<PAGE>
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 November 30, 1999
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, CA 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 December
14, 1999 was 24,246,248 shares.
Page 1 of 28 pages.
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<PAGE>
INTEGRATED SYSTEMS, INC.
FORM 10-Q
QUARTER ENDED NOVEMBER 30, 1999
INDEX
PAGE
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets as of November 30, 1999
and February 28, 1999 4
Condensed Consolidated Statements of Operations and
Comprehensive Income (Loss) for the Three Months and Nine
Months Ended November 30, 1999 and 1998 5
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended November 30, 1999 and 1998 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Item 3. Qualitative and Quantitative Disclosures about Market Risks 26
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 27
SIGNATURES 28
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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 ISI'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 from the forward-looking statements are those detailed elsewhere
in this Report in Management's Discussion and Analysis of Financial
Condition and Results of Operations and in ISI'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. ("ISI"), 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, ISI
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 ISI's Annual Report on
Form 10-K for the year ended February 28, 1999. The February 28, 1999 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.
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<PAGE>
INTEGRATED SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
NOVEMBER 30, FEBRUARY 28,
1999 1999
---------------- ----------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 18,578 $ 19,079
Marketable securities 1,460 9,554
Accounts receivable, net 39,416 28,431
Deferred income taxes 3,014 2,360
Prepaid expenses and other 6,884 5,255
---------------- ---------------
Total current assets 69,352 64,679
Marketable securities 24,743 49,698
Property and equipment, net 21,008 18,633
Intangible assets, net 35,808 3,503
Deferred income taxes 5,259 5,322
Other assets 2,216 1,200
---------------- ---------------
Total assets $ 158,386 $ 143,035
================ ===============
LIABILITIES
Current liabilities:
Accounts payable $ 6,119 $ 4,761
Accrued payroll and related expenses 8,578 6,250
Other accrued liabilities 8,162 10,668
Income taxes payable 2,950 2,562
Deferred revenue 21,956 18,003
---------------- ---------------
Total current liabilities 47,765 42,244
Long-term debt 598 --
---------------- ---------------
Total liabilities 48,363 42,244
---------------- ---------------
SHAREHOLDERS' EQUITY
Common Stock, no par value, 50,000 shares authorized:
24,216 and 22,686 shares issued and outstanding at
November 30, 1999 and February 28, 1999
respectively 74,367 59,848
Accumulated other comprehensive (loss), net (1,569) (759)
Retained earnings 37,225 41,702
---------------- ---------------
Total shareholders' equity 110,023 100,791
---------------- ---------------
Total liabilities and shareholders' equity $ 158,386 $ 143,035
================ ===============
</TABLE>
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 OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Product $ 28,094 $ 20,604 $ 67,808 $ 55,488
Services 15,538 14,358 43,464 42,961
---------- ---------- --------- ---------
Total revenue 43,632 34,962 111,272 98,449
---------- ---------- --------- ---------
Cost and expenses
Cost of product revenue 4,061 4,441 12,034 10,449
Cost of services revenue 5,967 6,316 17,848 18,919
Marketing and sales 17,094 12,142 45,508 35,505
Research and development 7,204 4,399 18,650 14,498
General and administrative 3,859 3,129 11,070 9,516
Amortization of intangibles 2,320 108 3,628 416
Acquisition-related and other expenses 1,497 1,117 8,586 2,177
---------- ---------- --------- ---------
Total costs and expenses 42,002 31,652 117,324 91,480
---------- ---------- --------- ---------
Income (loss) from operations 1,630 3,310 (6,052) 6,969
Interest and other income 485 1,354 2,582 3,575
---------- ---------- --------- ---------
Income (loss) before income taxes 2,115 4,664 (3,470) 10,544
Provision (benefit) for income taxes (592) 1,492 1,007 974
---------- ---------- --------- ---------
Net income (loss) $ 2,707 $ 3,172 $ (4,477) $ 9,570
========== ========== ========= =========
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments (64) 364 (221) 346
---------- ---------- --------- ---------
Unrealized gain (loss) on investments 59 135 (589) 431
---------- ---------- --------- ---------
Other comprehensive income (loss) (5) 499 (810) 777
---------- ---------- --------- ---------
Total comprehensive income (loss) $ 2,702 $ 3,671 $ (5,287) $ 10,347
========== ========== ========= =========
Earnings (loss) per share - basic $ 0.11 $ 0.14 $ (0.19) $ 0.41
========== ========== ========= =========
Earnings (loss) per share - diluted $ 0.11 $ 0.14 $ (0.19) $ 0.40
========== ========== ========= =========
Shares used in per share calculations - basic 23,926 22,969 23,322 23,299
========== ========== ========= =========
Shares used in per share calculations - diluted 24,933 23,241 23,322 23,984
========== ========== ========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
- 5 -
<PAGE>
INTEGRATED SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
NOVEMBER 30,
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (4,477) $ 9,570
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization of capitalized software 6,268 3,893
Amortization of other intangibles 3,628 416
In-process research and development written off 6,300 --
Deferred income taxes (1,610) (1,924)
Provision for doubtful accounts receivable (45) (25)
Changes in assets and liabilities:
Accounts receivable (8,780) 3,760
Prepaid expenses and other (1,190) (108)
Accounts payable, accrued payroll and
other accrued liabilities (3,261) 1,061
Income taxes payable 388 271
Deferred revenue 3,053 372
Other assets and liabilities (1,249) 241
---------- ----------
Net cash provided by (used in) operating activities (975) 17,527
---------- ----------
Cash flows from investing activities:
Sales and maturities (purchases) of marketable
securities, net 32,067 (5,493)
Additions to property and equipment (5,653) (3,104)
Capitalized software development costs (1,550) (1,405)
Acquisitions, net of cash acquired (24,872) --
---------- ----------
Net cash (used in) investing activities (8) (10,002)
---------- ----------
Cash flows from financing activities:
Repurchase of common stock (6,365) (8,739)
Proceeds from exercise of common stock options and
purchases under the Employee Stock Purchase Plan 6,943 3,108
---------- ----------
Net cash provided by (used in) financing activities 578 (5,631)
---------- ----------
Effect of exchange rate fluctuations on cash and cash
equivalents (96) 352
Net increase (decrease) in cash and cash equivalents (501) 2,246
Cash and cash equivalents at beginning of period 19,079 14,454
---------- ----------
Cash and cash equivalents at end of period $ 18,578 $ 16,700
========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $ 187 $ 2,340
Supplemental schedule of noncash investing activities:
Unrealized gain (loss) on marketable securities,
before tax effect $ (982) $ 718
Issuance of common stock in acquisition $ 13,941 $ --
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
- 6 -
<PAGE>
INTEGRATED SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information for the three months and nine months ended November 30, 1999 and
1998 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 ISI's Annual Report on Form 10-K for the year ended February
28, 1999. These condensed consolidated financial statements do not include all
disclosures normally required by generally accepted accounting principles.
Certain amounts in the fiscal year 1999 condensed consolidated financial
statements have been reclassified to conform to the fiscal year 2000
presentation. These reclassifications had no effect on previously reported
results of operations or shareholders' equity.
2. WIND RIVER SYSTEMS, INC. MERGER
On October 21, 1999, Integrated Systems, Inc. ("ISI"), and Wind River
Systems, Inc. ("Wind"), and University Acquisition Corp., a wholly-owned
subsidiary of Wind, entered into a definitive Agreement and Plan of
Reorganization ("Merger Agreement"). Wind develops, markets, supports and
provides consulting services for advanced software operating systems and
development tools for customers to create software applications for embedded
computers.
Pursuant to the Merger Agreement, ISI will become a wholly-owned
subsidiary of Wind. At the effective time of the Merger, all outstanding
shares of ISI common stock will be exchanged for shares of Wind common stock.
Each share of ISI common stock will automatically be converted into 0.92 of a
share of Wind common stock. In addition, Wind will assume all outstanding
options to purchase ISI common stock on the terms provided in the Merger
Agreement. The transaction is intended to be accounted for as a pooling of
interests and to qualify as a tax-free reorganization.
In connection with the execution of the Merger Agreement, ISI and Wind
entered into a Stock Option Agreement ("Option Agreement"), pursuant to which
ISI granted to Wind an irrevocable option to purchase newly issued shares of
ISI common stock representing up to 10% of ISI common stock outstanding as of
October 21, 1999. The purchase price per option share is $18.46.
The Merger, which is expected to close in the fourth quarter of fiscal
year 2000, is subject to approval of ISI shareholders and Wind stockholders.
The directors of ISI and eight of the executive officers of ISI have agreed
to vote their ISI shares in favor of the Merger at the ISI shareholders
meeting called for that purpose. On December 3, 1999, the waiting period under
Hart-Scott-Rodino Antitrust Improvements Act expired.
ISI may be required to pay a substantial termination fee if the Merger
Agreement is terminated for certain specific reasons. ISI has filed the
Merger Agreement with the Securities and Exchange Commission on November 5,
1999 as an exhibit to its report on Form 8-K.
3. ACQUISITION OF SOFTWARE DEVELOPMENT SYSTEMS, INC.
On July 21, 1999, Integrated Systems, Inc. acquired Software Development
Systems, Inc., ("SDS") a privately held Illinois corporation for
approximately $24.3 million in cash and 1,430,037 in ISI's common stock. This
transaction was accounted for using the purchase method of accounting. SDS is
engaged in the business of developing, marketing, and supporting embedded
software tools. ISI's operating results for the three and nine months ended
November 30, 1999 include the results of SDS from the date of acquisition.
SDS results are included in the Software reportable segment. ISI's
consolidated balance sheet, as of November 30, 1999, reflects a preliminary
allocation of the purchase price of SDS, which resulted in a change in
accounts receivable, deferred tax assets, prepaid and other current assets,
fixed assets, goodwill and other intangible assets, current and long-term
- 7 -
<PAGE>
liabilities. Other intangible assets includes completed technology, OEM
relationships, non-compete agreement, trade name and workforce. ISI recorded
an expense for the in-process research and development, which was charged
against earnings for the second quarter of fiscal year 2000.
- 8 -
<PAGE>
The purchase price of $39.9 million is allocated as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Completed technology $ 6,500
In-process research and development 6,300
OEM relationships 2,800
Non-compete agreement 1,000
Trade name 1,800
Workforce 2,900
Deferred tax liability (4,800)
Assumed net assets 2,617
Goodwill 20,780
------------
Total $ 39,897
</TABLE>
The following unaudited pro forma summary presents the consolidated results
of operations as if the acquisition had occurred at the beginning of each of
the periods presented and does not purport to be indicative of the results
that would have been achieved had the acquisition been made as of those dates
nor of the results which may occur in the future.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
November 30,
November 30,
---------------------- ----------------------
1999 1998 1999 1998
---------- --------- --------- ----------
<S> <C> <C> <C> <C>
(in thousands, except per share data)
Net revenue $ 43,632 $ 38,299 $ 116,091 $ 107,137
========== ========== ========= ==========
Net income (loss) $ 2,707 $ 498 $ (5,448) $ 431
========== ========== ========= ==========
Earnings (loss) per share - basic & diluted $ 0.11 $ 0.02 $ (0.23) $ 0.02
========== ========== ========= ==========
</TABLE>
4. EARNINGS PER SHARE
Earnings per share is computed in accordance with the provisions of
Financial Accounting Standards Board Statement of Financial Accounting
Standards No. 128 ("SFAS 128"), "Earnings Per Share." Basic earnings per
share is computed using the weighted average numbers of common shares
outstanding during the period. Diluted 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.
- 9 -
<PAGE>
The following table sets forth the calculations of earnings per share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
November 30, November 30,
---------------------- ----------------------
1999 1998 1999 1998
---------- --------- --------- ----------
<S> <C> <C> <C> <C>
(in thousands, except per share data)
Basic
Net income (loss) $ 2,707 $ 3,172 $ (4,477) $ 9,570
========== ========= ========= ==========
Number of shares:
Weighted average number of common
shares outstanding 23,926 22,969 23,322 23,299
========== ========= ========= ==========
Earning (loss) per share - basic $ 0.11 $ 0.14 $ (0.19) $ 0.41
========== ========= ========= ==========
Diluted
Net income (loss) $ 2,707 $ 3,172 $ (4,477) $ 9,570
========== ========= ========= ==========
Number of shares:
Weighted average number of common
shares outstanding 23,926 22,969 23,322 23,299
Diluted effect of stock options, net 1,007 272 -- 685
---------- --------- --------- ----------
Weighted average number of common shares
and common equivalent shares
outstanding 24,933 23,241 23,322 23,984
========== ========= ========= ==========
Earning (loss) per share - diluted $ 0.11 $ 0.14 $ (0.19) $ 0.40
========== ========= ========= ==========
</TABLE>
Certain options to purchase common stock were not included in the
above calculation as their exercise prices were greater than the average
market price of common stock in each of the respective periods and their
inclusion would be anti-dilutive. The number of such options excluded was
approximately 1,015,000 and 2,200,000 for the three months ended
November 30, 1999 and 1998, respectively, and 757,000 and 900,000 for the
nine months ended November 30, 1999 and 1998, respectively.
For periods where a net loss is shown, potentially dilutive securities
are excluded from the calculation of loss per common share as their inclusion
would have an anti-dilutive effect. These securities, stated in equivalent
shares of common stock, consisted of 679,000 options to purchase common stock
for the nine months ended November 30, 1999.
5. COMPREHENSIVE INCOME (LOSS)
The accumulated balances of other comprehensive income (loss), net of
taxes, as of November 30, 1999 was as follows (in thousands):
<TABLE>
<CAPTION>
NOVEMBER 30, 1999
---------------------------------
FOREIGN
CURRENCY UNREALIZED
TRANSLATION GAINS/ TOTAL
ADJUSTMENTS LOSSES OTHER
----------- ---------- -----
<S> <C> <C> <C>
Beginning balance $ (967) $ 208 $ (759)
Current-period change (221) (589) (810)
----------- ----------- ---------
Ending balance $ (1,188) $ (381) $ (1,569)
</TABLE>
6. DERIVATIVE FINANCIAL INSTRUMENTS
ISI enters into foreign currency forward exchange contracts to hedge the
value of recorded foreign currency denominated transactions against fluctuations
in exchange rates. The purpose of ISI's foreign exchange exposure management
policy and practices is to attempt to minimize the impact of exchange rate
fluctuations on the value of the foreign currency denominated assets and
liabilities being hedged. All foreign currency forward exchange
- 10 -
<PAGE>
contracts entered into by ISI have maturities of 360 days or less.
ISI's total contracted foreign currency forward exchange contracts as at
November 30, 1999 and February 28, 1999 were as follows (in thousands):
<TABLE>
<CAPTION>
NOVEMBER 30, 1999 FEBRUARY 28, 1999
---------------------- ----------------------
UNREALIZED UNREALIZED
GAINS/ GAINS/
COST (LOSSES) COST (LOSSES)
---------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Japanese Yen $ 2,585 $ (26) $ 3,400 $ 112
British Pound 523 9 -- --
French Franc 578 30 -- --
Italian Lira 555 27 -- --
German Mark 279 12 -- --
Swedish Krona 242 9 -- --
---------- ----------- ---------- -----------
Total $ 4,762 $ 61 $ 3,400 $ 112
========== =========== ========== ===========
</TABLE>
7. SEGMENT REPORTING
ISI has two reportable segments, Software and Engineering Services. The
Software segment includes design and development tools, real-time operating
systems software and components, and provides related maintenance, training
and consulting services for the embedded software market. The Engineering
Services segment provides design expertise to the embedded software and other
markets, and comprises Doctor Design.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. ISI evaluates performance
based on profit or loss from operations before income taxes, excluding
non-recurring gains and losses, acquisition-related and other costs, and
interest and other income.
ISI accounts for intersegment sales and transfers as if the sales or
transfers were to third parties, that is, at current market prices. Corporate
costs, such as those related to ISI's headquarters, are recorded in the
Software segment.
ISI's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
business requires different technology and marketing strategies. The
Engineering Services business was acquired as a unit and the management at
the time of the acquisition has been retained.
- 11 -
<PAGE>
The following tables summarize revenue and operating profit before
acquisition-related and other costs and before amortization of intangibles for
each segment.
For the three months ended November 30, 1998 (in thousands):
<TABLE>
<CAPTION>
ENGINEERING
SOFTWARE SERVICES TOTAL
-------- ----------- --------
<S> <C> <C> <C>
Revenue from external customers $ 27,019 $ 7,943 $ 34,962
Intersegment revenue $ -- $ 224 $ 224
Depreciation $ 1,173 $ 268 $ 1,441
Operating profit before amortization of
intangibles, acquisition-related and other
costs $ 3,101 $ 1,434 $ 4,535
<CAPTION>
For the three months ended November 30, 1999 (in thousands):
ENGINEERING
SOFTWARE SERVICES TOTAL
-------- ----------- --------
<S> <C> <C> <C>
Revenue from external customers $ 35,902 $ 7,730 $ 43,632
Intersegment revenue $ -- $ -- $ --
Depreciation $ 3,049 $ 211 $ 3,260
Operating profit before amortization of
intangibles, acquisition-related and other
costs $ 4,040 $ 1,407 $ 5,447
<CAPTION>
For the nine months ended November 30, 1998 (in thousands):
ENGINEERING
SOFTWARE SERVICES TOTAL
-------- ----------- --------
<S> <C> <C> <C>
Revenue from external customers $ 78,044 $ 20,405 $ 98,449
Intersegment revenue $ -- $ 1,466 $ 1,466
Depreciation $ 3,579 $ 730 $ 4,309
Operating profit before amortization of
intangibles, acquistion-related and other
costs $ 5,429 $ 4,133 $ 9,562
<CAPTION>
For the nine months ended November 30, 1999 (in thousands):
ENGINEERING
SOFTWARE SERVICES TOTAL
-------- ----------- --------
<S> <C> <C> <C>
Revenue from external customers $ 90,113 $ 21,159 $111,272
Intersegment revenue $ -- $ -- $ --
Depreciation $ 4,190 $ 630 $ 4,820
Operating profit before amortization of
intangibles, acquisition-related and other
costs $ 3,909 $ 2,253 $ 6,162
</TABLE>
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<PAGE>
The following table summarizes property and equipment and capital
expenditures by segment, for the nine months ended November 30, 1998 and 1999
(in thousands):
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
NOVEMBER 30,
-------------------------
1998 1999
----------- -----------
<S> <C> <C>
Software:
Property and equipment, net $ 17,006 $ 19,573
Capital expenditures $ 2,263 $ 5,328
Engineering services:
Property and equipment, net $ 1,627 $ 1,435
Capital expenditures $ 841 $ 325
</TABLE>
Revenue to non-affiliated customers analyzed on a geographical basis for
the three and nine months ended November 30, 1998 and 1999 were as follows (in
thousands):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
NOVEMBER 30,
--------------------------
1998 1999
----------- -----------
<S> <C> <C>
North America $ 19,615 $ 25,401
Europe 9,547 12,074
Asia/Pacific 5,800 6,157
----------- -----------
Total $ 34,962 $ 43,632
=========== ===========
FOR THE NINE MONTHS ENDED
NOVEMBER 30,
-------------------------
1998 1999
----------- -----------
North America $ 55,628 $ 64,398
Europe 26,050 30,267
Asia/Pacific 16,771 16,607
----------- -----------
Total $ 98,449 $ 111,272
=========== ===========
</TABLE>
No customer accounted for 10% or more of total revenue in the reported periods.
8. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which supercedes and amends a number of
existing standards. The statement is effective for ISI's fiscal year 2002,
but earlier application is permitted. The impact of the adoption of this
statement, if any, on the financial statements of ISI has not yet been
determined.
- 13 -
<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
ISI's Annual Report on Form 10-K for the year ended February 28, 1999, as
filed with the Securities and Exchange Commission on May 28, 1999.
OVERVIEW
Integrated Systems, Inc. provides solutions for embedded software
development consisting of real-time operating systems and software components
for embedded microprocessors; tools for designing, developing and optimizing
embedded applications; networking products for device connectivity and
management; and engineering design services for accelerated co-sourced
product development. ISI's products help users accelerate the design,
development, debugging, implementation and maintenance of embedded software.
ISI's products and services are intended to reduce the expense associated
with embedded software and system development and enable customers to develop
systems featuring greater functionality, enhanced performance, improved
reliability and ease-of-use. ISI 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, data communications, automotive,
consumer electronics, office products and point-of-sale, and aerospace.
Founded in 1980, ISI is headquartered in Sunnyvale, California, with a
worldwide sales and service presence extending throughout Asia, Europe, and
the Americas.
Effective July 21, 1999 ISI acquired all the outstanding stock and
stock rights of Software Development Systems, Inc. ("SDS") which develops,
markets and supports a family of specialized integrated software products
used in the embedded-systems industry. The total purchase price of
approximately $39.9 million consisted of 1,430,037 shares of ISI's common
stock with an estimated fair value of approximately $13.9 million, cash
consideration of $24.3 million and acquisition costs of $1.7 million. The
acquisition has been accounted for using the purchase method of accounting
and accordingly the purchase price has been allocated to the tangible and
intangible assets acquired and liabilities assumed on the basis of their
respective fair values on the acquisition date. ISI's consolidated balance
sheet, as of November 30, 1999, reflects a preliminary allocation of the
purchase price of SDS. ISI has combined the businesses of its Diab Data and
SDS subsidiaries to form one tools business named Diab-SDS.
On October 21, 1999, Integrated Systems, Inc. ("ISI"), and Wind River
Systems, Inc. ("Wind"), and University Acquisition Corp., a wholly-owned
subsidiary of Wind, entered into a definitive Agreement and Plan of
Reorganization ("Merger Agreement"). Wind develops, markets, supports and
provides consulting services for advanced software operating systems and
development tools for customers to create software applications for embedded
computers.
Pursuant to the Merger Agreement, ISI will become a wholly-owned
subsidiary of Wind. At the effective time of the Merger, all outstanding
shares of ISI common stock will be exchanged for shares of Wind common stock.
Each share of ISI common stock will automatically be converted into 0.92 of a
share of Wind common stock. In addition, Wind will assume all outstanding
options to purchase ISI common stock on the terms provided in the Merger
Agreement. The transaction is intended to be accounted for as a pooling of
interests and to qualify as a tax-free reorganization.
In connection with the execution of the Merger Agreement, ISI and Wind
entered into a Stock Option Agreement ("Option Agreement"), pursuant to which
ISI granted to Wind an irrevocable option to purchase newly issued shares of
ISI common stock representing up to 10% of ISI common stock outstanding as of
October 21, 1999. The purchase price per option share is $18.46.
The Merger, which is expected to close in the fourth quarter of fiscal
year 2000, is subject to approval of ISI shareholders and Wind stockholders.
The directors of ISI and eight of the executive officers of ISI have agreed
to vote their ISI shares in favor of the Merger at the ISI shareholders
meeting called for that purpose. On December 3, 1999, the waiting period
under Hart-Scott-Rodino Antitrust Improvements Act expired.
- 14 -
<PAGE>
ISI may be required to pay a substantial termination fee if the Merger
Agreement is terminated for certain specific reasons. ISI has filed the
Merger Agreement with the Securities and Exchange Commission on November 5,
1999 as an exhibit to its report on Form 8-K.
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 and
information. All forward-looking statements included in this document are
based on information available to ISI on the date hereof, and ISI assumes no
obligation to update any such forward-looking statements. ISI's actual
results could differ materially from those discussed herein. Factors that
could cause or contribute to such differences include, but are not limited to
those discussed below, and to other risk factors detailed in ISI's Annual
report on Form 10-K for the year ended February 28, 1999, and other documents
filed by ISI with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
The following tables set forth for the periods presented the percentage
of total revenue represented by each line item in ISI's condensed
consolidated statements of operations and the percentage change in each line
item from the prior year period.
<TABLE>
<CAPTION>
PERCENTAGE OF PERIOD-TO-PERIOD
TOTAL REVENUE PERCENTAGE CHANGE
----------------- ------------------
THREE MONTHS ENDED THREE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
1999 1998 1999 COMPARED TO 1998
-------- -------- ---------------------
<S> <C> <C> <C>
Revenue:
Product 64 % 59 % 36 %
Services 36 41 8
------ -----
Total revenue 100 100 25
------ -----
Costs and expenses:
Cost of product revenue 9 13 (9)
Cost of services revenue 14 18 (6)
Marketing and sales 39 35 41
Research and development 17 13 64
General and administrative 9 9 23
Amortization of intangibles 5 -- NM
Acquisition-related and other
expenses 3 3 NM
------ -----
Total costs and expenses 96 91 33
------ -----
Income from operations 4 9 NM
Interest and other income 1 4 (64)
------ -----
Income before income taxes 5 13 NM
Provision (benefit) for income taxes (1) 4 NM
------ -----
Net income 6 % 9 % NM
------ -----
</TABLE>
NM = Not Meaningful
- 15 -
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF PERIOD-TO-PERIOD
TOTAL REVENUE PERCENTAGE CHANGE
----------------- ------------------
NINE MONTHS ENDED NINE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
1999 1998 1999 COMPARED TO 1998
-------- -------- ---------------------
<S> <C> <C> <C>
Revenue:
Product 61 % 56 % 22 %
Services 39 44 1
------ -----
Total revenue 100 100 13
------ -----
Costs and expenses:
Cost of product revenue 11 11 15
Cost of services revenue 16 19 (6)
Marketing and sales 41 36 28
Research and development 17 15 29
General and administrative 10 10 16
Amortization of intangibles 3 -- NM
Acquisition-related and other
expenses 7 2 NM
------ -----
Total costs and expenses 105 93 28
------ -----
Income (loss) from
operations (5) 7 NM
Interest and other income 2 4 (28)
------ -----
Income (loss) before
income taxes (3) 11 NM
Provision for income taxes 1 1 NM
------ -----
Net income (loss) (4) % 10 % NM
====== =====
</TABLE>
NM = Not Meaningful
REVENUE
Revenue consists of fees from the licensing of software products ("product
revenue") and from the maintenance and support of software products, customer
training, and engineering services ("services revenue"). Total revenue was $43.6
million for the three months ended November 30, 1999 and $111.3 million for the
nine months ended November 30, 1999, as compared to $35.0 million and $98.4
million in the same periods of fiscal year 1999. Total revenue increased 25% and
13%, for the three and nine months ended November 30, 1999 over the respective
prior year periods.
ISI operates in two business segments, the Software segment and the
Engineering Services segment, each of which contribute product revenue and
services revenue. The Software segment includes design and development tools,
RTOS software and components, and also provides related maintenance, training
and consulting services for the embedded software market. The Engineering
Services segment provides design expertise to the embedded software and other
markets. This segment is managed separately as ISI's subsidiary, Doctor Design.
- 16 -
<PAGE>
Components of ISI's revenue by segment for the third quarter and first
nine months of fiscal years 1999 and 2000 were as follows:
<TABLE>
<CAPTION>
Three Months Ended November 30, 1998: Nine Months Ended November 30, 1998:
ENGINEERING ENGINEERING
SOFTWARE SERVICES TOTAL SOFTWARE SERVICES TOTAL
-------- ----------- ----- -------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Product.............. $18,657 $ 1,947 $20,604 Product........... $52,409 $ 3,079 $ 55,488
Services............. 8,362 5,996 14,358 Services.......... 25,635 17,326 42,961
------- ------- ------- ------- ------- --------
Total................ $27,019 $ 7,943 $34,962 Total............. $78,044 $20,405 $ 98,449
======= ======= ======= ======= ======= ========
<CAPTION>
Three Months Ended November 30, 1999: Nine Months Ended November 30, 1999:
ENGINEERING ENGINEERING
SOFTWARE SERVICES TOTAL SOFTWARE SERVICES TOTAL
-------- ----------- ----- -------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Product.............. $26,454 $ 1,640 $28,094 Product........... $62,318 $ 5,490 $ 67,808
Services............. 9,448 6,090 15,538 Services.......... 27,795 15,669 43,464
------- ------- ------- ------- ------- --------
Total................ $35,902 $ 7,730 $43,632 Total............. $90,113 $21,159 $111,272
======= ======= ======= ======= ======= ========
</TABLE>
Product revenue increased 36% to $28.1 million in the three months ended
November 30, 1999, as compared to $20.6 million in the same period of fiscal
year 1999. For the first nine months of fiscal year 2000, product revenue
increased 22% to $67.8 million, compared with $55.5 million for the same period
last year. The percentage of ISI's total revenue attributable to product revenue
increased to 64% for the three months ended November 30, 1999, up from 59% in
the same quarter last year. For the first nine months of fiscal year 2000,
product revenue, as a percentage of total revenue, increased to 61%, as compared
to 56% in the same period of fiscal year 1999. The increases in product revenue
are primarily due to increased sales of embedded software licenses and
associated development tools, which partly resulted from the inclusion of
Software Development Systems, Inc. ("SDS") since the date of acquisition.
Services revenue increased 8% to $15.5 million for the three months ended
November 30, 1999, as compared to $14.4 million for the same period last year.
For the first nine months of fiscal year 2000, services revenue increased 1% to
$43.5 million, as compared to $43.0 million in the first nine months of fiscal
year 1999. At the end of fiscal year 1999, ISI ceased entering into lower
margin, fixed-price government contracts. Impacting year-to-date services
revenue growth was the absence of this government contract revenue and the
reallocation of Doctor Design engineering services activities to the porting of
pJAVA and internet appliance work, which ISI believes are strategic to future
revenue growth. These two factors, offset be a continued growth in the installed
base resulting in higher maintenance and support revenues, contributed to lower
services revenue growth rates as compared with product revenues.
Price increases were not a material factor in ISI's revenue growth in the
periods presented.
Revenue from customers located internationally for the three months ended
November 30, 1999 was 42% of total revenue, as compared with 44% in the same
period last year. For the first nine months of fiscal year 2000, international
revenues were 42% of total revenue, as compared to 43% in the first nine months
of fiscal year 1999. International revenue for the first nine months of fiscal
year 2000 increased $4.1 million from the same period in fiscal year 1999 due
primarily to growth in Europe.
COSTS AND EXPENSES
Cost of product revenue includes third-party royalties, product
packaging and documentation costs, amortization of capitalized software
development costs, and hardware costs. Cost of product revenue, as a
percentage of product revenue, was 14% during the three months ended November
30, 1999, as compared to 22% in the same period of fiscal year 1999. For the
first nine months of fiscal year 2000, cost of product revenue was 18% of
total revenue, as compared to 19% in the same period last year. The decrease
in cost of product revenue, as a percentage of product revenue, in the three
and nine months ended November 30, 1999 as compared to same period last year
is due primarily to the reduction in royalty expense as a result of the
acquisition of SDS. Prior to the acquisition, these expenses were reported as
cost of product revenue. For the nine months ended November 30, 1999, the
reduction in product revenue margins was partially offset by a large Doctor
Design product sale in the first quarter of fiscal year 2000, which had a
very low margin. Excluding the effect of this sale, cost of product revenue
was 16% of product revenue in the first nine months of fiscal year 2000.
Cost of services revenue includes personnel and related direct costs
associated with providing training, maintenance, engineering and consulting
services to customers and the infrastructure to manage a services organization.
Cost of services revenue, as a percentage of services revenue, was 38% in the
three months ended November 30, 1999, as compared to 44% in the same period of
fiscal year 1999. For the first nine months of fiscal year 2000, cost of service
revenue was 41% of services revenue, as compared with 44 % in the same period
last year. The decrease in cost of services revenue, as a percentage of services
revenue, for the periods presented is due primarily to a shift in revenue mix.
An increase in higher margin software maintenance revenue was offset by a
decline in lower margin fixed price contract revenue.
- 17 -
<PAGE>
Marketing and sales expenses increased 41% to $17.1 million in the three
months ended November 30, 1999, as compared to $12.1 million in the same quarter
last year. For the first nine months of fiscal year 2000, marketing and sales
expenses increase 28% to $45.5 million, up from $35.5 million in the same period
of fiscal year 1999. As a percentage of total revenue, marketing and sales costs
increased to 39% in the three months ended November 30, 1999, from 35% in the
same period of fiscal year 1999. For the first nine months of fiscal year 2000,
marketing and sales costs increased to 41% of total revenue, as compared to 36%
for the first nine months of fiscal year 1999. The dollar increases in marketing
and sales expenses versus the prior year for the periods presented are primarily
due to the continued growth of the domestic and international sales and support
infrastructure, and the inclusion of SDS since the date of acquisition.
ISI believes that significant investment for product research and
development is essential to product and technical leadership. Research and
development expenses increased 64% to $7.2 million in the three months ended
November 30, 1999, as compared to $4.4 million in the same period last year. For
the first nine months of fiscal year 2000, research and development expenses
increased 29% to $18.7 million, as compared to $14.5 million in the same period
of fiscal year 1999. As a percentage of total revenue, research and development
costs increased to 17% for the three months ended November 30, 1999, as compared
to 13% in the same quarter last year. For the first nine months of fiscal year
2000, research and development costs increased to 17% of total revenue, as
compared with 15% for the same nine months of fiscal year 1999. The dollar
increases in research and development expenses in the periods reported were due
primarily to costs associated with pJAVA and internet appliance work at Doctor
Design and research and development expenses attributable to SDS, since the date
of acquisition. ISI anticipates that it will continue to devote substantial
resources to product research and development throughout fiscal year 2000.
General and administrative expenses increased 23% to $3.9 million in the
third quarter of fiscal year 2000, as compared to $3.1 million in the same
quarter of fiscal year 1999. For the first nine months of fiscal year 2000,
general and administrative expenses increased 16% to $11.1 million, as compared
to $9.5 million in the same period last year. General and administrative costs
remained at 9% of total revenues for the three months ended November 30, 1999,
as compared to the same percentage in the same quarter last year. For the first
nine months of fiscal year 2000, general and administrative expenses remained at
10% of total revenue, as compared to the same percentage in the first nine
months of fiscal year 1999. The dollar increase in the periods reported was due
primarily to an increase in administrative infrastructure at Doctor Design and
general and administrative expenses attributable to SDS, since the date of
acquisition.
Amortization of intangibles was $2.3 million in the three months ended
November 30, 1999, as compared to $0.1 million in the same period of fiscal year
1999. For the nine months ended November 30, 1999, amortization of intangibles
increased to $3.6 million, as compared to $0.4 million in the same period last
year. The increase for all periods presented is due to amortization of
intangible assets relating to ISI's acquisition of SDS in the second quarter of
fiscal year 2000.
Acquisition-related and other expenses were $1.5 million in the three
months ended November 30, 1999, as compared to $1.1 million in the same
quarter of fiscal year 1999. For the nine months ended
November 30, 1999, acquisition-related and other expenses were $8.6 million,
as compared to $2.2 million in the same period last year. For fiscal year
2000, acquisition-related and other expenses are comprised of a $6.3 million
charge relating to the write-off of in-process research and development
costs, discussed below, and $2.3 million of other expenses related to the
acquisition of SDS. During fiscal year 1999, acquisition-related and other
expenses consisted of CEO termination and recruitment costs and one-time
legal costs.
ISI recognized an in-process research and development charge of $6.3
million relating to the SDS acquisition, during the second quarter of fiscal
year 2000. The amount allocated to in-process technology represents purchased
in-process technology for a project that has not yet reached technological
feasibility and has no alternative future use. The value of in-process
project research and development was determined by estimating the net cash
flows resulting from the completion of the project reduced to the percentage
of completion of the project. Net cash flows were tax effected using
estimated income taxes consistent with ISI's anticipated tax rate for the
foreseeable future and then discounted back to their present value at a
discount rate based on ISI's required risk adjusted weighted average rate of
return. ISI estimated revenues, margins and operating costs based upon
historical information about similar product developments combined with
projections of future revenue and cost patterns, including projections used
when initially evaluating the acquisition of SDS. ISI cannot guarantee that
it will realize revenue from this in-process project in the amounts estimated
or that the costs incurred will be materially consistent with estimates made.
The nature of the efforts to develop all purchased in-process technology
into commercially viable products principally relates to the completion of
all planning, designing, prototyping, verification and testing activities
that are necessary to establish that the resulting products can meet their
design specification, including function, features and technical performance
requirements.
- 18 -
<PAGE>
Due to the fact that the project is in-process there is uncertainty
whether it can be successfully finished and result in the net cash flows that
were originally estimated at acquisition. It is reasonably possible that the
development of this technology could fail because of either prohibitive cost,
the ISI's inability to perform the required completion efforts or other
factors outside ISI's control such as a change in the market for the
resulting developed products. If the development of the technology is
unsuccessful, the technology may be abandoned during the development phase.
Should ISI's development efforts fail or encounter significant delay then
ISI's future returns may be significantly reduced. In such case, ISI may be
unable to recover its investment in this project, may be less well positioned
to benefit from new product markets in these areas and ISI's future operating
results could be adversely affected.
OTHER INCOME AND EXPENSES
Interest and other income decreased to $0.5 million in the three months
ended November 30, 1999, as compared to $1.4 million in the same quarter of
fiscal year 1999. For the nine months ended November 30, 1999, interest and
other income decreased to $2.6 million from $3.6 million in the same period last
year. The decrease in fiscal year 2000 is due to a decline in the amount of
interest-bearing cash equivalents and marketable securities, used in the
acquisition of SDS, and the absence of rental income from the sub-lease of a
portion of ISI's Sunnyvale headquarters during parts of fiscal year 2000.
PROVISION FOR INCOME TAXES
Net income was negatively impacted by $12.2 million of SDS
acquisition-related charges in the nine months ended
November 30, 1999, including $6.3 million of in-process research and
development, $3.6 million of amortization of goodwill and other intangibles,
and $2.3 million of other acquisition-related costs. Despite a net loss for
the nine months ended November 30, 1999, a tax provision resulted due to the
exclusion of amortization of goodwill and exclusion of in-process research
and development, which are non-deductible for income tax purposes. Excluding
non-deductible acquisition-related expenses and amortization of goodwill, the
effective tax rate for the first nine months of fiscal year 2000 is 30%. The
effective tax rate for the same period of fiscal year 1999 was 32%.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which supercedes and amends a
number of existing standards. The statement is effective for ISI's fiscal
year 2002, but earlier application is permitted. The impact of the adoption
of this statement, if any, on the financial statements of ISI has not yet
been determined.
"YEAR 2000" ISSUES
ISI believes that all of its most current product releases will not
cease to perform nor generate incorrect or ambiguous data or results solely
due to a change in date to or after January 1, 2000, and will calculate any
information dependent on such dates in the same manner, and with the same
functionality, data integrity, and performance, as such products do on or
before December 31, 1999 (collectively, "Year 2000 Compliance"). However,
there can be no assurance that all of ISI's customers will implement the Year
2000 compliant release of ISI's products in a timely manner, which could lead
to failure of customer systems and product liability claims against ISI. Even
if ISI's products are Year 2000 compliant, ISI may, in the future, be subject
to claims based on Year 2000 issues in the products of other companies or
issues arising from the integration of multiple products within a system. The
costs of defending and resolving Year 2000-related disputes, and any
liability of ISI for Year 2000-related damages, including consequential
damages, could have a material adverse effect on ISI's business, financial
condition and results of operations. Such failure could also affect the
perceived performance of ISI's products, which could have a negative effect
on ISI's competitive position.
In reviewing its operations for Year 2000 Compliance, ISI has identified
three categories of risk: internal business software, internal non-financial
software and embedded chip technology, and external noncompliance by
suppliers. With respect to internal business software, ISI is in full
compliance for all its mission-critical systems.
- 19 -
<PAGE>
Accordingly, ISI has not developed formal contingency plans. All financial,
order processing and manufacturing software is fully Year 2000 Compliant.
With respect to internal non-financial software and embedded chip
technology, ISI recently achieved full Year 2000 compliance. ISI does not
currently have a contingency plan in place for its internal non-financial
software and embedded chip technology.
With respect to external noncompliance by suppliers, ISI has completed
the process of identifying and contacting its critical suppliers, service
providers and contractors to determine the extent to which ISI's interface
systems are vulnerable to those third parties' failure to remedy their own
Year 2000 issues. To the extent that responses to Year 2000 readiness have
been unsatisfactory, ISI intends to change suppliers, service providers or
contractors to those who have demonstrated Year 2000 readiness. In the event
that any of ISI's critical suppliers do not successfully and timely achieve
Year 2000 Compliance, and ISI is unable to replace them with new or alternate
suppliers, ISI's business or operations could be adversely affected.
All costs associated with carrying out ISI's plan for the Year 2000
Compliance are being expensed as incurred, and are being funded from cash
provided from operations. As of November 30, 1999 it is estimated that costs
associated with preparation for the Year 2000 were approximately $1.6 million
to complete the above plans. Of these amounts, approximately $600,000 was to
cover new/replacement technologies, and $1.0 million was of a repair or
upgrade nature.
LIQUIDITY AND CAPITAL RESOURCES
ISI has funded its operations to date principally through cash flows
from operations. As of November 30, 1999, ISI had $44.8 million of cash, cash
equivalents and marketable securities. This represents a decrease of $33.6
million from February 28, 1999, primarily as a result of the acquisition of
SDS and from the repurchases of common stock.
Net cash used in operating activities was $1.0 million during the first
nine months of fiscal year 2000. This represents a decrease of $18.5 million
from the amount generated in the first nine months of fiscal year 1999. Net
cash from operating activities decreased in the first nine months of fiscal
year 2000, due primarily to lower net income and a large decrease in accrued
liabilities related to the Green Hills legal settlement. Additionally, there
was an increase of $8.8 million in accounts receivable due to revenue growth
in the first nine months of fiscal year 2000, particularly in the third
quarter.
Net cash used in investing activities decreased by $10.0 million during
the first nine months of fiscal year 2000. Net cash used in investing
activities in the first nine months of fiscal year 2000 was due primarily to
the sale of marketable securities to fund the acquisition of SDS, offset
primarily by approximately $24.3 million used in the acquisition of SDS.
Net cash provided by financing activities totaled $0.6 million in the
first nine months of fiscal year 2000 compared to net cash used of $5.6
million in the first nine months of fiscal year 1999. The difference was due
primarily to the repurchase of approximately 641,000 shares of common stock
in the first six months of fiscal year 2000, which was offset by an increase
in the proceeds from the exercise of options to purchase common stock and
purchases under the Employee Stock Purchase Plan.
ISI believes that cash flows from operations, together with existing
cash and investment balances, will be adequate to meet ISI's cash
requirements for working capital and capital expenditures for the next 12
months.
RISK FACTORS
THIS SECTION ON "RISK FACTORS" INCLUDES FORWARD-LOOKING STATEMENTS THAT
REFLECT ISI'S CURRENT VIEWS WITH RESPECT TO FUTURE MATTERS. THE FOLLOWING
DISCUSSION ALSO CONTAINS CAUTIONARY STATEMENTS THAT IDENTIFY IMPORTANT
FACTORS, INCLUDING CERTAIN RISKS AND UNCERTAINTIES, THAT MAY CAUSE ACTUAL
RESULTS OR OUTCOMES TO DIFFER MATERIALLY FROM THOSE IN THE FORWARD-LOOKING
STATEMENTS.
- 20 -
<PAGE>
FLUCTUATIONS IN QUARTERLY RESULTS MAKE PERIOD-TO-PERIOD COMPARISONS
DIFFICULT. ISI's quarterly operating results can vary significantly depending on
a number of factors. These factors include:
- - the volume and timing of orders received during the quarter;
- - the mix of and changes in customers to whom ISI's products are sold;
- - the timing and acceptance of new products and product enhancements by
ISI or its competitors;
- - changes in pricing;
- - buyouts of run-time licenses;
- - product life cycles;
- - the level of ISI's sales of third party products;
- - purchasing patterns of customers;
- - competitive conditions in the industry;
- - foreign currency exchange rate fluctuations;
- - business cycles affecting the markets in which ISI'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 these factors are difficult to forecast. The future operating
results of ISI may fluctuate as a result of these and other factors,
including ISI's ability to continue to develop innovative and competitive
products.
ISI 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, ISI generally recognizes a substantial
portion of its total quarterly revenue from sales orders received and shipped
in the last two weeks of the quarter. Thus, the magnitude of quarterly
fluctuations may not become evident until very late in, or after the end of,
a particular quarter. In addition, a significant amount of ISI's sales orders
involve products and services that yield revenue over multiple quarters or
upon completion of performance. If license agreements entered into during a
quarter do not meet ISI's revenue recognition criteria, even if ISI meets or
exceeds its forecast of aggregate licensing and other contracting activity,
it is possible that ISI's revenues would not meet expectations. Because ISI's
staffing and operating expenses are based on anticipated total revenue
levels, and a high percentage of ISI's costs are fixed in the short term and
do not vary with revenue, small variations between anticipated orders and
actual orders, as well as non-recurring or large orders, can cause
disproportionate variations in ISI's operating results from quarter to
quarter.
The procurement process of ISI'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 ISI's products increasingly becomes a more strategic decision made at
higher management levels, ISI believes that sales cycles for ISI's products
will lengthen. In addition, a portion of ISI's revenues from services are
earned pursuant to fixed price contracts. Variances in costs associated with
those contracts could have a material adverse effect on ISI's business and
results of operations. ISI's results of operations may also be affected by
seasonal trends. While ISI's revenues are not generally seasonal in nature,
ISI's total revenue and net income during the first fiscal quarter have
historically been lower than the previous fourth fiscal quarter for a variety
of reasons, including customer purchase cycles related to expiration of
budgetary authorizations.
Due to all of the foregoing factors, ISI 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. During
previous fiscal years, ISI has experienced actual performance that did not
meet financial market expectations. It is possible that, in some future
quarters, ISI's operating results will again be below the expectations of
stock market analysts and investors.
ISI'S ABILITY TO REMAIN COMPETITIVE DEPENDS ON ITS ABILITY TO INTRODUCE
PRODUCT ENHANCEMENTS AND NEW PRODUCTS QUICKLY THAT MEET CUSTOMER DEMANDS. The
market for embedded applications is fragmented and is characterized by
ongoing technological developments, evolving industry standards and rapid
changes in customer requirements. ISI's success depends upon its ability to
continue to develop and introduce in a timely manner new products that take
advantage of technological developments, 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 and preferences. ISI must continuously update its
existing products to keep them current
- 21 -
<PAGE>
with changing technology and must develop new products to take advantage of
new technologies that could render ISI's existing products obsolete.
Development delays are commonplace in the software industry. ISI has
experienced delays in the development of new products and the enhancement of
existing products in the past and is likely to experience delays in the
future. If the results of product development efforts are inadequate or
delayed, ISI's business, financial condition and results of operations would
be materially adversely affected. ISI may not 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. In addition, ISI's
enhanced or new products may not adequately address the changing needs of the
marketplace. The inability of ISI, 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 ISI's business, financial condition or results of operations. From time to
time, ISI or its competitors may announce new products, capabilities or
technologies that have the potential to replace or shorten the life cycles of
ISI's existing products. Announcements of currently planned or other new
products may cause customers to defer purchasing existing ISI products. Any
failure by ISI 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 ISI's business, financial condition
and results of operations.
COMPETITION CAN LEAD TO PRICING PRESSURES. The market for commercially
available software tools and embedded operating systems is fragmented, highly
competitive and is characterized by pressures to incorporate new features and
accelerate the release of new product versions. As the industry continues to
develop, ISI expects competition to increase in the future from existing
competitors and from other companies that may enter ISI's existing or future
markets with similar or substitute solutions that may be less costly or
provide better performance or functionality than ISI's products. Some of
ISI's existing and many of its potential competitors have substantially
greater financial, technical, marketing and sales resources than ISI and ISI
might not be able to compete successfully against these companies. In the
event that price competition increases significantly, competitive pressures
could cause ISI to reduce the prices of its products, which would result in
reduced profit margins and could negatively affect the ability of ISI to
provide adequate service to its customers. Prolonged price competition would
have a material adverse effect on ISI'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 ISI's real-time
operating systems, may be subject to significant pricing pressures, including
buy-out arrangements. A variety of other potential actions by ISI's
competitors, including increased promotion and accelerated introduction of
new or enhanced products, could have a material adverse effect on ISI's
business, financial condition and results of operations. In addition, ISI's
pricing model for software licenses may be subject to market pressure. The
pricing model for ISI's embedded software products is based on a range of
mid-priced development license packages, combined with low-priced per-unit
production (run-time) licenses. In the future, the market may demand
alternative pricing models. This may result in a material adverse effect on
ISI's business, financial condition and results of operations.
ISI MUST EFFECTIVELY INTEGRATE ACQUIRED BUSINESSES. ISI has completed a
number of acquisitions in recent years and may complete additional
acquisitions in the future. The process of integrating an acquired company's
business, most recently the acquisition of SDS in July 1999, into ISI'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 ISI's business. Moreover, the
anticipated benefits of an acquisition might not be realized. Future
acquisitions by ISI could result in potentially dilutive issuances of equity
securities, debt-obligations and contingent liabilities, the use of cash
reserves, and amortization expenses related to goodwill and other intangible
assets, which could have a material adverse effect on ISI'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 ISI has no or limited direct prior experience and
the potential loss of key employees of the acquired company.
ISI IS SUBJECT TO THE BUSINESS AND ECONOMIC RISKS OF INTERNATIONAL
OPERATIONS. In fiscal year 1999 and the first nine months of fiscal year
2000, ISI derived approximately 42% of its total revenue from sales outside
of North America. ISI expects that international sales will continue to
generate a significant percentage of its total revenue in the foreseeable
future. International operations are subject to a number of special risks.
These risks include:
- - foreign government regulation;
- - reduced protection of intellectual property rights in some countries
where ISI does business;
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<PAGE>
- - longer receivable collection periods and greater difficulty in accounts
receivable collection;
- - unexpected changes in, or imposition of, regulatory requirements,
tariffs, import and export restrictions and other barriers and
restrictions;
- - potentially adverse tax consequences;
- - the burdens of complying with a variety of foreign laws and staffing
and managing foreign operations;
- - exchange rate fluctuations;
- - general geopolitical risks, such as political and economic instability,
hostilities with neighboring countries and changes in diplomatic and
trade relationships; and
- - possible recessionary environments in economies outside the United
States.
ISI generally denominates sales to and by foreign subsidiaries in local
currency. An increase in the relative value of the dollar against local
currencies would reduce ISI's revenue in dollar terms or make ISI's products
more expensive and, therefore, potentially less competitive in foreign
markets. For example, revenue from sales in Japan during fiscal years 1998
and 1997 was adversely affected by the weakness of the yen against the
dollar. Similarly, the currencies of many other countries in the Asia Pacific
region have recently lost significant value against the dollar, notably the
currencies of Korea and Taiwan. ISI's future results of operations could be
adversely affected by currency fluctuations. More generally, recent
instability in Asian currency and stock market economies could adversely
affect the economic health of the entire region and could have an adverse
effect on ISI's results of operations. For example, in many countries in the
Asia Pacific region, during fiscal years 1998 and 1999 there was little or no
growth in investment in product development infrastructure by manufacturing
companies. ISI relies on distributors and representatives for sales of its
products in some foreign countries and, accordingly, depends on their ability
to promote and support ISI's products and, in some cases, to translate them
into foreign languages. ISI's international distributors and representatives
generally offer products of several different companies, including in some
cases products that are competitive with ISI's products, and these
distributors and representatives are not subject to any minimum purchase or
resale requirements. ISI's international distributors and representatives may
not continue to purchase ISI's products or provide them with adequate levels
of support.
PRODUCT DEFECTS CAN BE EXPENSIVE TO FIX AND CAN CAUSE ISI TO LOSE
CUSTOMERS. 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. Despite testing by ISI and testing and use
by current and potential customers, errors might be found in new products
after commencement of commercial shipments. The occurrence of errors could
result in loss of or delay in market acceptance of ISI's products, which
could have a material adverse effect on ISI's business, financial condition
and results of operations. The increasing use of ISI'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 ISI to significant product
liability claims. In addition, ISI's products are used for applications in
business systems where the failure of the embedded system could be linked to
substantial economic loss. ISI's license and other agreements with its
customers typically contain provisions designed to limit ISI's exposure to
potential product liability and other claims. It is likely, however, that the
limitation of liability provisions contained in ISI's agreements are not
effective in all circumstances and in all jurisdictions. ISI does not have
insurance against product liability risks and insurance may not be available
to ISI on commercially reasonable terms. ISI has errors and omissions
insurance; however, this insurance may not be adequate to cover claims. A
product liability claim or claim for economic loss brought against ISI, or a
product recall involving ISI's software, could have a material adverse effect
on ISI's business, financial condition and results of operations.
ISI's operations depend on its ability to protect its computer equipment
and the information stored in its databases against damage by fire, natural
disaster, power loss, telecommunications failure, unauthorized intrusion and
other catastrophic events. ISI believes it has taken prudent measures to
reduce the risk of interruption in its operations. However, these measures
might not be sufficient. Any damage or failure that causes interruption in
ISI's operations could have a material adverse effect on its business,
financial condition, and results of operations.
ISI FACES INTENSE COMPETITION FOR QUALIFIED EMPLOYEES. ISI's future
performance depends to a significant degree upon the continued contributions
of its key management, product development, sales, marketing and operations
personnel. In addition, ISI 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 qualified personnel is intense in Santa Clara
County, California, where ISI is headquartered, and there can be no assurance
that ISI will be successful in attracting and retaining personnel. The
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<PAGE>
failure of ISI to attract, assimilate and retain the necessary personnel
could have a material adverse effect on ISI's business, financial condition
and results of operations.
ISI DEPENDS ON ITS INTELLECTUAL PROPERTY RIGHTS, AND IS SUBJECT TO THE
RISKS OF INFRINGEMENT. ISI depends on its proprietary technology. Despite
ISI's efforts to protect its proprietary rights, it may be possible for
unauthorized third parties to copy ISI's products or to reverse engineer or
obtain and use information that ISI regards as proprietary. Policing
unauthorized use of ISI's products is difficult, and while ISI 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 foreign 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 be
issued that relate to fundamental technologies incorporated into ISI's
products.
As the number of patents, copyrights, trademarks and other intellectual
property rights in ISI's industry increases, products based on its technology
may increasingly become the subject of infringement claims. Third parties
could assert infringement claims against ISI in the future. Infringement
claims with or without merit could be time consuming, result in costly
litigation, cause product shipment delays or require ISI to enter into
royalty or licensing agreements. Royalty or licensing agreements, if
required, might not be available on terms acceptable to ISI, or at all, which
could have a material adverse affect on ISI's business, financial condition
and results of operations. In addition, ISI may initiate claims or litigation
against third parties for infringement of ISI's proprietary rights or to
establish the validity of ISI's proprietary rights. Litigation to determine
the validity of any claims, whether or not the litigation is resolved in
favor of ISI, could result in significant expense to ISI and divert the
efforts of ISI's technical and management personnel from productive tasks. In
the event of an adverse ruling in any litigation, ISI might be required to
pay substantial damages, discontinue the use and sale of infringing products
and expend significant resources to develop non-infringing technology or
obtain licenses to infringing technology. The failure of ISI to develop or
license a substitute technology could have a material adverse affect on ISI's
business, financial condition and results of operations.
ISI RELIES ON THIRD-PARTY LICENSES FOR SOME OF ITS PRODUCTS. ISI licenses
software development tool products from other companies to distribute with
its own products. The inability of these 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 ISI's business, financial condition and results of operations. In
addition, ISI's products compete with products produced by some of ISI's
licensors. When these licenses terminate or expire, continued license rights
might not be available to ISI on reasonable terms. In addition, ISI might not
be able to obtain similar products to substitute into the tool suites. The
inability to license these products could have a material adverse effect on
ISI's business, financial condition and results of operations.
THE MARKET PRICE OF ISI'S STOCK HAS BEEN VOLATILE. The prices for ISI's
common stock have fluctuated widely in the past. During the 9 months ended
November 30, 1999, the closing price of a share of ISI common stock ranged
from a high of $30.13 to a low of $8.44. The management of ISI believes that
stock price fluctuations may have been caused by actual or anticipated
variations in ISI's operating results, announcements of technical innovations
or new products or services by ISI or its competitors, changes in earnings
estimates by securities analysts 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 ISI and other high technology companies, often for reasons
unrelated to the operating performance of the specific companies. 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 ISI. Litigation, if instituted, could result in substantial costs and
a diversion of management attention and resources, which would have a
material adverse effect on ISI's business, financial condition and results of
operations even if ISI is successful in any 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.
FINANCIAL STATEMENTS ARE BASED ON ESTIMATES AND ASSUMPTIONS. The preparation
of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the
recorded amounts of assets and liabilities at the date of the financial
statements and the recorded amounts of revenues and expenses during the
reporting period. A change in the facts and circumstances surrounding these
estimates could result in a change to the estimates and impact future operating
results.
RISKS RELATING TO THE MERGER.
FAILURE TO REALIZE THE BENEFITS OF INTEGRATING THE OPERATIONS OF ISI AND
WIND, PRODUCTS AND DEVELOPMENT ORGANIZATIONS COULD DIMINISH THE BENEFITS OF
THE MERGER. Achieving the benefits of the merger will depend in part on the
integration of Wind's and ISI's operations, products and personnel in a
timely and efficient manner. In order
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<PAGE>
for the combined companies to provide enhanced and more valuable products to
its customers after the merger, it will need to integrate the product lines
and development organizations of ISI and Wind. This will be difficult and
unpredictable because their products are highly complex, have been developed
independently and were designed without regard to such integration.
Successful integration of product lines also requires coordination of
different development and engineering teams This, too, will be difficult and
unpredictable because of possible cultural conflicts and different opinions
on technical decisions and product roadmaps. The diversion of management
attention and any difficulties encountered in the transition and integration
process could have a material adverse effect on the combined company's
business, financial condition and operating results.
Wind expects to incur costs from integrating ISI's operations, products
and personnel. These costs may be substantial and may include costs for:
- employee redeployment, relocation or severance;
- conversion of information systems;
- combining research and development teams and processes;
- reorganization or closures of facilities; and
- relocation or disposition of excess equipment.
There can be no assurance that Wind will be successful in these
integration efforts or that Wind will realize the expected benefits of the
merger.
FAILURE TO RETAIN KEY EMPLOYEES COULD DIMINISH THE BENEFITS OF THE
MERGER. The successful combination of Wind and ISI will depend in part on the
retention of key personnel. There can be no assurance that Wind will be able
to retain ISI's key management, technical, sales and customer support
personnel, or that Wind will realize the anticipated benefits of the merger.
SALES COULD DECLINE IF CUSTOMER RELATIONSHIPS ARE DISRUPTED BY THE
MERGER. ISI's or Wind's customers may not continue their current buying
patterns during the pendency of, and following, the merger. Any significant
delay or reduction in orders for Wind's or ISI's products could have a
material adverse effect on the combined company's business, financial
condition and results of operations. Customers may defer purchasing decisions
as they evaluate the likelihood of successful integration of Wind's and ISI's
products and the combined company's future product strategy. Customers may
also consider purchasing products of competitors. In addition, by increasing
the breadth of Wind's and ISI's business, the merger may make it more
difficult for the combined company to enter into relationships, including
customer relationships, with strategic partners, some of whom may view the
combined company as a more direct competitor than either Wind or ISI as an
independent company.
ISI SHAREHOLDERS WILL RECEIVE A FIXED NUMBER OF SHARES OF WIND COMMON
STOCK IN THE MERGER, NOT A FIXED VALUE. Upon completion of the merger, each
share of ISI common stock will be converted into 0.92 of a share of Wind
common stock. Since the exchange ratio is fixed, the number of shares that
ISI shareholders will receive in the merger will not change, even if the
market price of Wind common stock changes. There will be no adjustment of the
exchange ratio or termination of the merger based solely on fluctuations in
the price of Wind common stock. In recent years, and particularly in recent
months, the stock market, in general, and the securities of technology
companies, in particular, have experienced extreme price and volume
fluctuations. These market fluctuations may adversely affect the market price
of Wind common stock. The market price of Wind common stock upon and after
completion of the merger could be lower than the market price on the date of
the merger agreement or the current market price.
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<PAGE>
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
ISI enters into foreign currency forward exchange contracts to reduce the
impact of currency exchange rate fluctuations on monetary asset and liability
positions. The objective of these contracts is to minimize the impact of
exchange rate fluctuations on ISI's operating results. Gains and losses
associated with exchange rate fluctuations on foreign currency forward
exchange contracts are recorded in income as they offset corresponding gains
and losses on the foreign currency denominated assets and liabilities being
hedged. The costs of the foreign currency forward exchange contracts are also
recorded in income. All foreign currency forward exchange contracts entered
into by ISI have maturities of less than one year. At November 30, 1999, ISI
had approximately $4.8 million of foreign currency forward exchange contracts
outstanding, in Japanese yen and numerous European currencies. At
February 28, 1999, ISI had approximately $3.4 million of foreign currency
forward exchange contracts outstanding, all in Japanese yen. Unrealized gains
on foreign currency forward exchange contracts at November 30, 1999 and
February 28, 1999 were approximately $ 61,000 and $112,000, respectively.
ISI believes that the fair market value of its portfolio of marketable
securities or related income would not be significantly impacted by increases
or decreases in interest rates due mainly to the short-term nature of the
portfolio. However, an increase in interest rates could have a material
adverse effect on the fair value of the portfolio. Conversely, declines in
interest rates could harm interest income from the portfolio.
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<PAGE>
PART II - OTHER INFORMATION
---------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
2.1 Agreement and Plan of Merger and Reorganization, dated as of
October 21, 1999 by and among Wind River Systems, Inc.,
University Acquisition Corp. and Integrated Systems, Inc.
(Incorporated by reference to Exhibit 2.1 to Form S-4, File
No. 333-91545, filed by Wind River Systems, Inc. on
November 23, 1999.)
2.2 Option Agreement, dated as of October 21, 1999, between
Integrated Systems, Inc. and Wind River Systems, Inc.
(Incorporated by reference to Exhibit 2.2 to Form S-4, File
No. 333-91545, filed by Wind River Systems, Inc. on
November 23, 1999.)
4.1 Form of Voting Agreement, dated as of October 21, 1999
(Incorporated by reference to Exhibit 2.3 to Form S-4, File
No. 333-91545, filed by Wind River Systems, Inc. on
November 23, 1999.)
27.1 Financial Data Schedule
(B) REPORTS ON FORM 8-K.
The following reports on Form 8-K were filed during the quarter ended
November 30, 1999:
On October 4, 1999, the company filed a Form 8-K/A under Item 7 which
amended the company's current report on Form 8-K originally filed on
August 5, 1999.
On November 2, 1999, the company filed a Form 8-K/A, Amended No. 2
under Item 7 which amended the company's current report on Form 8-K/A
filed on October 4, 1999 and Form 8-K originally filed on August 5,
1999.
On November 5, 1999, the company filed a Form 8-K under Item 1
reporting that it had entered into a definitive Agreement and Plan of
Merger and Reorganization with Wind River Systems, Inc. and University
Acquisition Corporation.
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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: December 21, 1999 INTEGRATED SYSTEMS, INC.
(Registrant)
/s/ CHARLES M. BOESENBERG
----------------------------
CHARLES M. BOESENBERG
President and Chief Executive
Officer
/s/ WILLIAM C. SMITH
----------------------------
WILLIAM C. SMITH
Vice President, Finance and
Chief Financial Officer
- 28 -
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS FINANCIAL INFORMATION FROM Q3 FY00 FORM 10-Q AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-29-2000
<PERIOD-START> MAR-01-1999
<PERIOD-END> NOV-30-1999
<CASH> 18,578
<SECURITIES> 1,460
<RECEIVABLES> 39,416
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 69,352
<PP&E> 21,008
<DEPRECIATION> 0
<TOTAL-ASSETS> 158,386
<CURRENT-LIABILITIES> 47,765
<BONDS> 0
0
0
<COMMON> 74,367
<OTHER-SE> 35,656
<TOTAL-LIABILITY-AND-EQUITY> 110,023
<SALES> 67,808
<TOTAL-REVENUES> 111,272
<CGS> 12,034
<TOTAL-COSTS> 29,882
<OTHER-EXPENSES> 87,442
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,470)
<INCOME-TAX> 1,007
<INCOME-CONTINUING> (4,477)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,477)
<EPS-BASIC> (0.19)
<EPS-DILUTED> (0.19)
</TABLE>
