-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ToQfJA3PIuDmGiOsrSN4zWG/vPJTLStrY6LlX3e8WZO3ZCS3gwx/j5pq6hjTmEx2 MvAZsqmUStCxJVWpy78OnA== 0000928385-01-500878.txt : 20010516 0000928385-01-500878.hdr.sgml : 20010516 ACCESSION NUMBER: 0000928385-01-500878 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTEGRAL SYSTEMS INC /MD/ CENTRAL INDEX KEY: 0000718130 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 521267968 STATE OF INCORPORATION: MD FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-18603 FILM NUMBER: 1637817 BUSINESS ADDRESS: STREET 1: 5000 PHILADELPHIA WAY STREET 2: STE A CITY: LANHAM STATE: MD ZIP: 20706 BUSINESS PHONE: 3017314233 MAIL ADDRESS: STREET 1: 5000 PHILADELPHIA WAY STREET 2: STE A CITY: LANHAM STATE: MD ZIP: 20706 10-Q 1 d10q.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 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 March 31, 2001 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 0-18603 ------- INTEGRAL SYSTEMS, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Maryland 52-1267968 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5000 Philadelphia Way, Lanham, MD 20706 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (301) 731-4233 --------------------------- - -------------------------------------------------------------------------------- (Former name, address and fiscal year, if changed since last report) Indicate by checkmark 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 --------- --------- Registrant had 9,454,418 shares of common stock outstanding as of April 30, 2001 INTEGRAL SYSTEMS, INC. TABLE OF CONTENTS Page No. -------- PART I. FINANCIAL INFORMATION: Item 1. Financial Statements Balance Sheets - March 31, 2001 and September 30, 2000............. 1 Statements of Operations - Three and Six Months Ended March 31, 2001 and March 31, 2000............................... 3 Statement of Stockholders' Equity - Six Months Ended March 31, 2001............................................ 5 Statements of Cash Flow - Six Months Ended March 31, 2001 and March 31, 2000............................... 6 Notes to Financial Statements...................................... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................... 9 Item 3. Quantitative and Qualitative Disclosures About Market Risk... 18 PART II. OTHER INFORMATION: Item 6. Exhibits and Reports on Form 8-K............................. 18 PART I. FINANCIAL INFORMATION - ------------------------------ INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS March 31, 2001 September 30, (unaudited) 2000 ------------- ------------- ASSETS ------ CURRENT ASSETS Cash $17,229,730 17,558,331 Marketable Securities 49,136,000 49,966,000 Accounts and Other Receivables 14,611,710 13,502,293 Notes Receivable 573,408 600,000 Prepaid Expenses 205,342 190,075 Income Taxes Receivable 1,664,049 1,655,290 ------------ ------------- TOTAL CURRENT ASSETS 83,420,239 83,471,989 PROPERTY AND EQUIPMENT 4,849,174 4,471,838 Less: Accum. Depreciation and Amortization 2,233,778 2,267,437 ------------ ------------- TOTAL PROPERTY AND EQUIPMENT 2,615,396 2,204,401 OTHER ASSETS Software Development Costs, net 3,899,362 3,188,783 Deposits 55,545 45,724 ------------ ------------- TOTAL OTHER ASSETS 3,954,907 3,234,507 TOTAL ASSETS $89,990,542 $88,910,897 ============ ============= The accompanying notes are an integral part of these consolidated financial statements. - 1 - INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
March 31, 2001 September 30, LIABILITIES & STOCKHOLDERS' EQUITY (unaudited) 2000 - ---------------------------------- ----------- ------------- CURRENT LIABILITIES Accounts Payable $ 1,980,183 $ 1,914,985 Accrued Expenses 2,781,407 2,618,512 Capital Leases Payable 275,437 454,154 Billings in Excess of Costs 1,025,935 1,832,520 Deferred Income Taxes 108,178 132,925 ------------- ------------- TOTAL CURRENT LIABILITIES 6,171,140 6,953,096 LONG TERM LIABILITIES Capital Leases Payable 169,908 259,951 ------------- ------------- TOTAL LONG TERM LIABILITIES 169,908 259,951 STOCKHOLDERS' EQUITY Common Stock, $.01 par value, 40,000,000 shares authorized, and 9,453,718 and 9,427,368 shares issued and outstanding at March 31, 2001 and September 30, 2000, respectively 94,537 94,274 Additional Paid-in Capital 65,813,421 65,702,313 Retained Earnings 17,741,536 15,901,263 ------------- ------------- TOTAL STOCKHOLDERS' EQUITY 83,649,494 81,697,850 ------------- ------------- TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $89,990,542 $88,910,897 ============= ==============
The accompanying notes are an integral part of these consolidated financial statements. - 2 - INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended March 31, March 31, 2001 2000 2001 2000 (unaudited) (unaudited) (unaudited) (unaudited) ------------ ------------ ------------ ------------ Revenue $9,544,596 $11,101,560 $18,013,272 $23,626,915 Cost of Revenue Direct Labor 2,711,556 3,306,690 4,905,549 6,030,079 Overhead Costs 1,963,885 2,227,202 3,743,475 4,523,841 Travel and other Direct Costs 388,771 366,932 784,270 761,675 Direct Equipment & Subcontracts 1,731,980 2,532,052 2,960,392 5,454,957 ------------ -------------- -------------- -------------- Total Cost of Revenue 6,796,192 8,432,876 12,393,686 16,770,552 ------------ -------------- -------------- -------------- Gross Margin 2,748,404 2,668,684 5,619,586 6,856,363 ------------ -------------- -------------- -------------- Selling, General & Administrative 1,903,637 1,854,513 3,796,923 3,853,089 Terminated Acquisition Costs 0 141,123 0 141,123 Product Amortization 342,500 237,500 685,000 475,000 ------------ -------------- -------------- -------------- Income From Operations 502,267 435,548 1,137,663 2,387,151 Other Income (Expense) Interest Income 626,708 488,493 1,442,427 758,365 Interest Expense (15,359) (22,874) (31,531) (51,437) Miscellaneous, net (40,983) (23,671) (138,486) (62,900) ------------ ------------ ------------ ------------ Total Other Income (Expense) 570,366 441,948 1,272,410 644,028 Income from Continuing Operations Before Income Taxes 1,072,633 877,496 2,410,073 3,031,179 ------------ ------------ ------------ ------------ Provision for Income Taxes 284,600 173,968 569,800 944,394 ------------ -------------- -------------- -------------- Income from Continuing Operations 788,033 703,528 1,840,273 2,086,785 ------------ -------------- -------------- -------------- Discontinued Operations Income from Operations of Discontinued Segment (Net of Tax) 0 33,161 0 116,156 ------------ ------------ ------------ ------------ Net Income $788,033 $ 736,689 $1,840,273 $2,202,941 ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. - 3 - INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
Three Months Ended Six Months Ended March 31, March 31, 2001 2000 2001 2000 (unaudited) (unaudited) (unaudited) (unaudited) ----------------- ---------------- ----------------- ----------------- Weighted Average Number of Common Shares Outstanding During Period 9,452,318 8,620,006 9,446,718 8,423,002 ================= ================ ================= ================= Earnings per Share - Basic Income from Continuing Oper. $ 0.08 $ 0.08 $ 0.19 $ 0.25 Income from Discont. Oper. $ 0.00 $ 0.01 $ 0.00 $ 0.01 ----------------- ---------------- ----------------- ----------------- Net Income $ 0.08 $ 0.09 $ 0.19 $ 0.26 ================= ================ ================= ================= Diluted Shares Outstanding 9,608,517 9,158,494 9,586,787 8,762,992 ================= ================ ================= ================= Earnings per Share - Diluted Income from Continuing Oper. $ 0.08 $ 0.08 $ 0.19 $ 0.24 Income from Discont. Oper. $ 0.00 $ 0.00 $ 0.00 $ 0.01 ----------------- ---------------- ----------------- ----------------- Net Income $ 0.08 $ 0.08 $ 0.19 $ 0.25 ================= ================ ================= =================
The accompanying notes are an integral part of these consolidated financial statements. - 4 - INTEGRAL SYSTEMS, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE SIX MONTHS ENDED MARCH 31, 2001 (unaudited)
Common Number Stock Additional of at Par Paid-in Retained Shares Value Capital Earnings Total -------------- ------------- --------------- --------------- ---------------- Balance September 30, 2000 9,427,368 $94,274 $65,702,313 $15,901,263 $81,697,850 Exercise of Stock Options 26,350 263 111,108 - 111,371 Net income - - - 1,840,273 1,840,273 -------------- ------------- --------------- --------------- ---------------- Balance March 31, 2001 9,453,718 $94,537 $65,813,421 $17,741,536 $83,649,494 ============== ============= =============== =============== ================
The accompanying notes are an integral part of these consolidated financial statements. - 5 -
INTEGRAL SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the Six Months Ended March 31, 2001 2000 (unaudited) (unaudited) ------------- ------------- Cash flows from operating activities: Net income $ 1,840,273 $ 2,202,941 --------------- ---------------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,216,054 995,782 Loss on disposal of fixed assets 2,229 32,498 Deferred Income taxes, net (24,747) (46,894) (Increase) decrease in: Accounts receivable and other receivables (1,109,417) 1,312,744 Prepaid expenses and deposits (25,088) (4,335) (Decrease) increase in: Accounts payable 65,198 310,356 Accrued expenses 162,895 (333,425) Billings in excess of cost (806,585) (5,410) Income taxes payable, net (8,759) (1,001,484) ---------------- ------------------ Total adjustments (528,220) 1,259,832 ---------------- ------------------ Net cash provided by operating activities 1,312,053 3,462,773 ---------------- ------------------ Cash flows from investing activities: Marketable securities 830,000 (39,127,257) Acquisition of fixed assets (944,278) (538,243) Software development costs (1,395,579) (928,431) ---------------- ------------------ Net cash used in investing activities (1,509,857) (40,593,931) ---------------- ------------------ Cash flow from financing activities: Payments on notes receivable 26,592 0 Proceeds from issuance of common stock 111,371 41,601,479 Payments on capital lease obligations (268,760) (297,275) ---------------- ------------------ Net cash (used) provided by financing activities (130,797) 41,304,204 ---------------- ------------------ Net (decrease) in cash (328,601) 4,173,046 Cash - beginning of year 17,558,331 9,267,207 ---------------- ------------------ Cash - end of period $17,229,730 $ 13,440,253 ================ ==================
The accompanying notes are an integral part of these consolidated financial statements. - 6 - INTEGRAL SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. Basis of Presentation --------------------- The interim financial statements include the accounts of Integral Systems, Inc. (ISI or the Company) and its wholly-owned subsidiaries, SAT Corporation (SAT), Integral Systems Europe (ISI Europe), and InterSys, Inc. (INTSYS). Because the merger of the Company and SAT qualified as a tax- free reorganization and has been accounted for as a pooling of interests, the consolidated financial statements have been restated for all periods prior to the acquisition of SAT to include the combined financial results of the Company and SAT. The effect of the restatement was to reduce net income and both basic and diluted earnings per share for the three months ended March 31, 2000 by $50,749 and $.01, respectively, and to increase net income for the six months ended March 31, 2000 by $155,390 but decrease basic earnings per share for that period by $.01. Furthermore, since the assets of its subsidiary Integral Marketing, Inc. (IMI) were disposed of during the year ended September 30, 2000, IMI is presented as discontinued operations in the consolidated statements of operations. In the opinion of management, the financial statements reflect all adjustments consisting only of normal recurring accruals necessary for a fair presentation of results for such periods. The financial statements, which are condensed and do not include all disclosures included in the annual financial statements, should be read in conjunction with the consolidated financial statements of the Company for the fiscal year ended September 30, 2000. The results of operations for any interim period are not necessarily indicative of results for the full year. Certain accounts in the prior period financial statements have been reclassified for comparative purposes to conform with the presentation in the current year financial statements. 2. Accounts Receivable ------------------- Accounts receivable at March 31, 2001 and September 30, 2000 consist of the following: March 31, 2001 Sept. 30, 2000 ------------------ ------------------ Billed $ 6,820,254 $ 5,045,075 Unbilled 7,637,043 8,223,557 Other 154,413 233,661 ------------------ ------------------ Total $ 14,611,710 $ 13,502,293 ================== ================== The Company uses the direct write-off method for bad debts. The Company's accounts receivable consist of amounts due on prime contracts and subcontracts with the U.S. Government and contracts with various private organizations. Unbilled accounts receivable consist principally of amounts that are billed in the month following the incurrence of cost or when milestones are delivered under fixed price contracts. All unbilled receivables are expected to be billed and collected within one year. - 7 - INTEGRAL SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 3. Line of Credit -------------- The Company has a line of credit agreement with a local bank for $9.0 million for operating purposes and an additional line of credit with the bank amounting to $6.0 million, to be used for corporate acquisitions. Borrowings under the line are due on demand with interest at the London Inter-Bank Offering Rate (LIBOR), plus a spread of 1.5 to 2.4% based on the ratio of funded debt to earnings before interest, taxes and depreciation (EBITDA). The lines of credit are secured by the Company's billed and unbilled accounts receivable and have certain financial covenants, including minimum net worth and liquidity ratios. The lines expire February 28, 2002. The Company also has a line of credit with another bank for $425,000. This line expires on August 2, 2001. At March 31, 2001, the Company had no amounts outstanding under the lines of credit. 4. Capital Leases -------------- The Company has access to a $2.0 million equipment lease line of credit that had a balance of $445,345 at March 31, 2001. - 8 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 ------------------------------------------------------------ Overview Integral Systems, Inc. builds satellite ground systems for command and control, integration and test, data processing, and simulation. Since its inception in 1982, the Company has provided ground systems for over 120 different satellite missions for communications, science, meteorology, and earth resource applications. The Company has an established domestic and international customer base that includes government and commercial satellite operators, spacecraft and payload manufacturers, and aerospace systems integrators. The Company has developed innovative software products that reduce the cost and minimize the development risk associated with traditional custom-built systems. The Company believes that it was the first to offer a comprehensive COTS (Commercial-Off-the-Shelf) software product line for command and control. As a systems integrator, the Company leverages these products to provide turnkey satellite control facilities that can operate multiple satellites from any manufacturer. These systems offer significant cost savings for customers that have traditionally purchased a separate custom control center for each of their satellites. Through its wholly owned subsidiary SAT Corporation ("SAT"), acquired in August 2000, the Company also offers turnkey systems and software for satellite and terrestrial communications signal monitoring. In March 2001 the Company formed a wholly-owned subsidiary, Integral Systems' Europe S.A.S. ("ISI Europe") with headquarters in Toulouse, France. The new subsidiary serves as the focal point for the support of all of Integral's European business. The consolidated financial statements of the Company presented herein have been restated for all periods prior to the acquisition of SAT to include the combined financial results of the Company and SAT. - 9 - Results of Operations The components of the Company's income statement as a percentage of revenue are depicted in the following table for the three months ended March 31, 2001 and March 31, 2000:
Three Months Ended March 31, % of % of 2001 Revenue 2000 Revenue ------ ------------- ------- ------------ (in thousands) (in thousands) Revenue $9,544 100.0 $11,102 100.0 Cost of Revenue 6,796 71.2 8,433 76.0 ------ ----- ------- ----- Gross Margin 2,748 28.8 2,669 24.0 Operating Expenses SG&A 1,903 19.9 1,855 16.7 Term. Acquisition Costs 0 0 141 1.3 Prod. Amortization 343 3.6 238 2.1 ------ ----- ------- ----- Income from Continuing Oper. 502 5.3 435 3.9 Other Income (Expense) (net) 571 6.0 442 4.0 ------ ----- ------- ----- Income from Continuing Oper. 1,073 11.3 877 7.9 Before Income Taxes Income Taxes 285 3.0 173 1.6 ------ ----- ------- ----- Income from Continuing Oper. 788 8.3 704 6.3 Income from Operations of Discontinued Segment 0 0 33 .3 ------ ----- ------- ----- Net Income $ 788 8.3 $ 737 6.6 ====== ===== ======= =====
Revenue The Company earns revenue from sales of its products and services through contracts that are funded by the U.S. Government, both as a prime contractor or a subcontractor, as well as commercial and international organizations. Internally, the Company classifies revenues in two separate categories on the basis of the contracts' procurement and development requirements: (i) contracts which require compliance with Government procurement and development standards ("Government Services") are classified as government revenue, and (ii) contracts conducted according to commercial practices ("Commercial Products and Services") are classified as commercial revenue, regardless of whether the end customer is a commercial or government entity. Sales of the Company's COTS products are classified as Commercial Products and Services revenue. SAT's and ISI Europe's revenue is also classified as Commercial Products and Services revenue. - 10 - For the three months ended March 31, 2001 and 2000, the Company's revenues were generated from the following sources: Three Months Ended March 31, Revenue Type 2001 2000 ------------ ---- ---- Commercial Products & Services Commercial Users 44% 46% U.S. Government Users 1 1 ---- ---- Subtotal 45 47 Government Services NOAA 40 42 NASA 5 6 Other U.S. Government Users 10 5 ---- ---- Subtotal 55 53 Total 100% 100% ==== ==== Based on the Company's revenue categorization system, the Company classified 45% and 47% of its revenue as Commercial Products and Services revenue with the remaining 55% and 53% classified as Government Services revenue for the three months ended March 31, 2001 and 2000, respectively. By way of comparison, if the revenues were classified strictly according to end-user (independent of the Company's internal revenue categorization system), the U.S. Government would account for 56% and 54% of the total revenues for the three months ended March 31, 2001 and 2000, respectively. On a consolidated basis, revenue decreased 14%, or $1.6 million, to $9.5 million for the three months ended March 31, 2001, from $11.1 million for the three months ended March 31, 2000. The decrease was principally due to a decline in the Company's revenue from pass-through equipment, which declined from approximately $2.7 million in the second quarter last year to $1.7 million in the current quarter, representing a $1.0 million decrease. Most of the remaining revenue decrease is attributable to a $600,000 revenue decline at SAT. Cost of Revenue/Gross Margin The Company computes gross margin by subtracting cost of revenue from revenue. Included in cost of revenue are direct labor expenses, overhead charges associated with the Company's direct labor base and other costs that can be directly related to specific contract cost objectives, such as travel, consultants, equipment, subcontracts and other direct costs. Gross margins on contract revenues vary depending on the type of product or service provided. Generally, license revenues related to the sale of the Company's COTS products have the greatest gross margins because of the minimal associated marginal costs to produce. By contrast, gross margins rates for equipment and subcontract pass-throughs seldom exceed 15%. Engineering service gross margins typically range between 20% and 35%. During the three months ended March 31, 2001, cost of revenue decreased by $1.6 million from $8.4 million during the three months ended March 31, 2000 to $6.8 million at March 31, 2001. The decrease was due primarily to decreases in direct labor, related overhead costs and equipment and subcontract pass- throughs. Cost of revenue expressed as a percentage of revenue decreased to approximately 71.2% at March 31, 2001 compared to 76.0% at March 31, 2000, which decrease was primarily due to a lower percentage of equipment and subcontract costs in the fiscal year 2001 cost of revenue mix. - 11 - The Company's gross margin increased $100,000, or 3% to $2.8 million for the three months ended March 31, 2001 from $2.7 million for the three months ended March 31, 2000 despite $1.6 million of lower revenue. The increase was principally due to a decline in cost of revenue as discussed above. Gross margin as a percentage of revenue was 28.8% during the three months ended March 31, 2001 compared to 24.0% for the three months ended March 31, 2000. This increase is primarily attributable to an increase in SAT's gross margin percentages. Operating Expenses/Income from Operations Selling, General & Administrative expenses (SG&A) increased slightly to approximately $1.9 million during the three months ended March 31, 2001 from $1.8 million in the quarter ended March 31, 2000. As a percentage of revenue, SG&A accounted for 19.9% of revenue for the three months ended March 31, 2001 compared to 16.7% in the quarter ended March 31, 2000. The change in percentage of revenue was primarily due to decreases in revenue discussed above. The Company believes that its current SG&A spending level is representative of current and future trends. Product amortization increased from $238,000 for the three months ended March 31, 2000 to $343,000 for the three months ended March 31, 2001 due to increases in capitalized software development costs. During the three months ended March 31, 2000, the Company incurred approximately $140,000 of costs related to a planned acquisition that did not materialize. Such costs did not recur during the three months ended March 31, 2001. Income from operations increased 15.4% to $502,000 for the three months ended March 31, 2001 from $435,000 for the three months ended March 31, 2000. As a percentage of revenue, income from operations increased to 5.3% for the three months ended March 31, 2001 from 3.9% for the prior year's second quarter. The foregoing dollar and percentage increases are primarily the result of an improvement in the Company's gross margin coupled with the elimination of terminated acquisition costs during the three months ended March 31, 2001. Income from continuing operations before income taxes increased by $200,000 to $1.1 million from $900,000 between the comparable periods principally due to an increase in interest income of $140,000 and the increase in income from operations discussed above. The Company's effective tax rate increased from 19.8% for the three months ended March 31, 2000 to 26.6% for the three months ended March 31, 2001. The increase was a result of a lower mix of tax-free interest income recorded in the current quarter than in the prior year's quarter. Income from discontinued operations was $33,000 during the three months ended March 31, 2000. There was no comparable income from discontinued operations in the current three-month period. As a result of the above, net income rose to approximately $800,000 from approximately $700,000 during the three months ended March 31, 2001 compared to the three months ended March 31, 2000. - 12 - COMPARISON OF THE SIX MONTHS ENDED MARCH 31, 2001 AND MARCH 31, 2000 -------------------------------------------------------------------- The components of the Company's income statement as a percentage of revenue are depicted in the following table for the six months ended March 31, 2001 and March 31, 2000:
Six Months Ended March 31, 2001 % of 2000 % of ------- Revenue ------- Revenue (in thousands) ------- (in thousands) ------- Revenue $18,013 100.0 $23,627 100.0 Cost of Revenue 12,393 68.8 16,771 71.0 ------- ----- ------- ----- Gross Margin 5,620 31.2 6,856 29.0 Operating Expenses SG&A 3,797 21.1 3,853 16.3 Term Acquisition Cost 0 0 141 .6 Prod. Amortization 685 3.8 475 2.0 ------- ----- ------- ----- Income from Continuing Oper. 1,138 6.3 2,387 10.1 Other Income (Expense) (net) 1,272 7.1 644 2.7 ------- ----- ------- ----- Income from Continuing Oper. Before Income Taxes 2,410 13.4 3,031 12.8 Income Taxes 570 3.2 944 4.0 ------- ----- ------- ----- Income from Continuing Oper. 1,840 10.2 2,087 8.8 Income from Operations of Discontinued Segment 0 0 116 .5 ------- ----- ------- ----- Net Income $ 1,840 10.2 $ 2,203 9.3 ======= ===== ======= =====
- 13 - Revenue - ------- For the six months ended March 31, 2001 and 2000 the Company's revenues were generated from the following sources: Six Months Ended March 31, Revenue Type 2001 2000 ------------ Commercial Products and Services Commercial Users 48% 49% U.S. Government Users 1 1 ---- ---- Subtotal 49 50 Government Services NOAA 38 40 NASA 5 6 Other U.S. Government Users 8 4 ---- ---- Subtotal 51 50 Total 100% 100% ==== ==== Based on the Company's revenue categorization system, the Company classified 49% and 50% of its revenue as Commercial Products and Services revenue with the remaining 51% and 50% classified as Government Services revenue for the six months ended March 31, 2001 and 2000, respectively. By way of comparison, if the revenues were classified strictly according to end-user (independent of the Company's internal revenue categorization system), the U.S. Government would account for 52% and 51% of the total revenues for the six months ended March 31, 2001 and 2000, respectively. On a consolidated basis, revenue decreased 24%, or $5.6 million, to $18.0 million for the six months ended March 31, 2001 from $23.6 million for the six months ended March 31, 2000. The decrease was due in part to a decline in the Company's revenue from pass-through equipment, which declined from approximately $4.9 million in the first half last year to $2.9 million in the current half year, representing a $2.0 million decrease. Most of the remaining revenue decrease is attributable to a $2.7 million revenue decline at SAT, which recorded in excess of 72% of its entire fiscal year 2000 revenue during the first half of that year. Licenses and engineering service revenues also declined by $900,000 between the periods being compared. Cost of Revenue/Gross Margin During the six months ended March 31, 2001, cost of revenue decreased 26.1% or $4.4 million to $12.4 million from $16.8 million during the six months ended March 31, 2000. The decrease was due to decreases in direct labor, related overhead costs and equipment and subcontract pass-throughs. Cost of revenue expressed as a percentage of revenues decreased to 68.8% for the six months ended March 31, 2001 from 71.0% for the six months ended March 31, 2000, which decrease was primarily due to a lower percentage of equipment and subcontract costs in the fiscal year 2001 cost of revenue mix. The Company's gross margin decreased $1.2 million, or 18.0%, to $5.6 million for the six months ended March 31, 2001 from $6.8 million for the six months ended March 31, 2000. The decrease was principally due to the $5.6 million decline in revenue discussed above. Gross margin as a percentage of - 14 - revenue was 31.2% during the six months ended March 31, 2001 compared to 29.0% for the six months ended March 31, 2000. This increase is primarily attributable to an increase in SAT's gross margin percentages. Operating Expenses/Income from Operations SG&A basically remained unchanged at $3.8 million for the six months ended March 31, 2001 when compared with the six months ended March 31, 2000. As a percentage of revenue, SG&A accounted for 21.1% of revenue for the six months ended March 31, 2001 compared to 16.3% in the half year ended March 31, 2000. The change in percentage of revenue was primarily due to the decreases in revenue discussed above. The Company believes that its current SG&A spending level is representative of current and future trends. Product amortization increased to $685,000 for the six months ended March 31, 2001 compared to $475,000 for the six months ended March 31, 2000. The Company recorded expenses of approximately $140,000 during the six months ended March 31, 2000 with respect to an unsuccessful acquisition attempt. Such costs did not recur during the six months ended March 31, 2001. Income from operations decreased $1.3 million, or 52.3%, to $1.1 million for the six months ended March 31, 2001 from $2.4 million for the six months ended March 31, 2000, which decrease was primarily due to decreases in gross margin dollars described above coupled with higher product amortization expenses. As a percentage of revenue, income from operations decreased to 6.3% for the six months ended March 31, 2001 from 10.1% for the prior fiscal year's first half. This decrease was principally the result of a higher percentage of SG&A and other operating expenses against revenue in the first six months of fiscal year 2001 compared to the same half of the last fiscal year. During the six months ended March 31, 2001, the Company recorded $1.4 million of interest income, which was principally derived from cash invested from the Company's two private placement equity infusions that occurred in June 1999 and February 2000. Since a significant portion of such investment was related to tax-free debt securities, the Company's effective tax rate was only 23.6% for the six months ended March 31, 2001 compared to 31.2% for the six months ended March 31, 2000. Income from discontinued operations was $116,000 during the six months ended March 31, 2000. There was no comparable income from discontinued operations in the current six-month period. As a result of the above, net income decreased to approximately $1.8 million from approximately $2.2 million during the six months ended March 31, 2001 compared to the six months ended March 31, 2000. Outlook ------- This outlook section contains forward-looking statements, including but not necessarily limited to projections, all of which are based on current expectations. There is no assurance that the Company's projections will in fact be achieved and these projections do not reflect any acquisitions or divestitures, which may occur in the future. Reference should be made to the various important factors listed under the heading "Forward Looking Statements" that could cause actual future results to differ materially. At this time, the Company has a backlog of work to be performed and it may receive additional contract awards based on proposals in the pipeline. Management believes that operating results for future periods will improve based on the following assumptions: - 15 - . Demand for satellite technology and related products and services will continue to expand; and . Sales of its software products and engineering services will continue to increase. Looking forward to fiscal year 2001 in its entirety, the Company is anticipating revenue levels comparable to amounts recorded in fiscal year 2000. Operating income, net income, and fully diluted earnings per share (excluding discontinued operations and certain non-recurring items recorded last fiscal year), are anticipated to be approximately 10% to 20% greater for fiscal year 2001 than the amounts recorded in fiscal year 2000. LIQUIDITY AND CAPITAL RESOURCES ------------------------------- Since the Company's inception in 1982, it has been profitable on an annual basis and has generally financed its working capital needs through internally generated funds, supplemented by borrowings under the Company's general line of credit facility with a commercial bank and the proceeds from the Company's initial public offering in 1988. In June 1999, the Company supplemented its working capital position by raising approximately $19.7 million (net) through the private placement of approximately 1.2 million shares of its common stock. In February 2000, the Company raised an additional $40.9 million (net) for use in connection with potential acquisitions and other general corporate purposes through the private placement of 1.4 million additional shares of its common stock. For the six months ended March 31, 2001, the Company generated approximately $1.3 million of cash from operating activities, and used approximately $1.5 million for investing activities, including approximately $1.4 million for newly capitalized software development costs and $900,000 for the purchase of fixed assets. The Company has access to a general line of credit facility through which it could borrow up to $9.0 million for operating purposes and has an additional line of credit with the bank amounting to $6.0 million, which can be used for corporate acquisitions. Borrowings under the line are due on demand with interest at the London Inter-Bank Offering Rate (LIBOR), plus a spread of 1.5 to 2.4% based on the ratio of funded debt to earnings before interest, taxes and depreciation (EBITDA). The lines of credit are secured by the Company's billed and unbilled accounts receivable and have certain financial covenants, including minimum net worth and liquidity ratios. The lines expire February 28, 2002. The Company also has a line of credit with another bank for $425,000. This line expires on August 2, 2001. At March 31, 2001, the Company had no amounts outstanding under the lines of credit. The Company also has access to a $2.0 million equipment lease line of credit that had a balance of approximately $445,000 at March 31, 2001. The Company currently anticipates that its current cash balances, amounts available under its lines of credit and net cash provided by operating activities will be sufficient to meet its working capital and capital expenditure requirements for at least the next twelve months. The Company believes that inflation did not have a material impact on the Company's revenues or income from operations during the six months ended March 31, 2001 or in past fiscal years. - 16 - FORWARD LOOKING STATEMENTS -------------------------- Certain of the statements contained in this section, including those under the headings "Outlook" and "Liquidity and Capital Resources," and in other parts of this 10-Q, are forward looking. In addition, from time to time, the Company may publish forward looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, research and development activities and similar matters. Forward- looking statements can be identified by the use of forward-looking terminology such as "may", "will", "believe", "expect", "anticipate", "estimate", "continue", or other similar words, including statements as to the intent, belief, or current expectations of the Company and its directors, officers, and management with respect to the Company's future operations, performance, or positions or which contain other forward-looking information. These forward- looking statements are predictions. No assurances can be given that the future results indicated, whether expressed or implied, will be achieved. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. While the Company believes that these statements are and will be accurate, a variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's statements. The Company's business is dependent upon general economic conditions and upon various conditions specific to its industry, and future trends cannot be predicted with certainty. Particular risks and uncertainties that may effect the Company's business, other than those described elsewhere herein, include the following: . A significant portion of the Company's revenue is derived from contracts or subcontracts funded by the U.S. Government, which are subject to termination without cause, government regulations and audits, competitive bidding, and the budget and funding process of the U.S. Government. . The presence of competitors with greater financial resources and their strategic response to the Company's new services. . The potential obsolescence of the Company's services due to the introduction of new technologies. . The response of customers to the Company's marketing strategies and services. . The Company's commercial contracts are subject to strict performance and other requirements. . The intense competition in the satellite ground system industry could harm the Company's financial performance. . Changes in activity levels in the Company's core markets. While sometimes presented with numerical specificity, these forward-looking statements are based upon a variety of assumptions relating to the business of the Company, which although considered reasonable by the Company, may not be realized. Because of the number and range of the assumptions underlying the Company's forward-looking statements, many of which are subject to significant uncertainties and contingencies beyond the reasonable control of the Company, some of the assumptions inevitably will not materialize and unanticipated events and circumstances may occur subsequent to the date of this document. These forward-looking statements are based on current information and expectation, and the Company assumes no obligation to update. Therefore, the actual experience of the Company and the results achieved during the period covered by any particular forward-looking statement should not be regarded as a representation by the Company or any other person that these estimates will be realized, and actual results may vary materially. There can be no assurance that any of these expectations will be realized or that any of the forward-looking statements contained herein will prove to be accurate. - 17 - ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. PART II. OTHER INFORMATION - --------------------------- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits -------- 3.1 Articles of Restatement of the Company (Incorporated by reference to the Registration Statement on Form S-3 (File No. 333-82499) filed with the Commission on July 8, 1999). 3.2 Amended and Restated Bylaws of the Company (Incorporated by reference to the Company's Annual Report on Form 10-K for the Fiscal Year ended September 30, 2000 filed with the Commission on December 21, 2000). 11.1 Computation of Per Share Earnings. b. Reports on Form 8-K ------------------- None. - 18 - SIGNATURES ---------- Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INTEGRAL SYSTEMS, INC. --------------------- (Registrant) Date: May 14, 2001 By: /s/ ------------------ -------------------------------------- Thomas L. Gough President & Chief Operating Officer Date: May 14, 2001 By: /s/ ------------------ -------------------------------------- Elaine M. Parfitt Vice President & Chief Financial Officer - 19 - EX-11.1 2 dex111.txt COMPUTATION OF PER SHARE EARNINGS Exhibit 11.1 INTEGRAL SYSTEMS INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE
Three Months Ended Six Months Ended March 31, March 31, 2001 2000 2001 2000 ------------- ------------ ----------- ----------- Basic: Weighted average number of common shares 9,452,318 8,620,006 9,446,718 8,243,002 Net Income $ 788,033 $ 736,689 $1,840,273 $2,202,941 Earnings per share Income from Continuing Operations $ 0.08 $ 0.08 $ 0.19 $ 0.25 Income from Discontinued Operations $ 0.00 $ 0.01 $ 0.00 $ 0.01 ---------- ---------- ---------- ---------- Net Income $ 0.08 $ 0.09 $ 0.19 $ 0.26 ========== ========== ========== ========== Diluted: Weighted average number of common shares 9,608,517 9,158,494 9,586,787 8,762,992 Net Income $ 788,033 $ 736,689 $1,840,273 $2,202,941 Earnings per share Income from Continuing Operations $ 0.08 $ 0.08 $ 0.19 $ 0.24 Income from Discontinued Operations $ 0.00 $ 0.00 $ 0.00 $ 0.01 ---------- ---------- ---------- ---------- Net Income $ 0.08 $ 0.08 $ 0.19 $ 0.25 ========== ========== ========== ==========
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