<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission File Number:
March 31, 1997 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 No.)
14600 Winchester Boulevard, Los Gatos, California 95030
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 379-0910
---------------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
(Title of Class)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing sale price of the Common Stock on May 31,
1997 as reported on the NASDAQ National Market System, was approximately
$9,572,922. Shares of Common Stock held by each officer and director and by each
person who owns 5% or more of the outstanding Common Stock have been excluded in
that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
As of May 31, 1997, registrant had outstanding
10,404,500 shares of Common Stock.
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PART I
ITEM 1. BUSINESS.
GENERAL
Impact Systems, Inc., founded in 1980, develops, manufactures, sells and
services a wide spectrum of computer-based measurement and control systems to
the paper industry. Impact's cross-direction (CD) measurement and control
systems reduce CD variations in key variables occurring in the production of
virtually all grades of paper. Actuators and sensors primarily improve quality
and reduce operating costs which are important in market-limited situations. The
Spectrum(TM) drying products are primarily used to improve production. Control
of these variables is critical to improving paper quality, increasing production
capacity, and reducing rejects, energy consumption and raw material costs. The
Company's products have been specifically designed for integration with existing
paper machine measurement and control systems.
The Company's paper industry expertise and specialized applications knowledge of
cross-directional controls substantially enhance the development and marketing
of its products. The Company's principal customers are among the larger
worldwide paper companies normally with sales exceeding $1 billion annually.
Additionally, the Company sells its products directly to large paper machine and
coater manufacturers.
The Company is incorporated in California.
PRODUCT OFFERING
AdvantagePlus(TM)
The Impact Advantage line of scanning paper machine sensors was introduced at a
paper industry trade show (TAPPI Process Control) in 1989, and the Company began
shipping its AdvantagePlus line in December 1991. The line offers a
comprehensive array of on-line sensors for the paper machine, including Basis
Weight, Infrared Moisture, Contacting or Air-Bearing Caliper, Microwave
Moisture, Ash, Direct Coat Weight, Opacity and Gloss. These sensors may be used
as standalone measurement systems which may be easily interfaced to any
distributed control system or the customer's existing packaged control system.
Alternatively, the Advantage line supplies weight and moisture software
controls, display and MIS reports in a completely self-contained process control
system configuration.
UnityPlus(TM)
The Company has cross-OEM (Original Equipment Manufacturer) agreements with
Elsag Bailey, Inc., a wholly-owned indirect subsidiary of Elsag Bailey Process
Automation N.V. (NYSE: EBY), Impact's largest shareholder (22.86 percent of
Impact's outstanding common stock at March 31, 1997). Impact OEM's the "Unity"
distributed control system and related software from Bailey. Unity is an
integrated control system, designed for the paper machine floor. It incorporates
the operator console, control processors, I/O (input/output), modules, control
logic and graphic configuration tools into a single, self-contained distributed
control system. Bailey OEM's Impact's complete line of cross-direction actuators
and related software, drying systems, and the "AdvantagePlus" line of scanners
and sensors which is specifically designed for Distributed Control Systems
(DCS). The combination UnityPlus product (Unity and AdvantagePlus) is a
complete, fully expandable DCS system, incorporating the latest technological
advances in cross-direction actuators and sensors -- specifically designed to
eliminate the hardware and software redundancy commonly found in conventional
packaged control systems. Installation of the UnityPlus product results in a
true 'single window' paper machine control system, giving high reliability and
flexibility. See Note 10 of Notes to the Consolidated Financial Statements -
Related Party Transactions.
Human Machine Interface (HMI) and Process Control
Impact has developed communication driver software packages to allow advanced
integration capabilities with Bailey DCS, Foxboro DCS, as well as Windows NT
console configured with the Wonderware(TM) InTouch Graphical User Interface.
Each of these HMI solutions may be chosen as a module independent from the
process control hardware where the control processor and I/O (input/output)
modules and control logic resides.
Infra-Pac(TM)
The Infra-Pac electric infrared actuator is a sectionalized, high intensity
dryer designed to control the moisture profile across the width of the paper web
or to provide incremental drying across the width of the paper web for
specialized coating applications. A third generation digital power supply allows
for narrow zone resolution, long lamp life, and unity power factor for efficient
operation. A fourth generation power supply was introduced to meet market needs
for DCS direct integration, as well as higher power output requirements.
Infra-PacPlus was introduced this year to provide 25% higher infrared drying
output capability within the same Infra-Pac drying frame. Infra-PacPlus offers
new customers a more competitive product while providing existing customers the
opportunity to increase infrared drying output at a reasonable investment cost.
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Therma-Jet(TM)
The Therma-Jet and Ultra-Jet(TM) II variable temperature air-jet actuators for
CD caliper control use a high velocity variable temperature air jet system which
causes a calender roll to expand or contract at logical intervals, thereby
adjusting the compression between two rolls and thus the thickness of the paper
sheet.
Dyna-Step(TM)
The Dyna-Step stepper motor actuator for CD weight control automatically adjusts
the opening through which the slurry flows out of the paper machine headbox,
permitting greater control of weight across the paper sheet. The unique
SimulStep(TM) feature moves all actuators in parallel for fast response to major
upsets or grade changes.
Aqua-Pac(TM)
The Aqua-Pac remoisturizing actuator for CD moisture control corrects moisture
profile variations by adding water to the dry areas of the paper sheet. Designed
for high reliability and ease of maintenance, it can reduce CD moisture
variations by up to 80 percent.
Spectrum-IR(TM) II Gas
The Spectrum-IR II Gas Infrared Drying System is specifically designed for
coating, sizing and drying applications. Its virtually instantaneous cooldown
eliminates fire hazards associated with conventional gas systems. Spectrum-IR
can add additional drying without additional space to achieve paper machine
speed increase. Impact also offers the recently introduced Spectrum III Dual IR
System with higher IR and drying output.
Systems Integration
The Company's products are also sold as standalone or fully integrated systems
which reside on a data network [i.e., Impact Net II, Ethernet (TCP/IP), etc.],
and are then interfaced to various operating consoles. Each Impact "system" may
be added on to a paper machine's existing measurement system provided by other
measurement system suppliers.
BACKLOG
The Company's systems backlog as of March 31, 1997, was approximately $4.2
million, as compared with approximately $8.8 million as of March 31, 1996. The
$4.2 million for March 31, 1997 does not include approximately $4.0 million in
new orders received in the first quarter of fiscal 1998 to date. Backlog
generally represents orders for systems scheduled for delivery within six
months. The Company typically ships its systems within three to six months after
receipt of an order and the majority of its current backlog is scheduled for
delivery within six months. Customers can reschedule shipping dates to
coordinate with their installation timetables. Due to the possibility of
customer changes in delivery schedules, the Company's backlog as of any
particular date may not be indicative of actual revenues for any future period.
While the Company believes operating results are highly dependent upon the
economic environment, it has not experienced significant seasonal variations in
the demand for its products.
SALES AND SERVICE
The Company markets its products through a direct sales and marketing force or
manufacturers representatives who are supported by Impact's sales and service
organization. Most of the Company's sales personnel are engineers with prior
experience in papermaking or in the sale of specialized capital equipment to the
paper industry. The Company's sales force is supported by field service and
engineering personnel who are responsible for managing the installation and
maintenance of Impact's products.
COMPETITION AND INDUSTRY CONDITIONS
The market for the sale of process control products to paper companies is highly
competitive. Impact's principal competitors in its actuator and process control
systems business are Honeywell/Measurex and ABB Industrial Systems, Inc. Impact
also competes with a small number of regional companies.
Competition is based primarily on performance, product quality and reliability,
as well as price, service and support capability, and corporate reputation.
Impact believes that a particularly important competitive factor is the degree
of applications engineering provided in the sale of the system.
The paper industry is capital intensive and highly cyclical. Expenditures on
capital equipment by paper manufacturers have tended to vary in cycles that
reflect overall economic conditions. In the event of an economic slowdown,
spending on capital equipment by the paper industry is likely to decrease. As a
result, orders for the Company's products, and therefore its operating results,
may be adversely affected during such periods. From 1989 through 1993, the paper
industry was in a severe recession, adversely affecting capital spending. The
situation improved in fiscal 1994, particularly in the United States, as demand
for paper products more closely met capacity thereby stimulating capital
investment. Starting in calendar 1996, most paper companies showed symptoms of a
weaker market with lower demand and prices. Capital equipment expenditures could
be adversely affected if the lower demand and prices continue.
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WORKING CAPITAL PRACTICES
The Company believes its working capital practices are consistent with those of
its industry. Inventory purchases are generally for current production and
service demand requirements. Cash, in excess of current payment obligations, is
generally invested in secured short-term interest-bearing instruments such as
Treasury bills. Customer payment terms are consistent with industry practices.
MANUFACTURING
The Company manufactures its products at its headquarters in Los Gatos,
California. Manufacturing operations consist primarily of final assembly, test
and quality control of materials and components. The Company uses standard parts
and components for its products, and in most cases multiple vendors are
available.
RESEARCH AND PRODUCT DEVELOPMENT
From fiscal 1995 through 1997, the Company reinvested between approximately 10
and 11 percent of its net revenues in research and development. The Company's
research and development expenses are expected to be directed toward
enhancements of its existing product line and expansion of the Company's system
integration capabilities at least through fiscal 1998.
PATENTS AND LICENSES
The Company holds thirteen U.S. patents and also has a number of patents filed
or pending in foreign countries and will continue to seek patent coverage for
its inventions in both the United States and foreign countries. The Company will
continue to seek proprietary protection for its inventions, trademarks and
copyrights where appropriate. The Company has in the past and will continue to
take legal action to uphold its patents.
EMPLOYEES
At March 31, 1997, the Company had 85 full-time employees, including 19 located
outside of the United States.
RISK FACTORS
Forward-looking statements
With the exception of the actual reported financial results, some of the
statements made in this Form 10-K are forward-looking, reflect the Company's
current expectations and involve certain risks and uncertainties. Any statements
in this 10-K that are not historical in nature are forward-looking statements.
Actual results may differ materially depending on the business conditions,
growth and changes in the paper industry competition, and general economy,
foreign, political and economic developments, availability and pricing of raw
materials, changes in product mix, competition, shifts in market demand and
changes in prevailing interest rates. There can be no assurance that the
Company's actual future performance will meet the Company's expectations.
Paper industry demand
As indicated previously (Competition and Industry Conditions), the Company's
market is the paper industry, and as such, is subject to certain risks inherent
with operating in a highly cyclical and, to some extent, unpredictable
marketplace. The Company's customers are typically large corporations with
lengthy procurement processes. The approval process often involves competing
capital budget considerations making the timing of actual purchase orders
difficult to predict, especially during economic downtimes. The paper industry
has in the past and most likely will be in the future subject to substantial
swings in demand for its products which effect the level of capital expenditures
in any given period, thereby effecting the Company's overall order rate.
Timing of orders/shipments
Given the lengthy and unpredictable nature of the Company's order cycle and the
relatively large percentage of total quarterly revenue which may be represented
by a single system shipment, the timing of shipments could cause substantial
positive or negative fluctuations in the Company's quarter-to-quarter financial
performance. In addition to the uncertainty of purchase order timing, shipment
dates can also be effected by the ability of a paper mill to schedule
installation which often requires the shut down of the paper machine.
International operations/markets
As a significant portion of the Company's revenue has historically been derived
from export sales, it is subject to certain risks associated with international
operations and shipments such as letters of credit, fluctuations in currency
exchange rates, import licenses, regulatory requirements, and economic
conditions of local markets. The Company's operating results could be adversely
effected by the inability to obtain appropriate export documents or by shifts in
the economic conditions effecting local markets or currencies.
Reliance on specific customers
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During fiscal 1996, no one customer accounted for sales greater than 10 percent
of consolidated net revenues. In fiscal 1995 and fiscal 1997, sales to one
customer accounted for approximately 10 percent and 13 percent, respectively, of
consolidated net revenues. Each of the aforementioned customers were original
equipment manufacturers (OEMs) who resold the purchased equipment to third party
end user customers. In fiscal 1997, the customer accounting for 13 percent of
consolidated net revenues were affiliates of Elsag Bailey Process Automation
N.V., the Company's largest shareholder. Since the composition of the customer
base varies due to the irregular nature of large capital equipment purchases,
the effect of the loss of any one specific customer is not fully determinable,
but could have a material adverse effect on the Company's results of operations
in any one given year.
ITEM 2. PROPERTIES.
The Company's corporate offices, research and development facilities, and
primary manufacturing facilities are located in Los Gatos, California and total
approximately 23,975 square feet. The Company also leases several sales offices.
The Company believes that its existing facilities are adequate to meet current
requirements.
ITEM 3. LEGAL PROCEEDINGS.
During the first quarter of fiscal 1997, the Company filed a patent infringement
action against ABB Industrial Systems, Inc. (ABB) in federal court in San Jose,
California. The Company believes ABB is infringing on its caliper actuator
patent, a key product in bundled sales opportunities, and is seeking to enjoin
them from the manufacture and sale of their product and is also seeking damages
from their unlicensed sales. During the fourth quarter of fiscal 1997, the
Company took a charge of $1.0 million to cover actual and anticipated future
legal expenses associated with the suit. The patent infringement action is in
discovery and deposition stages with a final determination, at this time,
uncertain as to timing. ABB has sued Impact in Columbus, Ohio claiming Impact is
infringing on a moisture sensor patent which Impact believes it is plainly a
retaliatory suit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
The following table sets forth the range of high and low closing sale prices in
dollars reported on the NASDAQ National Market System under the symbol MPAC for
the periods indicated. There were approximately 2,516 shareholders of record of
Common Stock on May 31, 1997 based on transfer agent's listings and broker
dealer demand for proxy statements on behalf of beneficial owners.
<TABLE>
<CAPTION>
Fiscal Year Ended March 31, 1996 March 31, 1997
- ----------------- -------------- --------------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter 2 3/16 1 15/16 3 3/4 2 3/4
Second Quarter 3 1/16 2 3 1/8 1 11/16
Third Quarter 2 15/16 2 1/16 2 1/4 1 9/32
Fourth Quarter 3 9/16 2 1/2 2 3/8 1 3/8
</TABLE>
On May 31, 1997, the closing trade was priced at $1 5/16 per share.
The Company has not paid cash dividends on its Common Stock, and its Board of
Directors presently intends to continue this policy in order to retain earnings
for the development of the Company's business. Accordingly, it is anticipated
that no cash dividends will be paid to holders of Common Stock in the
foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA:
(in thousands, except per share amounts)
Net revenues $14,551 13,295 $15,709 $17,765 19,756
------- ------ ------- ------- ------
Costs and expenses:
Cost of goods sold 6,907 6,046 7,603 8,627 10,691
Research and development 1,603 1,492 1,758 1,752 1,982
Selling, general and administrative 5,463 5,063 5,217 5,908 6,049
Provision for legal expenses -- -- -- -- 1,000
------- ------ ------- ------- ------
Total costs and expenses 13,973 12,601 14,578 16,287 19,722
------- ------ ------- ------- ------
Operating income 578 694 1,131 1,478 34
Interest income, net 8 167 284 333 346
Foreign currency gain (loss), net (55) (64) (23) (19) 70
Equity in net income (loss)
of investee (43) 35 50 199 (2)
------- ------ ------- ------- ------
Income before income taxes
and extraordinary credit 488 832 1,442 2,029 448
Income taxes 195 -- -- -- --
------- ------ ------- ------- ------
Income before
extraordinary credit 293 832 1,442 2,029 448
Extraordinary credit from utilization
of net operating loss
carryforwards 151 -- -- -- --
------- ------ ------- ------- ------
Net income $ 444 $ 832 $1,442 $2,029 $448
======= ====== ======= ======= ======
Income per share:
Income before
extraordinary credit $.03 $.07 $.14 $.19 $.04
Extraordinary credit from utilization
of net operating loss
carryforwards .01 -- -- -- --
------- ------ ------- ------- ------
Net income $.04 $.07 $.14 $.19 $.04
======= ====== ======= ======= ======
Weighted average common and common
equivalent shares 12,107 11,376 10,677 10,949 10,909
======= ====== ======= ======= ======
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
-------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEETS DATA:
(in thousands)
Working capital $ 9,631 $ 8,492 $ 9,897 $12,120 $11,096
Total assets $15,177 $13,597 $15,134 $18,120 $18,937
Long-term obligations,
less current portion -- -- -- -- --
Stockholders' equity $11,020 $10,213 $11,875 $13,975 $14,321
</TABLE>
NOTE: No cash dividends were declared or paid during any of the five years
presented.
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INTERIM FINANCIAL INFORMATION (unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
FISCAL 1997 QUARTER ENDED
----------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1996 1996 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues $ 5,215 $ 4,434 $ 5,152 $ 4,955
Gross margin 2,404 2,107 2,203 2,351
Operating expenses (excluding provision for legal 2,105 1,895 2,007 2,024
expense)
Provision for legal expenses -- -- -- 1,000
Net income (loss) 403 303 280 (538)
Net income (loss) per share .04 .03 .03 (.05)
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1996 QUARTER ENDED
----------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1995 1995 1995 1996
---- ----- ---- ----
<S> <C> <C> <C> <C>
Net revenues $ 3,729 $ 3,964 $ 4,441 $ 5,631
Gross margin 1,802 2,051 2,421 2,864
Operating expenses 1,680 1,820 1,971 2,189
Net income 305 502 607 615
Net income per share .03 .05 .06 .06
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
INTRODUCTION
During fiscal 1997, the Company continued to expand its market share of sensor
systems which contributed to an increase in revenues of over 11% (in terms of
net sales dollars) versus the prior fiscal year. Shipments of AdvantagePlus
sensor systems increased 68% over fiscal 1996 levels. Fiscal 1996 levels, in
turn, were nearly 60% higher than the previous year of fiscal 1995. The Company
believes that the success of this segment of its product line not only increases
overall market potential, but also generates additional opportunities for
associated actuator products. The Company also believes that its sensor product
line has helped establish it as a system integrator in the large North American
market.
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 worldwide. Although the Company has benefited from the
increased acceptance of its newer product line, there is no certainty that
economic conditions will remain the same conditions or new product acceptance
will be sustained in future fiscal periods. In general, the U.S. paper industry
is currently not expanding - a situation that could negatively affect future
capital equipment purchases by paper manufacturing companies.
NET REVENUES Net revenues for the year ended March 31, 1997 (fiscal 1997) were
$19.8 million compared to $17.8 million for the year ended March 31, 1996
(fiscal 1996) and $15.7 million for the year ended March 31, 1995 (fiscal 1995).
This increase from fiscal 1996 to fiscal 1997 is primarily attributable to the
increase in demand for the Company's sensor system product line as discussed
above. The increase from fiscal 1995 to fiscal 1996 is the result of the brief
paper industry economic recovery which began in late fiscal 1994. Prior to
fiscal 1994, the paper industry market experienced a five year slowdown which
adversely effected customer's capital investment programs including the
Company's products.
COST OF GOODS SOLD
Cost of goods sold (systems and spare parts shipments) were relatively
consistent for fiscal 1995 and 1996 (as a percentage of net revenue) amounting
to 48% and 49%, respectively, and increased to 54% for fiscal 1997. The increase
from fiscal 1995 and fiscal 1996 to fiscal 1997 is principally attributable to
product mix and associated sensor shipments which represented 31% of system
revenues in fiscal 1997 compared to 21% in fiscal 1996 and 15% in fiscal 1995
(see Introduction above). Cost of goods sold reflect the material, labor and
overhead expenses related to system and spare parts shipments and can vary with
fluctuations in product mix.
RESEARCH AND DEVELOPMENT
The Company's research and development program has primarily been directed at
system integration and interface enhancements the past three fiscal years and
amounted to $1.8 million, $1.8 million, and $2.0 million in fiscal 1995, fiscal
1996 and fiscal 1997, respectively. As mentioned previously, shipments of
Advantage sensor products increased approximately 60% from fiscal 1995 to fiscal
1996 and approximately 68% from fiscal 1996 to fiscal 1997, and a significant
portion of research and development resources were directed toward the newer
product line. The Company expects research and development costs to remain
relatively consistent, or modestly increase, over prior year levels as the focus
of development programs is directed toward system integration programs and
enhancements of its actuator products.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A)
Selling, general and administrative expenses increased from $5.2 million in
fiscal 1995 to $5.9 million in fiscal 1996 and $6.0 million in fiscal 1997. Most
of the year to year increases in SG&A were the result of higher variable costs
associated with the increased shipment levels. Spending in fiscal 1996 and
fiscal 1997 included costs to expand the Company's sales force in primary
markets in order to more effectively promote its broadened product line. The
Company is in the process of adding resources to position itself as a systems
integrator and these resources will be reflected in increased selling, general,
and administrative expenses in future fiscal periods.
PROVISION FOR LEGAL EXPENSES
During the first quarter of fiscal 1997, the Company filed a patent infringement
action against ABB Industrial Systems, Inc. (ABB) in federal court in San Jose,
California. The Company believes ABB is infringing on its caliper actuator
patent, a key product in bundled sales opportunities, and is seeking to enjoin
them from the manufacture and sale of their product and is also seeking damages
from their unlicensed sales. During the fourth quarter of fiscal 1997, the
Company took a charge of $1.0 million to cover actual and anticipated future
legal expenses associated with the suit. The patent infringement action is in
discovery and deposition stages with a final determination, at this time,
uncertain as to timing. ABB has sued Impact in Columbus, Ohio claiming Impact is
infringing on a moisture sensor patent which Impact believes it is plainly a
retaliatory suit.
OTHER INCOME AND EXPENSE
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Net interest income increased from $284,000 in fiscal 1995 to $333,000 in fiscal
1996 and $346,000 in fiscal 1997 reflecting primarily the gradual increase in
invested cash balances from year to year, and to a lesser extent, an increase in
yield on the Company's marketable securities investments.
Foreign currency gains and losses have not been material for the three fiscal
years ended March 31, 1997.
The Company experienced break-even results on its 40% investment in Impact
Systems Asia during fiscal 1997 compared to income of $50,000 and $199,000 in
fiscal 1995 and fiscal 1996, respectively. The reduction in income from fiscal
1996 to fiscal 1997 is the result of the anticipated decline in shipment levels
due to lower system orders. From an order and shipment standpoint, fiscal 1995
and fiscal 1997 were typical years for the affiliate while fiscal 1996 contained
a number of extraordinary large OEM orders normally spread over more than one
fiscal year.
INCOME TAXES
At March 31, 1997, the Company had net operating loss carryforwards of
approximately $4.5 million for federal income tax purposes. The Company also had
tax credit carryforwards of approximately $1.0 million and $0.1 million for
federal and state income tax purposes, respectively. The net operating loss
carryforwards and tax credits expire principally between fiscal 2004 and 2007.
Due to the cyclicality and volatility of the paper industry (See Risk Factors in
Item 1. Business), the Company has provided a valuation allowance of
approximately $3.7 million for the uncertainty of realization of certain
deferred tax assets at March 31, 1997, as it is not assured that these deferred
tax assets will be realized.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997, the Company's cash and short-term investments (treasury bills
and mutual funds) totalled $6.2 million compared to $6.5 million at March 31,
1996. At both March 31, 1996 and March 31, 1997, the Company had no outstanding
bank borrowings and its current ratio was 3.9 to 1 and 3.4 to 1 at the end of
fiscal 1996 and fiscal 1997, respectively. The Company also has a short-term
credit facility of $6.0 million which is used to issue standby letters of credit
to certain customers. At March 31, 1997 there were no advances and $328,000 in
standby letters of credit outstanding. The credit line is secured by accounts
receivable, inventory equipment and intangible rights. See Note 5 of Notes to
the Consolidated Financial Statements-Borrowing Arrangements. The short-term
credit facility expires in August, 1997 and the Company expects to renew such
with the current lender. The Company expects that existing cash balances
together with cash flow from operations and bank borrowings, if necessary, will
be adequate to meet its working capital requirements through fiscal 1998.
Total trade receivables (current and non-current) increased $545,000 during
fiscal 1997 primarily as the result of the effect of an increase in the number
of systems sold under longer term installment contracts. Accounts payable
balances increased $474,000 from March 31, 1996 to March 31, 1997 as the result
of payment timing differences primarily associated with inventory receipts.
Accrued installation and warranty costs increased approximately $542,000
primarily as the result of third party installation contracts associated with
certain second half fiscal 1997 system shipments. The $585,000 decline in other
liabilities is attributable to a reduction in deposits associated with system
backlog.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
IMPACT SYSTEMS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1995, 1996, AND 1997
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Impact Systems, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and (2) on page 30 present fairly, in all material
respects, the financial position of Impact Systems, Inc. and its subsidiaries at
March 31, 1996 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended March 31, 1997, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
San Francisco, California
May 16, 1997
-12-
<PAGE> 13
IMPACT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
-----------------------
1996 1997
---- ----
(In thousands )
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,736 $ 1,416
Short-term investments 3,752 4,809
Trade receivables, net of allowances of $48 and $73 5,864 5,475
Receivables from employees and affiliates 339 302
Inventories 3,536 3,674
Prepaid expenses and other assets 38 36
------- -------
Total current assets 16,265 15,712
Property and equipment, net 224 719
Non-current trade receivables 810 1,744
Minority equity investment in and advances to foreign affiliates 608 641
Other assets 213 121
------- -------
$18,120 $18,937
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,029 $1,503
Accrued installation and warranty costs 957 1,499
Accrued salaries, wages and employee benefits 481 452
Accrued commissions 236 305
Other liabilities 1,442 857
------- -------
Total current liabilities 4,145 4,616
------- -------
Commitments (Note 8)
Stockholders' equity:
Preferred stock, no par;
2,000,000 shares authorized; none outstanding -- --
Common stock, no par: 20,000,000 shares authorized;
10,328,976 and 10,404,500 shares issued and outstanding 24,850 24,871
Accumulated deficit (10,587) (10,139)
Cumulative translation adjustment (288) (411)
------- -------
Total stockholders' equity 13,975 14,321
------- -------
$18,120 $18,937
======= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
-13-
<PAGE> 14
IMPACT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------
1995 1996 1997
------- ------- -------
(In thousands, except per share amounts)
<S> <C> <C> <C>
Net revenues $15,709 $17,765 $19,756
Cost of goods sold 7,603 8,627 10,691
------- ------- -------
Gross margin 8,106 9,138 9,065
------- ------- -------
Operating expenses:
Research and development 1,758 1,752 1,982
Selling, general and administrative 5,217 5,908 6,049
Provision for legal expenses -- -- 1,000
------- ------- -------
Total operating expenses 6,975 7,660 9,031
------- ------- -------
Operating income 1,131 1,478 34
Interest income 298 344 355
Interest expense (14) (11) (9)
Foreign currency gain (loss), net (23) 19 70
Equity in net income (loss) of investee 50 199 (2)
------- ------- -------
Income before income taxes 1,442 2,029 448
Income taxes -- -- --
------- ------- -------
Net income $1,442 $2,029 $448
======= ======= =======
Net income per share:
Income before income taxes $ .14 $ .19 $ .04
Income taxes -- -- --
------- ------- -------
Net income $ .14 $ .19 $ .04
======= ======= =======
Weighted average common and common equivalent shares 10,677 10,949 10,909
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
-14-
<PAGE> 15
IMPACT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK CUMULATIVE
------------------------ ACCUMULATED TRANSLATION
SHARES AMOUNT DEFICIT ADJUSTMENT TOTAL
------ ------ ------- ---------- -----
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1994 10,042,150 $24,641 $(14,058) $(370) $10,213
Issuance of common stock 161,350 135 135
Foreign currency translation
adjustments 85 85
Net income 1,442 1,442
---------- ------- -------- ----- -------
Balance at March 31, 1995 10,203,500 24,776 (12,616) (285) 11,875
Issuance of common stock 150,476 130 130
Repurchase of common stock (25,000) (56) (56)
Foreign currency translation
adjustments (3) (3)
Net income 2,029 2,029
---------- ------- -------- ----- -------
Balance at March 31, 1996 10,328,976 24,850 (10,587) (288) 13,975
Issuance of common stock 117,100 94 94
Repurchase of common stock (41,576) (73) (73)
Foreign currency translation
adjustments (123) (123)
Net income 448 448
---------- ------- -------- ----- -------
Balance at March 31, 1997 10,404,500 $24,871 $(10,139) $(411) $14,321
========== ======= ======== ===== =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
-15-
<PAGE> 16
IMPACT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------------------
1995 1996 1997
------- ------- -------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,442 $ 2,029 $ 448
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 134 177 179
Equity in net (income) loss of investee (50) (199) 2
Translation (gain) loss 27 (28) 15
Changes in assets and liabilities
Restricted cash time deposits 32 -- --
Trade receivables, net (1,283) (1,810) (641)
Other receivables 100 (238) 26
Inventories 298 (662) (154)
Prepaid expenses and other assets (69) (12) 94
Accounts payable (70) 271 475
Accrued installation and warranty costs (499) 488 546
Accrued salaries, wages and employee benefits 184 (19) (2)
Accrued commissions 67 (99) 69
Other liabilities 162 208 (585)
------- ------- -------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES 475 106 472
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase or sale of short-term investments, net (934) (799) (1,057)
Capital expenditures (156) (158) (677)
Minority equity investment in and net receipts from (to)
affiliates 18 235 (35)
------- ------- -------
CASH USED IN INVESTING ACTIVITIES (1,072) (722) (1,769)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of capital stock and warrants, net of expenses 135 130 94
Repurchase and retirement of capital stock -- (56) (73)
------- ------- -------
CASH PROVIDED BY FINANCING ACTIVITIES 135 74 21
------- ------- -------
EFFECT OF EXCHANGE RATE FLUCTUATIONS ON CASH 9 31 (44)
------- ------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS (453) (511) (1,320)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 3,700 3,247 2,736
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,247 $ 2,736 $ 1,416
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 12 $ 10 $ 10
Income taxes $ 10 $ 33 $ 21
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
-16-
<PAGE> 17
IMPACT SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Impact Systems, Inc. develops, manufactures, sells and services computer-based
actuator, measurement and control systems to reduce variations which occur in
the production of all major types of paper. Impact's products enable paper
manufacturers to improve paper quality, increase production and reduce waste,
energy consumption and raw material costs.
The Company has adopted accounting practices which are generally accepted in the
industry in which it operates. The following are the Company's significant
accounting policies:
Financial statement presentation
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.
Principles of consolidation and accounting for minority-owned investees
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries after elimination of all significant intercompany
accounts and transactions.
Operations of a company incorporated in Japan in which the Company owns a
minority interest of 40 percent are accounted for using the equity method.
Cash and cash equivalents and short-term investments
Cash and cash equivalents include highly liquid investments with insignificant
interest rate risk and original maturities of three months or less at date of
acquisition. Short-term investments consist of government treasury bills or
institutional investments. The treasury bills have original maturities of more
than three but less than twelve months, are considered held-to-maturity
investments and are stated at amortized cost which approximates market value.
The institutional investments are highly liquid funds that are considered
available for sale and are carried at market value.
Inventories
Inventories are stated at the lower of cost or market using the first-in,
first-out method. Inventory costs include material, labor, and overhead
components.
Property and equipment
Property and equipment are stated at the lower of cost or, if impaired, the fair
value at date of impairment. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets ranging from two to ten
years. Amortization of leasehold improvements is computed using the
straight-line method over the shorter of the remaining lease term or the
estimated useful lives of the improvements. Maintenance and repair costs are
expensed as incurred.
Effective April 1, 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of." This Statement requires that
certain assets be reviewed for impairment and, if impaired, remeasured at fair
value, whenever events or changes in circumstances indicate that the carrying
amount of the asset may not be recoverable. The adoption of SFAS No. 121 at
April 1, 1996 and its application during fiscal 1997 had no material impact on
the Company's financial position or results of operations.
Revenue recognition
Revenue related to sales of production systems is recognized upon shipment
Service and other revenues are recognized as the services are provided or
ratably over the life of the contracts.
Net revenues included approximately $4.8 million in fiscal 1995, $5.3 million in
fiscal 1996, and $5.1 million in fiscal 1997 relating to system service revenues
and system spare part sales.
Concentration of credit risk
Financial instruments which potentially subject the Company to significant
concentration of credit risk consist primarily of trade receivables. The
Company's principal customers are large paper companies and paper machine and
coater manufacturers in North America, Europe and the Far East. The Company also
sells to Elsag Bailey, Inc. under cross OEM agreements with the related party
(see Note 10). The Company performs ongoing credit evaluations of its customers
and generally does not require collateral. During fiscal 1996, no one customer
accounted for sales greater than 10 percent of consolidated net revenues. In
fiscal 1995 and fiscal 1997, sales to one customer accounted for approximately
10 percent and 13 percent, respectively, of consolidated net revenues. The
Company provides an allowance for doubtful accounts
-17-
<PAGE> 18
based on historical trends and other current factors. Historically, the Company
has not experienced significant losses related to trade receivables.
Installation and warranty costs
Systems are generally covered by warranties for periods of one or five years,
depending on the product. An accrual is provided for estimated warranty costs
and for estimated installation costs, based upon historical experience, in
conjunction with the recognition of revenue on the related sale.
With respect to systems sold with performance guarantees, an estimate is made of
the potential cost of complying with such guarantees and a provision is made as
part of the installation and warranty accrual at the time of shipment.
Advertising
Advertising costs are expensed as incurred. Advertising expense amounted to
approximately $152,000, $178,000 and $105,000 for the years ended March 31,
1995, 1996, 1997.
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.
Foreign currency translation and hedging
The functional currency of each foreign operation is its local currency.
Accordingly, all assets and liabilities are translated at the current exchange
rate at the end of the period and revenues and costs at average exchange rates
in effect during the period. The resulting cumulative translation adjustments
are recorded directly as a separate component of stockholders' equity.
Gains or losses resulting from foreign currency transactions are computed using
current exchange rates and are included in the Consolidated Statements of
Operations in the period incurred.
In certain situations, forward exchange contracts are purchased to hedge certain
foreign denominated assets. Gains and losses on hedge contracts are deferred and
are recognized as adjustments of carrying amounts or in income when the hedged
transaction occurs. At March 31, 1997, the Company was not a party to any
foreign exchange contracts.
Stock based compensation Effective April 1, 1996, the Company adopted SFAS No.
123, "Accounting for Stock-Based Compensation." which allows companies either to
measure compensation cost in connection with the employee stock compensation
(option) plans using a fair value based method or to continue to use an
intrinsic value based method. The Company will continue to use the intrinsic
value based method in accordance with APB No. 25, which generally does not
result in compensation cost. The Company's stock option plans are discussed in
Note 7.
Earnings per share
Primary earnings per common and common equivalent share is computed using the
weighted average number of common stock outstanding during the period, and for
incremental shares assumed issued for dilutive common stock equivalents. Fully
diluted earnings per share did not differ materially from primary earnings per
share.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share." This Statement supersedes Accounting Principles Board
Opinion No. 15, "Earnings per Share ("APB 15") and its related interpretations
and establishes new accounting standards for the computation and manner of
presentation of the Company's earnings per share (EPS). The Company is required
to adopt the provisions of Statement No. 128 for the quarter ending December 31,
1997 and earlier application is not permitted, however, upon adoption the
Company may be required to restate previously reported annual and interim income
or loss per share in accordance with the provisions of Statement No. 128. The
Company does not believe the adoption of Statement No. 128 will have a material
impact on the computation or manner of presentation of its earnings per share
data as currently or previously presented under APB 15.
-18-
<PAGE> 19
NOTE 2 - CONSOLIDATED BALANCE SHEETS DETAILS:
<TABLE>
<CAPTION>
MARCH 31,
------------------------
1996 1997
------- -------
(In thousands)
<S> <C> <C>
Cash and cash equivalents
Cash $ 1,373 $ 829
Money market deposits 1,363 587
------- -------
$ 2,736 $ 1,416
======= =======
Short-term investments
U.S. Treasury bills $ 3,752 $ 1,991
Institutional mutual funds -- 2,818
------- -------
$ 3,752 $ 4,809
======= =======
Inventories
Raw materials and components $ 2,964 $ 3,205
Work-in-process 530 469
Finished goods 42 --
------- -------
$ 3,536 $ 3,674
======= =======
Property and equipment
Machinery and equipment $ 3,145 $ 1,568
Furniture and fixtures 532 290
Leasehold improvements 502 510
Demonstration equipment 418 59
------- -------
4,597 2,427
Less: Accumulated depreciation (4,373) (1,708)
------- -------
$ 224 $ 719
======= =======
Other liabilities
Accrued liabilities, legal
expense accrual, and other $ 585 $ 835
Customer deposits 857 22
------- -------
$ 1,442 $ 857
======= =======
</TABLE>
During FY97 the Company retired approximately $2,835,000 in fixed assets,
largely done in conjunction with the Company's move to the new office and plant
facility in Los Gatos, California. All items retired were fully depreciated and
most were scrapped with no residual contribution.
Of the $5,912,000 and $5,548,000 of gross current trade receivables at March
31,1996 and 1997, respectively, $500,000, and $860,000, respectively, represent
the current portion of long-term trade receivables. Contractual customer payment
terms are staggered and can relate to drawings, sign-off's, delivery, startup,
performance trials and warranty periods. Such amounts are contractually tied to
performance trials, passage of time and warranty periods.
NOTE 3 - RECEIVABLES FROM EMPLOYEES AND AFFILIATES:
At March 31, 1996, receivables from employees and affiliates included $311,000
of trade receivables from Impact Asia and $28,000 of loans or advances to
employees for relocation and travel. An additional $97,000 of long-term
promissory notes due from employees has been included in other assets.
At March 31, 1997, receivables from employees and affiliates included $254,000
of trade receivables from Impact Asia and $48,000 of loans or advances to
employees for relocation and travel. An additional $93,000 of long-term
promissory notes due from employees has been included in other assets. None of
the employee loans are from Company officers.
NOTE 4 - MINORITY EQUITY INVESTMENT IN AND ADVANCES TO FOREIGN AFFILIATES:
Impact Systems Asia KK (Impact Asia) was formed in Japan in 1986 to facilitate
marketing of Impact's products in Japan. Presently, the Company has a 40 percent
interest in Impact Asia and records 40 percent of its equity in the affiliate's
net income or loss. Advances to Impact Systems Asia amounted to $269,000 and
$588,000 at March 31, 1996 and March 31, 1997, respectively.
-19-
<PAGE> 20
NOTE 5 - BORROWING ARRANGEMENTS:
In August 1996, the Company finalized an extension (to August 15, 1997) of its
primary domestic credit facility. The revolving credit line remains at $6.0
million. The interest rate on any outstanding loan balances under the facility
is the prime rate (8.50% at March 31, 1997). At March 31, 1997, there were no
loan balances outstanding under this line, although the Company had issued
$328,000 in standby letters of credit under the facility. Fees under the
revolving credit line are immaterial and collateral for borrowings consists of
accounts receivable, inventory, equipment and intangible rights. As of March 31,
1997, the Company was in compliance with the maximum debt to tangible net worth
ratio, minimum quick ratio, and tangible net worth financial convenants under
the facility. A letter from the lender dated April 30, 1997, has waived the
requirement of quarterly profitability for the fourth quarter of fiscal year
1997.
NOTE 6 - INCOME TAXES:
Domestic and foreign income before income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------
1995 1996 1997
------ ------ ----
(In thousands)
<S> <C> <C> <C>
Domestic $ 829 $1,162 $221
Foreign 613 867 227
------ ------ ----
$1,442 $2,029 $448
====== ====== ====
</TABLE>
The components of the provision for income taxes for the years ended March 31,
1995, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------
1995 1996 1997
----- ----- -----
(In thousands)
<S> <C> <C> <C>
Current:
Federal $ 572 $ 253 $ 179
State 87 138 65
Foreign 114 161 --
Benefit from utilization of net operating loss
carryforwards (773) (552) (244)
----- ----- -----
-- -- --
----- ----- -----
Deferred:
Federal $ -- $ 592 $ 168
State -- 137 (1)
Foreign -- -- --
----- ----- -----
-- 729 167
Decrease in valuation allowance (--) (729) (167)
----- ----- -----
-- -- --
----- ----- -----
Total $ 0 $ 0 $ 0
===== ===== =====
</TABLE>
-20-
<PAGE> 21
The components of net deferred income tax assets (liabilities) are as follows:
<TABLE>
<CAPTION>
MARCH 31, MARCH 31, MARCH 31,
1995 1996 1997
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 2,016 $ 1,847 $ 1,613
Tax credit carryforwards 1,067 1,087 1,104
Nondeductible reserves and allowances 1,584 652 954
Other 368 465 289
------- ------- -------
Total deferred tax assets 5,035 4,051 3,960
Valuation allowance (4,620) (3,891) (3,724)
------- ------- -------
Net deferred tax assets 415 160 236
------- ------- -------
Deferred tax liabilities:
Software and research development costs (140) (--) (--)
Other (275) (160) (236)
------- ------- -------
Total deferred tax liabilities (415) (160) (236)
------- ------- -------
Total net deferred taxes $ 0 $ 0 $ 0
======= ======= =======
</TABLE>
Differences between the Company's effective tax rate and the federal statutory
rate are as follows:
<TABLE>
<CAPTION>
MARCH 31,
------------------------------
1995 1996 1997
----- ----- -----
(In thousands)
<S> <C> <C> <C>
Federal statutory income tax rate 34.0% 34.0% 34.0%
State taxes, net of federal tax benefit 6.0 4.4 .6
Adjustment to deferred tax asset valuation allowance (53.6) (35.9) (37.2)
Foreign taxes 7.9 7.9
Permanent differences 2.1 (4.4) 7.0
Other, net 3.6 (6.0) (4.4)
----- ----- -----
0.0% 0.0% 0.0%
===== ===== =====
</TABLE>
At March 31, 1997, the Company had net operating loss carryforwards of
approximately $4,500,000 for federal tax purposes. The Company also had tax
credit carryforwards of approximately $1,000,000 and $100,000 for federal and
state income tax purposes, respectively. The net operating loss carryforwards
and tax credits expire principally between fiscal 2004 and 2007. If certain
substantial changes in the Company's ownership should occur, there would be an
annual limitation on the amount of the carryforwards which can be utilized.
The Company has provided a valuation reserve for its net deferred tax assets at
March 31, 1996 and 1997 due to uncertainty as to the realization of such assets.
The valuation reserve decreased from approximately $3,891,000 at March 31, 1996
to $3,724,000 at March 31, 1997 primarily due to utilization of net operating
loss carryforwards.
NOTE 7 - CAPITAL STOCK:
Common Stock - Stock Options
The Company currently has two incentive stock option plans; the 1995 Incentive
Stock Option Plan (the 1995 Plan) and the 1989 Discount Stock Option Plan (the
DSO Plan). The Company's 1982 Incentive Stock Option Plan (the 1982 Plan)
expired in fiscal 1993 and its 1985 Incentive Stock Option Plan (the 1985 Plan)
expired in fiscal 1996 and although options previously granted under both of
these Plans remain eligible for exercise, no further grants are available.
Options under the 1995 Plan may be granted to officers and key employees at
prices determined by the Board of Directors, but in no event below the fair
market value of the Company's stock on the date of grant. Options under the
1982, 1985 and 1995 Plans become exercisable in four equal annual installments
commencing one year from the date of grant and expire if not exercised within
ten years from date of grant.
-21-
<PAGE> 22
Options under the DSO Plan may be granted to outside directors, officers, and
key employees at 10 percent of the fair market value on the date of grant. The
grant of options under the DSO Plan at less than their fair market value results
in compensation expense to the Company for financial accounting purposes equal
to the difference between the fair market value of the shares subject to the
option on the date of grant and the exercise price of such shares which is
recognized by the Company ratably over the period the options vest
(approximately $18,000, $18,000 and $43,000 were charged to operations in fiscal
1995, 1996, and 1997, respectively). Options granted under the DSO Plan to
officers and key employees vest over a four-year period, with 25 percent
becoming exercisable on each anniversary of the date of grant and expire if not
exercised within ten years from date of grant. Options granted to outside
directors vest in full one year from date of grant and expire if not exercised
within five years from date of grant.
The Company applies the intrinsic value based method of accounting prescribed by
APB Opinion No. 25 for its stock option plans. Accordingly, no compensation
expense has been recognized except that noted above for shares granted under the
DSO Plan. Had compensation expense for stock option awards been determined on
the fair value at the grant dates consistent with the method of FAS No. 123, the
Company's net income for fiscal 1996 and fiscal 1997 would have been reduced by
$34,000 and $77,000, respectively. Earnings per share would accordingly be
reduced by $.01 in both fiscal 1996 and fiscal 1997 as a result of the
additional compensation expense associated with option grants. The imputed fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants in fiscal 1996 and fiscal 1997: no dividend yield
for either fiscal year; expected volatility of 40.5%, and expected life of six
years for both fiscal years; and risk-free interest rates of 5.94% and 6.37% for
fiscal 1996 and fiscal 1997, respectively.
The following table summarizes activity in the 1982, 1985, 1995 and DSO Plans
for the three fiscal years ended March 31, 1997:
<TABLE>
<CAPTION>
OPTION SHARES OUTSTANDING
-------------------------------------------------------------
WEIGHTED
SHARES AVERAGE
AVAILABLE FOR EXERCISE OPTIONS
GRANT SHARES PRICE EXERCISABLE
----- ------ ----- -----------
<S> <C> <C> <C> <C>
Balance at March 31, 1994 415,150 1,176,699 $0.75
Options granted (152,050) 152,050 $1.65
Options exercised (161,350) $0.80
Options cancelled 17,099 (17,099) $1.42
Options expired (2,000)
-------- ---------
Balance at March 31, 1995 278,199 1,150,300 $0.85 950,813
Options granted (222,300) 222,300 $2.34
Options exercised (150,476) $0.81
Options cancelled 45,574 (45,574) $1.61
Options expired (35,723)
Additional shares reserved 500,000
-------- ---------
Balance at March 31, 1996 565,750 1,176,550 $1.11 850,600
Options granted (94,800) 94,800 $1.95
Options exercised (117,100) $0.81
Options cancelled 79,750 (79,750) $1.88
Options expired (57,800) ---------
--------
Balance at March 31, 1997 492,900 1,074,500 800,675
======== ========= =======
</TABLE>
The weighted average exercise prices of options exercisable at March 31, 1995,
1996, and 1997 were $.71, $.74, $.82, respectively.
At March 31, 1997, a total of approximately 1,567,400 shares of Common Stock
have been reserved for issuance under the Company's stock option plans.
-22-
<PAGE> 23
The following table summarizes information about options outstanding at March
31, 1997.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------- ------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
RANGE OF EXERCISE NUMBER REMAINING CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
----- ----------- ---- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$0.00 - $0.25 45,000 3.5 years $0.22 27,500 $0.23
$0.56 - $1.13 677,800 3.8 years $0.65 676,550 $0.64
$1.88 - $2.50 324,250 8.5 years $2.17 88,825 $2.12
$2.75 - $3.13 27,450 8.4 years $2.83 7,800 $2.86
--------- -------
1,074,500 800,675
--------- -------
</TABLE>
Common Stock - Repurchases
The Company repurchased 41,576 and 25,000 shares of its own common stock during
fiscal 1997 and fiscal 1996, respectively, in open market transactions.
NOTE 8 - COMMITMENTS:
The Company leases its primary office and production facility under an operating
lease which expires in November 2003. The Company is required to pay all
property taxes, insurance and normal maintenance and repairs. The Company also
leases facilities used by its foreign subsidiaries. Future minimum rental
payments under all operating leases at March 31, 1997 totalled $2,099,000 for
fiscal years 1998 through 2004, including $297,000 in fiscal 1998, $302,000 in
fiscal 1999, $305,000 in fiscal 2000, $316,000 in fiscal 2001, $328,000 in
fiscal 2002, $339,000 in fiscal 2003, and $212,000 in fiscal 2004. Total rent
and lease expense for the fiscal years ended in 1995, 1996, and 1997 was
approximately $556,000, $593,000, and $547,000, respectively.
NOTE 9 - FOREIGN OPERATIONS:
The Company operates in one industry segment, the paper industry. The Company
has two wholly-owned foreign subsidiaries which market the Company's products in
Scandinavia, Europe, and the United Kingdom. Total assets (primarily trade
receivables, inventories and fixed assets) and liabilities (exclusive of
intercompany accounts and the Company's minority equity investment - Note 4) in
foreign countries were as follows:
<TABLE>
<CAPTION>
MARCH 31,
-----------------------
1996 1997
---- ----
(In thousands)
<S> <C> <C>
Total assets $2,172 $1,012
Total liabilities $ 842 $ 204
</TABLE>
The following is a summary of operations by geographic entities:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------
1995 1996 1997
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Net revenues from unaffiliated customers and minority investee:
United States $13,537 $13,935 $18,099
Europe 2,172 3,830 1,657
Intercompany transfers 912 2,202 753
Eliminations (912) (2,202) (753)
------- ------- -------
Net revenues $15,709 $17,765 $19,756
======= ======= =======
Operating income:
United States $917 $769 $66
Europe 214 709 (32)
------- ------- -------
Operating income $ 1,131 $ 1,478 $ 34
======= ======= =======
</TABLE>
Net revenues from intercompany transfers consist of sales of products similar to
those sold to unaffiliated customers. Such sales are recorded at amounts which
exceed manufacturing cost. United States' net revenues include sales of
$336,000, $1,972,000, and $824,000 in the fiscal years ended in 1995, 1996, and
1997, respectively, made to the Company's minority equity investee at prices
exceeding manufacturing cost. European operating results are significantly
influenced by intercompany pricing and commission policies as a large portion of
the product sold in Europe is manufactured by the Company in the United States.
-23-
<PAGE> 24
Export sales (including those to the Company's foreign subsidiaries and minority
equity investee) for the fiscal years ended in 1995, 1996 and 1997 were
$7,476,000 , $9,773,000 and $11,032,000, respectively, and include shipments to
Canada, Europe, the Far East, Mexico and Brazil.
NOTE 10 - RELATED PARTY TRANSACTIONS
In fiscal 1993, the Company entered into an agreement with Elsag Bailey, Inc.
("Bailey") which serves as the framework for cross-OEM agreements with Bailey, a
wholly-owned subsidiary of Elsag International N.V. ("Elsag International"), the
Company's largest shareholder. Elsag Bailey Process Automation N.V. ("EBPA")
which ultimately owns and controls both Elsag International and Bailey, owns
22.9% of the Company's outstanding common shares at March 31, 1997. The
cross-OEM agreement covers both hardware and software. Impact OEM's the
Unity(TM)" Distributed Control System and related software from Bailey; Bailey
OEM's Impact's complete line of cross-direction actuators and related software,
drying systems, and the "AdvantagePlus(TM)" line of scanners and sensors, which
is specifically designed for Distributed Control Systems (DCS).
During fiscal 1997, the Company recorded revenue of approximately $2,568,000 on
sales to Bailey and Elsag Bailey (Canada) Inc. ("Bailey Canada"), both of which
are subsidiaries to Elsag International. During fiscal 1996, the Company
recorded revenue of $300,000 to a U.S. division of Bailey. There were no sales
during fiscal 1995 to Bailey or its affiliates.
For fiscal years ended 1995, 1996, and 1997, the Company purchased $190,000,
$213,000, and $540,000, respectively, in hardware and software from Bailey
Controls Company or Bailey Canada.
At March 31, 1996 the Company had a net outstanding receivable of $441,000 from
divisions of Elsag Bailey, Inc. of the U.S. and Canada, and a liability of
$42,000 in customer deposits received from a Bailey subsidiary in Europe. At
March 31, 1997 the Company had a net outstanding receivable of $13,000 from
Bailey Controls.
-24-
<PAGE> 25
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
-25-
<PAGE> 26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Kenneth P. Ostrow 55 President, Chief Executive Officer and
Chairman of the Board
Robert M. Gorski 44 Vice President, Finance/Service and Chief
Financial Officer
John F. Lynch, III 55 Vice President, Operations
Mike N. Zaharna 55 Director
Joseph J. Cusimano 57 Director
</TABLE>
MR. OSTROW, a founder of the Company, has been an officer and director of the
Company from its inception in 1980. Prior to founding the Company, Mr. Ostrow
was with Measurex in senior sales, service and marketing capacities. Mr. Ostrow
holds a B.A. in Mechanical Engineering from Ohio State University and a M.B.A.
from Northeastern University.
MR. GORSKI joined the Company in April 1988 as Vice President, Finance,
Administration and Service and Chief Financial Officer. Prior to joining the
Company, he was in senior finance capacities with computer manufacturers, Amdahl
Corporation and Kaypro Corporation and Price Waterhouse. Mr.Gorski holds a B.S.
in Business Administration from the University of Illinois and is a Certified
Public Accountant.
MR. LYNCH joined the Company in December 1982 as Vice President, Midwestern
Sales and is currently Vice President, Operations. Prior to joining the Company,
he was a Vice President of Measurex and served in various senior sales,
marketing, and service capacities. He holds a B.S. in Chemical Engineering from
the University of Mississippi and a M.B.A. from the Harvard Business School.
MR. CUSIMANO was elected a director of the Company in November 1991. Mr.
Cusimano is President of Honematic Machine Corporation in Boylston,
Massachusetts. Prior to that, he had been a Corporate Vice President of Norton
Company in Worcester, Massachusetts in charge of its Superabrasives and
Abrasives, Asia Operations. Mr. Cusimano joined Norton Company in 1966 and held
several positions within the company prior to his appointment as Marketing Vice
President, Abrasives, Europe, in 1986. In early 1988, Mr. Cusimano was appointed
Divisional Vice President of Seeded-Gel Products, and in early 1989 he was
elected a Corporate Vice President, Chemical Process Products.
MR. ZAHARNA was elected a director of the Company in July 1992. Mr. Zaharna was
appointed to the Board of Directors as a representative of Elsag International
N.V., the parent company of Elsag Bailey, Inc. and a wholly-owned subsidiary of
Elsag Bailey Process Automation N.V. (NYSE:EBY). M. N. Zaharna is Group
Executive Vice President and Chief Operating Officer of Elsag Bailey Process
Automation N.V.. Mr. Zaharna has served as Senior Group Vice President-Americas,
Pacific and the Far East and Group Vice President-Strategic Marketing and
Technology for the Elsag Bailey group of companies since 1992. Mr. Zaharna has
been with Bailey for over 25 years, serving in numerous key management
positions, including Executive Vice President and Chief Operating Officer of
Bailey Controls Company. Mr. Zaharna serves on the Board of Directors of Impact
Systems, Inc.. Transactions with Elsag Bailey, Inc. are detailed in footnote 10.
All directors hold office until the next annual meeting of stockholders of the
Company or until their successors have been elected and qualified. Officers
serve at the discretion of the Board of Directors.
-26-
<PAGE> 27
ITEM 11. EXECUTIVE COMPENSATION.
The following tables summarize the compensation of each of the three executive
officers of the Company for the fiscal year ended March 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM
($'S) COMPENSATION
------------------- AWARDS
------
NAME AND OPTIONS/GRANTS
PRINCIPAL POSITION YEAR SALARY BONUS TOTAL (#)
- ------------------ ---- ------ ----- ----- ------
<S> <C> <C> <C> <C> <C>
Kenneth P. Ostrow, 1997 $230,230 $0 $230,230 15,000
President & Chief 1996 $224,700 $83,590 $308,290 15,000
Executive Officer 1995 $213,400 $85,860 $299,260 15,000
Robert M. Gorski, 1997 $153,034 $0 $153,034 15,000
Vice President, 1996 $147,210 $36,506 $183,716 15,000
Finance/Service/ 1995 $147,210 $46,598 $193,808 15,000
Administration and Chief
Financial Officer
John F. Lynch III, 1997 $139,749 $0 $139,749 15,000
Vice President, 1996 $136,005 $41,345 $177,350 15,000
Operations 1995 $135,381 $30,350 $165,731 15,000
</TABLE>
AGGREGATE STOCK OPTION EXERCISES IN FISCAL 1997 AND MARCH 31, 1997
STOCK OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SHARES
ACQUIRED DOLLAR NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-
ON VALUE STOCK OPTIONS AT THE-MONEY STOCK OPTIONS
NAME EXERCISE REALIZED MARCH 31, 1997 AT MARCH 31, 1997
- ---- -------- -------- -------------- -----------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Kenneth P. Ostrow 0 0 351,250 33,750 $306,875 $9,375
Robert M. Gorski 0 0 141,250 33,750 $90,624 $0
John F. Lynch III 0 0 96,250 33,750 $63,438 $0
</TABLE>
The Company presently does not pay any fees to directors. Pursuant to the
Company's Discount Stock Option Plan, Mr. Cusimano and Mr. Zaharna were each
granted, in fiscal 1997, stock options for 5,000 shares of Common Stock each at
10 percent of the then fair market value (under the Discount Stock Option Plan),
all of which were subject to vesting restrictions and none of which had vested
at March 31, 1997.
-27-
<PAGE> 28
Employee Stock Option Plans
The Company's 1995 Option Plan (the "1995 Option Plan") was adopted by the Board
of Directors on August 28, 1995 and approved by the Company shareholders in
November, 1995. The 1995 Option Plan permits the direct sale of shares and the
grant of both "incentive stock options" (within the meaning of Section 422A of
the Internal Revenue Code of 1986, as amended) and non-statutory stock options
to employees, officers and directors of and consultants to the Company. A total
of 500,000 shares have been reserved for issuance under the 1995 Option Plan of
which options to purchase 238,350 shares were outstanding at March 31, 1997 at a
weighted average exercise price of $2.35 per share. As of March 31, 1997 no
shares had been exercised under the 1995 Plan. The 1995 Option Plan is
administered by the Board of Directors, which determines the terms of options
granted, including the exercise price, number of shares subject to the option,
and the exercisability thereof. The exercise price of all incentive stock
options for Common Stock granted under the 1995 Option Plan must be at least
equal to the fair market value of such shares on the date of grant, and the
maximum term of each incentive stock option is ten years. With respect to any
participant who owns stock possessing more than 10% of the voting rights of the
Company's outstanding capital stock, the exercise price of any incentive stock
option must be at least equal to 110% of fair market value on the date of grant
and the term may be no longer than five years.
The Company's 1985 Incentive Stock Option Plan (the "1985 Option Plan") was
adopted by the Board of Directors in September 1985 and approved by the
Company's stockholders in October 1985. Initially, 496,350 shares were reserved
for issuance under the 1985 Option Plan. In January 1987, the Board of Directors
increased the shares reserved under the 1985 Option Plan by 400,000 shares,
which increase was approved by the Company's stockholders in May 1987. In August
1989, the Board amended the 1985 Option Plan to increase the number of shares
reserved for issuance by an additional 250,000 shares, which increase was
approved by the Company's stockholders in October 1989. The terms of the 1985
Plan are substantially similar to those of the 1995 Plan. A total of 1,146,350
shares have been reserved for issuance under the 1985 Option Plan, of which
options to purchase 684,750 shares were outstanding as of March 31, 1997 at a
weighted average exercise price of $.85 per share. As of March 31, 1997, options
to purchase 368,877 shares had been exercised at a weighted average purchase
price of $.95 per share. The 1985 Option Plan expired in fiscal 1996.
The Company's 1982 Incentive Stock Option Plan (the "1982 Option Plan") was
adopted in September 1982 and approved by shareholders in October 1982. In
August 1988, the Board of Directors reduced the number of shares reserved for
issuance by 100,000 shares (initially 730,500 shares). The 1982 Option Plan
expired in fiscal 1993. However, as of March 31, 1997, there were options
outstanding to purchase 106,400 shares of Common Stock at a weighted average
exercise price of $.73 per share and options to purchase 483,800 shares had been
exercised at a weighted average purchased price of $1.11 per share.
The Company's Discount Stock Option Plan (The "Discount Option Plan") was
adopted by the Board of Directors in August 1988 and approved by the
shareholders in October 1988, reserving 350,000 shares for issuance under the
Plan. Options under the Discount Option Plan may be granted to outside
directors, officers, and key employees at 10% of the fair market value of such
shares on the date of grant. Of the 350,000 shares reserved at March 31, 1997,
there were options outstanding to purchase 45,000 shares of Common Stock at a
weighted average exercise price of $.22 per share, and options to purchase
73,750 shares had been exercised at a weighted average purchase price of $.17
per share. The grant of options under the Discount Option Plan at less than
their fair market value results in compensation expense to the Company for
financial accounting purposes equal to the difference between the fair market
value of the shares subject to the option on the date of grant and the exercise
price of such options. This accounting charge is recognized by the Company over
the period the shares vest. The Company recognized approximately $18,000,
$18,000, and $43,000 in Discount Option Plan compensation expense in fiscal
1995, 1996, and 1997, respectively, and will recognize an additional $20,000
over the next two fiscal years on the shares outstanding at March 31, 1997 under
the Discount Option Plan. The Company presently grants options under the
Discount Option Plan to officers and key employees that vest over a four-year
period, with 25 percent becoming exercisable on each anniversary of the date of
grant and expire if not exercised within ten years from date of grant. Options
granted to outside directors vest in full on the first anniversary from the date
of grant and expire if not exercised within five years from date of grant.
-28-
<PAGE> 29
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock on May 31, 1997, as to (a) each
director, (b) each executive officer, (c) all officers and directors of the
Company as a group, and (d) each person known to the Company who beneficially
owns 5% or more of the outstanding shares of its Common Stock.
<TABLE>
<CAPTION>
Beneficial Ownership
of Common Stock
------------------------------
Name(1) Number of Shares Percent
- ------- ---------------- -------
<S> <C> <C>
Elsag Bailey Process Automation N.V. (2) 2,378,900 22.86
Schiphol Boulevard 157
1118 BG Luchthaven Schiphol, The Netherlands
Kenneth P. Ostrow (3) 1,019,734 9.80
14600 Winchester Boulevard, Los Gatos, CA 95030
Executive Officer
Robert M. Gorski (4) 141,250 1.36
Executive Officer
John F. Lynch III (5) 126,250 1.21
Executive Officer
Joseph J. Cusimano (6) 43,461 *
Director
Mike N. Zaharna (7) 10,000 *
Director
All officers and directors as a group (5 persons) (8) 1,340,695 12.89
</TABLE>
* Represents less than 1% of outstanding shares.
(1) The persons named in the table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them,
subject to community property laws where applicable and the information
contained in the footnotes hereunder.
(2) All 2,378,900 shares are held of record by Elsag International N.V. which is
ultimately owned and controlled by Elsag Bailey Process Automation N.V..
(3) Includes 351,250 shares issuable upon exercise of options which are
exercisable within sixty (60) days of May 31, 1997.
(4) Includes 141,250 shares issuable upon exercise of options which are
exercisable within sixty (60) days of May 31, 1997.
(5) Includes 96,250 shares issuable upon exercise of options which are
exercisable within sixty (60) days of May 31, 1997.
(6) Includes 10,000 shares issuable upon exercise of options which are
exercisable within sixty (60) days of May 31, 1997.
(7) Includes 10,000 shares issuable upon exercise of options which are
exercisable within sixty (60) days of May 31, 1997.
(8) Includes 608,750 shares issuable upon exercise of options which are
exercisable within sixty (60) days of May 31, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Not applicable.
-29-
<PAGE> 30
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this Report:
1. Financial Statements. The following consolidated financial statements of
Impact Systems, Inc. and Report of Independent Accountants are filed as part of
this Report:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants 12
Consolidated Balance Sheets - March 31, 1996 and 1997 13
Consolidated Statements of Operations
Three Years Ended March 31, 1997 14
Consolidated Statements of Stockholders' Equity
Three Years Ended March 31, 1997 15
Consolidated Statements of Cash Flows
Three Years Ended March 31, 1997 16
Notes to the Consolidated Financial Statements 17
</TABLE>
2. Financial Statement Schedules. The following financial statement schedules of
Impact Systems, Inc. for the years ended March 31, 1995, 1996 and 1997 are filed
as part of this Report and should be read in conjunction with the consolidated
financial statements of Impact Systems, Inc.
PAGE
Schedule ----
I Marketable Securities-Other Investments 36
II Valuation and Qualifying Accounts and Reserves 37
Schedules not listed above have been omitted because they are not applicable or
are not required or the information required to be set forth therein is included
in the consolidated financial statements or notes thereto.
3. Exhibits. The following Exhibits are filed as part of, or incorporated by
reference into, this Report:
<TABLE>
<S> <C>
3.1* Amended and Restated Articles of Incorporation of Registrant.
3.2* By-laws of Registrant, as amended.
10.0* 1982 Incentive Stock Option Plan and form of Incentive Stock
Option Agreement.
10.1* 1985 Incentive Stock Option Plan and forms of Incentive Stock
Option Agreement and Non-statutory Stock Option Agreement.
10.2# Discount Stock Option Plan and forms of Discount Stock Option
Agreement
10.4* Investment Agreement (Impact Asia K.K.) dated February 14, 1986
among Registrant, Registrant's Chief Executive Officer, and the
Impact Asia K.K. investors specified therein.
10.18# Form of Indemnification Agreement between the Company and its
officers and directors.
10.19# Common Stock Purchase Agreement between the Company and Elsag
International B.V. dated July 25, 1991 and the attached
Registration Rights Agreement, Bailey Controls Company Product
Supply Agreement, Impact Product Supply Agreement, License
Agreement and form of amendment to Articles of Incorporation of
the Company.
10.20## Amendments to the Registrant's Articles of Incorporation
executed on September 4, 1991 and December 12, 1991.
10.21** Building lease agreement dated June 28, 1996 between Registrant
and C&W Joint Venture.
10.26+ Loan Modification Agreement between Registrant and Silicon
Valley Bank dated August 15, 1996.
22.0* Subsidiaries of Registrant.
24.0 Consent of Independent Accountants
25.0 Power of Attorney (See Page 32)
</TABLE>
-30-
<PAGE> 31
27.0 Financial Data Schedule
- ---------------------------------
* Incorporated by reference to exhibits filed as exhibits to the Company's
Registration Statement on Form S-1 (No. 33-13847), which became effective
June 11, 1987.
** Incorporated by reference to exhibit filed as Exhibit 10.21 to the
Company's Annual Report on Form 10-K for the year ended March 31, 1992.
*** Incorporated by reference to exhibit filed as Exhibit 10.23 to the
Company's Annual Report on Form 10-K for the year ended March 31, 1993.
# Incorporated by reference to exhibit filed as Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1991.
## Incorporated by reference to exhibit filed as Exhibit 10.20 to the
Company's Quarterly Report on Form 10-Q for the quarter ended December 31,
1991.
+ Incorporated by reference to exhibit filed as Exhibit 10.26 to the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30,
1994.
(b) Reports on Form 8-K. No reports on Form 8-K were filed by the Company
during the year ended March 31, 1997.
-31-
<PAGE> 32
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Kenneth P. Ostrow and Robert M. Gorski, jointly and
severally, his attorneys-in-fact, each with the power of substitution, for him
in any and all capacities, to sign any amendments to this Report on Form 10-K,
and to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
<TABLE>
<S> <C> <C>
/s/KENNETH P. OSTROW President and Chief Executive Officer June 27, 1997
- -------------------- (Principal Executive Officer)
(Kenneth P. Ostrow) and Director
/s/ROBERT M. GORSKI Vice President, Finance/Service/Administration June 27, 1997
- ------------------- and Chief Financial Officer (Principal
(Robert M. Gorski) Financial and Accounting Officer)
</TABLE>
-32-
<PAGE> 33
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/KENNETH P. OSTROW President and Chief Executive Officer June 27, 1997
- -------------------- (Principal Executive Officer)
(Kenneth P. Ostrow) and Director
/s/ROBERT M. GORSKI Vice President, Finance/Service/Administration June 27, 1997
- ------------------- and Chief Financial Officer (Principal
(Robert M. Gorski) Financial and Accounting Officer)
/s/JOSEPH J. CUSIMANO Director June 27, 1997
- ---------------------
(Joseph J. Cusimano)
/s/MIKE N. ZAHARNA Director June 27, 1997
- ------------------
(Mike N. Zaharna)
</TABLE>
-33-
<PAGE> 34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ KENNETH P. OSTROW
- -------------------------
Kenneth P. Ostrow
President and Chief
Executive Officer
Dated: June 27, 1997
-34-
<PAGE> 35
Schedule I
IMPACT SYSTEMS, INC.
MARKETABLE SECURITIES -- OTHER INVESTMENTS
MARCH 31, 1997
<TABLE>
<CAPTION>
NUMBER OF
SHARES OR AMOUNT AT WHICH
PRINCIPAL MARKET VALUE SECURITIES ARE
NAME OF ISSUER AND TITLE OF AMOUNT AT COST OF BALANCE AT CARRIED IN THE
EACH ISSUE MATURITY ISSUES SHEET DATE BALANCE SHEET(1)
- ---------- -------- ------ ---------- ----------------
<S> <C> <C> <C> <C>
United States Government $2,043,000 $1,943,478 $1,991,363 $1,991,363
(Treasury Bills)
Eaton Vance Corp.
(Classic Senior Floating
Rate Mutual Fund) 282,613 shares 2,817,648 2,817,648 2,817,648
---------- ---------- ----------
Totals $4,761,126 $4,809,011 $4,809,011
========== ========== ==========
</TABLE>
(1) Included in short-term investments.
NOTE: Difference between cost and market of United States Treasury Bills
represents accrued interest. Included in 282,613 shares of Eaton Vance Corp.
mutual fund shares are 11,614 shares of reinvested dividends.
-35-
<PAGE> 36
Schedule II
IMPACT SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE
BEGINNING BALANCE
DESCRIPTION OF YEAR ADDITIONS DEDUCTIONS(1) END OF YEAR
- ----------- ------- --------- ------------- -----------
<S> <C> <C> <C> <C>
Allowance for Doubtful
Accounts:
Year Ended March 31, 1995 $80 $24 $25 $79
Year Ended March 31, 1996 $79 -- $31 $48
Year Ended March 31, 1997 $48 $46 $21 $73
</TABLE>
(1) Write-off of doubtful accounts and adjustments against the allowance.
-36-
<PAGE> 1
Exhibit 24.0
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-17184) of Impact Systems, Inc. of our report dated
May 16, 1997 appearing on page 12 of this Form 10-K.
PRICE WATERHOUSE LLP
San Francisco, California
June 27, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 1,416
<SECURITIES> 4,809
<RECEIVABLES> 5,548
<ALLOWANCES> (73)
<INVENTORY> 3,674
<CURRENT-ASSETS> 15,712
<PP&E> 2,427
<DEPRECIATION> (1,708)
<TOTAL-ASSETS> 18,937
<CURRENT-LIABILITIES> 4,616
<BONDS> 0
0
0
<COMMON> 24,871
<OTHER-SE> (10,550)
<TOTAL-LIABILITY-AND-EQUITY> 18,937
<SALES> 19,756
<TOTAL-REVENUES> 19,756
<CGS> 10,691
<TOTAL-COSTS> 19,722
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9
<INCOME-PRETAX> 448
<INCOME-TAX> 0
<INCOME-CONTINUING> 448
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 448
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
