THIS DOCUMENT IS A COPY OF THE QUARTERLY REPORT ON FORM 10-Q FILED ON AUGUST 15,
2001 PURSUANT TO A RULE 201 TEMPORARY HARDSHIP EXEMPTION.
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, 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 9,488,978 shares of common stock outstanding as of July 31, 2001
INTEGRAL SYSTEMS, INC.
TABLE OF CONTENTS
Page No.
--------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Balance Sheets - June 30, 2001 and September 30, 2000 ......................................... 1
Statements of Operations - Three and Nine Months Ended
June 30, 2001 and June 30, 2000 ............................................................ 3
Statement of Stockholders' Equity - Nine Months
Ended June 30, 2001 ........................................................................ 5
Statements of Cash Flow - Nine Months Ended
June 30, 2001 and June 30, 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 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, 2001 and September 30, 2000
ASSETS
June 30,
2001 September 30,
(unaudited) 2000
----------------- -----------------
CURRENT ASSETS
Cash $17,735,316 $17,558,331
Marketable Securities 48,926,000 49,966,000
Accounts Receivable 16,347,968 13,502,293
Notes Receivable 546,483 600,000
Prepaid Expenses 354,582 190,075
Income Taxes Receivable 1,173,251 1,655,290
----------- -----------
TOTAL CURRENT ASSETS 85,083,600 83,471,989
PROPERTY AND EQUIPMENT 5,414,144 4,471,838
Less: Accum. Depreciation and
Amortization 2,406,951 2,267,437
----------- -----------
TOTAL PROPERTY AND EQUIPMENT 3,007,193 2,204,401
OTHER ASSETS
Software Development Costs 4,634,535 3,188,783
Deposits 57,982 45,724
----------- -----------
TOTAL OTHER ASSETS 4,692,517 3,234,507
TOTAL ASSETS $92,783,310 $88,910,897
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
-1-
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES & STOCKHOLDERS' EQUITY
- ----------------------------------
June 30,
2001 September 30,
(unaudited) 2000
----------------- -----------------
CURRENT LIABILITIES
Accounts Payable $ 3,435,566 $ 1,914,985
Accrued Expenses 2,912,683 2,618,512
Notes Payable - Line of Credit 235,000 0
Capital Leases Payable 200,559 454,154
Billings in Excess of Cost 976,937 1,832,520
Deferred Income Taxes 108,178 132,925
----------- -----------
TOTAL CURRENT LIABILITIES 7,868,923 6,953,096
----------- -----------
LONG TERM LIABILITIES
Capital Leases Payable 144,259 259,951
----------- -----------
TOTAL LONG TERM LIABILITIES 144,259 259,951
STOCKHOLDERS' EQUITY
Common Stock, $.01 par value,
40,000,000 shares authorized, and
9,479,018 and 9,427,368 shares issued and
outstanding at June 30, 2001 and September
30, 2000, respectively 94,790 94,274
Additional Paid-in Capital 65,928,314 65,702,313
Retained Earnings 18,747,024 15,901,263
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 84,770,128 81,697,850
----------- -----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $92,783,310 $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
(unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
2001 2000 2001 2000
-------------- -------------- -------------- --------------
Revenue $10,392,318 $8,520,097 $28,405,590 $32,147,012
Cost of Revenue
Direct Labor 2,834,597 2,718,251 7,740,146 8,748,330
Overhead Costs 1,916,358 2,041,144 5,659,833 6,564,985
Travel and Other Direct Costs 287,479 451,903 1,071,749 1,213,578
Direct Equipment & Subcontracts 2,677,446 878,046 5,637,838 6,333,003
----------- ---------- ----------- -----------
Total Cost of Revenue 7,715,880 6,089,344 20,109,566 22,859,896
----------- ---------- ----------- -----------
Gross Margin 2,676,438 2,430,753 8,296,024 9,287,116
----------- ---------- ----------- -----------
Selling, General & Administrative 1,370,399 1,947,898 5,167,322 5,800,987
Terminated Acquisition Costs 0 (620) 0 140,503
Product Amortization 342,500 237,500 1,027,500 712,500
----------- ---------- ----------- -----------
Income From Operations 963,539 245,975 2,101,202 2,633,126
Other Income (Expense)
Interest Income 602,134 806,453 2,044,561 1,564,818
Interest Expense (9,662) (21,190) (41,193) (72,627)
Miscellaneous, net (32,184) (138,176) (170,670) (201,074)
----------- ---------- ----------- -----------
Total Other Income (Expense) 560,288 647,087 1,832,698 1,291,117
Income from Continuing Operations
Before Income Taxes 1,523,827 893,062 3,933,900 3,924,243
----------- ---------- ----------- -----------
Provision for Income Taxes 518,339 62,679 1,088,139 1,007,073
----------- ---------- ----------- -----------
Income from Continuing Operations 1,005,488 830,383 2,845,761 2,917,170
----------- ---------- ----------- -----------
Discontinued Operations
Income from Operations of
Discontinued Segment (Net of Tax) 0 3,923 0 120,079
----------- ---------- ----------- -----------
Net Income $ 1,005,488 $ 834,306 $ 2,845,761 $ 3,037,249
=========== ========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
-3-
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
(unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Weighted Average Number of Common
Shares Outstanding During Period 9,464,818 9,404,657 9,452,751 8,630,220
========== ========== ========== ==========
Earnings per Share - Basic
Income from Continuing Oper. $ 0.11 $ 0.09 $ 0.30 $ 0.34
Income from Discont. Oper. $ 0.00 $ 0.00 $ 0.00 $ 0.01
---------- ---------- ---------- ----------
Net Income $ 0.11 $ 0.09 $ 0.30 $ 0.35
========== ========== ========== ==========
Diluted Shares Outstanding 9,690,170 9,707,622 9,570,947 9,122,870
========== ========== ========== ==========
Earnings per Share - Diluted
Income from Continuing Oper. $ 0.10 $ 0.09 $ 0.30 $ 0.32
Income from Discont. Oper. $ 0.00 $ 0.00 $ 0.00 $ 0.01
---------- ---------- ---------- ----------
Net Income $ 0.10 $ 0.09 $ 0.30 $ 0.33
========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
-4-
INTEGRAL SYSTEMS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED JUNE 30, 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 51,650 516 226,001 - 226,517
Net income - - - 2,845,761 2,845,761
--------- ------- ----------- ----------- -----------
Balance June 30, 2001 9,479,018 $94,790 $65,928,314 $18,747,024 $84,770,128
========= ======= =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
-5-
INTEGRAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the Nine Months Ended
June 30,
2001 2000
------------ ------------
Cash flows from operating activities:
Net income $ 2,845,761 $ 3,037,249
------------ ------------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 1,731,727 1,496,218
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 (2,845,675) 1,090,866
Prepaid expenses and deposits (176,765) (118,397)
(Decrease) increase in:
Accounts payable 1,520,581 (1,377,709)
Accrued expenses 294,171 (780,243)
Billings in excess of cost (855,583) (923,831)
Income taxes payable, net 482,039 (1,100,531)
------------ ------------
Total adjustments 127,977 (1,728,023)
------------ ------------
Net cash provided by operating activities 2,973,738 1,309,226
------------ ------------
Cash flows from investing activities:
Marketable securities 1,040,000 (37,524,792)
Acquisition of fixed assets (1,509,248) (632,467)
Software development costs (2,473,252) (1,638,973)
------------ ------------
Net cash used in investing activities (2,942,500) (39,796,232)
------------ ------------
Cash flow from financing activities:
Payments on notes receivable 53,517 0
Proceeds from line of credit 235,000 0
Proceeds from issuance of common stock 226,517 41,846,305
Payments on capital lease obligations (369,287) (447,793)
------------ ------------
Net cash (used) provided by financing activities 145,747 41,398,512
------------ ------------
Net increase in cash 176,985 2,911,506
Cash - beginning of year 17,558,331 9,267,207
------------ ------------
Cash - end of period $ 17,735,316 $ 12,178,713
============ ============
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 acquisition by the Company of 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 June 30, 2000 by $27,050
and $.01, respectively, and to increase net income for the nine months
ended June 30, 2000 by $128,340 but decrease both basic and diluted
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 June 30, 2001 and September 30, 2000 consist of
the following:
June 30, 2001 Sept. 30, 2000
------------- --------------
Billed $ 7,625,757 $ 5,045,075
Unbilled 8,581,953 8,223,557
Other 140,258 233,661
------------- --------------
Total $ 16,347,968 $ 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's subsidiary SAT also has a line of credit with another
bank for $425,000. At June 30, 2001, SAT had $235,000 outstanding under
this line of credit.
4. Capital Leases
--------------
The Company has access to a $2.0 million equipment lease line of credit
that had a balance of $344,818 at June 30, 2001.
-8-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 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 June 30, 2001 and
June 30, 2000:
Three Months Ended June 30,
% of % of
2001 Revenue 2000 Revenue
---- ------- ---- -------
(in thousands) (in thousands)
Revenue $10,392 100.0 $ 8,520 100.0
Cost of Revenue 7,716 74.2 6,089 71.5
------- ----- ------- -----
Gross Margin 2,676 25.8 2,431 28.5
Operating Expenses
SG&A 1,370 13.2 1,948 22.8
Term. Acquisition Costs 0 0 -1 0
Prod. Amortization 343 3.3 238 2.8
------- ----- ------- -----
Income from Operations 963 9.3 246 2.9
Other Income (Expense) (net) 560 5.4 647 7.6
------- ----- ------- -----
Income from Continuing Oper 1,523 14.7 893 10.5
Before Income Taxes
Income Taxes 518 5.0 63 .8
------- ----- ------- -----
Income from Continuing Oper 1,005 9.7 830 9.7
Income from Operations of
Discontinued Segment 0 0 4 .1
------- ----- ------- -----
Net Income $ 1,005 9.7 $ 834 9.8
======= ===== ======= =====
Revenue
The Company earns revenue from sales of its products and services through
contracts that are funded by the U.S. Government, both as a prime contractor or
a subcontractor, as well as commercial and international organizations.
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 June 30, 2001 and 2000, the Company's revenues were
generated from the following sources:
Three Months Ended June 30,
Revenue Type 2001 2000
------------ -------- -------
Commercial Products & Services
Commercial Users 40% 40%
U.S. Government Users 1 2
-------- --------
Subtotal 41 42
Government Services
NOAA 41 42
Air Force 14 2
Other U.S. Government Users 4 14
-------- -------
Subtotal 59 58
Total 100% 100%
======== =======
Based on the Company's revenue categorization system, the Company classified 41%
and 42% of its revenue as Commercial Products and Services revenue with the
remaining 59% and 58% classified as Government Services revenue for the three
months ended June 30, 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 60% of the total revenues for both the three months ended June 30,
2001 and 2000, respectively.
On a consolidated basis, revenue increased 22%, or $1.9 million, to $10.4
million for the three months ended June 30, 2001, from $8.5 million for the
three months ended June 30, 2000. The increase was principally due to a $2.1
million increase in the Company's revenue from pass-through equipment, which
increased from approximately $.7 million in the third quarter last year to $2.8
million in the current quarter.
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 June 30, 2001, cost of revenue increased by 26.7%,
or $1.6 million, from $6.1 million during the three months ended June 30, 2000
to $7.7 million during the three months ended June 30, 2001. The increase was
due primarily to increases in equipment and subcontract pass-throughs. Cost of
revenue expressed as a percentage of revenue increased to approximately 74.2%
during the three months ended June 30, 2001 compared to 71.5% during the three
months ended June 30, 2000, which increase was primarily due to a higher
percentage of equipment and subcontract costs in the fiscal year 2001 cost of
revenue mix.
- 11 -
The Company's gross margin increased $245,000, or 10% to $2.7 million for the
three months ended June 30, 2001 from $2.4 million for the three months ended
June 30, 2000. The increase was principally due to the $1.9 million revenue
increase discussed above. Gross margin as a percentage of revenue was 25.8%
during the three months ended June 30, 2001 compared to 28.5% for the three
months ended June 30, 2000. This decrease is primarily attributable to an
increase in lower margin equipment and subcontract pass-through revenue during
the current quarter.
Operating Expenses/Income from Operations
Selling, General & Administrative expenses (SG&A) decreased to $1.4 million
during the three months ended June 30, 2001 from $1.9 million in the quarter
ended June 30, 2000. As a percentage of revenue, SG&A accounted for 13.2% of
revenue for the three months ended June 30, 2001 compared to 22.8% in the
quarter ended June 30, 2000. The decrease in terms of both dollar amount and
percentage of revenue relates to unusually high bid and proposal expenses that
were incurred during the third quarter last fiscal year related to a contract
bid with the U.S. Air Force (that the Company won and announced earlier this
fiscal year). Such expenses were not replicated during the current quarter.
Product amortization increased from $238,000 for the three months ended June 30,
2000 to $343,000 for the three months ended June 30, 2001 due to increases in
capitalized software development costs. During the three months ended June 30,
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 June 30, 2001.
Income from operations increased $710,000 to $960,000 for the three months ended
June 30, 2001 from $250,000 for the three months ended June 30, 2000. As a
percentage of revenue, income from operations increased to 9.3% for the three
months ended June 30, 2001 from 2.9% for the prior year's third quarter. The
foregoing dollar and percentage increases are primarily the result of the
decrease in SG&A expenses during the three months ended June 30, 2001.
Income from continuing operations before income taxes increased by $600,000 to
$1.5 million from $900,000 between the two periods being compared principally
due to the increase in income from operations discussed above.
During the three months ended June 30, 2001, the Company recorded $602,000 of
interest income compared to $806,000 of interest income recorded for the three
months ended June 30, 2000. Absolute interest income decreased due to the
general decline in interest rates in response to recent cuts by the Federal
Reserve Board
The Company's effective tax rate increased from 7.1% for the three months ended
June 30, 2000 to 34.0% for the three months ended June 30, 2001. The increase
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 third quarter. Further the Company recorded an adjustment of
approximately $110,000 for income tax expense during the current quarter that
related to SAT's income from last fiscal year.
Income from discontinued operations was $4,000 during the three months ended
June 30, 2000. There was no comparable income from discontinued operations in
the current three-month period.
As a result of the above, net income increased to approximately $1.0 million
during the three months ended June 30, 2001 from approximately $800,000 during
the three months ended June 30, 2000.
- 12 -
COMPARISON OF THE NINE MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000
-------------------------------------------------------------------
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, 2001 and June
30, 2000:
Nine Months Ended June 30,
2001 2000
---- % of ---- % of
(in thousands) Revenue (in thousands) Revenue
------- ----------
Revenue $28,406 100.0 $32,147 100.0
Cost of Revenue 20,110 70.8 22,860 71.1
---------- --------- ---------- ----------
Gross Margin 8,296 29.2 9,287 28.9
Operating Expenses
SG&A 5,167 18.2 5,801 18.1
Term. Acquisition Cost 0 0 141 .4
Prod. Amortization 1,028 3.6 712 2.2
---------- --------- ---------- ----------
Income from Operations. 2,101 7.4 2,633 8.2
Other Income (Expense) (net) 1,833 6.4 1,291 4.0
---------- --------- ---------- ----------
Income from Continuing Oper.
Before Income Taxes 3,934 13.8 3,924 12.2
Income Taxes 1,088 3.8 1,007 3.1
---------- --------- --------- ----------
Income from Continuing Oper. 2,846 10.0 2,917 9.1
Income from Operations of
Discontinued Segment 0 0 120 .3
---------- --------- ---------- ----------
Net Income $ 2,846 10.0 $ 3,037 9.4
========== ========= ========== ==========
- 13 -
Revenue
- -------
For the nine months ended June 30, 2001 and 2000 the Company's revenues were
generated from the following sources:
Nine Months Ended June 30,
Revenue Type 2001 2000
------------ ---- ----
Commercial Products and Services
Commercial Users 44% 47%
U.S. Government Users 1 1
--- ---
Subtotal 45 48
Government Services
NOAA 41 40
Air Force 9 2
Other U.S. Government Users 5 10
--- ---
Subtotal 55 52
Total 100% 100%
=== ===
Based on the Company's revenue categorization system, the Company classified 45%
and 48% of its revenue as Commercial Products and Services revenue with the
remaining 55% and 52% classified as Government Services revenue for the nine
months ended June 30, 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 53% of the total revenues for the nine months ended June 30,
2001 and 2000, respectively.
On a consolidated basis, revenue decreased 11.6%, or $3.7 million, to $28.4
million for the nine months ended June 30, 2001 from $32.1 million for the nine
months ended June 30, 2000. The decrease was due principally to a decline in the
Company's revenue from SAT, which declined from approximately $5.8 million in
the first nine months last year to $2.4 million for the same period in the
current year, representing a $3.4 million decrease. Most of the remaining
revenue decrease is attributable to a $300,000 decrease in revenue from services
between the periods being compared.
Cost of Revenue/Gross Margin
During the nine months ended June 30, 2001, cost of revenue decreased 12.0%, or
$2.8 million to $20.1 million from $22.9 million during the nine months ended
June 30, 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 revenue was essentially unchanged at 70.8% for the
nine months ended June 30, 2001 compared to 71.1% for the nine months ended June
30, 2000.
The Company's gross margin decreased $1.0 million, or 10.7%, to $8.3 million for
the nine months ended June 30, 2001 from $9.3 million for the nine months ended
June 30, 2000. The decrease was principally due to the $3.7 million decline in
revenue discussed above. Gross margin as a percentage of revenue was essentially
unchanged at 29.2% during the nine months ended June 30, 2001 compared to 28.9%
for the nine months ended June 30, 2000.
- 14 -
Operating Expenses/Income from Operations
SG&A decreased to $5.2 million the for the nine months ended June 30, 2001 from
$5.8 million for the nine months ended June 30, 2000. As a percentage of
revenue, SG&A accounted for 18.2% of revenue for the nine months ended June 30,
2001 compared to 18.1% in the half-year ended June 30, 2000. The decrease in
SG&A dollars relates to unusually high bid and proposal expenses that were
incurred last fiscal year related to a contract bid with the U.S. Air Force
(that the Company won and announced earlier this fiscal year). Such expenses
were not replicated during the current period.
Product amortization increased to $1,028,000 for the nine months ended June 30,
2001 compared to $712,000 for the nine months ended June 30, 2000 due to
increases in capitalized software development costs. The Company recorded
expenses of approximately $140,000 during the nine months ended June 30, 2000
with respect to an unsuccessful acquisition attempt. Such costs did not recur
during the nine months ended June 30, 2001.
Income from operations decreased $500,000, or 20.2%, to $2.1 million for the
nine months ended June 30, 2001 from $2.6 million for the nine months ended June
30, 2000, which decrease was primarily due to the decreases in gross margin
dollars described above coupled with higher product amortization expenses. As a
percentage of revenue, income from operations decreased to 7.4% for the nine
months ended June 30, 2001 from 8.2% for the same time period in the prior
fiscal year. This percentage decrease was principally the result of a higher
percentage of product amortization expenses against revenue in the first nine
months of fiscal year 2001 compared to the same period last fiscal year.
During the nine months ended June 30, 2001, the Company recorded $2.0 million of
interest income compared to $1.6 million of interest income recorded for the
nine months ended June 30, 2000. The increase was attributable to the fact that
the Company's private placement equity infusion in February 2000 did not benefit
the entire nine-month period ending June 30, 2000.
Income taxes expressed as a percentage of income from continuing operations were
approximately comparable for the nine months ended June 30, 2001 and June 30,
2000. These percentages were 27.7% and 25.7% respectively.
Income from discontinued operations was $120,000 during the nine months ended
June 30, 2000. There was no comparable income from discontinued operations in
the current nine-month period.
As a result of the above, net income decreased to $2.8 million during the nine
months ended June 30, 2001 from $3.0 million during the nine months ended June
30, 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:
. Demand for satellite technology and related products and services will
continue to expand; and
- 15 -
. 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 and income levels comparable to 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 nine months ended June 30, 2001, the Company generated approximately
$3.0 million of cash from operating activities, and used approximately $2.9
million for investing activities, including approximately $2.5 million for newly
capitalized software development costs and $1.5 million 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's subsidiary SAT has a line of credit with another bank for
$425,000. At June 30, 2001 and August 7, 2001, SAT had $235,000 and $415,000
respectively outstanding under its line of credit. The Company repaid the SAT
line in full on August 7, 2001.
The Company also has access to a $2.0 million equipment lease line of credit
that had a balance of approximately $345,000 at June 30, 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 nine months ended June 30, 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, among others:
. 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.
. Risks related to the Company's acquisition strategy,
. 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 4. SUBMISION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the Company was held on April 25, 2001.
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 7,717,596 0 288,173 2,170,303
Thomas L. Gough 7,717,596 0 288,173 2,170,303
Bonnie K. Wachtel 7,464,846 252,750 288,173 2,170,303
Dominic Laiti 7,464,696 252,900 288,173 2,170,303
R. Doss McComas 7,464,346 253,250 288,173 2,170,303
John R. Murphy 7,563,146 154,450 288,173 2,170,303
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: August 14, 2001 By: /s/
---------------------- ----------------------------------------
Thomas L. Gough
President & Chief Operating Officer
Date: August 14, 2001 By: /s/
---------------------- ----------------------------------------
Elaine M. Parfitt
Vice President & Chief Financial Officer
- 19 -