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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[X] Quarterly Report Under Section 13 or 15 (d) of the Securities Exchange
Act of 1934
For quarterly period ended June 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 Identification
incorporation or organization) Number)
14600 Winchester Boulevard, Los Gatos, California 95030
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code: (408) 379-0910
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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 June 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>
Part I: Financial Information Page Number
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<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II: Other Information
Item 1. Legal Proceedings 10
Item 6. Exhibits and Reports on Form 8-K 12
Exhibit 27 - Financial Data Schedule 12
Signature 11
</TABLE>
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PART I - FINANCIAL INFORMATION
IMPACT SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Information)
(Unaudited)
<TABLE>
<CAPTION>
June 30, March 31,
ASSETS 1997 1997
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<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,908 $ 1,416
Short-term investments 4,481 4,809
Trade and other accounts receivable 5,014 5,777
Inventories 4,691 3,674
Prepaid expenses and other 102 36
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Total current assets 16,196 15,712
Property and equipment, net of accumulated depreciation 769 719
and amortization of $1,774 ($1,708 at March 31, 1997)
Non-current trade receivables 2,317 1,744
Minority equity investment in and advances to foreign 463 641
affiliates
Other assets 123 121
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$ 19,868 $ 18,937
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,108 $ 1,503
Accrued installation and warranty costs 1,377 1,499
Accrued salaries, wages and employee benefits 302 452
Accrued commissions 442 305
Other liabilities 1,143 857
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Total current liabilities 5,372 4,616
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Stockholders' equity:
Preferred stock, no par: 2,000,000 shares
authorized;
none outstanding
Common stock, no par value; 20,000,000 shares
authorized; 10,404,500 and 10,404,500 shares 24,871 24,871
issued and outstanding
Accumulated deficit (9,958) (10,139)
Cumulative translation adjustments (417) (411)
----------- -----------
Total stockholders' equity $ 14,496 $ 14,321
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$ 19,868 $ 18,937
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</TABLE>
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IMPACT SYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
-----------------------
1997 1996
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<S> <C> <C>
Net revenues $ 4,347 $ 5,215
Cost of goods sold 2,103 2,811
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Gross margin 2,244 2,404
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Operating expenses:
Research and development 528 500
Selling, general and administrative 1,611 1,605
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Total operating expense 2,139 2,105
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Operating income 105 299
Interest income, net 90 76
Foreign currency gain (loss), net 5 10
Equity in net income (loss) of investee (20) 18
-------- --------
Net income before income taxes 180 403
Income taxes -- --
-------- --------
Net income $ 180 $ 403
======== ========
Net income per common share and equivalent:
Net income per common share $ .02 $ .04
======== ========
Common and common equivalent
shares used in calculating
income per share 10,558 11,092
======== ========
</TABLE>
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IMPACT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------
1997 1996
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<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 180 $ 403
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 66 47
Equity in net (income) loss of investee 20 (18)
Cumulative translation effects (6) 5
Changes in assets and liabilities:
Trade and other accounts receivable 190 (373)
Inventories (1,017) (426)
Prepaid expenses and other (67) (63)
Accrued installation and warranty costs (122) 297
Accounts payable 605 495
Accrued salaries, wages and employee benefits (150) (281)
Accrued commissions 137 56
Other liabilities 286 (551)
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Cash Provided (Used) By Operating Activities 122 (409)
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Cash Provided (Used) By Investing Activities:
Sale (purchase) of short-term investments 328 (400)
Capital expenditures, net (116) (20)
Minority equity investment in and advances to affiliate 158 123
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Cash Provided (Used) By Investing Activities 370 (297)
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Cash Provided By Financing Activities:
Issuance of capital stock, net of expenses -- 38
Repayment of borrowings -- --
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Cash Provided By Financing Activities -- 38
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Net Increase (Decrease) in Cash and Cash Equivalents 492 (668)
Cash & Cash Equivalents At Beginning of Period 1,416 2,736
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Cash & Cash Equivalents at End of Period $ 1,908 $ 2,068
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</TABLE>
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IMPACT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 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 June 30,
1997, the results of operations for the three months ended June 30, 1997 and
June 30, 1996 and cash flows for the three months ended June 30, 1996 and June
30, 1997. 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 $129 at
June 30, 1997 and $254 at March 31, 1997. 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>
June 30, 1997 March 31, 1997
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<S> <C> <C>
Raw materials and components $3,438 $3,205
Work-in-process 1,118 469
Evaluation systems at customer sites 135 -
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$4,691 $3,674
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</TABLE>
Minority Equity Investments in and Advances to Affiliates
The Company has a 40% interest in Impact Systems Asia, KK. Net advances to the
affiliate were $341 at June 30, 1997 and $510 at March 31, 1997.
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<TABLE>
<CAPTION>
June 30, 1997 March 31, 1997
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<S> <C> <C>
Other Assets
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Building rent deposits and other $ 123 $121
Other Liabilities
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Accrued liabilities and other reserves $ 807 $835
Customer deposits 336 22
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$1,143 $857
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</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.
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ITEM 2
MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
Results of Operations
Introduction
The Company's results are highly dependent upon economic conditions affecting
the paper industry and, consequently, reflect the cyclical demand for paper
products worldwide. Although the Company benefited from increased acceptance of
its newer sensor system product line during fiscal 1997, the U.S. paper industry
is relatively slow which could negatively affect future capital equipment
purchases by the Company's customers, paper manufacturing companies.
Net Revenues
Net revenues for the current quarter (ended June 30, 1997) were $4.3 million
compared to $5.2 million for the prior year quarter (ended June 30, 1996) and
$5.0 million for the prior quarter (ended March 31, 1997). The decline in
revenues is primarily attributable to the timing of system shipments to meet
customer delivery requirements and a lower year end backlog at March 31, 1997
versus the prior year end, March 31, 1996.
Gross Margins
Gross margins, as a percentage of net revenues, increased to 51.6% for the
current quarter compared to 46.1% for the prior year quarter and 47.4% for the
prior quarter as the result of changes in the product mix of system shipments
and a higher proportion of system upgrades, add-ons, spare parts and service
revenues which typically yields higher margin percentages.
The Company's margins are affected by product mix variations and regional
competition, particularly involving new paper machine business (ie. equipment
provided for large new paper machines typically involve lower gross margins).
Operating Expenses
Research and development expenses were $528,000 for the current quarter compared
to $500,000 for the prior year quarter and $556,000 for the prior quarter. Given
current and projected market opportunities for the Company's enhanced integrated
product offerings, additional key technical resources have been added in the
past two quarters in order to further develop its market position, particularly
in the United States. The Company is continuing to recruit and hire additional
technical resources which is expected to result in higher research and
development spending for the remainder of fiscal 1998.
Selling, general and administrative expenses were $1.6 million in the current
quarter compared to $1.6 million for the prior year quarter and $1.5 million for
the prior quarter.
As with research and development spending, the Company has recently added
additional key resources in sales and marketing to position itself for renewed
growth when the paper industry market improves. Higher fixed costs associated
with the added personnel in the current quarter were offset, however, by
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lower variable selling expenses on the lower system shipment volume. The Company
is continuing to recruit additional marketing and sales resources which is
expected to increase fixed spending in the SG&A areas.
Other Income and Expense
Interest income was $90,000 for the current quarter compared to $76,000 in the
prior year quarter and $87,000 for the prior quarter. Although the Company
benefited from higher yields on its invested cash during the current quarter as
compared to the prior year quarter, invested funds are expected to decline
during the second quarter of fiscal 1998 (see Liquidity and Capital Resources)
resulting in lower interest income for the same period.
The Company recorded a loss of $20,000 on its 40% investment in Impact Asia
during the current quarter compared to a profit of $18,000 in the prior year
quarter reflecting a decline in system shipments by the affiliate.
Liquidity and Capital Resources
At June 30, 1997, the Company's cash and short term investments (treasury bills
and mutual funds) amounted to $6.4 million. The Company expects its cash
position will decrease during the second quarter of fiscal 1998 as the result of
the effect of the increase in number of systems sold under long term installment
contracts and working capital needs associated with the expansion of business.
The Company renewed its $6.0 million short term credit facility in August, 1997
with the same lender and with terms and conditions identical to those which were
already in place. As of June 30, 1997 and the current date, there were no
advances outstanding under the line. The Company expects that existing cash
balances together with cash flow from operations and borrowings, if necessary,
will be adequate to meet its working capital requirements through at least the
current fiscal year.
Inventories increased $1.0 million during the first 3 months of fiscal 1998 as
the result of increased work in process for the second quarter (fiscal 1998)
shipment plan. Accounts payable balances increased $.6 million during the same
time period reflecting late first quarter inventory receipts and payment timing
differences. Other liabilities increased $.3 million as the result of increased
customer deposits.
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,
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PART II - OTHER INFORMATION
ITEM 1
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. ABB has sued Impact in Columbus, Ohio
claiming Impact is infringing on a moisture sensor patent which Impact believes
is plainly a retaliatory suit.
On July 18, 1997 a summary judgment hearing on the California matter was held
and the results of that hearing are expected shortly.
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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: August 13, 1997 By: /s/ Robert M. Gorski
--------------------
Robert M. Gorski
Vice President, Finance &
Chief Financial Officer
(Principal Financial & Accounting Officer)
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PART II - OTHER INFORMATION
ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibit 27 - Financial Data Schedule
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,908
<SECURITIES> 4,481
<RECEIVABLES> 5,087
<ALLOWANCES> (73)
<INVENTORY> 4,691
<CURRENT-ASSETS> 16,196
<PP&E> 2,563
<DEPRECIATION> (1,774)
<TOTAL-ASSETS> 19,868
<CURRENT-LIABILITIES> 5,372
<BONDS> 0
24,871
0
<COMMON> 0
<OTHER-SE> (10,375)
<TOTAL-LIABILITY-AND-EQUITY> 19,868
<SALES> 4,347
<TOTAL-REVENUES> 4,347
<CGS> 2,103
<TOTAL-COSTS> 4,242
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 180
<INCOME-TAX> 0
<INCOME-CONTINUING> 180
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 180
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
