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`
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X Quarterly Report Under Section 13 or 15 (d)
- ----- of the Securities Exchange Act of 1934
- ----- For quarterly period ended December 31, 1996
or
Transition Report Pursuant To Section 13 or 15(d)
of The Securities and Exchange Act of 1934
For the transition period from _____ to ______.
Commission File No. 0-16227
IMPACT SYSTEMS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 94-2672923
- ------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
14600 Winchester Boulevard, Los Gatos, California 95030
-----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code: (408) 379-0910
--------------
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
---- ----
At December 31, 1996 there were 10,440,826 shares of the Company's common stock
outstanding.
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IMPACT SYSTEMS, INC.
Quarterly Report on Form 10-Q
INDEX
<TABLE>
<CAPTION>
Part I: Financial Information Page Number
-----------
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II: Other Information
Item 1. Legal Proceedings 10
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 12
Signature 13
Exhibit 27 - Financial Data Schedule 14
</TABLE>
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PART I - FINANCIAL INFORMATION
IMPACT SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Information)
(Unaudited)
<TABLE>
<CAPTION>
December 31 March 31
ASSETS 1996 1996
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,050 $ 2,736
Short-term investments 4,672 3,752
Trade and other accounts receivable 6,508 6,203
Inventories 3,679 3,536
Prepaid expenses and other 42 38
-------- --------
Total current assets 16,951 16,265
Property and equipment, net of accumulated depreciation and 515 224
amortization of $4,505 ($4,373 at March 31, 1996)
Non-current trade receivables 840 810
Minority equity investment in and advances to foreign affiliates 566 608
Other assets 258 213
-------- --------
$ 19,130 $ 18,120
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,497 $ 1,029
Accrued installation and warranty costs 1,319 957
Accrued salaries, wages and employee benefits 209 481
Accrued commissions 388 236
Other liabilities 684 1,442
-------- --------
Total current liabilities 4,097 4,145
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Stockholders' equity:
Preferred stock, no par: 2,000,000 shares authorized;
none outstanding
Common stock, no par value; 20,000,000 shares authorized;
10,440,826 and 10,328,976 shares issued and outstanding 24,940 24,850
Accumulated deficit (9,601) (10,587)
Cumulative translation adjustments (306) (288)
-------- --------
Total stockholders' equity 15,033 13,975
$ 19,130 $ 18,120
======== ========
</TABLE>
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IMPACT SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
December 31, December 31,
------------------ -----------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues $ 5,152 $ 4,441 $14,802 $12,133
Cost of goods sold 2,949 2,020 8,089 5,859
------- ------- ------- -------
Gross margin 2,203 2,421 6,713 6,274
------- ------- ------- -------
Operating expenses:
Research and development 495 427 1,426 1,248
Selling,general and administrative 1,512 1,544 4,581 4,223
------- ------- ------- -------
Total operating expenses 2,007 1,971 6,007 5,471
Operating income 196 450 706 803
Interest income, net 101 84 261 269
Foreign currency gain (loss), net 22 (17) 29 (21)
Equity in net income (loss) of investee (39) 90 (10) 363
------- ------- ------- -------
Net income before income taxes 280 607 986 1,414
Income taxes -- -- -- --
------- ------- ------- -------
Net income $ 280 $ 607 $ 986 $ 1,414
======= ======= ======= =======
Net income per common share and equivalent:
Net income per common share $ .03 $ .06 $ .09 $ .13
======= ======= ======= =======
Common and common equivalent
shares used in calculating income
per share 10,721 11,008 10,943 10,937
======= ======= ======= =======
</TABLE>
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IMPACT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER 31,
------------------------------
1996 1995
---- -----
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 986 $ 1,414
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 127 135
Equity in net (income) loss of investee 10 (363)
Cumulative translation effects (18) 18
Changes in assets and liabilities:
Trade and other accounts receivable (335) (1,334)
Inventories (143) (787)
Prepaid expenses and other (49) (55)
Accrued installation and warranty costs 362 249
Accounts payable 468 514
Accrued salaries, wages and employee benefits (272) (172)
Accrued commissions 152 (105)
Other liabilities (758) 86
------- -------
Cash Provided (Used) By Operating Activities 530 (400)
------- -------
Cash Provided (Used) By Investing Activities:
Purchase of short-term investments (920) (761)
Capital expenditures, net (418) (135)
Minority equity investment in and advances to affiliate 32 (21)
------- -------
Cash (Used) by Investing Activities (1,306) (917)
------- -------
Cash Provided (Used) by Financing Activities:
Issuance of capital stock, net of expenses 90 81
Repurchase of capital stock -- (56)
------- -------
Cash Provided By Financing Activities 90 25
------- -------
Net (Decrease) in Cash and Cash Equivalents (686) (1,292)
Cash and Cash Equivalents At Beginning of Period 2,736 3,247
------- -------
Cash and Cash Equivalents at End of Period $ 2,050 $ 1,955
======= =======
</TABLE>
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IMPACT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
(In Thousands, Unless Otherwise Noted)
(Unaudited)
NOTE 1 - Basis of Presentation
In the opinion of management, the consolidated financial statements
contain all adjustments necessary to present fairly the financial
position as of December 31, 1996, the results of operations for the
three months and nine months ended December 31, 1996 and December 31,
1995 and cash flows for the nine months ended December 31, 1996 and
December 31, 1995. These statements should be read in conjunction with
the March 31, 1996 financial statements and notes thereto incorporated
in the Company's Annual Report for the year ending March 31, 1996 (Form
10-K) previously filed with the Securities and Exchange Commission.
The interim financial results are not necessarily indicative of the
results to be expected for the full fiscal year.
NOTE 2 - Receivables From Affiliate
Trade and other accounts receivable include trade receivables from the
Company's minority owned affiliate - Impact Systems Asia KK - in the
amount of $318 and $311 at December 31, 1996 and March 31, 1996,
respectively. Such receivables arose from the sale of systems and spare
parts to the affiliate.
NOTE 3 - Balance Sheet Details
Inventories
Inventories include material, labor, and overhead costs; are stated at
the lower of first-in, first-out cost or market; and consist of the
following components.
<TABLE>
<CAPTION>
December 31, 1996 March 31, 1996
----------------- ---------------
<S> <C> <C>
Raw materials and components $2,257 $2,964
Work-in-process 1,245 530
Finished goods 98 42
Systems at customer sites for evaluation 79 --
------ ------
$3,679 $3,536
====== ======
</TABLE>
Minority Equity Investments in and Advances to Affiliates
The Company has a 40% interest in Impact Systems Asia, KK. Advances to
the affiliate were $264 at December 31, 1996 and $269 at March 31,
1996.
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<TABLE>
<CAPTION>
December 31, 1996 March 31, 1996
----------------- ---------------
<S> <C> <C>
Other Assets
Building rent deposits and other $258 $ 213
Other Liabilities
Accrued liabilities and other reserves $314 $ 585
Customer deposits 370 857
---- ------
$684 $1,442
==== ======
</TABLE>
Note 4 - Income Taxes
The Company accounts for income taxes using the liability method. Under
this method, deferred taxes are determined by applying current tax
rates to the differences between the financial reporting and tax bases
of the Company's assets and liabilities. The Company has provided a
valuation reserve for its net deferred tax assets at December 31, 1996
and March 31, 1996 due to uncertainty as to the realization of such
assets. The Company provides U.S. and foreign income taxes on the
portion of the accumulated earnings of the Company's foreign
subsidiaries which are intended to be remitted to the parent company
within the foreseeable future.
Note 5 - Earnings Per Share
Primary earnings per common and common equivalent share is computed
using the weighted average number of common stock shares outstanding
during the period and for incremental shares assumed issued for
dilutive common stock equivalents.
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ITEM 2
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Introduction
The following discussion contains forward-looking statements that are subject to
certain risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including without limitation, those described in this
section, in the Company's Annual Report on Form 10-K for the year ended March
31, 1996, and in other documents the Company files from time-to-time with the
Securities and Exchange Commission.
The Company's results are highly dependent upon economic conditions effecting
the paper industry and, consequently, orders tend to reflect the cyclical demand
for paper products and related paper prices. The paper industry is subject to
substantial cyclicality and economic cycles which affects the Company's order
rate and results of operations. Although the Company benefited from a
short-lived recovery of the paper industry in its fiscal 1996, the industry is
currently experiencing lower demand and paper prices.
Net Revenues
Net revenues for the current quarter (ended December 31, 1996), were $5.2
million compared to $4.4 million in the year ago quarter (ended December 31,
1995) and previous quarter (ended September 30, 1996). The increase in revenue
over both prior fiscal periods is attributable to significant growth in the
Company's Asian market, particularly with respect to newer product
introductions. Over the past three fiscal years, the Company's Asian operations
have been the focus of these newer products such as AdvantagePlus(TM),
UnityPlus(TM), and InfraPacPlus(TM). In addition to a shift in geographical
focus, the Company has directed its marketing and development efforts toward
total system integration versus standalone actuator, measurement, and control
systems. The Company believes that it is now positioned to expand as a system
integrator in the large North American market building upon its experience in
the Asian market.
Gross Margins
Gross margins, as a percentage of net revenues, were 42.8% for the current
quarter versus 54.5% in the year ago quarter and 47.5% for the previous quarter.
The aforementioned shift in product mix affected margins as a significant
portion of current quarter's revenues were related to newer products which
traditionally are more costly early in the product life cycles. On a year to
date basis, gross margins were 45.4% for the first nine months of fiscal 1997
compared to 51.7% for the same period of fiscal 1996 reflecting the trend toward
a mix of newer products.
Operating Expenses
Operating expenses were $2.0 million in the current quarter as well as prior
year's quarter as higher variable selling expenses associated with the increased
revenue level were offset by lower fixed costs
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associated with the Company's European operations. Research and development
costs were 9.6% of net revenues for both quarters as spending reflected system
integration enhancements. On a year to date basis, operating expenses were $6.0
million for the first nine months of fiscal 1997 compared to $5.5 million for
the same period of fiscal 1996 primarily as the result of increased variable
selling expenses on a higher revenue base and more resources in the system
integration area.
Other Income and Expense
The Company recorded a loss of $39,000 in the current quarter on its 40%
investment in Impact Systems Asia KK compared to an income of $90,000 for the
prior year quarter as the result of the anticipated decline in shipment levels
due to lower system orders. On a year to date basis, the Company recorded a loss
of $10,000 for the first nine months of fiscal 1997 compared to net income of
$363,000 for the same period of fiscal 1996 as fiscal 1996 included several
large system orders.
Liquidity and Capital Resources
The Company had cash balances and short-term investments of approximately $6.7
million at December 31, 1996 compared to $6.5 million at March 31, 1996 and
$6.1 million at prior quarter's end of September 30, 1996. There are no
outstanding borrowings under the Company's $6.0 million domestic credit facility
and the Company expects that existing cash balances together with cash flow from
operations and borrowings, if necessary, will be adequate to meet its working
capital requirements through at least the next several fiscal quarters.
Non-current trade receivables are expected to increase considerably over the
next several quarters as systems sold under longer term interest bearing notes
are shipped. Trade and other receivables increased $.3 million for the first
nine months of fiscal 1997 primarily the result of shipment timing. Property and
equipment increased by approximately $.3 million reflecting Company paid for
tenant improvements for its new corporate facility in Los Gatos, CA. Total
Company tenant improvements will be at approximately $.5 million.
Accrued installation and warranty costs increased $.4 million due to the payment
timing of certain turnkey installations. Accounts payable increased by
approximately $.5 million for the nine months year to date as the result of
payment timing differences and other liabilities decreased by almost $.8 million
principally as the result of the shipment of systems with customer deposits at
March 31, 1996.
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PART II - OTHER INFORMATION
ITEM 1
LEGAL PROCEEDINGS
On June 7, 1996, the Company filed a patent infringement action against ABB
Industrial Systems, Inc. in federal court in San Jose, California. In its suit,
the Company has alleged that ABB has infringed and continues to infringe an
Impact Systems, Inc. patent covering the manufacture, use, and sale of a caliper
control system and method. Among other things, the Company seeks to enjoin the
manufacture and sale of ABB's MICROSET Thermo-Profiler and ABB's Smart Calendar
Profiler and to recover damages resulting from ABB's earlier sales of the
product. This action is still in the early stages of discovery.
In December 1996, ABB filed a patent infringement action against the Company in
federal court in Columbus, Ohio, alleging that the Company's four-channel
moisture sensor infringes one of ABB's patents covering the manufacture, use and
sale of a moisture sensing system and method. ABB has not yet served the Company
with ABB's complaint in this new action. The Company believes that ABB's claims
are without merit, and intends to vigorously defend itself against such claims.
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PART II - OTHER INFORMATION
ITEM 5
OTHER INFORMATION
Recent Developments-Properties
On January 6, 1997, the Company moved its corporate offices, research and
development facilities and primary manufacturing facilities from San Jose,
California to Los Gatos, California. The new facilities are located at 14600
Winchester Boulevard, Los Gatos, California, 95030 and consist of 23,975 square
feet of offices and manufacturing area which is leased for a seven year term
commencing on November 16, 1996. The lease allows for expansion in adjacent
existing facilities of up to an additional 36,000 square feet. The lease term on
the Company's San Jose facility expired on January 15, 1997.
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PART II - OTHER INFORMATION
ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibit 27 - Financial Data Schedule
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SIGNATURE
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.
IMPACT SYSTEMS, INC.
Registrant
Date: February 13, 1997 By: /s/ Robert M. Gorski
-----------------------------------------
Robert M. Gorski
Vice President, Finance &
Chief Financial Officer
(Principal Financial & Accounting Officer)
February 13, 1997
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EXHIBIT INDEX
Exhibit 27 - Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,050
<SECURITIES> 4,672
<RECEIVABLES> 6,538
<ALLOWANCES> (30)
<INVENTORY> 3,679
<CURRENT-ASSETS> 16,951
<PP&E> 4,505
<DEPRECIATION> (4,373)
<TOTAL-ASSETS> 19,130
<CURRENT-LIABILITIES> 4,097
<BONDS> 0
0
0
<COMMON> 24,990
<OTHER-SE> (9,907)
<TOTAL-LIABILITY-AND-EQUITY> 19,130
<SALES> 14,802
<TOTAL-REVENUES> 14,802
<CGS> 8,089
<TOTAL-COSTS> 14,096
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 986
<INCOME-TAX> 0
<INCOME-CONTINUING> 986
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 986
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
</TABLE>
