<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-Q/A-1
(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, 1998
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 Registrant's Common Stock on December 31,
1998 was 22,647,952 shares.
<PAGE>
INTEGRATED SYSTEMS, INC.
FORM 10-Q
QUARTER ENDED NOVEMBER 30, 1998
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets as of November 30, 1998
and February 28, 1998 4
Condensed Consolidated Statements of Income for the Three and
Nine Months Ended November 30, 1998 and 1997 5
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended November 30, 1998 and 1997 6
Notes to Condensed Consolidated Financial Statements 7
SIGNATURES 10
</TABLE>
<PAGE>
This Form 10Q/A-1 is filed to correct a typographical error on the Deferred
Revenue line item of the November 30, 1998 Balance Sheet. The previously
filed number was $16,533. The correct number is $16,553.
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The condensed consolidated interim financial statements included herein have
been prepared by Integrated Systems, Inc. ("the Company"), without audit,
pursuant to the rules and regulations of the Securities and Exchange
Commission. Although certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
such rules and regulations, the Company believes that the disclosures made
are adequate to make the information presented not misleading. It is
suggested that the condensed consolidated interim financial statements be
read in conjunction with the consolidated financial statements and the notes
thereto included in the Company's Annual Report on Form 10-K for the year
ended February 28, 1998. The February 28, 1998 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 comformity with the standards of
accounting measurements set forth in Accounting Principles Board Opinion No.
28 and in the opinion of management, reflect all adjustments, consisting only
of normal recurring adjustments, necessary to summarize fairly the financial
position, results of operations, and cash flows for the periods indicated.
The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for the full year.
3
<PAGE>
INTEGRATED SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
NOVEMBER 30, FEBRUARY 28,
1998 1998
------------ ------------
<S> <C> <C>
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 16,700 $ 14,454
Marketable securities 9,904 6,670
Accounts receivable, net 25,714 29,455
Deferred income taxes 840 1,603
Prepaid expenses and other 4,656 4,548
------- -------
Total current assets 57,814 56,730
Marketable securities 49,299 46,322
Property and equipment, net 18,588 18,428
Intangible assets, net 2,970 2,867
Deferred income taxes 4,763 2,363
Other assets 1,106 1,410
------- -------
Total assets $134,540 $128,120
-------- --------
-------- --------
LIABILITIES
Current liabilities:
Accounts payable $ 4,260 $ 5,073
Accrued payroll and related expenses 5,038 4,321
Other accrued liabilities 6,529 5,372
Income taxes payable 3,018 2,747
Deferred revenue 16,553 16,181
------- -------
Total current liabilities 35,398 33,694
SHAREHOLDERS' EQUITY
Common Stock, no par value, 50,000 shares
authorized: 22,623 and 23,339 shares
issued and outstanding at November 30, 1998
and February 28, 1998; respectively 58,016 63,647
Accumulated other comprehensive income (loss), net (513) (1,290)
Retained earnings 41,639 32,069
------- -------
Total shareholders' equity 99,142 94,426
------- -------
Total liabilities and shareholders' equity $134,540 $128,120
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
<PAGE>
INTEGRATED SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue:
Product $ 20,604 $ 17,637 $ 55,488 $ 46,897
Services 14,358 12,265 42,961 39,763
--------- --------- --------- ---------
Total revenue 34,962 29,902 98,449 86,660
--------- --------- --------- ---------
Costs and expenses:
Cost of product revenue 5,034 3,208 12,167 9,458
Cost of services revenue 5,723 6,590 17,201 21,711
Marketing and sales 12,142 11,313 35,505 31,594
Research and development 4,399 4,672 14,498 14,221
General and administrative 4,354 2,767 12,109 8,346
--------- --------- --------- ---------
Total costs and expenses 31,652 28,550 91,480 85,330
--------- --------- --------- ---------
Income from operations 3,310 1,352 6,969 1,330
Interest and other income 1,354 1,090 3,575 2,864
--------- --------- --------- ---------
Income before income taxes 4,664 2,442 10,544 4,194
Provision for income taxes 1,492 830 974 1,426
--------- --------- --------- ---------
Net income $ 3,172 $ 1,612 $ 9,570 $ 2,768
--------- --------- --------- ---------
--------- --------- --------- ---------
Earnings per share--basic $ 0.14 $ 0.07 $ 0.41 $ 0.12
--------- --------- --------- ---------
--------- --------- --------- ---------
Earnings per share--diluted $ 0.14 $ 0.07 $ 0.40 $ 0.12
--------- --------- --------- ---------
--------- --------- --------- ---------
Shares used in per share calculations--basic 22,969 23,291 23,299 23,198
--------- --------- --------- ---------
--------- --------- --------- ---------
Shares used in per share calculations--diluted 23,241 24,349 23,984 24,057
--------- --------- --------- ---------
--------- --------- --------- ---------
</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,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 9,570 $ 2,768
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 4,309 4,255
Provision for (release of) doubtful accounts receivable (25) 1,619
Deferred income taxes (1,924) (354)
Changes in assets and liabilities:
Accounts receivable 3,760 444
Prepaid expenses and other (108) (756)
Accounts payable, accrued payroll and other accrued liabilities 1,061 1,730
Income taxes payable 271 (458)
Deferred revenue 372 1,213
Other assets and liabilities 241 (3)
---------- ----------
Net cash provided by operating activities 17,527 10,458
---------- ----------
Cash flows from investing activities:
Purchases of marketable securities, net (5,493) (21,647)
Additions to property and equipment (3,104) (3,816)
Capitalized software development costs (1,405) (825)
---------- ----------
Net cash used in investing activities (10,002) (26,288)
---------- ----------
Cash flows from financing activities:
Repurchase of common stock (8,739) (187)
Proceeds from exercise of common stock options and purchases under the Employee Stock
Purchase Plan 3,108 2,679
Tax benefit from disqualifying dispositions of common stock -- 918
---------- ----------
Net cash (used in) provided by financing activities (5,631) 3,410
---------- ----------
Effect of exchange rate fluctuations on cash and cash equivalents 352 (220)
Net increase (decrease) in cash and cash equivalents 2,246 (12,640)
Cash and cash equivalents at beginning of period 14,454 25,585
---------- ----------
Cash and cash equivalents at end of period $ 16,700 $ 12,945
---------- ----------
---------- ----------
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $ 2,340 $ 1,353
Supplemental schedule of noncash investing and financing activities:
Unrealized gain (loss) on marketable securities $ 718 $ (97)
</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 and nine months ended
November 30, 1998 and 1997 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, 1998. These condensed consolidated financial statements do
not include all disclosures normally required by generally accepted
accounting principles.
Certain amounts in the fiscal year 1998 condensed consolidated financial
statements have been reclassified to conform to the fiscal year 1999
presentation. These reclassifications had no effect on previously reported
results of operations or shareholder's equity.
2. 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 number 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.
The following table sets forth the calculations of earnings per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
------------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 1998 1997
------- ------- ------- ------
<S> <C> <C> <C> <C>
Basic:
Net income $ 3,172 $ 1,612 $ 9,570 $ 2,768
------- ------- ------- -------
------- ------- ------- -------
Number of shares:
Weighted average number of common shares outstanding 22,969 23,291 23,299 23,198
------- ------- ------- -------
------- ------- ------- -------
Earnings per share - basic $ 0.14 $ 0.07 $ 0.41 $ 0.12
------- ------- ------- -------
------- ------- ------- -------
Diluted:
Net income $ 3,172 $ 1,612 $ 9,570 $ 2,768
------- ------- ------- -------
------- ------- ------- -------
Number of shares:
Weighted average number of common shares outstanding 22,969 23,291 23,399 23,198
Dilutive effect of stock options, net 272 1,058 685 859
------- ------- ------- -------
Weighted average number of common and common equivalent shares outstanding 23,241 24,349 23,964 24,957
------- ------- ------- -------
------- ------- ------- -------
Earnings per share - diluted $ 0.14 $ 0.07 $ 0.40 $ 0.12
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
Certain options to purchase common stock were not included in the above
calculations as their exercise prices were greater than the average market
price of common stock in each respective period and their inclusion would be
antidilutive. The number of such options excluded was approximately 2.2
million and 0.2 million in the three months ended November 30, 1998 and 1997,
respectively, and 0.9 million and 0.4 million in the nine months ended
November 30, 1998, and 1997, respectively.
3. COMPREHENSIVE INCOME
In March 1998, the Company adopted Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 130 ("FAS 130"), "Reporting
Comprehensive Income." Comprehensive income is defined as the change in
equity from transactions and other events and circumstances excluding
transactions resulting from investments by owners and distributions to
owners. For the Company, the primary difference between net income and
comprehensive income results from foreign currency translation adjustments
and unrealized gains and losses on available-for-sale marketable securities.
7
<PAGE>
Comprehensive income for the three and nine months ended November 30, 1998
and 1997 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
----------------- ------------------
(in thousands) 1998 1997 1998 1997
------ ------ ------- ------
<S> <C> <C> <C> <C>
Net income $3,172 $1,612 $ 9,570 $2,768
Other comprehensive income, net of tax:
Foreign currency translation adjustments 364 28 346 (325)
Unrealized gain (loss) on marketable securities 135 (183) 431 (64)
------ ------ ------- ------
Other comprehensive income (loss) 499 (155) 777 (389)
------ ------ ------- ------
Total comprehensive income $3,671 $1,457 $10,347 $2,379
------ ------ ------- ------
------ ------ ------- ------
</TABLE>
The accumulated balances of other comprehensive income as of November 30,
1998 and 1997 are as follows:
<TABLE>
<CAPTION>
NOVEMBER 30, 1998 NOVEMBER 30, 1997
------------------------------------ ------------------------------------
FOREIGN FOREIGN
CURRENCY UNREALIZED CURRENCY UNREALIZED
TRANSLATION GAINS/ TOTAL TRANSLATION GAINS/ TOTAL
ADJUSTMENTS (LOSSES) OTHER ADJUSTMENTS (LOSSES) OTHER
----------- ---------- -------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Beginning balance $(1,438) $148 $(1,290) $(1,130) $148 $ (982)
Current-period change 346 431 777 (325) (64) (389)
----------- ---------- -------- ----------- ---------- --------
Ending balance $(1,092) $579 $ (513) $(1,455) $ 84 $(1,371)
----------- ---------- -------- ----------- ---------- --------
----------- ---------- -------- ----------- ---------- --------
</TABLE>
4. DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters into foreign currency forward exchange contracts to
reduce the impact of currency exchange rate fluctuations on monetary assets
and liability positions. The objective of these contracts is to minimize the
impact of exchange rate fluctuations on the Company'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 the Company have maturities of less than
one year. At November 30, 1998, the Company had approximately $2.3 million
of foreign currency forward exchange contracts outstanding, all in Japanese
yen. There were no foreign currency forward exchange contracts at February
28, 1998. Unrealized losses on foreign currency forward exchange contracts
at November 30, 1998 were approximately $210,000.
Other than the use of foreign currency forward exchange contracts discussed
above, the Company does not currently invest in or hold any other derivative
financial instruments.
5. INCOME TAXES
In May 1998, the Company made an election with the Internal Revenue Service
to treat the Company's Austrian subsidiary, TakeFive Software GmbH, as a
foreign branch of the Company in the United States tax return. For financial
statement purposes, this election resulted in a one-time tax benefit of $2.4
million in the first quarter of fiscal year 1999.
6. CONTINGENCIES
In October 1997, Greenhills Software, Inc. ("Greenhills"), a supplier, filed
a demand for arbitration against the Company, alleging among other things,
breach of contract, fraud, negligent misrepresentation and misappropriation
of trade name. In December 1997, the Company responded to the arbitration
demand, and filed a counter-claim against Greenhills. The Company believes it
has meritorious defenses to all claims against the Company and intends to
defend the claims vigorously. The arbitration hearings were completed in
early January, 1999, and a decision is pending. No accrual has been made in
the accompanying consolidated financial statements related to this dispute,
as the ultimate outcome is presently not determinable. The dispute, however,
is subject to inherent uncertainties and thus, there can be no assurance that
it will be resolved favorably to the Company or that it will not have a
material adverse effect on the Company's consolidated financial position or
results of operations.
8
<PAGE>
The Company is subject to various legal proceedings and claims, either
asserted or unasserted, which arise in the ordinary course of business. While
management does not believe that the outcome of any of the legal matters will
have a material adverse effect on the Company's consolidated financial
position, legal matters are subject to inherent uncertainties and thus, there
can be no assurance that these matters will be resolved favorably to the
Company.
7. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosure About
Segments of an Enterprise and Related Information," which specifies
disclosure requirements for segment reporting. The statement supersedes SFAS
14 and SFAS 18, is effective for fiscal years beginning after December 15,
1997, and requires earlier periods to be restated if practicable. The impact
of the adoption of this statement, if any, on the financial statements of the
Company has not yet been determined.
In April 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position 98-1 ("SOP 98-1"), "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1
provides guidance for determining whether computer software is internal-use
software and on accounting for the proceeds of computer software originally
developed or obtained for internal use and then subsequently sold to the
public. It also provides guidance on capitalization of the costs incurred for
computer software developed or obtained for internal use. The Company has not
yet determined the impact, if any, of adopting this statement. The
disclosures prescribed by SOP 98-1 will be effective for the Company's fiscal
year ending February 28, 2000.
Also in April 1998, the AICPA issued Statement of Position 98-5 ("SOP 98-5"),
"Reporting on the Costs of Start-Up Activities". SOP 98-5 provides guidance
on the financial reporting of start-up costs and organization costs and
requires such costs to be expensed as incurred. This statement will be
effective for the Company's fiscal year ending February 28, 2000. The Company
has not yet determined the impact, if any, of adopting SOP 98-5.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities", which supercedes and amends a
number of existing standards. The statement is effective for fiscal years
beginning after June 15, 1999, but earlier application is permitted. The
impact of the adoption of this statement, if any, on the financial statements
of the Company has not yet been determined.
9
<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: January 29, 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
10
