INTEGRAL SYSTEMS, INC.
10Q
FOR QUARTER ENDING
JUNE 30, 1996
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
X Quarterly report pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For the quarterly period ended June 30, 1996 or
_____ Transition report pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For the transition period from to
Commission file number 0-18603
INTEGRAL SYSTEMS, INC.
(Exact name of registrant as specified in its chapter)
Maryland 52-1267968
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5000 Philadelphia Way, Suite A, Lanham, MD 20706
(Address of principal executive offices) Zip Code)
Registrant's telephone number, including area code (301) 731-4233
(Former name, address and fiscal year, if changed since last
report)
Indicate by checkmark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
As of June 30, 1996 the aggregate market value of the Common
Stock of the Registrant (based upon the average bid and ask
prices of the Common Stock as reported by the market makers) held
by non-affiliates of the Registrant was $20,501,168.
Registrant has 952,133 shares of common stock outstanding as of
June 30, 1996.
<PAGE>
INTEGRAL SYSTEMS, INC.
TABLE OF CONTENTS
Page No.
Part I Financial Information:
Item 1. Financial Statements
Balance Sheets - June 30, 1996, September 30, 1995............. 1
Statements of Operations Nine Months and Three Months
Ended June 30, 1996 and June 30, 1995....................... 3
Statement of Cash Flow Nine Months Ended June 30, 1996
and June 30, 1995........................................... 4
Statement of Stockholders' Equity Nine Months
Ended June 30, 1996......................................... 5
Notes to Financial Statements.................................. 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations...... 7
Part II Other Information:
Item 6. Exhibits and Reports on Form 8-K..................... 11
<PAGE>
Item 1. Financial Statements
INTEGRAL SYSTEMS, INC.
JUNE 30, 1996 & SEPTEMBER 30, 1995
<TABLE>
<S> <C> <C>
ASSETS
June 30, September 30,
1996 1995
CURRENT ASSETS
Cash $1,395,066 $2,125,553
Accounts Receivable 3,672,629 3,483,777
Prepaid Expenses 44,666 71,537
Income Tax Receivable 123,685 0
Deferred Income Taxes 60,719 60,719
TOTAL CURRENT ASSETS 5,296,765 5,741,586
FIXED ASSETS
Electronic Equipment 691,726 624,708
Furniture & Fixtures 53,504 41,716
Leasehold Improvements 11,364 11,364
Software Purchases 45,433 37,085
SUBTOTAL 802,027 714,873
Less: Accum. Deprec. 391,723 426,249
TOTAL FIXED ASSETS 410,304 288,624
OTHER ASSETS
Software Development Costs 1,340,367 1,373,219
Deposits 7,332 150
TOTAL OTHER ASSETS 1,347,699 1,373,369
TOTAL ASSETS $7,054,768 $7,403,579
</TABLE>
<PAGE>
INTEGRAL SYSTEMS, INC.
BALANCE SHEETS
JUNE 30, 1996 & SEPTEMBER 30, 1995
<TABLE>
<S> <C> <C>
LIABILITIES & STOCKHOLDERS' EQUITY
June 30, September 30,
1996 1995
CURRENT LIABILITIES
Accounts Payable $362,675 $351,995
Accrued Expenses 869,487 875,248
Billings in Excess of Cost 160,043 561,202
Income Taxes Payable 0 108,481
TOTAL CURRENT LIABILITIES 1,392,205 1,896,926
LONG TERM LIABILITIES
STOCKHOLDERS' EQUITY
Common Stock, $.01 par value,
2,000,000 shares authorized, and
952,133 and 943,746 shares issued
and outstanding at June 30, 1996
and September 30, 1995, respectively 9,521 9,437
Addl Paid in Capital 819,113 696,437
Retained Earnings 4,833,929 4,800,779
TOTAL STOCKHOLDERS' EQUITY 5,662,563 5,506,653
TOTAL LIABILITIES & STOCKHOLDER'S EQUITY $7,054,768 $7,403,579
</TABLE>
<PAGE>
INTEGRAL SYSTEMS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Nine Months Ended Three Months Ended
June 30 June 30
1996 1995 1996 1995
Contract Revenue $7,268,974 $8,093,367 $2,336,178 $2,286,601
Cost of Revenue
Direct Labor 2,697,827 2,766,162 927,812 955,622
Overhead 1,961,834 1,846,922 631,956 600,896
Travel & Other Direct Costs 747,293 564,215 213,015 192,596
Equipment & Subcontractors 691,931 1,750,135 333,356 219,583
Total Cost of Revenue 6,098,885 6,927,434 2,106,139 1,968,697
Gross Profit 1,170,089 1,165,933 230,039 317,904
Operating Expenses
General & Administrative 996,365 811,990 391,424 266,523
Total Operating Expenses 996,365 811,990 391,424 266,523
Income (Loss) From Operations 173,724 353,943 (161,385) 51,381
Other Income (Expense)
Interest Income 51,535 45,922 19,786 24,602
Interest Expense (47) (2,129) (16) 307
Other Income (Expense) (171,262) (12,772) (124,558) (1,280)
Total Other Income (Expense) (119,774) 31,021 (104,788) 23,629
Income (Loss) Before Income Taxes 53,950 384,964 (266,173) 75,010
Income Taxes 20,800 150,535 (102,800) 31,300
Net Income (Loss) $33,150 $234,429 ($163,373) $43,710
Weighted Average Number of Common
Shares Outstanding During Period 947,072 941,921 949,033 942,979
Earnings per share $0.04 $0.25 ($0.17) $0.05
</TABLE>
<PAGE>
INTEGRAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
<S> <C> <C>
For the Nine Months Ended
June 30,
1996 1995
Cash Flows from Operating Activities
Net Income $33,150 $234,429
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 515,283 501,281
(Increase) decrease in:
Accounts Receivable (188,852) 94,391
Prepaid Expenses 26,869 (87,338)
Income Taxes Receivable (123,685) (6,703)
(Decrease) increase in:
Accounts Payable 10,680 10,755
Accrued Expenses (5,761) (280,818)
Billings in Excess of Cost (401,159) 94,842
Income Taxes Payable (108,481) 100,863
Total Adjustments (275,106) 427,273
Net Cash provided (used) by operations (241,956) 661,702
Cash Flow from investing activities:
Acquisition of fixed assets (262,949) (159,820)
Increase in software development (341,160) (245,049)
Sale of Marketable Securities 0 403,100
Increase in other assets (7,182) 0
Net cash provided (used) in investing activities (611,291) (1,769)
Cash flow from financing activities:
Proceeds from issuance of common stock 122,760 51,805
Net cash provided by financing activities 122,760 51,805
Net increase (decrease) in cash (730,487) 711,738
Cash - beginning of year 2,125,553 1,802,840
Cash - end of period $1,395,066 $2,514,578
</TABLE>
<PAGE>
INTEGRAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED
JUNE 30, 1996
<TABLE>
<S> <C> <C> <C> <C> <C>
Number Additional
of Common Paid-in Retained
Shares Stock Capital Earnings Total
Balance September 30, 1995 943,746 $9,437 $696,437 $4,800,779 $5,506,653
Exercise of Stock Options 8,387 84 122,676 - 122,760
Net income - - - 33,150 33,150
Balance June 30, 1996 952,133 $9,521 $819,113 $4,833,929 $5,662,563
</TABLE>
<PAGE>
INTEGRAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation
The interim financial statements include the accounts of
Integral Systems, Inc. (ISI) and its two wholly-owned
subsidiaries, Integral Marketing, Inc. (IMI) and InterSys,
Inc. (INTSYS). 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, 1995.
The results of operations for any interim period are not
necessarily indicative of results for the full year.
2. Accounts Receivable
Accounts receivable at June 30, 1996 and September 30, 1995
consist of the following:
June 30, Sept. 30,
1996 1995
Billed $2,824,625 $1,653,777
Unbilled 968,004 1,830,000
Subtotal 3,792,629 3,483,777
Less: Reserve (120,000) (0)
Total $3,672,629 $3,483,777
The Company uses the direct write-off method for bad debts.
The Company's accounts receivable consist of amounts due on
prime contracts and subcontracts with the U.S. Government
and contracts with various private organizations. Unbilled
accounts receivable consist principally of amounts that are
billed in the month following the incurrence of cost or when
milestones are delivered under fixed price contracts. All
unbilled receivables are expected to be billed and collected
within one year.
3. Line-of-Credit
The Company has a line of credit agreement with a local bank
for $1,200,000. Borrowing under the line of credit bears
interest at the bank's lending rate plus one-quarter of one
percentage point per annum. Any accrued interest is payable
monthly. At June 30, 1996 and September 30, 1995 the
Company had no outstanding balance under the line of credit.
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMPARISON OF THE QUARTER ENDED JUNE 30, 1996
TO THE QUARTER ENDED JUNE 30, 1995
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, 1996 and June 30, 1995:
<TABLE>
<CAPTION>
% of % of
1996 Revenue 1995 Revenue
(000's omitted) (000's omitted)
<S> <C> <C> <C> <C>
Revenue $2,336 100.0 $2,287 100.0
Expenses
Cost of Revenue 2,106 90.2 1,969 86.1
General & Admin. 391 16.7 267 11.7
Other 105 4.5 -24 -1.0
Income Taxes -103 -4.4 31 1.3
Total Expenses 2,499 107.0 2,243 98.1
Net income $ -163 -7.0 $ 44 1.9
</TABLE>
General
The Company recorded its second quarterly loss in its 14 year
history. The loss is principally due to three factors believed
to be non-recurring as follows:
1. Bad debt reserve of $120,000 taken on a potentially
uncollectible account.
2. Unanticipated quarterly loss of $140,000 on a fixed price
Government contract based on revised estimates to complete.
3. Quarterly loss of $170,000 in the Company's Commercial
Products division due to delays in shipments of software
licenses and increased selling expenses.
Revenue
Revenue was essentially flat between the quarters being compared.
During the current period, the Company derived approximately 49%
of its revenues from the sale of its commercial products and
related services which is a considerably higher percentage than
the 40% the Company realized during the third quarter in the
prior fiscal year. The percentages for both periods are
significant, and correlate to the Company's conscious effort to
reduce its reliance on the Federal Government, and to utilize its
recently developed software products to gain access to
organizations in order to sell both its products and associated
integration and support services.
<PAGE>
Although the Company believes that its full cadre of software
products is important for its future growth and prosperity, to
date the Company's largest product investment relates to the
development of its EPOCH software, a COTS (commercial off-the-
shelf) product for satellite command and control. The Company
believes that it is unique in its status as the only entity with
COTS software capable of "flying" satellites built by any
satellite manufacturer in the world. In fact during April, 1996
the Company received a strategically important contract to
provide its COTS products (and related integration services) to
command and control a fleet of satellites composed of spacecraft
from multiple manufacturers. The preponderance of revenue to be
derived from this contract is expected to be realized in fiscal
year 1997.
During the third quarter of fiscal year 1996, the Company
recorded approximately $950,000 of revenue for services
associated with its EPOCH product compared to $600,000 of revenue
during the third quarter of fiscal year 1995. Although third
quarter fiscal year 1996 EPOCH revenues included approximately
$18,000 of license fees (compared to no license fees earned
during the third quarter of fiscal year 1995), the loss incurred
during the current year third quarter is in part attributable to
the relatively small amount of license fees earned, especially
compared to the first and second quarters of this fiscal year.
Because license revenues have nominal marginal costs associated
with them, this form of revenue is highly important to the
Company's overall profitability. Looking forward to the 4th
quarter of fiscal year 1996 and fiscal year 1997 (in its
entirety), the Company is encouraged that its current contract
backlog includes in excess of $1.0 million of unearned license
revenues (for both its EPOCH and OASYS products) that are
anticipated to be recognized during these periods.
The principal balance of the Company's commercial revenues
pertain to other proprietary products as follows: OASYS (Orbital
Analysis System); DRS (DOMSAT Receive Station); and a collection
of software pertaining to database and information system
applications. During the third quarter of fiscal year 1996, the
Company recorded approximately $80,000 of revenue related to the
sale of products and services under these programs compared to
approximately $260,000 of revenue recorded during the third
quarter last fiscal year. The decrease principally relates to
fewer OASYS software shipments delivered in the third quarter
this fiscal year compared to last fiscal year's third quarter.
The Company's subsidiary, Integral Marketing, Inc., (IMI)
accounted for an additional $115,000 of commercial revenue during
the current period. IMI contributed approximately $40,000 of
revenue to the Company's consolidated revenue total last fiscal
year during the third quarter.
Expenses
Cost of revenue as a percentage of revenue for the third quarter
of fiscal year 1996 was 90.2% compared to 86.1% for the third
quarter in fiscal year 1995. The higher expense level is
primarily due to unanticipated additional direct costs against
one of the Company's fixed price Government jobs (amounting to
$140,000).
G&A expense increased approximately $125,000 between the periods
being compared, principally because the Company incurred
significant bid and proposal expenses during the current quarter
compared to such expenditures in the third quarter last fiscal
year.
In addition to the above, the Company recorded a bad debt
provision of $120,000 during the third quarter of fiscal year
1996 to reserve against a potentially uncollectible account.
Because of the Company's third quarter pretax loss amounting to
approximately $266,000, the Company recorded an income tax
expense credit of almost $103,000 relating to overacrruals of tax
expense in prior quarters of fiscal year 1996.
<PAGE>
COMPARISON OF THE NINE MONTHS ENDED JUNE 30, 1996
TO THE NINE MONTHS ENDED JUNE 30, 1995
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, 1996 and June 30, 1995:
<TABLE>
% of %of
1996 Revenue 1995 Revenue
(000's omitted) (000's omitted)
<S> <C> <C> <C> <C>
Revenue $7,269 100.0 $8,093 100.0
Expenses
Cost of Revenue 6,099 83.9 6,927 85.6
General & Admin. 996 13.7 812 10.0
Other 120 1.7 -31 -.4
Income Taxes 21 .3 151 1.9
Total Expenses 7,236 99.6 7,859 97.1
Net income $ 33 .4 $ 234 2.9
</TABLE>
General
Because of the loss incurred during the third quarter (as
explained in the previous section of this analysis), year to date
profitability has also suffered. Specifically the Company has
recognized net income of approximately $33,000 through June 30,
1996 (year to date) compared to net income of approximately
$234,000 through June 30th last fiscal year.
Revenue
Revenue decreased by approximately $820,000 between the nine
months ended June 30, 1996 and the nine months ended June 30,
1995. The decrease is attributable to the delivery of $1.0
million less equipment during the current period than what was
delivered in the first nine months last fiscal year.
During the current period, the Company derived approximately 47%
of its revenues from the sale of its commercial products and
related services which is a somewhat higher percentage than the
43% the Company realized during the first nine months in the
prior fiscal year.
During the first nine months of fiscal year 1996, the Company
recorded approximately $2,700,000 of revenue for services
associated with its EPOCH product which is comparable
to the EPOCH revenue recorded during the first nine months
of fiscal yeaer 1995. Fiscal year 1996 EPOCH revenues
included approximately $363,000 of EPOCH license fees,
while $200,000 of license fee revenues were recorded
during the first nine months of fiscal year 1995.
The principal balance of the Company's commercial revenues
pertain to other proprietary products as follows: OASYS (Orbital
Analysis System); DRS (DOMSAT Receive Station); and a collection
of software pertaining to database and information system
applications. During the first nine months of fiscal year 1996,
the Company recorded approximately $420,000 of revenue related to
the sale of products and services under these programs compared
to approximately $570,000 of revenue recorded during the first
nine months last fiscal year. The decrease principally relates
to reduced database and information systems revenue, which has
resulted from a deliberate recent phase down of this business
area.
The Company's subsidiary, Integral Marketing, Inc., (IMI)
accounted for an additional $350,000 of commercial revenue during
the current period. IMI contributed approximately $130,000 of
revenue to the Company's consolidated revenue total last fiscal
year through the first nine months.
Expenses
Cost of revenue as a percentage of revenue for the first nine
months of fiscal year 1996 was 83.9% compared to 85.6% for the
first nine months in fiscal year 1995. The Company believes that
there are no material differences between the two percentages and
that these figures are typical and representative of the
Company's current operating cost structure.
G&A expense increased approximately $180,000 between the periods
being compared, principally because the Company incurred
significant bid and proposal expenses during the current period
compared to such expenditures in the comparable period last
fiscal year.
Other expenses were $120,000 during the current period compared
to $31,000 of other income recorded during the first nine months
last fiscal year. This reversal is due to a bad debt provision
amounting to $120,000 to reserve against a potentially
uncollectible account.
Liquidity and Capital Resources
Based on its historical profitability, the Company has been able
to generate adequate cash flow from operations to fund its
operating and capital expenses. To supplement operating cash
flows, the Company has access to a line of credit facility in the
amount of $1.2 million which is currently unused. (See Note 3 of
the Notes to Financial Statements). During the first nine months
of fiscal year 1996, the Company used approximately $242,000 for
operating activities and used approximately $611,000 for
investing activities, including approximately $341,000 for
software development.
The Company has incurred and capitalized approximately $1,560,000
of costs (inception to date) relating to its EPOCH product. As
of June 30, 1996, the Company's balance sheet included
approximately $960,000 of unamortized software development costs
related to EPOCH. Most of the Company's remaining software
development costs (other than costs relating to EPOCH) pertain to
the Company's OASYS product, which can be sold as a standalone
product or in conjunction with EPOCH.
In July, 1988 the Company raised approximately $400,000 (net)
through the sale of 110,000 common shares in its initial public
offering.
As a result of its current cash reserves, its unused line of
credit, its current year to date profitability and its projected
profitability for the balance of fiscal year 1996 and fiscal year
1997 in its entirety, the Company believes it will have adequate
cash resources to meet its obligations for the foreseeable
future.
In terms of capital purchases, historically the Company has
funded such items through operating cash flow or capital lease.
The Company currently has no plans for major capital purchases in
the ensuing twelve month period, although the Company plans to
continue to invest in the further development and improvement of
its EPOCH and OASYS software products.
Part II. Other Information
6. Exhibits and Reports on Form 8-K
a. Exhibits
None
b. Form 8-K
No reports on Form 8-K have been filed during the
quarter ended June 30, 1996.
<PAGE>
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, 1996 By: /s/
Kimberly A. Chamberlain
Vice President &
Chief Financial Officer
Date: August 14, 1996 By: /s/
Elaine M. Parfitt
Director of
Accounting/Controller
(Principal Accounting
Officer)
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000718130
<NAME> KIM CHAMBERLAIN
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 1,395,066
<SECURITIES> 0
<RECEIVABLES> 3,909,031<F1>
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,296,765
<PP&E> 2,149,726
<DEPRECIATION> 391,723
<TOTAL-ASSETS> 7,054,768
<CURRENT-LIABILITIES> 1,392,205
<BONDS> 0
0
0
<COMMON> 9,521
<OTHER-SE> 5,653,042
<TOTAL-LIABILITY-AND-EQUITY> 7,054,768
<SALES> 7,268,974
<TOTAL-REVENUES> 7,268,974
<CGS> 6,098,885
<TOTAL-COSTS> 6,098,885
<OTHER-EXPENSES> 1,116,092
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 47
<INCOME-PRETAX> 53,950
<INCOME-TAX> 20,800
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 33,150
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
<FN>
<F1>RECEIVABLES BREAKDOWN AS FOLLOWS: CASH: 3,672,629; PREPAID EXPENSES: 44,666; INCOME
TAX RECEIVABLE: 123,685; DEFERRED INCOME TAXES: 60,719
</FN>
</TABLE>
