<PAGE> 1
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 September 30, 1997
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
incorporation or organization) Identification 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 September 30, 1997 there were 10,404,500 shares of the Company's common stock
outstanding.
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IMPACT SYSTEMS, INC.
Quarterly Report on Form 10-Q
INDEX
<TABLE>
<CAPTION>
Page Number
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<S> <C> <C>
Part I: Financial Information
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 4. Submission of Matters to a Vote of Security Holders 10
Item 6. Exhibits and Reports on Form 8-K 11
Signature 12
Exhibit 27 - Financial Data Schedule 13
</TABLE>
2
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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>
September 30, March 31,
1997 1997
------------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 145 $ 1,416
Short-term investments 3,639 4,809
Trade and other accounts receivable 6,359 5,777
Inventories 5,312 3,674
Prepaid expenses and other 140 36
-------- --------
Total current assets 15,595 15,712
Property and equipment, net of accumulated depreciation
and amortization of $1,839 ($1,708 at March 31, 1997) 758 719
Non-current trade receivables 2,641 1,744
Minority equity investment in and advances to foreign
affiliates 550 641
Other assets 121 121
-------- --------
$ 19,665 $ 18,937
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,239 $ 1,503
Accrued installation and warranty costs 1,102 1,499
Accrued salaries, wages and employee benefits 341 452
Accrued commissions 425 305
Other liabilities 742 857
-------- --------
Total current liabilities 4,849 4,616
-------- --------
Stockholders' equity:
Preferred stock, no par: 2,000,000 shares
authorized; none outstanding
Common stock, no par value; 20,000,000 shares
authorized; 10,404,500 and 10,404,500 shares
issued and outstanding 24,871 24,871
Accumulated deficit (9,647) (10,139)
Cumulative translation adjustments (408) (411)
-------- --------
Total stockholders' equity $ 14,816 $ 14,321
-------- --------
$ 19,665 $ 18,937
======== ========
</TABLE>
3
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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 Six Months Ended
September 30, September 30,
--------------------- ---------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues $ 4,766 $ 4,434 $ 9,113 $ 9,649
Cost of goods sold 2,329 2,327 $ 4,432 $ 5,139
-------- -------- -------- --------
Gross margin 2,437 2,107 4,681 4,510
-------- -------- -------- --------
Operating expenses:
Research and development 559 432 1,087 931
Selling,general and administrative 1,691 1,463 3,302 3,069
-------- -------- -------- --------
Total operating expense 2,250 1,895 4,389 4,000
Operating income 187 212 292 510
Interest income, net 95 84 185 160
Foreign currency gain (loss), net 4 (4) 8 7
Equity in net income of investee 26 11 7 29
-------- -------- -------- --------
Net income before income taxes 312 303 492 706
Income taxes -- -- -- --
-------- -------- -------- --------
Net income $ 312 $ 303 $ 492 $ 706
======== ======== ======== ========
Net income per common share
and equivalent:
Net income per common share $ .03 $ .03 $ .05 $ .06
======== ======== ======== ========
Common and common
equivalent shares used in
calculating income per share 10,700 10,955 10,631 11,025
======== ======== ======== ========
</TABLE>
4
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IMPACT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED SEPTEMBER 30,
------------------------------
1997 1996
------- -------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 492 $ 706
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 129 90
Equity in net (income) of investee (11) (29)
Cumulative translation effects 3 7
Changes in assets and liabilities:
Trade and other accounts receivable (1,479) (88)
Inventories (1,638) (342)
Prepaid expenses and other (104) (80)
Accrued installation and warranty costs (397) 53
Accounts payable 736 98
Accrued salaries, wages and employee benefits (111) (289)
Accrued commissions 120 58
Other liabilities (115) (599)
------- -------
Cash (Used) By Operating Activities (2,375) (415)
------- -------
Cash Provided (Used) By Investing Activities:
Sale (Purchase) of short-term investments 1,170 (960)
Capital expenditures, net (168) (36)
Minority equity investment in and advances to affiliate 102 13
------- -------
Cash Provided (Used) by Investing Activities 1,104 (983)
------- -------
Cash Provided By Financing Activities:
Issuance of capital stock, net of expenses -- 47
Repayment of borrowings -- --
------- -------
Cash Provided By Financing Activities -- 47
------- -------
Net (Decrease) in Cash and Cash Equivalents (1,271) (1,351)
Cash and Cash Equivalents At Beginning of Period 1,416 2,736
------- -------
Cash and Cash Equivalents at End of Period $ 145 $ 1,385
======= =======
</TABLE>
5
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IMPACT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(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 September
30, 1997, the results of operations for the three months and six months ended
September 30, 1997 and September 30, 1996 and cash flows for the six months
ended September 30, 1997 and September 30, 1996. These statements should be read
in conjunction with the March 31, 1997 financial statements and notes thereto
incorporated in the Company's Annual Report for the year ending March 31, 1997
(Form 10-K) previously filed with the Securities and Exchange Commission.
The preparation of financial statements in accordance with generally accepted
accounting principals requires management to make estimates and assumptions that
effect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period. Actual
amounts could differ from those estimates.
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 $372 and
$254 at September 30, 1997 and March 31, 1997, 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>
September 30, 1997 March 31, 1997
------------------ --------------
<S> <C> <C>
Raw materials and components $3,956 $3,205
Work-in-process 1,356 469
------ ------
$5,312 $3,674
====== ======
</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 $408 at September 30, 1997 and $510 at March 31, 1997.
6
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<TABLE>
<CAPTION>
September 30, 1997 March 31, 1997
------------------ --------------
<S> <C> <C>
Other Assets
Building rent deposits and other $121 $121
Other Liabilities
Accrued liabilities and other reserves $626 $835
Customer deposits 116 22
---- ----
$742 $857
==== ====
</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 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.
7
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ITEM 2
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
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, 1997, 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 affecting
the paper industry and, consequently, orders reflect the cyclical demand for
paper products worldwide. The U.S. paper industry is weak and the Asian market
has become increasingly competitive as projects are becoming less plentiful. It
is uncertain what the near term effect will be on capital projects given the
currency turmoil in the Asian financial markets.
Net Revenues
Net revenues for the current quarter (ended September 30, 1997) were $4.8
million compared to $4.4 million for the prior year quarter (ended September 30,
1996) and $4.3 million for the prior quarter (ended June 30, 1997). The increase
in revenues in the current quarter is mostly attributable to increased spares
and service revenue.
Gross Margins
Gross margins, as a percentage of net revenues, were 51% in the current quarter
compared to 48% for the prior year quarter and 52% for the quarter immediately
prior. The higher margins in fiscal 1998 versus fiscal 1997 were the result of
the increases in spares, system add-on shipments and higher service revenues.
The Company's margins are affected by product mix variations and regional
competition, particularly involving new paper machine business (i.e., equipment
provided for large new paper machines typically involve lower gross margins).
Operating Expenses
Research and development expenses were $559,000 for the current quarter compared
to $432,000 for the prior year quarter and $528,000 for the prior quarter. The
increase in spending year to year is the result of additional key technical
resources dedicated to integration of the Company's enhanced software product
offerings.
Selling and administrative expenses increased to $1.7 million in the current
quarter compared to $1.5 million in the prior year quarter and $1.6 million for
the prior quarter. The increase from the first to second quarter of fiscal 1998
is attributable to variable costs associated with the increased sales
8
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volume. The increase year to year is the result of hires in sales, marketing,
and service to accommodate expected growth when the paper industry market
improves.
Other Income and Expense
Interest income was $95,000 for the current quarter compared to $84,000 for the
prior year quarter and $90,000 for the prior quarter. Although invested cash
declined during the current quarter (see Liquidity and Capital Resources), lower
investment interest income was offset by the realization of imputed interest on
payments of longer term installment sales. The Company expects interest income
to decline during the second half of fiscal 1998 compared to fiscal 1997 as
investments are utilized to support expansion of the Company's business and long
term installment sale contracts.
The Company recorded a profit of $26,000 on its 40% investment in Impact Asia
during the current quarter compared to a profit of $11,000 in the prior year
quarter as revenue levels remained relatively constant.
Liquidity and Capital Resources
On September 30, 1997 the Company's cash and short term investments (treasury
bills and mutual funds) amounted to approximately $3.8 million, a decline of
$2.4 million from fiscal year end balances of approximately $6.2 million at
March 31, 1997. The decline is primarily the result of the effect of the
increase in number of systems sold under long term installment contracts during
the second half of fiscal 1997 and first half of fiscal 1998 and working capital
needs (primarily for inventory purchases) associated with expansion of the
Company's business. 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 through the current
fiscal year.
Trade and accounts receivable balances increased $1.5 million during the first
half of fiscal 1998 as receivables associated with installment sales contracts
increased by $1.2 million during the same fiscal period. Inventories increased
$1.6 million during the first six months of fiscal 1998 as the result of
increased work in process for the third and fourth quarter's (fiscal 1998)
shipment plan and, to a lesser extent, maintenance of spare part stocks
associated with the Company's newer product lines. Accounts payable balances
increased by approximately $.7 million during the first half of fiscal 1998
reflecting late second quarter inventory receipts and payment timing
differences.
Risk Factors
Certain statements contained in the above discussion are forward looking and
involve risks and uncertainties. There can be no assurance that the Company's
actual performance will meet the Company's expectations. Specific risks are
discussed in the Company's Form 10-K for the year ended March 31, 1997.
9
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PART II - OTHER INFORMATION
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 15, 1997, the Company's shareholders took the following actions at
the Company's Annual Meeting of Shareholders.
1) Proxies were solicited pursuant to Regulation 14 under the Securities and
Exchange Act of 1934, there was no solicitation in opposition to management's
nominees for the Company's Board of Directors as listed in the proxy statement
and all such nominees were elected to serve as directors for the ensuing year.
2) Price Waterhouse LLP was ratified as independent accountants for the current
fiscal year.
10
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PART II - OTHER INFORMATION
ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibit 27 - Financial Data Schedule
11
<PAGE> 12
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.
IMPACT SYSTEMS, INC.
Registrant
Date: November 13, 1997 By: /s/ Robert M. Gorski
------------------------------------------
Robert M. Gorski
Vice President, Finance &
Chief Financial Officer
(Principal Financial & Accounting Officer)
November 13, 1997
12
<PAGE> 13
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
27 Financial Data Schedule
13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 145
<SECURITIES> 3,639
<RECEIVABLES> 6,415
<ALLOWANCES> (56)
<INVENTORY> 5,312
<CURRENT-ASSETS> 15,595
<PP&E> 2,597
<DEPRECIATION> (1,839)
<TOTAL-ASSETS> 19,665
<CURRENT-LIABILITIES> 4,849
<BONDS> 0
0
0
<COMMON> 24,871
<OTHER-SE> (10,055)
<TOTAL-LIABILITY-AND-EQUITY> 19,665
<SALES> 9,113
<TOTAL-REVENUES> 9,113
<CGS> 4,432
<TOTAL-COSTS> 8,821
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 492
<INCOME-TAX> 0
<INCOME-CONTINUING> 492
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 492
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
