SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended August 31, 1997
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, CA 94089
(408) 542-1500
(Address, including zip code, of Registrant's
principal executive offices and telephone
number, including area code)
------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ___X___ No ______
The number of shares outstanding of the Registrant's Common Stock on September
30, 1997 was 23,252,586 shares.
The Exhibit Index is located on page 14. Page 1 of 22 pages.
INTEGRATED SYSTEMS, INC.
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets as of August 31, 1997
and February 28, 1997 4
Condensed Consolidated Statements of Income for the Three
and Six Months Ended August 31, 1997 and 1996 5
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended August 31, 1997 and 1996 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
PART II - OTHER INFORMATION
Item 4. Submission of matters to a vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
pRISM+, MATRIXx and SNiFF+ are either registered trademarks or trademarks of
Integrated Systems, Inc.
================================================================================
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 from the forward-looking statements are those detailed elsewhere
in this Report in Management's Discussion and Analysis of Financial
Condition and Results of Operations and in the Company's Securities and
Exchange Commission reports.
================================================================================
-2-
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The condensed consolidated interim financial statements included herein have
been prepared by Integrated Systems, Inc. ("the Company"), without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Although certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, the Company believes that the disclosures made are adequate to make
the information presented not misleading. 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, 1997. The
February 28, 1997 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.
-3-
INTEGRATED SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
August 31, February 28,
1997 1997
----------- -------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 20,868 $ 25,585
Marketable securities 4,813 4,483
Accounts receivable, net 26,843 28,266
Deferred income taxes 1,385 1,676
Prepaid expenses and other 4,542 4,136
-------- --------
Total current assets 58,451 64,146
Marketable securities 36,840 24,627
Property and equipment, net 18,771 17,956
Intangible assets, net 2,504 3,136
Deferred income taxes 1,293 1,293
Other assets 1,073 1,344
-------- --------
Total assets $118,932 $112,502
======== ========
LIABILITIES
Current liabilities:
Accounts payable $ 5,766 $ 4,143
Accrued payroll and related expenses 4,207 3,407
Other accrued liabilities 6,047 4,514
Income taxes payable 738 1,442
Deferred revenue 13,501 12,621
-------- --------
Total current liabilities 30,259 26,127
Other liabilities 249 203
-------- --------
Total liabilities 30,508 26,330
-------- --------
SHAREHOLDERS' EQUITY
Common Stock, no par value, 50,000 shares authorized:
23,230 and 23,039 shares issued and outstanding at
August 31, 1997 and February 28, 1997, respectively 62,488 61,158
Unrealized holding gain on marketable securities, net 267 148
Translation adjustment (1,483) (1,130)
Retained earnings 27,152 25,996
--------- ---------
Total shareholders' equity 88,424 86,172
--------- ---------
Total liabilities and shareholders' equity $ 118,932 $ 112,502
========= =========
<FN>
The accompanying notes are an integral part of these condensed consolidated financial statements.
</FN>
-4-
INTEGRATED SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
Three Months Ended Six Months Ended
August 31, August 31,
------------------------- ---------------------------
1997 1996 1997 1996
------- -------- -------- --------
Revenue:
Product $ 17,182 $ 17,107 $ 32,194 $ 30,825
Services 14,988 8,998 24,564 18,431
------- -------- -------- --------
Total revenue 32,170 26,105 56,758 49,256
------- -------- -------- --------
Costs and expenses:
Cost of product revenue 3,512 2,086 6,385 4,097
Cost of services revenue 8,961 3,892 13,817 8,066
Marketing and sales 11,242 9,842 21,302 18,663
Research and development 4,747 4,409 9,549 8,121
General and administrative 3,281 2,041 5,727 4,155
Acquisition-related and other -- 926 -- 926
------- -------- -------- --------
Total costs and expenses 31,743 23,196 56,780 44,028
------- -------- -------- --------
Income (loss) from operations 427 2,909 (22) 5,228
Interest and other income 979 798 1,774 2,192
------- -------- -------- --------
Income before income taxes 1,406 3,707 1,752 7,420
Provision for income taxes 471 1,335 596 2,597
------- -------- -------- --------
Net income $ 935 $ 2,372 $ 1,156 $ 4,823
======= ======== ======== ========
Earnings per share $ 0.04 $ 0.10 $ 0.05 $ 0.21
======= ======== ======== ========
Shares used in per share calculations 23,969 23,511 23,910 23,110
======= ======== ======== ========
<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)
Six Months Ended
August 31,
-----------------------------
1997 1996
-------- --------
Cash flows from operating activities:
Net income $ 1,156 $ 4,823
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,934 2,067
Write-down of intangible assets -- 616
Deferred income taxes 212 395
Net income from unconsolidated subsidiary -- (267)
Changes in assets and liabilities:
Accounts receivable 1,265 (1,564)
Prepaid expenses and other (406) (222)
Accounts payable, accrued payroll and
other accrued liabilities 3,956 (2,783)
Income taxes payable (704) (3,978)
Deferred revenue 880 186
Other assets and liabilities 265 (1,112)
-------- --------
Net cash provided by (used in) operating activities 9,558 (1,839)
-------- --------
Cash flows from investing activities:
Purchases of marketable securities (12,345) (12,631)
Additions to property and equipment (2,815) (14,771)
Capitalized software development costs (250) (735)
Other -- 956
-------- --------
Net cash used in investing activities (15,410) (27,181)
-------- --------
Cash flows from financing activities:
Repurchase of common stock (187) --
Proceeds from issuance of common stock -- 12,790
Proceeds from exercise of common stock options and
purchases under the Employee Stock Purchase Plan 1,517 1,928
Tax benefit from disqualifying dispositions of common stock -- 3,708
-------- --------
Net cash provided by financing activities 1,330 18,426
-------- --------
Effect of exchange rate fluctuations on cash and cash equivalents (195) (30)
Net decrease in cash and cash equivalents (4,717) (10,624)
Cash and cash equivalents at beginning of period 25,585 21,822
-------- --------
Cash and cash equivalents at end of period $ 20,868 $ 11,198
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes $ 986 $ 2,355
Supplemental schedule of noncash investing activities:
Unrealized gain (loss) on marketable securities $ 198 $ (469)
<FN>
The accompanying notes are an integral part of these condensed consolidated financial statements.
</FN>
-6-
INTEGRATED SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information for the three and six months ended August 31,
1997 and 1996 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, 1997. These condensed consolidated financial statements do not
include all disclosures normally required by generally accepted accounting
principles.
2. Earnings Per Share
Earnings per share is computed using the weighted average number of common and
common equivalent shares outstanding during the period. Common equivalent shares
result from the assumed exercise of outstanding stock options that have a
dilutive effect when applying the treasury stock method.
The following table sets forth the calculation of earnings per share for
purposes of this report:
Three Months Ended Six Months Ended
August 31, August 31,
------------------ ----------------
(in thousands, except per share data) 1997 1996 1997 1996
---- ---- ---- ----
(unaudited) (unaudited)
Primary:
Net income $ 935 $ 2,372 $ 1,156 $ 4,823
======= ======== ======== ========
Number of shares:
Weighted average number of common shares outstanding 23,182 22,335 23,151 21,921
Dilutive effect of stock options, net 787 1,176 759 1,189
------- -------- -------- --------
23,969 23,511 23,910 23,110
======= ======== ======== ========
Earnings per share $ 0.04 $ 0.10 $ 0.05 $ 0.21
======= ======== ======== ========
Fully diluted earnings per share, for all periods presented, were not materially
different from the amounts shown above.
3. Contingencies
In January 1997, a former employee filed a complaint against the Company and
certain of its officers, alleging claims for, among other things, breach of
contract, fraud, negligent misrepresentation and labor code violations. The
complaint seeks general and specific damages of no less than $1.5 million plus
exemplary damages, attorney's fees and costs of suit. The Company has filed
answers to the complaint denying all of the allegations and asserting various
affirmative defenses. The Company believes it has meritorious defenses to the
claims and intends to defend the suit vigorously.
In fiscal 1997, a distributor for the Company's sales and service subsidiary in
Paris, France filed a complaint against the subsidiary alleging breach of
contract. The complaint seeks damages of approximately $850,000. An answer to
the complaint has been filed denying the allegations. The Company believes it
has meritorious defenses to the claim and intends to defend the suit vigorously.
The Company is involved in a contract dispute with a customer. Management
believes it has meritorious defenses in relation to this dispute.
The litigation and dispute are subject to inherent uncertainties and thus, there
can be no assurance that the litigation or dispute will be resolved favorably to
the Company or that they will not have a material adverse effect on the
Company's financial position or results of operations.
The Company is subject to various other legal proceedings and claims, either
asserted or unasserted, which arise in the ordinary course of business. While
management does not believe that the outcome of any of the legal matters will
have a material adverse effect on the Company's consolidated financial position,
there can be no assurance that these matters will be resolved favorably to the
Company.
-7-
4. Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings per Share,"
which specifies the computation, presentation and disclosure requirements for
earnings per share. SFAS No. 128 supersedes Accounting Principles Board Opinion
No. 15, is effective for financial statements issued for periods ending after
December 15, 1997, and requires that prior periods be restated.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 ("SFAS No. 130"), "Reporting
Comprehensive Income," which establishes standards of disclosure and financial
statement presentation for reporting total comprehensive income in individual
components. SFAS No, 130 is effective for fiscal years beginning after December
15, 1997, and will require earlier periods to be restated to reflect application
of the provisions of SFAS No. 130.
In June 1997, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards No. 131 ("SFAS No. 131"), "Disclosures About
Segments of an Enterprise and Related Information," which specifies disclosure
requirements for segment reporting. The above statements supersedes SFAS No. 14
and SFAS No. 18 and is effective for fiscal years beginning after December 15,
1997, and requires earlier years to be restated if practicable.
The impact of the adoption of the above statements on the financial statements
of the Company has not yet been determined.
-8-
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, 1997, as filed with the
Securities and Exchange Commission on May 29, 1997.
Overview
Integrated Systems, Inc. ("the Company") designs, develops, markets and supports
software products and provides related engineering services principally for
embedded microprocessor-based applications. The Company currently derives
substantially all of its revenues from licensing these products and providing
related maintenance and engineering and consulting services. In July 1996, the
Company acquired Epilogue Technology Corporation ("Epilogue"), a New Mexico
corporation in the business of developing network management and embedded
Internet software for telecommunications and data communications equipment
manufacturers, embedded software suppliers and networking related integrated
circuit manufacturers. The combination was accounted for as a pooling of
interests. The results of operations for Epilogue have been included only since
the date of acquisition, as previous results were not significant. In November
1996, the Company amended the terms of the acquisition of Diab Data, Inc. ("Diab
Data") which was acquired in fiscal year 1996 in a transaction accounted for
under the equity method of accounting. Revising the terms of the original
acquisition agreement requires the Company to consolidate the results of Diab
Data from the fourth quarter of fiscal year 1997 forward.
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 and information (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,
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 the Company's Annual
Report on Form 10-K for the year ended February 28, 1997, and other documents
filed by the Company with the Securities and Exchange Commission.
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. During the
previous fiscal year, the Company's actual performance did not meet market
expectations. It is likely that, in some future quarters, the Company's
operating results will be below the expectations of stock market analysts and
investors. Consequently, the purchase or holding of the Company's Common Stock
involves an extremely high degree of risk.
-9-
Results of Operations
The following table sets forth for the periods presented the percentage of total
revenue represented by each line item in the Company's condensed consolidated
statements of income and the percentage change in each line item from the prior
year period:
Percentage of Period-to-Period
Total Revenue Percentage Change
-------------------- ---------------------
Three Months Ended Three Months Ended
August 31, August 31,
1997 1996 1997 compared to 1996
------ ------ ---------------------
Revenue:
Product 53% 66% - %
Services 47 34 67
--- ---
Total revenue 100 100 23
--- ---
Costs and expenses:
Cost of product revenue 11 8 68
Cost of services revenue 28 15 130
Marketing and sales 35 38 14
Research and development 15 17 8
General and administrative 10 7 61
Acquisition-related and other - 4 N/M
--- ---
Total costs and expenses 99 89 37
--- ---
Income from operations 1 11 (85)
Interest and other income 3 3 23
--- ---
Income before income taxes 4 14 (62)
Provision for income taxes 1 5 (65)
--- ---
Net income 3% 9% (61)%
=== ===
<FN>
N/M = Not Meaningful
</FN>
-10-
Percentage of Period-to-Period
Total Revenue Percentage Change
---------------- ---------------------
Six Months Ended Six Months Ended
August 31, August 31,
1997 1996 1997 compared to 1996
------ ------ ---------------------
Revenue:
Product 57 % 63 % 4 %
Services 43 37 33
--- ---
Total revenue 100 100 15
--- ---
Costs and expenses:
Cost of product revenue 11 8 56
Cost of services revenue 24 16 71
Marketing and sales 38 38 14
Research and development 17 17 18
General and administrative 10 8 38
Acquisition-related and other - 2 N/M
--- ---
Total costs and expenses 100 89 29
--- ---
Income from operations - 11 N/M
Interest and other income 3 4 (19)
--- ---
Income before income taxes 3 15 (76)
Provision for income taxes 1 5 (77)
--- ---
Net income 2 % 10 % (76)%
=== ===
<FN>
N/M = Not Meaningful
</FN>
Revenue
The Company's total revenue increased 23% to $32.2 million in the second quarter
of fiscal year 1998 from $26.1 million in the second quarter of fiscal year 1997
and 15% to $56.8 million in the first six months of fiscal year 1998 from $49.3
million in the first six months of fiscal year 1997. Product revenue increased
marginally to $17.2 million in the second quarter of fiscal year 1998 from $17.1
million in the second quarter of fiscal year 1997, and 4% to $32.2 million in
the first six months of fiscal year 1998 from $30.8 million in the first six
months of fiscal year 1997. The dollar increases in product revenue are
primarily due to the inclusion of product revenue from Diab Data and Epilogue in
fiscal year 1998, plus increased unit shipments of SNiFF+(TM). Services revenue
increased 67% to $15.0 million in the second quarter of fiscal year 1998 from
$9.0 million in the second quarter of fiscal year 1997, and 33% to $24.6 million
in the first six months of fiscal year 1998 from $18.4 million in the first six
months of fiscal year 1997. These dollar increases are the result of both an
increase in maintenance revenue from a growing installed base of customers, and
from an increase in engineering services and consulting activities at Doctor
Design, Inc. ("Doctor Design"), an engineering services subsidiary specializing
in multimedia hardware, software and application specific integrated circuit
technology.
The percentage of the Company's total revenue from customers located
internationally was 31% and 37% in the second quarters of fiscal years 1998 and
1997, respectively, and 31% and 38% in the first six months of fiscal years 1998
and 1997, respectively. These percentage decreases are primarily due to growth
at Doctor Design, which has a predominately domestic customer base.
-11-
Costs and Expenses
The Company's cost of product revenue as a percentage of product revenue
increased from 12% in the second quarter of fiscal year 1997 to 20% in the
second quarter of fiscal year 1998, and from 13% in the first six months of
fiscal year 1997 to 20% in the first six months of fiscal year 1998. These
percentage increases were due to increases in the proportion of product revenue
subject to third party royalty costs, the write-off of certain prepaid
royalties, and increased amortization of capitalized software development costs.
The Company's cost of services revenue as a percentage of services revenue
increased from 43% in the second quarter of fiscal year 1997 to 60% in the
second quarter of fiscal year 1998, and from 44% in the first six months of
fiscal year 1997 to 56% in the first six months of fiscal year 1998. These
percentage increases were due to an increase in lower margin fixed price
contracts. In particular, during the second quarter of fiscal year 1998, the
Company was required to procure a significant amount of materials with no
associated margin, under the terms of a large engineering services contract.
Excluding this anomaly, cost of services revenue as a percentage of services was
51% for the second quarter and the first six months of fiscal year 1998.
Marketing and sales expenses were $11.2 million and $9.8 million in the second
quarters of fiscal years 1998 and 1997, respectively, representing 35% and 38%
of total revenue, respectively, and $21.3 million and $18.7 million in the first
six months of fiscal years 1998 and 1997, respectively, representing 38% of
total revenue in both six month periods. The dollar increases for all periods
presented were primarily due to the Company's continued investment in it's
domestic and international sales and support infrastructure. In addition, the
Company incurred employee terminations related costs in Europe in the second
quarter of fiscal year 1998.
Research and development expenses were $4.7 million and $4.4 million in the
second quarters of fiscal years 1998 and 1997, respectively, representing 15%
and 17%, respectively, of total revenue, and $9.5 million and $8.1 million in
the first six months of fiscal years 1998 and 1997, respectively, representing
17% of total revenue in both six month periods. The dollar increases for all
periods presented were primarily the result of increased personnel and
consulting expenses associated with the development of the Company's pRISM+(TM)
development environment, MATRIXxR version 6.0 and other 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
$150,000 in the second quarter of fiscal year 1998 compared to $450,000 in the
second quarter of fiscal year 1997, and $250,000 in the first six months of
fiscal year 1998 compared to $735,000 in the first six months of fiscal year
1997. The amounts capitalized represent approximately 3% of total research and
development expenditures for the second quarter of fiscal year 1998 compared to
9% in the second quarter of the previous fiscal year, and 3% in the first six
months of fiscal year 1998 compared to 8% in the first six months of fiscal year
1997. The amount of research and development expenditures capitalized in a given
time period depends upon the nature of the development performed and,
accordingly, amounts capitalized may vary from period to period. Capitalized
costs are being amortized using the greater of the amount computed using the
ratio that current gross revenues for a product bear to the total of current and
anticipated future gross revenues for that product, or on a straight line basis
over three years. Amortization for the second quarter of fiscal year 1998 was
$232,000 compared to $206,000 for the second quarter of fiscal year 1997, and
$513,000 in the first six months of fiscal year 1998 compared to $435,000 in the
first six months of fiscal year 1997.
General and administrative expenses were $3.3 million and $2.0 million in the
second quarters of fiscal years 1998 and 1997, respectively, representing 10%
and 8% of total revenue, respectively, and $5.7 million and $4.2 million in the
first six months of fiscal years 1998 and 1997, respectively, representing 10%
and 8% of total revenue, respectively. The dollar increases for all periods
presented were primarily the result of increased headcount, related in part to
the acquisition of Epilogue and the consolidation of Diab Data, combined with
significant growth at Doctor Design.
Acquisition-related and other costs in the second quarter and six month period
of fiscal year 1997 comprised the write-off of intangible assets related to a
prior acquisition and direct costs related to the acquisition of Epilogue.
Interest and other income was $1.0 million in the second quarter of fiscal 1998
compared to $0.8 million in the second quarter of fiscal year 1997. The increase
is primarily due to higher interest earned from increased holdings of cash and
marketable securities in fiscal year 1998. Interest and other income was $1.8
million in the first six months of fiscal year 1998 compared to $2.2 million in
the first six months of fiscal year 1997. This decrease is due to the inclusion
in fiscal year 1997 of net operating income of $480,000 from Diab Data which was
required to be accounted for under the equity method of accounting until the
fourth quarter of fiscal year 1997, offset, in part, by increased interest
income in fiscal year 1998.
-12-
Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings per Share,"
which specifies the computation, presentation and disclosure requirements for
earnings per share. SFAS No. 128 supersedes Accounting Principles Board Opinion
No. 15, is effective for financial statements issued for periods ending after
December 15, 1997, and requires that prior periods be restated.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 ("SFAS No. 130"), "Reporting
Comprehensive Income," which establishes standards of disclosure and financial
statement presentation for reporting total comprehensive income in individual
components. SFAS No, 130 is effective for fiscal years beginning after December
15, 1997, and will require earlier periods to be restated to reflect application
of the provisions of SFAS No. 130.
In June 1997, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards No. 131 ("SFAS No. 131"), "Disclosures About
Segments of an Enterprise and Related Information," which specifies disclosure
requirements for segment reporting. The above statements supersedes SFAS No. 14
and SFAS No. 18 and is effective for fiscal years beginning after December 15,
1997, and requires earlier years to be restated if practicable.
The impact of the adoption of the above statements on the financial statements
of the Company has not yet been determined.
Liquidity and Capital Resources
The Company funds its operations principally through cash flows from operations.
As of August 31, 1997, the Company had $62.5 million of cash, cash equivalents
and marketable securities. This represents an increase of $7.8 million from
February 28, 1997. In April 1997, the Company announced that the Board of
Directors had authorized a new common stock repurchase program allowing the
Company to repurchase up to 1,000,000 shares of common stock for cash, from
time-to-time at market prices. No time limit was set for the completion of the
program. In April 1997, the Company repurchased 20,000 shares of common stock
for $187,500.
Net cash provided by operating activities during the first six months of fiscal
year 1998 totaled $9.6 million, as compared to net cash used of $1.8 million in
the first six months of fiscal year 1997. Net cash provided by operating
activities increased, in spite of a decrease in net income, due mainly to
changes in accounts receivable, accounts payable, accrued payroll and other
accrued liabilities, income taxes payable, and deferred revenue.
Net cash used in investing activities totaled $15.4 million in the first six
months of fiscal year 1998 compared to $27.2 million in fiscal year 1997. Net
cash used in investing activities was higher in fiscal year 1997 due primarily
to the purchase of a building in March 1996.
Net cash provided by financing activities totaled $1.3 million in the first six
months of fiscal year 1998 compared to $18.4 million in the first six months of
fiscal year 1997. Net cash provided by financing activities was significantly
higher in the first six months of fiscal 1997 due to the issuance of common
stock in May 1996. In addition the proceeds from the exercise of options to
purchase common stock and purchases under the Employee Stock Purchase Plan were
lower in the first six months of fiscal year 1998. The first six months of
fiscal year 1997 also benefited from a large tax benefit from disqualifying
dispositions of common stock.
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, stock repurchase and capital expenditures for the next 12
months and the foreseeable future.
-13-
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Shareholders held July 15, 1997, the
shareholders elected directors of the Company with the following
nominees receiving the votes indicated:
Name For Withheld
---- --- --------
John C. Bolger 19,191,456 126,719
Narendra K. Gupta 19,195,350 122,825
Vinita Gupta 19,186,168 132,007
Thomas Kailath 19,191,400 126,775
Richard C. Murphy 19,191,456 126,719
David P. St. Charles 19,153,398 164,777
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
The following exhibit is filed herewith:
Exhibit Page
Number Title Number
------- ----- ------
10.03 Registrant's 1988 Stock Option Plan, as amended to date 16
27.00 Financial Data Schedule 22
(b) Reports on Form 8-K. No reports on Form 8-K were filed by
Registrant during the three months ended August 31, 1997.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: October 14, 1997 INTEGRATED SYSTEMS, INC.
(Registrant)
/S/ DAVID P. ST. CHARLES
--------------------------------
DAVID P. ST. CHARLES
President and Chief Executive Officer
/S/ WILLIAM C. SMITH
--------------------------------
WILLIAM C. SMITH
Vice President, Finance and
Chief Financial Officer
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