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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K/A
AMENDMENT NO. 2
Current Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
JULY 21, 1999
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Date of Report (Date of earliest event reported)
INTEGRATED SYSTEMS, INC.
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(Exact name of Registrant as specified in its charter)
CALIFORNIA 0-18268 94-2658153
- ------------------------ ------------------------ -------------------------
(State of incorporation) (Commission file number) (I.R.S. Employer
Identification No.)
201 MOFFETT PARK DRIVE
SUNNYVALE, CALIFORNIA 94089
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(Address of principal executive offices, including zip code)
(408) 542-1500
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(Registrant's telephone number, including area code)
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ITEM 2: ACQUISITION OR DISPOSITION OF ASSETS
On July 21, 1999, Integrated Systems, Inc. ("ISI"), acquired Software
Development Systems, Inc., a privately held Illinois corporation ("SDS"),
pursuant to an Agreement and Plan of Reorganization dated as of July 15, 1999
(the "Merger Agreement") among SDS, certain shareholders of SDS, ISI and ISI
Acquisition Corporation, a wholly owned subsidiary of ISI. The acquisition was
structured as the merger (the "Merger") of SDS into ISI Acquisition Corporation.
Each share of SDS stock outstanding immediately prior to the Merger was
converted into the right to receive cash and shares of ISI Common Stock. ISI
paid a total Merger consideration of $13,942,947 in cash and 1,430,037 shares of
ISI Common Stock. All options to purchase SDS stock became immediately
exercisable as a result of the Merger. ISI paid a total of $3,464,191 to the
holders of those options in cash and the options were canceled. In addition, ISI
paid $5,513,920 to a creditor of SDS as full settlement of a loan liability. The
funds paid to the SDS shareholders, optionholders and creditor were derived from
ISI's working capital cash reserves. ISI will account for its acquisition of SDS
under the purchase method of accounting.
SDS is engaged in the business of developing, marketing and supporting
embedded software tools. ISI intends to continue to conduct SDS's business
following the acquisition. In 1998, SDS had revenue of approximately $16.5
million and net losses of approximately $2.3 million.
The shares of ISI Common Stock issued to the SDS shareholders in the
Merger were not registered under the Securities Act of 1933, as amended
("1933 Act"), in reliance upon the exemptions from registration provided by
Section 4(2) thereof and/or Rule 506 promulgated under Regulation D. ISI and
the SDS shareholders have entered into a Registration Rights Agreement,
pursuant to which ISI granted the SDS shareholders certain rights for the
registration under the 1933 Act of the resale of the shares of ISI Common
Stock issued to them in the Merger. Under the terms of the Registration
Rights Agreement, ISI agreed to file a shelf registration on Form S-3
pursuant to Rule 415 under the 1933 Act by no later than October 20, 1999, to
cover the resale by the SDS shareholders of the shares of ISI Common Stock
issued to them in the Merger. The registration statement was filed on October
19, 1999.
James E. Challenger, the Chief Executive Officer of SDS, was appointed to
the office of Chief Technology Officer of ISI pursuant to a letter agreement
dated July 15, 1999. In addition, Mr. Challenger signed a Non-Competition
Agreement with ISI in consideration of the payment by ISI of $1.0 million in
cash at the closing of the Merger. ISI also agreed to elect Mr. Challenger to a
newly created seat on the ISI Board of Directors.
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ITEM 7: FINANCIAL STATEMENTS AND EXHIBITS
(b) PRO FORMA COMBINED FINANCIAL INFORMATION.
OVERVIEW
Effective July 21, 1999 ISI acquired all the outstanding stock and stock
rights of 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 $39.2 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 $1.0
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.
The allocation of the purchase price is summarized below (in thousands):
<TABLE>
- ------------------------------------------------------- -----------------------------------------------------
<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/liabilities (293)
- ------------------------------------------------------- -----------------------------------------------------
Goodwill 23,028
- ------------------------------------------------------- -----------------------------------------------------
- ------------------------------------------------------- -----------------------------------------------------
Total purchase price $ 39,235
- ------------------------------------------------------- -----------------------------------------------------
</TABLE>
The acquisition has been structured as a tax-free exchange of stock, therefore,
the differences between the recognized fair value of acquired assets, including
tangible assets, and their historical tax bases are not deductible for tax
purposes.
The amount allocated to the in-process research and development represents the
purchased in-process technology for projects that, as of the date of the
acquisition, had not yet reached technological feasibility and had no
alternative future use. Based on preliminary assessments, the value of these
projects was determined by estimating the resulting net cash flows from the sale
of the products resulting from the completion of the projects, reduced by the
portion of the revenue attributable to core technology and the percentage
completion of the project. The resulting cash flows were then discounted back to
their present value at appropriate discount rates.
The nature of the efforts to develop the purchased in-process research and
development into commercially viable products principally relates to the
completion of all planning, designing, prototyping and testing activities that
are necessary to establish that the product can be produced to meet its design
specification including function, features and technical performance
requirements. The
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resulting net cash flows from such products are based on estimates of revenue,
cost of revenue, research and development costs, sales and marketing costs, and
income taxes from such projects.
The amount allocated to these projects identified as in-process research and
development of SDS will be charged to the income statement in the period the
valuation analysis is complete, shortly after the consummation of the
acquisition. Such charges relate to in-process research and development have not
been included in the unaudited pro forma combined statements of operations since
they are non-recurring in nature. However, the charges have been reflected in
the unaudited pro forma combined balance sheet.
The following unaudited pro forma combined balance sheet gives effect to the
transaction as if it had been consummated as of May 31, 1999, by combining the
balance sheet of ISI as at May 31, 1999 with the balance sheet of SDS as at
March 31, 1999.
The following unaudited pro forma combined financial statements of operations
for the year ended February 28, 1999 and the three months ended May 31, 1999
give effect to the acquisition as if it had occurred on March 1, 1998, by
combining the results of operations of ISI for the year ended February 28, 1999
and the three month period ended May 31, 1999 with the results of operations of
SDS for the year ended December 31, 1998 and the three month period ended March
31, 1999, respectively.
The pro forma information is presented for illustrative purposes only and is not
necessarily indicative of the operating results or financial position that would
have occurred if the acquisition had been consummated at the beginning of the
earliest period presented, nor is it necessarily indicative of future operating
results or financial position. The pro forma adjustments are based upon
information and assumptions available at the time of the filing of this Form
8-K/A. The pro forma information should be read in conjunction with the
accompanying notes thereto and with the historical financial statements and
related notes thereto in ISI's Form 10-K, filed in May 1999 and SDS's financial
statements and related notes filed with the first amendment to ISI's Form 8-K.
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INTEGRATED SYSTEMS, INC.
PRO FORMA COMBINED BALANCE SHEET
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
May 31, March 31,
1999 1999 Pro Forma Pro Forma
ISI SDS Adjustments Combined
--- --- ----------- --------
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 26,131 $ 2,009 $ (24,342) (a) $ 3,798
Marketable securities 2,382 2,382
Accounts receivable, net 25,377 2,733 $ (1,243) (b) 26,867
Deferred income taxes 2,490 1,686 4,176
Prepaid expenses and other 4,729 519 5,248
------------------------------ ----------- ----------
Total current assets 61,109 6,947 (25,585) 42,471
Marketable securities 45,078 45,078
Property and equipment, net 18,574 1,819 20,393
Intangible assets, net 3,411 131 32,663 (c) 36,205
Deferred income taxes 5,322 454 (4,800) (d) 976
Other assets 1,781 98 1,879
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Total Assets $ 135,275 $ 9,449 $ 2,278 $ 147,002
------------------------------ ----------- ----------
------------------------------ ----------- ----------
Liabilities
Current liabilities:
Accounts payable $ 3,730 $ 555 $ 4,285
Accrued payroll and related expenses 5,931 845 6,776
Other accrued liabilities 5,610 944 $ (1,243) (b) 5,311
1,652 (e) 1,652
Current portion of long term debt 598 598
Income taxes payable 1,906 1,906
Deferred revenue 18,139 1,952 (1,952) (f) 18,139
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Total current liabilities 35,316 4,894 (1,543) 38,667
Long-term liabilities:
Note payable 5,365 (5,365) (g)
Other long-term liabilities 735 735
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Total liabilities 35,316 10,994 (6,908) 39,402
Shareholders Equity
Common stock 59,647 13,941 (h) 73,588
1,301 (1,301) (i)
Less - notes receivable from shareholder (1,200) 1,200 (i)
Additional paid in capital from stock based compensation 3,302 (3,302) (i)
Deferred compensation on stock options (830) 830 (i)
Accumulated other comprehensive income (1,561) 15 (15) (i) (1,561)
Retained earnings 41,873 (4,133) 4,133 (i) 41,873
(6,300) (j) (6,300)
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Total shareholders equity 99,959 (1,545) 9,186 107,600
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Total liabilities and shareholders equity $ 135,275 $ 9,449 $ 2,278 $ 147,002
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</TABLE>
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INTEGRATED SYSTEMS, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
a) To reflect the cash consideration paid for the acquisition of SDS.
b) To reflect the elimination of accounts receivable and payable balances
between ISI and SDS.
c) To reflect the intangible assets resulting from the allocation of the total
amount of the consideration paid for the SDS acquisition.
d) To reflect the deferred tax liability arising on acquisition due to the
change in basis of the acquired assets.
e) To reflect the accrual of direct costs arising from the acquisition of SDS,
estimated at approximately $1,652,000 consisting mainly of legal fees,
appraisal fees, audit fees, and an accrual for the estimated expense
associated with SDS's deferred revenue.
f) To eliminate SDS's deferred revenue.
g) To reflect the repayment on acquisition of SDS's note payable by ISI.
h) To reflect the issuance of $13.9 million in common stock on acquisition of
SDS.
i) To reflect the elimination of SDS's equity.
j) To reflect the estimated write-off of in-process research and development
of $6.3 million. The charge related to in-process research and development
has not been included in the unaudited pro forma combined statements of
operations since it is non-recurring in nature. However, the charge has
been reflected in the unaudited pro forma combined balance sheet.
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INTEGRATED SYSTEMS, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Year Ended
----------
February 28, December 31,
1999 1998 Pro Forma Pro Forma
ISI SDS Adjustments Combined
--- --- ----------- --------
<S> <C> <C> <C> <C>
Revenue:
Product $ 76,622 $ 14,720 $ (4,362) (l) $ 86,980
Services 56,882 1,802 (210) (l) 58,474
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Total revenue 133,504 16,522 (4,572) 145,454
Costs and expenses:
Cost of product revenue 13,505 3,335 (4,362) (l) 12,478
Cost of services revenue 24,987 1,077 (210) (l) 25,854
Marketing and sales 48,743 8,285 57,028
Research and development 18,625 3,600 22,225
General and administrative 12,940 6,049 18,989
Acquisition-related and other 8,507 8,507
Amortization of intangibles 523 9,024 (m) 9,547
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Total costs and expenses 127,830 22,346 4,452 154,628
Income (loss) from operations 5,674 (5,824) (9,024) (9,174)
Interest and other income (expense) 4,962 (110) (1,069) (n) 3,783
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Income (loss) before income taxes 10,636 (5,934) (10,093) (5,391)
Provision (benefit) for income taxes 1,003 (1,247) (2,632) (o) (2,876)
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Net income (loss) $ 9,633 $ (4,687) $ (7,461) $ (2,515)
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Earnings per share - basic $ (0.10)
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Shares used in per share calculations-
basic 23,138 1,430 24,568 (p)
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</TABLE>
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INTEGRATED SYSTEMS, INC.
PRO FORMA COMBINED STATEMENT OF OPERATIONS
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
----------------------
May 31, March 31,
1999 1999 Pro Forma Pro Forma
ISI SDS Adjustments Combined
--- --- ----------- --------
<S> <C> <C> <C> <C>
Revenue:
Product $ 18,949 $ 3,730 $ (1,036) (l) $ 21,643
Services 13,643 542 (207) (l) 13,978
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Total revenue 32,592 4,272 (1,243) 35,621
Costs and expenses:
Cost of product revenue 4,909 771 (1,036) (l) 4,644
Cost of services revenue 5,994 176 (207) (l) 5,963
Marketing and sales 14,025 2,442 16,467
Research and development 5,309 958 6,267
General and administrative 3,331 996 4,327
Amortization of intangibles 172 2,256 (m) 2,428
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Total costs and expenses 33,740 5,343 1,013 40,096
Income (loss) from operations (1,148) (1,071) (2,256) (4,475)
Interest and other income (expense) 1,400 (94) (212) (n) 1,094
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Income (loss) before income taxes 252 (1,165) (2,468) (3,381)
Provision (benefit) for income taxes 81 (359) (531) (o) (809)
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Net income (loss) $ 171 $ (806) $ (1,937) $ (2,572)
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Earnings per share - basic $ (0.11)
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Shares used in per share calculations-
basic 22,775 1,430 24,205 (p)
--------- --------- ---------
--------- --------- ---------
</TABLE>
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INTEGRATED SYSTEMS, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
l) To reflect the elimination of product and services revenue and the related
cost of revenue on transactions between ISI and SDS.
m) To reflect amortization of goodwill and intangible assets associated with
the acquisition as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Amount Amortization Amortization Amortization
period expense for 12 expense for 3
month period month period
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Goodwill $20,118 5 years $4,024 $1,006
- -------------------------------------------------------------------------------------------------------------
OEM relationships, $7,500 5 years $1,500 $375
Trade name, Workforce
- -------------------------------------------------------------------------------------------------------------
Non-compete agreement $1,000 4 years $250 $62
- -------------------------------------------------------------------------------------------------------------
Completed technology $6,500 2 years $3,250 $813
- -------------------------------------------------------------------------------------------------------------
</TABLE>
n) To reflect the loss of interest income ($1.3 million for the year, and $0.3
million for the three month period) due to the cash portion of the purchase
price and reduction in interest expense ($0.2 million for the year and
$0.1 million for the three month period) on the note payable.
o) To reflect the effect of the above adjustments on income tax expense,
excluding the amortization of goodwill, which is a non-deductible item.
p) To reflect adjustment to the weighted average shares outstanding of the
1,430,037 shares issued to the shareholders of SDS on acquisition,
assuming that all the shares issued in the purchase were outstanding for
the period.
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(c) EXHIBITS
The following exhibits are filed herewith:
2.01 Agreement and Plan of Reorganization dated as of July 15, 1999
by and among ISI, Software Development Systems, Inc., ISI
Acquisition Corporation and certain individual shareholders of
Software Development Systems, Inc. Pursuant to Item 601(b)(2)
of Regulation of S-K, the schedules have been omitted but will
be furnished supplementally to the Commission upon request.*
4.01 Registration Rights Agreement dated as of July 15, 1999 by and
among ISI and the shareholders of Software Development
Systems, Inc.*
10.01 Offer of Employment dated July 15, 1999 from ISI to James E.
Challenger.*
10.02 Non-Competition Agreement dated as of July 15, 1999 between
ISI and James E. Challenger.*
23.01 Consent of KPMG LLP, Independent Auditors.*
----------------------
*Previously filed.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this amendment to report to be signed on its
behalf by the undersigned thereunto duly authorized.
INTEGRATED SYSTEMS, INC.
By: /s/ William C. Smith
---------------------
Date: October 29, 1999 William C. Smith
Vice President, Finance and
Chief Financial Officer
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