INTEGRAL SYSTEMS, INC.
10Q
FOR QUARTER ENDING
DECEMBER 31, 1996
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 December 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 December 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
$20,198,845.
Registrant has 952,533 shares of common stock outstanding as
of December 31, 1996.
INTEGRAL SYSTEMS, INC.
TABLE OF CONTENTS
Page No.
Part I Financial Information:
Item 1. Financial Statements
Balance Sheets - December 31, 1996, September 30, 1996.....1
Statements of Operations Three Months
Ended December 31, 1996 and December 31, 1995..............3
Statement of Cash Flow Three Months Ended December 31,
1996 and December 31, 1995.................................4
Statement of Stockholders' Equity Three Months
Ended December 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 9
ITEM 1. FINANCIAL STATEMENTS
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and September 30, 1996
ASSETS
December 31, September 30,
1996 1996
CURRENT ASSETS
Cash $1,046,009 $1,369,915
Accounts Receivable 6,776,566 4,874,086
Prepaid Expenses 29,990 59,956
Deferred Income Taxes 73,913 73,913
TOTAL CURRENT ASSETS 7,926,478 6,377,870
FIXED ASSETS
Electronic Equipment 664,930 728,956
Furniture & Fixtures 41,633 54,898
Leasehold Improvements 11,364 11,364
Software Purchases 111,421 50,659
SUBTOTAL 829,348 845,877
Less: Accum. Deprec. 342,758 446,769
TOTAL FIXED ASSETS 486,590 399,108
OTHER ASSETS
Software Development Costs 1,330,834 1,295,514
Deposits 7,182 7,182
TOTAL OTHER ASSETS 1,338,016 1,302,696
TOTAL ASSETS $9,751,084 $8,079,674
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and September 30, 1996
LIABILITIES & STOCKHOLDERS' EQUITY
December 31, September 30,
1996 1996
CURRENT LIABILITIES
Accounts Payable $2,042,123 $ 786,701
Accrued Expenses 936,134 1,157,356
Billings in Excess of Cost 517,029 128,925
Income Taxes Payable 116,960 48,060
TOTAL CURRENT LIABILITIES 3,612,246 2,121,042
LONG TERM LIABILITIES
STOCKHOLDERS' EQUITY
Common Stock, $.01 par value,
2,000,000 shares authorized,
and 952,533 shares issued and
outstanding at December 31, 1996
and September 30, 1996 9,525 9,525
Additional Paid-in Capital 825,311 825,311
Retained Earnings 5,304,002 5,123,796
TOTAL STOCKHOLDERS' EQUITY 6,138,838 5,958,632
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $9,751,084 $8,079,674
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<s
Three Months Ended
December
1996 1995
Revenue $4,858,948 $2,300,015
Cost of Revenue
Direct Labor 992,156 790,845
Overhead Costs 810,176 634,566
Travel and Other Direct Costs 74,793 62,674
Direct Equipment & Subcontracts 2,102,885 129,858
Total Cost of Revenue 3,980,010 1,617,943
Gross Margin 878,938 682,072
Selling, General & Administrative 399,312 431,190
Product Amortization 165,000 127,140
Income From Operations 314,626 123,742
Other Income (Expense)
Interest Income 13,218 20,454
Interest Expense (2,981) 8
Miscellaneous, net (31,257) (43,275)
Total Other Income (Expense) (21,020) (22,813)
Income Before Income Taxes 293,606 100,929
Provision for Income Taxes 113,400 39,000
Net Income $180,206 $61,929
Weighted Average Number of Common
Shares Outstanding During Period 952,533 944,913
Earnings per share $0.19 $0.07
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended
December 31,
1996 1995
Cash flows from operating actiivties:
Net income $ 180,206 $ 61,929
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 215,089 166,949
(Increase) decrease in:
Accounts receivable (1,902,480) (509,640)
Prepaid expenses 29,966 21,750
(Decrease) increase in:
Accounts payable 1,255,422 14,384
Accrued expenses (221,222) (253,503)
Billings in excess of cost 388,104 64,409
Income taxes payable 68,900 (69,481)
Total Adjustments (166,221) (565,132)
Net cash provided (used) by operations 13,985 (503,203)
Cash flow from investing activities:
Acquisition of fixed assets (137,571) (119,258)
Increase in software development (200,320) (101,664)
Net cash provided (used)
in investing activities (337,891) (220,922)
Cash flow from financing activities:
Proceeds from issuance of common stock 0 49,275
Net cash provided by financing activities 0 49,275
Net increase (decrease) in cash (323,906) (674,850)
Cash - beginning of year 1,369,915 2,125,553
Cash - end of period $1,046,009 $1,450,703
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED
DECEMBER 31, 1996
Number Additional
of Common Paid-In Retained
Shares Stock Capital Earnings Total
Balance September 30, 1996 952,533 $9,525 $825,311 $5,123,796 $5,958,632
Exercise of Stock Options 0 0 0 - 0
Net income - - - 180,206 180,206
Balance December 31, 1996 952,533 $9,525 $825,311 $5,304,002 $6,138,838
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, 1996.
The results of operations for any interim period are
not necessarily indicative of results for the full
year.
Certain accounts in the prior period financial
statements have been reclassified for comparative
purposes to conform with the presentation in the
current year financial statements.
2. Accounts Receivable
Accounts receivable at December 31, 1996 and September
30, 1996 consist of the following:
Dec. 31, 1996 Sept. 30, 1996
Billed $4,068,839 $2,766,042
Unbilled 2,682,766 2,083,844
Other 24,961 24,200
Total $6,776,566 $4,874,086
The Company uses the direct write-off method for bad
debts.
The Company's accounts receivable consist of amounts
due on prime contracts and subcontracts with the U.S.
Government and contracts with various private
organizations. Unbilled accounts receivable consist
principally of amounts that are billed in the month
following the incurrence of cost or when milestones are
delivered under fixed price contracts. All unbilled
receivables are expected to be billed and collected
within one year.
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 December 31,
1996 and September 30, 1996 the Company had no
outstanding balance under the line of credit.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMPARISON OF THE QUARTER ENDED DECEMBER 31, 1996
TO THE QUARTER ENDED DECEMBER 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 December 31, 1996 and December 31,
1995. Certain classifications and presentations from fiscal
year 1996 have been changed to be consistent with fiscal
year 1997 formats.
% of % of
Quarter Ended Dec. 31, 1996 Revenue 1995 Revenue
(000's omitted) (000's omitted)
Revenue $4,859 100.0 $2,300 100.0
Expenses
Cost of Revenue 3,980 82.0 1,618 70.4
Selling, General
& Admin. 399 8.2 431 18.7
Prod. Amortization 165 3.4 127 5.5
Other 21 .4 23 1.0
Income Taxes 114 2.3 39 1.7
Total Expenses 4,679 96.3 2,238 97.3
Net income $280 3.7 $62 2.7
Revenue
The Company's principal components of revenue for the 1st
quarters of fiscal years 1997 and 1996 are as follows:
% of % of
Quarter Ended Dec. 31, 1996 Revenue 1995 Revenue
(000's omitted) (000's omitted)
Government Revenue $3,150 64.8 $1,331 57.9
Commercial Revenue
EPOCH 1,431 29.5 772 33.6
OASYS/DRS/Other 141 2.9 93 4.0
IMI 137 2.8 104 4.5
Total 1,709 35.2 969 42.1
Total Consolidated Revenue $4,859 100.0 $2,300 100.0
Consolidated revenue more than doubled between the quarter
ended December 31, 1996 and the quarter ended December 31,
1995, increasing by approximately $2,560,000. The revenue
growth is principally attributable to a Government contract
awarded to the Company during the latter half of fiscal year
1996. This contract alone generated approximately $2.1
million of 1st quarter revenue in fiscal year 1997,
including the pass through of approximately $1.5 million of
equipment and subcontract costs during the period.
During the 1st quarter of fiscal year 1997, the Company
derived approximately 35% of its revenue from the sale of
its commercial products and related services as opposed to
42% of such revenue during the prior fiscal year 1st
quarter. The percentage decrease is a reflection of the
revenue contribution from the Government contract mentioned
above and not necessarily an indication of longer term
revenue trends.
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 Company believes that several
recent and pending commercial contracts have been (or
shortly will be) awarded as a result of this contract
reference.
During the 1st quarter of fiscal year 1997, the Company
recorded approximately $1.4 million of revenue for its EPOCH
product and associated services compared to $800,000 of
revenue during the 1st quarter of fiscal year 1996. The
1997 EPOCH revenue total included approximately $160,000 of
license revenue compared to approximately $135,000 of this
revenue type recorded in 1996.
In addition, the Company recorded approximately $140,000 of
revenue during the quarter ended December 31, 1996 from the
sale of other proprietary software products, (i.e. OASYS and
DRS) compared to approximately $90,000 of such revenue for
the quarter ended December 31, 1995. OASYS (Orbital
Analysis System) is an additional COTS product that can
either be sold in conjunction with EPOCH or as a standalone
product. DRS (DOMSAT Receive Station) is a product that
facilitates the collection, storage, and analysis of
environmental data. Included in the current quarter revenue
total is $85,000 of OASYS license revenues which compares to
$35,000 of such revenue during the comparable quarter in
fiscal year 1996.
Because license revenues have nominal marginal costs
associated with them, this form of revenue is highly
important to the Company's overall profitability. Looking
forward to the balance of fiscal year 1997 and beyond, the
Company is encouraged that its current contract backlog
includes in excess of $750,000 of unearned license revenues
for its EPOCH and OASYS products.
Expenses
Cost of revenue as a percentage of revenue for the 1st
quarter of fiscal year 1997 was 82.0% compared to 70.4% for
the 1st quarter of fiscal year 1996. The increased
percentage in fiscal year 1997 is higher than the Company's
typical cost of revenue percentage due to the extremely high
equipment and subcontract content that has been passed
through during the current quarter. During the quarter, in
excess of $2.1 million of equipment and subcontract costs
were incurred, of which $1.5 million was incurred under the
major Government contract described above. Because
equipment and subcontract costs have lower margins
associated with them than the Company's other cost
components, the gross profit percentage for the 1st quarter
of fiscal year 1997 was significantly lower than the
percentage during the 1st quarter of fiscal year 1996.
SG&A decreased in both absolute terms (by approximately
$30,000) and as a percentage of revenue (8.2% vs. 18.7%) in
the 1st quarter of fiscal year 1997 compared to the 1st
quarter of fiscal year 1996. The Company believes that the
decrease in absolute dollars is immaterial and that the
decrease in percentage terms is not particularly meaningful
due to the large equipment and subcontract component in the
current period revenue figure.
Amortization expense increased by almost $40,000 in the
current quarter compared to last year's quarter, reflecting
the Company's expanding software development amortization
base. The increase was incurred despite the fact that all
software development costs for the Company's DRS and
information systems products were fully amortized in fiscal
year 1996.
General
Overall, net income as a percentage of revenue was 3.7% in
1st quarter of fiscal year 1997 compared to 2.7% in for the
1st quarter in fiscal year 1996. The increased percentage
was achieved due to greater license revenue recognized and
to the stabilization of SG&A expenses on an increased sales
base. Further the Company recorded its highest ever
quarterly revenue total ($4.9 million), exceeding its
previous high established in the 4th quarter of fiscal year
1996 by over 23%, (i.e. $900,000). Because of its 1ST
quarter performance, its current and significant backlog,
and contracts believed to be imminently received, the
Company believes that results for fiscal year 1997 in its
entirety will exceed those recorded for fiscal year 1996 for
both revenue and profitability.
Liquidity and Capital Resources
The Company has been profitable on an annual basis 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 1st quarter of fiscal
year 1997, the Company generated approximately $14,000 from
operating activities and used approximately $338,000 for
investing activities, including approximately $200,000 for
newly capitalized software development costs.
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 1997, the
Company believes it will have adequate cash resources to
meet its obligations for the foreseeable future. Although
operating and investing activities consumed significant sums
of cash during fiscal year 1996 and to a lesser extent the
1st quarter of fiscal year 1997, the Company does not
believe it will have to rely on external sources of cash
(i.e. its line of credit) to fund its growth and future
software development in fiscal year 1997.
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 in the continued
development and improvement of its principal software
products, EPOCH and OASYS.
PART II. OTHER INFORMATION
6. Exhibits and Reports on Form 8-K
a. Exhibits
None
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: February 12, 1997 By: /s/
Thomas L. Gough
President
Date: February 12, 1997 By: /s/
Elaine M. Parfitt
Director of Accounting/Controller
(Principal Accounting Officer)