SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(mark one)
X Quarterly report pursuant to Section 13 or 15 (d) of the
------- Securities Exchange Act of 1934
For the quarterly period ended March 31, 2000 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
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(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, 2000 the aggregate market value of the Common Stock of the
Registrant (based upon the closing price of the Common Stock on the NASDAQ Stock
Exchange at March 31, 2000) held by non-affiliates of the Registrant was
$366,216,345.
Registrant had 8,699,046 shares of common stock outstanding as of March 31,
2000.
INTEGRAL SYSTEMS, INC.
TABLE OF CONTENTS
Page No.
--------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Balance Sheets - March 31, 2000 and September 30, 1999........... 1
Statements of Operations - Three and Six Months Ended
March 31, 2000 and March 31, 1999............................. 3
Statement of Stockholders' Equity - Six Months
Ended March 31, 2000.......................................... 4
Statement of Cash Flow - Six Months Ended
March 31, 2000 and March 31, 1999............................. 5
Notes to Financial Statements.................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 8
Item 3. Quantitative and Qualitative Disclosures About
Market Risk.................................................... 16
PART II. OTHER INFORMATION:
Item 2. Changes in Securities and Use of Proceeds.................. 17
Item 6. Exhibits and Reports on Form 8-K........................... 17
PART I. FINANCIAL INFORMATION
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 2000 and September 30, 1999
ASSETS
March 31, September 30,
2000 1999
(unaudited)
-------------- --------------
CURRENT ASSETS
Cash $10,984,569 $ 7,027,446
Marketable Securities 57,263,257 18,136,000
Accounts Receivable 11,441,603 13,052,820
Prepaid Expenses 50,739 78,123
Income Taxes Receivable 941,440 0
-------------- --------------
TOTAL CURRENT ASSETS 80,681,608 38,294,389
FIXED ASSETS
Electronic Equipment 672,723 655,272
Furniture & Fixtures 402,795 380,904
Leasehold Improvements 152,857 132,110
Software Purchases 161,323 67,861
Equip. Under Capital Lease 1,911,463 1,911,463
-------------- --------------
SUBTOTAL 3,301,161 3,147,610
Less: Accumulated Depreciation 1,521,071 1,322,169
-------------- --------------
TOTAL FIXED ASSETS 1,780,090 1,825,441
OTHER ASSETS
Software Development Costs 2,459,625 2,006,194
Deposits 65,348 13,666
-------------- --------------
TOTAL OTHER ASSETS 2,524,973 2,019,860
TOTAL ASSETS $84,986,671 $42,139,690
============== ==============
See Notes to Financial Statements
1
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 2000 and September 30, 1999
LIABILITIES & STOCKHOLDERS' EQUITY
March 31, September 30,
2000 1999
unaudited)
-------------- -------------
CURRENT LIABILITIES
Accounts Payable $ 2,717,923 $ 2,838,639
Accrued Expenses 2,417,764 2,555,850
Capital Leases Payable 572,813 601,327
Billings in Excess of Cost 1,594,150 1,666,484
Income Taxes Payable 0 173,637
Deferred Income Taxes 146,890 146,890
-------------- -------------
TOTAL CURRENT LIABILITIES 7,449,540 7,982,827
LONG TERM LIABILITIES
Capital Leases Payable 445,345 714,106
-------------- -------------
TOTAL LONG TERM LIABILITIES 445,345 714,106
STOCKHOLDERS' EQUITY
Common Stock, $.01 par value,
40,000,000 shares authorized, and
8,699,046 and 7,163,908 shares issued
and outstanding at March 31, 2000
and September 30, 1999, respectively 86,990 71,639
Additional Paid-in Capital 63,579,748 21,993,620
Retained Earnings 13,425,048 11,377,498
-------------- -------------
TOTAL STOCKHOLDERS' EQUITY 77,091,786 33,442,757
-------------- -------------
TOTAL LIABILITIES & $84,986,671 $42,139,690
STOCKHOLDERS' EQUITY ============== =============
See Notes to Financial Statements
2
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended
March 31, March 31,
2000 1999 2000 1999
(unaudited) (unaudited) (unaudited) (unaudited)
-------------- -------------- ------------- ------------
Revenue 9,625,394 9,827,993 19,647,255 17,504,479
Cost of Revenue
Direct Labor 2,484,162 2,535,765 4,807,286 4,607,205
Overhead Costs 1,627,174 1,740,206 3,537,217 3,401,934
Travel and Other Direct Costs 355,312 341,812 750,055 601,758
Direct Equipment & Subcontracts 2,424,434 2,692,606 4,356,676 4,351,278
-------------- -------------- ------------- ------------
Total Cost of Revenue 6,891,082 7,310,389 13,451,234 12,962,175
-------------- -------------- ------------- ------------
Gross Margin 2,734,312 2,517,604 6,196,021 4,542,304
-------------- -------------- ------------- ------------
Selling, General & Administrative 1,743,319 957,650 3,204,504 2,004,308
Terminated Acquisition Costs 141,123 0 141,123 0
Product Amortization 237,500 165,000 475,000 330,000
-------------- -------------- ------------- ------------
Income From Operations 612,370 1,394,954 2,375,394 2,207,996
Other Income (Expense)
Interest Income 470,213 19,748 724,330 57,896
Interest Expense (22,874) (37,645) (51,437) (68,054)
Miscellaneous, net (36,971) (27,631) (80,136) (103,971)
-------------- -------------- ------------- ------------
Total Other Income (Expense) 410,368 (45,528) 592,757 (114,129)
Income Before Income Taxes 1,022,738 1,349,426 2,968,151 2,093,867
Provision for Income Taxes 235,300 521,200 920,600 808,700
-------------- -------------- ------------- ------------
Net Income 787,438 828,226 2,047,551 1,285,167
============== ============== ============= ============
Weighted Average Number of Common
Shares Outstanding During Period 7,970,006 5,910,394 7,593,002 5,857,499
============== ============== ============= ============
Earnings per Share $0.10 $0.14 $0.27 $0.22
============== ============== ============= ============
Diluted Shares Outstanding 8,508,494 6,283,722 8,112,992 6,289,785
============== ============== ============= ============
Diluted Earnings per share $0.09 $0.13 $0.25 $0.20
============== ============== ============= ============
See Notes to Financial Statements
3
INTEGRAL SYSTEMS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED MARCH 31, 2000
(unaudited)
Common
Number Stock Additional
of at Par Paid-in Retained
Shares Value Capital Earnings Total
------------ ------------ ------------- ------------- -------------
Balance September 30, 1999 7,163,908 $71,639 $21,993,620 $11,377,498 $33,442,757
.
Stock Options exercised 135,138 1,351 688,753 - 690,104
Private Placement offering 1,400,000 14,000 40,897,375 40,911,375
Net income - - - 2,047,550 2,047,550
-------------- ------------ ------------- ------------- -------------
Balance March 31, 2000 8,699,046 $86,990 $63,579,748 $13,425,048 $77,091,786
============== ============ ============= ============= =============
See Notes to Financial Statements
4
INTEGRAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended
March 31,
2000 1999
(unaudited) (unaudited)
-------------- ----------------
Cash flows from operating activities:
Net income $2,047,551 $1,285,167
-------------- -------------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 943,293 641,179
(Increase) decrease in:
Accounts receivable 1,611,217 (2,465,794)
Prepaid expenses and deposits (24,298) 6,285
(Decrease) increase in:
Accounts payable (120,716) 613,434
Accrued expenses (138,086) 220,170
Billings in excess of cost (72,334) 525,200
Income taxes payable, net (1,115,077) (580,530)
-------------- -------------
Total adjustments 1,083,999 (1,040,056)
-------------- -------------
Net cash provided by operations 3,131,550 245,111
-------------- -------------
Cash flow from investing activities:
Marketable Securities (39,127,257) 0
Acquisition of fixed assets (422,943) (15,340)
Increase in software develoment costs (928,431) (511,840)
-------------- -------------
Net cash provided (used) in investing activities (40,478,631) (527,180)
-------------- -------------
Cash flow from financing activities:
Proceeds from issuance of common stock 41,601,479 216,284
Payments on capital lease obligations (297,275) (238,325)
-------------- -------------
Net cash provided by financing activities 41,304,204 (22,041)
-------------- -------------
Net increase (decrease) in cash 3,957,123 (304,110)
Cash - beginning of year 7,027,446 3,055,144
-------------- -------------
Cash - end of period $10,984,569 $2,751,034
============== =============
See Notes to Financial Statements
5
INTEGRAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
---------------------
The interim financial statements include the accounts of Integral Systems,
Inc. ("ISI" or the "Company") and its two wholly owned subsidiaries,
Integral Marketing, Inc. ("IMI") and InterSys, Inc. ("InterSys"). 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 and necessary to make such
financial statements not misleading. 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,
1999. The results of operations for any interim period are not necessarily
indicative of results for the full year.
During the three months ended March 31, 2000 the Company terminated
discussions with an independent company that was being considered for
acquisition purposes. The Company has segregated the costs associated with
this failed acquisition attempt as a separate line item on its current
period income statements.
Certain accounts in the prior period financial statements have been
reclassified for comparative purposes to conform with the presentation in
the current year financial statements.
2. Accounts Receivable
-------------------
Accounts receivable at March 31, 2000 and September 30, 1999 consist of the
following:
March 31, 2000 September 30,
1999
---------------- ----------------
Billed $ 6,269,596 $ 7,758,571
Unbilled 4,973,137 5,231,611
Other 198,870 62,638
---------------- ----------------
Total $11,441,603 $13,052,820
================ ================
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 $9,000,000
for operating purposes and has an additional line of credit amounting to
$6,000,000, which can be used for corporate acquisitions. The lines of
credit are secured by the Company's billed and unbilled accounts receivable
and have certain financial covenants, including minimum net worth and
liquidity ratios. The lines expire February 28, 2002. At March 31, 2000 and
September 30, 1999, the Company had no outstanding balance under the lines
of credit.
4. Capital Lease
-------------
The Company has access to a $2.0 million equipment lease line of credit that
had a balance of $1,018,158 at March 31, 2000.
6
5. Stock Splits and Common Stock
-----------------------------
On June 4, 1997, the Company's stockholders approved an increase to the
Company's authorized shares from 2.0 million to 10.0 million and also
authorized a three-for-one stock split, which became effective in July 1997.
On May 29, 1998, the Company's board of directors declared a two-for-one
stock split in the form of a 100% stock dividend for stockholders of record
as of June 9, 1998.
On April 27, 1999, The Company's stockholders approved an amendment to the
Company's charter increasing the total number of shares of common stock
which the Corporation is authorized to issue from 10.0 million to 40.0
million.
Stockholders' equity has been restated to give retroactive recognition to
the stock splits for all periods presented by reclassifying from additional
paid-in capital to common stock the par value of the additional shares
arising from the splits. In addition, all references to number of shares,
per share amounts, stock option data, and market prices of common stock have
been restated.
In February 2000, the Company issued stock under a private placement. The
Company received approximately $40.9 million from this offering. The costs
associated with this offering are included as a direct reduction to paid in
capital.
6. Business Segment Information
----------------------------
During the periods ended March 31, 2000 and March 31, 1999, the Company's
operations included two reportable segments: Satellite ground systems and
electronic test instrumentation and equipment marketing.
The Company builds satellite ground systems for command and control,
integration and test, data processing, and simulation. Customers for these
systems include U.S. Government organizations such as the National
Aeronautics and Space Administration ("NASA"), the National Oceanic and
Atmospheric Administration ("NOAA"), and the U.S. Air Force, as well as
commercial satellite operators, both domestic and foreign.
Through its wholly-owned subsidiary IMI, the Company acts as a
manufacturer's representative, selling electronic test instrumentation and
equipment to customers primarily in Maryland, Virginia and the District of
Columbia. (The Company's other wholly-owned subsidiary, InterSys, provides
consulting services for satellite design and procurement, but is presently
inactive.) Summarized financial information is as follows:
Six Months Ended
------------------------------------------
March 31, 2000 March 31, 1999
------------------- -------------------
Net Sales
Satellite ground systems $19,072,524 $16,840,645
Equipment marketing $ 574,731 $ 663,834
Income before taxes
Satellite ground systems $ 2,761,651 $ 1,857,249
Equipment marketing $ 206,500 $ 236,618
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2000 AND MARCH 31, 1999
----------------------------------------------------------------------
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 100 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 ground
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.
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, 2000 and
March 31, 1999:
Three Months Ended Three Months Ended
March 31 March 31
2000 1999
---- % of ---- % of
(in thousands) Revenue (in thousands) Revenue
------- -------
Revenue $9,625 100.0 $9,828 100.0
Cost of Revenue 6,891 71.6 7,310 74.4
----- ---- ----- ----
Gross Margin 2,734 28.4 2,518 25.6
Operating Expenses
SG&A 1,743 18.1 958 9.7
Term. Acquisition Cost 141 1.5 0 0
Prod. Amortization 238 2.5 165 1.7
----- ---- ----- ----
Income from Operations 612 6.3 1,395 14.2
Other (net) 410 4.3 -46 -.5
----- ---- ----- ----
Pretax Income 1,022 10.6 1,349 13.7
Income Taxes 235 2.4 521 5.3
----- ---- ----- ----
Net Income $787 8.2 $828 8.4
===== ==== ===== ====
8
Revenue
- -------
The Company earns revenue from sales of its products and services through
contracts that are funded by the U.S. Government, both as a prime contractor or
a subcontractor, as well as commercial and international organizations. The
Company, through its wholly owned subsidiary IMI, earns commission revenue by
representing a number of electronic product manufacturers in Maryland, Virginia
and the District of Columbia, principally in space-related markets.
Internally, the Company classifies revenues in two separate categories on the
basis of the contracts' procurement and development requirements: (i) contracts
which require compliance with Government procurement and development standards
("Government Services") are classified as government revenue, and (ii) contracts
conducted according to commercial practices ("Commercial Products and Services")
are classified as commercial revenue, regardless of whether the end customer is
a commercial or government entity. Sales of the Company's COTS products are
classified as Commercial Products and Services revenue. IMI sales of third-
party hardware and software are also classified as Commercial Products and
Services revenue.
For the three months ended March 31, 2000 and 1999 the Company's revenues were
generated from the following sources:
Three Months Ended March 31,
Revenue Type 2000 1999
------------ ---- ----
Commercial Products and Services
Commercial Users 38% 26%
U.S. Government Users 1 4
---- ----
Subtotal 39 30
Government Services
NOAA 49 53
NASA 6 13
Other U.S. Government Users 6 4
---- ----
Subtotal 61 70
Total 100% 100%
==== ====
Based on the Company's revenue categorization system, the Company classified 39%
and 30% of its revenue as Commercial Products and Services revenue with the
remaining 61% and 70% classified as Government Services revenue for the three
months ended March 31, 2000 and 1999, respectively. By way of comparison, if
the revenues were classified strictly according to end-user (independent of the
Company's internal revenue categorization system), the U.S. Government would
account for 62% and 74% of the total revenues for the three months ended March
31, 2000 and 1999, respectively.
On a consolidated basis, revenue decreased 2%, or $200,000 to $9.6 million for
the three months ended March 31, 2000, from $9.8 million for the three months
ended March 31, 1999. The decrease was due to decreases in the Company's
Government Services equipment and subcontract revenues (approximately $800,000).
Commercial Products and Services revenues increased approximately $700,000
during the three months ended March 31, 2000 compared to the three months ended
March 31, 1999 principally as a result of increased Commercial Products and
Services engineering services revenues and increased equipment revenues. Sales
for IMI declined approximately $100,000 between the two periods.
9
Cost of Revenue/Gross Margin
The Company calculates 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 margin rates for
equipment and subcontract pass-throughs seldom exceed 20%. Engineering service
gross margins typically range between 20% and 40%, while gross margins for IMI
vary considerably depending on sales volume achieved.
During the three months ended March 31, 2000, cost of revenue decreased to $6.9
million from $7.3 million during the three months ended March 31, 1999, which
decrease was due primarily to decreases in direct equipment and subcontracts
costs. Direct labor and related overhead costs also decreased slightly between
the periods as a significant amount of direct labor effort was redirected toward
bid and proposal activities that are accounted for as SG&A expenses.
Cost of revenue expressed as a percentage of revenues decreased to 71.6% for the
three months ended March 31, 2000 from 74.4% for the three months ended March
31, 1999, which decrease was primarily due to a lower percentage of equipment
and subcontract costs in the fiscal year 2000 cost of revenue mix.
The Company's gross margin increased 9%, or $200,000, to $2.7 million for the
three months ended March 31, 2000 from $2.5 million for the three months ended
March 31, 1999. The increase was principally due to improved engineering
service margins.
Gross margin as a percentage of revenue was 28.4% during the three months ended
March 31, 2000 compared to 25.6% for the three months ended March 31, 1999. The
increase is principally due to a lower percentage of equipment and subcontract
costs in the cost of revenue mix coupled with higher engineering service
margins.
Operating Expenses/Income from Operations
Selling, General & Administrative expenses ("SG&A") increased to approximately
$1.7 million during the three months ended March 31, 2000 from $960,000 in the
quarter ended March 31, 1999. The change was primarily due to increases in the
Company's selling and marketing initiatives (including the establishment of
small offices in California and France) combined with significant bid and
proposal efforts. As a percentage of revenue, SG&A accounted for 18.1% of
revenue for the three months ended March 31, 2000 compared to 9.7% in the
quarter ended March 31, 1999.
Product amortization increased to $238,000 for the three months ended March 31,
2000 compared to $165,000 for the three months ended March 31, 1999. As
discussed in Note 1 of the Notes to the Consolidated Financial Statements, the
Company recorded expenses of approximately $140,000 during the three months
ended March 31, 2000 with respect to an unsuccessful acquisition attempt.
Income from operations decreased $800,000 or 56% to $600,000 for the three
months ended March 31, 2000 from $1.4 million for the three months ended March
31, 1999, which decrease was primarily due to the increases in operating
expenses described above. As a percentage of revenue, income from operations
decreased to 6.4% for the three months ended March 31, 2000 from 14.2% for the
prior year's second quarter. This decrease was principally the result of a
higher percentage of SG&A and other operating expenses against revenue in the
current quarter compared to the same quarter last fiscal year.
During the quarter ended March 31, 2000 the Company recorded $470,000 of
interest income principally derived from cash invested from the Company's two
private placement equity infusions that occurred in
10
June 1999 and February 2000. Since a significant portion of such investment was
related to tax-free debt securities, the Company's effective tax rate was only
23.0% for the three months ended March 31, 2000 compared to 38.6% for the three
months ended March 31, 1999.
COMPARISON OF THE SIX MONTHS ENDED MARCH 31, 2000 AND MARCH 31, 1999
--------------------------------------------------------------------
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, 2000 and
March 31, 1999:
Six Months Ended March 31, Six Months Ended March 31,
2000 % of 1999 % of
------- Revenue ------- Revenue
(in thousands) ----------- (in thousands) -----------
Revenue $19,647 100.0 $17,504 100.0
Cost of Revenue 13,451 68.5 12,962 74.1
------- ----- ------- -----
Gross Margin 6,196 31.5 4,542 25.9
Operating Expenses
SG&A 3,205 16.3 2,004 11.4
Term Acquisition Cost 141 .7 0 0
Prod. Amortization 475 2.4 330 1.9
------- ----- ------- -----
Income from Operations 2,375 12.1 2,208 12.6
Other (net) 593 3.0 -114 -.7
------- ----- ------- -----
Pretax Income 2,968 15.1 2,094 11.9
------- -------
Income Taxes 921 4.7 809 4.6
------- ----- ------- -----
Net Income $ 2,047 10.4 $ 1,285 7.3
======= ===== ======= =====
Revenue
- -------
The Company earns revenue from sales of its products and services through
contracts that are funded by the U.S. Government, both as a prime contractor or
a subcontractor, as well as commercial and international organizations. The
Company, through its wholly owned subsidiary IMI, earns commission revenue by
representing a number of electronic product manufacturers in Maryland, Virginia
and the District of Columbia, principally in space related markets.
Internally, the Company classifies revenues as either Government Services
revenue or Commercial Products and Services revenue. See "Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations" --
"Comparison of the Three Months Ended March 31, 2000 and March 31, 1999" --
"Revenue."
11
For the six months ended March 31, 2000 and 1999 the Company's revenues were
generated from the following sources:
Revenue Type Six Months Ended Six Months Ended
------------ March 31, 2000 March 31, 1999
-------------- --------------
Commercial Products and Services
Commercial Users 39% 24%
U.S. Government Users 1 5
--- ---
Subtotal 40 29
Government Services
NOAA 48 53
NASA 7 11
Other U.S. Government Users 5 7
--- ---
Subtotal 60 71
Total 100% 100%
=== ===
Based on the Company's revenue categorization system, the Company classified 40%
and 29% of its revenue as Commercial Products and Services revenue with the
remaining 60% and 71% classified as Government Services revenue for the six
months ended March 31, 2000 and 1999, respectively. By way of comparison, if
the revenues were classified strictly according to end-user (independent of the
Company's internal revenue categorization system), the U.S. Government would
account for 61% and 76% of the total revenues for the six months ended March 31,
2000 and 1999, respectively.
On a consolidated basis, revenue increased 12%, or $2.1 million, to $19.6
million for the six months ended March 31, 2000 from $17.5 million for the six
months ended March 31, 1999. The increase was due to increases in the Company's
Commercial Products and Services revenues (approximately $2.8 million) as all
applicable revenue components (licenses, engineering services and equipment pass
throughs) increased for this group.
Government Services revenues decreased approximately $600,000 during the six
months ended March 31, 2000 compared to the six months ended March 31, 1999.
This decline was attributable to a decrease of approximately $1.2 million in
lower margin equipment and subcontract revenue in the first half of fiscal year
2000 than in the first half of fiscal year 1999.
Sales for IMI declined approximately $100,000 between the two periods.
Cost of Revenue/Gross Margin
During the six months ended March 31, 2000, cost of revenue increased to $13.4
million from $13.0 million during the six months ended March 31, 1999, which
increase was due primarily to increases in direct labor and related overhead
costs necessary to staff the Company's new contracts and revenue growth.
Cost of revenue expressed as a percentage of revenues decreased to 68.5% for the
six months ended March 31, 2000 from 74.1% for the six months ended March 31,
1999, which decrease was primarily due to a lower percentage of equipment and
subcontract costs in the fiscal year 2000 cost of revenue mix.
12
The Company's gross margin increased 36.4%, or $1.7 million, to $6.2 million for
the six months ended March 31, 2000 from $4.5 million for the six months ended
March 31, 1999. The increase was due to margin dollar improvements in most of
the Company's revenue components (i.e. licenses, engineering services, and
equipment pass-throughs) coupled with overall revenue growth. As a result of
the foregoing factors, gross margin as a percentage of revenue was 31.5% during
the six months ended March 31, 2000 compared to 25.9% for the six months ended
March 31, 1999.
Operating Expenses/Income from Operations
SG&A increased to approximately $3.2 million during the six months ended March
31, 2000 from $2.0 million during the six months ended March 31, 1999. The
change was primarily due to increases in the Company's selling and marketing
initiatives (including the establishment of small offices in California and
France) combined with significant bid and proposal efforts. As a percentage of
revenue, SG&A accounted for 16.3% of revenue for the six months ended March 31,
2000 compared to 11.4% in the half year ended March 31, 1999.
Product amortization increased to $475,000 for the six months ended March 31,
2000 compared to $330,000 for the six months ended March 31, 1999. As discussed
in Note 1 of the Notes to the Consolidated Financial Statements, the Company
recorded expenses of approximately $140,000 during the six months ended March
31, 2000 with respect to an unsuccessful acquisition attempt.
Income from operations increased $170,000, or 8%, to $2.4 million for the six
months ended March 31, 2000 from $2.2 million for the six months ended March 31,
1999, which increase was primarily due to increases in gross margin dollars
described above. As a percentage of revenue, income from operations decreased
to 12.1% for the six months ended March 31, 2000 from 12.6% for the prior fiscal
year's first half. This decrease was principally the result of a higher
percentage of SG&A and other operating expenses against revenue in the first six
months of fiscal year 2000 compared to the same half of the last fiscal year.
During the six months ended March 31, 2000, the Company recorded $720,000 of
interest income, which was principally derived from cash invested from the
Company's two private placement equity infusions that occurred in June 1999 and
February 2000. Since a significant portion of such investment was related to
tax-free debt securities, the Company's effective tax rate was only 31.0% for
the six months ended March 31, 2000 compared to 38.6% for the six months ended
March 31, 1999.
Outlook
The Company's first half results represent a continued trend from prior fiscal
years of increased sales and profitability on those sales. At this time, the
Company has a backlog of work to be performed and it may receive additional
contract awards based on proposals in the pipeline. Management believes that
operating results for future periods will continue to improve based on the
following assumptions:
. Demand for satellite technology and related products and services will
continue to expand
. Sales of its software products and engineering services will continue to
increase
13
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. As of March 31, 2000, the
Company had in excess of $57.2 million invested in low risk marketable debt
securities (exclusive of operating cash balances in excess of $10.9 million).
For the six months ended March 31, 2000, the Company generated approximately
$3.1 million of cash from operating activities and used approximately $40.5
million for investing activities, including approximately $39.1 million to
purchase marketable debt securities. The Company also spent approximately
$930,000 for newly capitalized software development costs. The Company
anticipates that it will spend more money for software development in fiscal
year 2000 than in fiscal year 1999, as it completes the development of NT
versions of its software products.
The Company has access to a general line of credit facility through which it can
borrow up to $9.0 million for operating purposes and has an additional line of
credit amounting to $6.0 million, which can be used for corporate acquisitions.
The lines of credit are secured by the Company's billed and unbilled accounts
receivable. The lines also have certain financial covenants, including minimum
net worth and liquidity ratios. The lines expire February 28, 2002. At March
31, 2000, the Company had no amounts outstanding under the lines of credit.
The Company also has access to a $2.0 million equipment lease line of credit
under which it had approximately $1.0 million outstanding as of March 31, 2000.
The Company currently anticipates that its current cash balances (including its
marketable debt securities), amounts available under its credit facilities and
net cash provided by operating activities will be sufficient to meet its working
capital and capital expenditure requirements for at least the next twelve
months. The Company believes that inflation did not have a material impact on
the Company's revenues or income from operations during the six months ended
March 31, 2000 or in past fiscal periods.
Year 2000 Compliance
Many currently installed computer systems, software products, and
microprocessor-dependent equipment were originally coded to accept only two
digit entries in the date code field. To distinguish 21st century dates from
20th century dates, these date code fields must be able to accept four digit
entries.
The Company may realize exposure and risk if its suppliers or the systems it
relies upon to conduct day-to-day operations are not year 2000 compliant. The
potential areas of exposure include electronic data exchange systems operated by
third parties with whom the Company transacts business, products purchased from
third parties and computers, software, telephone systems and other equipment
used internally. To minimize the potential adverse effects of the year 2000
problem, the Company established an internal project team comprised of all
functional disciplines. This project team implemented a three-phase process of:
. identifying the Company's internal information and non-information
technology systems that are not year 2000 compliant;
. determining their significance in the effective operation of the
Company; and
. developing plans to resolve the issues where necessary.
14
After review of the Company's internal computer systems, software products and
microprocessor dependent equipment, management determined the Company to be year
2000 compliant and, as such, does not anticipate any material adverse
operational issues to arise.
In addition to its internal review, the Company has communicated with its
suppliers and others with whom it does business to coordinate year 2000
readiness. The responses received by the Company to date indicate that steps
have been taken to address this concern. However, if those third parties have
not been able to make all systems year 2000 compliant, there could be a material
adverse impact on the Company.
Although the rollover from December 31, 1999 to January 1, 2000 has occurred,
the Company still faces risks to the extent that suppliers of products,
services, and systems purchased by the Company or the suppliers of others with
whom the Company transacts business cannot timely provide the Company with
products, services, or systems that meet year 2000 requirements. In the event
that any such third parties cannot timely provide the Company with products,
services, or systems that meet the year 2000 requirements, the Company's
business could be harmed. For example, if one of the Company's major vendors
experiences a material disruption in business due to a failure to achieve year
2000 compliance, the Company could experience a material disruption in business.
To date the Company has not experienced any problems associated with Year 2000
computer issues nor does it anticipate any material adverse operational issues
to arise.
Forward Looking Statements
Certain of the statements contained 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. 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
including the following:
. A significant portion of the Company's revenue is derived from contracts
or subcontracts funded by the U.S. government.
. The presence of competitors with greater financial resources and their
strategic response to the Company's new services.
. The potential obsolescence of the Company's services due to the
introduction of new technologies.
. The response of customers to the Company's marketing strategies and
services.
. Changes in activity levels in the Company's core markets.
. The inability of the Company to find any attractive or suitable
candidates for acquisition or to negotiate suitable terms for the
acquisition of any potential candidates, or, if the Company is able to
identify and acquire one or more businesses, the cost of integrating the
acquired business or businesses.
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
15
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
Not applicable.
16
Part II. Other Information
- ---------------------------
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In February 2000, the Company sold an aggregate of 1,400,000 shares of its
common stock, par value $.01 per share, to investors which represented that they
were accredited investors. The aggregate offering price for such sale was
$43,400,000. The Company intends to use the proceeds of the foregoing private
placement for potential acquisitions and other general corporate purposes. No
underwriters were involved in the sale. However, in connection with the private
placement, Allen and Company, Miller, Johnson, and Kuehn, Incorporated, and ING
Barings LLC received a cash fee. 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
--------
11.1 Computation of Per Share Earnings.
27.1 Financial Data Schedule.
b. Reports on Form 8-K
-------------------
None.
17
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTEGRAL SYSTEMS, INC.
---------------------
(Registrant)
Date: May 12, 2000 By: /s/
-------------------- ---------------------------------------
Thomas L. Gough
President and Chief Operating Officer
Date: May 12, 2000 By: /s/
--------------------- ---------------------------------------
Elaine M. Parfitt
Vice President and Chief Financial Officer
18