiaries based in France, Germany, Italy, Sweden, the United Kingdom,
Israel and Japan. In addition, the Company has sales and support offices in
Korea and India. The sales and support personnel in these subsidiaries and
offices are complemented by distributors and sales representatives that address
certain geographical areas, market segments or product families. Sales
representatives market and support the Company's products in Australia, China,
India, Korea, Taiwan and several other countries in Asia, while distributors
cover the rest of the world. The Company initiated direct selling operations in
Japan and Italy, replacing its existing third party distributor arrangements,
and implemented certain substantial changes to its direct sales operations in
Germany and France in the first quarter of fiscal 1997. These transitions may
result in a decline in the Company's sales in those countries during such
transition.
The Company's software development products are typically licensed on a
per-user basis. The Company's real-time operating systems and run-time packages
are also generally licensed for development on a per-user basis. Run-time
license fees are typically charged on a per-unit basis when the customer's
application is deployed. List prices for the Company's software development
tools and real-time operating systems
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development licenses generally range from less than $4,000 to over $100,000,
with a typical development license averaging between $25,000 and $50,000.
Approximately 30%, 28% and 34% of the Company's total revenue was derived
from sales outside of North America in fiscal 1994, 1995 and 1996, respectively.
See Note 10 of Notes to Consolidated Financial Statements. The Company has made
significant investments in developing its distribution and support channels
outside North America to increase the percentage of revenue derived from
international sales. There can be no assurance that changes from distribution
sales to direct sales or these additional investments will lead to increased
revenue. See "--Risk Factors--Risks Associated with International Operations."
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CUSTOMERS AND APPLICATIONS
The Company markets its products to customers in a variety of industries,
with principal focus on telecommunications and data communications, automotive,
multimedia and consumer and office and industrial automation. Recently, the
Company has introduced embedded operating software and design tools for Internet
applications. No single customer accounted for more than 10% of the Company's
total revenue in fiscal 1995 or fiscal 1996.
The Company's customers include the following:
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CUSTOMERS SELECTED APPLICATIONS
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TELECOMMUNICATIONS AND DATA COMMUNICATIONS:
Alcatel Telephone switching equipment
AT&T Central office switching equipment
Cascade Communications Frame relay switch
DSC Communications Interoffice switching equipment
Fujitsu SONET switch
Motorola Corporation Satellite communications system
Northern Telecom PBXs
Samsung Transmission equipment
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AUTOMOTIVE:
Bosch Automotive components
Daimler-Benz Automotive electronics
Ford Motor Corporation Chassis control
General Motors Powertrain controllers
Honda Engine controllers
Nissan Automotive electronics
Toyota Traction control
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MULTIMEDIA AND CONSUMER:
Hewlett-Packard Set-top box development
Philips N.V. HDTV and consumer appliances
Sega Corporation Karaoke system
Sony Corporation Digital broadcast satellite system
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OFFICE AND INDUSTRIAL AUTOMATION:
Eastman Kodak Company Copiers
Sharp Corporation Multifunction devices
Xerox Corporation Copiers and printers
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EMBEDDED INTERNET:
UB Networks Network management
Xionics Printer maintenance and
management
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MISCELLANEOUS:
Gilbarco Automated gas pumps
G-TECH Electronic lottery machines
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PRODUCT DEVELOPMENT
The Company's product development activities specifically address the needs
of the market segments upon which the Company focuses, offer customers open
cross-development capability and enhance the capabilities of current products
and modules to address user requirements. In addition, the Company seeks to port
the pSOSystem to additional microprocessors, make the pSOSystem suitable for
additional high-volume applications, add new products and modules to the
Company's product lines, create interfaces between the Company's products and
other key computer-aided design and software development tools and provide the
end user greater flexibility to integrate automatically-generated code with
manually-written code, thereby allowing the end user to accelerate application
development.
The Company attempts to release upgrades and to introduce new products or
modules on a regular basis. In connection with each release, the Company works
closely with its customers to define improvements and enhancements that are
incorporated into the next release of the product. This approach includes
customer feedback in the Company's product design process, as well as in the
evaluation stage, thereby permitting customers to influence functionality early
in the product's life-cycle. The Company believes that its engineering services
group provides the Company with a competitive advantage for product development
by defining needs for new products, guiding future enhancements and testing new
implementations. In addition, this group contracts with customers to research
new methodologies that can serve as prototypes for new features, products or
modules. As of February 28, 1996, the Company employed 127 engineers in the
product development group and 62 in the engineering services group. The
Company's engineers include experts in software engineering, software
development tools, multimedia, telecommunications, real-time controls and
operating systems technology.
For fiscal 1994, 1995 and 1996, the Company's research and development
expenses were approximately $5.9 million, $8.3 million and $11.4 million or 13%,
14% and 13% of its total revenue, respectively. The Company capitalizes certain
costs of developing computer software to be licensed or otherwise marketed to
customers in accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed" ("SFAS No. 86"). The Company capitalized approximately $1.1 million,
$492,000 and $335,000 of research and development expenses related to the
development of software products in fiscal 1994, 1995 and 1996, respectively.
The amounts capitalized represented approximately 16%, 6% and 3%, respectively,
of total research and development expenses for fiscal 1994, 1995 and 1996. Such
capitalized costs are being amortized using the greater of the amount computed
using the ratio that current gross revenues for a product bear to the total of
current and anticipated future gross revenues for that product, or on a
straight-line basis over three years. Amortization of capitalized cost for
fiscal 1994, 1995 and 1996 was $160,000, $607,000 and $921,000, respectively.
The amount of research and development expenses capitalized in a given time
period depends upon the nature of the development performed and, accordingly,
amounts capitalized may vary from period to period.
The market for embedded applications is fragmented and is characterized by
ongoing technological developments, evolving industry standards and rapid
changes in customer requirements. The Company's success depends upon its ability
to continue to develop and introduce in a timely manner new products that take
advantage of technological advances, to continue to enhance its existing product
lines, to offer its products across a spectrum of microprocessor families used
in the embedded systems market and to respond promptly to customers'
requirements. The Company must continuously update its existing products to keep
them current with changing technology and must develop new products to take
advantage of new technologies that could render the Company's existing products
obsolete. The Company has in the past experienced delays in the development of
new products and the enhancement of existing products. Such delays are
commonplace in the software industry and are likely to be experienced by the
Company in the future. The Company's future prospects depend upon the Company's
ability to increase the functionality of existing products in a timely manner
and to develop new products that address new technologies and achieve market
acceptance. New products and enhancements must keep pace with competitive
offerings, adapt to evolving industry standards and provide additional
functionality. There can be no assurance that the Company will be successful in
developing and marketing, on a timely basis or at all, competitive products,
product enhancements and new products that respond to technological change,
changes in customer requirements and emerging industry
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standards, or that the Company's enhanced or new products will adequately
address the changing needs of the marketplace. The inability of the Company, due
to resource constraints or technological or other reasons, to develop and
introduce new products or product enhancements in a timely manner could have a
material adverse effect on the Company's business, financial condition or
results of operations. From time to time, the Company or its competitors may
announce new products, capabilities or technologies that have the potential to
replace or shorten the life cycles of the Company's existing products. There can
be no assurance that announcements of currently planned or other new products
will not cause customers to defer purchasing existing Company products. Any
failure by the Company to anticipate or respond adequately to changing market
conditions, or any significant delays in product development or introduction,
would have a material adverse effect on the Company's business, financial
condition and results of operations. Currently, the Company is expending
substantial time and financial resources to develop a product line for
applications that use Internet technology with embedded microprocessors. If the
Internet market, or any other new market targeted by the Company in the future,
fails to develop, develops more slowly than anticipated or becomes saturated
with competitors, or if the Company's products and services do not achieve or
sustain market acceptance, the Company's business, financial condition and
results of operations would be materially adversely affected. See "-- Risk
Factors -- Risks Associated with New or Emerging Markets."
COMPETITION
The market for commercially available software tools and embedded operating
systems is fragmented and highly competitive and is characterized by pressures
to incorporate new features and accelerate the release of new product versions.
The Company's products compete with software developed internally by embedded
systems manufacturers and software offered by other third parties. Many
organizations that internally develop and maintain real-time operating systems
have substantial programming resources and can develop specific products for
their needs. Many of these companies have significant investments in their
existing software and there can be no assurance that the Company will be able to
persuade existing and potential customers to replace or augment their internally
developed real-time operating systems with the Company's products.
The Company's principal competitors for third-party embedded software
development and related tools (pSOSystem) are Mentor Graphics (through its
acquisition of Microtec Research Inc.), Microware Systems Corporation and Wind
River Systems, Inc. The MATRIXx product family competes with products offered by
Mathworks Incorporated and a number of other companies that provide design and
analysis, modeling and simulation, and code generation products. The Company
also competes with a number of other vendors that address one or more segments
of the system design process, including vendors that have modified general
purpose software engineering products for real-time and control design
applications.
As the industry continues to develop, the Company expects competition to
increase in the future from existing competitors and from other companies that
may enter the Company's existing or future markets with similar or substitute
solutions that may be less costly or provide better performance or functionality
than the Company's products. Some of the Company's existing and many of its
potential competitors have substantially greater financial, technical, marketing
and sales resources than the Company and there can be no assurance that the
Company will be able to compete successfully against these companies. In the
event that price competition increases significantly, competitive pressures
could cause the Company to reduce the prices of its products, which would result
in reduced profit margins. Prolonged price competition would have a material
adverse effect on the Company's business, financial condition and results of
operations. Also, run-time licenses, which provide for per-unit royalty payments
for each embedded system that incorporates the Company's real-time operating
systems, may be subject to significant pricing pressures. A variety of other
potential actions by the Company's competitors, including increased promotion
and accelerated introduction of new or enhanced products, could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company believes that the principal bases for a customer's decision to
license the Company's products are product functionality and performance, degree
of integration, ease of product use, quality of support services and corporate
reputation. The Company believes that it competes favorably in these areas.
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<PAGE> 12
PROPRIETARY RIGHTS
The Company's success is heavily dependent upon its proprietary technology.
To protect its proprietary rights, the Company relies on a combination of
copyright, trade secret, patent and trademark laws, nondisclosure and other
contractual restrictions on copying and distribution and technical measures. The
Company seeks to protect its software, documentation and other written materials
through trade secret and copyright laws, which provide only limited protection.
In addition, the Company holds two United States patents and has additional
United States patent applications pending. There can be no assurance that
patents held by the Company will not be challenged and invalidated, that patents
will issue from any of the Company's pending applications or that any claims
allowed from existing or pending patents will be of sufficient scope or strength
(or be issued in all countries where the Company's products can be sold) to
provide meaningful protection or any commercial advantage to the Company. As
part of its confidentiality procedures, the Company generally enters into
nondisclosure agreements with its employees, consultants, distributors and
corporate partners and limits access to and distribution of its software,
documentation and other proprietary information. End user licenses of the
Company's software are frequently in the form of shrink wrap license agreements
which are not signed by licensees, and therefore may be unenforceable under the
laws of many jurisdictions. The source code of the Company's products is also
protected as a trade secret and is generally not licensed to customers. Despite
the Company's efforts to protect its proprietary rights, it may be possible for
unauthorized third parties to copy the Company's products or to reverse engineer
or obtain and use information that the Company regards as proprietary. There can
be no assurance that the Company's competitors will not independently develop
technologies that are substantially equivalent or superior to the Company's
technologies. Policing unauthorized use of the Company's products is difficult,
and while the Company is unable to determine the extent to which software piracy
of its products exists, software piracy can be expected to be a persistent
problem. In addition, effective protection of intellectual property rights may
be unavailable or limited in certain countries. The status of United States
patent protection in the software industry is not well defined and will evolve
as the United States Patent and Trademark Office grants additional patents.
Patents have been granted on fundamental technologies in software, and patents
may issue that relate to fundamental technologies incorporated into the
Company's products.
As the number of patents, copyrights, trademarks and other intellectual
property rights in the Company's industry increases, products based on its
technology may increasingly become the subject of infringement claims. There can
be no assurance that third parties will not assert infringement claims against
the Company in the future. Any such claims with or without merit could be time
consuming, result in costly litigation, cause product shipment delays or require
the Company to enter into royalty or licensing agreements. Such royalty or
licensing agreements, if required, might not be available on terms acceptable to
the Company, or at all, which could have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
the Company may initiate claims or litigation against third parties for
infringement of the Company's proprietary rights or to establish the validity of
the Company's proprietary rights. Litigation to determine the validity of any
claims, whether or not such litigation is determined in favor of the Company,
could result in significant expense to the Company and divert the efforts of the
Company's technical and management personnel from productive tasks. In the event
of an adverse ruling in any such litigation, the Company might be required to
pay substantial damages, discontinue the use and sale of infringing products,
expend significant resources to develop non-infringing technology or obtain
licenses to infringing technology. The failure of the Company to develop or
license a substitute technology could have a material adverse affect on the
Company's business, financial condition and results of operations.
The Company licenses certain software development tool products from other
companies to distribute with its own products. The inability of such third
parties to provide competitive products with adequate features and high quality
on a timely basis or to provide sales and marketing cooperation could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, the Company's products compete with products
produced by certain of the Company's licensors. There can be no assurance that,
upon the termination or expiration of these licenses, such licenses will be
available on reasonable terms or at all, or that similar products could be
obtained to substitute into the tool suites. The inability to license such
products could have a material adverse effect on the Company's business,
financial condition and results of operations.
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<PAGE> 13
BACKLOG
The Company generally ships its products within 30 days after acceptance of
a customer purchase order and, therefore, has insignificant product backlog. The
insignificant product backlog makes it difficult to predict with accuracy
quarterly revenue and quarterly earnings prior to the end of a quarterly
reporting period. Engineering services backlog, consisting of orders for
engineering services scheduled to be performed within the following twelve
months, was approximately $2.1 million, $4.1 million and $7.2 million at
February 28, 1994, 1995 and 1996, respectively. Most of the contracts with the
Company's engineering services customers are terminable at the convenience of
the customer. Although the Company has not experienced any material
cancellations in the past, there can be no assurance that such cancellations
will not occur in the future.
EMPLOYEES
As of February 28, 1996, the Company employed 416 persons, including 155 in
marketing, sales and support services, 189 in engineering (62 in engineering
services and 127 in product development) and 72 in management, administration
and finance. Of these employees, 345 are located in the United States and 71 are
located at the Company's subsidiaries and sales offices outside of the United
States. In addition, from time to time the Company employs temporary employees
and consultants. None of the Company's employees is represented by a labor union
or is the subject of a collective bargaining agreement. The Company has never
experienced a work stoppage and believes that its employee relations are good.
The Company believes its future success will depend in large part upon its
ability to attract and retain highly skilled managerial, engineering, sales,
marketing and operations personnel, many of whom are in great demand.
Competition for such personnel has intensified dramatically over the last twelve
months in Santa Clara County, California, where the Company is headquartered,
and there can be no assurance that the Company will be successful in attracting
and retaining such personnel. See "--Risk Factors--Dependence on Key Personnel;
Need for Additional Personnel."
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<PAGE> 14
RISK FACTORS
The statements contained in this Annual Report that are not purely
historical are forward looking statements, including statements regarding the
Company's expectations, hopes or intentions regarding the future. Actual results
could differ materially from those discussed in the forward-looking statements.
Among the factors that could cause actual results to differ materially are those
discussed below. In addition to the other information in this Annual Report, the
following risk factors should be considered carefully in evaluating the Company
and its business.
Fluctuations in Quarterly Results. The Company's quarterly operating
results vary significantly depending on a number of factors, including the
volume and timing of orders received during the quarter, the mix of and changes
in distribution channels through which the Company's products are sold, the
timing and acceptance of new products and product enhancements by the Company or
its competitors, changes in pricing, buyouts of run-time licenses, product life
cycles, the level of the Company's sales of third party products, purchasing
patterns of distributors and customers, competitive conditions in the industry,
business cycles affecting the markets in which the Company's products are sold,
extraordinary events, such as litigation or acquisitions, including related
charges, and economic conditions generally or in various geographic areas. All
of the foregoing factors are difficult to forecast. The future operating results
of the Company may fluctuate as a result of these and other factors, including
the Company's ability to continue to develop innovative and competitive
products.
The Company historically has operated with insignificant product backlog
because its products are generally shipped as orders are received. As a result,
product revenue in any quarter depends on the volume and timing of orders
received in that quarter. In addition, the Company has at times recognized a
substantial portion of its total revenue from sales booked and shipped in the
last two weeks of the quarter such that the magnitude of quarterly fluctuations
may not become evident until very late in, or after the end of, a particular
quarter. Because the Company's staffing and operating expenses are based on
anticipated total revenue levels, and a high percentage of the Company's costs
are fixed in the short term, small variations between anticipated orders and
actual orders, as well as non-recurring or large orders, can cause
disproportionate variations in the Company's operating results from quarter to
quarter.
The procurement process of the Company's customers typically ranges from a
few weeks to several months or longer from initial inquiry to order, making the
timing of sales and license fees difficult to predict. Moreover, as licensing of
the Company's products increasingly becomes a more strategic decision made at
higher management levels, there can be no assurance that sales cycles for the
Company's products will not lengthen. The Company's results of operations may
also be affected by seasonal trends. The Company's total revenue and net income
during the first fiscal quarter have been lower than the previous fourth fiscal
quarter for a variety of reasons, including customer purchase cycles related to
expiration of budgetary authorizations, and the Company expects that total
revenue and net income in the first quarter of fiscal 1997 will be lower than
the fourth quarter of fiscal 1996. In addition, in the first quarter of fiscal
1997, the Company shifted from third party distributors to direct sales and
support in Japan and Italy. In the past, the Company's sales declined in the
short term during such transitions. There can be no assurance that declines will
not occur during the current transitions or similar transitions in the future.
Also, the Company's recent acquisitions in fiscal 1996, as well as any future
acquisitions, involve numerous risks and could have a material adverse effect on
the Company's business, financial condition and results of operations. The
Company expects to move its Santa Clara, California operations to Sunnyvale,
California by the end of the first quarter of fiscal 1997. There can be no
assurance that the move will not disrupt the Company's operations or affect the
Company's operating results. Due to all of the foregoing factors, the Company
believes that period-to-period comparisons of its results of operations are not
necessarily meaningful and should not be relied upon as an indication of future
performance. It is likely that, in some future quarters, the Company's operating
results will be below the expectations of stock market analysts and investors.
In such event, the price of the Company's Common Stock would likely be
materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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<PAGE> 15
Rapid Technological Change; Dependence on New Products. The market for
embedded applications is fragmented and is characterized by ongoing
technological developments, evolving industry standards and rapid changes in
customer requirements. The Company's success depends upon its ability to
continue to develop and introduce in a timely manner new products that take
advantage of technological advances, to continue to enhance its existing product
lines, to offer its products across a spectrum of microprocessor families used
in the embedded systems market and to respond promptly to customers'
requirements. The Company must continuously update its existing products to keep
them current with changing technology and must develop new products to take
advantage of new technologies that could render the Company's existing products
obsolete. The Company has in the past experienced delays in the development of
new products and the enhancement of existing products. Such delays are
commonplace in the software industry and are likely to be experienced by the
Company in the future. The Company's future prospects depend upon the Company's
ability to increase the functionality of existing products in a timely manner
and to develop new products that address new technologies and achieve market
acceptance. New products and enhancements must keep pace with competitive
offerings, adapt to evolving industry standards and provide additional
functionality. There can be no assurance that the Company will be successful in
developing and marketing, on a timely basis or at all, competitive products,
product enhancements and new products that respond to technological change,
changes in customer requirements and emerging industry standards, or that the
Company's enhanced or new products will adequately address the changing needs of
the marketplace. The inability of the Company, due to resource constraints or
technological or other reasons, to develop and introduce new products or product
enhancements in a timely manner could have a material adverse effect on the
Company's business, financial condition or results of operations. From time to
time, the Company or its competitors may announce new products, capabilities or
technologies that have the potential to replace or shorten the life cycles of
the Company's existing products. There can be no assurance that announcements of
currently planned or other new products will not cause customers to defer
purchasing existing Company products. Any failure by the Company to anticipate
or respond adequately to changing market conditions, or any significant delays
in product development or introduction, would have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business--Product Development."
Risks Associated with New or Emerging Markets. From time to time, the
Company embarks on product development for new or emerging markets. Currently,
the Company is expending substantial time and financial resources to develop a
product line for applications that use Internet technology with embedded
microprocessors. The Company has introduced both embedded operating software and
development tools for Internet applications. The commercial Internet market has
only recently begun to develop, is rapidly changing and is characterized by an
increasing number of new entrants with competitive products. It is difficult to
predict with any assurance whether the Internet will prove to be a viable
commercial marketplace, or whether demand for Internet related products and
services will emerge or increase in the future. If the Internet market, or any
other new market targeted by the Company in the future, fails to develop,
develops more slowly than anticipated or becomes saturated with competitors, or
if the Company's products and services do not achieve or sustain market
acceptance, the Company's business, financial condition and results of
operations would be materially adversely affected. See "Business--Product
Development."
Competition. The market for commercially available software tools and
embedded operating systems is fragmented and highly competitive and is
characterized by pressures to incorporate new features and accelerate the
release of new product versions. The Company's products compete with software
developed internally by embedded systems manufacturers and software offered by
other third parties. Many organizations that internally develop and maintain
real-time operating systems have substantial programming resources and can
develop specific products for their needs. Many of these companies have
significant investments in their existing software and there can be no assurance
that the Company will be able to persuade existing and potential customers to
replace or augment their internally developed real-time operating systems with
the Company's products. The Company's principal competitors for third-party
embedded software development and related tools (pSOSystem) are Mentor Graphics
(through its acquisition of Microtec Research Inc.), Microware Systems
Corporation and Wind River Systems, Inc. The MATRIXx product family competes
with products offered by Mathworks Incorporated and a number of other companies
that provide design and analysis, modeling and simulation, and code generation
products. The Company also
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<PAGE> 16
competes with a number of other vendors that address one or more segments of the
system design process, including vendors that have modified general purpose
software engineering products for real-time and control design applications.
As the industry continues to develop, the Company expects competition to
increase in the future from existing competitors and from other companies that
may enter the Company's existing or future markets with similar or substitute
solutions that may be less costly or provide better performance or functionality
than the Company's products. Some of the Company's existing and many of its
potential competitors have substantially greater financial, technical, marketing
and sales resources than the Company and there can be no assurance that the
Company will be able to compete successfully against these companies. In the
event that price competition increases significantly, competitive pressures
could cause the Company to reduce the prices of its products, which would result
in reduced profit margins. Prolonged price competition would have a material
adverse effect on the Company's business, financial condition and results of
operations. Also, run-time licenses, which provide for per-unit royalty payments
for each embedded system that incorporates the Company's real-time operating
systems, may be subject to significant pricing pressures. A variety of other
potential actions by the Company's competitors, including increased promotion
and accelerated introduction of new or enhanced products, could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Competition."
Acquisition-Related Risks. The Company completed a number of acquisitions
in fiscal 1996 and may complete additional acquisitions in the future. The
process of integrating an acquired company's business into the Company's
operations may result in unforeseen operating difficulties and expenditures and
may absorb significant management attention that would otherwise be available
for the ongoing development of the Company's business. Moreover, there can be no
assurance that the anticipated benefits of an acquisition will be realized.
Future acquisitions by the Company could result in potentially dilutive
issuances of equity securities, the incurrence of debt and contingent
liabilities and amortization expenses related to goodwill and other intangible
assets, which could materially adversely affect the Company's business,
financial condition and results of operations. In addition, acquisitions involve
numerous risks, including difficulties in the assimilation of the operations,
technologies and products of the acquired companies, difficulties in managing
diverse geographic sales and research and development operations, the diversion
of management attention from other business concerns, risks of entering markets
in which the Company has no or limited direct prior experience and the potential
loss of key employees of the acquired company. The inability of the Company's
management to respond to changing business conditions effectively, including the
changes associated with its recent acquisitions, could have a material adverse
effect on the Company's business, financial condition and results of operations.
From time to time, the Company evaluates potential acquisitions of businesses,
products or technologies. The Company has no present understandings, commitments
or agreements with respect to any material acquisition of other businesses,
products or technologies, and no material acquisition is currently being pursued
actively. In the event that such an acquisition were to occur, however, there
can be no assurance that the Company's business, operating results and financial
condition would not be materially adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Risks Associated with International Operations. In fiscal 1994, 1995 and
1996, the Company derived approximately 30%, 28% and 34%, respectively, of its
total revenue from sales outside of North America. The Company expects that
international sales will continue to generate a significant percentage of its
total revenue in the foreseeable future. The Company expects to continue to make
substantial investments in its international operations and to increase its
direct sales force in Europe and Asia. There can be no assurance that these
increases will result in commensurate increases in the Company's international
sales. In addition, international operations are subject to a number of special
risks, including foreign government regulation, more prevalent software piracy,
longer payment cycles, unexpected changes in, or imposition of, regulatory
requirements, tariffs, import and export restrictions and other barriers and
restrictions, greater difficulty in accounts receivable collection, potentially
adverse tax consequences, the burdens of complying with a variety of foreign
laws, staffing and managing foreign operations, general geopolitical risks, such
as political and economic instability, hostilities with neighboring countries
and changes in diplomatic and trade relationships,
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<PAGE> 17
possible recessionary environments in economies outside the United States and
other factors beyond the control of the Company. The Company generally
denominates sales to and by foreign subsidiaries in local currency, and an
increase in the relative value of the dollar against such currencies, as has
recently occurred, would reduce the Company's revenue in dollar terms or make
the Company's products more expensive and, therefore, potentially less
competitive in foreign markets. The Company has little experience in hedging its
foreign currency sales and often does not hedge such sales. There can be no
assurance that the Company's future results of operations will not be adversely
affected by currency fluctuations. The Company relies on distributors for sales
of its products in certain foreign countries and, accordingly, is dependent on
their ability to promote and support the Company's products and, in some cases,
to translate them into foreign languages. The Company's international
distributors generally offer products of several different companies, including
in some cases products that are competitive with the Company's products, and
such distributors are not subject to any minimum purchase or resale
requirements. There can be no assurance that the Company's international
distributors will continue to purchase the Company's products or provide them
with adequate levels of support. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Risks of Product Defects; Product and Other Liability. As a result of
their complexity, software products may contain undetected errors or
compatibility issues, particularly when first introduced or as new versions are
released. There can be no assurance that, despite testing by the Company and
testing and use by current and potential customers, errors will not be found in
new products after commencement of commercial shipments. The occurrence of such
errors could result in loss of or delay in market acceptance of the Company's
products, which could have a material adverse effect on the Company's business,
financial condition and results of operations. The increasing use of the
Company's products for applications in systems that interact directly with the
general public, particularly applications in transportation, medical systems and
other markets where the failure of the embedded system could cause substantial
property damage or personal injury, could expose the Company to significant
product liability claims. In addition, the Company's products are used for
applications in mission-critical business systems where the failure of the
embedded system could be linked to substantial economic loss. The Company's
license and other agreements with its customers typically contain provisions
designed to limit the Company's exposure to potential product liability and
other claims. It is likely, however, that the limitation of liability provisions
contained in the Company's agreements are not effective in all circumstances and
in all jurisdictions. Although the Company has not experienced any product
liability or economic loss claims to date, the sale and support of the Company's
products may entail the risk of such claims. The Company currently does not have
insurance against product liability risks or errors or omissions coverage and
there can be no assurance that such insurance will be available to the Company
on commercially reasonable terms or at all. A product liability claim or claim
for economic loss brought against the Company, or a product recall involving the
Company's software, could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business--Product
Development."
Dependence on Key Personnel; Need for Additional Personnel. The Company's
future performance depends to a significant degree upon the continued
contributions of its key management, product development, sales, marketing and
operations personnel. The Company does not have employment agreements with any
of its key personnel and does not maintain any key person life insurance
policies. In addition, the Company believes its future success will also depend
in large part upon its ability to attract and retain highly skilled managerial,
engineering, sales, marketing and operations personnel, many of whom are in
great demand. Competition for such personnel has intensified dramatically over
the last twelve months in Santa Clara County, California, where the Company is
headquartered, and there can be no assurance that the Company will be successful
in attracting and retaining such personnel. The failure of the Company to
attract, assimilate and retain the necessary personnel could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Employees."
Limited Protection of Proprietary Technology. The Company's success is
heavily dependent upon its proprietary technology. To protect its proprietary
rights, the Company relies on a combination of copyright, trade secret, patent
and trademark laws, nondisclosure and other contractual restrictions on copying
and distribution and technical measures. The Company seeks to protect its
software, documentation and other written materials through trade secret and
copyright laws, which provide only limited protection. In addition,
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<PAGE> 18
the Company holds two United States patents and has additional United States
patent applications pending. There can be no assurance that patents held by the
Company will not be challenged and invalidated, that patents will issue from any
of the Company's pending applications or that any claims allowed from existing
or pending patents will be of sufficient scope or strength (or be issued in all
countries where the Company's products can be sold) to provide meaningful
protection or any commercial advantage to the Company. As part of its
confidentiality procedures, the Company generally enters into nondisclosure
agreements with its employees, consultants, distributors and corporate partners
and limits access to and distribution of its software, documentation and other
proprietary information. End user licenses of the Company's software are
frequently in the form of shrink wrap license agreements, which are not signed
by licensees, and therefore may be unenforceable under the laws of many
jurisdictions. The source code of the Company's products is also protected as a
trade secret and is generally not licensed to customers. Despite the Company's
efforts to protect its proprietary rights, it may be possible for unauthorized
third parties to copy the Company's products or to reverse engineer or obtain
and use information that the Company regards as proprietary. There can be no
assurance that the Company's competitors will not independently develop
technologies that are substantially equivalent or superior to the Company's
technologies. Policing unauthorized use of the Company's products is difficult,
and while the Company is unable to determine the extent to which software piracy
of its products exists, software piracy can be expected to be a persistent
problem. In addition, effective protection of intellectual property rights may
be unavailable or limited in certain countries. The status of United States
patent protection in the software industry is not well defined and will evolve
as the United States Patent and Trademark Office grants additional patents.
Patents have been granted on fundamental technologies in software, and patents
may issue that relate to fundamental technologies incorporated into the
Company's products.
As the number of patents, copyrights, trademarks and other intellectual
property rights in the Company's industry increases, products based on its
technology may increasingly become the subject of infringement claims. There can
be no assurance that third parties will not assert infringement claims against
the Company in the future. Any such claims with or without merit could be time
consuming, result in costly litigation, cause product shipment delays or require
the Company to enter into royalty or licensing agreements. Such royalty or
licensing agreements, if required, may not be available on terms acceptable to
the Company, or at all, which could have a material adverse affect on the
Company's business, financial condition and results of operations. In addition,
the Company may initiate claims or litigation against third parties for
infringement of the Company's proprietary rights or to establish the validity of
the Company's proprietary rights. Litigation to determine the validity of any
claims, whether or not such litigation is determined in favor of the Company,
could result in significant expense to the Company and divert the efforts of the
Company's technical and management personnel from productive tasks. In the event
of an adverse ruling in any such litigation, the Company may be required to pay
substantial damages, discontinue the use and sale of infringing products, expend
significant resources to develop non-infringing technology or obtain licenses to
infringing technology. The failure of the Company to develop or license a
substitute technology could have a material adverse affect on the Company's
business, financial condition and results of operations. See
"Business--Proprietary Rights."
Dependence on Licenses from Third Parties. The Company licenses certain
software development tool products from other companies to distribute with its
own products. The inability of such third parties to provide competitive
products with adequate features and high quality on a timely basis or to
cooperate in sales and marketing activities could have a material adverse effect
on the Company's business, financial condition and results of operations. In
addition, the Company's products compete with products produced by certain of
the Company's licensors. There can be no assurance that, upon the termination or
expiration of these licenses, such licenses will be available on reasonable
terms or at all, or that similar products could be obtained to substitute into
the tool suites. The inability to license such products could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Volatility of Stock Price. The prices for the Company's Common Stock have
fluctuated widely in the past. The management of the Company believes that such
fluctuations may have been caused by actual or anticipated variations in the
Company's operating results, announcements of technical innovations or new
products or services by the Company or its competitors, changes in earnings
estimates by securities analysts
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and other factors, including changes in conditions of the software and other
technology industries in general. Stock markets have experienced extreme price
volatility in recent years. This volatility has had a substantial effect on the
market prices of securities issued by the Company and other high technology
companies, often for reasons unrelated to the operating performance of the
specific companies. The trading prices of many high technology companies'
stocks, including the stock of the Company, are at or near their historical
highs and reflect price/earnings ratios substantially above historical norms.
There can be no assurance that the trading price of the Company's stock will
remain at or near its current level. In the past, following periods of
volatility in the market price of a company's securities, securities class
action litigation has often been instituted against such a company. Such
litigation, if instituted, could result in substantial costs and a diversion of
management attention and resources, which would have a material adverse effect
on the Company's business, financial condition and results of operations even if
the Company is successful in such suits. These market fluctuations, as well as
general economic, political and market conditions such as recessions, may
adversely affect the market price of the Common Stock.
ITEM 2. PROPERTIES.
The Company's principal offices are located in two buildings in Santa
Clara, California covering approximately 60,000 square feet. The Company
occupies this space under lease agreements that expire in September 1996. The
annual base rental payment for this space (not including operating expenses,
insurance, property taxes and assessment) is approximately $700,000. The Company
also leases a number of additional offices in North America, Europe, Asia and
Israel.
In March 1996, the Company purchased for approximately $12.0 million in
cash a building in Sunnyvale, California covering approximately 150,000 square
feet. By the end of the first quarter of fiscal 1997, the Company expects to
move its operations to this space from the two buildings in Santa Clara and
terminate its obligations under the lease agreements. The Company will occupy
approximately 100,000 square feet of this facility and lease the remaining space
for approximately two years. There can be no assurance that the move will not
disrupt the Company's operations or affect the Company's operating results over
the near term.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any litigation other than ordinary routine
litigation incidental to the business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Narendra K. Gupta...................... 47 Chairman of the Board of Directors and Secretary
David P. St. Charles................... 47 President, Chief Executive Officer and Director
Joseph Addiego......................... 40 Vice President, North American Sales
Robert M. Dressler..................... 56 Vice President, Advanced Systems Group
Hamid Mirab............................ 34 Vice President, European Operations
Steven Sipowicz........................ 43 Vice President, Finance and Chief Financial Officer
David E. Stepner....................... 51 Vice President, Research and Development
Tony Tolani............................ 50 Vice President, Far East Operations
Janice Waterman........................ 36 Vice President, Human Resources and Operations
</TABLE>
Executive officers are chosen by and serve at the discretion of the Board
of Directors of the Company.
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Dr. Gupta is a founder of the Company and has been a director of the
Company since its formation in 1980. He has been the Chairman of the Board of
the Company since March 1993 and Secretary since September 1989. Dr. Gupta was
Chief Executive Officer from 1987 to May 1994 and President from the Company's
formation in 1980 to May 1994. He was elected a Fellow of the Institute of
Electrical and Electronic Engineers ("IEEE") in November 1991. Dr. Gupta serves
on the board of Digital Link Corporation, a data communications and wide-area
networking equipment manufacturer and Simulation Sciences, Inc., a developer of
chemical simulation software. Dr. Gupta holds an M.S. in Engineering from the
California Institute of Technology and a Ph.D. in Engineering from Stanford
University.
Mr. St. Charles joined the Company in August 1993 and was appointed
President and Chief Executive Officer of the Company in May 1994. He has been a
director since he joined the Company in August 1993. From April 1990 until
August 1993, Mr. St. Charles served as President and a director of Wind River
Systems, Inc., a real-time software company. He holds a B.A. in Liberal Arts and
an M.A. in International Economics from Carleton University and an M.S. from the
Sloan School of Management at the Massachusetts Institute of Technology.
Mr. Addiego has been Vice President, North American Sales since March 1994.
Since joining the Company in April 1986, he has held a variety of positions in
marketing and sales, including Vice President, Sales, Design Automation Group
from January 1992 until March 1994. Prior to joining the Company, he was
employed by the Hewlett-Packard Company and American Telephone & Telegraph
Company in technical support and sales positions. Mr. Addiego holds a B.S. in
Computer Engineering from San Francisco State University.
Dr. Dressler has been Vice President, Advanced Systems Group since he
joined the Company in February 1991. Prior to joining the Company, Dr. Dressler
was employed for approximately 16 years by ESL Inc., a defense, aerospace and
electrical systems company, most recently as Manager, Aerospace Systems
Laboratory. He has also been employed by Systems Control Inc., a computer
services company, and Stanford Research Institute in a variety of technical
management and engineering research positions. Dr. Dressler holds a B.S. in
Electrical Engineering from Rensselaer Polytechnic Institute and an M.S. and a
Ph.D., both in Electrical Engineering, from Stanford University.
Dr. Mirab joined the Company in November 1989 and has been Vice President,
European Operations since October 1995. From November 1989 to September 1992,
Dr. Mirab served as Manager, Technical Support in the United Kingdom and from
September 1992 to February 1995 he served as Managing Director of the Company's
United Kingdom subsidiary. From February 1995 to October 1995, Dr. Mirab served
as General Manager, European Operations. Dr. Mirab holds a B.S. in General
Engineering and a Ph.D. in Control Systems from the University of Glasgow.
Mr. Sipowicz joined the Company in January 1992 and has been Vice
President, Finance of the Company since April 1993 and Chief Financial Officer
of the Company since September 1994. From January 1992 to April 1993, he served
as the Company's Corporate Controller. Prior to joining the Company, Mr.
Sipowicz spent 17 years in various management positions with Coopers & Lybrand,
an accounting firm, in the United Kingdom and the United States. He holds a B.S.
in Chemistry from the University of Bristol in the United Kingdom. Mr. Sipowicz
is a certified public accountant.
Dr. Stepner has been Vice President, Research and Development since he
joined the Company in December 1993. From April 1984 until March 1993, he served
as Founder, President and Chief Executive Officer of Greyhawk Systems, Inc., a
manufacturer of high resolution liquid crystal displays. In March 1993, Greyhawk
Systems, Inc. was sold to AmPro Corporation and Dr. Stepner served as Executive
Vice President of AmPro Corporation and General Manager of the AmPro/Greyhawk
Division from March 1993 until December 1993. Dr. Stepner holds a B.S. in
General Engineering from Brown University and an M.S. and a Ph.D., both in
Electrical Engineering, from Stanford University.
Dr. Tolani has been Vice President, Far East Operations since he joined the
Company in December 1994. From 1973 to September 1994, he was employed by
Structural Dynamics Research Corporation, a mechanical design software company,
most recently as Vice President and General Manager, Far East Operations.
18
<PAGE> 21
Dr. Tolani holds a B.S. in Mechanical Engineering from Birla College of
Engineering in India and an M.S. and a Ph.D., both in Mechanical Engineering,
from the University of Missouri.
Ms. Waterman joined the Company in July 1995 as Vice President, Human
Resources and has served as Vice President, Human Resources and Operations of
the Company since March 1996. From September 1994 to July 1995, she served as
Vice President, Human Resources and Administration for Salick Health Care Inc.,
a health care provider. From May 1991 until September 1994, she served as Vice
President of Human Resources and Administration of Tekelec, Inc., a
telecommunications company. Ms. Waterman holds a B.A. in Sociology and Economics
from the University of California at Davis and an M.S. in Industrial Psychology
from California State University, Hayward.
19
<PAGE> 22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock is listed on the Nasdaq National Market under
the trading symbol "INTS." The range of high and low sale prices for the
Company's common stock on that market for each of the four quarters during the
last two fiscal years are as follows:
<TABLE>
<CAPTION>
Q1 Q2 Q3 Q4
------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
FY95 High......................... $ 6.250 $ 6.500 $ 8.625 $11.750
$ 4.500 $ 4.188 $ 6.125 $ 7.125
Low..........................
FY96 High......................... $12.000 $15.375 $21.000 $23.875
$ 9.875 $10.000 $14.625 $16.000
Low..........................
</TABLE>
All share prices have been adjusted to reflect the two-for-one split of the
Company's common stock effected on April 5, 1996.
As of February 28, 1996, there were 147 holders of record of the Company's
common stock.
The Company has never declared or paid cash dividends on its capital stock
and anticipates that, for the foreseeable future, it will continue to retain any
earnings for use in the operation of its business.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data is qualified by
reference to and should be read in conjunction with the consolidated financial
statements and the notes thereto included elsewhere herein. The consolidated
statement of operations data set forth below with respect to the years ended
February 28, 1994, 1995 and 1996 and the consolidated balance sheet data at
February 28, 1995 and 1996 are derived from, and are qualified by reference to,
the audited consolidated financial statements and notes thereto included in this
Annual Report. The consolidated statement of operations data set forth below
with respect to the years ended February 28, 1992 and 1993 and the consolidated
balance sheet data at February 28, 1992 and 1993 are derived from audited
consolidated financial statements not included in this Annual Report. During
fiscal 1996, the Company acquired TakeFive Software GmbH and Doctor Design, Inc.
in transactions accounted for as poolings of interests. The annual financial
information has been restated to combine the results of the Company and Doctor
Design, Inc. in fiscal 1994 and fiscal 1995. Fiscal 1996 includes the results of
Doctor Design, Inc. and TakeFive Software GmbH. The annual financial information
has not been restated for earlier years because such financial information was
not material to the Company.
20
<PAGE> 23
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28,
-------------------------------------------------------
1992(1) 1993(1) 1994 1995 1996
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenue:
Product....................................... $13,384 $19,690 $26,350 $34,952 $51,597
Services...................................... 11,228 12,698 19,433 23,102 32,845
------- ------- -------
Total revenue............................ 24,612 32,388 45,783 58,054 84,442
------- ------- -------
Cost and expenses:
Cost of product revenue....................... 1,843 3,221 4,986 5,980 9,046
Cost of services revenue...................... 3,947 4,170 8,262 9,547 15,824
Marketing and sales........................... 7,349 11,564 16,515 20,565 27,209
Research and development...................... 4,537 6,133 5,926 8,341 11,379
General and administrative.................... 1,995 2,468 3,567 4,311 6,637
Amortization of intangible assets............. 600 1,199 1,764 1,311 556
Acquisition and other......................... 11,840 -- -- -- 7,327
------- ------- ------- ------- -------
Total costs and expenses................. 32,111 28,755 41,020 50,055 77,978
------- ------- ------- ------- -------
Income (loss) from operations....... (7,499) 3,633 4,763 7,999 6,464
Interest and other income........................ 1,735 1,575 1,258 1,601 2,331
------- ------- ------- ------- -------
Income (loss) before income taxes... (5,764) 5,208 6,021 9,600 8,795
Provision for income taxes....................... 2,126 1,771 1,935 3,110 3,512
------- ------- ------- ------- -------
Net income (loss)................... $(7,890) $ 3,437 $ 4,086 $ 6,490 $ 5,283
======= ======= ======= ======= =======
Earnings (loss) per share(2)..................... $ (0.45) $ 0.18 $ 0.21 $ 0.33 $ 0.24
======= ======= ======= ======= =======
Earnings per share before acquisition and other
costs(3)...................................... $ 0.23 $ 0.18 $ 0.21 $ 0.33 $ 0.50
======= ======= ======= ======= =======
Shares used in per share calculations(2)......... 17,478 18,636 19,122 19,964 22,088
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
FEBRUARY 28,
-------------------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and marketable
securities.................................... $23,985 $27,150 $33,156 $36,517 $49,476
Working capital.................................. 9,744 13,005 12,298 17,783 31,431
Total assets..................................... 38,417 40,918 52,970 66,101 85,264
Total shareholders' equity....................... 30,946 32,447 38,032 47,948 58,276
</TABLE>
- ------------------------------
(1) Fiscal 1992 and 1993 have not been restated to reflect the annual financial
information for Doctor Design, Inc. as such financial information was not
material to the Company.
(2) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the determination of the number of shares used in per share calculations.
(3) Fiscal 1992 and 1996 earnings per share before acquisition and other costs
reflect earnings per share as if the Company had not incurred such
acquisition and other costs, net of any tax effects.
21
<PAGE> 24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion provides an analysis of the Company's financial
condition and results of operations, and should be read in conjunction with the
"Selected Consolidated Financial Data" and the Note thereto and the Consolidated
Financial Statements and the Notes thereto of the Company.
OVERVIEW
Integrated Systems designs, develops, markets and supports software
products for embedded microprocessor-based applications and provides related
engineering services. The Company currently derives substantially all of its
revenues from licensing of these products and providing related maintenance and
engineering and consulting services. The Company's revenue has grown steadily
through increased licensing of existing and new products and through
acquisitions, and its net income, excluding acquisition and other charges has
also grown steadily. In October 1995, the Company acquired TakeFive Software
GmbH ("TakeFive"), an Austrian corporation in the business of developing and
marketing software tools used in software development, including SNiFF+, an
advanced object-oriented integrated development environment. In January 1996,
the Company completed a merger with Doctor Design, Inc. ("Doctor Design"), a
California corporation that develops multimedia hardware, software and
application specific integrated circuit technology. Each of these business
combinations has been accounted for as a pooling of interests and the results of
operations for fiscal 1996 include the results of TakeFive and Doctor Design for
the whole year. The fiscal 1994 and 1995 results have been restated to include
only the results of Doctor Design, since those of TakeFive were not significant
in those years. See "Business -- Risk Factors--Acquisition-Related Risks."
FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY
Certain statements in the financial discussion and analysis by management
contain "forward-looking" information (as defined in the Private Securities
Litigation Reform Act of 1995) that involve risk and uncertainty, including
projections for fiscal 1997 and various business environment and trends
projections. Actual future results and trends may differ materially depending on
a variety of factors, including the volume and timing of orders received during
the quarter, the mix of and changes in distribution channels through which the
Company's products are sold, the timing and acceptance of new products and
product enhancements by the Company or its competitors, changes in pricing,
buyouts of run-time licenses, product life cycles, the level of the Company's
sales of third party products, purchasing patterns of distributors and
customers, competitive conditions in the industry, business cycles affecting the
markets in which the Company's products are sold, extraordinary events, such as
litigation or acquisitions, including related charges, and economic conditions
generally or in various geographic areas. All of the foregoing factors are
difficult to forecast. The future operating results of the Company may fluctuate
as a result of these and the other risk factors detailed from time-to-time in
the Company's Securities and Exchange Commission reports and in the section of
this Annual Report entitled "Business -- Risk Factors."
Due to all of the foregoing factors, the Company believes that
period-to-period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as an indication of future performance.
It is likely that, in some future quarters, the Company's operating results will
be below the expectations of stock market analysts and investors. In such event,
the price of the Company's Common Stock would likely be materially adversely
affected. Consequently, the purchase or holding of the Company's Common Stock
involves a high degree of risk.
22
<PAGE> 25
RESULTS OF OPERATIONS
The following table sets forth for the periods presented the percentage of
total revenue represented by each line item in the Company's consolidated
statements of income and the percentage change in each line item from the prior
period.
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL REVENUE PERIOD-TO-PERIOD
------------------------- PERCENTAGE CHANGES
---------------------------
YEAR ENDED FEBRUARY 28, FISCAL 1994 FISCAL 1995
------------------------- TO TO
1994 1995 1996(1) FISCAL 1995 FISCAL 1996
---- ---- ------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenue:
Product..................................... 58 % 60 % 61% 33% 48%
Services.................................... 42 40 39 19 42
--- --- ---
Total revenue....................... 100 100 100 27 45
--- --- ---
Costs and expenses:
Cost of product revenue..................... 11 10 11 20 51
Cost of services revenue.................... 18 17 19 16 66
Marketing and sales......................... 36 36 32 25 32
Research and development.................... 13 14 13 41 36
General and administrative.................. 8 7 8 21 54
Amortization of intangible assets........... 4 2 1 (26) (58)
--- --- ---
Total costs and expenses............ 90 86 84 22 41
--- --- ---
Income from operations......... 10 14 16 68 72
Interest and other income..................... 3 3 3 27 46
--- --- ---
Income before income taxes..... 13 17 19 59 68
Provision for income taxes.................... 4 6 6 61 66
--- --- ---
Net income..................... 9 % 11 % 13% 59 69
=== === ===
</TABLE>
- ------------------------------
(1) The table excludes acquisition and other costs of $7.3 million, including
related tax effects, in 1996 since inclusion of such costs would render
year-to-year comparisons less meaningful.
Revenue. The Company's total revenue increased 27% from $45.8 million in
fiscal 1994 to $58.1 million in fiscal 1995 and an additional 45% to $84.4
million in fiscal 1996. A majority of the Company's total revenue came from
product revenue, which increased 33% from $26.4 million in fiscal 1994 to $35.0
million in fiscal 1995 and an additional 48% to $51.6 million in fiscal 1996.
The increase in product revenue from fiscal 1994 to fiscal 1995 was primarily
due to increased unit shipments of pSOSystem and new products. The increase in
product revenue from fiscal 1995 to fiscal 1996 was due primarily to increased
unit shipments of pSOSystem and MATRIXx and the inclusion of SNiFF+ product
revenue in fiscal 1996. pSOSystem revenue increased between both comparison
periods as a result of increased unit volume in all geographic regions and the
introduction of new products. MATRIXx revenue was flat from fiscal 1994 to
fiscal 1995 as domestic growth was offset by a decline in international revenue
due, in part, to the transition from independent sales representatives to direct
sales and support organizations in Europe. MATRIXx revenue grew from fiscal 1995
to fiscal 1996 due to increased unit shipments and the introduction of new
products. Services revenue increased 19% from $19.4 million in fiscal 1994 to
$23.1 million in fiscal 1995 and an additional 42% to $32.8 million in fiscal
1996. These increases were the result of increases in the number and size of
consulting contracts and increases in maintenance revenue from the Company's
growing installed base of customers.
The percentage of the Company's total revenue from customers located
internationally was 30%, 28% and 34% in fiscal 1994, 1995 and 1996,
respectively. The Company expects international revenue will continue to grow as
a percentage of total revenue.
23
<PAGE> 26
Costs and Expenses. The Company's cost of product revenue as a percentage
of product revenue was 19%, 17% and 18% in fiscal 1994, 1995 and 1996,
respectively. These fluctuations are due primarily to changes in the mix of
product revenue derived from the sale of higher margin products. The Company's
cost of services revenue as a percentage of services revenue was 43%, 41% and
48% in fiscal 1994, 1995 and 1996, respectively. Fluctuations in these
percentages result from shifts in service revenue mix between higher margin
maintenance revenue and lower margin consulting contract revenue.
Marketing and sales expenses were $16.5 million, $20.6 million and $27.2
million in fiscal 1994, 1995 and 1996, respectively, representing 36%, 36% and
32%, respectively of total revenue. The dollar increases were primarily due to
additional expenses associated with the Company's continued expansion of its
marketing and sales organization both domestically and overseas. The percentage
decrease from fiscal 1995 to fiscal 1996 was the result of pooling the operating
results of several acquired companies whose marketing and sales expenses had
represented a smaller percentage of their total revenue. The Company anticipates
that marketing and sales expenses will increase in fiscal 1997 as a percentage
of total revenue as the Company invests in infrastructure to support certain
acquired products and to continue its expansion into new geographical areas.
Research and development expenses were $5.9 million, $8.3 million and $11.4
million in fiscal 1994, 1995 and 1996, respectively, representing 13%, 14% and
13%, respectively, of total revenue. These dollar increases were primarily the
result of increased activity associated with bringing several products to
market, including increased personnel and consulting expenses, and a decrease in
software cost capitalization. Costs that are required to be capitalized under
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed" ("SFAS No. 86") were
$335,000 in fiscal 1996 compared to $492,000 in fiscal 1995 and $1.1 million in
fiscal 1994. The amount capitalized represents approximately 3% of total
research and development expenditures for fiscal 1996 compared to 6% for fiscal
1995 and 16% for fiscal 1994. The amount of research and development
expenditures capitalized in a given time period depends upon the nature of the
development performed and, accordingly, amounts capitalized may vary from period
to period. Capitalized costs are being amortized using the greater of the amount
computed using the ratio that current gross revenues for a product bear the
total of current and anticipated future gross revenues for that product, or on a
straight-line basis over three years. Amortization for fiscal 1996 was $921,000,
compared to $607,000 for fiscal 1995 and $160,000 for fiscal 1994.
General and administrative expenses were $3.6 million, $4.3 million and
$6.6 million in fiscal 1994, 1995 and 1996, respectively, representing 8%, 7%
and 8%, respectively, of total revenue. These dollar increases were primarily
the result of increased headcount, related in part to the acquisitions of Doctor
Design and TakeFive.
Amortization of intangible assets was $1.8 million, $1.3 million and
$556,000 in fiscal 1994, 1995 and 1996, respectively. These dollar amounts
declined as the Company reached the end of the amortization period for software
purchased in an earlier acquisition.
Acquisition and other costs in fiscal 1996 totaled $7.3 million and
comprised direct costs related to the acquisitions of TakeFive and Doctor
Design, the write-off of intangible assets related to a prior acquisition whose
product offering will be replaced by the use of other products, costs associated
with the acquisition of certain technology and related assets to enhance
pSOSystem product offerings, and costs related to the termination of a
distributor relationship in Japan. See Note 2 to Notes to Consolidated Financial
Statements.
Interest and other income was $1.3 million, $1.6 million and $2.3 million
in fiscal 1994, 1995 and 1996, respectively. Interest and other income increased
due to an increase in the amount of cash equivalents and marketable securities
and to higher interest rates.
The effective tax rate was 40% in fiscal 1996 compared to 32% in both
fiscal 1995 and fiscal 1994. The increase in the effective rate is due to the
effect of non-deductible acquisition and other costs. After adjusting for such
items, the effective rate for fiscal 1996 is 32%.
24
<PAGE> 27
QUARTERLY FINANCIAL DATA
The following tables set forth selected unaudited quarterly financial data
for the Company's fiscal year ended February 28, 1996. The unaudited information
has been prepared on the same basis as the audited information and, in the
opinion of management, reflects all adjustments (which include only normal
recurring adjustments) necessary for the fair presentation of the information
for the periods presented. Based on the Company's operating history and factors
that may cause fluctuations in the quarterly results, quarter-to-quarter
comparisons should not be relied upon as indicators of future performance.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FEBRUARY 28, 1996
--------------------------------------------------
QUARTER ENDED
--------------------------------------------------
MAY 31, AUGUST 31, NOVEMBER 30, FEBRUARY 28,
1995 1995 1995 1996
------- ---------- ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenue:
Product........................................... $11,622 $ 12,146 $ 12,665 $ 15,164
Services.......................................... 6,836 7,705 8,845 9,459
------- ------- ------- -------
Total revenue............................. 18,458 19,851 21,510 24,623
Costs and expenses:
Cost of product revenue........................... 2,466 2,073 2,128 2,379
Cost of services revenue.......................... 3,423 3,971 4,147 4,283
Marketing and sales............................... 6,379 6,246 6,761 7,823
Research and development.......................... 2,585 2,843 2,827 3,124
General and administrative........................ 1,557 1,604 1,563 1,913
Amortization of intangible assets................. 186 186 77 107
Acquisition and other............................. -- -- 3,601 3,726
------- ------- ------- -------
Total costs and expenses.................. 16,596 16,923 21,104 23,355
------- ------- ------- -------
Income from operations............... 1,862 2,928 406 1,268
Interest and other income........................... 525 691 511 604
------- ------- ------- -------
Income before income taxes................ 2,387 3,619 917 1,872
Provision for income taxes.......................... 809 1,185 333 1,185
------- ------- ------- -------
Net income................................ $ 1,578 $ 2,434 $ 584 $ 687
======= ======= ======= =======
Earnings per share.................................. $ 0.07 $ 0.11 $ 0.03 $ 0.03
======= ======= ======= =======
Earnings per share before acquisition and other
costs............................................. $ 0.07 $ 0.11 $ 0.14 $ 0.17
======= ======= ======= =======
Shares used in per share calculations............... 21,714 21,994 22,284 22,362
======= ======= ======= =======
</TABLE>
25
<PAGE> 28
<TABLE>
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUE(1)
--------------------------------------------------
QUARTER ENDED
--------------------------------------------------
MAY 31, AUGUST 31, NOVEMBER 30, FEBRUARY 28,
1995 1995 1995 1996
------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Product............................................ 63% 61% 59% 62%
Services........................................... 37 39 41 38
------- ---- --- ---- --- ---- ---
Total revenue.............................. 100 100 100 100
------- ---- --- ---- --- ---- ---
Costs and expenses:
Cost of product revenue............................ 13 11 10 10
Cost of services revenue........................... 19 20 19 17
Marketing and sales................................ 35 31 31 32
Research and development........................... 14 14 13 13
General and administrative......................... 8 8 7 8
Amortization of intangible assets.................. 1 1 1 --
------- ---- --- ---- --- ---- ---
Total costs and expenses................... 90 85 81 80
------- ---- --- ---- --- ---- ---
Income from operations................ 10 15 19 20
Interest and other income............................ 3 3 2 2
------- ---- --- ---- --- ---- ---
Income before income taxes................. 13 18 21 22
Provision for income taxes........................... 4 6 7 7
------- ---- --- ---- --- ---- ---
Net income................................. 9% 12% 14% 15%
======= ======= ======= =======
</TABLE>
- ---------------
(1) The table excludes acquisition and other costs, including the related tax
effects, since inclusion of such costs would render the comparison less
meaningful.
The Company's quarterly operating results vary significantly depending on a
number of factors, including the volume and timing of orders received during the
quarter, the mix of and changes in distribution channels through which the
Company's products are sold, the timing and acceptance of new products and
product enhancements by the Company or its competitors, changes in pricing,
buyouts of run-time licenses, product life cycles, the level of the Company's
sales of third party products, purchasing patterns of distributors and
customers, competitive conditions in the industry, business cycles affecting the
markets in which the Company's products are sold, extraordinary events, such as
litigation or acquisitions, including related charges, and economic conditions
generally or in various geographic areas. All of the foregoing factors are
difficult to forecast. The future operating results of the Company may fluctuate
as a result of these and other factors, including the Company's ability to
continue to develop innovative and competitive products.
The Company historically has operated with insignificant product backlog
because its products are generally shipped as orders are received. As a result,
product revenue in any quarter depends on the volume and timing of orders
received in that quarter. In addition, the Company has at times recognized a
substantial portion of its total revenue from sales booked and shipped in the
last two weeks of the quarter such that the magnitude of quarterly fluctuations
may not become evident until very late in, or after the end of, a particular
quarter. Because the Company's staffing and operating expenses are based on
anticipated total revenue levels, and a high percentage of the Company's costs
are fixed in the short term, small variations between anticipated orders and
actual orders, as well as non-recurring or large orders, can cause
disproportionate variations in the Company's operating results from quarter to
quarter.
The procurement process of the Company's customers typically ranges from a
few weeks to several months or longer from initial inquiry to order, making the
timing of sales and license fees difficult to predict. Moreover, as licensing of
the Company's products increasingly becomes a more strategic decision made at
higher management levels, there can be no assurance that sales cycles for the
Company's products will not lengthen. The Company's results of operations may
also be affected by seasonal trends. The Company's total
26
<PAGE> 29
revenue and net income during the first fiscal quarter have been lower than the
previous fourth fiscal quarter for a variety of reasons, including customer
purchase cycles related to expiration of budgetary authorizations, and the
Company expects that total revenue and net income in the first quarter of fiscal
1997 will be lower than the fourth quarter of fiscal 1996. In addition, in the
first quarter of fiscal 1997, the Company shifted from third party distributors
to direct sales and support in Japan and Italy. In the past, the Company's sales
declined in the short term during such transitions. There can be no assurance
that declines will not occur during the current transitions or similar
transitions in the future. Also, the Company's recent acquisitions in fiscal
1996, as well as any future acquisitions, involve numerous risks and could have
a material adverse effect on the Company's business, financial condition and
results of operations. The Company expects to move its Santa Clara, California
operations to Sunnyvale, California by the end of the first quarter of fiscal
1997. There can be no assurance that the move will not disrupt the Company's
operations or affect the Company's operating results. Due to all of the
foregoing factors, the Company believes that period-to-period comparisons of its
results of operations are not necessarily meaningful and should not be relied
upon as an indication of future performance. It is likely that, in some future
quarters, the Company's operating results will be below the expectations of
stock market analysts and investors. In such event, the price of the Company's
Common Stock would likely be materially adversely affected.
RECENT ACCOUNTING PRONOUNCEMENTS
During March 1995, the Financial Accounting Standards Board issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" (SFAS No. 121), which requires the Company
to review for impairment of long-lived assets, certain identifiable intangibles
and goodwill related to those assets whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. In certain
situations, an impairment loss would be recognized. SFAS No. 121 will be
effective for the Company's fiscal year 1997. The Company has studied the
implications of the statement, and, based on its initial evaluation, does not
expect it to have a material impact on the Company's financial condition or
results of operations.
During October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123). This accounting standard permits the use of either
a fair value based method or the current Accounting Principals Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB No. 25) when accounting for
stock-based compensation arrangements. Companies that do not follow the new fair
value based method will be required to disclose pro forma net income and
earnings per share computed as if the fair value based method had been applied.
The disclosure provisions of SFAS No. 123 are effective for fiscal years
beginning after December 15, 1995. Management has not determined whether it will
adopt the fair value based method of accounting for stock-based compensation
arrangements nor the impact of SFAS No. 123 on the Company's consolidated
financial statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations to date principally through cash
flows from operations. As of February 28, 1996, the Company had $49.5 million of
cash, cash equivalents and marketable securities. This represents an increase of
$13.0 million from February 28, 1995. During the first quarter of fiscal 1995,
the Company announced that the Board of Directors had authorized the Company to
repurchase up to an additional 1,000,000 shares of Common Stock for cash, from
time-to-time at market prices, pursuant to a repurchase program announced in
September 1992. In the second quarter of fiscal 1995, under this program, the
Company repurchased 250,000 shares of Common Stock for $1.1 million. The Company
believes that cash flows from operations, together with existing cash balances,
available borrowings and the proceeds from this offering, will be adequate to
meet the Company's cash requirements for working capital, capital expenditures
and stock repurchases for the next 12 months and the foreseeable future.
Net cash provided by operating activities during fiscal 1996 totaled $18.5
million, an increase of $10.7 million over the amount generated in fiscal 1995
which increased by $293,000 over fiscal 1994. The increase in net cash provided
by operating activities in fiscal 1996 was due to increases in depreciation and
amortization,
27
<PAGE> 30
current liabilities, income taxes payable and deferred revenue were offset by
increases in accounts receivable and other current assets.
Net cash used in investing activities totaled $6.0 million in fiscal 1996
compared to $9.3 million in fiscal 1995 and $7.0 million in fiscal 1994. The
decrease in net cash used in investing activities in fiscal 1996 was due
primarily to the reduction in net purchases of marketable securities, offset by
increases in additions to property and equipment and net cash paid in
acquisitions. The increase in net cash used in investing activities in fiscal
1995 was due primarily to the acquisition of the FlexOS product line and an
increase in expenditures for property and equipment.
Net cash provided by financing activities totaled $1.6 million in fiscal
1996 compared to $961,000 in fiscal 1995 and $674,000 in fiscal 1994. The
increase in net cash provided by financing activities in fiscal 1996 was due to
an increase in proceeds from the exercise of options to purchase Common Stock
and purchases under the Employee Stock Purchase Plan and the absence of Common
Stock repurchases. The increase in net cash provided by financing activities in
fiscal 1995 was due to an increase in proceeds from the exercise of options to
purchase Common Stock and purchases under the Employee Stock Purchase Plan,
offset by the repurchase of 250,000 shares of Common Stock.
After the end of fiscal 1996, in March 1996, the Company purchased a
building, which will become its principal facility, for cash of approximately
$12.0 million. The Company expects the move to this new facility to be completed
by the end of the first quarter of fiscal 1997.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
QUARTERLY FINANCIAL DATA
The following table sets forth selected unaudited quarterly financial data
for the Company's last eight fiscal quarters. This unaudited information has
been prepared on the same basis as the audited information and, in management's
opinion, reflects all adjustments (which include only normal recurring
adjustments) necessary for the fair presentation of the information for the
periods presented. Based on the Company's operating history and factors that may
cause fluctuations in the quarterly results, quarter-to-quarter comparisons
should not be relied upon as indicators of future performance.
<TABLE>
<CAPTION>
FISCAL 1995
-------------------------------------------
Q1 Q2 Q3 Q4
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Total revenue............................... $11,018 $13,610 $15,714 $17,712
Income from operations...................... 611 1,632 2,718 3,038
Net income.................................. 659 1,403 2,125 2,303
Earnings per share.......................... 0.03 0.07 0.11 0.11
Shares used in per share calculations....... 19,646 19,476 20,060 20,674
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1996
-------------------------------------------
Q1 Q2 Q3 Q4
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Total revenue............................... $18,458 $19,851 $21,510 $24,623
Income from operations...................... 1,862 2,928 406 1,268
Net income.................................. 1,578 2,434 584 687
Earnings per share.......................... 0.07 0.11 0.03 0.03
Shares used in per share calculations....... 21,714 21,994 22,284 22,362
</TABLE>
The financial statements required by this item are submitted as a separate
section of this Form 10-K. See Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
None
28
<PAGE> 31
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by Item 10 as to directors is incorporated by
reference from the section entitled "Election of Directors" in the Company's
definitive Proxy Statement for its Annual Meeting of Shareholders to be held
July 17, 1996. The information required by this Item as to executive officers is
included in Part I under "Executive Officers of the Registrant."
The information required by this item as to compliance with Section 16(a)
of the Securities Exchange Act of 1934 is incorporated by reference from
"Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the
Company's definitive Proxy Statement for its Annual Meeting of Shareholders to
be held July 17, 1996.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference from
"Executive Compensation" and "Compensation Committee Interlocks and Insider
Participation" in the Company's definitive Proxy Statement for its Annual
Meeting of Shareholders to be held July 17, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference from
"Security Ownership of Certain Beneficial Owners and Management" in the
Company's definitive Proxy Statement for its Annual Meeting of Shareholders to
be held July 17, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated by reference from
"Certain Transactions" in the Company's definitive Proxy Statement for its
Annual Meeting of Shareholders to be held July 17, 1996.
29
<PAGE> 32
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULE, AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements
<TABLE>
<S> <C>
PAGE
----
Report of Independent Accountants 33
Consolidated Balance Sheets at February 28, 1995 and 1996 34
Consolidated Statements of Income for the years ended February 28, 1994, 1995 and
1996 35
Consolidated Statements of Shareholders' Equity for the years ended February 28,
1994, 1995 and 1996 36
Consolidated Statements of Cash Flows for the years ended February 28, 1994, 1995
and 1996 37
Notes to Consolidated Financial Statements 38
</TABLE>
(a)(2) Financial Statement Schedule. Registrant's financial statement schedule
filed herewith is
as follows:
<TABLE>
<S> <C>
SCHEDULE:
Report of Independent Accountants on Schedule 48
Schedule II: Valuation and Qualifying Accounts for the years ended February
28, 1994, 1995 and 1996 49
</TABLE>
(a)(3) Exhibits. The following exhibits are filed herewith or incorporated
herein by reference:
<TABLE>
<CAPTION>
EXHIBIT
---------
<S> <C> <C>
2.01 Agreement and Plan of Reorganization by and among Registrant, Software
Components Group, Inc. a California corporation ("SCG"), and Alfred
Chao dated as of August 9, 1991 (incorporated by reference to Exhibit
Number 2.01 to Registrant's Form 8-K filed with the Securities and
Exchange Commission on September 3, 1991 (the "September 3, 1991 Form
8-K")
2.02 Agreement of a Merger by and between Registrant and SCG dated as of
August 20, 1991 (incorporated by reference to Exhibit Number 2.02 to
the September 3, 1991 Form 8-K).
2.03 Stock Exchange Agreement dated as of October 31, 1995 by and between
the Registrant and TakeFive Software GmbH and the holders of share
interests in TakeFive Software GmbH (incorporated herein by reference
to Exhibit 2.01 to the Registrant's Current Report on Form 8-K, dated
October 31, 1995).
2.04 Agreement and Plan of Reorganization dated as of December 14, 1995, as
amended January 26, 1996, by and among Registrant, ISI Purchasing
Corporation and Doctor Design, Inc. and related documents
(incorporated herein by reference to Exhibit 2.01 to the Registrant's
Current Report on Form 8-K, dated January 26, 1996 (the "January 26,
1996 Form 8-K")).
2.05 Agreement of Merger dated as of January 26, 1996 by and between ISI
Purchasing Corporation and Doctor Design, Inc. (incorporated herein by
reference to Exhibit 2.02 to the January 26, 1996 Form 8-K).
3.01(i) Registrant's Articles of Incorporation, as amended to date.
3.01(ii) Registrant's Bylaws, as amended July 14, 1993 (incorporated by
reference to Exhibit Number 3.03 to Registrant's Form 10-Q for the
quarter ended August 31, 1993).
</TABLE>
- ---------------
* Represents a management contract or compensatory plan or arrangement.
30
<PAGE> 33
<TABLE>
<CAPTION>
EXHIBIT
---------
<S> <C> <C>
10.01* Registrant's 401(k) Plan (incorporated by reference to Exhibit Number
10.01 to Registrant's Registration Statement on Form S-1 under the
Securities Act of 1933, as amended, filed January 26, 1990,
Registration No. 33-33219 (the "S-1 Registration Statement")).
10.02* Registrant's 1983 Incentive Stock Option Plan, as amended to date, and
related documents (incorporated by reference to Exhibit Number 10.02
to the S-1 Registration Statement).
10.03* Registrant's 1988 Stock Option Plan, as amended to date (incorporated
by reference to Exhibit Number 4.01 to the Registrant's Form S-8 filed
with the Securities and Exchange Commission on June 16, 1992).
10.04* Registrant's 1990 Stock Purchase Plan, as amended to date
(incorporated by reference to Exhibit Number 4.03 to the Registrant's
Form S-8 filed with the Securities and Exchange Commission on October
18, 1993).
10.05* Dr. Design, Inc. 1991 Stock Option Plan, as amended to date
(incorporated by reference to Exhibit Number 4.03 to the Registrant's
Form S-8 filed with the Securities and Exchange Commission on February
22, 1996).
10.06* Form of Indemnity Agreement with Directors (incorporated by reference
to Exhibit Number 10.06 to the S-1 Registration Statement).
10.07 Lease Agreement by and between Registrant and Boyd C. Smith, Trustee
of the Richard T. Perry 1976 Children Trusts, and Louis B. Sullivan,
Trustee of the John Arrillaga 1976 Children Trusts, dba A&P Family
Investments dated as of December 13, 1990 (for 3260 Jay Street, Santa
Clara, CA 95054) (incorporated by reference to Exhibit Number 10.09 to
the Registrant's Form 10-K for the fiscal year ended February 28,
1991).
10.08* Form of Stock Option Grant and Stock Option Exercise Form used in
connection with Registrant's 1988 Stock Option Plan, as amended to
date (incorporated by reference to Exhibit Number 19.01 to
Registrant's Form 10-Q for the quarter ended August 31, 1990).
10.09* Form of Option Modification Agreement (incorporated by reference to
Exhibit Number 19.01 to the Registrant's Form 10-Q for the quarter
ended August 31, 1991).
10.10* Registrant's 1994 Directors Stock Option Plan (incorporated by
reference to Exhibit Number 10.10 to the Registrant's Form 10-Q for
the quarter ended August 31, 1991).
10.11* Form of Stock Option Grant and Stock Option Exercise Form used in
connection with Registrant's 1994 Directors Stock Option Plan
(incorporated by reference to Exhibit Number 10.11 to the Registrant's
Form 10-K for the fiscal year ended February 28, 1994).
10.12 Revolving Line of Credit Note by and between Registrant and Wells
Fargo Bank, National Association, dated July 15, 1994 and related
Letter Agreement (incorporated by reference to Exhibit Number 10.11 to
the Registrant's Form 10-Q for the quarter ended August 31, 1994).
</TABLE>
- ---------------
* Represents a management contract or compensatory plan or arrangement.
31
<PAGE> 34
<TABLE>
<CAPTION>
EXHIBIT
---------
<S> <C> <C>
10.13 Amendment dated January 19, 1995, to Revolving Line of Credit Note by
and between Registrant and Wells Fargo Bank, National Association,
dated July 15, 1994 and related Letter Agreement (incorporated by
reference to Exhibit Number 10.12 to the Registrant's Form 10-K for
the fiscal year ended February 28, 1995).
10.14 Agreement of Purchase and Sale between Connecticut General Life
Insurance Company and the Registrant dated February 9, 1996.
10.15* Form of Stock Option Exercise Form used in connection with
Registrant's 1988 Stock Option Plan, as amended to date (incorporated
by reference to Exhibit Number 10.13 to the Registrant's Form 10-Q for
the quarter ended May 31, 1995).
11.01 Statement regarding computation of net income per share.
21.01 List of Registrant's Subsidiaries.
23.01 Consent of Independent Accountants.
27.01 Financial Data Schedule
</TABLE>
- ---------------
* Represents a management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K.
The Registrant filed a Current Report on Form 8-K dated January 26, 1996 to
report the merger with Doctor Design, Inc. under Items 2 and 7 of Form 8-K.
Filed therewith were the financial statements of Doctor Design, Inc. as of
June 30, 1995 and 1994 and for the years ended June 30, 1995 and 1994 and as
of September 30, 1995 and for the three-month period ended September 30,
1995 and 1994, and Pro Forma Combined financial statements as of November
30, 1995 and for the nine-month periods ended November 30, 1995 and 1994 and
the years ended February 28, 1995, 1994 and 1993.
No other reports on Form 8-K were filed during the last quarter of the
fiscal year covered by this Report.
(c) Exhibits. See (a)(3) above.
(d) Financial Statement Schedules. See (a)(2) above.
32
<PAGE> 35
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders
Integrated Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Integrated
Systems, Inc. as of February 28, 1995 and 1996 and the related consolidated
statements of income, shareholders' equity and cash flows for each of the three
years in the period ended February 28, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements 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 consolidated financial position of
Integrated Systems, Inc. as of February 28, 1995 and 1996, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended February 28, 1996 in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
San Jose, California
March 27, 1996
33
<PAGE> 36
INTEGRATED SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FEBRUARY 28,
---------------------
1995 1996
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................................... $ 7,746 $21,822
Marketable securities......................................................... 6,472 12,231
Accounts receivable, net of allowance for doubtful accounts of $629 and
$852 in 1995 and 1996, respectively........................................ 15,475 19,822
Deferred income taxes......................................................... 1,595 373
Prepaid expenses and other.................................................... 2,793 3,587
------- -------
Total current assets.................................................. 34,081 57,835
Marketable securities........................................................... 22,299 15,423
Property and equipment, net..................................................... 3,613 5,593
Intangible assets, net.......................................................... 5,466 2,106
Deferred income taxes........................................................... 1,906
Other assets.................................................................... 642 2,401
------- -------
Total assets.......................................................... $66,101 $85,264
======= =======
LIABILITIES
Current liabilities:
Accounts payable.............................................................. $ 2,092 $ 4,309
Accrued payroll and related expenses.......................................... 2,331 3,673
Other accrued liabilities..................................................... 3,257 4,842
Income taxes payable.......................................................... 2,354 4,191
Deferred revenue.............................................................. 6,264 9,389
------- -------
Total current liabilities............................................. 16,298 26,404
Deferred income taxes........................................................... 790
Other liabilities............................................................... 1,065 584
------- -------
Total liabilities..................................................... 18,153 26,988
------- -------
Commitments (Note 6).
SHAREHOLDERS' EQUITY
Preferred stock, no par value, 5,000 shares authorized:
Issued and outstanding: none in 1995 and 1996
Common stock, no par value, 50,000 shares authorized:
Issued and outstanding: 19,722 and 21,206 shares in 1995 and 1996,
respectively............................................................... 35,688 40,283
Unrealized holding gain (loss) on marketable securities, net.................... (109) 333
Retained earnings............................................................... 12,369 17,660
------- -------
Total shareholders' equity............................................ 47,948 58,276
------- -------
Total liabilities and shareholders' equity............................ $66,101 $85,264
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
34
<PAGE> 37
INTEGRATED SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28,
-------------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Revenue:
Product..................................................... $26,350 $34,952 $51,597
Services.................................................... 19,433 23,102 32,845
------- ------- -------
Total revenue....................................... 45,783 58,054 84,442
------- ------- -------
Costs and expenses:
Cost of product revenue..................................... 4,986 5,980 9,046
Cost of services revenue.................................... 8,262 9,547 15,824
Marketing and sales......................................... 16,515 20,565 27,209
Research and development.................................... 5,926 8,341 11,379
General and administrative.................................. 3,567 4,311 6,637
Amortization of intangible assets........................... 1,764 1,311 556
Acquisition and other....................................... 7,327
------- ------- -------
Total costs and expenses............................ 41,020 50,055 77,978
------- ------- -------
Income from operations......................... 4,763 7,999 6,464
Interest and other income..................................... 1,258 1,601 2,331
------- ------- -------
Income before income taxes..................... 6,021 9,600 8,795
Provision for income taxes.................................... 1,935 3,110 3,512
------- ------- -------
Net income..................................... $ 4,086 $ 6,490 $ 5,283
======= ======= =======
Earnings per share............................................ $ 0.21 $ 0.33 $ 0.24
======= ======= =======
Shares used in per share calculations......................... 19,122 19,964 22,088
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
35
<PAGE> 38
INTEGRATED SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED
COMMON STOCK HOLDING
------------------ GAIN (LOSS), RETAINED
SHARES AMOUNT NET EARNINGS TOTAL
------ ------- ------------ -------- -------
<S> <C> <C> <C> <C> <C>
Balances, February 28, 1993................. 17,774 $29,699 $ 2,748 $32,447
Exercise of common stock options.......... 469 572 572
Common stock purchased under Employee
Stock Purchase Plan.................... 120 312 312
Amortization of deferred compensation..... 242 242
Tax benefit from disqualifying
dispositions of common stock........... 372 372
Pooling of interests with Doctor Design... 614 79 (291) (212)
Note receivable from shareholder.......... (14) (14)
Unrealized holding gain on marketable
securities, net........................ $ 227 227
Net income................................ 4,086 4,086
------ ------- ----- ------- -------
Balances, February 28, 1994................. 18,977 31,262 227 6,543 38,032
Exercise of common stock options.......... 585 1,858 1,858
Common stock purchased under Employee
Stock Purchase Plan.................... 94 420 420
Amortization of deferred compensation..... 183 183
Tax benefit from disqualifying
dispositions of common stock........... 1,009 1,009
Repurchase of common stock................ (250) (430) (664) (1,094)
Issuance of common stock in connection
with acquisition....................... 316 1,386 1,386
Unrealized holding loss on marketable
securities, net........................ (336) (336)
Net income................................ 6,490 6,490
------ ------- ----- ------- -------
Balances, February 28, 1995................. 19,722 35,688 (109) 12,369 47,948
Exercise of common stock options.......... 540 2,050 2,050
Common stock purchased under Employee
Stock Purchase Plan.................... 72 557 557
Tax benefit from disqualifying
dispositions of common stock........... 2,323 2,323
Pooling of interests with TakeFive
Software............................... 872 50 8 58
Purchase of TakeFive Software common stock
for cash............................... (400) (400)
Payment of note receivable from
shareholder............................ 15 15
Unrealized holding gain on marketable
securities, net........................ 442 442
Net income................................ 5,283 5,283
------ ------- ----- ------- -------
Balances, February 28, 1996................. 21,206 $40,283 $ 333 $ 17,660 $58,276
====== ======= ===== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
36
<PAGE> 39
INTEGRATED SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28,
---------------------------------
1994 1995 1996
-------- ------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.......................................................... $ 4,086 $ 6,490 $ 5,283
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.................................... 3,868 3,584 4,103
Write-down of intangible assets.................................. 3,083
Deferred income taxes............................................ (2) (558) (1,768)
Changes in assets and liabilities:
Accounts receivable............................................ (1,661) (5,321) (4,347)
Prepaid expenses and other..................................... (658) (1,171) (794)
Accounts payable, accrued payroll and other accrued
liabilities................................................... 844 2,201 5,255
Income taxes payable........................................... 635 1,979 4,160
Deferred revenue............................................... 1,058 640 3,125
Other assets and liabilities................................... (687) (68) 375
-------- ------- --------
Net cash provided by operating activities................... 7,483 7,776 18,475
-------- ------- --------
Cash flows from investing activities:
Purchases of marketable securities.................................. (11,633) (8,041) (16,878)
Maturities of marketable securities................................. 7,234 3,593 18,731
Additions to property and equipment................................. (1,448) (2,089) (4,332)
Disposals of property and equipment................................. 128 46 149
Capitalized software development costs.............................. (1,132) (492) (335)
Net cash paid in acquisitions....................................... (117) (2,081) (2,885)
Other............................................................... (200) (480)
-------- ------- --------
Net cash used in investing activities....................... (6,968) (9,264) (6,030)
-------- ------- --------
Cash flows from financing activities:
Repurchase of common stock.......................................... (1,094)
Proceeds from exercise of common stock options and purchases under
Employee Stock Purchase Plan..................................... 884 2,278 2,607
Other............................................................... (210) (223) (976)
-------- ------- --------
Net cash provided by financing activities................... 674 961 1,631
-------- ------- --------
Net increase (decrease) in cash and cash equivalents.................. 1,189 (527) 14,076
Cash and cash equivalents at beginning of year........................ 7,084 8,273 7,746
-------- ------- --------
Cash and cash equivalents at end of year.............................. $ 8,273 $ 7,746 $ 21,822
======== ======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for income taxes, net..................... $ 2,056 $ 1,741 $ 700
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
Increase in carrying amount of purchased intangible assets upon
adoption of Financial Accounting Standards No. 109, "Accounting
for Income Taxes"................................................ $ 767
Unrealized holding gain (loss) on marketable securities............. $ 379 $ (560) $ 736
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES:
Tax benefit from disqualifying dispositions of common stock......... $ 372 $ 1,009 $ 2,323
Issuance of common stock in connection with acquisition (Note 2).... $ 1,386
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
37
<PAGE> 40
INTEGRATED SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Integrated Systems, Inc. (the Company) designs, develops, markets and
supports software products for embedded microprocessor-based applications and
also provides related engineering services. Embedded microprocessors are used to
add functionality and intelligence to a variety of products and to operate as an
integral part of these products, generally without any direct human
intervention. The Company offers software that consists of a real-time operating
system and a series of modules and design tools that aid the development of
embedded applications. The Company markets and supports its products and
provides services on a worldwide basis to a variety of users in a broad range of
industries, including telecommunications and data communications, automotive,
multimedia and consumer, and office and industrial automation, as well as in the
embedded Internet market, through a direct sales force augmented by a
telemarketing organization, distributors and sales representatives.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Integrated
Systems, Inc. and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated. Investments in affiliated
companies that are not controlled are carried at cost plus the Company's equity
in undistributed earnings since acquisition (see Note 2).
USE OF ESTIMATES
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 dates of the financial
statements and the reported amounts of revenues and expenses during a reporting
period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents, which are held at a variety of financial
institutions, include demand deposits, money market accounts and all highly
liquid debt instruments with an original or remaining maturity at the date of
purchase of three months or less. The Company has not experienced any material
losses relating to any investment instruments.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The amounts reported for cash equivalents, accounts receivable, accounts
payable and accrued liabilities are considered to approximate fair values based
upon comparable market information available at February 28, 1996. Based upon
interest rates available to the Company for debt with comparable maturities, the
carrying values of the Company's notes payable approximate fair values. The fair
values of the Company's marketable securities are set forth in Note 3.
Financial instruments that potentially subject the Company to
concentrations of credit risks comprise, principally, cash, cash equivalents,
investments and trade accounts receivable. The Company invests its excess cash
in government securities, tax exempt municipal securities, preferred stock,
Eurodollar notes and bonds, time deposits, certificates of deposit, commercial
paper rated Aa or better and other specific money market and corporate
instruments of similar liquidity and credit quality. The Company performs
ongoing evaluations of its customers' financial condition and does not require
collateral. The Company maintains allowances for potential credit losses and
such losses have been within management's expectations.
38
<PAGE> 41
INTEGRATED SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MARKETABLE SECURITIES
All marketable securities are classified as available-for-sale and
therefore are carried at fair value. Marketable securities classified as current
assets have scheduled maturities of less than one year, while marketable
securities classified as noncurrent assets have scheduled maturities of more
than one year. Unrealized holding gains and losses on such securities are
reported net of related taxes as a separate component of shareholders' equity.
Realized gains and losses on sales of all such securities are reported in
interest and other income and computed using the specific identification cost
method.
REVENUE RECOGNITION
Product Revenue
Product revenue consists principally of revenue from product licensing
fees. Product licensing fees, including advanced production royalty payments,
are generally recognized when a customer purchase order has been received, a
license agreement has been executed, the software has been shipped, remaining
obligations are insignificant and collection of the resulting account receivable
is probable. Generally, the Company's distributors do not have the right of
return. Provisions for estimated product returns, warranty costs and
insignificant vendor obligations are recorded at the time products are shipped.
Services Revenue
Services revenue consists principally of maintenance and renewal fees for
providing product updates, technical support and related services for software
products, and engineering and consulting services fees. Software maintenance
revenue bundled with the initial product license revenue is deferred and
recognized ratably over the related service period. The Company unbundles a
portion of its initial product license revenue related to software maintenance
revenue based upon product license renewal amounts, which are substantially less
than the initial product license fee, or based upon the amount charged for such
services when they are sold separately. License renewal fees, which are
substantially less than the initial license, are deferred and recognized ratably
over the license term. Revenue from separately sold maintenance contracts is
recognized ratably over the related service period. Engineering and consulting
services revenue from short-term and long-term contracts is generally recognized
on the percentage-of-completion method. For cost reimbursement and firm fixed
price contracts, revenues are recognized as the work is performed, based on the
ratio of incurred costs to estimated total completion costs. For
time-and-material contracts, revenues are recognized on the basis of direct
labor hours and other direct costs incurred. Provisions for anticipated losses
are made in the period in which they first become determinable.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the respective
assets (three to twenty years). Leasehold improvements are amortized over the
lease term or the estimated useful life of the asset, whichever is shorter.
SOFTWARE DEVELOPMENT COSTS
The Company capitalizes certain costs to develop computer software to be
licensed or otherwise marketed to customers. Such costs are amortized using the
greater of the amount computed using the ratio that current gross revenues for a
product bear to the total of current and anticipated future gross revenues for
that product, or on a straight-line basis over three years. Software development
costs included in intangible assets at February 28, 1995 and 1996, were
$1,763,000 and $1,177,000, respectively, net of accumulated
39
<PAGE> 42
INTEGRATED SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
amortization of $822,000 and $1,743,000, respectively. Capitalized software
development costs were $1,132,000, $492,000 and $335,000 in fiscal 1994, 1995
and 1996, respectively. Amortization, which is included in cost of product
revenue, was $160,000, $607,000 and $921,000 in fiscal 1994, 1995 and 1996,
respectively.
INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill, purchased software and
capitalized software development costs. Goodwill and purchased software are
amortized on a straight-line basis over their estimated useful lives. The
Company periodically evaluates the recoverability of these costs based upon
estimated undiscounted future cash flows from the related products and
businesses acquired.
INCOME TAXES
The Company's provision for income taxes is comprised of its current tax
liability and the change in its deferred tax assets and liabilities. Deferred
tax assets and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse.
ADVERTISING
The Company expenses advertising costs as they are incurred. Advertising
expense for fiscal 1994, 1995 and 1996 was $409,000, $800,000 and $927,000,
respectively.
COMPUTATION OF EARNINGS PER SHARE
Earnings per share is computed using the weighted average number of common
and common equivalent shares outstanding during the period. Common equivalent
shares result from the assumed exercise of outstanding stock options that have a
dilutive effect when applying the treasury stock method.
FOREIGN CURRENCY TRANSLATION
The Company's foreign subsidiaries that operate as sales and marketing
offices for the Company's products, translate their financial statements using
the U.S. dollar as the functional currency. Accordingly, foreign exchange gains
and losses, which have been insignificant, are included in the consolidated
statements of income. The Company's remaining foreign subsidiaries use the local
currency as the functional currency. Accordingly, all assets and liabilities are
recorded at year-end exchange rates and income and expenses are recorded at
average rates. Adjustments resulting from the translation have been
insignificant.
FISCAL YEAR
Prior to fiscal 1996, the Company's fiscal year was reported on a 52/53
week period ending on the last Saturday in February of each year. Beginning in
fiscal 1996, the Company's fiscal year end is the last day in February.
Accordingly, the fiscal year end for fiscal 1994, 1995 and 1996 was February 26,
25 and 29, respectively. The effect of this change was not material to the
Company's financial statements for the year ended February 29, 1996. For clarity
of presentation herein, all fiscal years are referred to as ending on February
28.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year presentation.
40
<PAGE> 43
INTEGRATED SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
During March 1995, the Financial Accounting Standards Board issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" (SFAS No. 121), which requires the Company
to review for impairment of long-lived assets, certain identifiable intangibles
and goodwill related to those assets whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. In certain
situations, an impairment loss would be recognized. SFAS No. 121 will be
effective for the Company's fiscal year 1997. The Company has studied the
implications of the statement and, based on its initial evaluation, does not
expect it to have a material impact on the Company's financial condition or
results of operations.
During October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123). This accounting standard permits the use of either
a fair value based method or the current Accounting Principals Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB No. 25) when accounting for
stock-based compensation arrangements. Companies that do not follow the new fair
value based method will be required to disclose pro forma net income and
earnings per share computed as if the fair value based method had been applied.
The disclosure provisions of SFAS No. 123 are effective for fiscal years
beginning after December 15, 1995. Management has not determined if it will
adopt the fair value based method of accounting for stock-based compensation
arrangements nor the impact of SFAS No. 123 on the Company's consolidated
financial statements.
2. ACQUISITIONS
MERGER WITH TAKEFIVE
In October 1995, the Company acquired TakeFive Software GmbH (TakeFive), an
Austrian corporation by issuing 871,980 shares of its common stock in exchange
for 97% of the shares of TakeFive. The remaining 3% of the shares of TakeFive
were purchased for cash. The business combination was accounted for as a pooling
of interests and the Company's results of operations for fiscal 1996 include
those of TakeFive. The prior years' results have not been restated to include
TakeFive operations as such operations were insignificant. Prior to the business
combination, TakeFive was in the business of developing, marketing and
supporting software tools used in software development. The Company intends to
continue the business of TakeFive and operate TakeFive as an independent
subsidiary.
MERGER WITH DOCTOR DESIGN
In January 1996, the Company acquired Doctor Design, Inc. (Doctor Design),
an engineering services company specializing in multimedia hardware, software
and application specific integrated circuit technology. The Company issued
743,214 shares of its common stock for substantially all the outstanding stock
of Doctor Design. The Company also assumed stock options that converted into
options to purchase 263,724 shares of the Company's common stock. The business
combination was accounted for as a pooling of interests and the consolidated
financial statements have been restated as if Doctor Design had been combined
for all periods presented. The Company intends to continue the business of
Doctor Design and operate Doctor Design as an independent subsidiary.
41
<PAGE> 44
INTEGRATED SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. ACQUISITIONS (CONTINUED)
COMBINED AND SEPARATE RESULTS OF MERGERS
Combined and separate results of the Company, Doctor Design and TakeFive
during the periods preceding the mergers were as follows (in thousands):
<TABLE>
<CAPTION>
INTEGRATED DOCTOR
SYSTEMS DESIGN TAKEFIVE COMBINED
---------- ------ -------- --------
<S> <C> <C> <C> <C>
Nine months ended November 30, 1995
(unaudited):
Net revenue............................... $ 47,455 $9,171 $3,193 $59,819
Net income................................ 3,134 882 580 4,596
Year ended February 28, 1995:
Net revenue............................... 51,979 6,075 58,054
Net income................................ 5,754 736 6,490
Year ended February 28, 1994:
Net revenue............................... 41,701 4,082 45,783
Net income................................ 4,033 53 4,086
</TABLE>
OTHER ACQUISITIONS
In September 1994, the Company acquired certain software products and other
assets for a total purchase price of approximately $3,467,000, consisting of
$2,081,000 in cash and non-cash consideration of approximately 316,000 shares of
restricted common stock with a value of approximately $1,386,000. The
acquisition was accounted for using the purchase method of accounting and
accordingly, its operations have been included with those of the Company since
the date of acquisition. Substantially all of the purchase price was allocated
to purchased software, which prior to the third quarter of fiscal 1996, was
being amortized on a straight-line basis over a seven-year period. During the
third quarter of fiscal 1996, the Company determined that the recoverability of
the purchased software was not probable as the products purchased would be
replaced by the products acquired in the merger with TakeFive. Accordingly,
capitalized purchased software totaling $3,083,000 was charged to acquisition
and other expenses in the consolidated statement of income.
In December 1995, the Company acquired certain technology, related assets
and all of the outstanding common stock of a company for $1,735,000. The
acquisition has been accounted for under the equity method of accounting and is
included in other assets in the accompanying balance sheet. The acquisition cost
exceeded the underlying equity in net assets by $1,395,000, of which $756,000,
$425,000 and $214,000 was allocated to existing software products, which had
reached technological feasibility, goodwill and in-process software development,
which had not reached technological feasibility, respectively, based on their
respective fair values. The costs allocated to goodwill and existing products
are being amortized over periods of five and two years, respectively, and the
costs allocated to in-process software development were charged to acquisition
and other expenses. In addition to the purchase price, the Company paid bonuses
to non-shareholder management and employees totaling $1,645,000, which were
expensed and are included as part of acquisition and other expenses in the
consolidated statement of income for fiscal 1996. The operations of the acquired
company are not material to the consolidated financial statements of the
Company, and accordingly, separate financial information for this company has
not been presented.
42
<PAGE> 45
INTEGRATED SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. ACQUISITIONS (CONTINUED)
ACQUISITION AND OTHER EXPENSES
Acquisition and other expenses for fiscal 1996 consist of (in thousands):
<TABLE>
<S> <C>
In-process software development costs written-off......................... $ 214
Bonuses paid to management and employees of acquired company.............. 1,645
Purchased software written-off............................................ 3,083
Professional fees and other acquisition costs............................. 1,585
Termination fees payable to a distributor................................. 800
------
$7,327
======
</TABLE>
The termination fees payable to a distributor relate to amounts payable
resulting from the termination of the Company's reseller arrangement with a
Japanese distributor in February 1996.
3. MARKETABLE SECURITIES
At February 28, 1995 and 1996, marketable securities consisted of
fixed-income U.S. Government securities, primarily treasury notes, municipal
securities and preferred stock, held by two investment banks.
Marketable securities at February 28, 1995 are summarized below (in
thousands):
<TABLE>
<CAPTION>
UNREALIZED
FAIR COST UNREALIZED UNREALIZED NET GAINS
VALUE BASIS GAINS LOSSES (LOSSES)
------- ------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
U.S. Government securities............ $12,911 $13,076 $ 65 $ (230) $ (165)
Municipal securities.................. 13,790 13,837 40 (87) (47)
Preferred stock....................... 2,070 2,039 31 31
------- ------- ---- ----- -----
$28,771 $28,952 $136 $ (317) (181)
======= ======= ==== =====
Related deferred taxes................ 72
-----
Unrealized holding loss, net.......... $ (109)
=====
</TABLE>
Marketable securities at February 28, 1996 are summarized below (in
thousands):
<TABLE>
<CAPTION>
FAIR COST UNREALIZED UNREALIZED UNREALIZED
VALUE BASIS GAINS LOSSES NET GAINS
------- ------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
U.S. Government securities............ $12,678 $12,471 $221 $(14) $ 207
Municipal securities.................. 11,550 11,456 94 94
Preferred stock....................... 3,426 3,172 254 254
------- ------- ---- ---- -----
$27,654 $27,099 $569 $(14) 555
======= ======= ==== ====
Related deferred taxes................ (222)
-----
Unrealized holding gain, net.......... $ 333
=====
</TABLE>
At February 28, 1996, all marketable debt securities classified as current
assets have scheduled maturities of less than one year. Marketable debt
securities classified as noncurrent assets have scheduled maturities of one to
five years.
43
<PAGE> 46
INTEGRATED SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT, NET (IN THOUSANDS):
<TABLE>
<CAPTION>
FEBRUARY 28,
---------------------
1995 1996
------- -------
<S> <C> <C>
Buildings...................................................... $ 908 $ 908
Furniture and fixtures......................................... 1,150 1,373
Computer equipment............................................. 7,786 11,642
Leasehold improvements......................................... 246 258
------- -------
10,090 14,181
Less accumulated depreciation and amortization................. (6,477) (8,588)
------- -------
$ 3,613 $ 5,593
======= =======
</TABLE>
Depreciation expense amounted to $1,367,000, $1,531,000 and $2,203,000 in
fiscal 1994, 1995 and 1996, respectively.
5. LINE OF CREDIT
At February 28, 1996, the Company had available a $1,000,000 unsecured bank
line of credit and a $5,000,000 foreign exchange contract facility under an
agreement that expires on July 15, 1996. Borrowings under the line of credit
bear interest at the bank's prime rate. The agreement contains certain
restrictive covenants regarding the Company's financial position. The Company
has had no borrowings under this agreement.
6. LEASEHOLD COMMITMENTS
OPERATING LEASES
The Company occupies its principal facilities under an operating lease
agreement that expires in September 1996. Under the agreement, the Company is
responsible for taxes, utilities and insurance expenses. Future minimum lease
payments under all noncancelable operating leases amount to approximately
$973,000, $361,000, $137,000, $102,000, $47,000 and $230,000 for fiscal 1997,
1998, 1999, 2000, 2001 and thereafter, respectively. Rent expense for fiscal
1994, 1995 and 1996 was $875,000, $1,148,000 and $1,455,000, respectively.
BUILDING PURCHASE
In March 1996, the Company purchased a building, which will become its
principal facility, for cash of approximately $12,000,000. The Company expects
the move to this new facility to be completed by the end of the first quarter of
fiscal 1997.
7. SHAREHOLDERS' EQUITY
COMMON STOCK SPLIT
On March 4, 1996, the Company's Board of Directors authorized a two-for-one
stock split to be effective on April 5, 1996 for the shareholders of record on
March 18, 1996. All share and per share information in the accompanying
financial statements has been restated to give retroactive recognition to the
stock split for all periods presented.
COMMON STOCK OPTION PLANS
At February 28, 1996, the Company had reserved 6,663,724 shares of common
stock for issuance under various stock option plans, including a plan resulting
from the business combination with Doctor Design (see
44
<PAGE> 47
INTEGRATED SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. SHAREHOLDERS' EQUITY (CONTINUED)
Note 2). The plans provide for the granting of incentive stock options to
officers and employees of the Company and nonqualified stock options to
officers, employees, directors and consultants of the Company at prices not less
than fair market value (as determined by the Compensation Committee of the Board
of Directors) on the date of grant. Options are exercisable at times and in
increments as specified by the Compensation Committee. Options generally vest
over five years and expire in six to ten years.
Activity under these plans is as follows (in thousands, except share and
per share amounts):
<TABLE>
<CAPTION>
SHARES NUMBER
AVAILABLE OF PRICE PER
FOR GRANT OPTIONS SHARE TOTAL
---------- --------- ------------ -------
<S> <C> <C> <C> <C>
Balances, February 28, 1993................... 2,122,866 1,643,080 $0.32-$ 6.63 $ 4,192
Options granted............................. (1,561,812) 1,561,812 $0.68-$ 5.88 5,577
Options exercised........................... (468,884) $0.32-$ 4.44 (572)
Options canceled............................ 212,912 (216,112) $0.38-$ 6.63 (748)
---------- --------- -------
Balances, February 28, 1994................... 773,966 2,519,896 $0.32-$ 5.88 8,449
Adoption of 1994 Directors Stock Option
Plan..................................... 400,000
Shares added to 1988 Plan................... 2,000,000
Options granted............................. (826,164) 826,164 $0.68-$ 9.38 4,894
Options exercised........................... (584,848) $0.32-$ 5.25 (1,858)
Options canceled............................ 337,344 (337,344) $2.63-$ 5.32 (1,227)
---------- --------- -------
Balances, February 28, 1995................... 2,685,146 2,423,868 $0.32-$ 9.38 10,258
Options granted............................. (882,272) 882,272 $1.35-$19.50 11,915
Options exercised........................... (540,254) $0.39-$ 9.38 (2,050)
Options canceled............................ 239,966 (239,966) $2.88-$14.63 (1,419)
---------- --------- -------
Balances, February 28, 1996................... 2,042,840 2,525,920 $0.32-$19.50 $18,704
========== ========= =======
</TABLE>
At February 28, 1996, options to purchase 799,630 shares of common stock
were exercisable.
EMPLOYEE STOCK PURCHASE PLAN
At February 28, 1996, the Company had reserved a total of 1,000,000 shares
of common stock for issuance under its 1990 Employee Stock Purchase Plan (the
ESPP). The purpose of the ESPP is to provide eligible employees of the Company
with a means of acquiring common stock of the Company through payroll
deductions. The purchase price of such stock under the ESPP cannot be less than
85% of the lower of the fair market value on the specified purchase date or the
beginning of the offering period. During fiscal 1994, 1995 and 1996,
approximately 120,000 shares, 94,000 shares and 72,000 shares, respectively,
were sold through the ESPP.
8. 401(K) PLANS
The Company has two 401(k) Plans (the Plans), including a plan resulting
from the business combination with Doctor Design (see Note 2), that cover
essentially all employees. Each eligible employee may elect to contribute to the
Plans, through payroll deductions, up to 15% of their compensation, subject to
certain limitations. The Company is obligated to make matching contributions on
behalf of each participating employee in an amount equal to 25% of an employee's
contribution, up to 2% of the employee's compensation.
45
<PAGE> 48
INTEGRATED SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. 401(K) PLAN (CONTINUED)
For individuals who were employed by the Company prior to December 1, 1994,
Company contributions are fully vested on the date of contribution. For
individuals who became employed subsequent to November 30, 1994, Company
contributions vest ratably over a six-year period. The Company's contributions
charged against income totaled approximately $170,000, $228,000 and $390,000 in
fiscal 1994, 1995 and 1996, respectively.
9. INCOME TAXES
The provision for income taxes included the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28,
------------------------------
1994 1995 1996
------- ------ -------
<S> <C> <C> <C>
Federal:
Current.............................................. $ 1,851 $1,838 $ 3,211
Deferred............................................. (1,021) (429) (1,584)
------- ------ -------
830 1,409 1,627
------- ------ -------
State:
Current.............................................. 730 647 1,208
Deferred............................................. (252) (58) (593)
------- ------ -------
478 589 615
------- ------ -------
Foreign................................................ 627 1,112 1,270
------- ------ -------
$ 1,935 $3,110 $ 3,512
======= ====== =======
</TABLE>
The reconciliation between the effective tax rates and statutory federal
income tax rate is shown in the following table:
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY
28,
----------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate.............................. 34.0% 34.0% 34.0%
State taxes, net of federal income tax benefit................. 5.3 4.6 5.4
Acquisition costs.............................................. 8.0
Research and development tax credit and credit carryforwards... (2.9) (1.2) (2.0)
Foreign sales corporation tax benefit.......................... (3.8) (3.7) (3.5)
Other.......................................................... (0.5) (1.3) (1.9)
---- ---- ----
Effective tax rate............................................. 32.1% 32.4% 40.0%
==== ==== ====
</TABLE>
Domestic and foreign components of income before income taxes were (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28,
----------------------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Domestic................................................. $5,410 $8,558 $7,430
Foreign.................................................. 611 1,042 1,365
------ ------ ------
$6,021 $9,600 $8,795
====== ====== ======
</TABLE>
46
<PAGE> 49
INTEGRATED SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES (CONTINUED)
The significant components of deferred tax assets and liabilities consist
of the following (in thousands):
<TABLE>
<CAPTION>
FEBRUARY 28,
-------------------
1995 1996
------ ------
<S> <C> <C>
Deferred tax assets:
Purchased intangibles.......................................... $2,572
Tax credit carryforwards....................................... $ 778
Accelerated depreciation....................................... 207 296
Accrued vacation and holiday................................... 266 262
Allowance for doubtful accounts................................ 243 387
Other.......................................................... 366 58
------ ------
$1,860 $3,575
====== ======
Deferred tax liabilities:
Software development costs..................................... $ 766 $ 510
Marketable securities.......................................... 222
Cash to accrual adjustment..................................... 289 564
------ ------
$1,055 $1,296
====== ======
</TABLE>
The Company has not provided a valuation allowance for its net deferred tax
assets as it expects such amounts to be realized through taxable income from
future operations, or by carryback to prior years' taxable income.
10. BUSINESS SEGMENT INFORMATION
The Company operates in one business segment: the design, marketing and
support of products for automating the process of real-time software development
and system design, including engineering services to assist customers in
implementing specific solutions.
The Company's foreign operations primarily consist of sales and customer
service organizations. Revenue, income and assets of the Company's foreign
subsidiaries were not material to the consolidated financial statements in
fiscal 1994, 1995 and 1996.
Revenue by geographical location of customer is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28,
--------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
North America......................................... $ 32,277 $ 41,723 $ 56,109
Europe................................................ 8,734 9,541 17,028
Asia/Pacific.......................................... 4,772 6,790 11,305
------- ------- -------
$ 45,783 $ 58,054 $ 84,442
======= ======= =======
</TABLE>
Export revenue to Europe was $5,213,000, $6,472,000 and $9,458,000 for
fiscal 1994, 1995 and 1996, respectively. Export revenue to Asia/Pacific was
$4,772,000, $6,790,000 and $11,305,000, in fiscal 1994, 1995 and 1996,
respectively.
Revenue from the United States Government, which are primarily engineering
services, was approximately 11% of total revenue for fiscal 1994. No other
customer accounted for 10% or more of total revenue in the reported periods.
47
<PAGE> 50
REPORT OF INDEPENDENT ACCOUNTANTS ON SCHEDULE
In connection with our audits of the consolidated financial statements of
Integrated Systems, Inc. and Subsidiaries as of February 28, 1995 and 1996, and
for the each of the three years in the period ended February 28, 1996, which
financial statements are included in the Registrant's Annual Report on Form
10-K, we have also audited the financial statement schedule listed in Item 14
herein.
In our opinion, the financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, present fairly, in
all material respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
San Jose, California
March 27, 1996
48
<PAGE> 51
SCHEDULE II
INTEGRATED SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN C
COLUMN B --------------------- COLUMN E
----------- CHARGED ----------
COLUMN A BALANCE AT TO COSTS CHARGE COLUMN D BALANCE
- --------------------------------------------- BEGINNING AND TO OTHER ---------- AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS WRITE-OFFS OF PERIOD
- --------------------------------------------- ----------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
For the year ended February 28, 1994:
Allowance for doubtful accounts............ $ 310,000 $184,000 -- $ 12,000 $ 482,000
For the year ended February 28, 1995:
Allowance for doubtful accounts............ $ 482,000 $253,000 -- $ 106,000 $ 629,000
For the year ended February 28, 1996:
Allowance for doubtful accounts............ $ 629,000 $286,000 -- $ 63,000 $ 852,000
</TABLE>
49
<PAGE> 52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on April 11, 1996.
INTEGRATED SYSTEMS, INC.
By: /s/ NARENDRA K. GUPTA
------------------------------------
Narendra K. Gupta,
Chairman of the Board and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ---------------------------------------- ----------------------------------- ---------------
<C> <S> <C>
Principal Executive Officer:
/s/ DAVID P. ST. CHARLES President, Chief Executive Officer April 11, 1996
- ---------------------------------------- and Director
David P. St. Charles
Principal Financial and Accounting
Officer:
/s/ STEVEN SIPOWICZ Vice President, Finance and Chief April 11, 1996
- ---------------------------------------- Financial Officer
Steven Sipowicz
Additional Directors:
/s/ NARENDRA K. GUPTA Chairman of the Board and Secretary April 11, 1996
- ----------------------------------------
Narendra K. Gupta
/s/ JOHN C. BOLGER Director April 11, 1996
- ----------------------------------------
John C. Bolger
/s/ VINITA GUPTA Director April 11, 1996
- ----------------------------------------
Vinita Gupta
/s/ THOMAS KAILATH Director April 11, 1996
- ----------------------------------------
Thomas Kailath
/s/ RICHARD C. MURPHY Director April 11, 1996
- ----------------------------------------
Richard C. Murphy
</TABLE>
50
<PAGE> 53
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT PAGE
- -------- ---------------------------------------------------------------------- ------------
<S> <C> <C>
3.01(i) Registrant's Articles of Incorporation, as amended to date. ..........
10.14 Agreement of Purchase and Sale between Connecticut General Life
Insurance Company and the Registrant dated February 9, 1996. .........
11.01 Statement regarding computation of net income per share. .............
21.01 List of Registrant's Subsidiaries. ...................................
23.01 Consent of Independent Accountants. ..................................
27.01 Financial Data Schedule. .............................................
</TABLE>
51
<PAGE> 1
EXHIBIT 3.01(i)
RESTATED ARTICLES OF INCORPORATION
OF
INTEGRATED SYSTEMS, INC.
The undersigned, David St. Charles and Narendra K. Gupta, do hereby
certify that:
1. They are the duly elected President and Secretary, respectively, of
Integrated Systems, Inc., a California corporation.
2. The Articles of Incorporation of this corporation are restated in
their entirety to read as follows:
"I. The name of this Corporation is Integrated Systems, Inc.
II. The purpose of this Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of California other than the banking business, the trust company business or
the practice of a profession permitted to be incorporated by the California
Corporations Code.
III. 1. Authorization of Shares. This Corporation is authorized to
issue two classes of stock to be designated, respectively, Common Stock and
Preferred Stock, both without par value. The total number of shares of all
classes which the Corporation is authorized to issue is 55,000,000 shares. The
number of shares of Common Stock authorized is 50,000,000 shares and the number
of shares of Preferred Stock authorized is 5,000,000 shares.
2. Designation of Unissued Series of Preferred Stock. The
Preferred Stock may be divided into such number of series as the board of
directors may determine. The board of directors of the Corporation may
designate, fix the number of shares of and determine or alter the rights,
preferences, privileges and restrictions granted to or imposed upon, any series
of Preferred Stock as to which there are no outstanding shares or rights to
acquire shares. As to any series of Preferred Stock, the number of shares of
which is authorized to be fixed by the board of directors, the board may,
within any limits and restrictions stated in the resolutions of the board
originally fixing the number of shares constituting such series, increase or
decrease (but not below the number of shares of such series then outstanding
and as to which rights to acquire shares of such series are then outstanding)
the number of shares of any such series subsequent to the issue of shares of
that series.
IV. The liability of the directors of the corporation for monetary
damages shall be eliminated to the fullest extent permissible under California
law.
V. The corporation is authorized to provide indemnification of agents
(as defined in Section 317 of the California Corporations Code) through bylaw
provisions, by agreement or otherwise, in excess of the indemnification
otherwise permitted by Section 317 of the California
<PAGE> 2
Corporations Code, subject only to the limits on such excess indemnification
set forth in Section 204 of the California Corporations Code.
VI. This Corporation shall not have cumulative voting. This provision
shall become effective only when this Corporation becomes a listed corporation
within the meaning of Section 301.5 of the California Corporations Code."
3. The foregoing restatement of the Articles of Incorporation has been
duly approved by the Board of Directors of this corporation.
4. There were 672,322 shares of Convertible Preferred Stock issued.
Pursuant to Article IV, Paragraphs 4(b) and 5 of the Articles of Incorporation,
all such shares were automatically converted to Common Stock and may not be
reissued as Convertible Preferred Stock. Pursuant to Section 910(b) of the
California Corporations Code, this restatement may be adopted without
shareholder approval.
We further declare under penalty of perjury under the laws of the State
of California that we have read the foregoing Certificate and know the contents
thereof and that the matters set forth in this Certificate are true and correct
of our knowledge.
/s/ David St. Charles
Date: March 25, 1996 ________________________________
David St. Charles, President
/s/ Narendra K. Gupta
________________________________
Narendra K. Gupta, Secretary
2
<PAGE> 1
EXHIBIT 10.14
AGREEMENT OF PURCHASE AND SALE
BETWEEN
CONNECTICUT GENERAL LIFE INSURANCE COMPANY, a Connecticut
corporation, on behalf of its Closed-End Real Estate Fund II,
SELLER
AND
INTEGRATED SYSTEMS, INC., a California corporation, PURCHASER
215 Moffett Park Drive
Sunnyvale, California
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Article 1 Property 1
Article 2 Purchase Price and Deposits 3
Article 3 Failure to Close 5
3.1 Purchaser's Default 5
3.2 Seller's Default 5
Article 4 Closing and Transfer of Title 6
4.1 Closing 6
4.2 Closing Procedure 7
4.3 Purchaser's Performance 8
4.4 Evidence of Authority; Miscellaneous 8
Article 5 Prorations of Rents, Taxes, Etc. 8
Article 6 Purchasers Inspections and Contingencies 10
6.1 Document Inspection 10
6.2 Physical Inspection 11
6.3 Feasibility Period 12
6.4 Survey Contingency 13
6.5 Title Contingency 14
6.6 Radius Lease Termination Contingency 16
Article 7 Loss due to Casualty or Condemnation 16
7.1 Loss due to Condemnation 16
7.2 Loss due to Casualty 17
Article 8 Maintenance of the Property 18
Article 9 Broker 19
Article 10 Representations and Warranties 20
10.1 Limitations on Representations
and Warranties 20
10.2 Representations and Warranties 21
10.3 Seller's Knowledge 23
10.4 Survival 23
Article 11 Intentionally Omitted 24
Article 12 Assignment 24
Article 13 Notices 24
Article 14 Expenses 26
</TABLE>
<PAGE> 3
TABLE OF CONTENTS (Continued)
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Article 15 Miscellaneous 26
15.1 Successors and Assigns 26
15.2 Gender 27
15.3 Captions 27
15.4 Construction 27
15.5 Entire Agreement 27
15.6 Recording 27
15.7 No Continuance 28
15.8 Time of Essence 28
15.9 Original Document 28
15.10 Governing Law 28
15.11 Acceptance of Offer 28
15.12 Confidentiality 29
15.13 Surviving Covenants 29
15.14 Intentionally Omitted 29
15.15 Attorneys' Fees 29
15.16 ERISA 30
Exhibit A - Description of Land
Exhibit B - Intentionally Omitted
Exhibit C - Grant Deed
Exhibit D - Bill of Sale
Exhibit E - Service and Maintenance Contracts
to be Assumed by Purchaser
Exhibit F - Indemnification Agreement
Exhibit G - Form of Seller's Affidavit of
Non-Foreign Status
Exhibit H - Pending Litigation
</TABLE>
<PAGE> 4
AGREEMENT OF PURCHASE AND SALE
THIS AGREEMENT OF PURCHASE AND SALE is made by and between CONNECTICUT
GENERAL LIFE INSURANCE COMPANY, a Connecticut corporation, on behalf of its
Closed-End Real Estate Fund II ("Seller"), and INTEGRATED SYSTEMS, INC., a
California corporation ("Purchaser"), as of the "Effective Date" (as defined
below).
Article I.
Property
Seller hereby agrees to sell, and Purchaser hereby agrees to buy, all
of the following property: (a) a parcel of real property (the "Land"), located
in the City of Sunnyvale, County of Santa Clara, State of California, more
particularly described on Exhibit A attached to this Agreement; (b) the
buildings and other improvements located on the Land, including an office
building of approximately 152,844 square feet generally known as 215 Moffett
Park (the "Improvements") (the Land and Improvements are referred to herein,
collectively, as the "Real Property"); and (c) all fixtures, equipment, and
other personal property (both tangible and intangible, including, without
limitation, any service and maintenance agreements applicable thereto which are
either approved by Purchaser or which by its terms does not permit Seller to
terminate the agreement without cause or which cannot be terminated by its
terms in the time period between the expiration of the Feasibility Period and
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Closing, a list of which are attached hereto as Exhibit E, other than the
property management agreement, which shall be terminated) owned by Seller and
contained in or related to the Improvements, including any rights of Seller to
any tangible personal property left or abandoned in the Improvements by Radius
(as hereinafter defined) (the "Personal Property") (collectively, the Real
Property and the Personal Property are sometimes referred to herein as the
"Property").
The Improvements are currently occupied by a single tenant, Radius,
Inc. ("Radius"), under a Lease Agreement between Seller and Radius'
predecessor-in-interest, SuperMac Technology, Inc. ("SuperMac") dated as of
November 13, 1992, as amended by a First Amendment to Lease Agreement dated as
of May 4, 1993, by a Second Amendment to Lease Agreement dated as of December
21, 1993, and by a Third Amendment to Lease Agreement dated as of May 2, 1995
(collectively, the "Radius Lease"). Radius has acquired all of the outstanding
stock of SuperMac and succeeded to all of the rights and assumed all of the
obligations under the Radius Lease. Seller and Radius have currently
negotiating a Lease Termination Agreement (the "Lease Termination Agreement")
which shall be entered into prior to Closing and contingent upon the Closing of
the sale of the Real Property from Seller to Purchaser pursuant to this
Agreement, whereby at the time of the sale contemplated herein there shall be
no tenant leases relating to the Improvements. The parties agree that Purchaser
will not be a party to the Lease Termination Agreement and that Purchaser shall
not in any way be liable or responsible for the obligations of
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<PAGE> 6
Radius or Seller under the Lease Termination Agreement. Radius and Purchaser
are concurrently negotiating an agreement (the "Radius/ISI Agreement") to set
forth an exit strategy for Radius whether through a lease by Radius of a
portion of the Improvements from Purchaser and to use certain personal property
of Purchaser after the Closing, or some other exit arrangement, contingent on
the Closing taking place. The parties agree that Seller will not be a party to
the Radius/ISI Agreement and that Seller shall not in any way be liable or
responsible for the obligations of Radius or Purchaser under the Radius/ISI
Agreement. Seller and Purchaser both covenant to use best efforts to
respectively negotiate and agree upon the terms of the Lease Termination
Agreement and the Radius/ISI Agreement.
Article II.
Purchase Price and Deposits
The purchase price which the Purchaser agrees to pay and the Seller
agrees to accept for the Property shall be the sum of Eleven Million, Nine
Hundred Twenty-One Thousand, Eight Hundred Thirty-Two Dollars ($11,921,832)
(hereinafter referred to as the "Purchase Price"), subject to adjustment as
provided in Article V hereof, payable as follows:
(a) An earnest money deposit ("Deposit") of Fifty Thousand
Dollars ($50,000), in cash, to be deposited with Santa Clara Land
Title Company (the "Title Company") within three (3) business days after
execution hereof by both
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<PAGE> 7
parties, such amount to be held in escrow and deposited in an
interest-bearing account;
(b) An additional earnest money deposit (the "Additional
Deposit") or Fifty Thousand Dollars ($50,000), in cash, to be deposited
by Purchaser with the Title Company, within three (3) business days
after expiration of the Feasibility Period (hereinafter defined), such
amount to be held in escrow and deposited in an interest-bearing
account (the Earnest Deposit and the Additional Deposit, with interest
thereon, will be referred to hereinafter, collectively, as the
"Deposit"); and
(c) The balance of the Purchase Price shall be paid at time of
Closing by Federal wire transfer, with the transfer of funds to Seller
to be completed on the day of the Closing.
The Deposit shall be paid to Seller at the Closing as a credit against
the Purchase Price. Purchaser shall provide the Title Company with its tax
identification number, and all interest shall be for Purchaser's account for
tax purposes.
In addition to the Deposit, Purchaser shall deposit five fully executed
copies of this Agreement with the Title Company immediately after both parties
have executed it. The date of such deposit shall be acknowledged by the Title
Company on all copies, and such date shall be the "Effective Date" of this
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<PAGE> 8
Agreement. The Title Company shall retain one copy of this Agreement and
deliver two copies hereof to each of Purchaser and Seller.
Article III.
Failure to Close
3.1 Purchaser's Default. IF SELLER HAS COMPLIED WITH ALL OF THE
COVENANTS AND CONDITIONS CONTAINED HEREIN AND IS READY, WILLING AND ABLE TO
CONVEY THE PROPERTY IN ACCORDANCE WITH THIS AGREEMENT AND PURCHASER FAILS TO
CONSUMMATE THIS AGREEMENT AND TAKE TITLE, THEN THE PARTIES HERETO RECOGNIZE AND
AGREE THAT THE DAMAGES THAT SELLER WILL SUSTAIN AS A RESULT THEREOF WILL BE
SUBSTANTIAL, BUT DIFFICULT IF NOT IMPOSSIBLE TO ASCERTAIN. THEREFORE, THE
PARTIES AGREE THAT, IN THE EVENT OF PURCHASER'S DEFAULT, SELLER SHALL, AS ITS
SOLE REMEDY, BE ENTITLED TO RETAIN THE DEPOSIT AS LIQUIDATED DAMAGES, AND
NEITHER PARTY SHALL HAVE ANY FURTHER RIGHTS OR OBLIGATIONS WITH RESPECT TO THE
OTHER UNDER THIS AGREEMENT, EXCEPT FOR THE SURVIVING COVENANTS (HEREINAFTER
DEFINED).
Seller's Initials: ________ Purchaser's Initials: ________
3.2 Seller's Default. In the event that Purchaser has complied with
all of the covenants and conditions contained herein and is ready, willing and
able to take title to the Property in accordance with this Agreement, and
Seller fails to
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<PAGE> 9
consummate this Agreement and convey title as set forth herein, then Purchaser
may, as its sole remedy, elect to either (i) terminate this contract and
recover the Deposit and all expenses incurred by it in connection with this
Agreement or (ii) bring an action against Seller for specific performance of
this Agreement.
Article IV.
Closing and Transfer of Title
4.1 Closing. The parties hereto agree to conduct a closing of this
sale (the "Closing") on or before the date thirty (30) days after the
expiration of the Feasibility Period as defined in section 6.3 below ("Closing
Date") in the principal office of the Title Company, or at such other place as
may be agreed upon by the parties hereto. This Agreement shall terminate if
transfer of title is not completed by the Closing Date (unless such failure to
close is due to Seller's default, the date for Closing is extended pursuant to
any provision hereof, including, without limitation, the matters described in
Sections 6.3, 6.4, 6.5 and Article VII hereof, or the date for Closing is
extended by agreement of the parties, which agreement shall be confirmed in
writing). Notwithstanding the foregoing, or any other provision herein, Seller
shall have no obligation to close if the closing and transfer of title does not
occur on or prior to April 30, 1996, unless such failure to close is due solely
to the default of Seller.
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<PAGE> 10
4.2 Closing Procedure. Seller shall execute and deliver or cause to
be delivered (a) a Grant Deed limiting the Seller's warranties to title matters
claimed by, through or under Seller but not otherwise, in the form attached
hereto as Exhibit C, proper for recording and acceptable to the Title Company,
conveying Seller's interest in the Real Property to Purchaser; (b) a Bill of
Sale in the form attached hereto as Exhibit D, dated as of the date of Closing
conveying to Purchaser any and all Personal Property; (c) an Owner's Title
Insurance Policy (the "Owner's Title Policy") dated no earlier than the date of
the recording of the Deed, in the full amount of the Purchase Price, insuring
that good and indefeasible fee simple title to the Property is vested in
Purchaser, containing no exceptions to such title other than the standard
printed exceptions (provided, however, that (i) the printed survey exception
must be deleted, except for matters shown on the Survey and either approved by
Purchaser or as to which objection has been waived by Purchaser, and (ii) the
exception as to ad valorem taxes shall be limited to taxes for the current and
subsequent years), those items listed on Schedule "B" of the Title Commitment
that either were approved by Purchaser or as to which objection has been waived
by Purchaser; (d) to the extent in Seller's possession or under Seller's
control, the originals of all as-built plans and specifications and maintenance
and service contracts that are to be assumed; (e) an indemnification agreement
(the "Indemnification Agreement") in the form attached as Exhibit F, dated the
date of Closing; (f) an affidavit that Seller is not a "foreign person" in the
form attached as Exhibit G; (g) a master
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<PAGE> 11
key or duplicate key for all locks in the Improvements; (h) to the extent in
the possession of Seller or Seller's property management company, all
construction and maintenance records; and (i) the Lease Termination Agreement.
4.3 Purchaser's Performance. At the Closing, Purchaser will cause
the Purchase Price to be delivered to the Title Company, will execute and
deliver the Indemnification Agreement, the Bill of Sale and the Radius/ISI
Agreement.
4.4 Evidence of Authority; Miscellaneous. Both parties will deliver
to the Title Company and each other such evidence or documents as may
reasonably be required by the Title Company or either party hereto evidencing
the power and authority of Seller and Purchaser and the due authority of, and
execution and delivery by, any person or persons who are executing any of the
documents required hereunder in connection with the sale of the Property. Both
parties will execute and deliver such other documents as are reasonably
required to effect the intent of this Agreement.
Article V.
Prorations of Taxes, Etc.
Real estate taxes for the year of closing shall be prorated as of the
date of Closing either using actual tax figures or, if actual figures are not
available, then using as a basis for said proration the most recent assessed
value of the Real Estate
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<PAGE> 12
multiplied by the current tax rate, with a subsequent cash adjustment to be
made between Purchaser and Seller when actual tax figures are available.
Personal property taxes, annual permit or inspection fees, sewer charges and
other expenses normal to the operation and maintenance of the Property shall
also be prorated as of the date of Closing. Because there will be no tenants as
of Closing, there will be no prorations of rent.
Final readings on all gas, water and electric meters shall be made as
of the date of closing, if possible. If final readings are not possible, gas,
water and electricity charges will be prorated based on the most recent period
for which costs are available. Any deposits made by Seller with utility
companies shall be returned to Seller. Purchaser shall be responsible for
making all arrangements for the continuation of utility services.
All items (including taxes) that are not subject to an exact
determination shall be estimated by the parties. When any item so estimated is,
after the Closing capable of exact determination, the party in possession of
the facts necessary to make the determination shall send the other party a
detailed report on the exact determination so made and the parties shall adjust
the prior estimate within thirty (30) days after both parties have received
said reports.
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<PAGE> 13
ARTICLE VI.
Purchaser Inspections and Contingencies
6.1 Document Inspection. Seller has made or will make available within
ten (10) days from the Effective Date of this Agreement the following items
relating to the Real Property for review by Purchaser:
(1) Copies of all service and maintenance agreements, including those
to be assumed by Purchaser as listed on Exhibit E hereto;
(2) Copies of any certificates of occupancy, licenses, permits and
approvals (to the extent in Seller's or its property manager's
possession);
(3) Books and records of the Property in Seller's or its property
manager's possession including copies of tax and utility bills and
all operating reports for the last two years, any governmental
notices, copies of any correspondence or memoranda pertaining to
the condition of the Property or the need for any repair, and
copies of any estoppel certificates;
(4) Copies of any environmental or engineering studies or feasibility
studies in Seller's possession, Seller's existing survey, and all
plans, drawings and specifications and "as-built" plans or drawings
in Seller's possession; and
(5) a copy of Seller's policy of lender's title insurance.
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<PAGE> 14
If Seller or its management company is aware of any information of the
kind described in subsections 1-7 which is not in its possession, Seller will
so notify Purchaser when it delivers the available materials. Seller or its
management company will also promptly deliver any other material in its
possession which reasonably pertains to the Property upon written request of
Purchaser.
Purchaser agrees that if for any reason the Closing is not consummated,
Purchaser will immediately return to Seller all materials furnished to
Purchaser pursuant to this Section 6.1.
6.2 Physical Inspection. In addition to the items set forth in
Section 6.1, Seller will make the Property available for inspection by
Purchaser and Purchaser shall, at Purchaser's risk, conduct an engineering
and/or market and economic feasibility study of the Property and undertake such
physical inspection of the Property as Purchaser deems appropriate as soon as
possible after the Effective Date of this Agreement. Such inspection shall be
conducted at reasonable times upon reasonable oral or written notice to
Seller's property manager. Seller shall have the right to designate a
representative to accompany Purchaser's employees, agents, and independent
contractors on any such inspections.
Purchaser hereby agrees to pay, protect, defend, indemnify and save
Seller harmless against all liabilities, obligations, claims (including
mechanic's lien claims), damages, penalties
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causes of action, judgments, costs and expenses (including, without limitation,
attorneys' fees and expenses) imposed upon, incurred by or asserted against
Seller in connection with or arising out of the entry upon the Real Property by
Purchaser's employees, agents or independent contractors and the actions of
such persons on the Real Property. In the event any part of the Property is
damaged or excavated by Purchaser, its employees, agents or independent
contractors, Purchaser agrees in the event its purchase hereunder is not
consummated, to make such additional payments to Seller as may be reasonably
required to return the Property to its condition immediately prior to such
damage or excavation or, at Seller's option, to cause such work to be done.
Notwithstanding any provision to the contrary herein, Purchaser's obligations
under this subparagraph shall survive the expiration or termination of this
Agreement, and shall survive Closing.
6.3. Feasibility Period. Purchaser shall have a period ending 30 days
after the Effective Date of this Agreement to conduct its inspection of the
documents delivered in accordance with Section 6.1 and to conduct a physical
inspection of the Property as set forth in Section 6.2 (the "Feasibility
Period"). On or before the last day of the Feasibility Period, Purchaser may, in
its sole discretion without obligation to specify which aspect of its inspection
was unsatisfactory, terminate this Agreement by providing a written notice to
Seller so providing. Upon receipt of such notice, this Agreement shall terminate
and Seller shall instruct the Title Company to return the Deposit to
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Purchaser, and neither party shall have any obligation to the other, except for
the Surviving Covenants. If Purchaser fails to provide such notice of
termination on or before the last day of the Feasibility Period, Purchaser
shall be deemed to have approved such inspections and this contract shall
remain in full force and effect.
6.4 Survey Contingency. Purchaser's obligation to purchase the
Property is subject to its receipt, within fifteen (15) days of the Effective
Date of this Agreement, of a survey of the Real Property by a registered
surveyor (the "Survey"). The Survey shall show the location of all improvements,
structures, driveways, parking areas, easements, rights of way, and any
encroachments and shall specify whether the Property is within the 100 year
flood plain or flood way. The Survey shall further set forth a legal description
of the boundaries of the Real Property in accordance with local practices.
Purchaser shall have until the earlier to occur of the last day of the
Feasibility Period or the date fifteen (15) days after the receipt of the
Survey by Purchaser to object in writing to the Survey, including any objection
to the boundaries set forth in the Survey and to the legal description. This
contingency shall be deemed satisfied or waived if Seller has not received
written notice of Purchaser's objection before such date. Any such written
notice shall state all of Purchaser's objections with specificity. Upon receipt
of such notice, Seller may, but shall not be obligated to, cure such
objections. If Seller cures
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such objections within fifteen (15) days, or, if such objections are such that
they cannot be cured within fifteen (15) days and Seller has commenced curing
such objections and thereafter diligently proceeds to perfect such cure (but in
no event beyond forty-five (45) days unless agreed to by Purchaser), then this
Agreement shall continue in force and effect, and the Closing Date shall be
adjusted accordingly. If Seller is unable to, or chooses not to, cure such
objections within the time permitted, this Agreement shall terminate, Seller
shall instruct the Title Company to return the Deposit to Purchaser, and neither
party shall have any further obligations hereunder except for the Surviving
Covenants. Notwithstanding the foregoing, however, Purchaser may waive such
objections that Seller is unable to or chooses not to cure, and upon receipt by
Seller of such waiver in full from Purchaser within ten (10) days of notice from
Seller that it is unable or chooses not to cure such objections, this Agreement
shall remain in full force and effect with no reduction in the Purchase Price.
If requested by Seller, Purchaser will confirm in writing whether this
survey contingency has been satisfied and, if so, the date on which it was
satisfied.
6.5. Title Contingency. Purchaser's obligation to purchase the
Property is subject to its receipt of a preliminary title report (the "Title
Report"), issued by the Title Company, together with legible copies of all
items and documents referred to in the Title Report. The Title Report and
accompanying
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documents shall be delivered by Seller within fifteen (15) days after the
Effective Date of this Agreement. Upon receipt of the Title Report and
accompanying documents by Purchaser, Purchaser shall have until the earlier to
occur of the last day of the Feasibility Period or the date fifteen (15) days
after receipt of all such items to state any objections in writing. This
contingency shall be deemed satisfied or waived if such written notice of
objection is not received by Seller before such date. Such written notice of
objection shall state all of Purchaser's objections with specificity. Upon
receipt of such notice, Seller may, but shall not be obligated to, cure such
objection. If Seller cures such objections within 15 days, or, if such
objections are such that they cannot be cured within 15 days and Seller has
commenced curing such objections and thereafter diligently proceeds to perfect
such cure (but in no event beyond forty-five (45) days unless agreed to by
Purchaser), then this Agreement shall continue in full force and effect and the
Closing Date shall be adjusted accordingly. If Seller is unable or chooses not
to cure such objections within the time permitted, then this Agreement shall
terminate, and Seller shall instruct the Title Company to return the Deposit to
Purchaser, and neither party shall have any further obligations hereunder
except for the Surviving Covenants. Notwithstanding the foregoing, however,
Purchaser may waive such objections that Seller is unable or chooses not to
cure within 10 days after receipt of a notice that Seller is unable or chooses
not to cure such objections, and upon receipt by Seller of such waiver in full
from Purchaser, this
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Agreement shall remain in full force and effect with no reduction in the
Purchase Price.
If requested by Seller, Purchaser will confirm in writing whether this
title contingency has been satisfied and, if so, the date on which it was
satisfied.
6.6 Radius Lease Termination Contingency. Purchaser's obligation to
purchase the Property and Seller's obligation to sell the Property are subject
to the receipt by each of a copy of a fully executed Lease Termination
Agreement and a fully executed Radius/ISI Agreement prior to the expiration of
the Feasibility Period, the terms of which agreements shall be reasonably
satisfactory to both Seller and Purchaser.
Article VII.
Loss due to Casualty or Condemnation
7.1 Loss due to Condemnation. In the event of a condemnation of all or
a Substantial Portion of the Real Property which condemnation shall or would
render a Substantial Portion of the Real Property untenantable, or if any
portion of the building or parking area is taken, either party may, upon
written notice to the other party given within 10 days of receipt of notice of
such event, cancel this Agreement, in which event Seller shall instruct the
Title Company to return the Deposit to Purchaser, this Agreement shall
terminate and neither party shall have any rights or obligations hereunder
except for the Surviving.
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Covenants. In the event that neither party elects to terminate, or if the
condemnation affects less than a Substantial Portion or does not affect the
building or parking area, then this Agreement shall remain in full force and
effect, and Seller shall be entitled to all monies received or collected by
reason of such condemnation prior to closing. In such event, the transaction
hereby contemplated shall close in accordance with the terms and conditions of
this Agreement except that there will be an abatement of the Purchase Price
equal to the amount of the net proceeds, less costs and attorney's fees, which
are received by Seller by reason of such condemnation prior to closing. If the
condemnation proceeding shall not have been concluded prior to the Closing,
then there shall be no abatement of the Purchase Price and Seller shall assign
any interest it has in the pending award to Purchaser. For purposes of this
Section 7.1, a Substantial Portion shall mean a condemnation of in excess of
$500,000 in value of the Real Property.
7.2 Loss due to Casualty. In the event of Substantial Loss or Damage
to the Real Property by fire or other casualty (not resulting from acts of
Purchaser), either party may, upon written notice to the other party given
within 10 days of receipt of notice of such event, cancel this Agreement in
which event Seller shall instruct the Title Company to return the Deposit to
Purchaser and this Agreement shall terminate and neither party shall have any
rights or obligations hereunder except for the Surviving Covenants. In the
event that neither party elects to terminate, or if the casualty results in
less than Substantial
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Loss or Damage, then this Agreement shall remain in full force and effect and
Seller shall be entitled to all insurance proceeds received or collected by
reason of such damage or loss, whereupon the transaction hereby contemplated
shall close in accordance with the terms and conditions of this Agreement
except that there will be abatement of the Purchase Price equal to the amount
of the net proceeds, less costs and attorney's fees, which are received by
Seller as a result of such damage or loss, provided that such abatement will be
reduced by the amount expended by Seller in accordance with Article VIII hereof
for restoration or preservation of the Property following the casualty.
Alternatively, Purchaser may, in its discretion, have Seller repair or replace
the damaged Property, and there shall be no abatement of the Purchase Price in
such case. However, Purchaser shall not be entitled to require Seller to effect
repair or replacement unless the loss is entirely covered by insurance (except
for any applicable deductible) and the repair or replacement will take no more
than three (3) months to complete. For purposes of this Section 7.2,
"Substantial Loss or Damage" shall mean loss or damage, the cost for repair of
which exceed $500,000.
Article VIII.
Maintenance of the Property
Between the time of execution of this Agreement and the Closing, Seller
shall maintain the Property in good repair, reasonable wear and tear excepted,
shall perform all work
Page 18
<PAGE> 22
required to be done under the terms of any lease or agreement relating to the
Property, and shall timely make all repairs, maintenance and replacements of
equipment or improvements, the same as though Seller were retaining the
Property; except that in the event of a fire or other casualty, damage or loss,
Seller shall have no duty to repair said damage. However, Seller may repair any
such damage with Purchaser's prior, written approval and may, without
Purchaser's approval, repair damage where such repair is necessary in Seller's
reasonable opinion to preserve and protect the health and safety of tenants of
the Property or to preserve the Property from imminent risk of further damage
or if required to do so by Seller's insurance carrier. Any such emergency
repairs shall be reported to Purchaser within 48 hours of their completion.
After the Effective Date, Seller shall not lease any portion of the Real
Property unless such lease has been approved in writing by Purchaser. Any such
proposed lease shall be on Seller's standard form of lease and shall be
reviewed and approved or rejected within five (5) business days after receipt
thereof by Purchaser. Failure to approve or reject such proposed lease within
such period shall be deemed approval. If the proposed lease is rejected, then
Seller shall not enter into such lease.
Article IX.
Broker
Purchaser represents to Seller that it has not engaged any broker,
finder or agent in connection with this transaction
Page 19
<PAGE> 23
other than Commercial Property Services Company ("Purchaser's Broker") and that
it has not dealt with any broker, finder or agent other than Purchaser's Broker
and Seller's Broker (as hereinafter defined). Seller represents to Purchaser
that it has not engaged any broker or agent in connection with this transaction
other than SBC&D Company, Inc. ("Seller's Broker") and that it has not dealt
with any broker, finder or agent other than Purchaser's Broker and Seller's
Broker. Seller shall pay Seller's Broker a commission at Closing pursuant to a
separate agreement. Seller's Broker shall pay Purchaser's Broker a commission
pursuant to a separate written agreement. Each party will indemnify and hold
the other party harmless from all loss, cost and expense (including reasonable
attorney's fees) arising out of a breach of its representation or undertaking
hereunder. The provisions of this Article IX shall survive the Closing and any
termination of this Agreement.
Article X.
Representations and Warranties
10.1 Limitations on Representations and Warranties. Purchase hereby
agrees and acknowledges that, except as set forth in Section 10.2 below,
neither Seller nor any agent, attorney, employee or representative of Seller
has made any representation whatsoever regarding the subject matter of this
sale, or any part thereof, including (without limiting the generality of the
foregoing) representations as to the physical nature or condition of the
Property or the capabilities thereof,
Page 20
<PAGE> 24
and that Purchaser, in executing, delivering and/or performing this Agreement,
does not rely upon any statement and/or information to whomever made or given,
directly or indirectly, orally or in writing, by any individual, firm or
corporation. Purchaser agrees to take the Real Property and the Personal
Property "as is," as of the date hereof, reasonable wear and tear, and minor
damage caused by the removal of any personal property or fixtures not included
in this sale, excepted. EXCEPT AS SET FORTH IN SECTION 10.2 BELOW, (i) SELLER
MAKES NO REPRESENTATIONS OR WARRANTIES AS TO THE PHYSICAL CONDITION OF THE
PROPERTY OR THE SUITABILITY THEREOF FOR ANY PURPOSE FOR WHICH PURCHASER MAY
DESIRE TO USE IT; (ii) SELLER HEREBY EXPRESSLY DISCLAIMS ANY WARRANTIES OF
MERCHANTABILITY AND/OR FITNESS FOR A PARTICULAR PURPOSE AND ANY OTHER
WARRANTIES OR REPRESENTATIONS AS TO THE PHYSICAL CONDITION OF THE PROPERTY; AND
(iii) PURCHASER, BY ACCEPTANCE OF THE DEED, AGREES THAT IT HAS INSPECTED THE
PROPERTY AND ACCEPTS SAME "AS IS" AND "WITH ALL FAULTS".
Purchaser understands that any financial statements and data,
including, without limitation, gross rental income, operating expenses and cash
flow statements, to be made available by Seller to Purchaser, will be unaudited
financial statements and data not prepared or reviewed by independent public
accountants, and that Seller makes no representation as to the accuracy or
completeness thereof.
10.2 Representations and Warranties. Seller makes the following
representations and warranties and agrees that
Page 21
<PAGE> 25
Purchaser's obligations under this Agreement are conditioned upon the truth and
accuracy of such representations and warranties, both as of this date and as of
the date of the Closing:
(a) Seller has the corporate power and authority to enter into this
Agreement and convey the Property to Purchaser.
(b) Seller has received no notice of any existing, pending or
threatened litigation, administrative proceeding or condemnation or sale in
lieu thereof, or cancellation of insurance coverage, with respect to any
portion of the Real Property, except as noted on Exhibit H attached hereto.
(c) Except for Radius, who at Closing shall have terminated its lease,
there are no parties in possession of, or claiming any possession to, any
portion of the Real Property as lessees, tenants at sufferance, licensees,
trespassers or otherwise.
(d) Intentionally Omitted.
(e) There are no attachments or executions affecting the Property,
general assignments for the benefit of creditors, or voluntary or involuntary
proceedings in bankruptcy, pending or, to the best of Seller's knowledge,
threatened against Seller.
(f) During the period of Seller's ownership of the Property Seller has
not itself, and to the best of Seller's knowledge no prior owner or current or
prior tenant or other occupant of all
Page 22
<PAGE> 26
or any part of the Property at any time has, used Hazardous Materials
(hereinafter defined) on, from, or affecting the Property in any manner that
violates federal, state, or local laws, ordinances, rules, or regulations
governing the use, storage, treatment, transportation, generation, or disposal
of Hazardous Materials (collectively, the "Environmental Laws"), and to the
best of Seller's knowledge no Hazardous Materials have been disposed of on the
Property. "Hazardous Materials" shall mean any flammable substances,
explosives, radioactive materials, hazardous wastes, toxic substances,
pollutants, pollution, or related materials regulated under any of the
Environmental Laws.
10.3 Seller's Knowledge. Whenever the term "to the best of Seller's
knowledge" is used in this Agreement or in any representations and warranties
given to Purchaser at Closing, such knowledge shall be the actual knowledge of
Michael J. Riccio and Leon Pouncy (the "Key Personnel"), the asset managers
assigned to the Real Property by CIGNA Investments, Inc., authorized agent for
Seller, after review of the files of Seller and CIGNA Investments, Inc. and
inquiry of Seller's property manager Scott Trobbe of South Bay Construction and
Development Company. Seller shall have no duty to conduct any further inquiry
in making any such representations and warranties, and no knowledge of any
other person shall be imputed to the Key Personnel.
10.4 Survival. All representations and warranties contained in Section
10.2 will survive the Closing of this transaction (but
Page 23
<PAGE> 27
only as to the status of facts as they exist as of the Closing, it being
understood that the Seller makes no representations or warranties which would
apply to changes or other matters occurring after the Closing), but shall
expire on the date one year from the date of Closing, and no action on such
representations and warranties may be commenced after such expiration.
Article XI.
Intentionally Omitted
Article XII.
Assignment
This Agreement may not be assigned or transferred by Purchaser without
prior written consent of Seller. No assignment shall relieve Purchaser of any
of its obligations under this Agreement.
Article XIII.
Notices
All notices hereunder or required by law shall be sent via United States
Mail, postage prepaid, certified mail, return receipt requested, or via any
nationally recognized commercial overnight carrier with provisions for receipt,
addressed to the parties hereto at their respective addresses set forth below or
Page 24
<PAGE> 28
as they have theretofore specified by written notice delivered in accordance
herewith:
PURCHASER: Narenda K. Gupta, Chairman
Integrated Systems, Inc.
3260 Jay Street
Santa Clara, CA 95054
with a copy to: David Healy
Fenwick & West
2 Palo Alto Square
Palo Alto, CA 94306
SELLER: Connecticut General Life Insurance
Company
c/o CIGNA Investments, Inc.
900 Cottage Grove Road
Hartford, CT 06152-2311
Attn: Asset Management, S-311
with a copy to: CIGNA Corporation
Investment Law Department
Mortgage and Real Estate Group, S-215A
900 Cottage Grove Road
Hartford, CT 06152-2215
Delivery will be deemed complete upon actual receipt or refusal to accept
delivery.
Page 25
<PAGE> 29
Article XIV.
Expenses
Seller shall pay (i) its own attorney's fees, (ii) the real estate
transfer stamp, documentary or conveyance taxes, (iii) the cost of an Owner's
title insurance policy without extended coverage or special endorsements issued
in connection with this transaction, and (iv) one-half of the Title Company's
escrow fee. Purchaser shall pay for (a) all of Purchaser's attorneys' fees and
expenses, (b) costs of Purchaser's inspecting architect and engineer, if any,
(c) recording charges, (d) survey costs, (e) one-half of the Title Company's
escrow fee, and (f) the cost of any title insurance in excess of the cost of an
Owner's policy without extended coverage or special endorsements, including any
additional premium charges for endorsements and/or deletions of exception
items. Any cancellation charges imposed by any title company in the event a
title insurance policy is not issued shall be split evenly, unless caused by
willful default of one party, in which case such charges shall be borne by the
willfully defaulting party.
Article XV.
Miscellaneous
15.1 Successors and Assigns. All the terms and conditions of this
Agreement are hereby made binding upon the executors, heirs, administrators,
successors and permitted assigns of both parties hereto.
Page 26
<PAGE> 30
15.2 Gender. Words of any gender used in this Agreement shall be held
and construed to include any other gender, and words in the singular number
shall be held to include the plural, and vice versa, unless the context
requires otherwise.
15.3 Captions. The captions in this Agreement are inserted only for
the purpose of convenient reference and in no way define, limit or prescribe
the scope or intent of this Agreement or any part hereof.
15.4 Construction. No provision of this Agreement shall be construed
by any Court or other judicial authority against any party hereto by reason of
such party's being deemed to have drafted or structured such provisions.
15.5 Entire Agreement. This Agreement constitutes the entire contract
between the parties hereto and there are no other oral or written promises,
conditions, representations, understandings or terms of any kind as conditions
or inducements to the execution hereof and none have been relied upon by either
party.
15.6 Recording. The parties agree that this Agreement shall not be
recorded. If Purchaser causes this Agreement or any notice or memorandum
thereof to be recorded, this Agreement shall be null and void at the option of
the Seller.
Page 27
<PAGE> 31
15.7 No Continuance. Purchaser acknowledges that there shall be no
assignment, transfer or continuance of any of Seller's insurance coverage or of
the property management contract.
15.8 Time of Essence. Time is of the essence in this transaction.
15.9 Original Document. This Agreement may be executed by both
parties in counterparts in which event each shall be deemed an original.
15.10 Governing Law. This Agreement shall be construed, and the rights
and obligations of Seller and Purchaser hereunder, shall be determined in
accordance with the laws of the State of California.
15.11 Acceptance of Offer. This Agreement constitutes Seller's offer
to sell to Purchaser on the terms set forth herein and must be accepted by
Purchaser by signing four copies hereof and returning two copies to Seller no
later than February 9, 1996. If Purchaser has not accepted this Agreement by
such date, then this Agreement and the offer represented hereby shall
automatically be revoked and shall be of no further force or effect.
15.12 Confidentiality. Purchaser and Seller agree that all documents
and information concerning the Property delivered to
Page 28
<PAGE> 32
Purchaser, the subject matter of this Agreement, and all negotiations will
remain confidential. Purchaser and Seller will disclose such information only
to those parties required to know it, including, without limitation, employees
of either of the parties, consultants and attorneys engaged by either of the
parties, and prospective or existing investors and lenders.
15.13 Surviving Covenants. Notwithstanding any provisions hereof to
the contrary, the provisions of the second paragraph of Section 6.2 hereof and
the provisions of Article IX hereof (collectively, the "Surviving Covenants")
shall survive the closing and any termination of this Agreement.
15.14 Intentionally Omitted.
15.15 Attorneys' Fees. If either party hereto fails to perform any of
its obligations under this Agreement or if any dispute arises between the
parties hereto concerning the meaning or interpretation of any provision of
this Agreement, then the defaulting party or the party not prevailing in such
dispute, as the case may be, shall pay any and all costs and expenses incurred
by the other party on account of such default and/or in enforcing or
establishing its rights hereunder, including, without limitation, court costs
and reasonable attorney's fees and disbursements. Any such attorneys' fees and
other expenses incurred by either party in enforcing a judgment in its favor
under this Agreement shall be recoverable separately from and in addition to
any other amount included in such judgment, and such
Page 29
<PAGE> 33
attorneys' fees obligation is intended to be severable from the other
provisions of this Agreement and to survive and not be merged into any such
judgment.
15.16 ERISA. Purchaser acknowledges that Connecticut General Life
Insurance Company is entering into this Agreement on behalf of its Closed-End
Real Estate Fund II ("CERF II"). According to Seller, CERF II is a separate
account as defined in Section 3(17) of the Employee Retirement Income Security
Act of 1974 ("ERISA"). Under ERISA and under United States Department of Labor
Prohibited Transaction Class Exemption 78-19, Seller is prohibited from
entering into transactions with certain classes of parties ("parties in
interest") with respect to any participant in CERF II holding an interest in
excess of 10%. Seller represents to the Purchaser that the only such 10%
participants in CERF II are the State of Connecticut Pension Fund, Pension Plan
of United Technologies Corporation, United States Pension Plan of CIGNA
Corporation, and the Pension Plan of Unisys (the "Plans"). In order to assist
Seller in determining that Seller is not engaging in a prohibited transaction
under ERISA by entering into this Agreement, Purchaser hereby represents to
Seller that Purchaser:
1. Is not a fiduciary who exerts discretion, control or
authority over the Plans; or an administrator, officer,
trustee or custodian of such fiduciary; or counsel to,
or an employee of, the Plans;
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<PAGE> 34
2. Is not owned, 50% or more, by any fiduciary, counsel or
employee described in subparagraph 1;
3. Is not an employee, officer, director, 10% shareholder
or 10% partner of any "owning" entity described in
subparagraph 2.
In addition, only the assets of CERF II shall be bound for the
obligations under this Agreement and any agreements contemplated hereby, and no
recourse shall be had to the general assets of Connecticut General Life
Insurance Company for any such obligation.
EXECUTED BY PURCHASER this 9th day of February, 1996.
PURCHASER:
INTEGRATED SYSTEMS, INC.
By: /s/ Narendra Gupta
----------------------
Name:
Title: Chairman
Page 31
<PAGE> 35
EXECUTED BY SELLER this _______ day of February, 1996.
SELLER:
CONNECTICUT GENERAL LIFE INSURANCE
COMPANY, on behalf of its Closed-
End Real Estate Fund II
By: CIGNA Investments, Inc.
By: /s/ Leon Pouncy
--------------------------------
Name: Leon Pouncy
Title: Managing Director
Receipt of original copies of this Agreement executed by Seller and Purchaser
is acknowledged this _______ day of ________________________, 19____.
TITLE COMPANY:
SANTA CLARA LAND TITLE COMPANY
By: ______________________________
Name:
Title:
Page 32
<PAGE> 36
EXHIBIT A
TO
AGREEMENT OF PURCHASE AND SALE
Description of Land
<PAGE> 37
Page No. 6
File No. 116511
SCHEDULE A
LEGAL DESCRIPTION
All that certain property situate in the City of Sunnyvale, County of Santa
Clara, State of California, described as follows:
Parcel 1, as shown on that Parcel Map filed for record in the office of the
Recorder of the County of Santa Clara, State of California on November 9,
1976, in Book 383 of Maps, page(s) 19.
ARB No: 110-3-62
<PAGE> 38
EXHIBIT B
TO
AGREEMENT OF PURCHASE AND SALE
Intentionally Omitted
<PAGE> 39
EXHIBIT C
TO
AGREEMENT OF PURCHASE AND SALE
Grant Deed
[The form of Grant Deed follows this page.]
<PAGE> 40
GRANT DEED
RECORDING REQUESTED BY
AND WHEN RECORDED RETURN TO:
________________________________________
________________________________________
________________________________________
Documentary Transfer Tax is not of public record and is shown on a separate
sheet attached to this deed.
_______________________________________________________________________________
GRANT DEED
FOR VALUABLE CONSIDERATION, receipt of which is hereby acknowledged,
____________________, a ____________________, hereby grants to
____________________, a ____________________, the real property located in
____________________, County of ____________________, State of California,
described on Exhibit A attached hereto and made a part hereof.
Subject, however, to Exhibit A attached hereto and made a part hereof.
Executed as of this ____ day of ____________________, 19__.
_____________________________________, a
________________________________________
By: ____________________________________
Name:
Its:
MAIL TAX STATEMENTS TO:
[Buyer's Address]
________________________________________
________________________________________
________________________________________
________________________________________
<PAGE> 41
EXHIBIT A
TO
GRANT DEED
REAL PROPERTY
[TO COME]
Subject to:
(a) all real property taxes and assessments not delinquent, and all easements,
liens, covenants, conditions and restrictions of record and (b) any and all
matters referenced or indicated on that certain survey prepared by
, dated , under Job No. .
- ---------------------- ---------------------- ---------
<PAGE> 42
EXHIBIT B
TO
GRANT DEED
PERMITTED TITLE EXCEPTIONS
[TO COME]
<PAGE> 43
EXHIBIT D
TO
AGREEMENT OF PURCHASE AND SALE
Bill of Sale
[The form of Bill of Sale follows this page.]
<PAGE> 44
BILL OF SALE AND GENERAL ASSIGNMENT
STATE OF ________________________ )
)
COUNTY OF _______________________ )
Concurrently with the execution and delivery hereof, ________________,
a ________________ ("Assignor"), is conveying to ________________, a
________________ ("Assignee"), by Grant Deed, that certain tract of land
together with the improvements thereon (the "Property") lying and being
situated in ________________, ________________ and being more particularly
described in Exhibit A, attached hereto and made a part hereof.
It is the desire of Assignor to hereby assign, transfer, setover and
deliver to Assignee all furnishings, fixtures, fittings, appliances, apparatus,
equipment, machinery and other items of personal property, if any, affixed or
attached to, or placed or situated upon, the Property, except those not owned
by Assignor but including all of Assignor's interest in and to any tangible
personal property left or abandoned in or on the Property by Radius, Inc., and
any and all other incidental rights and appurtenances relating thereto, all as
more fully described below (such properties being collectively called the
"Assigned Properties").
NOW, THEREFORE, in consideration of the receipt of Ten Dollars ($10.00)
and other good and valuable consideration in hand paid by Assignee to Assignor,
the receipt and sufficiency of which are hereby acknowledged and confessed by
Assignor, Assignor does hereby ASSIGN, TRANSFER, SET OVER and DELIVER to
Assignee, its successors and assigns, all of the Assigned Properties, without
warranty (whether statutory, express or implied), including, without limitation
the following:
1. All furnishings, fittings, equipment, appliances, apparatus,
machinery fixtures and all other personal property of every kind and character
(both tangible and intangible), if any, owned by Assignor and located in or on
the Property;
2. All of Assignor's interest in and to all use, occupancy, building and
operating permits, licenses and approvals, if any, issued from time to time
with respect to the Property or the Assigned Properties;
3. All of Assignor's interest in and to all maintenance, service and
supply contracts, if any, relating to the Property or the Assigned Properties
(to the full extent same are assignable) listed on Exhibit B hereto;
<PAGE> 45
BILL OF SALE AND GENERAL ASSIGNMENT
(Continued)
4. All of Assignor's interest in and to all existing and assignable
guaranties and warranties (express or implied), if any, issued in connection
with the construction, alteration and repair of the Property and/or the
purchase, installation and the repair of the Assigned Properties;
5. All rights which Assignor may have to use any names commonly used in
connection with the Property, if any; and
6. All rights, which Assignor may have, if any, in and to any tenant
data, telephone numbers and listings, all master keys and keys to common areas,
all good will, if any, and any and all other rights, privileges and
appurtenances owned by Assignor and related to or used in connection with the
existing business operation of the Property.
ASSIGNOR MAKES NO REPRESENTATIONS OR WARRANTIES AS TO THE PHYSICAL
CONDITION OF THE PROPERTY OR THE ASSIGNED PROPERTIES OR THE SUITABILITY THEREOF
FOR ANY PURPOSE THAT ASSIGNEE MAY DESIRE TO USE IT. ASSIGNOR HEREBY EXPRESSLY
DISCLAIMS ANY WARRANTIES AS TO MERCHANTABILITY AND/OR FITNESS FOR A PARTICULAR
PURPOSE AND ANY OTHER WARRANTIES OR REPRESENTATIONS AS TO THE PHYSICAL
CONDITION OF THE ASSIGNED PROPERTIES. ASSIGNEE ACKNOWLEDGES AND AGREES THAT IT
HAS INSPECTED THE ASSIGNED PROPERTIES AND ACCEPTS SAME IN THEIR PRESENT
CONDITION, "AS IS" AND "WITH ALL FAULTS."
Assignor on behalf of itself and its successors and assigns does hereby
agree to indemnify and hold Assignee, its successors and assigns, harmless from
all obligations accruing under the maintenance, service and supply contracts
assigned hereby and any liabilities arising thereunder, prior to the date
hereof but not thereafter.
Assignee on behalf of itself, its successors and assigns, hereby agrees
to assume and perform all obligations accruing under the maintenance, service
and supply contracts from and after the date hereof, the Assignee on behalf of
itself, its successors and assigns does hereby agree to indemnify and hold
Assignor, its successors and assigns, harmless from all such obligations and
any liabilities arising thereunder from and after the date hereof.
If either party hereto fails to perform any of its obligations under
this Agreement or if any dispute arises between the parties hereto concerning
the meaning or interpretation of any provision of this Agreement, then the
defaulting party or the party not prevailing in such dispute, as the case may
be, shall pay any and all costs and expenses incurred by the other party on
account of such default and/or in enforcing or establishing its
<PAGE> 46
BILL OF SALE AND GENERAL ASSIGNMENT
(Continued)
rights hereunder, including, without limitation, court costs and reasonable
attorneys' fees and disbursements. Any such attorneys' fees and other expenses
incurred by either party in enforcing a judgment in its favor under this
Agreement shall be recoverable separately from and in addition to any other
amount included in such judgment, and such attorneys' fees obligation is
intended to be severable from the other provisions of this Agreement and to
survive and not be merged into any such judgment.
This document may be executed in any number of counterparts, each of
which may be executed by any one or more of the parties hereto, but all of
which shall constitute one instrument, and shall be binding and effective when
all parties hereto have executed at least one counterpart.
IN WITNESS WHEREOF, Assignor and Assignee have caused this Assignment
to be executed as of the ______ day of ________________________, 19___.
ASSIGNOR:
ASSIGNEE:
<PAGE> 47
BILL OF SALE AND GENERAL ASSIGNMENT
(Continued)
EXHIBIT A
TO
BILL OF SALE AND GENERAL ASSIGNMENT
REAL PROPERTY
[TO COME]
<PAGE> 48
BILL OF SALE AND GENERAL ASSIGNMENT
(Continued)
EXHIBIT B
TO
BILL OF SALE AND GENERAL ASSIGNMENT
SERVICE AND MAINTENANCE CONTRACTS TO BE ASSUMED BY PURCHASER
[TO COME]
<PAGE> 49
EXHIBIT E
TO
AGREEMENT OF PURCHASE AND SALE
Service and Maintenance Agreements
to be Assumed by Purchaser
<PAGE> 50
EXHIBIT F
TO
AGREEMENT OF PURCHASE AND SALE
Indemnification Agreement
[The form of Indemnification Agreement follows this page.]
<PAGE> 51
INDEMNIFICATION AGREEMENT
Concurrently with the execution and delivery hereof, ___________________
______________, a _________________________________________________ ("Seller"),
is conveying to _______________________________________________, a _____________
_______________ ("Purchaser"), by Grant Deed, that certain tract of land
together with the improvements thereon (the "Property"), lying and being
situated in ____________________________________________, ______________________
__________________ and being more particularly described on Exhibit A attached
hereto and made a part hereof. It is the desire of Seller and Purchaser to
deliver a mutual cross-indemnification pertaining to the expenses relating to
the ownership, management and operation of the Property.
NOW, THEREFORE, in consideration of the receipt of Ten Dollars ($10.00)
and other good and valuable consideration in hand paid, the receipt and
sufficiency of which are hereby acknowledged, Purchaser and Seller hereby agree
as follows:
1. Seller on behalf of itself and its successors and assigns does
hereby agree to indemnify and hold Purchaser, its successors and assigns,
harmless from and against all costs, charges and expenses related to the
ownership, management and operation of the Property prior to the date hereof
but not thereafter.
2. Purchaser on behalf of itself, its successors and assigns does
hereby agree to indemnify and hold Seller, its successors and assigns, harmless
from and against all costs, charges and expenses relating to the ownership,
management and operation of the Property from and after the date hereof, Except
for pre-closing contractual obligations in connection with the Property not
assumed by Purchaser.
The foregoing indemnities shall not imply any warranties or indemnities
with respect to compliance with environmental and land use laws or disposal of
hazardous materials, such matters being governed solely by the terms of that
certain Agreement of Purchase and Sale between Seller and Purchaser having an
Effective Date (as defined therein) of February __, 1996.
If either party hereto fails to perform any of its obligations under
this Agreement or if any dispute arises between the parties hereto concerning
the meaning or interpretation of any provision of this Agreement, then the
defaulting party or the party not prevailing in such dispute, as the case may
be, shall pay any and all costs and expenses incurred by the other party on
account of such default and/or in enforcing or establishing its rights
hereunder, including without limitation, court costs and reasonable attorneys'
fees and disbursements. Any such attorneys' fees and other expenses incurred by
either party in enforcing a judgment in its favor under this Agreement shall be
recoverable separately from and in addition to any other amount
<PAGE> 52
included in such judgment, and such attorneys' fees obligation is intended to
be severable from the other provisions of this Agreement and to survive and not
be merged into any such judgment.
This document may be executed in any number of counterparts, each of
which may be executed by and one or more of the parties hereto, but all of
which shall constitute one instrument, and shall be binding and effective when
all parties hereto have executed at least one counterpart.
IN WITNESS WHEREOF, Purchaser and Seller have caused this Agreement to
be executed as of the ____ day of _______________________, 19__.
SELLER:
PURCHASER:
<PAGE> 53
EXHIBIT G
TO
AGREEMENT OF PURCHASE AND SALE
Form of Seller's Affidavit of Non-Foreign Status
STATE OF ____________________________)
) (insert date)
COUNTY OF ___________________________)
I, (proper name of Seller's officer), as (office held) of (Seller),
being duly authorized to make this affidavit on behalf of (Seller) and being
duly sworn, do depose and say, that:
1. (Seller's) taxpayer identification number is
_______________________.
2. (Seller) is not a "foreign person" within the meaning of Section
1445(f)(3), of the Internal Revenue Code of 1954 (the "Code"), as amended; and
(Buyer) is not required, pursuant to Section 1445 of the Code, to withhold ten
percent (10%) of the amount realized by Seller on the disposition of the
Property to (Buyer).
3. I understand that I am making this Affidavit under penalty or
perjury pursuant to the requirements of Section 1445 of the Code.
(Seller)
By:
______________________________________________
SWORN TO and subscribed before me this _____________ day of
___________________, 199_.
_____________________________________________
Notary Public
My Commission Expires:
<PAGE> 54
EXHIBIT H
TO
AGREEMENT TO PURCHASE AND SALE
Pending Litigation
NONE.
<PAGE> 1
EXHIBIT 11.01
INTEGRATED SYSTEMS, INC.
COMPUTATION OF NET INCOME PER SHARE(1)
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED FEBRUARY 28,
--------------------------------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Primary:
Net income ............................ $ 4,086 $ 6,490 $ 5,283
======== ======== ========
Reconciliation of weighted number of
shares outstanding to amount used
in net income per share computation:
Weighted average number of common
shares outstanding ................ 18,636 19,318 20,962
Dilutive effect of options at
weighted average price ............ 486 646 1,126
------- ------- -------
19,122 19,964 22,088
======= ======= =======
Net income per share(2) .................. $ 0.21 $ 0.33 $ 0.24
======= ======= =======
</TABLE>
- -------------------
(1) See Note 1 of Notes to Consolidated Financial Statements.
(2) Primary and fully diluted earnings per share are the same for all years
presented.
<PAGE> 1
EXHIBIT 21.01
LIST OF REGISTRANT'S SUBSIDIARIES
State or Jurisdiction of
Name Incorporation or Organization
---- -----------------------------
Integrated Systems, Inc. F.S.C. U.S. Virgin Islands
Integrated Systems Inc. Limited United Kingdom
Integrated Systems, Inc., S.A. France
ARS Integrated Systems GmbH Germany
Integrated Systems, Inc. A.B. Sweden
Integrated Systems (Israel) Ltd. Israel
TakeFive Software GmbH Austria
Doctor Design, Inc. California
ISICAN Integrated Systems
(Canada) Inc. Canada
Integrated Systems Japan K.K. Japan
Integrated Systems Inc.
Italia SRL Italy
<PAGE> 1
EXHIBIT 23.01
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements
of Integrated Systems, Inc. on Form S-8 (File Nos. 33-35281, 33-48626, 33-70494,
333-1145) of our report dated March 27, 1996, on our audits of the consolidated
financial statements and financial statement schedule of Integrated Systems,
Inc. as of February 28, 1995 and 1996, and for each of the three years in the
period ended February 28, 1996 which report is included in this Form 10-K.
Coopers & Lybrand L.L.P.
San Jose, California
April 11, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FY96 FORM
10-K FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-29-1996
<PERIOD-START> MAR-01-1995
<PERIOD-END> FEB-29-1996
<CASH> 21,822
<SECURITIES> 12,231
<RECEIVABLES> 20,674
<ALLOWANCES> 852
<INVENTORY> 0
<CURRENT-ASSETS> 57,835
<PP&E> 14,181
<DEPRECIATION> 8,588
<TOTAL-ASSETS> 85,264
<CURRENT-LIABILITIES> 26,404
<BONDS> 0
0
0
<COMMON> 40,283
<OTHER-SE> 17,993
<TOTAL-LIABILITY-AND-EQUITY> 85,264
<SALES> 51,597
<TOTAL-REVENUES> 84,442
<CGS> 9,046
<TOTAL-COSTS> 24,870
<OTHER-EXPENSES> 53,108
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 8,795
<INCOME-TAX> 3,512
<INCOME-CONTINUING> 5,283
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,283
<EPS-PRIMARY> 0.24
<EPS-DILUTED> 0.24
</TABLE>
