SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
X Quarterly report pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For the quarterly period ended March 31, 1996 or
_____ Transition report pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For the transition period from to
Commission file number 0-18603
INTEGRAL SYSTEMS, INC.
(Exact name of registrant as specified in its chapter)
Maryland 52-1267968
(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification No.)
5000 Philadelphia Way, Suite A, 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
As of March 31, 1996 the aggregate market value of the
Common Stock of the Registrant (based upon the average bid and
ask prices of the Common Stock as reported by the market makers)
held by non-affiliates of the Registrant was $17,426,355.
Registrant has 947,483 shares of common stock outstanding as
of March 31, 1996.
INTEGRAL SYSTEMS, INC.
TABLE OF CONTENTS
Part I Financial Information:
Page No.
Item 1. Financial Statements
Balance Sheets - March 31, 1996, September 30, 1995 1
Statements of Operations Six Months and Three Months
Ended March 31, 1996 and March 31, 1995 3
Statement of Cash Flow Six Months Ended March 31, 1996
and March 31, 1995 4
Statement of Stockholders' Equity Six Months
Ended March 31, 1996 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Part II Other Information:
Item 6. Exhibits and Reports on Form 8-K 11
Item 1. Financial Statements
INTEGRAL SYSTEMS, INC.
BALANCE SHEETS
MARCH 31, 1996 & SEPTEMBER 30, 1995
ASSETS
March 31, September 30,
1996 1995
CURRENT
Cash $1,793,303 $2,125,553
Accounts Receivable 3,580,868 3,483,777
Prepaid Expenses 44,769 71,537
Deferred Income Taxes 60,719 60,719
TOTAL CURRENT ASSETS 5,479,659 5,741,586
FIXED ASSETS
Electronic Equipment 641,796 624,708
Furniture & Fixtures 40,408 41,716
Leasehold Improvements 11,364 11,364
Software Purchases 29,615 37,085
SUBTOTAL 723,183 714,873
Less: Accum. Deprec. 337,692 426,249
TOTAL FIXED ASSETS 385,491 288,624
OTHER ASSETS
Software Development Costs 1,336,095 1,373,219
Deposits 150 150
TOTAL OTHER ASSETS 1,336,245 1,373,369
TOTAL ASSETS $7,201,395 $7,403,579
INTEGRAL SYSTEMS, INC.
BALANCE SHEETS
MARCH 31, 1996 & SEPTEMBER 30, 1995
LIABILITIES & STOCKHOLDERS' EQUITY
March 31, September 30,
1996 1995
CURRENT LIABILITIES
Accounts Payable $509,864 $351,995
Accrued Expenses 824,984 875,248
Billings in Excess of Cost 77,494 561,202
Income Taxes Payable 28,854 108,481
TOTAL CURRENT LIABILITIES 1,441,196 1,896,926
LONG TERM LIABILITIES
STOCKHOLDERS' EQUITY
Common Stock, $.01 par value,
2,000,000 shares authorized, and
947,483 and 943,746 shares issued
and outstanding at March 31, 1996
and September 30, 1995, respectively 9,475 9,437
Addl Paid in Capital 753,422 696,437
Retained Earnings 4,997,302 4,800,779
TOTAL STOCKHOLDERS' EQUITY 5,760,199 5,506,653
TOTAL LIABILITIES & $7,201,395 $7,403,579
STOCKHOLDERS' EQUITY
INTEGRAL SYSTEMS, INC.
STATEMENTS OF OPERATIONS
Six Months Ended Three Months Ended
March 31 March 31
1996 1995 1996 1995
Contract Revenue $4,932,796 $5,806,766 $2,632,781 $2,479,085
Cost of Revenue
Direct Labor 1,770,015 1,810,540 914,850 938,737
Overhead 1,329,878 1,246,026 645,934 635,680
Travel & Other Direct Costs 534,278 371,619 272,232 185,507
Equipment & Subcontractors 358,575 1,530,552 216,958 331,979
Total Cost of Revenue 3,992,746 4,958,737 2,049,974 2,091,903
Gross Profit 940,050 848,029 582,807 387,182
Operating Expenses
General & Administrative 604,941 545,467 371,440 239,385
Total Operating Expenses 604,941 545,467 371,440 239,385
Income From Operations 335,109 302,562 211,367 147,797
Other Income (Expense)
Interest Income 31,749 21,320 11,295 9,157
Interest Expense (31) (2,436) (23) (2,435)
Other Income (Expense) (46,704) (11,492) (3,429) (6,711)
Total Other Income (Expense) (14,986) 7,392 7,843 11
Income Before Income Taxes 320,123 309,954 219,210 147,808
Income Taxes 123,600 119,235 84,600 59,535
Net Income $196,523 $190,719 $134,610 $88,273
Weighted Average Number of
Common Shares Outstanding
During Period 946,092 941,391 947,271 942,846
Earnings per share $0.21 $0.20 $0.14 $0.09
INTEGRAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended
March 31,
1996 1995
Cash Flows from Operating Actiivties:
Net Income $196,523 $190,719
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 341,516 329,381
(Increase) decrease in:
Accounts Receivable (97,091) (1,569,029)
Prepaid Expenses 26,768 (92,555)
Deferred Income Taxes 0 (342)
(Decrease) increase in:
Accounts Payable 157,869 51,486
Accrued Expenses (50,264) (138,690)
Billings in Excess of Cost (483,708) (73,671)
Income Taxes Payable (79,627) 76,639
Total Adjustments (184,537) (1,416,781)
Net cash provided (used) by operations 11,986 (1,226,062)
Cash Flow from investing activities:
Acquisition of fixed assets (184,104) (98,258)
Increase in software development (217,155) (191,212)
Sale (purchase) of marketable securities 0 403,100
Net cash provided
(used) in investing activities (401,259) 113,630
Cash flow from financing activities:
Proceeds from issuance of common stock 57,023 49,881
Net cash provided by financing activities 57,023 49,881
Net increase (decrease) in cash (332,250) (1,062,551)
Cash - beginning of year 2,125,553 1,802,839
Cash - end of period $1,793,303 $740,288
INTEGRAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED
MARCH 31, 1996
Number Additional
of Common Paid-in Retained
Shares Stock Capital Earnings Total
Balance
September 30, 1995 943,746 $9,437 $696,437 $4,800,779 $5,506,653
Exercise of Stock Options 3,737 38 56,985 - 57,023
Net income - - - 196,523 196,523
Balance March 31, 1996 947,483 $9,475 $753,422 $4,997,302 $5,760,199
INTEGRAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation
The interim financial statements include the accounts of
Integral Systems, Inc. (ISI) and its two wholly-owned
subsidiaries, Integral Marketing, Inc. (IMI) and InterSys,
Inc. (INTSYS). 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, 1995.
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, 1996 and September 30, 1995
consist of the following:
Mar. 31, Sept. 30,
1996 1995
Billed $2,213,820 $1,653,777
Unbilled 1,367,048 1,830,000
$3,580,868 $3,483,777
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. All
unbilled receivables are expected to be billed and collected
within one year.
3. Line-of-Credit
The Company has a line of credit agreement with a local bank
for $1,200,000. Borrowing under the line of credit bears
interest at the bank's lending rate plus one-quarter of one
percentage point per annum. Any accrued interest is payable
monthly. At March 31, 1996 and September 30, 1995 the
Company had no outstanding balance under the line of credit.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMPARISON OF THE SIX MONTHS ENDED MARCH 31, 1996
TO THE SIX MONTHS ENDED MARCH 31, 1995
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, 1996 and March 31, 1995:
% of % of
1996 Revenue 1995 Revenue
(000's (000's
omitted) omitted)
Revenue $4,933 100.0 $5,807 100.0
Expenses
Cost of Revenue 3,993 80.9 4,959 85.4
General & Admin. 605 12.3 545 9.4
Other 15 .3 -7 -.1
Income Taxes 124 2.5 119 2.0
Total Expenses 4,737 96.0 5,616 96.7
Net income $196 4.0 $191 3.3
Revenue
Revenue decreased by approximately $900,000 between the six
months ended March 31, 1996 and the six months ended March 31,
1995. The decrease is attributable to the delivery of $1.2
million less equipment during the current period than what was
delivered in the first half last fiscal year.
During the current period, the Company derived approximately
47% of its revenues from the sale of its commercial products and
related services which is a slightly higher percentage than the
45% the Company realized during the first half in the prior
fiscal year. The percentages for both periods are significant,
and correlate to the Company's conscious effort to reduce its
reliance on the Federal Government, and to utilize its recently
developed software products to gain access to organizations in
order to sell both its products and associated integration and
support services.
Although the Company believes that its full cadre of
software products is important for its future growth and
prosperity, to date the Company's largest product investment
relates to the development of its EPOCH software, a COTS
(commercial off-the-shelf) product for satellite command and
control. The Company believes that it is unique in its status as
the only entity with COTS software capable of flying satellites
built by any satellite manufacturer in the world. In fact during
April, 1996, the Company received a strategically important
contract to provide its COTS products (and related integration
services) to command and control a fleet of satellites composed
of spacecraft from multiple manufacturers. The preponderance of
revenue to be derived from this contract is expected to be
realized in fiscal year 1997.
During the first half of fiscal year 1996, the Company
recorded approximately $1,730,000 of revenue for services
associated with its EPOCH product compared to $2,200,000 of
revenue during the first half of fiscal year 1995. The decrease
relates to the delivery of only $210,000 of equipment in the
current period compared to $950,000 of equipment delivered in the
first half last fiscal year. Fiscal year 1996 EPOCH revenues
included approximately $345,000 of license fees, while $200,000
of license fee revenues were recorded during the first half of
fiscal year 1995.
The principal balance of the Company's commercial revenues
pertain to other proprietary products as follows: OASYS (Orbital
Analysis System); DRS (DOMSAT Receive Station); and a collection
of software pertaining to database and information system
applications. During the first half of fiscal year 1996, the
Company recorded approximately $345,000 of revenue related to the
sale of products and services under these programs compared to
approximately $310,000 of revenue recorded during the first half
last fiscal year.
The increase principally relates to DRS and OASYS shipments
delivered in the first half this fiscal year, offset by reduced
database and information systems revenue, instigated by a
deliberate recent phase down of this business area.
The Company's subsidiary, Integral Marketing, Inc., (IMI)
accounted for an additional $235,000 of commercial revenue during
the current period. IMI contributed approximately $90,000 of
revenue to the Companys consolidated revenue total last fiscal
year during the first half.
Expenses
Cost of revenue as a percentage of revenue for the first
half of fiscal year 1996 was 80.9% compared to 85.4% for the
first half in fiscal year 1995. The improvement during the
current year represents a lower equipment component in the
Company's cost of revenue figure. Typically equipment carries a
lower margin than the Company's other cost of revenue line items.
Further, the Company's cost of revenue margin was improved over
last fiscal year due to increased software license revenue which
bears significant margin dollars.
G&A expense increased approximately $60,000 between the
periods being compared, principally because the Company incurred
significant bid and proposal expenses during the current half
year compared to such expenditures in the first half last fiscal
year.
Other expenses were $15,000 during the current period
compared to $7,000 of other income recorded during the first half
last fiscal year. This reversal is principally due to expenses
incurred by the Company that were previously classified as
reimbursable overhead costs that are currently considered
unallowable by the Defense Contract Audit Agency (DCAA) under
cost reimbursable type contracts with the Federal Government.
Considering that pretax income was virtually the same during
the periods being compared, income tax expense (in actual
dollars) was also approximately the same.
General
Overall, net income as a percentage of revenue was 4.0% in
the first half of fiscal year 1996 compared to 3.3% in the first
half of fiscal year 1995. Essentially fiscal year 1996 net
income to date was comparable in actual dollar terms to that
earned in fiscal year 1995, despite lower revenues.
Specifically, higher licenses recorded combined with less
equipment pass throughs (bearing lower margins) kept net income
in line with last year, but at a higher percentage of revenue.
COMPARISON OF THE QUARTER ENDED MARCH 31, 1996
TO THE QUARTER ENDED MARCH 31, 1995
The components of the Company's income statement as a
percentage of revenue are depicted in the following table for the
quarters ended March 31, 1996 and March 31, 1995:
% of % of
1996 Revenue 1995 Revenue
(000's omitted) (000's omitted)
Revenue $2,633 100.0 $2,479 100.0
Expenses
Cost of Revenue 2,050 77.9 2,092 84.4
General & Admin. 371 14.1 239 9.6
Other -8 -.3 0 0
Income Taxes 85 3.2 60 2.4
Total Expenses 2,498 94.9 2,391 96.4
Net income $135 5.1 $88 3.6
Revenue
Revenue increased by approximately $150,000 between the
quarter ended March 31, 1996 and the quarter ended March 31,
1995. The increase is principally attributable to the delivery
of $135,000 more software licenses (EPOCH and OASYS) to customers
during the current period than what was delivered in the second
quarter last fiscal year.
During the current period, the Company derived approximately
51% of its revenues from the sale of its commercial products and
related services which is a somewhat higher percentage than the
45% the Company realized during the second quarter in the prior
fiscal year. The percentages for both periods are significant,
and correlate to the Company's conscious effort to reduce its
reliance on the Federal Government, and to utilize its recently
developed software products to gain access to organizations in
order to sell both its products and associated integration and
support services.
Although the Company believes that its full cadre of
software products is important for its future growth and
prosperity, to date the Company's largest product investment
relates to the development of its EPOCH software, a COTS
(commercial off-the-shelf) product for satellite command and
control. The Company believes that it is unique in its status as
the only entity with COTS software capable of of flying satellites
built by any satellite manufacturer in the world. In fact during
April, 1996 the Company received a strategically important
contract to provide its COTS products (and related integration
services) to command and control a fleet of satellites composed
of spacecraft from multiple manufacturers. The preponderance of
revenue to be derived from this contract is expected to be
realized in fiscal year 1997.
During the second quarter of fiscal year 1996, the Company
recorded approximately $950,000 of revenue for services
associated with its EPOCH product compared to $1,000,000 of
revenue during the second quarter of fiscal year 1995. The
decrease relates to the delivery of only $160,000 of equipment in
the current period compared to $240,000 of equipment delivered in
the second quarter last fiscal year. Second quarter fiscal year
1996 EPOCH revenues included approximately $210,000 of license
fees, while $200,000 of license fee revenues were recorded during
the second quarter of fiscal year 1995.
The principal balance of the Company's commercial revenues
pertain to other proprietary products as follows: OASYS (Orbital
Analysis System); DRS (DOMSAT Receive Station); and a collection
of software pertaining to database and information system
applications. During the second quarter of fiscal year 1996, the
Company recorded approximately $250,000 of revenue related to the
sale of products and services under these programs compared to
approximately $75,000 of revenue recorded during the second
quarter last fiscal year.
The increase principally relates to DRS and OASYS shipments
delivered in the second quarter this fiscal year, offset by
reduced database and information systems revenue, instigated by a
deliberate recent phase down of this business area.
The Company's subsidiary, Integral Marketing, Inc., (IMI)
accounted for an additional $130,000 of commercial revenue during
the current period. IMI contributed approximately $35,000 of
revenue to the Company's consolidated revenue total last fiscal
year during the second quarter.
Expenses
Cost of revenue as a percentage of revenue for the second
quarter of fiscal year 1996 was 77.9% compared to 84.4% for the
second quarter in fiscal year 1995. The improvement during the
current year represents a lower equipment component in the
Company's cost of revenue figure. Typically equipment carries a
lower margin than the Company's other cost of revenue line items.
Further, the Company's cost of revenue margin was improved over
last fiscal year due to increased software license revenue which
bears significant margin dollars.
G&A expense increased approximately $130,000 between the
periods being compared, principally because the Company incurred
significant bid and proposal expenses during the current quarter
compared to such expenditures in the second quarter last fiscal
year.
General
Overall, net income as a percentage of revenue was 5.1% in
the second quarter of fiscal year 1996 compared to 3.6% in the
second quarter of fiscal year 1995. Essentially fiscal year 1996
net income was greater both in absolute dollar terms and as a
percentage of revenue due to increased license fee revenue.
Further the Company's IMI subsidiary posted a pretax profit in
excess of $30,000 during the current quarter compared to a loss
of $40,000 during the comparable period in fiscal year 1995.
Liquidity and Capital Resources
With the exception of the Company's second quarter of fiscal
year 1994, the Company has been profitable since inception and
has been able to generate adequate cash flow from operations to
fund its operating and capital expenses. To supplement operating
cash flows, the Company has access to a line of credit facility
in the amount of $1.2 million which is currently unused. (See
Note 3 of the Notes to Financial Statements). During the first
half of fiscal year 1996, the Company generated approximately
$12,000 from operating activities and used approximately $400,000
for investing activities, including approximately $217,000 for
software development.
The Company has incurred and capitalized approximately
$1,480,000 of costs (inception to date) relating to its EPOCH
product. As of March 31, 1996, the Company's balance sheet
included approximately $960,000 of unamortized software
development costs related to EPOCH. Most of the Company's
remaining software development costs (other than costs relating
to EPOCH) pertain to the Company's OASYS product, which can be
sold as a standalone product or in conjunction with EPOCH.
In July, 1988 the Company raised approximately $400,000
(net) through the sale of 110,000 common shares in its initial
public offering.
As a result of its current cash reserves, its unused line of
credit, its current profitability and its projected profitability
for the balance of fiscal year 1996, the Company believes it will
have adequate cash resources to meet its obligations for the
foreseeable future.
In terms of capital purchases, historically the Company has
funded such items through operating cash flow or capital lease.
The Company currently has no plans for major capital purchases in
the ensuing twelve month period, although the Company plans to
continue to invest (albeit at lower levels) in the continued
development and improvement of its software products, especially
EPOCH and OASYS.
Part II. Other Information
6. Exhibits and Reports on Form 8-K
a. Exhibits
None
b. Form 8-K
No reports on Form 8-K have been filed during the
quarter ended March 31, 1996.
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: By: /s/
Kimberly A. Chamberlain
Vice President &
Chief Financial Officer