-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JiaZcN284iahGSVs3spDHw5Tx1qmcgF7Ol7gLS4knLTvTlgbaiwJiDC/wM9VSSW1 xJm9PYomBs2RWDsrA6IYcA== 0000950005-96-000810.txt : 19961016 0000950005-96-000810.hdr.sgml : 19961016 ACCESSION NUMBER: 0000950005-96-000810 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960831 FILED AS OF DATE: 19961015 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTEGRATED SYSTEMS INC CENTRAL INDEX KEY: 0000775163 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 942658153 STATE OF INCORPORATION: CA FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-18268 FILM NUMBER: 96643260 BUSINESS ADDRESS: STREET 1: 3260 JAY ST CITY: SANTA CLARA STATE: CA ZIP: 95054-3309 BUSINESS PHONE: 4089801500 MAIL ADDRESS: STREET 1: 3260 JAY STREET CITY: SANTA CLARA STATE: CA ZIP: 95054-3309 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended August 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from __________ to __________ Commission file number: 0-18268 ------------------------------ INTEGRATED SYSTEMS, INC. (Exact name of Registrant as specified in its charter) California 94-2658153 (State or other jurisdiction (I.R.S. employer of incorporation or organization) identification no.) ------------------------------ 201 Moffett Park Drive Sunnyvale, California 94089 (408) 542-1500 (Address, including zip code, of Registrant's principal executive offices and telephone number, including area code) ------------------------------ 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 ----- ----- The number of shares outstanding of the Registrant's Common Stock on September 30, 1996 was 22,900,235 shares. The Exhibit Index is located on page 13. Page 1 of 15 pages. INTEGRATED SYSTEMS, INC. INDEX
Page ---- PART I - FINANCIAL INFORMATION Item 1. Financial Statements 3 Condensed Consolidated Balance Sheets at August 31, 1996 and February 28, 1996 4 Condensed Consolidated Statements of Income for the Three and Six Months Ended August 31, 1996 and 1995 5 Condensed Consolidated Statements of Cash Flows for the Six Months Ended August 31, 1996 and 1995 6 Notes to Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 13 Item 6. Exhibits and Reports on Form 8-K 13 SIGNATURES 14
================================================================================ This Form 10-Q contains forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995), including but not limited to statements regarding the Company's expectations, hopes or intentions regarding the future. Actual results and trends could differ materially from those discussed in the forward-looking statements. In addition, past trends should not be perceived as indicators of future performance. Among the factors that could cause actual results to differ are those detailed elsewhere in this Report in Management's Discussion and Analysis of Financial Condition and Results of Operations and in the Company's Securities and Exchange Commission reports. ================================================================================ -2- PART I - FINANCIAL INFORMATION Item 1. Financial Statements The condensed consolidated interim financial statements included herein have been prepared by Integrated Systems, Inc. (the "Company"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Although certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, the Company believes that the disclosures made are adequate to make the information presented not misleading. The condensed consolidated interim financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended February 28, 1996. The February 28, 1996 condensed consolidated balance sheet data was derived from the audited financial statements, but does not include all disclosures required by generally accepted accounting principles. The accompanying condensed consolidated interim financial statements have been prepared in all material respects in conformity with the standards of accounting measurements set forth in Accounting Principles Board Opinion No. 28 and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, necessary to summarize fairly the financial position, results of operations, and cash flows for the periods indicated. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full fiscal year. -3- INTEGRATED SYSTEMS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands) August 31, February 28, 1996 1996 ---------- ----------- (unaudited) ASSETS Current assets: Cash and cash equivalents $ 11,198 $ 21,822 Marketable securities 9,915 12,231 Accounts receivable, net 21,386 19,822 Deferred income taxes 142 373 Prepaid expenses and other 3,609 3,587 --------- --------- Total current assets 46,250 57,835 Marketable securities 29,901 15,423 Property and equipment, net 18,996 5,593 Intangible assets, net 2,533 2,106 Deferred income taxes 1,906 1,906 Other assets 3,288 2,401 --------- --------- Total assets $ 102,874 $ 85,264 ========= ========= LIABILITIES Current liabilities: Accounts payable $ 3,823 $ 4,309 Accrued payroll and related expenses 2,300 3,673 Other accrued liabilities 4,614 4,842 Income taxes payable 357 4,191 Deferred revenue 9,575 9,389 --------- --------- Total current liabilities 20,669 26,404 Other liabilities 127 584 --------- --------- Total liabilities 20,796 26,988 --------- --------- SHAREHOLDERS' EQUITY Common Stock, no par value, 50,000 shares authorized: 22,855 and 21,206 shares issued and outstanding at August 31, 1996 and February 28, 1996, respectively 58,583 40,283 Unrealized holding gain on marketable securities, net 28 333 Translation adjustment (98) -- Retained earnings 23,565 17,660 --------- --------- Total shareholders' equity 82,078 58,276 --------- --------- Total liabilities and shareholders' equity $ 102,874 $ 85,264 ========= ========= The accompanying notes are an integral part of these condensed consolidated financial statements. -4- INTEGRATED SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data) (unaudited) Three Months Ended Six Months Ended August 31, August 31, ------------------ ------------------ 1996 1995 1996 1995 ------- ------- ------- ------- Revenue: Product $17,107 $12,146 $30,825 $23,768 Services 8,998 7,705 18,431 14,541 ------- ------- ------- ------- Total revenue 26,105 19,851 49,256 38,309 ------- ------- ------- ------- Costs and expenses: Cost of product revenue 2,086 2,073 4,097 4,539 Cost of services revenue 3,892 3,971 8,066 7,394 Marketing and sales 9,842 6,246 18,663 12,625 Research and development 4,409 2,843 8,121 5,428 General and administrative 1,937 1,604 3,948 3,161 Amortization of intangible assets 104 186 207 372 Acquisition and other 926 -- 926 -- ------- ------- ------- ------- Total costs and expenses 23,196 16,923 44,028 33,519 ------- ------- ------- ------- Income from operations 2,909 2,928 5,228 4,790 Interest and other income 798 691 2,192 1,216 ------- ------- ------- ------- Income before income taxes 3,707 3,619 7,420 6,006 Provision for income taxes 1,335 1,185 2,597 1,994 ------- ------- ------- ------- Net income $ 2,372 $ 2,434 $ 4,823 $ 4,012 ======= ======= ======= ======= Earnings per share $ 0.10 $ 0.11 $ 0.21 $ 0.18 ======= ======= ======= ======= Shares used in per share calculations 23,511 21,994 23,110 21,854 ======= ======= ======= ======= The accompanying notes are an integral part of these condensed consolidated financial statements. -5- INTEGRATED SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
Six Months Ended August 31, -------------------- 1996 1995 -------- -------- Cash flows from operating activities: Net income $ 4,823 $ 4,012 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,067 1,998 Write-down of intangible assets 616 -- Deferred income taxes 395 378 Net income from unconsolidated subsidiary (267) -- Changes in assets and liabilities: Accounts receivable (1,564) 224 Prepaid expenses and other (222) (43) Accounts payable, accrued payroll and other accrued liabilities (2,783) 1,005 Income taxes payable (270) 821 Deferred revenue 186 38 Other assets and liabilities (1,112) 23 -------- -------- Net cash provided by operating activities 1,869 8,456 -------- -------- Cash flows from investing activities: Purchases of marketable securities, net (12,631) (3,408) Additions to property and equipment, net (14,771) (2,071) Capitalized software development costs (735) (235) Other 956 58 -------- -------- Net cash used in investing activities (27,181) (5,656) -------- -------- Cash flows from financing activities: Proceeds from issuance of common stock 12,790 -- Proceeds from exercise of common stock options and purchases under the Employee Stock Purchase Plan 1,928 1,791 Other -- (75) -------- -------- Net cash provided by financing activities 14,718 1,716 -------- -------- Effect of exchange rate fluctuations on cash and cash equivalents (30) -- Net increase (decrease) in cash and cash equivalents (10,624) 4,516 Cash and cash equivalents at beginning of period 21,822 7,746 -------- -------- Cash and cash equivalents at end of period $ 11,198 $ 12,262 ======== ======== Supplemental disclosure of cash flow information: Cash paid during the period for income taxes, net $ 2,355 $ 1,173 Supplemental schedule of noncash investing and financing activities: Unrealized gain (loss) on marketable securities $ (469) $ 540 Tax benefit from disqualifying dispositions of common stock $ 3,708 -- The accompanying notes are an integral part of these condensed consolidated financial statements.
-6- INTEGRATED SYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Information for the three and six months ended August 31, 1996 and 1995 is unaudited) 1. Summary of Significant Accounting Policies The condensed consolidated financial statements include the accounts of Integrated Systems, Inc. and its wholly owned subsidiaries, after elimination of all significant intercompany accounts and transactions, and should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended February 28, 1996. These condensed consolidated financial statements do not include all disclosures normally required by generally accepted accounting principles. 2. Earnings Per Share Earnings per share is computed using the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares result from the assumed exercise of outstanding stock options that have a dilutive effect when applying the treasury stock method. The following table sets forth the calculation of earnings per share for purposes of this report:
Three Months Ended Six Months Ended August 31, August 31, ----------------- ----------------- (in thousands, except per share data) 1996 1995 1996 1995 ------- ------- ------- ------- (unaudited) (unaudited) Primary: Net income $ 2,372 $ 2,434 $ 4,823 $ 4,012 ======= ======= ======= ======= Number of shares: Weighted average number of common shares outstanding 22,335 20,911 21,921 20,798 Dilutive effect of stock options, net 1,176 1,083 1,189 1,056 ------- ------- ------- ------- 23,511 21,994 23,110 21,854 ======= ======= ======= ======= Earnings per share $ 0.10 $ 0.11 $ 0.21 $ 0.18 ======= ======= ======= ======= Fully diluted: Net income $ 2,372 $ 2,434 $ 4,823 $ 4,012 ======= ======= ======= ======= Number of shares: Weighted average number of common shares outstanding 22,335 20,911 21,921 20,798 Dilutive effect of stock options, net 1,213 1,151 1,256 1,090 ------- ------- ------- ------- 23,548 22,062 23,177 21,888 ======= ======= ======= ======= Earnings per share $ 0.10 $ 0.11 $ 0.21 $ 0.18 ======= ======= ======= =======
3. Acquisition and Other Expenses Included in acquisition and other expenses is a $0.7 million write-down of capitalized intangible assets related to prior acquisitions and $0.2 million of professional fees and other costs incurred in connection with the acquisition of Epilogue Technology Corporation (see Note 4). -7- 4. Business Combinations In July 1996, the Company acquired Epilogue Technology Corporation ("Epilogue"), a New Mexico corporation, by issuing 630,963 shares of Common Stock in exchange for all outstanding Epilogue common and preferred stock. The Company also assumed stock options that converted into options to purchase 69,033 shares of the Company's Common Stock. The business combination was accounted for as a pooling of interests. Results of operations have been included from the date of acquisition. Prior quarter and prior year's results have not been restated to include Epilogue operations as such operations were insignificant. In connection with the business combination, $0.2 million of merger related costs and expenses were charged to operations in the second quarter of fiscal 1997. Epilogue is a developer and distributor of network management and embedded Internet software for telecommunications and datacommunications equipment manufacturers, embedded software suppliers and networking related integrated circuit manufacturers. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following information should be read in conjunction with the condensed consolidated interim financial statements and the notes thereto included in Item 1 of this Quarterly Report and with Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's Annual Report on Form 10-K for the year ended February 28, 1996, as filed with the Securities and Exchange Commission on April 12, 1996. Overview Integrated Systems designs, develops, markets and supports software products for embedded microprocessor-based applications and provides related engineering services. The Company currently derives substantially all of its revenues from licensing these products and providing related maintenance and engineering and consulting services. In October 1995, the Company acquired TakeFive Software GmbH ("TakeFive"), an Austrian corporation in the business of developing and marketing software tools used in software development, including SNiFF+, an advanced object-oriented integrated development environment. In January 1996, the Company acquired Doctor Design, Inc. ("Doctor Design"), a California corporation that develops multimedia hardware, software and application specific integrated circuit technology. In July 1996, the Company acquired Epilogue Technology Corporation ("Epilogue"), a New Mexico corporation that develops and distributes network management and embedded internet software. Each of these business combinations has been accounted for as a pooling of interests. The results of operations for all periods presented include the results of TakeFive and Doctor Design. Results of operations for Epilogue have been included from the date of acquisition. Prior period results have not been restated to include Epilogue since those results were not significant. Forward-Looking Information is Subject to Risk and Uncertainty; Additional Risks and Uncertainties Except for the historical information contained in this Quarterly Report, the matters herein contain "forward-looking" statements (as defined in the Private Securities Litigation Reform Act of 1995) that involve risk and uncertainty. These forward-looking statements include, but are not limited to, certain operating expense levels, the level of international revenue, the level of other income, the Company's liquidity and capital needs and various business environment and trend information. Actual future results and trends may differ materially depending on a variety of factors, including the volume and timing of orders received during the quarter, the mix of and changes in distribution channels through which the Company's products are sold, the timing and acceptance of new products and product enhancements by the Company or its competitors, changes in pricing, buyouts of run-time licenses, product life cycles, the level of the Company's sales of third party products, purchasing patterns of distributors and customers, competitive conditions in the industry, business cycles affecting the markets in which the Company's products are sold, extraordinary events, such as litigation or acquisitions, including related charges, and economic conditions generally or in various geographic areas. All of the foregoing factors are difficult to forecast. The future operating results of the Company may fluctuate as a result of these and the other risk factors detailed in documents filed by the Company with the Securities and Exchange Commission. The Company has made, and expects to continue to make in the near future, substantial expenditures in the areas of product development and sales and marketing. If the Company does not realize commensurate high levels of revenue, the Company will be unable to achieve satisfactory levels of earnings. The Company recently announced several new products, in particular pRISM(TM) and Decorum(TM). Portions of these products are expected to be released shortly. Delays in release of new products or the acceptance of these products by customers is likely to have a negative impact on the performance of the Company. -8- Due to all of the foregoing factors, the Company believes that period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as an indication of future performance. It is likely that, in some future quarters, the Company's operating results will be below the expectations of stock market analysts and investors. In such event, the price of the Company's Common Stock would likely be materially adversely affected. Consequently, the purchase or holding of the Company's Common Stock involves an extremely high degree of risk. Results of Operations The following tables set forth for the periods presented the percentage of total revenue represented by each line item in the Company's condensed consolidated statements of income and the percentage change from the comparative prior period in each line item: Percentage of Period-to-Period Total Revenue Percentage Change ------------------ --------------------- Three Months Ended Three Months Ended August 31, August 31, 1996 1995 1996 compared to 1995 ----- ----- --------------------- Revenue: Product 66% 61% 41% Services 34 39 17 ----- ----- Total revenue 100 100 32 ----- ----- Costs and expenses: Cost of product revenue 8 10 1 Cost of services revenue 15 20 (2) Marketing and sales 38 32 58 Research and development 17 14 55 General and administrative 7 8 21 Amortization of intangible assets -- 1 (44) Acquisition and other 4 -- N/M ----- ----- Total costs and expenses 89 85 37 ----- ----- Income from operations 11 15 (1) Interest and other income 3 3 15 ----- ----- Income before income taxes 14 18 2 Provision for income taxes 5 6 13 ----- ----- Net income 9% 12% (3)% ===== ===== -9- Percentage of Period-to-Period Total Revenue Percentage Change ------------------ --------------------- Six Months Ended Six Months Ended August 31, August 31, 1996 1995 1996 compared to 1995 ----- ----- --------------------- Revenue: Product 63% 62% 30% Services 37 38 27 ----- ----- Total revenue 100 100 29 ----- ----- Costs and expenses: Cost of product revenue 8 12 (10) Cost of services revenue 16 19 9 Marketing and sales 38 33 48 Research and development 17 14 50 General and administrative 8 8 25 Amortization of intangible assets -- 1 (44) Acquisition and other 2 -- N/M ----- ----- Total costs and expenses 89 87 31 ----- ----- Income from operations 11 13 9 Interest and other income 4 3 80 ----- ----- Income before income taxes 15 16 24 Provision for income taxes 5 5 30 ----- ----- Net income 10% 11% 20% ===== ===== N/M = Not Meaningful Revenue The Company's total revenue increased 32% from $19.9 million in the second quarter of fiscal 1996 to $26.1 million in the second quarter of fiscal 1997 and 29% from $38.3 million in the first six months of fiscal 1996 to $49.3 million in the first six months of fiscal 1997. A majority of the Company's total revenue came from product revenue, which increased 41% from $12.1 million in the second quarter of fiscal 1996 to $17.1 million in the second quarter of fiscal 1997 and 30% from $23.8 million for the first six months of fiscal 1996 to $30.8 million in the first six months of fiscal 1997. The increase in product revenue was primarily due to increased unit shipments of pSOSystem and SNiFF+ in all geographic regions and the introduction of new products. MATRIXx revenue for the second quarter and the first six months of fiscal 1997 was essentially unchanged year over year. Services revenue increased 17% from $7.7 million in the second quarter of fiscal 1996 to $9.0 million in the second quarter of fiscal 1997, and 27% from $14.5 million in the first six months of fiscal 1996 to $18.4 million in the first six months of fiscal 1997, primarily due to increases in the number and size of consulting contracts and an increase in maintenance revenue from the Company's growing installed base of customers. The percentage of the Company's total revenue from customers located internationally was 37% and 30% in the second quarters of fiscal 1997 and 1996, respectively, and 38% and 30% in the first six months of fiscal 1997 and 1996, respectively. The Company expects international revenue will continue to grow as a percentage of total revenue. Costs and Expenses The Company's cost of product revenue as a percentage of product revenue decreased from 17% in the second quarter of fiscal 1996 to 12% in the second quarter of fiscal 1997 and from 19% in the first six months of fiscal 1996 to 13% in the first six months of fiscal 1997. These decreases are primarily due to product sales mix and third party software royalty costs. The Company's cost of services revenue as a percentage of services revenue was 43% in the second quarter of fiscal 1997 compared to 52% in the second quarter of fiscal 1996 and 44% in the first six months of fiscal 1997 compared to 51% in the first six months of fiscal 1996. These decreases are primarily a result of a shift in service revenue mix to higher margin maintenance revenue as opposed to lower margin consulting revenue. -10- Marketing and sales expenses were $9.8 million and $6.2 million in the second quarters of fiscal 1997 and 1996, respectively, representing 38% and 32%, respectively, of total revenue. For the first six months of fiscal 1997 and 1996, marketing and sales expenses were $18.7 million and $12.6 million, respectively, representing 38% and 33%, respectively, of total revenue. These increases were primarily due to additional expenses associated with the Company's continued investment in the domestic and international sales and support infrastructure, along with promotional costs and other costs involved in the introduction of new products. The Company anticipates that marketing and sales expenses will decrease as a percentage of total revenue for the whole of fiscal 1997. Research and development expenses were $4.4 million and $2.8 million in the second quarters of fiscal 1997 and 1996, respectively, representing 17% and 14%, respectively, of total revenue. For the first six months of fiscal 1997 and 1996, research and development expenses were $8.1 million and $5.4 million, respectively, representing 17% and 14%, respectively, of total revenue. These increases were primarily the result of increased personnel and consulting expenses associated with the announcement of several new products at the Embedded Systems Conference in September 1996, and to support the Company's continued emphasis on developing new products and enhancing existing products. Costs that are required to be capitalized under Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed" (SFAS No. 86) were $450,000 in the second quarter of fiscal 1997 compared to $75,000 in the second quarter of fiscal 1996 and $735,000 in the first six months of fiscal 1997 compared to $235,000 in the first six months of fiscal 1996. The amounts capitalized represent approximately 9% of total research and development expenses for the second quarter of fiscal 1997 compared to 3% in the second quarter of the previous fiscal year and 8% in the first six months of fiscal 1997 compared to 3% in the first six months of fiscal 1996. The amount of research and development expenditures capitalized in a given time period depends upon the nature of the development performed and, accordingly, amounts capitalized may vary from period to period. Capitalized costs are being amortized using the greater of the amount computed using the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product, or on a straight-line basis over three years. Amortization for the second quarter of fiscal 1997 was $206,000 compared to $247,000 for the second quarter of fiscal 1996 and $435,000 for the first six months of fiscal 1997 compared to $461,000 for the first six months of fiscal 1996. General and administrative expenses were $1.9 million and $1.6 million in the second quarters of fiscal 1997 and 1996, respectively, representing 7% and 8%, respectively, of total revenue. For the first six months of fiscal 1997 and 1996, general and administrative expenses were $3.9 million and $3.2 million, respectively, representing 8% of total revenue. The dollar increases were primarily the result of increased headcount, related in part to the acquisitions of Doctor Design, TakeFive and Epilogue. Interest and other income was $0.8 million in the second quarter of fiscal 1997 compared to $0.7 million in the second quarter of fiscal 1996 and $2.2 million in the first six months of fiscal 1997 compared to $1.2 million in the first six months of fiscal 1996. These increases are primarily due to the inclusion of net operating income from an unconsolidated subsidiary acquired in December 1995 which is required to be accounted for under the equity method of accounting. The Company anticipates that the unconsolidated subsidiary will post significant losses for the remainder of fiscal 1997. Recent Accounting Pronouncements During March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS No. 121), which requires the Company to review for impairment of long-lived assets, certain identifiable intangibles and goodwill related to those assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In certain situations, an impairment loss would be recognized. SFAS No. 121 is effective for the Company's fiscal year 1997. The Company has studied the implications of the statement and does not expect it to have a material impact on the Company's financial condition or results of operations. -11- During October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123). This accounting standard permits the use of either a fair value based method or the current Accounting Principals Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25) when accounting for stock-based compensation arrangements. Companies that do not follow the new fair value based method will be required to disclose pro forma net income and earnings per share computed as if the fair value based method had been applied. The disclosure provisions of SFAS No. 123 are effective for fiscal years beginning after December 15, 1995. Management has not determined whether it will adopt the fair value based method of accounting for stock-based compensation arrangements nor the impact of SFAS No. 123 on the Company's consolidated financial statements. Liquidity and Capital Resources The Company has funded its operations to date principally through cash flows from operations. As of August 31, 1996, the Company had $51.0 million of cash, cash equivalents and marketable securities. This represents an increase of $1.5 million from February 28, 1996. The Company believes that cash flows from operations, together with existing cash balances, and available borrowings will be adequate to meet the Company's cash requirements for working capital and capital expenditures for the next 12 months and the foreseeable future. Net cash provided by operating activities during the first six months of fiscal 1997 totaled $1.9 million, a decrease of $6.6 million over the amount generated in the first six months of fiscal 1996. Net cash provided by operating activities decreased, in spite of an increase in net income, due mainly to changes in accounts receivable, accounts payable, accrued payroll and other accrued liabilities, and other assets and liabilities. Net cash used in investing activities totaled $27.1 million in the first six months of fiscal 1997 compared to $5.7 million in fiscal 1996. The increase in net cash used in investing activities was due primarily to the purchase of a building, which became the Company's principal facility, and net purchases of marketable securities. Net cash provided by financing activities totaled $14.7 million in the first six months of fiscal 1997 compared to $1.7 million in the first six months of fiscal 1996. The increase in net cash provided by financing activities was due to the issuance of Common Stock in May 1996 in a secondary offering and an increase in the proceeds from the exercise of options to purchase Common Stock and purchases under the Employee Stock Purchase Plan. -12- PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders At the Annual Meeting of Shareholders held July 17, 1996, the shareholders elected directors of the Company with the following nominees receiving the votes indicated: Name For Withheld ---- --- -------- John C. Bolger 19,155,984 64,556 Narendra K. Gupta 19,155,054 65,486 Vinita Gupta 19,153,148 67,392 Thomas Kailath 19,155,784 64,756 Richard C. Murphy 19,156,184 64,356 David P. St. Charles 19,156,184 64,356 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. The following exhibit is filed herewith: Exhibit Page Number Title Number ------ ----- ------ 27.00 Financial Data Schedule 15 (b) Reports on Form 8-K. No reports on Form 8-K were filed by Registrant during the three months ended August 31, 1996. -13- 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. Dated: October 14, 1996 INTEGRATED SYSTEMS, INC. (Registrant) /s/ David P. St. Charles ------------------------------------- DAVID P. ST. CHARLES President and Chief Executive Officer /s/ Naren K. Gupta ------------------------------------- NARENDRA K. GUPTA Chairman and Chief Financial Officer -14- EX-27 2 FINANCIAL DATA SCHEDULE
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM Q2 FY97 FORM 10-Q FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS FEB-28-1997 MAR-01-1996 AUG-31-1996 11,198 9,915 21,386 0 0 46,250 18,996 0 102,874 20,669 0 58,583 0 0 23,495 102,874 30,825 49,256 4,097 12,163 31,865 0 0 7,420 2,597 4,823 0 0 0 4,823 0.21 0.21
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