-----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, GsIh+iWAODycGSVAMQyQU29sSaRoMg43rctxn26/qZ/IkKGi9q7b2voygN4yrNDw P4EXKaOeyBiwiYv9ms2fNw== 0000950005-97-000018.txt : 19970115 0000950005-97-000018.hdr.sgml : 19970115 ACCESSION NUMBER: 0000950005-97-000018 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961130 FILED AS OF DATE: 19970114 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: 97505405 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 November 30, 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 December 31, 1996 was 22,968,104 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 November 30, 1996 and February 28, 1996 4 Condensed Consolidated Statements of Operations for the Three and Nine Months Ended November 30, 1996 and 1995 5 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended November 30, 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 5. Other Information 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 other 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) November 30, February 28, 1996 1996 ------------ ------------ (unaudited) ASSETS Current assets: Cash and cash equivalents $11,321 $21,822 Marketable securities 7,085 12,231 Accounts receivable, net 26,815 19,822 Deferred income taxes -- 373 Prepaid expenses and other 4,126 3,587 -------- ------- Total current assets 49,347 57,835 Marketable securities 34,047 15,423 Property and equipment, net 19,139 5,593 Intangible assets, net 2,569 2,106 Deferred income taxes 1,906 1,906 Other assets 1,063 2,401 -------- ------- Total assets $108,071 $85,264 ======== ======= LIABILITIES Current liabilities: Accounts payable $4,413 $4,309 Accrued payroll and related expenses 4,939 3,673 Other accrued liabilities 4,144 4,842 Income taxes payable 422 4,191 Deferred revenue 10,680 9,389 -------- ------- Total current liabilities 24,598 26,404 Other liabilities 254 584 -------- ------- Total liabilities 24,852 26,988 -------- ------- SHAREHOLDERS' EQUITY Common Stock, no par value, 50,000 shares authorized: 22,945 and 21,206 shares issued and outstanding at November 30, 1996 and February 28, 1996, respectively 59,590 40,283 Unrealized holding gain on marketable securities, net 611 333 Translation adjustment (453) -- Retained earnings 23,471 17,660 -------- ------- Total shareholders' equity 83,219 58,276 -------- ------- Total liabilities and shareholders' equity $108,071 $85,264 ======== ======= The accompanying notes are an integral part of these condensed consolidated financial statements. -4- INTEGRATED SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (unaudited)
Three Months Ended Nine Months Ended November 30, November 30, ------------------ ------------------ 1996 1995 1996 1995 ------- ------- ------- ------- Revenue: Product $18,515 $12,665 $49,340 $36,433 Services 8,288 8,845 26,719 23,386 ------- ------- ------- ------- Total revenue 26,803 21,510 76,059 59,819 ------- ------- ------- ------- Costs and expenses: Cost of product revenue 2,681 2,128 6,778 6,667 Cost of services revenue 4,223 4,147 12,289 11,541 Marketing and sales 9,999 6,761 28,662 19,386 Research and development 4,149 2,827 12,270 8,255 General and administrative 2,154 1,640 6,309 5,173 Acquisition-related and other 4,750 3,601 5,676 3,601 ------- ------- ------- ------- Total costs and expenses 27,956 21,104 71,984 54,623 ------- ------- ------- ------- Income (loss) from operations (1,153) 406 4,075 5,196 Interest and other income 1,008 511 3,200 1,727 ------- ------- ------- ------- Income (loss) before income taxes (145) 917 7,275 6,923 Provision (benefit) for income taxes (51) 333 2,546 2,327 ------- ------- ------- ------- Net income (loss) ($94) $584 $4,729 $4,596 ======= ======= ======= ======= Earnings per share $0.00 $0.03 $0.20 $0.21 ======= ======= ======= ======= Shares used in per share calculations 22,909 22,284 23,385 21,997 ======= ======= ======= ======= 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) Nine Months Ended November 30, -------------------- 1996 1995 -------- -------- Cash flows from operating activities: Net income $ 4,729 $ 4,596 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,002 2,636 Write-down of intangible assets 616 3,083 Deferred income taxes 474 220 Net income from unconsolidated subsidiary (604) -- Changes in assets and liabilities: Accounts receivable (7,000) (3,847) Prepaid expenses and other (706) (424) Accounts payable, accrued payroll and other accrued liabilities (263) 1,775 Income taxes payable (671) 717 Deferred revenue 935 1,321 Other assets and liabilities (315) (164) -------- -------- Net cash provided by operating activities 197 10,761 -------- -------- Cash flows from investing activities: Purchases of marketable securities, net (13,050) (6,261) Additions to property and equipment, net (15,423) (2,746) Capitalized software development costs (1,085) (285) Cash acquired in acquistions 3,150 -- Other -- (442) -------- -------- Net cash used in investing activities (26,408) (9,734) -------- -------- 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 2,935 2,251 Other -- (111) -------- -------- Net cash provided by financing activities 15,725 2,140 -------- -------- Effect of exchange rate fluctuations on cash and cash equivalents (15) -- Net increase (decrease) in cash and cash equivalents (10,501) 3,167 Cash and cash equivalents at beginning of period 21,822 7,746 -------- -------- Cash and cash equivalents at end of period $ 11,321 $ 10,913 ======== ======== Supplemental disclosure of cash flow information: Cash paid during the period for income taxes, net $ 2,607 $ 1,610 Supplemental schedule of noncash investing and financing activities: Unrealized gain on marketable securities $ 428 $ 750 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 nine months ended November 30, 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, if dilutive, 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 Nine Months Ended November 30, November 30, ------------------ ----------------- (in thousands, except per share data) 1996 1995 1996 1995 ------ ------ ------ ------ (unaudited) (unaudited) Primary: Net income (loss) ($94) $584 $4,729 $4,596 ====== ====== ====== ====== Number of shares: Weighted average number of common shares outstanding 22,909 21,099 22,250 20,899 Dilutive effect of stock options, net 1,185 1,135 1,098 ------ ------ ------ ------ 22,909 22,284 23,385 21,997 ====== ====== ====== ====== Earnings per share $0.00 $0.03 $0.20 $0.21 ====== ====== ====== ====== Fully diluted: Net income (loss) ($94) $584 $4,729 $4,596 ====== ====== ====== ====== Number of shares: Weighted average number of common shares outstanding 22,909 21,099 22,250 20,899 Dilutive effect of stock options, net 1,221 1,180 1,132 ------ ------ ------ ------ 22,909 22,320 23,430 22,031 ====== ====== ====== ====== Earnings per share $0.00 $0.03 $0.20 $0.21 ====== ====== ====== ======
3. Acquisition-related and Other Expenses Acquisition-related and other expenses for the three months ended November 30, 1996, include a $4.8 million change related primarily to a one time payment made to the executives of a previously acquired company, Diab Data, Inc. (Diab Data). The payment was in exchange for the termination of future incentive payments that the Company was expecting to make through December 1998 under employment agreements entered into with those executives at the time of the acquisition. -7- In addition, the terms of the original acquisition agreement were revised, which enables the Company to consolidate the results of this subsidiary, which previously had been accounted for under the equity method of accounting. Accordingly, as of November 30, 1996 the balance sheet of this subsidiary is included in the consolidated balance sheet of the Company. The operating results of the subsidiary will be included in the Company's consolidated results from December 1, 1996 onward. 4. Contingencies The Company is involved in two separate contract disputes, one with a customer and one with a supplier. While management expects that these disputes, individually or in the aggregate, are not expected to have a material adverse effect on the Company's annual consolidated financial statements, the ultimate resolution of these matters is currently not determinable. 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, engineering and consulting services. In October 1995, the Company acquired TakeFive Software GmbH ("TakeFive"), an Austrian corporation that develops and markets 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 Delaware 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. In December 1995, the Company acquired Diab Data, Inc. ("Diab Data"), a California corporation that develops and distributes software development tools. This acquisition was accounted for under the equity method of accounting until November 1996, when the financial position and results of operations of Diab Data have been included with the consolidated financial position and results of operations of the Company (see Note 3 of Notes to Condensed Consolidated Financial Statements). 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 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. -8- 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 were released recently. 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. 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 operations 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 November 30, November 30, 1996 1995 1996 compared to 1995 ----- ----- --------------------- Revenue: Product 69% 59% 46 % Services 31 41 (6) ----- ----- Total revenue 100 100 25 ----- ----- Costs and expenses: Cost of product revenue 10 10 26 Cost of services revenue 16 19 2 Marketing and sales 37 31 48 Research and development 15 13 47 General and administrative 8 8 31 Acquisition-related and other 18 17 N/M ----- ----- Total costs and expenses 104 98 32 Income (loss) from operations (4) 2 N/M Interest and other income 4 2 97 % ----- ----- Income (loss) before income taxes -- 4 N/M Provision (benefit) for income taxes -- 1 N/M ----- ----- Net income (loss) -- 3% N/M ===== ===== N/M= Not Meaningful -9- Percentage of Period-to-Period Total Revenue Percentage Change ------------------ --------------------- Nine Months Ended Nine Months Ended November 30, November 30, 1996 1995 1996 compared to 1995 ----- ----- --------------------- Revenue: Product 65% 61% 35 % Services 35 39 14 ----- ----- Total revenue 100 100 27 ----- ----- Costs and expenses: Cost of product revenue 9 11 2 Cost of services revenue 16 19 6 Marketing and sales 38 32 48 Research and development 16 14 49 General and administrative 8 9 22 Acquisition-related and other 8 6 N/M ----- ----- Total costs and expenses 95 91 32 ----- ----- Income (loss) from operations 5 9 (22) Interest and other income 4 3 85 ----- ----- Income (loss) before income taxes 9 12 5 Provision for income taxes 3 4 9 ----- ----- Net income (loss) 6% 8% 3 % ===== ===== N/M = Not Meaningful Revenue The Company's total revenue increased 25% from $21.5 million in the third quarter of fiscal 1996 to $26.8 million in the third quarter of fiscal 1997 and 27% from $59.8 million in the first nine months of fiscal 1996 to $76.1 million in the first nine months of fiscal 1997. A majority of the Company's total revenue came from product revenue, which increased 46% from $12.7 million in the third quarter of fiscal 1996 to $18.5 million in the third quarter of fiscal 1997 and 35% in the first nine months of fiscal 1997 to $49.3 million from $36.4 million in the first nine months of fiscal 1996. The increase in product revenue was primarily due to increased unit shipments of pSOSystem and SNiFF+, and the introduction of new products. MATRIXx revenue for the third quarter of fiscal 1997 was higher than in the third quarter of fiscal 1996, primarily due to increased unit sales in North America. MATRIXx revenue was up slightly for the first nine months of fiscal 1997 over the first nine months of fiscal 1996. Services revenue decreased 6% from $8.8 million in the third quarter of fiscal 1996 to $8.3 million in the third quarter of fiscal 1997. This decrease was primarily due to a decrease in some of the Company's consulting activities in the third quarter of fiscal 1997. For the first nine months of fiscal 1997 services revenue increased 14% over the first nine months of fiscal 1996, from $23.4 million to $26.7 million, primarily due to 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 36% and 33% in the third quarters of fiscal 1997 and 1996, respectively, and 37% and 31% in the first nine months of fiscal 1997 and 1996, respectively. Costs and Expenses The Company's cost of product revenue as a percentage of product revenue decreased from 17% in the third quarter of fiscal 1996 to 14% in the third quarter of fiscal 1997 and from 18% in the first nine months of fiscal 1996 to 14% in the first nine months of fiscal 1997. These decreases were primarily due to product sales mix and lower third party software royalty costs. The Company's cost of services revenue as a percentage of services revenue was 51% in the third quarter of fiscal 1997 compared to 47% in the third quarter of fiscal 1996 and 46% in the first nine months of fiscal 1997 compared to 49% in the first nine months of fiscal 1996. Cost of services revenue as a percentage of services revenue is dependent upon the mix between higher margin maintenance revenue and lower margin consulting revenues. -10- Marketing and sales expenses were $10.0 million and $6.8 million in the third quarters of fiscal 1997 and 1996, respectively, representing 37% and 31%, respectively, of total revenue. For the first nine months of fiscal 1997 and 1996, marketing and sales expenses were $28.7 million and $19.4 million, respectively, representing 38% and 32%, 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 and other costs involved in the introduction of new products. Research and development expenses were $4.1 million and $2.8 million in the third quarters of fiscal 1997 and 1996, respectively, representing 15% and 13%, respectively, of total revenue. For the first nine months of fiscal 1997 and 1996, research and development expenses were $12.3 million and $8.3 million, respectively, representing 16% and 14%, respectively, of total revenue. These increases were primarily the result of increased personnel and consulting expenses associated with the continued development of several new products announced 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 $350,000 in the third quarter of fiscal 1997 compared to $50,000 in the third quarter of fiscal 1996 and $1,085,000 in the first nine months of fiscal 1997 compared to $285,000 in the first nine months of fiscal 1996. The amounts capitalized represent approximately 8% of total research and development expenses for the third quarter of fiscal 1997 compared to 2% in the third quarter of the previous fiscal year and 8% in the first nine months of fiscal 1997 compared to 3% in the first nine 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 third quarter of fiscal 1997 was $238,000 compared to $229,000 for the third quarter of fiscal 1996 and $673,000 for the first nine months of fiscal 1997 compared to $690,000 for the first nine months of fiscal 1996. General and administrative expenses were $2.2 million and $1.6 million in the third quarters of fiscal 1997 and 1996, respectively, representing 8% of total revenue. For the first nine months of fiscal 1997 and 1996, general and administrative expenses were $6.3 million and $5.2 million, respectively, representing 8% and 9%, respectively, of total revenue. The dollar increases were primarily the result of increased headcount. Acquisition-related and other expenses were $4.8 million in the third quarter of fiscal 1997, and related primarily to a one-time payment to the executives of Diab Data in November, 1996. See Note 3 of Notes to Condensed Consolidated Financial Statements. Acquisition-related and other expenses in the third quarter of fiscal 1996 of $3.6 million, related to the acquisition of Takefive Software GmbH in October 1995. Interest and other income was $1.0 million in the third quarter of fiscal 1997 compared to $0.5 million in the third quarter of fiscal 1996 and $3.2 million in the first nine months of fiscal 1997 compared to $1.7 million in the first nine months of fiscal 1996. These increases are primarily due to an increase in total cash and marketable securities, higher interest rates, foreign exchange gains and rental income from a portion of a facility owned by the Company. 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. 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. -11- Liquidity and Capital Resources The Company has funded its operations to date principally through cash flows from operations. As of November 30, 1996, the Company had $52.5 million of cash, cash equivalents and marketable securities. This represents an increase of $3.0 million from February 28, 1996. The Company believes that cash flows from operations, together with existing cash balances, will be adequate to meet the Company's cash requirements for working capital and capital expenditures for the next 12 months. Net cash provided by operating activities during the first nine months of fiscal 1997 totaled $0.2 million, a decrease of $10.6 million over the amount generated in the first nine 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, income taxes payable and the adjustment for write-downs of intangible assets. Net cash used in investing activities totaled $26.4 million in the first nine months of fiscal 1997 compared to $9.7 million in the first nine months of 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 $15.7 million in the first nine months of fiscal 1997 compared to $2.1 million in the first nine 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 5. Other Information On September 27, 1996, the Company's Form S-8 Registration Statement was filed with the Securities and Exchange Commission covering the registration of an additional 69,033 shares of Common Stock issuable under stock options assumed by the Company as part of its acquisition of Epilogue Technology Corporation. Effective January 6, 1997, William C. Smith joined the Company as Vice President of Finance and Chief Financial Officer. 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 November 30, 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: January 13, 1997 INTEGRATED SYSTEMS, INC. (Registrant) -------------------------------------------------- DAVID P. ST. CHARLES President and Chief Executive Officer -------------------------------------------------- WILLIAM C. SMITH Vice President Finance and Chief Financial Officer EX-27 2 FINANCIAL DATA SCHEDULE
5 The Schedule contains summary financial information extracted from Q3 FY97 Form 10-Q financial statements and is qualified in its entirety by reference to such financial statements. 1,000 US DOLLARS 9-MOS FEB-28-1997 MAR-01-1996 NOV-30-1996 1 11,321 7,085 26,815 0 0 49,347 19,139 0 108,071 24,598 0 59,590 0 0 23,629 108,071 49,340 76,059 6,778 19,067 52,917 0 0 7,275 2,546 4,729 0 0 0 4,729 0.20 0.20
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