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 June 30, 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 charter)
Maryland 52-1267968
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5000 Philadelphia Way, Lanham, MD 20706
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (301) 731-4233
------------------------
- -------------------------------------------------------------------------------
(Former name, address and fiscal year, if changed since last report)
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No _______
---------
As of June 30, 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 June 30, 2000) held by non-affiliates of the Registrant was
$136,393,491.
Registrant had 8,773,178 shares of common stock outstanding as of June 30, 2000.
INTEGRAL SYSTEMS, INC.
TABLE OF CONTENTS
Page No.
--------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Balance Sheets - June 30, 2000 and September 30, 1999.............. 1
Statements of Operations - Three and Nine Months Ended
June 30, 2000 and June 30, 1999................................. 3
Statement of Stockholders' Equity - Nine Months
Ended June 30, 2000............................................. 4
Statement of Cash Flow - Nine Months Ended
June 30, 2000 and June 30, 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 4. Submission of Matters to a Vote of Security Holders.......... 18
Item 6. Exhibits and Reports on Form 8-K............................. 18
PART I. FINANCIAL INFORMATION
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2000 and September 30, 1999
ASSETS
June 30, September 30,
2000 1999
(unaudited)
------------------ ------------------
CURRENT ASSETS
Cash $10,803,482 $ 7,027,446
Marketable Securities 55,660,792 18,136,000
Accounts Receivable 11,841,993 13,052,820
Prepaid Expenses 153,547 78,123
Income Taxes Receivable 841,288 0
----------------- -----------------
TOTAL CURRENT ASSETS 79,301,102 38,294,389
FIXED ASSETS
Electronic Equipment 762,236 655,272
Furniture & Fixtures 422,143 380,904
Leasehold Improvements 152,857 132,110
Software Purchases 196,594 67,861
Equip. Under Capital Lease 1,911,463 1,911,463
----------------- -----------------
SUBTOTAL 3,445,293 3,147,610
Less: Accumulated Depreciation 1,770,248 1,322,169
----------------- -----------------
TOTAL FIXED ASSETS 1,675,045 1,825,441
OTHER ASSETS
Software Development Costs 2,932,667 2,006,194
Deposits 65,348 13,666
----------------- -----------------
TOTAL OTHER ASSETS 2,998,015 2,019,860
TOTAL ASSETS $83,974,162 $42,139,690
================= =================
See Notes to Financial Statements
1
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2000 and September 30, 1999
LIABILITIES & STOCKHOLDERS' EQUITY
June 30, September 30,
2000 1999
(unaudited)
----------------- ----------------
CURRENT LIABILITIES
Accounts Payable $ 1,287,781 $ 2,838,639
Accrued Expenses 2,416,903 2,555,850
Notes Payable 0 0
Capital Leases Payable 522,822 601,327
Billings in Excess of Cost 1,056,977 1,666,484
Income Taxes Payable 0 173,637
Deferred Income Taxes 146,890 146,890
--------------- ---------------
TOTAL CURRENT LIABILITIES 5,431,373 7,982,827
--------------- ---------------
LONG TERM LIABILITIES
Capital Leases Payable 344,818 714,106
--------------- ---------------
TOTAL LONG TERM LIABILITIES 344,818 714,106
STOCKHOLDERS' EQUITY
Common Stock, $.01 par value, 40,000,000 shares
authorized, and 8,773,178 and 7,163,908 shares
issued and outstanding at June 30, 2000
and September 30, 1999, respectively 87,732 71,639
Additional Paid-in Capital 63,823,832 21,993,620
Retained Earnings 14,286,407 11,377,498
--------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 78,197,971 33,442,757
--------------- ---------------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $83,974,162 $42,139,690
=============== ===============
See Notes to Financial Statements
2
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
2000 1999 2000 1999
-------------- ------------- --------------- --------------
Revenue $ 7,300,502 $10,598,274 $26,373,026 $27,438,919
Cost of Revenue
Direct Labor 2,378,330 2,586,685 7,094,756 7,148,171
Overhead Costs 1,548,936 1,494,175 4,809,974 4,525,362
Travel and Other Direct Costs 446,049 258,291 1,196,104 860,049
Direct Equipment & Subcontracts 625,888 3,157,296 4,982,564 7,508,574
------------- ------------ -------------- -------------
Total Cost of Revenue 4,999,203 7,496,447 18,083,398 20,042,156
------------- ------------ -------------- -------------
Gross Margin 2,301,299 3,101,827 8,289,628 7,396,763
------------- ------------ -------------- -------------
Selling, General & Administrative 1,757,927 1,234,360 4,942,591 3,222,039
Terminated Acquisition Costs (620) 0 140,503 0
Product Amortization 237,500 165,000 712,500 495,000
------------- ------------ -------------- -------------
Income From Operations 306,492 1,702,467 2,494,034 3,679,724
Other Income (Expense)
Interest Income 792,416 45,555 1,497,493 88,617
Interest Expense (21,190) (30,091) (72,627) (98,145)
Miscellaneous, net (139,573) (54,371) (208,558) (149,386)
------------- ------------ -------------- -------------
Total Other Income (Expense) 631,653 (38,907) 1,216,308 (158,914)
Income from Continuing Operations
Before Income Taxes 938,145 1,663,560 3,710,342 3,520,810
------------- ------------ -------------- -------------
Provision for Income Taxes 80,712 642,400 921,512 1,359,700
------------- ------------ -------------- -------------
Income from Continuing Operations 857,433 1,021,160 2,788,830 2,161,110
Discontinued Operations
Income from Operations of Discontinued
Segment (Net of tax) 3,923 53,375 120,079 198,592
Net Income $ 861,356 $ 1,074,535 $ 2,908,909 $ 2,359,702
============= ============ ============== =============
Weighted Average Number of Common
Shares Outstanding During Period 8,754,657 6,342,882 7,980,220 6,043,982
============= ============ ============== =============
Earnings per Share - Basic
Income from Continuing Operations $ 0.10 $ 0.16 $ 0.35 $ 0.36
Income from Discontinued Operations $ 0.00 $ 0.01 $ 0.01 $ 0.03
------------- ------------ -------------- -------------
Net Income $ 0.10 $ 0.17 $ 0.36 $ 0.39
============= ============ ============== =============
Weighted Average Number of
Diluted Common Shares Outstanding
During Period 9,057,622 6,881,653 8,472,870 6,512,550
============= ============ ============== =============
Earnings per Share - Diluted
Income from Continuing Operations $ 0.10 $ 0.15 $ 0.33 $ 0.33
Income from Discontinued Operations $ 0.00 $ 0.01 $ 0.01 $ 0.03
------------- ------------ -------------- -------------
Net Income $ 0.10 $ 0.16 $ 0.34 $ 0.36
============= ============ ============== =============
See Notes to Financial Statements
3
INTEGRAL SYSTEMS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED JUNE 30, 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 209,270 2,093 946,453 - 948,546
Private Placement offering 1,400,000 14,000 40,883,759 40,897,759
Net income - - - 2,908,909 2,908,909
------------- ------------- -------------- --------------- ---------------
Balance June 30, 2000 8,773,178 $87,732 $63,823,832 $14,286,407 $78,197,971
============= ============= ============== ============== ===============
See Notes to Financial Statements
4
INTEGRAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the Nine Months Ended
June 30,
2000 1999
-------------- --------------
Cash flows from operating activities:
Net income $ 2,908,909 $ 2,359,702
------------ ------------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 1,429,970 1,007,969
(Increase) decrease in:
Accounts receivable 1,210,827 (3,505,694)
Prepaid expenses and deposits (127,106) (5,682)
(Decrease) increase in:
Accounts payable (1,550,858) 693,308
Accrued expenses (138,947) 201,207
Billings in excess of cost (609,507) 1,709,294
Income taxes payable, net (1,014,925) (268,880)
------------ ------------
Total adjustments (800,546) (168,478)
------------ ------------
Net cash provided by operations 2,108,363 2,191,224
------------ ------------
Cash flow from investing activities:
Marketable securities (37,524,792) 0
Acquisition of fixed assets (567,074) (338,293)
Increase in software development costs (1,638,973) (831,786)
Increase in other assets 0 (1,995)
------------ ------------
Net cash (used) in investing activities (39,730,839) (1,172,074)
------------ ------------
Cash flow from financing activities:
Proceeds from issuance of common stock 41,846,305 20,019,854
Payments on capital lease obligations (447,793) (359,616)
------------ ------------
Net cash provided (used) by financing activities 41,398,512 19,660,238
------------ ------------
Net increase (decrease) in cash 3,776,036 20,679,388
Cash - beginning of year 7,027,446 3,055,144
------------ ------------
Cash - end of period $ 10,803,482 $ 23,734,532
============ ============
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 terminated 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 June 30, 2000 and September 30, 1999 consist of the
following:
June 30, 2000 September 30, 1999
----------------- ---------------------
Billed $ 5,441,035 $ 7,758,571
Unbilled 6,154,790 5,231,611
Other 246,168 62,638
-------------- ----------------
Total $11,841,993 $ 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 with the bank
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 June 30,
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 $867,640 at June 30, 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. Discontinued Operations
-----------------------
In July 2000, the Company announced a plan to sell its wholly-owned
subsidiary IMI. IMI acts as a manufacturer's representative, selling
electronic test instrumentation and equipment to customers primarily in
Maryland, Virginia and the District of Columbia. The assets to be sold
consist primarily of cash, accounts receivable, property, and equipment.
Integral Systems, Inc. anticipates a gain on the disposal of the
discontinued operation. This gain will be recognized when the sale occurs.
Operating results of IMI for the three and nine months ended June 30, 2000
are shown separately under Discontinued Operations in the accompanying
income statement, net of income taxes of ($9,400) and $70,381,
respectively. The income statements for 1999 have been restated and
operating results of IMI are also shown separately, net of income taxes of
$84,500 and $124,900, respectively.
Revenue of IMI for the nine months ended June 30, 2000 and June 30, 1999
were $704,204 and $1,034,109 respectively. These amounts are not included
in revenue in the accompanying income statements.
Assets and liabilities of IMI to be disposed of consisted of the following:
June 30, 2000 September 30, 1999
Cash $ 865,376 $ 723,669
Accounts Receivable (net) 282,721 529,852
Prepaid Expenses 2,740 500
Fixed Assets (net) 9,106 11,508
Deposits 1,995 1,995
------------- -----------
Total Assets 1,161,938 1,267,524
------------- -----------
Accounts Payable 14,641 15,095
Accrued Expenses 375,788 507,902
Income Taxes Payable 26,880 129,977
------------- -----------
Net Assets to be disposed of $ 744,629 $ 614,550
============= ===========
Assets are shown at their book values and liabilities are shown at their
face amounts.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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. 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
include the following, among other things:
. A significant portion of the Company's revenue is derived from
contracts or subcontracts funded by the U.S. government.
. The Company's commercial contracts are subject to competition and
strict performance requirements.
. 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 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.
8
The discussion and analysis that follows is based on the restated figures
presented above.
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2000 AND JUNE 30, 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 120 different satellite
missions for communications, science, meteorology, and earth resource
applications. The Company has an established domestic and international customer
base that includes government and commercial satellite operators, spacecraft and
payload manufacturers, and aerospace systems integrators.
The Company has developed innovative software products that reduce the cost and
minimize the development risk associated with traditional custom-built 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 June 30, 2000 and
June 30, 1999, respectively.
Three Months Ended Three Months Ended
June 30 June 30
2000 % of 1999 % of
---- ----
(in thousands) Revenue (in thousands) Revenue
------- -------
Revenue $7,300 100.0 $10,598 100.0
Cost of Revenue 4,999 68.5 7,496 70.7
------ ----- ------- -----
Gross Margin 2,301 31.5 3,102 29.3
Operating Expenses
SG&A 1,758 24.1 1,234 11.6
Term Acquisition Cost -1 0 0 0
Prod. Amortization 238 3.2 165 1.6
------ ----- ------- -----
Income from Operations 306 4.2 1703 16.1
Other (net) 632 8.6 -39 -.4
------ ----- ------- -----
Pretax Income from
Continuing Operations 938 12.8 1,664 15.7
Income Taxes 81 1.1 642 6.1
------ ----- ------- -----
Income from
Continuing Operations $ 857 11.7 $1,022 9.6
Discontinued Operations
Income from Discontinued
Operations (net of tax) 4 0.1 53 0.5
Net Income $ 861 11.8 $ 1,075 10.1
====== ===== ======= =====
9
Revenue
The Company earns revenue from sales of its products and services through
contracts that are funded by the U.S. Government, both as a prime contractor or
a subcontractor, as well as commercial and international organizations.
Internally, the Company classifies revenues in two separate categories on the
basis of the contracts' procurement and development requirements: (i) contracts
which require compliance with Government procurement and development standards
("Government Services") are classified as government revenue, and (ii) contracts
conducted according to commercial practices ("Commercial Products and Services")
are classified as commercial revenue, regardless of whether the end customer is
a commercial or government entity. Sales of the Company's COTS products are
classified as Commercial Products and Services revenue.
For the three months ended June 30, 2000 and 1999, respectively, the Company's
revenues were generated from the following sources:
Three Months Ended June 30,
Revenue Type 2000 1999
------------ ---- ----
Commercial Products and Services
Commercial Users 24% 42%
U.S. Government Users 3 2
---- ----
Subtotal 27 44
Government Services
NOAA 53 43
NASA 11 10
Other U.S. Government Users 9 3
---- ----
Subtotal 73 56
Total 100% 100%
==== ====
Based on the Company's revenue categorization system, the Company classified 27%
and 44% of its revenue as Commercial Products and Services revenue with the
remaining 73% and 56% classified as Government Services revenue for the three
months ended June 30, 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 76% and 58% of the total revenues for the three months ended June
30, 2000 and 1999, respectively.
On a consolidated basis, revenue decreased 31%, or $3.3 million, to $7.3 million
for the three months ended June 30, 2000, from $10.6 million for the three
months ended June 30, 1999. The decrease was principally due to a decrease in
the Company's Commercial Products and Services equipment revenues (approximately
$1.9 million).
Government Services revenues decreased approximately $1.2 million during the
three months ended June 30, 2000 compared to the three months ended June 30,
1999 principally as a result of decreased Government Services equipment and
subcontract revenues.
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.
10
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 15% while engineering
service gross margins typically range between 20% and 40%.
During the three months ended June 30, 2000, cost of revenue decreased to $5.0
million from $7.5 million during the three months ended June 30, 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 68.5% for the
three months ended June 30, 2000, from 70.7% for the three months ended June 30,
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 decreased 25.8%, or $0.8 million, to $2.3 million for
the three months ended June 30, 2000 from $3.1 million for the three months
ended June 30, 1999. The decrease was principally due to lower revenue.
Gross margin as a percentage of revenue was 31.5% during the three months ended
June 30, 2000 compared to 29.3% for the three months ended June 30, 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 Continuing Operations
Selling, General & Administrative expenses ("SG&A") increased to approximately
$1.8 million during the three months ended June 30, 2000 from $1.2 million in
the quarter ended June 30, 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 24.1% of
revenue for the three months ended June 30, 2000 compared to 11.6% in the
quarter ended June 30, 1999.
Product amortization increased to $238,000 for the three months ended June 30,
2000 compared to $165,000 for the three months ended June 30, 1999.
Income from continuing operations decreased $725,000, or 43.6%, to $940,000 for
the three months ended June 30, 2000 from $1.7 million for the three months
ended June 30, 1999, which decrease was primarily due to the decreases in
revenue and increased operating expenses as described above. As a percentage of
revenue, income from continuing operations decreased to 12.8% for the three
months ended June 30, 2000 from 15.7% for the prior year's third 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 June 30, 2000, the Company recorded $790,000 of
interest income 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 8.6% for the three months
ended June 30, 2000 compared to 38.6% for the three months ended June 30, 1999.
Discontinued Operations
On July 5, 2000, the Company announced its plan to divest its wholly owned
subsidiary Integral Marketing, Inc. Integral Marketing earns commission revenue
by representing a number of electronic product manufacturers in Maryland,
Virginia and the District of Columbia, principally in space-related markets.
Sale of Integral Marketing is expected to take place in fiscal 2000 (see Note 6
of Notes to the Consolidated Financial Statements). As a result of this plan of
disposal, the results of operations for
11
Integral Marketing have been reported as discontinued operations (the
"Discontinued Operations") and previously reported financial statements have
been restated.
Income from Discontinued Operations decreased $50,000 to $4,000 for the three
months ended June 30, 2000 from $53,000 for the three months ended June 30,
1999. The decrease was principally due to decreased commission revenue and
increased cost of revenue.
COMPARISON OF THE NINE MONTHS ENDED JUNE 30, 2000 AND JUNE 30, 1999
-------------------------------------------------------------------
The components of the Company's income statement as a percentage of revenue are
depicted in the following table for the nine months ended June 30, 2000 and June
30, 1999, respectively:
Nine Months Ended June 30, Nine Months Ended June 30,
2000 % of 1999 % of
---- ----
(in thousands) Revenue (in thousands) Revenue
------- -------
Revenue $26,373 100.0 $27,439 100.0
Cost of Revenue 18,083 68.6 20,042 73.0
------- ------ ------- -----
Gross Margin 8,290 31.4 7,397 27.0
Operating Expenses
SG&A 4,943 18.7 3,222 11.7
Term Acquisition Cost 141 .5 0 0
Prod. Amortization 712 2.7 495 1.9
------- ------ ------- -----
Income from Operations 2,494 9.5 3,680 13.4
Other (net) 1,216 4.6 -159 -.6
------- ------ ------- -----
Pretax Income from 3,710 14.1 3,521 12.8
------- -------
Continuing Operations
Income Taxes 921 3.5 1,360 4.9
------- ------ ------- -----
Income from
Continuing Operations 2,789 10.6 2,161 7.9
Discontinued Operations
Income from Discontinued
Operations (net of tax) 120 .4 199 .7
Net Income $ 2,909 11.0 $ 2,360 8.6
======= ====== ======= =====
Revenue
The Company earns revenue from sales of its products and services through
contracts that are funded by the U.S. Government, both as a prime contractor or
a subcontractor, as well as commercial and international organizations.
Internally, the Company classifies revenues 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 June 30, 2000 and June 30, 1999" --
"Revenue."
12
For the nine months ended June 30, 2000 and 1999, respectively, the Company's
revenues were generated from the following sources:
Revenue Type Nine Months Nine Months
------------
Ended Ended
June 30, 2000 June 30, 1999
------------- -------------
Commercial Products and Services
Commercial Users 35% 31%
U.S. Government Users 2 3
----- -----
Subtotal 37 34
Government Services
NOAA 49 50
NASA 8 11
Other U.S. Government Users 6 5
----- -----
Subtotal 63 66
Total 100% 100%
===== =====
Based on the Company's revenue categorization system, the Company classified 37%
and 34% of its revenue as Commercial Products and Services revenue with the
remaining 63% and 66% classified as Government Services revenue for the nine
months ended June 30, 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 65% and 69% of the total revenues for the nine months ended June 30,
2000 and 1999, respectively.
On a consolidated basis, revenue decreased 4%, or $1.0 million, to $26.4 million
for the nine months ended June 30, 2000 from $27.4 million for the nine months
ended June 30, 1999. The decline was due to decreases in the Company's
Government Services revenues (approximately $1.5 million) as applicable
equipment pass-through revenue decreased for this group.
Commercial Products and Services revenues increased approximately $430,000
during the nine months ended June 30, 2000 compared to the nine months ended
June 30, 1999. This increase was attributable to an increase of $1.2 million in
engineering services revenue and a decrease of $570,000 in equipment and
subcontract revenue in the first nine months of fiscal year 2000 when compared
to the first nine months of fiscal year 1999.
Cost of Revenue/Gross Margin
During the nine months ended June 30, 2000, cost of revenue decreased to $18.1
million from $20.0 million during the nine months ended June 30, 1999, which
decrease was due primarily to a decrease in equipment and subcontract pass-
throughs.
Cost of revenue expressed as a percentage of revenues decreased to 68.6% for the
nine months ended June 30, 2000 from 73% for the nine months ended June 30,
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 12.1%, or $900,000, to $8.3 million for the
nine months ended June 30, 2000 from $7.4 million for the nine months ended June
30, 1999. The increase was due to margin dollar improvements in most of the
Company's revenue components, including licenses and engineering services. As a
result of the foregoing factors, gross margin as a percentage of revenue was
31.4% during the nine months ended June 30, 2000 compared to 27% for the nine
months ended June 30, 1999.
13
Operating Expenses/Income from Continuing Operations
SG&A increased to approximately $4.9 million during the nine months ended June
30, 2000 from $3.2 million during the nine months ended June 30, 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 18.7% of revenue for the nine months ended June 30,
2000 compared to 11.7% in the nine months ended June 30, 1999.
Product amortization increased to $710,000 for the nine months ended June 30,
2000 compared to $500,000 for the nine months ended June 30, 1999. As discussed
in Note 1 of the Notes to the Consolidated Financial Statements, the Company
recorded expenses of approximately $140,000 during the nine months ended June
30, 2000 with respect to an unsuccessful acquisition attempt.
Income from operations decreased $1.2 million, or 32.2%, to $2.5 million for the
nine months ended June 30, 2000 from $3.7 million for the nine months ended June
30, 1999, which decrease was primarily due to decreases in gross margin dollars
described above. As a percentage of revenue, income from operations decreased to
9.5% for the nine months ended June 30, 2000 from 13.4% for the prior fiscal
year's first nine months. This decrease was principally the result of a higher
percentage of SG&A and other operating expenses against revenue in the first
nine months of fiscal year 2000 compared to the same nine months of the last
fiscal year.
During the nine months ended June 30, 2000, the Company recorded $1.5 million of
interest income, which was principally derived from cash invested from the
Company's two private placement equity infusions that occurred in June 1999 and
February 2000. Since a significant portion of such investment was related to
tax-free debt securities, the Company's effective tax rate was only 24.8% for
the nine months ended June 30, 2000 compared to 38.6% for the nine months ended
June 30, 1999.
Discontinued Operations
Income from Discontinued Operations decreased $80,000 to $120,000 for the nine
months ended June 30, 2000 from $200,000 for the nine months ended June 30,
1999. For a description of Discontinued Operations and the Company's restatement
of previously reported financial statements, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations" - "Comparison of the
Three Months Ended June 30, 2000 and June 30, 1999" - "Discontinued Operations".
The decrease in income was principally due to decreased commission and increased
cost of revenue.
OUTLOOK
-------
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
In July 2000 the Company announced forward-looking guidance for the balance of
its fiscal year ending September 30, 2000 and fiscal year 2001. Currently, the
Company is anticipating revenue for the quarter ending September 30, 2000 in the
mid $9.0 million range. Operating income is expected to exceed $1.5 million,
while net income should approach $2.0 million. The Company expects revenue for
fiscal year 2000 in its entirety to be in the $35.0 to $36.0 million range, down
about $3.0 million from fiscal year 1999 revenue amounts. Net income for fiscal
year 2000 in its entirety should approach $5.0 million (compared to $3.7 million
in fiscal year 1999). For fiscal year 2001, the Company is anticipating revenue
growth of approximately 25% to 35% over fiscal year 2000 revenue after adjusting
for the planned sale of IMI. Income from operations is expected to grow over 35%
over fiscal year 2000 levels, with net income growing in excess of 25%.
14
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 June 30, 2000, the Company
had in excess of $55.7 million invested in low risk marketable debt securities
(exclusive of operating cash balances in excess of $10.8 million).
For the nine months ended June 30, 2000, the Company generated approximately
$2.1 million of cash from operating activities and used approximately $39.7
million for investing activities, including approximately $37.5 million to
purchase marketable debt securities. The Company also spent approximately $1.6
million for newly capitalized software development costs. Overall, the Company
has spent more money on software development for the nine months ended June 30,
2000 than in fiscal year 1999, as it completes the development of a new testing
product (VI-LINK) and 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 June 30,
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 $870,000 outstanding as of June 30, 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 nine months ended
June 30, 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.
15
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
16
PART II. OTHER INFORMATION
- ---------------------------
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of the Company was held on April 26, 2000.
The following matters were voted on by stockholders, and received the votes
indicated.
1. The stockholders elected the following individuals to the Board of
Directors:
Director For Against Abstain Broker Non-Votes
Steven R. Chamberlain 4,701,146 1,200 3,550 3,975,550
Steven A. Carchedi 4,702,146 200 3,550 3,975,550
Thomas L. Gough 4,702,346 0 3,550 3,975,550
Bonnie K. Wachtel 4,702,346 0 3,550 3,975,550
Dominic A. Laiti 4,702,196 150 3,550 3,975,550
R. Doss McComas 4,701,996 350 3,550 3,975,550
John R. Murphy 4,701,946 400 3,550 3,975,550
2. The stockholders approved a proposal to ratify the appointment of
Rubino & McGeehin, chartered as independent accountants of the Company
for the fiscal year ending September 30, 2000.
For Against Abstain Broker Non-Votes
Total 6,298,099 1,500 19,333 3,987,450
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: August 14, 2000 By: /s/ Thomas L. Gough
------------------------------- -----------------------------
Thomas L. Gough
President and Chief Operating
Officer
Date: August 14, 2000 By: /s/ Elaine M. Parfitt
------------------------------- ------------------------------
Elaine M. Parfitt
Vice President and Chief
Financial Officer
-18-