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
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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
======= ======= ======= =======
<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,
--------------------
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