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, 2001 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
--------- ---------
Registrant had 9,454,418 shares of common stock outstanding as of April 30, 2001
INTEGRAL SYSTEMS, INC.
TABLE OF CONTENTS
Page No.
--------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Balance Sheets - March 31, 2001 and September 30, 2000............. 1
Statements of Operations - Three and Six Months Ended
March 31, 2001 and March 31, 2000............................... 3
Statement of Stockholders' Equity - Six Months
Ended March 31, 2001............................................ 5
Statements of Cash Flow - Six Months Ended
March 31, 2001 and March 31, 2000............................... 6
Notes to Financial Statements...................................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk... 18
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K............................. 18
PART I. FINANCIAL INFORMATION
- ------------------------------
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31,
2001 September 30,
(unaudited) 2000
------------- -------------
ASSETS
------
CURRENT ASSETS
Cash $17,229,730 17,558,331
Marketable Securities 49,136,000 49,966,000
Accounts and Other Receivables 14,611,710 13,502,293
Notes Receivable 573,408 600,000
Prepaid Expenses 205,342 190,075
Income Taxes Receivable 1,664,049 1,655,290
------------ -------------
TOTAL CURRENT ASSETS 83,420,239 83,471,989
PROPERTY AND EQUIPMENT 4,849,174 4,471,838
Less: Accum. Depreciation
and Amortization 2,233,778 2,267,437
------------ -------------
TOTAL PROPERTY AND EQUIPMENT 2,615,396 2,204,401
OTHER ASSETS
Software Development Costs, net 3,899,362 3,188,783
Deposits 55,545 45,724
------------ -------------
TOTAL OTHER ASSETS 3,954,907 3,234,507
TOTAL ASSETS $89,990,542 $88,910,897
============ =============
The accompanying notes are an integral part of these consolidated
financial statements.
- 1 -
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31,
2001 September 30,
LIABILITIES & STOCKHOLDERS' EQUITY (unaudited) 2000
- ---------------------------------- ----------- -------------
CURRENT LIABILITIES
Accounts Payable $ 1,980,183 $ 1,914,985
Accrued Expenses 2,781,407 2,618,512
Capital Leases Payable 275,437 454,154
Billings in Excess of Costs 1,025,935 1,832,520
Deferred Income Taxes 108,178 132,925
------------- -------------
TOTAL CURRENT LIABILITIES 6,171,140 6,953,096
LONG TERM LIABILITIES
Capital Leases Payable 169,908 259,951
------------- -------------
TOTAL LONG TERM LIABILITIES 169,908 259,951
STOCKHOLDERS' EQUITY
Common Stock, $.01 par value,
40,000,000 shares authorized, and
9,453,718 and 9,427,368 shares issued
and outstanding at March 31, 2001
and September 30, 2000, respectively 94,537 94,274
Additional Paid-in Capital 65,813,421 65,702,313
Retained Earnings 17,741,536 15,901,263
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 83,649,494 81,697,850
------------- -------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $89,990,542 $88,910,897
============= ==============
The accompanying notes are an integral part of these consolidated
financial statements.
- 2 -
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended
March 31, March 31,
2001 2000 2001 2000
(unaudited) (unaudited) (unaudited) (unaudited)
------------ ------------ ------------ ------------
Revenue $9,544,596 $11,101,560 $18,013,272 $23,626,915
Cost of Revenue
Direct Labor 2,711,556 3,306,690 4,905,549 6,030,079
Overhead Costs 1,963,885 2,227,202 3,743,475 4,523,841
Travel and other Direct Costs 388,771 366,932 784,270 761,675
Direct Equipment & Subcontracts 1,731,980 2,532,052 2,960,392 5,454,957
------------ -------------- -------------- --------------
Total Cost of Revenue 6,796,192 8,432,876 12,393,686 16,770,552
------------ -------------- -------------- --------------
Gross Margin 2,748,404 2,668,684 5,619,586 6,856,363
------------ -------------- -------------- --------------
Selling, General & Administrative 1,903,637 1,854,513 3,796,923 3,853,089
Terminated Acquisition Costs 0 141,123 0 141,123
Product Amortization 342,500 237,500 685,000 475,000
------------ -------------- -------------- --------------
Income From Operations 502,267 435,548 1,137,663 2,387,151
Other Income (Expense)
Interest Income 626,708 488,493 1,442,427 758,365
Interest Expense (15,359) (22,874) (31,531) (51,437)
Miscellaneous, net (40,983) (23,671) (138,486) (62,900)
------------ ------------ ------------ ------------
Total Other Income (Expense) 570,366 441,948 1,272,410 644,028
Income from Continuing Operations
Before Income Taxes 1,072,633 877,496 2,410,073 3,031,179
------------ ------------ ------------ ------------
Provision for Income Taxes 284,600 173,968 569,800 944,394
------------ -------------- -------------- --------------
Income from Continuing Operations 788,033 703,528 1,840,273 2,086,785
------------ -------------- -------------- --------------
Discontinued Operations
Income from Operations of
Discontinued Segment
(Net of Tax) 0 33,161 0 116,156
------------ ------------ ------------ ------------
Net Income $788,033 $ 736,689 $1,840,273 $2,202,941
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
- 3 -
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
Three Months Ended Six Months Ended
March 31, March 31,
2001 2000 2001 2000
(unaudited) (unaudited) (unaudited) (unaudited)
----------------- ---------------- ----------------- -----------------
Weighted Average Number of Common
Shares Outstanding During Period 9,452,318 8,620,006 9,446,718 8,423,002
================= ================ ================= =================
Earnings per Share - Basic
Income from Continuing Oper. $ 0.08 $ 0.08 $ 0.19 $ 0.25
Income from Discont. Oper. $ 0.00 $ 0.01 $ 0.00 $ 0.01
----------------- ---------------- ----------------- -----------------
Net Income $ 0.08 $ 0.09 $ 0.19 $ 0.26
================= ================ ================= =================
Diluted Shares Outstanding 9,608,517 9,158,494 9,586,787 8,762,992
================= ================ ================= =================
Earnings per Share - Diluted
Income from Continuing Oper. $ 0.08 $ 0.08 $ 0.19 $ 0.24
Income from Discont. Oper. $ 0.00 $ 0.00 $ 0.00 $ 0.01
----------------- ---------------- ----------------- -----------------
Net Income $ 0.08 $ 0.08 $ 0.19 $ 0.25
================= ================ ================= =================
The accompanying notes are an integral part of these consolidated
financial statements.
- 4 -
INTEGRAL SYSTEMS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED MARCH 31, 2001
(unaudited)
Common
Number Stock Additional
of at Par Paid-in Retained
Shares Value Capital Earnings Total
-------------- ------------- --------------- --------------- ----------------
Balance September 30, 2000 9,427,368 $94,274 $65,702,313 $15,901,263 $81,697,850
Exercise of Stock Options 26,350 263 111,108 - 111,371
Net income - - - 1,840,273 1,840,273
-------------- ------------- --------------- --------------- ----------------
Balance March 31, 2001 9,453,718 $94,537 $65,813,421 $17,741,536 $83,649,494
============== ============= =============== =============== ================
The accompanying notes are an integral part of these consolidated
financial statements.
- 5 -
INTEGRAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended
March 31,
2001 2000
(unaudited) (unaudited)
------------- -------------
Cash flows from operating activities:
Net income $ 1,840,273 $ 2,202,941
--------------- ----------------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 1,216,054 995,782
Loss on disposal of fixed assets 2,229 32,498
Deferred Income taxes, net (24,747) (46,894)
(Increase) decrease in:
Accounts receivable and other receivables (1,109,417) 1,312,744
Prepaid expenses and deposits (25,088) (4,335)
(Decrease) increase in:
Accounts payable 65,198 310,356
Accrued expenses 162,895 (333,425)
Billings in excess of cost (806,585) (5,410)
Income taxes payable, net (8,759) (1,001,484)
---------------- ------------------
Total adjustments (528,220) 1,259,832
---------------- ------------------
Net cash provided by operating activities 1,312,053 3,462,773
---------------- ------------------
Cash flows from investing activities:
Marketable securities 830,000 (39,127,257)
Acquisition of fixed assets (944,278) (538,243)
Software development costs (1,395,579) (928,431)
---------------- ------------------
Net cash used in investing activities (1,509,857) (40,593,931)
---------------- ------------------
Cash flow from financing activities:
Payments on notes receivable 26,592 0
Proceeds from issuance of common stock 111,371 41,601,479
Payments on capital lease obligations (268,760) (297,275)
---------------- ------------------
Net cash (used) provided by financing activities (130,797) 41,304,204
---------------- ------------------
Net (decrease) in cash (328,601) 4,173,046
Cash - beginning of year 17,558,331 9,267,207
---------------- ------------------
Cash - end of period $17,229,730 $ 13,440,253
================ ==================
The accompanying notes are an integral part of these consolidated
financial statements.
- 6 -
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 wholly-owned subsidiaries, SAT
Corporation (SAT), Integral Systems Europe (ISI Europe), and InterSys, Inc.
(INTSYS). Because the merger of the Company and SAT qualified as a tax-
free reorganization and has been accounted for as a pooling of interests,
the consolidated financial statements have been restated for all periods
prior to the acquisition of SAT to include the combined financial results
of the Company and SAT. The effect of the restatement was to reduce net
income and both basic and diluted earnings per share for the three months
ended March 31, 2000 by $50,749 and $.01, respectively, and to increase net
income for the six months ended March 31, 2000 by $155,390 but decrease
basic earnings per share for that period by $.01. Furthermore, since the
assets of its subsidiary Integral Marketing, Inc. (IMI) were disposed of
during the year ended September 30, 2000, IMI is presented as discontinued
operations in the consolidated statements of operations.
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, 2000. 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 March 31, 2001 and September 30, 2000 consist of
the following:
March 31, 2001 Sept. 30, 2000
------------------ ------------------
Billed $ 6,820,254 $ 5,045,075
Unbilled 7,637,043 8,223,557
Other 154,413 233,661
------------------ ------------------
Total $ 14,611,710 $ 13,502,293
================== ==================
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.
- 7 -
INTEGRAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
3. Line of Credit
--------------
The Company has a line of credit agreement with a local bank for $9.0
million for operating purposes and an additional line of credit with the
bank amounting to $6.0 million, to be used for corporate acquisitions.
Borrowings under the line are due on demand with interest at the London
Inter-Bank Offering Rate (LIBOR), plus a spread of 1.5 to 2.4% based on the
ratio of funded debt to earnings before interest, taxes and depreciation
(EBITDA). The 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. The Company also has a line of credit with another bank
for $425,000. This line expires on August 2, 2001. At March 31, 2001, the
Company had no amounts outstanding under the lines of credit.
4. Capital Leases
--------------
The Company has access to a $2.0 million equipment lease line of credit
that had a balance of $445,345 at March 31, 2001.
- 8 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
------------------------------------------------------------
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 systems.
The Company believes that it was the first to offer a comprehensive COTS
(Commercial-Off-the-Shelf) software product line for command and control. As a
systems integrator, the Company leverages these products to provide turnkey
satellite control facilities that can operate multiple satellites from any
manufacturer. These systems offer significant cost savings for customers that
have traditionally purchased a separate custom control center for each of their
satellites.
Through its wholly owned subsidiary SAT Corporation ("SAT"), acquired in August
2000, the Company also offers turnkey systems and software for satellite and
terrestrial communications signal monitoring.
In March 2001 the Company formed a wholly-owned subsidiary, Integral Systems'
Europe S.A.S. ("ISI Europe") with headquarters in Toulouse, France. The new
subsidiary serves as the focal point for the support of all of Integral's
European business.
The consolidated financial statements of the Company presented herein have been
restated for all periods prior to the acquisition of SAT to include the combined
financial results of the Company and SAT.
- 9 -
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, 2001 and
March 31, 2000:
Three Months Ended March 31,
% of % of
2001 Revenue 2000 Revenue
------ ------------- ------- ------------
(in thousands) (in thousands)
Revenue $9,544 100.0 $11,102 100.0
Cost of Revenue 6,796 71.2 8,433 76.0
------ ----- ------- -----
Gross Margin 2,748 28.8 2,669 24.0
Operating Expenses
SG&A 1,903 19.9 1,855 16.7
Term. Acquisition Costs 0 0 141 1.3
Prod. Amortization 343 3.6 238 2.1
------ ----- ------- -----
Income from Continuing Oper. 502 5.3 435 3.9
Other Income (Expense) (net) 571 6.0 442 4.0
------ ----- ------- -----
Income from Continuing Oper. 1,073 11.3 877 7.9
Before Income Taxes
Income Taxes 285 3.0 173 1.6
------ ----- ------- -----
Income from Continuing Oper. 788 8.3 704 6.3
Income from Operations of
Discontinued Segment 0 0 33 .3
------ ----- ------- -----
Net Income $ 788 8.3 $ 737 6.6
====== ===== ======= =====
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 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. SAT's and ISI Europe's
revenue is also classified as Commercial Products and Services revenue.
- 10 -
For the three months ended March 31, 2001 and 2000, the Company's revenues were
generated from the following sources:
Three Months Ended March 31,
Revenue Type 2001 2000
------------ ---- ----
Commercial Products & Services
Commercial Users 44% 46%
U.S. Government Users 1 1
---- ----
Subtotal 45 47
Government Services
NOAA 40 42
NASA 5 6
Other U.S. Government Users 10 5
---- ----
Subtotal 55 53
Total 100% 100%
==== ====
Based on the Company's revenue categorization system, the Company classified 45%
and 47% of its revenue as Commercial Products and Services revenue with the
remaining 55% and 53% classified as Government Services revenue for the three
months ended March 31, 2001 and 2000, 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 56% and 54% of the total revenues for the three months ended March
31, 2001 and 2000, respectively.
On a consolidated basis, revenue decreased 14%, or $1.6 million, to $9.5 million
for the three months ended March 31, 2001, from $11.1 million for the three
months ended March 31, 2000. The decrease was principally due to a decline in
the Company's revenue from pass-through equipment, which declined from
approximately $2.7 million in the second quarter last year to $1.7 million in
the current quarter, representing a $1.0 million decrease. Most of the
remaining revenue decrease is attributable to a $600,000 revenue decline at SAT.
Cost of Revenue/Gross Margin
The Company computes gross margin by subtracting cost of revenue from revenue.
Included in cost of revenue are direct labor expenses, overhead charges
associated with the Company's direct labor base and other costs that can be
directly related to specific contract cost objectives, such as travel,
consultants, equipment, subcontracts and other direct costs.
Gross margins on contract revenues vary depending on the type of product or
service provided. Generally, license revenues related to the sale of the
Company's COTS products have the greatest gross margins because of the minimal
associated marginal costs to produce. By contrast, gross margins rates for
equipment and subcontract pass-throughs seldom exceed 15%. Engineering service
gross margins typically range between 20% and 35%.
During the three months ended March 31, 2001, cost of revenue decreased by $1.6
million from $8.4 million during the three months ended March 31, 2000 to $6.8
million at March 31, 2001. The decrease was due primarily to decreases in
direct labor, related overhead costs and equipment and subcontract pass-
throughs. Cost of revenue expressed as a percentage of revenue decreased to
approximately 71.2% at March 31, 2001 compared to 76.0% at March 31, 2000, which
decrease was primarily due to a lower percentage of equipment and subcontract
costs in the fiscal year 2001 cost of revenue mix.
- 11 -
The Company's gross margin increased $100,000, or 3% to $2.8 million for the
three months ended March 31, 2001 from $2.7 million for the three months ended
March 31, 2000 despite $1.6 million of lower revenue. The increase was
principally due to a decline in cost of revenue as discussed above. Gross
margin as a percentage of revenue was 28.8% during the three months ended March
31, 2001 compared to 24.0% for the three months ended March 31, 2000. This
increase is primarily attributable to an increase in SAT's gross margin
percentages.
Operating Expenses/Income from Operations
Selling, General & Administrative expenses (SG&A) increased slightly to
approximately $1.9 million during the three months ended March 31, 2001 from
$1.8 million in the quarter ended March 31, 2000. As a percentage of revenue,
SG&A accounted for 19.9% of revenue for the three months ended March 31, 2001
compared to 16.7% in the quarter ended March 31, 2000. The change in percentage
of revenue was primarily due to decreases in revenue discussed above. The
Company believes that its current SG&A spending level is representative of
current and future trends.
Product amortization increased from $238,000 for the three months ended March
31, 2000 to $343,000 for the three months ended March 31, 2001 due to increases
in capitalized software development costs. During the three months ended March
31, 2000, the Company incurred approximately $140,000 of costs related to a
planned acquisition that did not materialize. Such costs did not recur during
the three months ended March 31, 2001.
Income from operations increased 15.4% to $502,000 for the three months ended
March 31, 2001 from $435,000 for the three months ended March 31, 2000. As a
percentage of revenue, income from operations increased to 5.3% for the three
months ended March 31, 2001 from 3.9% for the prior year's second quarter. The
foregoing dollar and percentage increases are primarily the result of an
improvement in the Company's gross margin coupled with the elimination of
terminated acquisition costs during the three months ended March 31, 2001.
Income from continuing operations before income taxes increased by $200,000 to
$1.1 million from $900,000 between the comparable periods principally due to an
increase in interest income of $140,000 and the increase in income from
operations discussed above.
The Company's effective tax rate increased from 19.8% for the three months ended
March 31, 2000 to 26.6% for the three months ended March 31, 2001. The increase
was a result of a lower mix of tax-free interest income recorded in the current
quarter than in the prior year's quarter.
Income from discontinued operations was $33,000 during the three months ended
March 31, 2000. There was no comparable income from discontinued operations in
the current three-month period.
As a result of the above, net income rose to approximately $800,000 from
approximately $700,000 during the three months ended March 31, 2001 compared to
the three months ended March 31, 2000.
- 12 -
COMPARISON OF THE SIX MONTHS ENDED MARCH 31, 2001 AND MARCH 31, 2000
--------------------------------------------------------------------
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, 2001 and
March 31, 2000:
Six Months Ended March 31,
2001 % of 2000 % of
------- Revenue ------- Revenue
(in thousands) ------- (in thousands) -------
Revenue $18,013 100.0 $23,627 100.0
Cost of Revenue 12,393 68.8 16,771 71.0
------- ----- ------- -----
Gross Margin 5,620 31.2 6,856 29.0
Operating Expenses
SG&A 3,797 21.1 3,853 16.3
Term Acquisition Cost 0 0 141 .6
Prod. Amortization 685 3.8 475 2.0
------- ----- ------- -----
Income from Continuing Oper. 1,138 6.3 2,387 10.1
Other Income (Expense) (net) 1,272 7.1 644 2.7
------- ----- ------- -----
Income from Continuing Oper.
Before Income Taxes 2,410 13.4 3,031 12.8
Income Taxes 570 3.2 944 4.0
------- ----- ------- -----
Income from Continuing Oper. 1,840 10.2 2,087 8.8
Income from Operations of
Discontinued Segment 0 0 116 .5
------- ----- ------- -----
Net Income $ 1,840 10.2 $ 2,203 9.3
======= ===== ======= =====
- 13 -
Revenue
- -------
For the six months ended March 31, 2001 and 2000 the Company's revenues were
generated from the following sources:
Six Months Ended March 31,
Revenue Type 2001 2000
------------
Commercial Products and Services
Commercial Users 48% 49%
U.S. Government Users 1 1
---- ----
Subtotal 49 50
Government Services
NOAA 38 40
NASA 5 6
Other U.S. Government Users 8 4
---- ----
Subtotal 51 50
Total 100% 100%
==== ====
Based on the Company's revenue categorization system, the Company classified 49%
and 50% of its revenue as Commercial Products and Services revenue with the
remaining 51% and 50% classified as Government Services revenue for the six
months ended March 31, 2001 and 2000, 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 52% and 51% of the total revenues for the six months ended March 31,
2001 and 2000, respectively.
On a consolidated basis, revenue decreased 24%, or $5.6 million, to $18.0
million for the six months ended March 31, 2001 from $23.6 million for the six
months ended March 31, 2000. The decrease was due in part to a decline in the
Company's revenue from pass-through equipment, which declined from approximately
$4.9 million in the first half last year to $2.9 million in the current half
year, representing a $2.0 million decrease. Most of the remaining revenue
decrease is attributable to a $2.7 million revenue decline at SAT, which
recorded in excess of 72% of its entire fiscal year 2000 revenue during the
first half of that year. Licenses and engineering service revenues also
declined by $900,000 between the periods being compared.
Cost of Revenue/Gross Margin
During the six months ended March 31, 2001, cost of revenue decreased 26.1% or
$4.4 million to $12.4 million from $16.8 million during the six months ended
March 31, 2000. The decrease was due to decreases in direct labor, related
overhead costs and equipment and subcontract pass-throughs. Cost of revenue
expressed as a percentage of revenues decreased to 68.8% for the six months
ended March 31, 2001 from 71.0% for the six months ended March 31, 2000, which
decrease was primarily due to a lower percentage of equipment and subcontract
costs in the fiscal year 2001 cost of revenue mix.
The Company's gross margin decreased $1.2 million, or 18.0%, to $5.6 million for
the six months ended March 31, 2001 from $6.8 million for the six months ended
March 31, 2000. The decrease was principally due to the $5.6 million decline in
revenue discussed above. Gross margin as a percentage of
- 14 -
revenue was 31.2% during the six months ended March 31, 2001 compared to 29.0%
for the six months ended March 31, 2000. This increase is primarily attributable
to an increase in SAT's gross margin percentages.
Operating Expenses/Income from Operations
SG&A basically remained unchanged at $3.8 million for the six months ended March
31, 2001 when compared with the six months ended March 31, 2000. As a
percentage of revenue, SG&A accounted for 21.1% of revenue for the six months
ended March 31, 2001 compared to 16.3% in the half year ended March 31, 2000.
The change in percentage of revenue was primarily due to the decreases in
revenue discussed above. The Company believes that its current SG&A spending
level is representative of current and future trends.
Product amortization increased to $685,000 for the six months ended March 31,
2001 compared to $475,000 for the six months ended March 31, 2000. The Company
recorded expenses of approximately $140,000 during the six months ended March
31, 2000 with respect to an unsuccessful acquisition attempt. Such costs did
not recur during the six months ended March 31, 2001.
Income from operations decreased $1.3 million, or 52.3%, to $1.1 million for the
six months ended March 31, 2001 from $2.4 million for the six months ended March
31, 2000, which decrease was primarily due to decreases in gross margin dollars
described above coupled with higher product amortization expenses. As a
percentage of revenue, income from operations decreased to 6.3% for the six
months ended March 31, 2001 from 10.1% 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
2001 compared to the same half of the last fiscal year.
During the six months ended March 31, 2001, the Company recorded $1.4 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 23.6% for
the six months ended March 31, 2001 compared to 31.2% for the six months ended
March 31, 2000.
Income from discontinued operations was $116,000 during the six months ended
March 31, 2000. There was no comparable income from discontinued operations in
the current six-month period.
As a result of the above, net income decreased to approximately $1.8 million
from approximately $2.2 million during the six months ended March 31, 2001
compared to the six months ended March 31, 2000.
Outlook
-------
This outlook section contains forward-looking statements, including but not
necessarily limited to projections, all of which are based on current
expectations. There is no assurance that the Company's projections will in fact
be achieved and these projections do not reflect any acquisitions or
divestitures, which may occur in the future. Reference should be made to the
various important factors listed under the heading "Forward Looking Statements"
that could cause actual future results to differ materially.
At this time, the Company has a backlog of work to be performed and it may
receive additional contract awards based on proposals in the pipeline.
Management believes that operating results for future periods will improve based
on the following assumptions:
- 15 -
. Demand for satellite technology and related products and services will
continue to expand; and
. Sales of its software products and engineering services will continue to
increase.
Looking forward to fiscal year 2001 in its entirety, the Company is anticipating
revenue levels comparable to amounts recorded in fiscal year 2000. Operating
income, net income, and fully diluted earnings per share (excluding discontinued
operations and certain non-recurring items recorded last fiscal year), are
anticipated to be approximately 10% to 20% greater for fiscal year 2001 than the
amounts recorded in fiscal year 2000.
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.
For the six months ended March 31, 2001, the Company generated approximately
$1.3 million of cash from operating activities, and used approximately $1.5
million for investing activities, including approximately $1.4 million for newly
capitalized software development costs and $900,000 for the purchase of fixed
assets.
The Company has access to a general line of credit facility through which it
could borrow up to $9.0 million for operating purposes and has an additional
line of credit with the bank amounting to $6.0 million, which can be used for
corporate acquisitions. Borrowings under the line are due on demand with
interest at the London Inter-Bank Offering Rate (LIBOR), plus a spread of 1.5 to
2.4% based on the ratio of funded debt to earnings before interest, taxes and
depreciation (EBITDA). The 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.
The Company also has a line of credit with another bank for $425,000. This line
expires on August 2, 2001. At March 31, 2001, 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
that had a balance of approximately $445,000 at March 31, 2001.
The Company currently anticipates that its current cash balances, amounts
available under its lines of credit and net cash provided by operating
activities will be sufficient to meet its working capital and capital
expenditure requirements for at least the next twelve months. The Company
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, 2001 or in past
fiscal years.
- 16 -
FORWARD LOOKING STATEMENTS
--------------------------
Certain of the statements contained in this section, including those under the
headings "Outlook" and "Liquidity and Capital Resources," and in other parts of
this 10-Q, are forward looking. In addition, from time to time, the Company may
publish forward looking statements relating to such matters as anticipated
financial performance, business prospects, technological developments, new
products, research and development activities and similar matters. Forward-
looking statements can be identified by the use of forward-looking terminology
such as "may", "will", "believe", "expect", "anticipate", "estimate",
"continue", or other similar words, including statements as to the intent,
belief, or current expectations of the Company and its directors, officers, and
management with respect to the Company's future operations, performance, or
positions or which contain other forward-looking information. These forward-
looking statements are predictions. No assurances can be given that the future
results indicated, whether expressed or implied, will be achieved. The
Company's actual results may differ significantly from the results discussed in
the forward-looking statements. While the Company believes that these
statements are and will be accurate, a variety of factors could cause the
Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Company's statements.
The Company's business is dependent upon general economic conditions and upon
various conditions specific to its industry, and future trends cannot be
predicted with certainty. Particular risks and uncertainties that may effect
the Company's business, other than those described elsewhere herein, include the
following:
. A significant portion of the Company's revenue is derived from contracts
or subcontracts funded by the U.S. Government, which are subject to
termination without cause, government regulations and audits, competitive
bidding, and the budget and funding process of the U.S. Government.
. The presence of competitors with greater financial resources and their
strategic response to the Company's new services.
. The potential obsolescence of the Company's services due to the
introduction of new technologies.
. The response of customers to the Company's marketing strategies and
services.
. The Company's commercial contracts are subject to strict performance and
other requirements.
. The intense competition in the satellite ground system industry could
harm the Company's financial performance.
. Changes in activity levels in the Company's core markets.
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.
- 17 -
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II. OTHER INFORMATION
- ---------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
--------
3.1 Articles of Restatement of the Company (Incorporated by reference to
the Registration Statement on Form S-3 (File No. 333-82499) filed
with the Commission on July 8, 1999).
3.2 Amended and Restated Bylaws of the Company (Incorporated by reference
to the Company's Annual Report on Form 10-K for the Fiscal Year ended
September 30, 2000 filed with the Commission on December 21, 2000).
11.1 Computation of Per Share Earnings.
b. Reports on Form 8-K
-------------------
None.
- 18 -
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: May 14, 2001 By: /s/
------------------ --------------------------------------
Thomas L. Gough
President & Chief Operating Officer
Date: May 14, 2001 By: /s/
------------------ --------------------------------------
Elaine M. Parfitt
Vice President & Chief Financial Officer
- 19 -