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 August 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
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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 September
30, 1996 was 22,900,235 shares.
The Exhibit Index is located on page 13. Page 1 of 15 pages.
<PAGE>
<TABLE>
INTEGRATED SYSTEMS, INC.
INDEX
<CAPTION>
Page
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<S> <C> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets at August 31, 1996 and February 28, 1996 4
Condensed Consolidated Statements of Income for the Three and Six Months Ended
August 31, 1996 and 1995 5
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
August 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 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
</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.
================================================================================
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<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. The condensed consolidated interim
financial statements should 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 fiscal year.
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<PAGE>
INTEGRATED SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
August 31, February 28,
1996 1996
---------- -----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 11,198 $ 21,822
Marketable securities 9,915 12,231
Accounts receivable, net 21,386 19,822
Deferred income taxes 142 373
Prepaid expenses and other 3,609 3,587
--------- ---------
Total current assets 46,250 57,835
Marketable securities 29,901 15,423
Property and equipment, net 18,996 5,593
Intangible assets, net 2,533 2,106
Deferred income taxes 1,906 1,906
Other assets 3,288 2,401
--------- ---------
Total assets $ 102,874 $ 85,264
========= =========
LIABILITIES
Current liabilities:
Accounts payable $ 3,823 $ 4,309
Accrued payroll and related expenses 2,300 3,673
Other accrued liabilities 4,614 4,842
Income taxes payable 357 4,191
Deferred revenue 9,575 9,389
--------- ---------
Total current liabilities 20,669 26,404
Other liabilities 127 584
--------- ---------
Total liabilities 20,796 26,988
--------- ---------
SHAREHOLDERS' EQUITY
Common Stock, no par value, 50,000 shares authorized:
22,855 and 21,206 shares issued and outstanding at
August 31, 1996 and February 28, 1996, respectively 58,583 40,283
Unrealized holding gain on marketable securities, net 28 333
Translation adjustment (98) --
Retained earnings 23,565 17,660
--------- ---------
Total shareholders' equity 82,078 58,276
--------- ---------
Total liabilities and shareholders' equity $ 102,874 $ 85,264
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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<PAGE>
INTEGRATED SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
Three Months Ended Six Months Ended
August 31, August 31,
------------------ ------------------
1996 1995 1996 1995
------- ------- ------- -------
Revenue:
Product $17,107 $12,146 $30,825 $23,768
Services 8,998 7,705 18,431 14,541
------- ------- ------- -------
Total revenue 26,105 19,851 49,256 38,309
------- ------- ------- -------
Costs and expenses:
Cost of product revenue 2,086 2,073 4,097 4,539
Cost of services revenue 3,892 3,971 8,066 7,394
Marketing and sales 9,842 6,246 18,663 12,625
Research and development 4,409 2,843 8,121 5,428
General and administrative 1,937 1,604 3,948 3,161
Amortization of intangible assets 104 186 207 372
Acquisition and other 926 -- 926 --
------- ------- ------- -------
Total costs and expenses 23,196 16,923 44,028 33,519
------- ------- ------- -------
Income from operations 2,909 2,928 5,228 4,790
Interest and other income 798 691 2,192 1,216
------- ------- ------- -------
Income before income taxes 3,707 3,619 7,420 6,006
Provision for income taxes 1,335 1,185 2,597 1,994
------- ------- ------- -------
Net income $ 2,372 $ 2,434 $ 4,823 $ 4,012
======= ======= ======= =======
Earnings per share $ 0.10 $ 0.11 $ 0.21 $ 0.18
======= ======= ======= =======
Shares used in per share calculations 23,511 21,994 23,110 21,854
======= ======= ======= =======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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<PAGE>
INTEGRATED SYSTEMS, INC.
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<CAPTION>
Six Months Ended
August 31,
--------------------
1996 1995
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,823 $ 4,012
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,067 1,998
Write-down of intangible assets 616 --
Deferred income taxes 395 378
Net income from unconsolidated subsidiary (267) --
Changes in assets and liabilities:
Accounts receivable (1,564) 224
Prepaid expenses and other (222) (43)
Accounts payable, accrued payroll and
other accrued liabilities (2,783) 1,005
Income taxes payable (270) 821
Deferred revenue 186 38
Other assets and liabilities (1,112) 23
-------- --------
Net cash provided by operating activities 1,869 8,456
-------- --------
Cash flows from investing activities:
Purchases of marketable securities, net (12,631) (3,408)
Additions to property and equipment, net (14,771) (2,071)
Capitalized software development costs (735) (235)
Other 956 58
-------- --------
Net cash used in investing activities (27,181) (5,656)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock 12,790 --
Proceeds from exercise of common stock options and
purchases under the Employee Stock Purchase Plan 1,928 1,791
Other -- (75)
-------- --------
Net cash provided by financing activities 14,718 1,716
-------- --------
Effect of exchange rate fluctuations on cash and cash equivalents (30) --
Net increase (decrease) in cash and cash equivalents (10,624) 4,516
Cash and cash equivalents at beginning of period 21,822 7,746
-------- --------
Cash and cash equivalents at end of period $ 11,198 $ 12,262
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes, net $ 2,355 $ 1,173
Supplemental schedule of noncash investing and financing activities:
Unrealized gain (loss) on marketable securities $ (469) $ 540
Tax benefit from disqualifying dispositions of common stock $ 3,708 --
<FN>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
</FN>
</TABLE>
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<PAGE>
INTEGRATED SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information for the three and six months ended August 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.
<TABLE>
The following table sets forth the calculation of earnings per share for
purposes of this report:
<CAPTION>
Three Months Ended Six Months Ended
August 31, August 31,
----------------- -----------------
(in thousands, except per share data) 1996 1995 1996 1995
------- ------- ------- -------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Primary:
Net income $ 2,372 $ 2,434 $ 4,823 $ 4,012
======= ======= ======= =======
Number of shares:
Weighted average number of common shares outstanding 22,335 20,911 21,921 20,798
Dilutive effect of stock options, net 1,176 1,083 1,189 1,056
------- ------- ------- -------
23,511 21,994 23,110 21,854
======= ======= ======= =======
Earnings per share $ 0.10 $ 0.11 $ 0.21 $ 0.18
======= ======= ======= =======
Fully diluted:
Net income $ 2,372 $ 2,434 $ 4,823 $ 4,012
======= ======= ======= =======
Number of shares:
Weighted average number of common shares outstanding 22,335 20,911 21,921 20,798
Dilutive effect of stock options, net 1,213 1,151 1,256 1,090
------- ------- ------- -------
23,548 22,062 23,177 21,888
======= ======= ======= =======
Earnings per share $ 0.10 $ 0.11 $ 0.21 $ 0.18
======= ======= ======= =======
</TABLE>
3. Acquisition and Other Expenses
Included in acquisition and other expenses is a $0.7 million write-down of
capitalized intangible assets related to prior acquisitions and $0.2 million of
professional fees and other costs incurred in connection with the acquisition of
Epilogue Technology Corporation (see Note 4).
-7-
<PAGE>
4. Business Combinations
In July 1996, the Company acquired Epilogue Technology Corporation ("Epilogue"),
a New Mexico corporation, by issuing 630,963 shares of Common Stock in exchange
for all outstanding Epilogue common and preferred stock. The Company also
assumed stock options that converted into options to purchase 69,033 shares of
the Company's Common Stock. The business combination was accounted for as a
pooling of interests. Results of operations have been included from the date of
acquisition. Prior quarter and prior year's results have not been restated to
include Epilogue operations as such operations were insignificant. In connection
with the business combination, $0.2 million of merger related costs and expenses
were charged to operations in the second quarter of fiscal 1997. Epilogue is a
developer and distributor of network management and embedded Internet software
for telecommunications and datacommunications equipment manufacturers, embedded
software suppliers and networking related integrated circuit manufacturers.
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 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. In July 1996, the Company acquired Epilogue
Technology Corporation ("Epilogue"), a New Mexico corporation that develops and
distributes network management and embedded internet software. Each of these
business combinations has been accounted for as a pooling of interests. The
results of operations for all periods presented include the results of TakeFive
and Doctor Design. Results of operations for Epilogue have been included from
the date of acquisition. Prior period results have not been restated to include
Epilogue since those results were not significant.
Forward-Looking Information is Subject to Risk and Uncertainty; Additional Risks
and Uncertainties
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 documents filed by the Company with the Securities and Exchange
Commission.
The Company has made, and expects to continue to make in the near future,
substantial expenditures in the areas of product development and sales and
marketing. If the Company does not realize commensurate high levels of revenue,
the Company will be unable to achieve satisfactory levels of earnings. The
Company recently announced several new products, in particular pRISM(TM) and
Decorum(TM). Portions of these products are expected to be released shortly.
Delays in release of new products or the acceptance of these products by
customers is likely to have a negative impact on the performance of the Company.
-8-
<PAGE>
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.
Results of Operations
The following tables set 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 from the comparative prior period
in each line item:
Percentage of Period-to-Period
Total Revenue Percentage Change
------------------ ---------------------
Three Months Ended Three Months Ended
August 31, August 31,
1996 1995 1996 compared to 1995
----- ----- ---------------------
Revenue:
Product 66% 61% 41%
Services 34 39 17
----- -----
Total revenue 100 100 32
----- -----
Costs and expenses:
Cost of product revenue 8 10 1
Cost of services revenue 15 20 (2)
Marketing and sales 38 32 58
Research and development 17 14 55
General and administrative 7 8 21
Amortization of intangible assets -- 1 (44)
Acquisition and other 4 -- N/M
----- -----
Total costs and expenses 89 85 37
----- -----
Income from operations 11 15 (1)
Interest and other income 3 3 15
----- -----
Income before income taxes 14 18 2
Provision for income taxes 5 6 13
----- -----
Net income 9% 12% (3)%
===== =====
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<PAGE>
Percentage of Period-to-Period
Total Revenue Percentage Change
------------------ ---------------------
Six Months Ended Six Months Ended
August 31, August 31,
1996 1995 1996 compared to 1995
----- ----- ---------------------
Revenue:
Product 63% 62% 30%
Services 37 38 27
----- -----
Total revenue 100 100 29
----- -----
Costs and expenses:
Cost of product revenue 8 12 (10)
Cost of services revenue 16 19 9
Marketing and sales 38 33 48
Research and development 17 14 50
General and administrative 8 8 25
Amortization of intangible assets -- 1 (44)
Acquisition and other 2 -- N/M
----- -----
Total costs and expenses 89 87 31
----- -----
Income from operations 11 13 9
Interest and other income 4 3 80
----- -----
Income before income taxes 15 16 24
Provision for income taxes 5 5 30
----- -----
Net income 10% 11% 20%
===== =====
N/M = Not Meaningful
Revenue
The Company's total revenue increased 32% from $19.9 million in the second
quarter of fiscal 1996 to $26.1 million in the second quarter of fiscal 1997 and
29% from $38.3 million in the first six months of fiscal 1996 to $49.3 million
in the first six months of fiscal 1997. A majority of the Company's total
revenue came from product revenue, which increased 41% from $12.1 million in the
second quarter of fiscal 1996 to $17.1 million in the second quarter of fiscal
1997 and 30% from $23.8 million for the first six months of fiscal 1996 to $30.8
million in the first six months 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
second quarter and the first six months of fiscal 1997 was essentially unchanged
year over year. Services revenue increased 17% from $7.7 million in the second
quarter of fiscal 1996 to $9.0 million in the second quarter of fiscal 1997, and
27% from $14.5 million in the first six months of fiscal 1996 to $18.4 million
in the first six months 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 37% and 30% in the second quarters of fiscal 1997 and 1996,
respectively, and 38% and 30% in the first six months 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 17% in the second quarter of fiscal 1996 to 12% in the second
quarter of fiscal 1997 and from 19% in the first six months of fiscal 1996 to
13% in the first six months of fiscal 1997. These decreases are primarily due to
product sales mix and third party software royalty costs. The Company's cost of
services revenue as a percentage of services revenue was 43% in the second
quarter of fiscal 1997 compared to 52% in the second quarter of fiscal 1996 and
44% in the first six months of fiscal 1997 compared to 51% in the first six
months of fiscal 1996. These decreases are primarily a result of a shift in
service revenue mix to higher margin maintenance revenue as opposed to lower
margin consulting revenue.
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<PAGE>
Marketing and sales expenses were $9.8 million and $6.2 million in the second
quarters of fiscal 1997 and 1996, respectively, representing 38% and 32%,
respectively, of total revenue. For the first six months of fiscal 1997 and
1996, marketing and sales expenses were $18.7 million and $12.6 million,
respectively, representing 38% and 33%, 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, along with promotional costs and other costs involved in
the introduction of new products. 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 $4.4 million and $2.8 million in the
second quarters of fiscal 1997 and 1996, respectively, representing 17% and 14%,
respectively, of total revenue. For the first six months of fiscal 1997 and
1996, research and development expenses were $8.1 million and $5.4 million,
respectively, representing 17% and 14%, respectively, of total revenue. These
increases were primarily the result of increased personnel and consulting
expenses associated with the announcement of several new products at the
Embedded Systems Conference in September 1996, 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 $450,000 in the second
quarter of fiscal 1997 compared to $75,000 in the second quarter of fiscal 1996
and $735,000 in the first six months of fiscal 1997 compared to $235,000 in the
first six months of fiscal 1996. The amounts capitalized represent approximately
9% of total research and development expenses for the second quarter of fiscal
1997 compared to 3% in the second quarter of the previous fiscal year and 8% in
the first six months of fiscal 1997 compared to 3% in the first six months of
fiscal 1996. 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 second quarter of fiscal 1997 was
$206,000 compared to $247,000 for the second quarter of fiscal 1996 and $435,000
for the first six months of fiscal 1997 compared to $461,000 for the first six
months of fiscal 1996.
General and administrative expenses were $1.9 million and $1.6 million in the
second quarters of fiscal 1997 and 1996, respectively, representing 7% and 8%,
respectively, of total revenue. For the first six months of fiscal 1997 and
1996, general and administrative expenses were $3.9 million and $3.2 million,
respectively, representing 8% of total revenue. The dollar increases were
primarily the result of increased headcount, related in part to the acquisitions
of Doctor Design, TakeFive and Epilogue.
Interest and other income was $0.8 million in the second quarter of fiscal 1997
compared to $0.7 million in the second quarter of fiscal 1996 and $2.2 million
in the first six months of fiscal 1997 compared to $1.2 million in the first six
months of fiscal 1996. These increases are primarily due to the inclusion of net
operating income from an unconsolidated subsidiary acquired in December 1995
which is required to be accounted for under the equity method of accounting. The
Company anticipates that the unconsolidated subsidiary will post significant
losses 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.
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<PAGE>
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 August 31, 1996, the Company had $51.0 million of cash,
cash equivalents and marketable securities. This represents an increase of $1.5
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.
Net cash provided by operating activities during the first six months of fiscal
1997 totaled $1.9 million, a decrease of $6.6 million over the amount generated
in the first six months of fiscal 1996. Net cash provided by operating
activities decreased, in spite of an increase in net income, due mainly to
changes in accounts receivable, accounts payable, accrued payroll and other
accrued liabilities, and other assets and liabilities.
Net cash used in investing activities totaled $27.1 million in the first six
months of fiscal 1997 compared to $5.7 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 six
months of fiscal 1997 compared to $1.7 million in the first six months of fiscal
1996. The increase in net cash provided by financing activities was due to the
issuance of Common Stock in May 1996 in a secondary offering and an increase in
the proceeds from the exercise of options to purchase Common Stock and purchases
under the Employee Stock Purchase Plan.
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<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Shareholders held July 17, 1996, the
shareholders elected directors of the Company with the following
nominees receiving the votes indicated:
Name For Withheld
---- --- --------
John C. Bolger 19,155,984 64,556
Narendra K. Gupta 19,155,054 65,486
Vinita Gupta 19,153,148 67,392
Thomas Kailath 19,155,784 64,756
Richard C. Murphy 19,156,184 64,356
David P. St. Charles 19,156,184 64,356
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 15
(b) Reports on Form 8-K. No reports on Form 8-K were filed by Registrant
during the three months ended August 31, 1996.
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<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: October 14, 1996 INTEGRATED SYSTEMS, INC.
(Registrant)
/s/ David P. St. Charles
-------------------------------------
DAVID P. ST. CHARLES
President and Chief Executive Officer
/s/ Naren K. Gupta
-------------------------------------
NARENDRA K. GUPTA
Chairman and Chief Financial Officer
-14-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM Q2
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> 6-MOS
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-START> MAR-01-1996
<PERIOD-END> AUG-31-1996
<CASH> 11,198
<SECURITIES> 9,915
<RECEIVABLES> 21,386
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 46,250
<PP&E> 18,996
<DEPRECIATION> 0
<TOTAL-ASSETS> 102,874
<CURRENT-LIABILITIES> 20,669
<BONDS> 0
<COMMON> 58,583
0
0
<OTHER-SE> 23,495
<TOTAL-LIABILITY-AND-EQUITY> 102,874
<SALES> 30,825
<TOTAL-REVENUES> 49,256
<CGS> 4,097
<TOTAL-COSTS> 12,163
<OTHER-EXPENSES> 31,865
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 7,420
<INCOME-TAX> 2,597
<INCOME-CONTINUING> 4,823
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,823
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.21
</TABLE>
