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, 2002 or
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_____ Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission file number 0-18603
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INTEGRAL SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
Maryland 52-1267968
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5000 Philadelphia Way, Lanham, MD 20706
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (301) 731-4233
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(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
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Registrant had 9,225,663 shares of common stock outstanding as of April 30, 2002
INTEGRAL SYSTEMS, INC.
TABLE OF CONTENTS
Page No.
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PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Balance Sheets - March 31, 2002 (unaudited) and September 30, 2001 2
Unaudited Statements of Operations - Three and Six Months Ended
March 31, 2002 and March 31, 2001 4
Unaudited Statement of Stockholders' Equity - Six Months
Ended March 31, 2002 5
Unaudited Statements of Cash Flow - Six Months Ended
March 31, 2002 and March 31, 2001 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 19
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K 19
- 1 -
PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
- -----------------------------
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 2002 (Unaudited) and September 30, 2001
ASSETS
March 31, September 30,
2002 2001
(Unaudited)
------------------ -----------------
CURRENT ASSETS
Cash $ 6,109,676 $ 2,379,503
Marketable Securities 52,129,220 57,890,170
Accounts Receivable 17,013,328 18,384,883
Notes Receivable 115,325 112,495
Prepaid Expenses 919,805 340,677
Deferred Income Tax - Current Portion 447,078 611,395
Income Taxes Receivable 725,280 1,940,573
------------------ -----------------
TOTAL CURRENT ASSETS 77,459,712 81,659,696
PROPERTY AND EQUIPMENT 5,856,282 5,853,334
Less: Accum. Depreciation 2,354,465 2,659,644
------------------ -----------------
TOTAL PROPERY AND EQUIPMENT 3,501,817 3,193,690
OTHER ASSETS
Notes Receivable - Non-Current 348,348 406,727
Intangible Assets, net 500,000 0
Goodwill 2,353,103 0
Software Development Costs 6,008,911 5,080,629
Deposits and Deferred Charges 83,377 72,702
------------------ -----------------
TOTAL OTHER ASSETS 9,293,739 5,560,058
TOTAL ASSETS $ 90,255,268 $ 90,413,444
================== =================
- 2 -
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 2002 (Unaudited) and September 30, 2001
LIABILITIES & STOCKHOLDERS' EQUITY
March 31, September 30,
2002 2001
(Unaudited)
----------------- -----------------
CURRENT LIABILITIES
Accounts Payable $2,850,547 $5,131,229
Accrued Expenses 3,215,030 2,926,443
Capital Leases Payable 59,999 137,791
Billings in Excess of Cost 1,949,935 2,036,795
----------------- -----------------
TOTAL CURRENT LIABILITIES 8,075,511 10,232,258
LONG TERM LIABILITIES
Capital Leases Payable 107,648 122,161
Deferred Income Taxes 2,064,191 1,882,384
----------------- -----------------
TOTAL LONG TERM LIABILITIES 2,171,839 2,004,545
STOCKHOLDERS' EQUITY
Common Stock, $.01 par value,
40,000,000 shares authorized, and
9,142,363 and 9,071,113 shares issued and
outstanding at March 31, 2002
and September 30, 2001, respectively 91,424 90,711
Additional Paid-in Capital 63,554,243 63,246,985
Retained Earnings 16,077,887 15,095,953
Accumulated other comprehensive income 284,364 (257,008)
----------------- -----------------
TOTAL STOCKHOLDERS' EQUITY 80,007,918 78,176,641
----------------- -----------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $90,255,268 $90,413,444
================= =================
- 3 -
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
2002 2001 2002 2001
----------------- ---------------- -------------- --------------
Revenue $10,557,529 $9,544,596 $20,814,986 $18,013,272
Cost of Revenue
Direct Labor 3,171,993 2,711,556 5,752,355 4,905,549
Overhead Costs 2,279,745 1,963,885 4,234,965 3,743,475
Travel and Other Direct Costs 399,087 388,771 783,922 784,270
Direct Equipment & Subcontracts 1,655,825 1,731,980 3,879,092 2,960,392
----------------- ---------------- -------------- --------------
Total Cost of Revenue 7,506,650 6,796,192 14,650,334 12,393,686
----------------- ---------------- -------------- --------------
Gross Margin 3,050,879 2,748,404 6,164,652 5,619,586
Selling, General & Administrative 2,352,004 1,903,637 4,260,045 3,796,923
Product Amortization 547,276 342,500 1,094,526 685,000
----------------- ---------------- -------------- --------------
Income From Operations 151,599 502,267 810,081 1,137,663
Other Income (Expense)
Interest Income 240,517 626,708 526,994 1,442,427
Interest Expense (46,668) (15,359) (64,411) (31,531)
Gain on sale of marketable securities 386,599 0 386,599 0
Miscellaneous, net (24,322) (40,983) (82,946) (138,486)
----------------- ---------------- -------------- -------------
Total Other Income 556,126 570,366 766,236 1,272,410
Income Before Income Taxes 707,725 1,072,633 1,576,317 2,410,073
Provision for Income Taxes 274,126 284,600 526,613 569,800
----------------- ---------------- -------------- --------------
Net Income $433,599 $788,033 $1,049,704 $1,840,273
================= ================ ============== ==============
Weighted Avg. Number of Common
Shares Outstanding During Period 9,120,763 9,452,318 9,096,980 9,446,718
Earnings per Share - Basic $0.05 $0.08 $0.12 $0.19
Diluted Shares Outstanding 9,316,743 9,608,517 9,296,883 9,586,787
Earnings per Share - Diluted $0.05 $0.08 $0.11 $0.19
================= ================ ============== ==============
- 4 -
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED MARCH 31, 2002
(Unaudited)
Common Accumulated
Number Stock Additional Other
of At Par Paid-in Retained Comprehensive
Shares Value Capital Earnings Income Total
Balance September 30, 2001 9,071,113 $90,711 $63,246,985 $15,095,953 ($257,008) $78,176,641
Comprehensive income
Net income - - - 1,049,704 - 1,049,704
Unrealized gain on marketable
securities
(Net of taxes of $346,124) - - - - 541,372 541,372
----------------
Comprehensive Income 1,591,076
Repurchased Shares (6,000) (60) (41,820) (67,770) (109,650)
Stock Options Exercised 77,250 773 349,078 349,851
-----------------------------------------------------------------------------------
Balance March 31, 2002 9,142,363 $91,424 $63,554,243 $16,077,887 $284,364 $80,007,918
====================================================================================
- 5 -
INTEGRAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended March 31, 2002 and 2001
(Unaudited)
For the Six Months Ended
March 31,
2002 2001
--------------- --------------
Cash flows from operating activities:
Net income $1,049,704 $1,840,273
--------------- --------------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 1,707,252 1,216,054
Gain on sale of marketable securities (386,599) 0
Loss on disposal of fixed assets 0 2,229
Deferred Income taxes, net 0 (24,747)
(Increase) decrease in operational assets and
liabilities net of effects from acquisition:
Accounts receivable and other receivables 2,198,421 (1,109,417)
Prepaid expenses and deposits (463,071) (25,088)
Accounts payable (4,668,019) 65,198
Accrued expenses (171,990) 162,895
Billings in excess of cost (742,974) (806,585)
Income taxes payable, net 1,215,293 (8,759)
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Total adjustments (1,311,687) (528,220)
--------------- --------------
Net cash used in operating activities (261,983) 1,312,053
--------------- --------------
Cash flows from investing activities:
Sale of marketable securities, net 6,225,000 830,000
Sale of common stock, net 810,045 0
Notes receivable, net 55,549 26,592
Acquisition of fixed assets (656,446) (944,278)
Software development costs (2,022,808) (1,395,579)
Net advances to Newpoint Technologies (448,332) 0
Acquisition of Newpoint Technologies (118,749) 0
--------------- --------------
Net cash provided by investing activities 3,844,259 (1,483,265)
--------------- --------------
Cash flows from financing activities:
Proceeds from issuance of common stock 349,852 111,371
Payments on stock repurchase (109,650) 0
Payments on capital lease obligations (92,305) (268,760)
--------------- --------------
Net cash provided by financing activities 147,897 (157,389)
--------------- --------------
Net increase (decrease) in cash 3,730,173 (328,601)
Cash - beginning of year 2,379,503 17,558,331
-------------- --------------
Cash - end of period $6,109,676 $17,229,730
============== ==============
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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), Newpoint Technologies, Inc. (Newpoint), Integral
Systems Europe (ISI Europe), and InterSys, Inc. (INTSYS). All
significant intercompany accounts and transactions have been eliminated
in consolidation.
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, 2001. 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, 2002 and September 30, 2001 consist of
the following:
March 31, 2002 Sept. 30, 2001
----------------- ------------------
Billed $ 9,160,026 $ 10,081,489
Unbilled 7,778,463 8,163,934
Other 74,839 139,460
----------------- ------------------
Total $ 17,013,328 $ 18,384,883
================= ==================
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, amounts related to indirect cost variances on cost
reimbursable type contracts or amounts related to milestones that 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 $10.0
million for general corporate purposes. 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 line
of credit is secured by the Company's billed and unbilled accounts
receivable and has certain financial covenants, including minimum net
worth and liquidity ratios. The line expires February 28, 2004.
The Company had no balance outstanding at March 31, 2002, under the
line of credit.
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INTEGRAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Acquisition
-----------
On January 30, 2002, the Company completed its acquisition of Newpoint
Technologies, Inc. (Newpoint). As consideration for all of the shares
issued and outstanding of Newpoint the Company agreed to make future
contingent payments to the shareholders of Newpoint for the period
beginning February 1, 2002 through September 30, 2005. The contingent
payments are calculated every September 30 in the period from February
1, 2002 through September 30, 2005 based on a formula of net income and
excess revenues as defined in the acquisition agreement.
A total of $118,749 represents Integral Systems' direct transaction
costs relating to the acquisition. To retire debt and fund operations,
the Company made advances to Newpoint in the amounts of $490,000 and
$1,837,849 immediately prior to and immediately following consummation
of the acquisition. The operations of Newpoint are included in the
consolidated statement of operations as of February 1, 2002.
The acquisition was accounted for using the purchase method of
accounting under the guidance in FASB Statement 141, Business
Combinations. Accordingly, a portion of the purchase price has been
allocated to assets acquired and liabilities assumed and other
identified intangible assets based on estimated fair values on the
acquisition date. Approximately $2,734,354, $400,000 and $100,000 were
allocated to net liabilities assumed, technology and customer base,
respectively. The excess of the net liabilities assumed and the direct
transaction costs over the identified intangible assets acquired was
allocated to goodwill. The Company's primary reason for acquiring
Newpoint was to gain entrance to new markets and increase exposure to a
certain class of customer. The technology and specific customers
acquired were incidental to the transaction. Accordingly, a significant
portion of the excess of net liabilities assumed and the purchase price
was allocated to goodwill. The net liabilities assumed includes amounts
previously advanced by the Company. The identified intangible assets
are being amortized on a straight-line basis over an estimated useful
life of four years for the technology and customer base. Goodwill is
not being amortized but is being reviewed annually for impairment in
accordance with FAS 142. The purchase price allocation is based on
preliminary estimates and is subject to change as final valuations are
made.
- 8 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
------------------------------------------------------------
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.
On January 30, 2002, the Company completed the acquisition of Newpoint
Technologies, Inc. (Newpoint) of Salem, New Hampshire. Newpoint provides
equipment monitoring and control software to satellite operators and the
telecommunications industry.
Critical Accounting Policies
The Company believes the following accounting policies are critical to the
understanding of the Company's financial condition and results of operations.
Revenue Recognition
- -------------------
The Company provides services under fixed price contracts for which revenue is
generally recognized using the percentage of completion method based on the
relationship of actual costs incurred to total costs estimated over the duration
of the contract. These estimates regarding costs underlie the Company's
determinations as to overall contract profitability and the timing of revenue
recognition. If the Company does not accurately estimate the resources required
or the scope of the work to be performed, or does not manage its projects
properly within the planned periods of time or satisfy its obligations under the
contracts, then actual results may differ from projected results and losses on
contracts may need to be recognized.
Revenue results are difficult to predict, and any shortfall in revenue or delay
in recognizing revenue could cause the Company's operating results to vary
significantly from quarter to quarter.
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Provision for Doubtful Accounts
- -------------------------------
The Company maintains an allowance for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. A
considerable amount of judgment is required in assessing the ultimate
realization of individual accounts receivable balances, including the credit
worthiness of each customer and the period in which customers' financial
condition deteriorate and they are no longer able to pay the balances owed to
the Company.
To the extent the Company does not recognize deterioration in its customers'
financial condition in the period it occurs, or to the extent the Company
underestimates its customers' ability to pay, the amount of bad debt expense
recognized in a given reporting resulting will be impacted.
Goodwill and Other Intangible Assets
- ------------------------------------
The Company's acquisitions of other companies have resulted in the acquisition
of certain intangible assets and goodwill. These assets are subject to
impairment to the extent the Company's operations experience significant
negative results. These negative results can be the result of The Company's
individual operations or negative trends in the Company's industry or in the
general economy, which impact the Company. To the extent The Company's
intangible assets or goodwill are determined to be impaired, then these balances
are written down to their estimated fair value on the date of the impairment.
Determining when an impairment has occurred involves a significant amount of
judgment. Management bases its judgment on a number of factors including
viability of the businesses acquired, their integration into the Company's
operations, the market in which those businesses operate and their projected
future results, cash flow projections, and numerous other factors. The results
reported in any given period could be impacted by management's determination as
to when an impairment has occurred.
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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, 2002 and
March 31, 2001:
Three Months Ended March 31,
% of % of
2002 Revenue 2001 Revenue
---- ------- ---- -------
(in thousands) (in thousands)
Revenue $10,558 100.0 $9,545 100.0
Cost of Revenue 7,507 71.1 6,796 71.2
------- ----- ------ -----
Gross Margin 3,051 28.9 2,749 28.8
Operating Expenses
SG&A 2,352 22.3 1,904 19.9
Prod. Amortization 547 5.2 342 3.6
------- ----- ------ -----
Income from Operations 152 1.4 503 5.3
Other Income (Expense) (net) 556 5.3 570 6.0
------- ----- ------ -----
Income Before Income Taxes 708 6.7 1,073 11.3
Income Taxes 274 2.6 285 3.0
------- ----- ------ -----
Net Income $ 434 4.1 $ 788 8.3
======= ===== ====== =====
Revenue
The Company earns revenue, both as a prime contractor and a subcontractor, from
sales of its products and services through contracts that are funded by the U.S.
Government, 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. Revenues attributable to
SAT, Newpoint, and ISI Europe are also classified as Commercial Products and
Services revenue.
- 11 -
For the three months ended March 31, 2002 and 2001, the Company's revenues were
generated from the following sources:
Three Months Ended March 31,
Revenue Type 2002 2001
------------ -------- --------
Commercial Products & Services
Commercial Users 49% 44%
U.S. Government Users - 1
---- ----
Subtotal 49 45
Government Services
NOAA 38 40
Air Force 7 5
Other U.S. Government Users 6 10
---- ----
Subtotal 51 55
Total 100% 100%
==== ====
Based on the Company's revenue categorization system, the Company classified 49%
of its revenue as Commercial Products and Services revenue with the remaining
51% classified as Government Services revenue for the three months ended March
31, 2002. For the three months ended March 31, 2001 the Company classified 45%
of its revenue Commercial Products and Services revenue with the remaining 55%
classified as Government Services revenue. 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
51% and 56% of the total revenues for the three months ended March 31, 2002 and
2001, respectively.
On a consolidated basis, revenue increased 11%, or $1.1 million, to $10.6
million for the three months ended March 31, 2002, from $9.5 million for the
three months ended March 31, 2001. The increase was due to increases in the
Company's Commercial Products and Services revenues, which fully accounted for
the change. Specifically, the Company recorded approximately $600,000 in
Commercial Products and Services revenues for Newpoint subsequent to its
acquisition at the end of January 2002. Newpoint revenues were not part of the
Company's consolidated revenues during the three months ended March 31, 2001.
The remaining $500,000 increase in revenues was primarily attributable to
increased license revenues and increases in revenues generated from services
provided in the commercial sector.
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, 2002, cost of revenue increased by
10.5%, or $700,000, from $6.8 million during the three months ended March 31,
2001 to $7.5 million during the three months ended March 31, 2002. The increase
was mostly due to Newpoint's cost of revenue (approximately $500,000) which was
not included with the Company's results from operations for the three months
ended March 31, 2001. In addition costs of revenue for SAT increased
approximately $400,000 between the
- 12 -
quarters being compared even though SAT revenue decreased by $50,000. The
increased costs at SAT for the three months ended March 31, 2002 relate to cost
overruns on two -fixed price contracts. Overall cost of revenue expressed as a
percentage of revenue remained relatively constant at 71.1% for the three months
ended March 31, 2002 and 71.2% for the three months ended March 31, 2001.
The Company's gross margin increased $300,000, or 11% to $3.0 million for the
three months ended March 31, 2002 from $2.7 million for the three months ended
March 31, 2001. The increase was principally due to the $1.1 million revenue
increase discussed above. Gross margin as a percentage of revenue was relatively
constant at 28.9% during the three months ended March 31, 2002 compared to 28.8%
for the three months ended March 31, 2001.
Operating Expenses/Income from Operations
Selling, General & Administrative expenses (SG&A) were $2.4 million during the
three months ended March 31, 2002 compared to $1.9 million for the three months
ended March 31, 2001. More than half of the increase was the result of the
inclusion of SG&A costs for Newpoint, which costs were not recorded by the
Company during the three months ended March 31, 2001, while the balance of the
increase was attributable to sales and marketing costs incurred in pursuit of
new business principally with the U.S. Air Force. As a percentage of revenue,
SG&A accounted for 22.3% of revenue for the three months ended March 31, 2002
compared to 19.9% for the three months ended March 31, 2001.
Product amortization increased from $342,000 for the three months ended March
31, 2001 to $547,000 for the three months ended March 31, 2002 due to increases
in capitalized software development costs.
Income from operations decreased $350,000 to $150,000 for the three months ended
March 31, 2002 from $500,000 for the three months ended March 31, 2001. The
decrease is primarily due to increases in SG&A expenses and product amortization
expenses. Further, the Company experienced an operating loss of approximately
$300,000 at SAT and an operating loss of approximately $139,000 at Newpoint for
the three months ended March 31, 2002. As a percentage of revenue, income from
operations decreased to 1.4% for the three months ended March 31, 2002 from 5.3%
for the prior year's second quarter. The decrease is the result of the higher
SG&A coupled with an increased percentage of product amortization expenses
against revenue during the three months ended March 31, 2002 compared to the
three months ended March 31, 2001 plus the operating losses at SAT and Newpoint
discussed above.
During the three months ended March 31, 2002, the Company recorded $240,000 of
interest income compared to $627,000 of interest income recorded for the three
months ended March 31, 2001. The decrease is due to the general decline in
interest rates in response to recent interest rate cuts by the Federal Reserve
Board and the Company's reduction in interest generating capital resulting from
the repurchase of approximately $8.0 million of Company stock in September and
October of 2001. During the current quarter, the Company also realized a gain of
approximately $400,000 resulting from the sale of marketable securities. No such
gain was recorded during the three months ended March 31, 2001.
Income before income taxes decreased by approximately $400,000 to $700,000 from
$1.1 million between the two periods being compared principally due to the
increase in SG&A and product amortization expenses accompanied by the decrease
in interest income discussed above.
The Company's effective tax rate increased from 26.6% for the three months ended
March 31, 2001 to 38.7% for the three months ended March 31, 2002. The increase
in tax rate was primarily a result of a lower percentage of tax-free interest
income compared to operating income recorded in the current quarter compared to
the prior year's second quarter.
As a result of the above, net income decreased to approximately $430,000 during
the three months ended March 31, 2002 from approximately $790,000 during the
three months ended March 31, 2001.
- 13 -
COMPARISON OF THE SIX MONTHS ENDED MARCH 31, 2002 AND MARCH 31, 2001
--------------------------------------------------------------------
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, 2002 and
March 31, 2001:
Six Months Ended March 31,
% of % of
2002 Revenue 2001 Revenue
---- -------- ---- -------
(in thousands) (in thousands)
Revenue $20,815 100.0 $18,013 100.0
Cost of Revenue 14,650 70.4 12,393 68.8
------- ------ ------- -----
Gross Margin 6,165 29.6 5,620 31.2
Operating Expenses
SG&A 4,260 20.5 3,797 21.1
Prod. Amortization 1,095 5.2 685 3.8
------- ------ ------- -----
Income from Operations 810 3.9 1,138 6.3
Other Income (Expense) (net) 766 3.7 1,272 7.1
------- ------ ------- -----
Income Before Income Taxes 1,576 7.6 2,410 13.4
Income Taxes 526 2.5 570 3.2
------- ------ ------- -----
Net Income 1,050 5.1 1,840 10.2
Revenue
- -------
For the six months ended March 31, 2002 and 2001 the Company's revenues were
generated from the following sources:
Six Months Ended March 31,
Revenue Type 2002 2001
------------
Commercial Products and Services
Commercial Users 48% 48%
U.S. Government Users 1 1
--- ---
Subtotal 49 49
Government Services
NOAA 38 38
NASA 7 5
Other U.S. Government Users 6 8
---- -----
Subtotal 51 51
Total 100% 100%
======= =======
Based on the Company's revenue categorization system, the Company classified 49%
of its revenue as Commercial Products and Services revenue with the remaining
51% classified as Government Services revenue for the six months ended March 31,
2002 and 2001. By way of comparison, if the revenues were classified strictly
according to end user (independent of the Company's internal revenue
categorization
- 14 -
system), the U.S. Government would account for 52% of the total revenues for the
six months ended March 31, 2002 and 2001.
On a consolidated basis, revenue increased 16%, or $2.8 million, to $20.8
million for the six months ended March 31, 2002 from $18.0 million for the six
months ended March 31, 2001. All revenue functional components (i.e. licenses,
services, and pass throughs) were greater during the six months ended March 31,
2002 compared to the six months ended March 31, 2001. Further approximately
$600,000 In Commercial Products and Services revenue was recorded for Newpoint
in the current six month period whereas no Newpoint revenues were recorded by
the Company during the first six months in fiscal year 2001.
Cost of Revenue/Gross Margin
During the six months ended March 31, 2002, cost of revenue increased 18.2% or
$2.2 million to $14.6 million from $12.4 million during the six months ended
March 31, 2001. The increase was due to increases in direct labor, related
overhead costs and equipment and subcontract pass-throughs necessary to support
the increase in revenue discussed above. Further, cost of sales amounts
attributed to Newpoint (approximately $500,000) were not included with the
Company's results from operations for the six months ended March 31, 2001. In
addition, costs of revenue for SAT increased approximately $500,000 between the
periods being compared even though SAT revenue only increased by $260,000. The
increased costs at SAT for the six months ended March 31, 2002 relate to
overruns on two fixed price contracts. Overall cost of revenue expressed as a
percentage of revenues increased to 70.4% for the six months ended March 31,
2002 from 68.8% for the six months ended March 31, 2001. The increase was
primarily due to a higher cost of revenue percentage at SAT for the six months
ended March 31, 2002 compared to the six months ended March 31, 2001.
The Company's gross margin increased approximately $500,000 to $6.1 million for
the six months ended March 31, 2002 from $5.6 million for the six months ended
March 31, 2001. The increase was principally due to the $2.8 million increase in
revenue discussed above. Gross margin as a percentage of revenue was 29.6%
during the six months ended March 31, 2002 compared to 31.2% for the six months
ended March 31, 2001. This decrease is primarily attributable to a decrease in
gross margin at SAT as a result of the two overrun contracts discussed above.
Further Newpoint's gross margin percentage was only 22%, for the six months
ended March 31, 2002, thereby reducing the Company's overall gross margin
percentage.
Operating Expenses/Income from Operations
SG&A increased approximately $500,000 for the six months ended March 31, 2002
when compared with the six months ended March 31, 2001. More than half of the
increase was the result of the inclusion of SG&A costs for Newpoint, which costs
were not recorded by the Company during the six months ended March 31, 2001,
while the balance of the increase was attributable to sales and marketing costs
incurred in pursuit of new business principally with the U.S. Air Force. As a
percentage of revenue, SG&A accounted for 20.5% of revenue for the six months
ended March 31, 2002 compared to 21.1% for the six months ended March 31, 2001.
The change in percentage of revenue was primarily due to the increases in
revenue discussed above.
Product amortization increased to $1.1 million for the six months ended March
31, 2002 compared to $685,000 for the six months ended March 31, 2001 due to
increases in capitalized software development costs.
Income from operations decreased approximately $300,000, or 28.7%, to $800,000
for the six months ended March 31, 2002 from $1.1 million for the six months
ended March 31, 2001, which decrease was primarily due to higher SG&A and
product amortization expenses. Further, the Company experienced an operating
loss of approximately $200,000 at SAT and an operating loss of approximately
$139,000 at
- 15 -
Newpoint for the six months ended March 31, 2002. As a percentage of revenue,
income from operations decreased to 3.9% for the six months ended March 31, 2002
from 6.3% for the prior fiscal year's first half. This decrease was principally
the result of a lower gross margin percentage coupled with a higher percentage
of product amortization expense against revenue in the first six months of
fiscal year 2002 compared to the first six months of the last fiscal year.
During the six months ended March 31, 2002, the Company recorded $500,000 of
interest income compared to $1.4 million of interest income for the six months
ended March 31, 2001. The decrease is due to the general decline in interest
rates in response to recent interest rate cuts by the Federal Reserve Board and
the Company's reduction in interest generating capital resulting from the
repurchase of approximately $8.0 million of Company stock in September and
October of 2001. During the current six months the Company also realized a gain
of approximately $400,000 resulting from the sale of marketable securities. No
such gain was recorded during the six months ended March 31, 2001.
Income before income taxes decreased by approximately $800,000 to $1.6 million
from $2.4 million between the two periods being compared principally due to the
increase in SG&A and product amortization expenses accompanied by the decrease
in interest income discussed above.
The Company's effective tax rate increased from 23.6% for the six months ended
March 31, 2001 to 33.4% for the six months ended March 31, 2002. The increase
was primarily a result of a lower percentage of tax-free interest income
compared to operating income recorded in the current six month period compared
to the prior year's first six months.
As a result of the above, net income decreased to approximately $1.0 million
during the six months ended March 31, 2002 from approximately $1.8 million
during the six months ended March 31, 2001.
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 subsequent to the end of the quarterly reporting period covered by
this Form 10-Q. 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:
o Demand for satellite technology and related products and services will
continue to expand; and
o Sales of its software products and engineering services will continue to
increase.
Looking forward to fiscal year 2002 in its entirety, the Company is anticipating
growth in revenue, of at least 20% over results posted for fiscal year 2001 in
its entirety. Conversely (and consistent with previously announced guidance)
earnings per share may be as much as 20% lower than results recorded for fiscal
year 2001. The anticipated lower earnings would result from:
o Lower first half results as discussed above
o Continued lower interest income
o Anticipated operating losses from Newpoint
o Expected lower results from SAT
- 16 -
Based on recently announced contract awards (particularly with the U.S. Air
Force) and also consistent with previous guidance, management believes that
revenues for fiscal year 2003 should be at least 25% greater than revenues for
fiscal year 2002, while earnings per share should be at least 50% greater in
fiscal year 2003 compared to fiscal year 2002.
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, 2002, the Company used approximately $260,000
of cash from operating activities, and generated $3.8 million from investing
activities, net of approximately $2.0 million used for newly capitalized
software development costs and $660,000 for the purchase of fixed assets.
The Company has a line of credit agreement with a local bank for $10.0 million
for general corporate purposes. 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 line of credit is secured by the Company's billed and
unbilled accounts receivable and has certain financial covenants, including
minimum net worth and liquidity ratios. The line expires February 28, 2004.
The Company had no balance outstanding at March 31, 2002, under the line of
credit.
The Company also has access to a $2.0 million equipment lease line of credit
that had a balance of approximately $168,000 at March 31, 2002.
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, 2002 or in past
fiscal years.
- 17 -
FORWARD LOOKING STATEMENTS
--------------------------
Certain of the statements contained in the Management's Discussion and
Analysis of Financial Condition and Results of Operations section, in other
parts of this 10-Q, and 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. 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:
o 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.
o The presence of competitors with greater financial resources and
their strategic response to the Company's new services.
o The potential obsolescence of the Company's services due to the
introduction of new technologies.
o The response of customers to the Company's marketing
strategies and services.
o The Company's commercial contracts are subject to strict performance
and other requirements.
o The intense competition in the satellite ground system industry
could harm our financial performance.
o Risks related to the Company's acquisition strategy. In
particular, the Company may not be able to find any attractive
candidates or it may find that the acquisition terms proposed by
potential acquisition candidates are not favorable to the
Company. In addition, the Company may compete with other
companies for these acquisition candidates, which competition may
make an acquisition more expensive for the Company. If the
Company is unable to identify and acquire any suitable
candidates, the Company may not be able to find alternative uses
for the cash proceeds of its previous private placements that
improve the Company's business, financial conditions, or results
of operations to the extent that an acquisition could. In
addition, the integration of the acquired business or businesses
may be costly and may result in a decrease in the value of the
Company's common stock for the following reasons, among others:
o the Company may not adequately assess the risks inherent in a
particular acquisition candidate or correctly assess the
candidate's potential contribution to the Company's financial
performance;
o the Company may need to divert more management resources to
integration than it planned, which may adversely affect its
ability to pursue other more profitable activities;
- 18 -
o the difficulties of integration may be increased by the
necessity of coordinating geographically separated
organizations, integrating personnel with disparate
backgrounds and combining different corporate cultures;
o the Company may not eliminate as many redundant costs as it
anticipated in selecting acquisition candidates; and
o an acquisition candidate may have liabilities or adverse operating
issues that the Company failed to discover through its due
diligence prior to the acquisition.
o 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. The actual
experience of the Company and the results achieved during the period covered by
any particular forward-looking statement may vary materially. Therefore, these
forward-looking statements should not be regarded as a representation by the
Company or any other person that these estimates will be realized. 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.
PART II. OTHER INFORMATION
- ---------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
--------
4.1 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).
4.2 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).
10.1 Line of Credit Extension to that certain Revolving Line of
Credit Loan Agreement and Security Agreement, dated December 9,
1999, by and between Integral Systems, Inc. and Bank of
America, N.A.
10.2 Award/Contract No. F04701-01-C-0012 from MCK Space & Missile
Systems Center, effective as of February 7, 2001.
11.1 Computation of Per Share Earnings.
- 19 -
b. Reports on Form 8-K
-------------------
A report on Form 8-K was filed with the Commission on January 10,2002.
The date of the report is January 4, 2002. The Form 8-K reports that the
Company dismissed its independent auditors and engaged new independent
auditors for fiscal year 2002.
- 20 -
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, 2002 By: /s/
------------------ ------------------------------------
Thomas L. Gough
President & Chief Operating Officer
Date: May 14, 2002 By: /s/
------------------ ------------------------------------
Elaine M. Parfitt
Vice President &
Chief Financial Officer
- 21 -