SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended May 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from __________ to __________
Commission file number: 0-18268
------------------------------
INTEGRATED SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
California 94-2658153
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
------------------------------
201 Moffett Park Drive
Sunnyvale, California 94089
(408) 542-1500
(Address, including zip code, of Registrant's
principal executive offices and telephone
number, including area code)
------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
The number of shares outstanding of the Registrant's Common Stock on June 30,
1996 was 22,158,887 shares.
The Exhibit Index is located on page 12. Page 1 of 14 pages.
<PAGE>
<TABLE>
INTEGRATED SYSTEMS, INC.
INDEX
<CAPTION>
Page
----
<S> <C> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets at May 31, 1996 and February 28, 1996 4
Condensed Consolidated Statements of Income for the Three Months Ended
May 31, 1996 and 1995 5
Condensed Consolidated Statements of Cash Flows for the Three Months
Ended May 31, 1996 and 1995 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 8
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
</TABLE>
=======================================================================
This Form 10-Q contains forward-looking statements (as defined in the
Private Securities Litigation Reform Act of 1995), including but not
limited to statements regarding the Company's expectations, hopes or
intentions regarding the future. Actual results and trends could differ
materially from those discussed in the forward-looking statements. In
addition, past trends should not be perceived as indicators of future
performance. Among the factors that could cause actual results to
differ are those detailed elsewhere in this Report in Management's
Discussion and Analysis of Financial Condition and Results of
Operations and in the Company's Securities and Exchange Commission
reports.
========================================================================
-2-
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The condensed consolidated interim financial statements included herein have
been prepared by Integrated Systems, Inc. (the "Company"), without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Although certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, the Company believes that the disclosures made are adequate to make
the information presented not misleading. It is suggested that the condensed
consolidated interim financial statements be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the year ended February 28, 1996. The
February 28, 1996 condensed consolidated balance sheet data was derived from the
audited financial statements, but does not include all disclosures required by
generally accepted accounting principles.
The accompanying condensed consolidated interim financial statements have been
prepared in all material respects in conformity with the standards of accounting
measurements set forth in Accounting Principles Board Opinion No. 28 and, in the
opinion of management, reflect all adjustments, consisting only of normal
recurring adjustments, necessary to summarize fairly the financial position,
results of operations, and cash flows for the periods indicated. The results of
operations for the interim periods presented are not necessarily indicative of
the results to be expected for the full year.
-3-
<PAGE>
INTEGRATED SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
May 31, February 28,
1996 1996
-------- --------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 17,043 $ 21,822
Marketable securities 11,180 12,231
Accounts receivable, net 19,894 19,822
Deferred income taxes 528 373
Prepaid expenses and other 3,931 3,587
--------- ---------
Total current assets 52,576 57,835
Marketable securities 23,554 15,423
Property and equipment, net 18,101 5,593
Intangible assets, net 1,891 2,106
Deferred income taxes 1,906 1,906
Other assets 3,241 2,401
--------- ---------
Total assets $ 101,269 $ 85,264
========= =========
LIABILITIES
Current liabilities:
Accounts payable $ 3,067 $ 4,309
Accrued payroll and related expenses 3,899 3,673
Other accrued liabilities 4,278 4,842
Income taxes payable -- 4,191
Deferred revenue 11,282 9,389
--------- ---------
Total current liabilities 22,526 26,404
Other liabilities 492 584
--------- ---------
Total liabilities 23,018 26,988
--------- ---------
SHAREHOLDERS' EQUITY
Common Stock, no par value, 50,000 shares authorized:
22,115 and 21,206 shares issued and outstanding at
May 31, 1996 and February 28, 1996, respectively 58,165 40,283
Unrealized holding gain on marketable securities, net 49 333
Translation adjustment (74) --
Retained earnings 20,111 17,660
--------- ---------
Total shareholders' equity 78,251 58,276
--------- ---------
Total liabilities and shareholders' equity $ 101,269 $ 85,264
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
-4-
<PAGE>
INTEGRATED SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
Three Months Ended
May 31,
---------------------
1996 1995
------- -------
Revenue:
Product $13,718 $11,622
Services 9,433 6,836
------- -------
Total revenue 23,151 18,458
------- -------
Costs and expenses:
Cost of product revenue 2,011 2,466
Cost of services revenue 4,174 3,423
Marketing and sales 8,821 6,379
Research and development 3,712 2,585
General and administrative 2,011 1,557
Amortization of intangible assets 103 186
------- -------
Total costs and expenses 20,832 16,596
------- -------
Income from operations 2,319 1,862
Interest and other income 1,394 525
------- -------
Income before income taxes 3,713 2,387
Provision for income taxes 1,262 809
------- -------
Net income $ 2,451 $ 1,578
======= =======
Earnings per share $ 0.11 $ 0.07
======= =======
Shares used in per share calculations 22,709 21,714
======= =======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
-5-
<PAGE>
<TABLE>
INTEGRATED SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<CAPTION>
Three Months Ended
May 31,
----------------------------
1996 1995
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,451 $ 1,578
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 962 1,214
Deferred income taxes (9) 249
Net income from unconsolidated subsidiary (483) --
Changes in assets and liabilities:
Accounts receivable (72) 2,109
Prepaid expenses and other (344) 33
Accounts payable, accrued payroll and
other accrued liabilities (1,580) 600
Income taxes payable (1,061) (636)
Deferred revenue 1,893 (284)
Other assets and liabilities (97) (18)
-------- --------
Net cash provided by operating activities 1,660 4,845
-------- --------
Cash flows from investing activities:
Purchases of marketable securities, net (7,510) (1,152)
Additions to property and equipment, net (13,095) (1,176)
Capitalized software development costs (285) (160)
Other (152) 58
-------- --------
Net cash used in investing activities (21,042) (2,430)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 12,955 --
Proceeds from exercise of common stock options and
purchases under the Employee Stock Purchase Plan 1,700 642
Other -- (53)
-------- --------
Net cash provided by financing activities 14,655 589
-------- --------
Effect of exchange rate fluctuations on cash and cash equivalents (52) --
Net increase (decrease) in cash and cash equivalents (4,779) 3,004
Cash and cash equivalents at beginning of period 21,822 7,746
-------- --------
Cash and cash equivalents at end of period $ 17,043 $ 10,750
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes, net $ 1,889 $ 1,011
Supplemental schedule of noncash investing and financing activities:
Unrealized gain (loss) on marketable securities $ (430) $ 464
Tax benefit from disqualifying dispositions of common stock $ 3,379 --
<FN>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
</FN>
</TABLE>
-6-
<PAGE>
INTEGRATED SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information for the three months ended May 31,
1996 and 1995 is unaudited)
1. Summary of Significant Accounting Policies
The condensed consolidated financial statements include the accounts of
Integrated Systems, Inc. and its wholly owned subsidiaries, after elimination of
all significant intercompany accounts and transactions, and should be read in
conjunction with the Company's Annual Report on Form 10-K for the year ended
February 28, 1996. These condensed consolidated financial statements do not
include all disclosures normally required by generally accepted accounting
principles.
2. 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.
The following table sets forth the calculation of earnings per share for
purposes of this report:
Three Months Ended
May 31,
-------------------
(in thousands, except per share data) 1996 1995
------- -------
(unaudited)
Primary:
Net income $ 2,451 $ 1,578
======= =======
Number of shares:
Weighted average number of common
shares outstanding 21,506 20,685
Dilutive effect of stock options, net 1,203 1,029
------- -------
22,709 21,714
======= =======
Earnings per share $ 0.11 $ 0.07
======= =======
Fully diluted:
Net income $ 2,451 $ 1,578
======= =======
Number of shares:
Weighted average number of common
shares outstanding 21,506 20,685
Dilutive effect of stock options, net 1,301 1,029
------- -------
22,807 21,714
======= =======
Earnings per share $ 0.11 $ 0.07
======= =======
3. Building Purchase
In March 1996, the Company purchased a building, which became its principal
facility, for cash of approximately $12.0 million. The Company moved to this new
facility in April 1996. Depreciation is computed using the straight-line method
over the estimated useful life of 25 years. No depreciation is charged in
respect of the land acquired.
4. Issuance of Common Stock
In May 1996, 500,000 shares of common stock were issued by the Company and
approximately 1.7 million shares were sold by selling shareholders to the
public, at a price of $28.00 per share in connection with an offering of the
Company's common stock. The net proceeds to the Company, after issuance costs,
were approximately $13.0 million, and will be used for general corporate
purposes, including working capital and possible acquisitions.
In addition, all share and per share information applicable to prior periods in
the accompanying financial statements has been restated to reflect the
two-for-one stock split which was effective April 5, 1996.
-7-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following information should be read in conjunction with the condensed
consolidated interim financial statements and the notes thereto included in Item
1 of this Quarterly Report and with Management's Discussion and Analysis of
Financial Condition and Results of Operations contained in the Company's Annual
Report on Form 10-K for the year ended February 28, 1996, as filed with the
Securities and Exchange Commission on April 12, 1996.
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. 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 acquired 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 all
periods presented include the results of TakeFive and Doctor Design.
Forward-Looking Information is Subject to Risk and Uncertainty
Except for the historical information contained in this Quarterly Report, the
matters herein contain "forward-looking" statements (as defined in the Private
Securities Litigation Reform Act of 1995) that involve risk and uncertainty.
These forward-looking statements include, but are not limited to, certain
operating expense levels, the level of international revenue, the level of other
income, the Company's liquidity and capital needs and various business
environment and trend information. 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 in the Company's Annual Report on Form 10-K for the year ended February
28, 1996, Form S-3 and other documents filed with the Securities and Exchange
Commission.
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 an
extremely high degree of risk.
-8-
<PAGE>
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 condensed consolidated
statements of income and the percentage change in each line item from the prior
period:
Percentage of Period-to-Period
Total Revenue Percentage Change
------------------- ---------------------
Three Months Ended Three Months Ended
May 31, May 31,
1996 1995 1996 compared to 1995
------- ------- ---------------------
Revenue:
Product 59% 63% 18%
Services 41 37 38
---- ----
Total revenue 100 100 25
---- ----
Costs and expenses:
Cost of product revenue 9 13 (18)
Cost of services revenue 18 19 22
Marketing and sales 38 35 38
Research and development 16 14 44
General and administrative 9 8 29
Amortization of intangible
assets -- 1 (45)
---- ----
Total costs and expenses 90 90 26
---- ----
Income from operations 10 10 25
Interest and other income 6 3 166
---- ----
Income before income
taxes 16 13 56
Provision for income taxes 5 4 56
---- ----
Net income 11% 9% 55%
==== ====
Revenue
The Company's total revenue increased 25% from $18.5 million in the first
quarter of fiscal 1996 to $23.2 million in the first quarter of fiscal 1997. A
majority of the Company's total revenue came from product revenue, which
increased 18% from $11.6 million in the first quarter of fiscal 1996 to $13.7
million in the first quarter of fiscal 1997. The increase in product revenue was
primarily due to increased unit shipments of pSOSystem and SNiFF+ in all
geographic regions and the introduction of new products. MATRIXx revenue for the
first quarter of fiscal 1997 was flat year over year due, in part, to a slowdown
in the domestic market and changes in the MATRIXx sales force. Services revenue
increased 38% from $6.8 million in the first quarter of fiscal 1996 to $9.4
million in the first quarter of fiscal 1997 primarily due to increases in the
number and size of consulting contracts and an increase 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 33% and 31% in the first quarters of fiscal 1997 and 1996,
respectively. The Company expects international revenue will continue to grow as
a percentage of total revenue.
Costs and Expenses
The Company's cost of product revenue as a percentage of product revenue
decreased from 21% in the first quarter of fiscal 1996 to 15% in the first
quarter of fiscal 1997. This decrease is due to a reduction in hardware costs
associated with product sales and third party software costs. The Company's cost
of services revenue as a percentage of services revenue was 44% in the first
quarter of fiscal 1997 compared to 50% in the first quarter of fiscal 1996. The
decrease is primarily a result of a shift in service revenue mix to higher
margin maintenance revenue as opposed to lower margin consulting revenue.
-9-
<PAGE>
Marketing and sales expenses were $8.8 million and $6.4 million in the first
quarters of fiscal 1997 and 1996, respectively, representing 38% and 35%,
respectively, of total revenue. These increases were primarily due to additional
expenses associated with the Company's continued investment in the domestic and
international sales and support infrastructure. The Company has opened
subsidiary offices in Japan, Korea, Canada, Germany and Italy during the
quarter. The Company anticipates that marketing and sales expenses will decrease
as a percentage of total revenue for the whole of fiscal 1997.
Research and development expenses were $3.7 million and $2.6 million in the
first quarters of fiscal 1997 and 1996, respectively, representing 16% and 14%,
respectively, of total revenue. These increases were primarily the result of
increased personnel and consulting expenses associated with bringing several
products to market, and to support the Company's continued emphasis on
developing new products and enhancing existing products. 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 $285,000 in the first quarter of fiscal 1997
compared to $160,000 in the first quarter of fiscal 1996. The amount capitalized
represents approximately 7% of total research and development expenditures for
the first quarter of fiscal 1997 compared to 6% in the first quarter of the
previous fiscal year. 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 to the total of
current and anticipated future gross revenues for that product, or on a
straight-line basis over three years. Amortization for the first quarter of
fiscal 1997 was $229,000 compared to $214,000 for the first quarter of fiscal
1996.
General and administrative expenses were $2.0 million and $1.6 million in the
first quarters of fiscal 1997 and 1996, respectively, representing 9% and 8%,
respectively, of total revenue. The dollar increases were primarily the result
of increased headcount, related in part to the acquisitions of Doctor Design and
TakeFive.
Interest and other income was $1.4 million in the first quarter of fiscal 1997
compared to $525,000 in the first quarter of fiscal 1996. The increase is
primarily due to the inclusion of net operating income of $730,000 from an
unconsolidated affiliate acquired in December 1995 which is required to be
accounted for under the equity method of accounting. The Company anticipates
that the net operating results of the unconsolidated affiliate will
significantly decline for the remainder of fiscal 1997.
Recent Accounting Pronouncements
During March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 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 is effective for the Company's fiscal year 1997. The
Company has studied the implications of the statement and 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 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 May 31, 1996, the Company had $51.8 million of cash, cash
equivalents and marketable securities. This represents an increase of $2.3
million from February 28, 1996. The Company believes that cash flows from
operations, together with existing cash balances, and available borrowings will
be adequate to meet the Company's cash requirements for working capital and
capital expenditures for the next 12 months and the foreseeable future.
-10-
<PAGE>
Net cash provided by operating activities during the first quarter of fiscal
1997 totaled $1.7 million, a decrease of $3.2 million over the amount generated
in the first quarter of fiscal 1996. Net cash provided by operating activities
decreased, in spite of an increase in net income, due mainly to changes in
accounts payable, accrued payroll and other accrued liabilities, and deferred
revenue.
Net cash used in investing activities totaled $21.0 million in the first quarter
of fiscal 1997 compared to $2.4 million in fiscal 1996. The increase in net cash
used in investing activities was due primarily to the purchase of a building,
which became the Company's principal facility, and net purchases of marketable
securities.
Net cash provided by financing activities totaled $14.7 million in the first
quarter of fiscal 1997 compared to $589,000 in the first quarter of fiscal 1996.
The increase in net cash provided by financing activities in the first quarter
of fiscal 1997 was due to the issuance of common stock in May 1996 and an
increase in the proceeds from the exercise of options to purchase Common Stock
and purchases under the Employee Stock Purchase Plan.
-11-
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
The following exhibit is filed herewith:
Exhibit Page
Number Title Number
------ ----- ------
27.00 Financial Data Schedule 14
(b) Reports on Form 8-K. No reports on Form 8-K were filed by Registrant
during the three months ended May 31, 1996.
-12-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: July 12, 1996 INTEGRATED SYSTEMS, INC.
(Registrant)
-----------------------------
DAVID P. ST. CHARLES
President and Chief Executive Officer
----------------------------
STEVEN SIPOWICZ
Vice President Finance and
Chief Financial Officer
-13-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM Q1 FY97
FORM 10-Q FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-START> MAR-01-1996
<PERIOD-END> MAY-31-1996
<CASH> 17,043
<SECURITIES> 11,180
<RECEIVABLES> 19,894
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 52,576
<PP&E> 18,101
<DEPRECIATION> 0
<TOTAL-ASSETS> 101,269
<CURRENT-LIABILITIES> 22,526
<BONDS> 0
<COMMON> 58,165
0
0
<OTHER-SE> 20,086
<TOTAL-LIABILITY-AND-EQUITY> 101,269
<SALES> 13,718
<TOTAL-REVENUES> 23,151
<CGS> 2,011
<TOTAL-COSTS> 6,185
<OTHER-EXPENSES> 14,647
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,713
<INCOME-TAX> 1,262
<INCOME-CONTINUING> 2,451
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,451
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.11
</TABLE>
