UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q/A
AMENDMENT 1
(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, 2004
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 incorporation or organization) | (I.R.S. Employer 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.
Yesx No¨
Indicate by checkmark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act).
Yesx No¨
Registrant had 9,960,344 shares of common stock outstanding as of April 23, 2004.
EXPLANATORY NOTE
Integral Systems, Inc. hereby amends its Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 for the sole purpose of adding conforming signatures on the signature pages of this Form 10-Q. No other changes have been made. In connection with the filing of this amendment and pursuant to Rule 12b-15 under the Securities Exchange Act of 1934, as amended, the Company is including certain currently dated certifications. This amendment continues to speak as of the date of the original filing of the Form 10-Q and the Company has not updated the disclosure in this amendment to speak to any later date.
INTEGRAL SYSTEMS, INC.
EXPLANATORY NOTE
Integral Systems, Inc. hereby amends the Signature Page and Exhibits 10, 31 and 32 of its Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 for the sole purpose of conforming signature lines. No other changes have been made.
PART I. FINANCIAL INFORMATION
| Item 1. | Financial Statements |
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 2004 and September 30, 2003
| March 31, 2004 | September 30, 2003 | |||||
| (unaudited) | ||||||
ASSETS | ||||||
CURRENT ASSETS | ||||||
Cash | $ | 20,458,774 | $ | 22,526,718 | ||
Marketable Securities | 28,263,849 | 28,188,935 | ||||
Accounts Receivable | 34,219,917 | 32,226,317 | ||||
Notes Receivable | 260,708 | 257,583 | ||||
Prepaid Expenses | 474,442 | 361,743 | ||||
Inventory | 1,673,834 | 973,702 | ||||
Deferred Income Tax | 876,585 | 876,585 | ||||
TOTAL CURRENT ASSETS | 86,228,109 | 85,411,583 | ||||
FIXED ASSETS | ||||||
Electronic Equipment | 4,553,338 | 4,814,843 | ||||
Furniture & Fixtures | 803,207 | 776,323 | ||||
Leasehold Improvements | 929,100 | 971,965 | ||||
Software Purchases | 776,101 | 724,537 | ||||
SUBTOTAL - FIXED ASSETS | 7,061,746 | 7,287,668 | ||||
Less: Accum. Depreciation | 3,486,267 | 3,362,553 | ||||
TOTAL FIXED ASSETS | 3,575,479 | 3,925,115 | ||||
OTHER ASSETS | ||||||
Notes Receivable - Non-Current | 366,439 | 430,917 | ||||
Intangible Assets, net | 774,993 | 1,419,522 | ||||
Goodwill | 25,715,264 | 25,715,264 | ||||
Software Development Costs | 5,326,432 | 5,754,971 | ||||
Deposits, Deferred Charges, and Other | 208,513 | 135,827 | ||||
TOTAL OTHER ASSETS | 32,391,641 | 33,456,501 | ||||
TOTAL ASSETS | $ | 122,195,229 | $ | 122,793,199 | ||
The accompanying notes are an integral part of these consolidated financial statements.
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INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 2004 and September 30, 2003
| March 31, 2004 | September 30, 2003 | |||||||
| (unaudited) | ||||||||
LIABILITIES & STOCKHOLDERS’ EQUITY | ||||||||
CURRENT LIABILITIES | ||||||||
Accounts Payable | $ | 5,506,281 | $ | 4,544,677 | ||||
Accrued Expenses | 5,131,748 | 12,507,716 | ||||||
Capital Leases Payable | 33,665 | 32,270 | ||||||
Billings in Excess of Cost | 6,715,494 | 7,009,629 | ||||||
Income Taxes Payable | 139,287 | 601,978 | ||||||
TOTAL CURRENT LIABILITIES | 17,526,475 | 24,696,270 | ||||||
LONG TERM LIABILITIES | ||||||||
Capital Leases Payable | 43,050 | 60,238 | ||||||
Deferred Income Taxes | 2,450,077 | 2,408,105 | ||||||
TOTAL LONG TERM LIABILITIES | 2,493,127 | 2,468,343 | ||||||
STOCKHOLDERS’ EQUITY | ||||||||
Common Stock, $.01 par value, 40,000,000 shares authorized, and 9,953,594 and 9,723,802 shares issued and outstanding at March 31, 2004 and September 30, 2003, respectively | 99,536 | 97,238 | ||||||
Additional Paid-in Capital | 81,213,398 | 77,019,957 | ||||||
Retained Earnings | 20,905,466 | 18,588,185 | ||||||
Accumulated other comprehensive income | (42,773 | ) | (76,794 | ) | ||||
TOTAL STOCKHOLDERS’ EQUITY | 102,175,627 | 95,628,586 | ||||||
TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY | $ | 122,195,229 | $ | 122,793,199 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three Months Ended March 31, | Six Months Ended March 31, | |||||||||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||||||
Revenue | $ | 22,508,021 | $ | 19,956,596 | $ | 42,562,322 | $ | 39,526,377 | ||||||||
Cost of Revenue | ||||||||||||||||
Direct Labor | 5,000,074 | 4,514,164 | 9,271,044 | 8,700,646 | ||||||||||||
Overhead Costs | 3,676,326 | 3,199,103 | 7,191,199 | 6,370,311 | ||||||||||||
Travel and Other Direct Costs | 672,061 | 579,698 | 1,220,776 | 1,171,041 | ||||||||||||
Direct Equipment & Subcontracts | 5,215,790 | 4,789,988 | 10,310,818 | 10,794,357 | ||||||||||||
Total Cost of Revenue | 14,564,251 | 13,082,953 | 27,993,837 | 27,036,355 | ||||||||||||
Gross Margin | 7,943,770 | 6,873,643 | 14,568,485 | 12,490,022 | ||||||||||||
Selling, General & Administrative | 3,228,720 | 2,936,196 | 6,085,163 | 5,670,652 | ||||||||||||
Research & Development | 915,251 | 578,885 | 1,706,492 | 1,108,502 | ||||||||||||
Product Amortization | 761,381 | 747,231 | 1,522,762 | 1,494,462 | ||||||||||||
Intangible Asset Amortization | 322,264 | 322,265 | 644,529 | 644,530 | ||||||||||||
Income From Operations | 2,716,154 | 2,289,066 | 4,609,539 | 3,571,876 | ||||||||||||
Other Income (Expense) | ||||||||||||||||
Interest Income | 140,323 | 139,365 | 309,409 | 304,624 | ||||||||||||
Interest Expense | (1,739 | ) | (2,389 | ) | (4,145 | ) | (4,982 | ) | ||||||||
Gain on sale of marketable securities | 0 | 0 | 21,439 | 8,327 | ||||||||||||
Miscellaneous, net | (65,735 | ) | (59,658 | ) | (283,963 | ) | (237,547 | ) | ||||||||
Total Other Income | 72,849 | 77,318 | 42,740 | 70,422 | ||||||||||||
Income Before Income Tax | 2,789,003 | 2,366,384 | 4,652,279 | 3,642,298 | ||||||||||||
Provision for Income Taxes | 1,008,768 | 881,630 | 1,698,233 | 1,307,736 | ||||||||||||
Net Income | $ | 1,780,235 | $ | 1,484,754 | $ | 2,954,046 | $ | 2,334,562 | ||||||||
Weighted Avg. Number of Common Shares: | ||||||||||||||||
Basic | 9,955,794 | 9,710,205 | 9,843,386 | 9,705,717 | ||||||||||||
Diluted | 10,076,410 | 9,758,275 | 9,977,816 | 9,751,072 | ||||||||||||
Earnings per Share (Basic) | $ | 0.18 | $ | 0.15 | $ | 0.30 | $ | 0.24 | ||||||||
Earnings per Share (Diluted) | $ | 0.18 | $ | 0.15 | $ | 0.30 | $ | 0.24 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE SIX MONTHS ENDED MARCH 31, 2004
(Unaudited)
Number of Shares | Common Stock At Par Value | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income | Total | ||||||||||||||||||
Balance September 30, 2003 | 9,723,802 | $ | 97,238 | $ | 77,019,957 | $ | 18,588,185 | $ | (76,794 | ) | $ | 95,628,586 | |||||||||||
Net income | — | — | — | 2,954,046 | — | 2,954,046 | |||||||||||||||||
Unrealized Gain on Marketable Securities (net of deferred tax of $41,972) | — | — | — | — | 65,649 | 65,649 | |||||||||||||||||
Unrealized Loss on Foreign Currency Exchange Contracts | — | — | — | — | (86,404 | ) | (86,404 | ) | |||||||||||||||
Effect of Currency Translation | — | — | — | — | 54,776 | 54,776 | |||||||||||||||||
Total Comprehensive Income | 2,954,046 | 34,021 | 2,988,067 | ||||||||||||||||||||
Repurchased Shares | (4,650 | ) | (46 | ) | (35,236 | ) | (46,103 | ) | — | (81,385 | ) | ||||||||||||
Shares issued to acquire RT Logic | 209,926 | 2,099 | 3,817,924 | — | — | 3,820,023 | |||||||||||||||||
Stock Options Exercised | 24,516 | 245 | 410,753 | — | — | 410,998 | |||||||||||||||||
Declared Dividends | — | — | — | (590,662 | ) | — | (590,662 | ) | |||||||||||||||
Balance March 31, 2004 | 9,953,594 | $ | 99,536 | $ | 81,213,398 | $ | 20,905,466 | $ | (42,773 | ) | $ | 102,175,627 | |||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended March 31, 2004 and 2003
(Unaudited)
| For the Six Months Ended March 31, | ||||||||
| 2004 | 2003 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 2,954,046 | $ | 2,334,562 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 3,001,933 | 2,904,086 | ||||||
Reserve for doubtful accounts | 65,325 | 0 | ||||||
Gain on sale of marketable securities | (21,439 | ) | (8,327 | ) | ||||
Gain on warrants | (95,000 | ) | 0 | |||||
Loss on disposal of fixed assets | 33,604 | 22,396 | ||||||
Changes in operating assets and liabilities, net: | ||||||||
Accounts receivable and other receivables | (2,041,232 | ) | (1,336,112 | ) | ||||
Prepaid expenses and deposits | (87,343 | ) | 381,144 | |||||
Inventories | (700,132 | ) | 265,568 | |||||
Accounts payable | 363,315 | (2,915,247 | ) | |||||
Accrued expenses | (3,646,736 | ) | (221,496 | ) | ||||
Billings in excess of revenue | (294,135 | ) | 523,094 | |||||
Income taxes payable, net | (462,691 | ) | 3,472,284 | |||||
Total adjustments | (3,884,531 | ) | 3,087,390 | |||||
Net cash (used in) provided by operating activities | (930,485 | ) | 5,421,952 | |||||
Cash flows from investing activities: | ||||||||
Purchases of marketable securities | (115,691 | ) | 0 | |||||
Sale of marketable securities | 169,837 | 16,063,000 | ||||||
Issuance of Notes Receivable | 0 | 5,182,958 | ||||||
Proceeds from payments on notes receivable | 61,353 | 0 | ||||||
Acquisition of fixed assets | (517,092 | ) | (734,614 | ) | ||||
Software development costs | (1,094,223 | ) | (1,188,769 | ) | ||||
Acquisition of RT Logic, net of cash received | 0 | (13,407,596 | ) | |||||
Net cash (used in) provided by investing activities | (1,495,816 | ) | 5,914,979 | |||||
Cash flows from financing activities: | ||||||||
Proceeds from issuance of common stock | 410,998 | 119,490 | ||||||
Stock repurchases | (81,385 | ) | (6,251,644 | ) | ||||
Note Payable | 0 | (802,190 | ) | |||||
Capital lease obligation payments | (15,793 | ) | (14,513 | ) | ||||
Net cash provided by (used in) financing activities | 313,820 | (6,948,857 | ) | |||||
Effect of currency translations | 44,537 | 0 | ||||||
Net (decrease) increase in cash | (2,112,481 | ) | 4,388,074 | |||||
Cash – beginning of year | 22,526,718 | 16,064,363 | ||||||
Cash - end of period | $ | 20,458,774 | $ | 20,452,437 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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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), Newpoint Technologies, Inc. (Newpoint), Real Time Logic, Inc. (RT Logic), and Integral Systems Europe (ISI Europe). All significant intercompany accounts and transactions have been eliminated in consolidation.
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, 2003. The results of operations for any interim period are not necessarily indicative of results for the full year.
| 2. | Accounts Receivable |
Accounts receivable at March 31, 2004 and September 30, 2003 consist of the following:
| March 31, 2004 | Sept. 30, 2003 | |||||||
Billed | $ | 12,855,376 | $ | 12,816,226 | ||||
Unbilled | 21,236,156 | 19,081,023 | ||||||
Other | 277,578 | 412,936 | ||||||
Reserve | (149,193 | ) | (83,868 | ) | ||||
Total | $ | 34,219,917 | $ | 32,226,317 | ||||
The Company’s accounts receivable consist of amounts due on prime contracts and subcontracts with the U.S. Government and contracts with various commercial and international organizations. Unbilled accounts receivable consist principally of amounts that are billed in the month following the incurrence of cost, amounts related to indirect cost variances on cost reimbursable type contracts or amounts related to milestones that are delivered under fixed price contracts. All unbilled receivables are expected to be billed and collected within one year.
The reserve for doubtful accounts is determined based upon management’s best estimate of potentially uncollectible accounts receivable.
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INTEGRAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
| 3. | Line of Credit |
The Company has a line of credit agreement with a local bank for $10.0 million for general corporate purposes. 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 line of credit is secured by the Company’s billed and unbilled accounts receivable and contains certain customary covenants, including minimum net worth and liquidity ratios. The line expires February 28, 2006. The Company had no balance outstanding at March 31, 2004 under the line of credit.
The Company also has access to a $2.0 million equipment lease line of credit that had a balance of approximately $76,700 at March 31, 2004. The outstanding balance is payable over a 26-month period and bears interest at a rate of 8.8% per annum.
| 4. | Inventory |
Inventory consists of service parts and materials and is stated at the lower of cost or market using the first-in, first-out (FIFO) method of accounting.
| 5. | Stock-Based Compensation |
The Company recognizes expense for stock-based compensation arrangements in accordance with the provisions of Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees, and related Interpretations. Accordingly, compensation cost is recognized for the excess of the estimated fair value of the stock at the grant date over the exercise price, if any.
The effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123,Accounting for Stock-Based Compensation, to stock-based employee compensation for the three and six months ended March 31, 2004 is as follows:
Three Months Ended March 31, | Six Months Ended March 31, | |||||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||
Net income, as reported | $ | 1,780,235 | $ | 1,484,754 | $ | 2,954,046 | $ | 2,334,562 | ||||
Deduct: Total stock-based employee compensation expense determined under fair value-based method for all awards | 386,140 | 430,211 | 833,484 | 841,433 | ||||||||
Add: Stock-based employee compensation included in net income | — | — | — | — | ||||||||
Pro forma net income (loss) | $ | 1,394,095 | $ | 1,054,543 | $ | 2,120,562 | $ | 1,493,129 | ||||
Earnings per share: | ||||||||||||
As reported - basic | $ | 0.18 | $ | 0.15 | $ | 0.30 | $ | 0.24 | ||||
- dilutive | $ | 0.18 | $ | 0.15 | $ | 0.30 | $ | 0.24 | ||||
Pro forma - basic | $ | 0.14 | $ | 0.11 | $ | 0.22 | $ | 0.15 | ||||
- dilutive | $ | 0.14 | $ | 0.11 | $ | 0.21 | $ | 0.15 | ||||
These pro forma amounts are not necessarily indicative of future effects of applying the fair value-based method due to, among other things, the vesting period of the stock options and the fair value of the additional stock options issued in future years.
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INTEGRAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
| 6. | Foreign Currency Exchange Contracts |
The Company periodically uses foreign currency exchange contracts to hedge risk associated with its European long-term contracts. Under Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” all derivative instruments must be recorded on the balance sheet as an asset or liability with any gain or loss recorded as a component of accumulated other comprehensive income until recognized in earnings. The fair value of the exchange contracts is based upon quoted market prices. If a derivative does not qualify for hedge accounting the gain or loss is recorded through earnings. For the six month period ended March 31, 2004, the Company recorded as accumulated other comprehensive income an unrealized loss of $86,404. The Company also recorded a realized gain of $14,440 during the same period.
| 7. | Business Segment Information |
The Company operates in four business segments:
| • | satellite ground systems; |
| • | satellite and terrestrial communications signal monitoring (CSM); |
| • | equipment monitoring and control; and |
| • | space communication systems. |
Integral Systems, Inc. and ISI Europe build satellite ground systems for command and control, integration and test, data processing, and simulation.
Through its wholly owned subsidiary SAT, the Company offers turnkey systems and software for satellite and terrestrial communications signal monitoring.
The Company provides equipment monitoring and control software to satellite operators and the telecommunications industry through its wholly owned subsidiary Newpoint.
Through its wholly owned subsidiary RT Logic (acquired October 2002), the Company manufactures telemetry processing components and systems for military applications, including tracking stations, control centers, and range operations.
The accounting policies of the segments are the same as those described in Note 1. The Company evaluates the performance of each segment based on operating income. There are no inter-segment allocations of overhead and all corporate-level expenses are included in the Satellite Ground Systems segment.
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INTEGRAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
| 8. | Business Segment Information (continued) |
Summarized financial information by business segment is as follows:
Three Months March 31, 2004 | Three Months March 31, 2003 | Six Months March 31, 2004 | Six Months March 31, 2003 | |||||||||||||
Revenue | ||||||||||||||||
Satellite ground systems | $ | 15,202,196 | $ | 14,087,008 | $ | 28,977,355 | $ | 28,714,897 | ||||||||
Satellite ground systems – intercompany | 333,327 | 257,053 | 726,659 | 636,230 | ||||||||||||
Satellite & terrestrial CSM | 1,126,066 | 1,103,723 | 2,241,078 | 1,589,537 | ||||||||||||
Satellite & terrestrial CSM - intercompany | 142,412 | N/A | 216,492 | 753 | ||||||||||||
Equip. monitoring & control | 384,803 | 521,161 | 803,407 | 1,373,997 | ||||||||||||
Equip. monitoring & control – intercompany | 387,064 | N/A | 579,253 | 7,847,946 | ||||||||||||
Space communication systems | 5,794,956 | 4,244,704 | 10,540,482 | 1,406,745 | ||||||||||||
Space communication systems – intercompany | 261,898 | 675,416 | 830,787 | |||||||||||||
Elimination of intercompanySales | (1,124,701 | ) | (932,469 | ) | (2,353,191 | ) | (2,043,728 | ) | ||||||||
Total Revenue | $ | 22,508,021 | $ | 19,956,596 | $ | 42,562,322 | $ | 39,526,377 | ||||||||
Operating Income | ||||||||||||||||
Satellite ground systems | $ | 798,281 | $ | 1,338,277 | $ | 1,026,535 | $ | 2,221,501 | ||||||||
Satellite ground systems – intercompany | (76 | ) | 5,684 | (3,429 | ) | 2,812 | ||||||||||
Satellite & terrestrial CSM | (261,647 | ) | (253,259 | ) | (224,292 | ) | (835,776 | ) | ||||||||
Satellite & terrestrial CSM - intercompany | 307 | N/A | 307 | N/A | ||||||||||||
Equip. monitoring & control | 18,390 | (183,453 | ) | 22,643 | (347,494 | ) | ||||||||||
Equip. monitoring & control – intercompany | (3,620 | ) | N/A | (3,620 | ) | N/A | ||||||||||
Space communication systems | 2,161,131 | 1,387,501 | 3,784,653 | 2,533,645 | ||||||||||||
Space communication systems– intercompany | N/A | 259 | N/A | (10 | ) | |||||||||||
Elimination of intercompany Operating Income | 3,389 | (5,943 | ) | 6,742 | (2,802 | ) | ||||||||||
Total Operating Income | $ | 2,716,155 | $ | 2,289,066 | $ | 4,609,539 | $ | 3,571,876 | ||||||||
Total Assets | ||||||||||||||||
Satellite ground systems | $ | 84,763,053 | $ | 75,477,595 | ||||||||||||
Satellite & terrestrial CSM | 3,478,387 | 3,613,305 | ||||||||||||||
Equip. monitoring & control | 3,691,264 | 4,358,534 | ||||||||||||||
Space communication systems | 45,616,467 | 33,792,760 | ||||||||||||||
Elimination of intercompany accounts receivable | (15,353,942 | ) | (8,647,313 | ) | ||||||||||||
Total Assets | $ | 122,195,229 | $ | 108,594,881 | ||||||||||||
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| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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 190 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, 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, ISI Europe, with headquarters in Toulouse, France. ISI Europe serves as the focal point for the support of all of Integral’s European business.
On January 30, 2002, the Company acquired Newpoint. Newpoint provides equipment monitoring and control software to satellite operators and the telecommunications industry.
In October 2002, the Company acquired RT Logic. RT Logic manufactures telemetry processing components and systems for military applications, including tracking stations, control centers, and range operations.
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COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
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, 2004 and March 31, 2003:
| Three Months Ended March 31, | ||||||||||
| 2004 | % of Revenue | 2003 | % of Revenue | |||||||
| (in thousands) | (in thousands) | |||||||||
Revenue | $ | 22,508 | 100.0 | $ | 19,957 | 100.0 | ||||
Cost of Revenue | 14,564 | 64.7 | 13,083 | 65.6 | ||||||
Gross Margin | 7,944 | 35.3 | 6,874 | 34.4 | ||||||
Operating Expenses | ||||||||||
Selling, General & Admin. (SG&A) | 3,229 | 14.3 | 2,936 | 14.7 | ||||||
Research and Development | 915 | 4.1 | 579 | 2.9 | ||||||
Product Amortization | 761 | 3.4 | 747 | 3.7 | ||||||
Amortization-Intangible Assets | 323 | 1.4 | 323 | 1.6 | ||||||
Income from Operations | 2,716 | 12.1 | 2,289 | 11.5 | ||||||
Other Income (Expense) (net) | 73 | 0.3 | 78 | .4 | ||||||
Income Before Income Taxes | 2,789 | 12.4 | 2,367 | 11.9 | ||||||
Income Taxes | 1,009 | 4.5 | 882 | 4.5 | ||||||
Net Income | $ | 1,780 | 7.9 | $ | 1,485 | 7.4 | ||||
Revenue
The Company earns revenue, both as a prime contractor and a subcontractor, from sales of its products and services through contracts that are funded by the U.S. Government as well as commercial and international organizations.
For the three months ended March 31, 2004 and 2003, the Company’s revenues were generated from the following sources:
| Three Months Ended March 31, | ||||||
Revenue Type | 2004 | 2003 | ||||
Government Revenue | ||||||
NOAA | 16 | % | 15 | % | ||
Air Force | 53 | 49 | ||||
Other U.S. Government Users | 6 | 10 | ||||
Subtotal | 75 | 74 | ||||
Commercial Revenue | 25 | 26 | ||||
Total | 100 | % | 100 | % | ||
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On a consolidated basis, revenue increased 12.8%, or $2.5 million, to $22.5 million for the three months ended March 31, 2004, from $20.0 million for the three months ended March 31, 2003. Revenue for the three-month periods ended March 31, 2004 and 2003 for each of the Company’s segments is shown in the following table:
Segment | Three Months March 31, 2004 | Three Months Ended March 31, 2003 | Increase/ (Decrease) | |||||||||
| (in thousands) | (in thousands) | (in thousands) | ||||||||||
Revenue | ||||||||||||
Satellite Ground Systems (Integral) | $ | 15,536 | $ | 14,344 | $ | 1,192 | ||||||
Satellite & Terrestrial CSM (SAT) | 1,268 | 1,104 | 164 | |||||||||
Equip. Monitoring & Control (Newpoint) | 772 | 521 | 251 | |||||||||
Space Communication Systems (RT Logic) | 6,057 | 4,920 | 1,137 | |||||||||
Elimination | (1,125 | ) | (933 | ) | (192 | ) | ||||||
Total Revenue | $ | 22,508 | $ | 19,956 | $ | 2,552 | ||||||
Revenue increases in the Company’s Satellite Ground Systems segment primarily pertain to revenue growth from the Segment’s European subsidiary (ISI Europe), which reports through that segment’s commercial division. Revenue for ISI Europe increased by $950,000 for the periods compared as a result of new contract awards to this entity. The Company also recorded approximately $430,000 of revenue during the three months ended March 31, 2004 from this segment’s newly established Antenna division. There were no such revenues recorded during the corresponding three-month period last fiscal year.
Revenue increases for SAT, Newpoint and RT Logic resulted from increased order bookings and increased product shipments to customers.
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 40%. These definitions and ratios generally apply across all segments, although margins on equipment costs for RT Logic are generally greater than the equipment margins in the other segments because RT Logic’s business is more hardware intensive.
- 12 -
During the three months ended March 31, 2004, cost of revenue increased by 11.3%, or $1.5 million, compared to the same period during the prior year, increasing from $13.1 million during the three months ended March 31, 2003 to $14.6 million during the three months ended March 31, 2004. Gross margin increased from $6.9 million to $7.9 million, an increase of $1.0 million, or 15.6%, during the periods being compared. Cost of revenue and gross margin for the three months ended March 31, 2004 and 2003 for each of the Company’s segments are shown in the following table:
Segment | Three Months Mar. 31, 2004 | Three Months Ended Mar. 31, 2003 | Increase/ (Decrease) | |||||||||
| (in thousands) | (in thousands) | (in thousands) | ||||||||||
Cost of Revenue | ||||||||||||
Satellite Ground Systems (Integral) | $ | 11,949 | $ | 10,707 | $ | 1,242 | ||||||
Satellite & Terrestrial CSM (SAT) | 878 | 632 | 246 | |||||||||
Equip. Monitoring & Control (Newpoint) | 376 | 367 | 9 | |||||||||
Space Communication Systems (RT Logic) | 2,475 | 2,289 | 186 | |||||||||
Elimination | (1,114 | ) | (912 | ) | (202 | ) | ||||||
Total Cost of Revenue | $ | 14,564 | $ | 13,083 | $ | 1,481 | ||||||
Gross Margin | ||||||||||||
Satellite Ground Systems (Integral) | $ | 3,587 | $ | 3,637 | ($ | 50 | ) | |||||
Satellite & Terrestrial CSM (SAT) | 390 | 472 | (82 | ) | ||||||||
Equip. Monitoring & Control (Newpoint) | 396 | 155 | 241 | |||||||||
Space Communication Systems (RT Logic) | 3,582 | 2,631 | 951 | |||||||||
Elimination | (11 | ) | (21 | ) | 10 | |||||||
Total Gross Margin | $ | 7,944 | $ | 6,874 | $ | 1,070 | ||||||
The lower gross margin for the Company’s Satellite Ground Systems segment is primarily attributable to contract overruns in the segment’s newly established Antenna Division. Several fixed price contracts in this division were under-priced and under-bid, especially with respect to direct material and equipment costs. Consequently, this division recorded approximately $710,000 of cost of revenue against revenue of only $430,000 during the current quarter. As a result, the Company has recently made certain management changes in this business area and has modified its internal procedures to guard against this in the future.
As a result of the above, gross margin as a percentage of revenue for the Satellite Ground Systems segment decreased from 25.4% to 23.1%.
The decrease in gross margin at SAT is due to increases in direct equipment and material costs between the quarters being compared, while the increased gross margin at Newpoint relates to a combination of increased revenue coupled with the effect of cost-cutting measures implemented at the end of fiscal year 2003.
The increase in gross margin at RT Logic pertains to increased revenue levels and a higher content of production oriented contracts. Production oriented contracts typically generate higher gross margins for this segment than non-production oriented jobs due to increased efficiencies. On several large contracts, product deliveries were completed at lower cost than anticipated resulting in higher gross margins for the period.
Significant research and development investments over the past several years have driven increased productivity through deployment of a common product architecture. In addition, by leveraging an efficient and consistent hardware and software architecture across multiple business areas, RT Logic has realized increased economies of scale in the application of this new technology.
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Operating Expenses
Operating Expenses for the three months ended March 31, 2004 and 2003 for each of the Company’s segments are shown in the following table:
Segment | Three Months Ended Mar. 31, 2004 | Three Months Ended Mar. 31, 2003 | Increase/ (Decrease) | |||||||||
| (in thousands) | (in thousands) | (in thousands) | ||||||||||
Operating Expenses | ||||||||||||
Satellite Ground Systems (Integral) | ||||||||||||
SG&A | $ | 2,102 | $ | 1,658 | $ | 444 | ||||||
R&D | 76 | 38 | 38 | |||||||||
Amortization | 611 | 596 | 15 | |||||||||
Total Satellite Ground Systems (Integral) | 2,789 | 2,292 | 497 | |||||||||
Satellite & Terrestrial CSM (SAT) | ||||||||||||
SG&A | 305 | 301 | 4 | |||||||||
R&D | 196 | 274 | (78 | ) | ||||||||
Amortization | 150 | 150 | 0 | |||||||||
Total Satellite & Terrestrial CSM (SAT) | 651 | 725 | (74 | ) | ||||||||
Equip. Monitoring & Control (Newpoint) | ||||||||||||
SG&A | 292 | 307 | (15 | ) | ||||||||
R&D | 57 | 0 | 57 | |||||||||
Amortization | 32 | 32 | 0 | |||||||||
Total Equip. Monitoring & Control (Newpoint) | 381 | 339 | 42 | |||||||||
Space Communication Systems (RT Logic) | ||||||||||||
SG&A | 546 | 685 | (139 | ) | ||||||||
R&D | 584 | 267 | 317 | |||||||||
Amortization | 291 | 291 | 0 | |||||||||
Total Space Communication Systems (RT Logic) | 1,421 | 1,243 | 178 | |||||||||
Elimination | (14 | ) | (15 | ) | 1 | |||||||
Total Operating Expenses | $ | 5,228 | $ | 4,584 | $ | 644 | ||||||
In the Company’s Satellite Ground Systems segment, SG&A expenses increased by approximately $440,000 during the periods being compared. The increase principally pertains to increased management, marketing and proposal costs relating to new Air Force opportunities and the Company’s new SKYLIGHT product. R&D expenses for the three months ended March 31, 2004 primarily relate to SKYLIGHT efforts. Product amortization increased nominally during the three months ended March 31, 2004 as compared to the three months ended March 31, 2003 due to higher capitalized development costs related to the Company’s EPOCH product line.
At SAT, period-to-period operating costs are down approximately $75,000 due to decreased R&D expenses resulting from the application of the engineering staff to direct contracts as opposed to R&D activities.
Newpoint’s current period SG&A expenses are $15,000 lower relative to last fiscal year’s second quarter SG&A expenses while R&D spending increased approximately $60,000 (from zero last fiscal year) due to new product undertakings at this segment.
- 14 -
RT Logic’s current period SG&A expenses were down 20% compared to last fiscal year’s second quarter SG&A expenses while R&D spending increased approximately $320,000 due to new product undertakings at this segment. R&D spending at RT Logic is consistent with the current year’s plan.
The current and prior period amortization expenses for both Newpoint and RT Logic relate to the amortization of intangible assets that were acqiuired at the time of each company’s acquisition by the Company.
Income from Operations
Income from Operations for the three months ended March 31, 2004 and 2003 for each of the Company’s segments is shown in the following table:
Segment | Three Months Ended Mar. 31, 2004 | Three Months Ended Mar. 31, 2003 | Increase/ (Decrease) | |||||||||
| (in thousands) | (in thousands) | (in thousands) | ||||||||||
Income from Operations | ||||||||||||
Satellite Ground Systems (Integral) | $ | 798 | $ | 1,344 | $ | (546 | ) | |||||
Satellite & Terrestrial CSM (SAT) | (261 | ) | (254 | ) | (7 | ) | ||||||
Equip. Monitoring & Control (Newpoint) | 15 | (183 | ) | 198 | ||||||||
Space Communication Systems (RT Logic) | 2,161 | 1,388 | 773 | |||||||||
Elimination | 3 | (6 | ) | 9 | ||||||||
Total Income from Operations | $ | 2,716 | $ | 2,289 | $ | 427 | ||||||
Income from operations during the periods compared decreased by almost $550,000 in the Company’s Satellite Ground Systems segment as a result of decreased gross margins described above coupled with increased operating expenses. In addition to the quarterly operating losses posted by the segment’s Antenna Division, of approximately $370,000, the segment also had operating losses from its I&T Division ($140,000) and its Product Group ($170,000). For the second quarter last fiscal year, the I&T Division posted a $10,000 operating loss while the Product Group recorded operating income of $70,000. The current period loss at the I&T Division relates to $500,000 of lower quarterly revenue coupled with an overrun on a fixed price contract that adversely impacted operating income by approximately $50,000. The Product Group operating loss relates to somewhat lower quarterly license revenue coupled with increased amortization expenses.
Although the Commercial Division of the Satellite Ground Systems segment recorded operating income of approximately $220,000 for the three months ended March 31, 2004, the Company recorded $550,000 of operating income in this division during the quarter ended March 31, 2003. In this case, the Company is continuing to experience the effects of the economic downturn in the commercial satellite marketplace.
The Government Division of the Company’s Satellite Ground Systems segment experienced a 81% increase in quarterly operating income, increasing from $620,000 in the second quarter last fiscal year to $1,120,000 in the second quarter this fiscal year. Most of the increase pertains to reserves and overruns that were recorded against fixed price contracts with NOAA during the second quarter last fiscal year. The reserves and overruns were not recorded during the second quarter this fiscal year. This increase in operating income mitigated to an extent the overall period-to-period operating income decline for the segment.
SAT’s operating loss was relatively flat for the two periods being compared although this segment did post higher revenues on a quarter-to-quarter basis. The increased revenues were more than offset by increases in direct equipment and material costs. Newpoint posted a modest operating profit for the current quarter compared to operating losses for the quarter ended March 31, 2003, resulting from increased revenue and the effects of prior period cost cutting measures.
- 15 -
RT Logic increased income from operations by more than 55% over the second quarter last fiscal year as a result of higher gross margins as described above, somewhat offset by increased R&D spending.
Other Income/Expense
The changes in other income and expense between the quarters being compared are immaterial.
Income Before Income Taxes/Net Income
Income before income taxes increased by more than $420,000 to $2.79 million from $2.37 million between the two periods being compared principally due to the increases in income from operations, mostly attributable to operating income increases at RT Logic.
As a result of the above, net income increased to approximately $1.8 million during the three months ended March 31, 2004 from $1.5 million during the three months ended March 31, 2003.
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COMPARISON OF THE SIX MONTHS ENDED MARCH 31, 2004 AND 2003
Results of Operations
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, 2004 and March 31, 2003:
| Six Months Ended March 31, | ||||||||||
| 2004 | % of Revenue | 2003 | % of Revenue | |||||||
| (in thousands) | (in thousands) | |||||||||
Revenue | $ | 42,562 | 100.0 | $ | 39,526 | 100.0 | ||||
Cost of Revenue | 27,994 | 65.8 | 27,036 | 68.4 | ||||||
Gross Margin | 14,568 | 34.2 | 12,490 | 31.6 | ||||||
Operating Expenses | ||||||||||
Selling, General & Admin. (SG&A) | 6,086 | 14.3 | 5,671 | 14.4 | ||||||
Research and Development | 1,706 | 4.0 | 1,109 | 2.8 | ||||||
Product Amortization | 1,523 | 3.6 | 1,494 | 3.8 | ||||||
Amortization-Intangible Assets | 644 | 1.5 | 644 | 1.6 | ||||||
Income from Operations | 4,609 | 10.8 | 3,572 | 9.0 | ||||||
Other Income (Expense) (net) | 43 | 0.1 | 71 | 0.2 | ||||||
Income Before Income Taxes | 4,652 | 10.9 | 3,643 | 9.2 | ||||||
Income Taxes | 1,698 | 4.0 | 1,308 | 3.3 | ||||||
Net Income | $ | 2,954 | 6.9 | $ | 2,335 | 5.9 | ||||
For the six months ended March 31, 2004 and 2003, the Company’s revenues were generated from the following sources:
| Six Months Ended March 31, | ||||||
Revenue Type | 2004 | 2003 | ||||
Government Revenue | ||||||
NOAA | 16 | 21 | ||||
Air Force | 53 | 47 | ||||
Other U.S. Government Users | 6 | 8 | ||||
Subtotal | 75 | 76 | ||||
Commercial Revenue | 25 | 24 | ||||
Total | 100 | % | 100 | % | ||
- 17 -
On a consolidated basis, revenue increased 7.7%, or $3.0 million, to $42.5 million for the six months ended March 31, 2004, from $39.5 million for the six months ended March 31, 2003. Revenue for the six-month periods ending March 31, 2004 and 2003 for each of the Company’s segments is shown in the following table:
Segment | Six Months Ended March 31, 2004 | Six Months Ended March 31, 2003 | Increase/ (Decrease) | |||||||||
| (in thousands) | (in thousands) | (in thousands) | ||||||||||
Revenue | ||||||||||||
Satellite Ground Systems (Integral) | $ | 29,704 | $ | 29,351 | $ | 353 | ||||||
Satellite & Terrestrial CSM (SAT) | 2,457 | 1,590 | 867 | |||||||||
Equip. Monitoring & Control (Newpoint) | 1,383 | 1,374 | 9 | |||||||||
Space Communication Systems (RT Logic) | 11,371 | 9,255 | 2,116 | |||||||||
Elimination | (2,353 | ) | (2,044 | ) | (309 | ) | ||||||
Total Revenue | $ | 42,562 | $ | 39,526 | $ | 3,036 | ||||||
Revenue increases in the Company’s Satellite Ground Systems segment primarily pertain to revenue growth from the segment’s European subsidiary (ISI Europe), which reports through that segment’s commercial division. Revenue for ISI Europe increased by $1.6 million for the periods compared as a result of new contract awards to this entity. The increase in revenue from ISI Europe enabled the Commercial Division to report overall increased revenues of approximately $600,000 for the periods being compared. The Company also recorded approximately $1.1 million of revenue during the six months ended March 31, 2004 from this segment’s newly established Antenna division. There were no such revenues recorded during the corresponding six-month period last fiscal year.
In the Government Division of the Company’s Satellite Ground Systems segment, revenues derived from the Company’s non-military customers (principally NOAA) decreased by approximately $1.4 million between the periods being compared due to decreased orders from these Government customers. Offsetting these decreases were approximately $700,000 in increased revenues resulting from the Company’s contracts with the U.S. Air Force (specifically the CCS-C and SCNC programs).
The segment’s I&T Division experienced a decrease in revenues of almost $600,000 due to lower order bookings during the period.
Revenue increases for SAT and RT Logic resulted from increased order bookings and increased product shipments to customers.
Revenue for Newpoint was basically flat for the six months ended March 31, 2004 compared to the six months ended March 31, 2003.
- 18 -
Cost of Revenue/Gross Margin
During the six months ended March 31, 2004, cost of revenue increased by 3.5%, or $1.0 million, compared to the same period during the prior year, increasing from $27.0 million during the six months ended March 31, 2003 to $28.0 million during the six months ended March 31, 2004. Gross margin increased from $12.5 million to $14.6 million, an increase of $2.1 million, or 16.6%, during the periods being compared. Cost of revenue and gross margin for the six months ended March 31, 2004 and 2003 for each of the Company’s segments are shown in the following table:
Segment | Six Months Ended March 31, 2004 | Six Months Ended March 31, 2003 | Increase/ (Decrease) | |||||||||
| (in thousands) | (in thousands) | (in thousands) | ||||||||||
Cost of Revenue | ||||||||||||
Satellite Ground Systems (Integral) | $ | 23,379 | $ | 22,664 | $ | 715 | ||||||
Satellite & Terrestrial CSM (SAT) | 1,512 | 882 | 630 | |||||||||
Equip. Monitoring & Control (Newpoint) | 609 | 1,071 | (462 | ) | ||||||||
Space Communication Systems (RT Logic) | 4,825 | 4,434 | 391 | |||||||||
Elimination | (2,331 | ) | (2,015 | ) | (316 | ) | ||||||
Total Cost of Revenue | $ | 27,994 | $ | 27,036 | $ | 958 | ||||||
Gross Margin | ||||||||||||
Satellite Ground Systems (Integral) | $ | 6,325 | $ | 6,687 | $ | (362 | ) | |||||
Satellite & Terrestrial CSM (SAT) | 945 | 708 | 237 | |||||||||
Equip. Monitoring & Control (Newpoint) | 774 | 303 | 471 | |||||||||
Space Communication Systems (RT Logic) | 6,546 | 4,821 | 1,725 | |||||||||
Elimination | (22 | ) | (29 | ) | 7 | |||||||
Total Gross Margin | $ | 14,568 | $ | 12,490 | $ | 2,078 | ||||||
The lower gross margin for the Company’s Satellite Ground Systems segment is primarily attributable to contract overruns in the segment’s newly established Antenna Division. Several fixed price contracts in this division were improperly priced and under-bid, especially with respect to direct material and equipment costs. Consequently, this Division recorded approximately $1.45 million of cost of revenue against revenue of only $1.14 million during the current six-month period.
As a result of the above, gross margin as a percentage of revenue for the Satellite Ground Systems segment decreased from 22.8% to 21.3%.
The increase in gross margin at SAT is due to increases in revenue between the periods being compared, while the increased Gross Margin at Newpoint primarily relates to the effect of cost-cutting measures implemented at the end of fiscal year 2003.
The increase in gross margin at RT Logic pertains to increased revenue levels and a higher content of production oriented contracts. Production oriented contracts typically generate higher gross margins for this segment than non-production oriented jobs due to increased efficiencies. On several large contracts, product deliveries were completed at lower cost than anticipated resulting in higher gross margins for the period.
Significant research and development investments over the past several years have driven increased productivity through deployment of a common product architecture. In addition, by leveraging an efficient and consistent hardware and software architecture across multiple business areas, RT Logic has realized increased economies of scale in the application of this new technology.
- 19 -
Operating Expenses
Operating Expenses for the six months ended March 31, 2004 and 2003 for each of the Company’s segments are depicted in the following table:
Segment | Six Months Ended March 31, 2004 | Six Months Ended March 31, 2003 | Increase/ (Decrease) | |||||||||
| (in thousands) | (in thousands) | (in thousands) | ||||||||||
Operating Expenses | ||||||||||||
Satellite Ground Systems (Integral) | ||||||||||||
SG&A | $ | 3,960 | $ | 3,201 | $ | 759 | ||||||
R&D | 120 | 68 | 52 | |||||||||
Amortization | 1,222 | 1,193 | 29 | |||||||||
Total Satellite Ground Systems (Integral) | 5,302 | 4,462 | 840 | |||||||||
Satellite & Terrestrial CSM (SAT) | ||||||||||||
SG&A | 469 | 627 | (158 | ) | ||||||||
R&D | 399 | 616 | (217 | ) | ||||||||
Amortization | 301 | 301 | 0 | |||||||||
Total Satellite & Terrestrial CSM (SAT) | 1,169 | 1,544 | (375 | ) | ||||||||
Equip. Monitoring & Control (Newpoint) | ||||||||||||
SG&A | 560 | 588 | (28 | ) | ||||||||
R&D | 132 | 0 | 132 | |||||||||
Amortization | 63 | 63 | 0 | |||||||||
Total Equip. Monitoring & Control (Newpoint) | 755 | 651 | 104 | |||||||||
Space Communication Systems (RT Logic) | ||||||||||||
SG&A | 1,126 | 1,280 | (154 | ) | ||||||||
R&D | 1,054 | 425 | 629 | |||||||||
Amortization | 582 | 582 | 0 | |||||||||
Total Space Communication Systems (RT Logic) | 2,762 | 2,287 | 475 | |||||||||
Elimination | (29 | ) | (26 | ) | (3 | ) | ||||||
Total Operating Expenses | $ | 9,959 | $ | 8,918 | $ | 1,041 | ||||||
In the Company’s Satellite Ground Systems segment, SG&A expenses increased during the two periods being compared by approximately $760,000. This increase was principally because of marketing efforts related to the Company’s Air Force efforts and its new SKYLIGHT product. As a percentage of revenue, SG&A for this segment represented 13.3% of revenue in the current period compared to 10.9% of revenue during the six months ended March 31, 2003. R&D expenses for the six months ended March 31, 2004 primarily relate to SKYLIGHT efforts. Product amortization has increased by approximately $30,000 due to higher capitalized development costs related to the Company’s EPOCH product line.
At SAT, period-to-period SG&A costs are down approximately $160,000 due to cost reductions implemented at the end of last fiscal year while R&D expenses have decreased almost $220,000 resulting from the application of the engineering staff to direct contracts as opposed to R&D activities. Product amortization was $301,000 for both periods being compared.
Newpoint’s current period SG&A expenses are almost $30,000 lower relative to last year’s six-month SG&A expenses while R&D spending increased approximately $130,000 (from zero last fiscal year) due to new product undertakings at this segment.
- 20 -
RT Logic’s current period SG&A expenses are approximately $150,000 lower than to last year’s six-month totals while R&D spending increased approximately $630,000 due to new product undertakings at this segment. R&D spending at RT Logic is consistent with the current year’s plan.
The current period amortization expenses for both Newpoint and RT Logic relate to the amortization of intangible assets that were acquired at the time of each company’s acquisition by the Company.
Income from Operations
Income from Operations for the six months ended March 31, 2004 and 2003 for each of the Company’s segments is shown in the following table:
Segment | Six Months March 31, | Six Months March 31, | Increase/ (Decrease) | |||||||||
| (in thousands) | (in thousands) | (in thousands) | ||||||||||
Income from Operations | ||||||||||||
Satellite Ground Systems (Integral) | $ | 1,023 | $ | 2,224 | $ | (1,201 | ) | |||||
Satellite & Terrestrial CSM (SAT) | (224 | ) | (836 | ) | 612 | |||||||
Equip. Monitoring & Control (Newpoint) | 19 | (347 | ) | 366 | ||||||||
Space Communication Systems (RT Logic) | 3,784 | 2,534 | 1,250 | |||||||||
Elimination | 7 | (3 | ) | 10 | ||||||||
Income from Operations | $ | 4,609 | $ | 3,572 | $ | 1,037 | ||||||
Income from operations during the periods compared decreased by approximately $1.2 million in the Company’s Satellite Ground Systems segment as a result of decreased gross margins described above coupled with increased operating expenses. In addition to the half-year operating losses posted by the segment’s Antenna Division, of approximately $460,000, the segment also had operating losses from its I&T Division ($200,000) and its Product Group ($670,000). For the first six months of last fiscal year, the I&T Division posted a $90,000 operating loss while the Product Group recorded an operating loss of $150,000. The current period loss at the I&T Division relates to $600,000 of lower current period revenue coupled with an overrun on a fixed price contract that adversely impacted operating income by approximately $50,000. The Product Group operating loss relates to somewhat lower current period license revenue coupled with increased amortization expenses.
Although the Commercial Division of the Satellite Ground Systems segment recorded operating income of approximately $220,000 for the six months ended March 31, 2004, the Company recorded $670,000 of operating income in this Division during the six months ended March 31, 2003. In this case, the Company is continuing to experience the effects of the economic downturn in the commercial satellite marketplace.
The Government Division of the Company’s Satellite Ground Systems segment experienced a 24% increase in current period operating income, increasing from $1.7 million in the first half last fiscal year to $2.1 million in the first half this fiscal year. Most of the increase pertains to increased revenues and related operating income on fixed price contracts with the U.S. Air Force. This increase in operating income somewhat mitigated the period-to-period operating income decrease for the segment.
SAT’s operating loss was considerably reduced for the two periods being compared as this segment posted higher revenues and reduced current period operating expenses. The Company remains optimistic that SAT will be able to post positive operating income for the full fiscal year ending September 30, 2004.
- 21 -
Newpoint posted a modest operating profit for the current six month period compared to operating losses of approximately $350,000 for the six months ended March 31, 2003, resulting from increased gross margins that benefited from the effects of prior period cost cutting measures.
RT Logic increased income from operations by almost 50% over the first half last fiscal year as a result of higher gross margins as described above, somewhat offset by increased R&D spending. Since its acquisition by the Company in October of 2002, RT Logic has cumulatively contributed in excess of $11.0 million of operating income over six fiscal quarters.
Other Income
The changes in other income and expense between the periods being compared are immaterial.
Income Before Income Taxes/Net Income
Income before income taxes increased by approximately $1.1 million to $4.7 million from $3.6 million between the two periods being compared principally due to the increase in operating income, most of which was attributable to increases by RT Logic.
The Company’s effective tax rate increased from 35.9% for the six months ended March 31, 2003 to 36.5% for the six months ended March 31, 2004. The increase was primarily a result of a lower percentage of tax-free interest income compared to operating income recorded in the current six-month period compared to the prior year’s first six-month period.
As a result of the above, net income increased to approximately $3.0 million during the six months ended March 31, 2004 from approximately $2.3 million during the six months ended March 31, 2003.
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OUTLOOK
This outlook section contains forward-looking statements, 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 that 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, although the estimated backlog under the Company’s government contracts is not necessarily indicative of revenues that will actually be realized under the contract. Management believes that operating results for future periods will improve based on the following assumptions:
| • | 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. |
As disclosed in its Form 10-K for the fiscal year ending September 30, 2003, the Company was anticipating growth in revenue, operating income, net income, and fully diluted earnings per common share for fiscal year 2004 in its entirety of approximately 10%, 20%, 35%, and 35%, respectively over FY03 levels. Although operating income, net income and fully diluted earnings per common share were all slightly less than the Company’s internal plan for the six months ended March 31, 2004, the Company believes that it is still on target to meet these previously announced goals for fiscal year 2004 in its entirety.
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. With respect to the capital raised in the private placements, at March 31, 2004, $18.0 million was invested in variable rate State of Maryland debt securities, $10.0 million was invested in Banc of America Preferred Funding Corporation “Dividends Received Eligible Auction Market” preferred stock (“DREAMS”), and $162,000 was invested in common stock of independent third-party companies.
For the six months ended March 31, 2004, the Company used approximately $930,000 of cash in operating activities and approximately $1.5 million in investing activities. Included in the $1.5 million of investing activities is approximately $1.1 million used for newly capitalized software development costs and $520,000 used for the purchase of fixed assets.
The Company has a line of credit agreement with a local bank for $10.0 million for general corporate purposes. 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 line of credit is secured by the Company’s billed and unbilled accounts receivable and contains certain customary covenants, including minimum net worth and liquidity ratios. The line expires February 28, 2006. The Company had no balance outstanding at March 31, 2004 under the line of credit.
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On December 3, 2003, the Company’s Board of Directors declared a dividend of three cents per share for stockholders of record as of December 15, 2003. The dividend was paid on January 5, 2004 in the amount of $291,966. The Company’s Board of Directors declared a cash dividend of $.03 per share to all stockholders of record as of the close of business on March 3, 2004. The dividend was paid on March 30, 2004 in the amount of $298,696. The Company has also announced that its Board of Directors has declared a cash dividend of $.03 per share to all stockholders on record as of close of business on June 2, 2004. The dividend is scheduled to be paid on or about June 29, 2004.
The Company also has access to a $2.0 million equipment lease line of credit that had a balance of approximately $76,700 at March 31, 2004. The outstanding balance is payable over a 26-month period and bears interest at a rate of 8.8% per annum.
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 plans to continue to invest in the on-going development and improvement of its current software products, EPOCH and OASYS, as well as the development of new products through the use of its current cash balances and cash provided by operating activities. The Company believes that the investment in product development for EPOCH and OASYS will be less in fiscal year 2004 than it was in fiscal year 2003.
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, 2004 or in past fiscal years.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no “off-balance sheet arrangements” as such term is defined in Item 303(a)(4)(ii) of Regulation S-K.
FORWARD LOOKING STATEMENTS
Certain of the statements contained in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section, in other parts of this 10-Q, and in this section, including those under the headings “Outlook” and “Liquidity and Capital Resources,” 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 or in our other filings with the Securities and Exchange Commission (the “SEC” or the “Commission”), include the following:
| • | A substantial 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. |
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| • | 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. |
| • | Risks related to the Company’s acquisition strategy. In particular, the Company may not be able to find any attractive candidates or it may find that the acquisition terms proposed by potential acquisition candidates are not favorable to the Company. In addition, the Company may compete with other companies for these acquisition candidates, which competition may make an acquisition more expensive for the Company. If the Company is unable to identify and acquire any suitable candidates, the Company may not be able to find alternative uses for the cash proceeds of its previous private placements that improve the Company’s business, financial conditions, or results of operations to the extent that an acquisition could. In addition, the integration of the acquired business or businesses may be costly and may result in a decrease in the value of the Company’s common stock for the following reasons, among others: |
| • | the Company may not adequately assess the risks inherent in a particular acquisition candidate or correctly assess the candidate’s potential contribution to the Company’s financial performance; |
| • | the Company may need to divert more management resources to integration than it planned, which may adversely affect its ability to pursue other more profitable activities; |
| • | the difficulties of integration may be increased by the necessity of coordinating geographically separated organizations, integrating personnel with disparate backgrounds and combining different corporate cultures; |
| • | the Company may not eliminate as many redundant costs as it anticipated in selecting acquisition candidates; and |
| • | an acquisition candidate may have liabilities or adverse operating issues that the Company failed to discover through its due diligence prior to the acquisition. |
| • | Changes in activity levels in the Company’s core markets. |
| • | The Company may not be able to effectively manage any continued growth. |
| • | The business is subject to risks associated with international transactions. |
| • | The Company depends upon intellectual property rights and risk having our rights infringed. |
| • | The estimated backlog is not necessarily indicative of revenues that will actually be realized under the contracts. |
| • | The Company’s quarterly operating results may vary significantly from quarter to quarter. |
| • | The market price of the Company’s common stock may be volatile. |
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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.
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
While the Company currently does not have significant European operations, our customer base is expanding outside the U.S. and therefore certain contracts now and in the future will likely be denominated in currencies other than the U.S. dollar. As a result, the Company’s financial results could be affected by factors such as foreign currency exchange rates for contracts denominated in currencies other than the U.S. dollar. To mitigate the effect of changes in foreign currency exchange rates, the Company may hedge this risk by entering into forward foreign currency contracts. As of March 31, 2004, virtually all of our contracts are denominated in U.S. dollars. Three contracts were denominated in Euros that were hedged. As we enter into new foreign currency based contracts in the future, we may employ similar hedging contracts. The change in fair value of our hedge at March 31, 2004 reflected an unrealized loss of $86,404.
| ITEM 4. | CONTROLS AND PROCEDURES |
| a. | Disclosure Controls and Procedures |
As required by Rule 13a-15 under the Securities Exchange Act of 1934 (the “Exchange Act”), the Company’s management carried out an evaluation of the effectiveness of the Company’s disclosure controls and procedures, as of the end of the fiscal quarter subject to this quarterly report. This evaluation was carried out under the supervision and with the participation of the Company’s management, including the Company’s chief executive officer and chief financial officer. Based upon that evaluation, the Company’s chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures are effective. Disclosure controls and procedures are controls and other procedures of the Company that are designed to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the Company’s chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosures.
| b. | Changes in internal controls |
As required by Rule 13a-15 under the Exchange Act, the Company’s management carried out an evaluation of any changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely
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to materially affect, the Company’s internal control over financial reporting. This evaluation was carried out under the supervision and with the participation of the Company’s management, including the chief executive officer and chief financial officer. Based upon that evaluation, the Company concluded that there was no change in the Company’s internal control over financial reporting during this period that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, the Company’s chief executive officer and chief financial officer, and effected by the board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
PART II. OTHER INFORMATION
| ITEM 2. | CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES |
(c) On October 1, 2002, the Company acquired all of the issued and outstanding stock of RT Logic pursuant to an Agreement and Plan of Reorganization dated October 1, 2002 (the “Reorganization Agreement”) for an initial purchase price payable to the shareholders of RT Logic that included 683,870 shares of the Company’s common stock, par value $.01 per share. Pursuant to the terms of the Reorganization Agreement, in November 2002, the former shareholders of RT Logic received additional aggregate consideration that included 25,806 shares of the Company’s common stock. Pursuant to the Reorganization Agreement, in January 2004, the former shareholders of RT Logic received contingent purchase price with respect to the year ended September 30, 2003, that included 209,926 shares of the Company’s common stock. The Company relied on Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”), and Rule 506 under Regulation D of the Securities Act for the exemption from registration of the sale of such shares.
(f)Issuer Purchases of Equity Securities
Period | (a) Total Number of Shares Purchased | (b) Average Price Paid per Share | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | (d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs(1) | |||||
January 1 to January 31, 2004 | — | — | 336,521 | 596,237 | |||||
February 1 to February 29, 2004 | — | — | 336,521 | 596,237 | |||||
March 1 to March 31, 2004 | 4,650 | $ | 17.50 | 341,171 | 591,587 | ||||
| (1) | On September 23, 2002, the Company announced a plan to repurchase up to 932,758 shares of its common stock. The stock repurchase program will be transacted over an indefinite period of time and purchases will be made as management and the Board of Directors deem prudent. |
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| 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). | |
| 10.1 | Line of Credit Extension to Revolving Line of Credit Loan Agreement and Security Agreement, dated August 31, 2001, by and between Integral Systems, Inc. and Bank of America, N.A.* | |
| 11.1 | Computation of Per Share Earnings.* | |
| 31.1 | Certification Pursuant to Rule 13a-14(a) Under the Securities Exchange Act of 1934, as amended. | |
| 31.2 | Certification Pursuant to Rule 13a-14(a) Under the Securities Exchange Act of 1934, as amended. | |
| 32.1 | Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| 32.2 | Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| * | Previously filed. |
| b. | Reports on Form 8-K |
The Company filed a report on Form 8-K (dated May 10, 2004) with the Commission on May 11, 2004, reporting its earnings for the quarter and six months ended March 31, 2004.
The Company filed a report on Form 8-K (dated February 9, 2004) with the Commission on February 10, 2004, reporting its earnings for the quarter ended December 31, 2003.
The Company filed a report on Form 8-K (dated December 30, 2003) with the Commission on January 6, 2004, reporting changes in its certifying accountants.
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: August 19, 2004 | By: | /s/ THOMAS L. GOUGH | ||||||
Thomas L. Gough | ||||||||
| President & Chief Operating Officer | ||||||||
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| Date: August 19, 2004 | By: | /s/ ELAINE M. PARFITT | ||||||
Elaine M. Parfitt Executive Vice President & Chief Financial Officer | ||||||||
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