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, 1995
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.)
------------------------------
3260 Jay Street
Santa Clara, California 95054-3309
(408) 980-1500
(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, 1995 was 10,193,893 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, 1995
and February 28, 1995 4
Condensed Consolidated Statements of Income for the Three
Months and Nine Months Ended November 30, 1995 and 1994 5
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended November 30, 1995 and 1994 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 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
-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. It is suggested that the condensed
consolidated interim financial statements 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, 1995. The
February 28, 1995 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 year.
Prior to fiscal 1996, the Company's fiscal year was reported on a 52/53-week
period ending on the last Saturday in February of each year. Accordingly,
quarterly periods did not necessarily end on the last day of a calendar month.
Beginning in fiscal 1996, the Company's fiscal year end is the last day in
February and quarterly periods will end on the last day of a calendar month. The
effect of this change was not material to the Company's financial statements for
the three and nine-month periods ended November 30, 1995. For clarity of
presentation herein, all fiscal periods are described as ending on a calendar
month-end.
-3-
INTEGRATED SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
November 30, February 28,
1995 1995
------------ ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 10,162 $ 7,144
Marketable securities, current 16,192 6,472
Accounts receivable, net 17,100 14,156
Deferred income taxes 852 1,153
Other current assets 2,334 2,757
-------- --------
Total current assets 46,640 31,682
Marketable securities, noncurrent 19,590 22,299
Property and equipment, net 3,578 2,584
Other assets 790 427
Intangible assets, net 1,994 5,466
-------- --------
Total assets $ 72,592 $ 62,458
======== ========
LIABILITIES
Current liabilities:
Accounts payable $ 2,222 $ 1,741
Accrued payroll and related expenses 2,124 2,110
Other accrued liabilities 3,491 3,097
Income taxes payable 2,852 1,952
Deferred revenue 7,466 6,067
-------- --------
Total current liabilities 18,155 14,967
Other liabilities 451 200
-------- --------
Total liabilities 18,606 15,167
-------- --------
SHAREHOLDERS' EQUITY
Common Stock, no par value, 25,000 shares authorized:
10,190 and 9,494 shares issued and outstanding
at November 30, 1995 and February 28, 1995,
respectively 37,780 35,529
Unrealized holding gain (loss) on marketable
securities, net 341 (109)
Retained earnings 15,865 11,871
-------- --------
Total shareholders' equity 53,986 47,291
-------- --------
Total liabilities and shareholders' equity $ 72,592 $ 62,458
======== ========
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 Nine Months Ended
November 30, November 30,
-------------------- -------------------
1995 1994 1995 1994
-------- -------- -------- --------
Revenue:
Product licenses $ 12,542 $ 8,789 $ 34,740 $ 22,915
Maintenance and renewals 2,717 2,352 7,640 6,965
Engineering services 3,167 2,423 8,268 6,386
-------- -------- -------- --------
Total revenue 18,426 13,564 50,648 36,266
-------- -------- -------- --------
Costs and expenses:
Cost of product licenses revenue 2,025 1,303 5,577 3,575
Cost of maintenance and renewals revenue 58 66 296 480
Cost of engineering services revenue 2,063 1,483 6,105 4,175
Marketing and sales 6,479 5,366 18,478 14,332
Research and development 2,807 2,202 8,229 5,874
General and administrative 1,427 896 4,178 2,678
Amortization of intangible assets 77 181 449 1,123
Merger related expenses 3,601 -- 3,601 --
-------- -------- -------- --------
Total costs and expenses 18,537 11,497 46,913 32,237
-------- -------- -------- --------
Income (loss) from operations (111) 2,067 3,735 4,029
Interest and other income 518 445 1,727 1,302
-------- -------- -------- --------
Income before income taxes 407 2,512 5,462 5,331
Provision for income taxes 130 804 1,748 1,706
-------- -------- -------- --------
Net income $ 277 $ 1,708 $ 3,714 $ 3,625
======== ======== ======== ========
Earnings per share $ 0.03 $ 0.18 $ 0.35 $ 0.38
======== ======== ======== ========
Shares used in per share calculations 10,647 9,657 10,494 9,492
======== ======== ======== ========
<FN>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
</FN>
-5-
INTEGRATED SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended
November 30,
---------------------
1995 1994
-------- --------
Cash flows from operating activities:
Net income $ 3,714 $ 3,625
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,260 2,667
Write-down of intangible assets 3,083 --
Changes in assets and liabilities:
Accounts receivable (2,944) (1,566)
Other current assets 424 (333)
Accounts payable, accrued payroll and
other accrued liabilities 889 (166)
Income taxes payable 900 208
Deferred revenue 1,399 (337)
Other assets and liabilities 168 (139)
-------- --------
Net cash provided by operating activities 9,893 3,959
-------- --------
Cash flows from investing activities:
Purchases of marketable securities, net (6,261) (339)
Additions to property and equipment, net (2,080) (1,577)
Capitalized software development costs (285) (467)
Net cash paid in acquisitions -- (1,750)
Other investments (500) (200)
-------- --------
Net cash used in investing activities (9,126) (4,333)
-------- --------
Cash flows from financing activities:
Proceeds from exercise of common stock options and
purchases under the employee stock purchase plan 2,251 1,467
Repurchase of common stock -- (1,094)
-------- --------
Net cash provided by financing activities 2,251 373
-------- --------
Net increase (decrease) in cash and cash equivalents 3,018 (1)
Cash and cash equivalents at beginning of period 7,144 8,021
-------- --------
Cash and cash equivalents at end of period $ 10,162 $ 8,020
======== ========
Supplemental disclosure of noncash investing and
financing activities:
Unrealized gain (loss) on marketable securities $ 750 $ (812)
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, 1995 and 1994 is unaudited)
1. Summary of Significant Accounting Policies
The condensed consolidated financial statements include the accounts of
Integrated Systems, Inc. and its majority 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, 1995. These condensed consolidated financial statements do not
include all disclosures normally required by generally accepted accounting
principles.
2. Software Development Costs
The Company incurs certain costs to develop computer software to be licensed or
otherwise marketed to customers. 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
$285,000 in the first nine months of fiscal 1996 compared to $467,000 in the
same period of the previous year. Such 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
three and nine months ended November 30, 1995 was $229,000 and $690,000,
respectively, compared to $200,000 and $393,000, respectively, for the same
periods of the previous year.
3. 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 Nine Months Ended
November 30, November 30,
----------------- -----------------
(in thousands, except per share data) 1995 1994 1995 1994
------- ------- ------- -------
(unaudited) (unaudited)
Primary:
Net income $ 277 $ 1,708 $ 3,714 $ 3,625
======= ======= ======= =======
Number of shares:
Weighted average number of common shares outstanding 10,178 9,309 10,045 9,201
Dilutive effect of stock options, net 469 348 449 291
------- ------- ------- -------
10,647 9,657 10,494 9,492
======= ======= ======= =======
Earnings per share $ 0.03 $ 0.18 $ 0.35 $ 0.38
======= ======= ======= =======
Fully diluted:
Net income $ 277 $ 1,708 $ 3,714 $ 3,625
======= ======= ======= =======
Number of shares:
Weighted average number of common shares outstanding 10,178 9,309 10,045 9,201
Dilutive effect of stock options, net 487 390 466 330
------- ------- ------- -------
10,665 9,699 10,511 9,531
======= ======= ======= =======
Earnings per share $ 0.03 $ 0.18 $ 0.35 $ 0.38
======= ======= ======= =======
-7-
4. Business Combination
On October 31, 1995, the Company acquired TakeFive Software GmbH, an
Austrian corporation ("TakeFive"), in a share exchange reorganization, by
issuing 435,990 shares of Common Stock in exchange for 97% of the shares of
TakeFive. The business combination was accounted for as a pooling of interests
and the results of operations for the nine months ended November 30, 1995 have
been restated to include those of TakeFive for the period. Revenues and net
income for TakeFive for the nine months ended November 30, 1995 were $3.2
million and $0.6 million, respectively. The prior year's results have not been
restated as those of TakeFive were insignificant. Prior to the business
combination, TakeFive was in the business of developing, marketing and
supporting software tools used in software development. The Company intends to
continue the business of TakeFive and operate TakeFive as an independent
subsidiary. In connection with the business combination, $3.6 million of merger
related costs and expenses were charged to operations in the third quarter of
fiscal 1996. The merger costs and expenses include approximately $0.5 million of
direct transaction costs and a $3.1 million write-down of previously capitalized
intangible assets related to a prior acquisition whose product offering will be
replaced by the use of TakeFive products.
5. Subsequent Events
Following the end of the third quarter, the Company announced that it
has signed a definitive agreement to acquire privately-held Doctor Design, Inc.
("DDI"), a California corporation. DDI is a developer of multimedia hardware,
software and application specific integrated circuit technology. In connection
with this transaction, the Company will issue common stock in exchange for DDI
stock. Although the number of shares has not yet been determined, the total
value of the transaction is estimated to be approximately $17.5 million. The
acquisition is expected to close by the end of January 1996 and will be
accounted for as a pooling of interests.
Following the end of the third quarter, the Company acquired certain
technology and related assets to enhance pSOSystem product offerings for
approximately $3.2 million plus additional cash payments contingent upon the
achievement of certain sales levels of the acquired products over the next three
years. The Company expects that the results for the fourth quarter and the full
fiscal year ending February 29, 1996, will include a charge for the write-off of
in-process research and development associated with this acquisition. The amount
of the charge has not yet been determined.
6. Statement of Financial Accounting Standards No. 123
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
No. 123") in October 1995. This accounting standard permits the use of either a
fair value based method or the current Accounting Principals Board Opinion 25,
"Accounting for Stock Issued to Employees" ("APB 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 if 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.
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, 1995, as filed with the
Securities and Exchange Commission on May 26, 1995.
Results of Operations
The following tables set forth for the periods indicated 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:
-8-
Percentage of Period-to-Period
Total Revenue Percentage Change
------------------ ---------------------
Three Months Ended Three Months Ended
November 30, November 30,
1995 1994 1995 compared to 1994
------ ---- ---------------------
Revenue:
Product licenses 68% 65% 43%
Maintenance and renewals 15 17 16
Engineering services 17 18 31
----- -----
Total revenue 100 100 36
----- -----
Costs and expenses:
Cost of product licenses revenue 11 10 55
Cost of maintenance and renewals revenue -- -- (12)
Cost of engineering services revenue 11 11 39
Marketing and sales 35 40 21
Research and development 15 16 27
General and administrative 8 7 59
Amortization of intangible assets 1 1 (57)
Merger related expenses 20 -- N/M
------ ----
Total costs and expenses 101 85 61
------ ----
Income (loss) from operations (1) 15 (105)
Interest and other income 3 4 16
------ ----
Income before income taxes 2 19 (84)
Provision for income taxes 1 6 (84)
------ ----
Net income 1% 13% (84)%
------ ----
Percentage of Period-to-Period
Total Revenue Percentage Change
------------------ ---------------------
Nine Months Ended Nine Months Ended
November 30, November 30,
1995 1994 1995 compared to 1994
------ ---- ---------------------
Revenue:
Product licenses 69% 63% 52%
Maintenance and renewals 15 19 10
Engineering services 16 18 29
------ ----
Total revenue 100 100 40
------ ----
Costs and expenses:
Cost of product licenses revenue 11 10 56
Cost of maintenance and renewals revenue 1 1 (38)
Cost of engineering services revenue 12 12 46
Marketing and sales 37 40 29
Research and development 16 16 40
General and administrative 8 7 56
Amortization of intangible assets 1 3 (60)
Merger related expenses 7 -- N/M
------ ----
Total costs and expenses 93 89 46
------ ----
Income from operations 7 11 (7)
Interest and other income 4 4 33
------ ----
Income before income taxes 11 15 2
Provision for income taxes 4 5 2
------ ----
Net income 7% 10% 2%
------ ----
N/M = not meaningful
-9-
Revenue
The Company's revenue is derived from the licensing of its products, related
maintenance and license renewals, and engineering services. Total revenue in the
third quarter of fiscal 1996 of $18,426,000 increased 36% compared to the third
quarter of fiscal 1995, while total revenue for the first nine months of fiscal
1996 of $50,648,000 increased 40% compared to the first nine months of fiscal
1995. These increases were due to growth in all revenue categories. Product
licenses revenue increased by 43% in the third quarter of fiscal 1996 compared
to the third quarter of fiscal 1995 and 52% for the first nine months of fiscal
1996 compared to the first nine months of fiscal 1995, due to growth in both the
real-time product line and the MATRIXx product line. Real-time product licenses
revenue for the three and nine months ended November 30, 1995 includes revenues
of TakeFive Software GmbH. The Company acquired TakeFive Software GmbH on
October 31, 1995. The business combination has been accounted for as a pooling
of interests and, accordingly, the results of operations for the three and nine
months ended November 30, 1995 include those of TakeFive Software GmbH. The
prior year comparative results have not been restated as those of TakeFive
Software GmbH were insignificant. Total maintenance and renewals revenue
increased by 16% over the prior year's third quarter and by 10% over the prior
year's first nine months due to increased customer base. Engineering services
revenue over these periods increased by 31% and 29%, respectively, due to
increases in the number and size of contracts.
The Company's real-time product licenses, maintenance and renewals revenue
increased 44% in the third quarter of fiscal 1996 compared to the same quarter
of the prior fiscal year and by 63% in the first nine months of fiscal 1996
compared to the same period of the prior fiscal year. Contributing to revenue
growth of the real-time product family was the introduction of new products and
sales related to TakeFive Software GmbH, which the Company acquired in the third
quarter of fiscal 1996. MATRIXx product licenses, maintenance and renewals
revenue increased 25% in the third quarter of fiscal 1996 compared to the third
quarter of fiscal 1995 and 14% in the first nine months of fiscal 1996 compared
to the first nine months of fiscal 1995, due mostly to the introduction of new
products.
Domestic product licenses, maintenance and renewals revenue increased by 40%
between the comparative quarterly periods and 29% between the comparative
nine-month periods, while international product licenses, maintenance and
renewals revenue increased by 33% and 66%, respectively. The percentage of the
Company's total revenue from customers located internationally was 33% in the
third quarter of fiscal 1996 and 35% in the first nine months of fiscal 1996,
compared to 34% in the third quarter of fiscal 1995 and 29% in the first nine
months of fiscal 1995.
Costs and Expenses
The Company's cost of product licenses revenue as a percentage of total revenue
increased to 11% in both the three and nine-month periods of fiscal 1996
compared to 10% in the comparative periods of fiscal 1995. This increase was due
in part to an increase in the amortization of capitalized research and
development expenditures with releases of new products and an increase in
royalty and other third party software costs. The cost of maintenance and
renewals revenue as a percentage of total revenue was not significant in the
third quarter and first nine months of fiscal 1996 and fiscal 1995. The cost of
engineering services revenue as a percentage of engineering services revenue
increased in both the three and nine-month periods due primarily to changes in
contract mix.
Marketing and sales expenses increased 21% and 29% between the comparative three
and nine-month periods, respectively, primarily as a result of the Company's
continuing efforts to strengthen its sales, support and service organization,
both domestically and overseas, as well as an increase in volume-related sales
expenses. Marketing and sales expenses decreased from 40% to 35% of total
revenue and from 40% to 37% of total revenue for the three and nine-month
comparative period, respectively. Sales and marketing expenses as a percentage
of revenue are expected to be higher for the whole of fiscal 1996 as the Company
continues to build its sales and marketing infrastructure, particularly in Japan
and the rest of Asia.
-10-
Research and development expenses increased by 27% and 40%, respectively,
between the quarterly and nine-month comparative periods. These increases were
primarily the result of increased activity associated with bringing several
significant products to market, including increased personnel and consulting
expenses. 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 $50,000 in the third
quarter of fiscal 1996 compared to $75,000 in the third quarter of fiscal 1995
and $285,000 in the first nine months of fiscal 1996 compared to $467,000 in the
first nine months of fiscal 1995. The amount capitalized represents
approximately 2% of total research and development expenditures for the third
quarter of fiscal 1996 compared to 3% for the third quarter of fiscal 1995, and
3% for the first nine months of fiscal 1996 compared to 7% for the first nine
months of fiscal 1995. 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 three months ended
November 30, 1995 was $229,000 compared to $200,000 for the three months ended
November 30, 1994, and $690,000 for the nine months ended November 30, 1995
compared to $393,000 for the nine months ended November 30, 1994.
General and administrative expenses increased 59% between the three-month
comparative periods and 56% between the nine-month comparative periods due
mostly to increased headcount. General and administrative expenses increased
slightly as a percentage of total revenue.
Amortization of intangible assets in the third quarter of fiscal 1996 and for
the nine months ended November 30, 1995 has decreased from the prior year
quarter and comparative nine-month period as certain assets and deferred
compensation related to the acquisition of Software Components Group, Inc. in
the second quarter of fiscal 1992 became fully amortized in fiscal 1995.
In conjunction with the merger with TakeFive Software GmbH, the Company incurred
merger related expenses of $3.6 million consisting of approximately $0.5 million
of direct transaction costs and a $3.1 million write-down of previously
capitalized intangible assets related to a prior acquisition whose product
offering will be replaced by the use of TakeFive products.
Other
The Company's interest and other income increased by $73,000 between the
three-month comparative periods and $425,000 between the nine-month comparative
periods due primarily to an increase in cash and marketable securities.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
No. 123") in October 1995. This accounting standard permits the use of either a
fair value based method or the current Accounting Principals Board Opinion 25,
"Accounting for Stock Issued to Employees" ("APB 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 if 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.
Risk Factors That May Affect Future Results of Operations
The Company believes that in the future, its results of operations could be
impacted by factors such as delays in shipment of the Company's new products and
major new versions of existing products, declining product prices and margins,
market acceptance of new products and upgrades, growth in the marketplace in
which it operates, competitive product offerings and adverse changes in general
economic conditions in any of the countries in which the Company does business.
The Company's performance may also be adversely affected by the ability of its
suppliers to provide competitive products. During the last twelve months, the
Company's competitors have continued to make a variety of product announcements
and offerings. The Company continues to release new versions of its product
lines and the successful acceptance of these products will play a key role in
future growth. The impact of any of these factors is difficult to predict or
forecast.
-11-
The Company's recent acquisitions have not been fully integrated into the
Company. Delays or problems in this integration could significantly impact the
Company's quarterly or annual results. Furthermore, newly discovered problems
with these acquisitions could affect Company performance.
During the quarter, one of the Company's major competitors announced that it
intends to be acquired by a company with significantly more resources. The
Company expects that this acquisition will make the embedded software market
more competitive.
Due to the risk factors noted above, the Company's future earnings and stock
price may be subject to significant volatility, particularly on a quarterly
basis. Any shortfall in revenue or earnings from levels expected by securities
analysts could have an immediate and significant adverse effect on the trading
price of the Company's common stock in any given period. Additionally, the
Company often does not learn of such shortfalls until late in the fiscal
quarter, or even after the quarter is over, which could result in an even more
immediate and adverse effect on the trading price of the Company's common stock.
The trading prices of many high technology companies' stocks, including the
stock of the Company, are at or near their historical highs and reflect
price/earnings ratios substantially above historical norms. There can be no
assurance that the trading price of the Company's stock will remain at or near
its current level. Finally, the Company participates in a highly dynamic
industry, which often results in significant volatility of the Company's common
stock price. Consequently, the purchase or holding of the Company's stock
involves a high degree of risk.
Liquidity and Capital Resources
The Company funds its operations principally through cash flows from operations.
As of November 30, 1995, the Company had $45,944,000 of cash, cash equivalents
and marketable securities. This represents an increase of $10,029,000 from
February 28, 1995. During fiscal 1995, the Company announced that the Board of
Directors authorized the Company to repurchase up to an additional 500,000
shares of common stock for cash, from time-to-time at market prices, pursuant to
a repurchase program announced in September 1992. In fiscal 1995, under this
program, the Company repurchased 125,000 shares of common stock for $1,094,000.
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, capital expenditures and stock
repurchases for the next twelve months and the foreseeable future.
Net cash provided by operating activities during the nine months ended November
30, 1995 totaled $9,893,000 compared to $3,959,000 in the nine months ended
November 30, 1994. The increase in net cash provided by operating activities was
primarily due to increased net income and the write-down of intangible assets.
Net cash used in investing activities totaled $9,126,000 in the first nine
months of fiscal 1996 compared to $4,333,000 in the first nine months of fiscal
1995. The increase in net cash used in investing activities was due primarily to
net purchases of marketable securities. Net cash provided by financing
activities during the nine months ended November 30, 1995 totaled $2,251,000
compared to $373,000 for the nine months ended November 30, 1994. The increase
was due to increased proceeds from the exercise of common stock options and
purchases under the Employee Stock Purchase Plan and due to use of funds in
fiscal 1995 resulting from the repurchase of common stock for $1,094,000. The
Company expects that it will be able to sustain its level of expenditures on
property and equipment and fund operational needs for the next twelve months and
the foreseeable future, from cash flow from operations.
-12-
PART II - OTHER INFORMATION
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. A Form 8-K was filed by the Registrant on November
15, 1995 in conjunction with the acquisition of
TakeFive Software GmbH.
-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 11, 1996 INTEGRATED SYSTEMS, INC.
(Registrant)
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DAVID P. ST. CHARLES
President and Chief Executive Officer
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STEVEN SIPOWICZ
Vice President Finance and
Chief Financial Officer
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