<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(mark one)
X Quarterly report under Section 13 or 15 (d) of the Securities Exchange Act
- ---
of 1934
For the quarterly period ended MARCH 31, 1999 or
--------------
___ Transition report under Section 13 or 15 (d) of the Securities Exchange Act
of 1934
For the transition period from ____________ to ____________
Commission file number 0-18603
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INTEGRAL SYSTEMS, INC.
- --------------------------------------------------------------------------------
(Exact name of small business issuer 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, Suite A, Lanham, MD 20706
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (301) 731-4233
--------------------------------
(Former name, address and fiscal year, if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the last 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 5,926,256 shares of common stock outstanding as of MARCH 31, 1999
Transitional Small Business Disclosure Format (check one):
Yes____ No X
---
<PAGE>
INTEGRAL SYSTEMS, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Balance Sheets - March 31, 1999 and September 30, 1998............... 1
Statements of Operations - Three and Six Months
Ended March 31, 1999 and March 31, 1998............................. 3
Statement of Stockholders' Equity - Six Months
Ended March 31, 1999................................................ 4
Statement of Cash Flow - Six Months Ended March 31, 1999
and March 31, 1998.................................................. 5
Notes to Financial Statements........................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 8
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K............................... 16
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
ASSETS
March 31, September 30,
1999 1998
------------ -------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 2,751,034 $ 3,055,144
Accounts Receivable 13,380,852 10,915,059
Prepaid Expenses 46,188 52,472
Deferred Income Taxes 182,691 182,691
------------ -------------
TOTAL CURRENT ASSETS 16,360,765 14,205,366
FIXED ASSETS
Electronic Equipment 364,872 560,509
Furniture & Fixtures 38,166 43,743
Leasehold Improvements 14,038 7,863
Software Purchases 43,461 55,040
Equip. Under Capital Lease 1,821,671 1,331,968
------------ -------------
SUBTOTAL 2,282,208 1,999,123
Less: Accumulated Depreciation 907,918 818,698
------------ -------------
TOTAL FIXED ASSETS 1,374,290 1,180,425
OTHER ASSETS
Software Development Costs 1,667,391 1,485,551
Deposits 11,671 11,671
------------ -------------
TOTAL OTHER ASSETS 1,679,062 1,497,222
TOTAL ASSETS $ 19,414,117 $ 16,883,013
============ =============
</TABLE>
See Notes to Financial Statements
1
<PAGE>
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
LIABILITIES & STOCKHOLDERS' EQUITY
March 31, September 30,
1999 1998
------------ -------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts Payable $ 3,697,398 $ 3,083,964
Accrued Expenses 2,483,858 2,263,688
Capital Leases Payable 537,408 401,386
Billings in Excess of Cost 1,043,920 518,720
Income Taxes Payable 167,247 747,777
------------ -------------
TOTAL CURRENT LIABILITIES 7,929,831 7,015,535
------------ -------------
LONG TERM LIABILITIES
Capital Leases Payable 863,803 748,446
------------ -------------
TOTAL LONG TERM LIABILITIES 863,803 748,446
STOCKHOLDERS' EQUITY
Common Stock, $.01 par value,
10,000,000 shares authorized, and
5,926,256 and 5,839,984 shares issued
and outstanding at March 31, 1999
and September 30, 1998, respectively 59,263 58,399
Additional Paid-in Capital 1,614,402 1,398,982
Retained Earnings 8,946,818 7,661,651
------------ -------------
TOTAL STOCKHOLDERS' EQUITY 10,620,483 9,119,032
------------ -------------
TOTAL LIABILITIES & $ 19,414,117 $ 16,883,013
============ =============
STOCKHOLDERS' EQUITY
</TABLE>
See Notes to Financial Statements
2
<PAGE>
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenue $ 9,827,993 $ 5,826,753 $ 17,504,479 $ 12,385,731
Cost of Revenue
Direct Labor 2,535,765 1,523,419 4,607,205 2,802,073
Overhead Costs 1,740,206 1,268,115 3,401,934 2,329,206
Travel and Other Direct Costs 341,812 211,525 601,758 327,335
Direct Equipment & Subcontracts 2,692,606 1,090,126 4,351,278 3,829,974
--------------- --------------- --------------- ---------------
Total Cost of Revenue 7,310,389 4,093,185 12,962,175 9,288,588
--------------- --------------- --------------- ---------------
Gross Margin 2,517,604 1,733,568 4,542,304 3,097,143
--------------- --------------- --------------- ---------------
Selling, General & Administrative 957,650 674,598 2,004,308 1,361,017
Product Amortization 165,000 165,000 330,000 330,000
--------------- --------------- --------------- ---------------
Income From Operations 1,394,954 893,970 2,207,996 1,406,126
Other Income (Expense)
Interest Income 19,748 9,425 57,896 19,919
Interest Expense (37,645) (22,983) (68,054) (47,914)
Miscellaneous, net (27,631) (37,230) (103,971) (89,126)
--------------- --------------- --------------- ---------------
Total Other Income (Expense) (45,528) (50,788) (114,129) (117,121)
Income Before Income Taxes 1,349,426 843,182 2,093,867 1,289,005
Provision for Income Taxes 521,200 325,600 808,700 497,800
--------------- --------------- --------------- ---------------
Net Income $ 828,226 $ 517,582 $ 1,285,167 $ 791,205
=============== =============== =============== ===============
Weighted Average Number of Common Shares:
Basic 5,910,394 5,781,836 5,857,499 5,762,786
Diluted 6,283,722 6,216,684 6,289,785 6,132,469
Earnings per share:
Basic $ 0.14 $ 0.09 $ 0.22 $ 0.14
Diluted $ 0.13 $ 0.08 $ 0.20 $ 0.13
</TABLE>
See Notes to Financial Statements
3
<PAGE>
INTEGRAL SYSTEMS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
COMMON
NUMBER STOCK ADDITIONAL
OF AT PAR PAID-IN RETAINED
SHARES VALUE CAPITAL EARNINGS TOTAL
------ ----- ------- -------- -----
<S> <C> <C> <C> <C> <C>
Balance September 30, 1998 5,839,984 $ 58,399 $1,398,982 $7,661,651 $ 9,119,032
Stock Options exercised 86,272 864 215,420 -- 216,284
Net income -- -- -- 1,285,167 1,285,167
--------- -------- ---------- ---------- -----------
Balance March 31, 1999 5,926,256 $ 59,263 $1,614,402 $8,946,818 $10,620,483
========= ======== ========== ========== ===========
</TABLE>
4
<PAGE>
INTEGRAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
March 31,
1999 1998
-------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,285,167 $ 791,205
-------------- -------------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 641,179 521,916
(Increase) decrease in:
Accounts receivable (2,465,794) (1,317,702)
Prepaid expenses 6,285 (131,575)
(Decrease) increase in:
Accounts payable 613,434 (992,678)
Accrued expenses 220,170 328,235
Billings in excess of cost 525,200 624,347
Income taxes payable (580,530) 139,690
-------------- -------------
Total adjustments (1,040,056) (827,767)
-------------- -------------
Net cash provided (used) by operations 245,111 (36,562)
-------------- -------------
Cash flow from investing activities:
Acquisition of fixed assets (15,340) (101,215)
Increase in software development costs (511,840) (291,197)
Increase in other assets 0 (2,400)
-------------- -------------
Net cash provided (used) in investing activities (527,180) (394,812)
-------------- -------------
Cash flow from financing activities:
Proceeds from sale/lease back 0 500,000
Proceeds from issuance of common stock 216,284 267,328
Payments on capital lease obligations (238,325) (40,092)
-------------- -------------
Net cash provided by financing activities (22,041) 727,236
-------------- -------------
Net increase (decrease) in cash (304,110) 295,862
Cash - beginning of year 3,055,144 1,006,614
-------------- -------------
Cash - end of period $ 2,751,034 $ 1,302,476
============== =============
</TABLE>
5
<PAGE>
INTEGRAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
---------------------
The interim financial statements include the accounts of Integral Systems,
Inc. ("ISI" or the Company) and its two wholly-owned subsidiaries, Integral
Marketing, Inc. ("IMI") and InterSys, Inc. ("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 and necessary to make such financial statements
not misleading. The financial statements, which are condensed and do not
include all disclosures included in the annual financial statements, should
be read in conjunction with the consolidated financial statements of the
Company for the fiscal year ended September 30, 1998. 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, 1999 and September 30, 1998 consist of the
following:
<TABLE>
<CAPTION>
March 31, September 30,
1999 1998
----------------- ------------------
<S> <C> <C>
Billed $ 6,622,311 $ 6,928,894
Unbilled 6,755,360 3,983,479
Other 3,181 2,686
================= ==================
Total $ 13,380,852 $ 10,915,059
================= ==================
</TABLE>
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
$3,000,000. Borrowings under the line of credit bear interest at the
Eurodollar Rate plus 1.9% per annum. 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 July 31, 1999. At March 31, 1999 and September 30, 1998, the
Company had no outstanding balance under the line of credit.
4. Capital Lease
-------------
The Company has access to a $2.0 million equipment lease line of credit
that had a balance of $1,401,211 at March 31, 1999. The balance is payable
over 36 months and bears interest at a rate of 8.89% per annum. The unused
portion of the line of credit will be used to finance future equipment
purchases under substantially similar terms.
5. Stock Splits
------------
On June 4, 1997, the Company's stockholders approved an increase to the
Company's authorized shares from 2.0 million to 10.0 million and also
authorized a three-for-one stock split which became effective in July 1997.
On May 29, 1998, the Company's board of directors declared a two-for-one
stock split in the form of a 100% stock dividend for stockholders of record
as of June 9, 1998.
6
<PAGE>
Stockholders' equity has been restated to give retroactive recognition to
the stock splits for all periods presented by reclassifying from additional
paid-in capital to common stock the par value of the additional shares
arising from the splits. In addition, all references to number of shares,
per share amounts, stock option data, and market prices of common stock
have been restated.
6. Business Segment Information
----------------------------
During the periods ended March 31, 1999 and March 31, 1998, the Company's
operations included two reportable segments: Satellite ground systems and
electronic test instrumentation and equipment marketing.
The Company builds satellite ground systems for command and control,
integration and test, data processing, and simulation. Customers for these
systems include U.S. Government organizations such as the National
Aeronautics and Space Administration ("NASA"), the National Oceanic and
Atmospheric Administration ("NOAA"), and the U.S. Air Force, as well as
commercial satellite operators, both domestic and foreign.
Through its wholly-owned subsidiary IMI, the Company acts as a
manufacturer's representative, selling electronic test instrumentation and
equipment to customers primarily in Maryland, Virginia and the District of
Columbia. (The Company's other wholly-owned subsidiary, InterSys, provides
consulting services for satellite design and procurement, but is presently
inactive.) Summarized financial information is as follows:
<TABLE>
<CAPTION>
Six Months Ended
Net Sales March 31, 1999 March 31, 1998
-------------- --------------
<S> <C> <C>
Satellite ground systems $ 16,840,645 $ 11,567,464
Equipment marketing $ 663,834 $ 818,267
Income before taxes
Satellite ground systems $ 1,857,249 $ 975,932
Equipment marketing $ 236,618 $ 313,073
</TABLE>
7. Subsequent event
----------------
On April 27, 1999, The Company's stockholders approved an amendment to the
Company's charter increasing the total number of shares of stock which the
Corporation is authorized to issue from 10,000,000 to 40,000,000.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998
----------------------------------------------------------------------
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 100 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.
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, 1999 and
March 31, 1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31 MARCH 31
1999 % OF 1998 % OF
---- ----
(IN THOUSANDS) REVENUE (IN THOUSANDS) REVENUE
------- -------
<S> <C> <C> <C> <C>
Revenue $ 9,828 100.0 $ 5,827 100.0
Cost of Revenue 7,310 74.4 4,093 70.2
----------- -------- ----------- ---------
Gross Margin 2,518 25.6 1,734 29.8
Operating Expenses
SG&A 958 9.7 675 11.6
Prod. Amortization 165 1.7 165 2.8
----------- -------- ----------- ---------
Income from Operations 1,395 14.2 894 15.4
Other (net) -46 -.5 -51 -.9
----------- -------- ----------- ---------
Pretax Income 1,349 13.7 843 14.5
Income Taxes 521 5.3 326 5.6
----------- -------- ----------- ---------
Net Income $ 828 8.4 $ 518 8.9
=========== ======== =========== =========
</TABLE>
8
<PAGE>
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. The
Company, through its wholly-owned subsidiary IMI, earns commission revenue by
representing a number of electronic product manufacturers in Maryland, Virginia
and the District of Columbia, principally in space-related markets.
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. IMI sales of third-party
hardware and software are also classified as Commercial Products and Services
revenue.
For the three months ended March 31, 1999 and 1998 the Company's revenues were
generated from the following sources:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
REVENUE TYPE 1999 1998
------------ ------ ------
<S> <C> <C>
COMMERCIAL PRODUCTS AND SERVICES
Commercial Users 26% 39%
U.S. Government Users 4 6
------ ------
Subtotal 30 45
GOVERNMENT SERVICES
NOAA 53 30
NASA 13 22
Other U.S. Government Users 4 3
------ ------
Subtotal 70 55
TOTAL 100% 100%
====== ======
</TABLE>
Based on the Company's revenue categorization system, the Company classified 30%
and 45% of its revenue as Commercial Products and Services revenue with the
remaining 70% and 55% classified as Government Services revenue for the three
months ended March 31, 1999 and 1998, 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 74% and 61% of the total revenues for the three months ended March
31, 1999 and 1998, respectively.
On a consolidated basis, revenue increased 69%, or $4.0 million, to $9.8 million
for the three months ended March 31, 1999, from $5.8 million for the three
months ended March 31, 1998. The increase was due to increases in the Company's
Government Services revenues (an increase of approximately $3.7 million) as U.S.
Government customers increased their purchases of the Company's EPOCH product
line and related services for both command and control applications and for
Integration and Test ("I&T") services.
Commercial Products and Services revenues increased approximately $500,000
during the three months ended March 31, 1999 compared to the three months ended
March 31, 1998 principally as a result of increased product license sales. Sales
for IMI declined approximately $200,000 between the two periods.
9
<PAGE>
COST OF REVENUE/GROSS MARGIN
The Company calculates gross margin by subtracting cost of revenue from revenue.
Included in cost of revenue are direct labor expenses, overhead charges
associated with the Company's direct labor base and other costs that can be
directly related to specific contract cost objectives, such as travel,
consultants, equipment, subcontracts and other direct costs.
Gross margins on contract revenues vary depending on the type of product or
service provided. Generally, license revenues related to the sale of the
Company's COTS products have the greatest gross margins because of the minimal
associated marginal costs to produce. By contrast, gross margin rates for
equipment and subcontract pass-throughs seldom exceed 15%. Engineering service
gross margins typically range between 20% and 30%, while gross margins for IMI
vary considerably depending on sales volume achieved.
During the three months ended March 31, 1999, cost of revenue increased to $7.3
million from $4.1 million during the three months ended March 31, 1998 due
primarily to increases in direct labor and related overhead costs necessary to
staff the Company's new contracts and revenue growth. Direct equipment and
subcontract costs also increased by approximately $1.6 million between these
periods.
Cost of revenue expressed as a percentage of revenues increased to 74.4% for the
three months ended March 31, 1999 from 70.2% for the three months ended March
31, 1998 primarily due to a higher percentage of equipment and subcontract costs
in the fiscal year 1999 cost of revenue mix.
The Company's gross margin increased 45%, or $800,000, to $2.5 million for the
three months ended March 31, 1999 from $1.7 million for the three months ended
March 31, 1998. The increase was principally due to higher product license
revenues coupled with revenue growth.
Gross margin as a percentage of revenue was 25.6% during the three months ended
March 31, 1999 compared to 29.8% for the three months ended March 31, 1998. The
decline is principally attributable to the increased percentage of lower margin
direct equipment and subcontract pass-through revenue in the Company's current
quarter revenue mix. Specifically, direct equipment and subcontract revenues
comprised approximately 30% of total revenue for the three months ended March
31, 1999 compared to approximately 21% of total revenue for the three months
ended March 31, 1998. The Company also experienced somewhat lower margins in the
first quarter of fiscal year 1999 compared to the first quarter of fiscal year
1998 for engineering service revenues and IMI revenue, neither of which is
considered by management to be material or trend setting.
OPERATING EXPENSES/ INCOME FROM OPERATIONS
Selling, General & Administrative expenses ("SG&A") increased to approximately
$960,000 during the three months ended March 31, 1999 from $670,000 in the
quarter ended March 31, 1998. The change was primarily due to increases in the
Company's selling and marketing infrastructure costs combined with increased
management labor costs and expenses associated with the implementation of a new
accounting and management information system. As a percentage of revenue, SG&A
accounted for 9.7% of revenue for the three months ended March 31, 1999 compared
to 11.6% in the quarter ended March 31, 1998. Product amortization was $165,000
for both the three months ended March 31, 1999 and the three months ended 1998.
Income from operations increased 56% to $1,400,000 for the three months ended
March 31, 1999 from $900,000 for the three months ended March 31, 1998 primarily
due to increases in gross margin dollars described above. As a percentage of
revenue, income from operations decreased to 14.2% for the three months ended
March 31, 1999 from 15.4% for the prior year's first quarter. This decrease was
principally the result of lower gross margin rates offset by a lower percentage
of SG&A expenses against revenue.
The Company's effective tax rate was 38.6% for both the three months ended March
31, 1999 and the three months ended March 31, 1998.
10
<PAGE>
COMPARISON OF THE SIX MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998
--------------------------------------------------------------------
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, 1999 and
March 31, 1998:
<TABLE>
<CAPTION>
SIX MONTHS ENDED MARCH 31 SIX MONTHS ENDED MARCH 31
1999 % OF 1998 % OF
---- ----
(IN THOUSANDS) REVENUE (IN THOUSANDS) REVENUE
------- -------
<S> <C> <C> <C> <C>
Revenue $ 17,504 100.0 $ 12,386 100.0
Cost of Revenue 12,962 74.1 9,289 75.0
----------- ------- ----------- -------
Gross Margin 4,542 25.9 3,097 25.0
Operating Expenses
SG&A 2,004 11.4 1,361 11.0
Prod. Amortization 330 1.9 330 2.7
----------- ------- ----------- -------
Income from Operations 2,208 12.6 1,406 11.3
Other (net) -114 -.7 -117 -.9
----------- ------- ----------- -------
Pretax Income 2,094 11.9 1,289 10.4
----------- ------- ----------- -------
Income Taxes 809 4.6 498 4.0
----------- ------- ----------- -------
Net Income $ 1,285 7.3 $ 791 6.4
=========== ======= =========== =======
</TABLE>
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. The
Company, through its wholly-owned subsidiary IMI, earns commission revenue by
representing a number of electronic product manufacturers in Maryland, Virginia
and the District of Columbia, principally in space related markets.
Internally, the Company classifies revenues as either Government Services
revenue or Commercial Products and Services revenue. See "Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations" --
"Comparison of the Three Months Ended March 31, 1999 and March 31, 1998" --
"Revenue."
11
<PAGE>
For the six months ended March 31, 1999 and 1998 the Company's revenues were
generated from the following sources:
<TABLE>
<CAPTION>
REVENUE TYPE SIX MONTHS ENDED SIX MONTHS ENDED
------------
MARCH 31, 1999 MARCH 31, 1998
-------------- --------------
<S> <C> <C>
COMMERCIAL PRODUCTS AND SERVICES
Commercial Users 24% 37%
U.S. Government Users 5 12
----- -----
Subtotal 29 49
GOVERNMENT SERVICES
NOAA 53 33
NASA 11 13
Other U.S. Government Users 7 5
----- -----
Subtotal 71 51
TOTAL 100% 100%
===== =====
</TABLE>
Based on the Company's revenue categorization system, the Company classified 29%
and 49% of its revenue as Commercial Products and Services revenue with the
remaining 71% and 51% classified as Government Services revenue for the six
months ended March 31, 1999 and 1998, respectively. By way of comparison, if the
revenues were classified strictly according to end-user (independent of the
Company's internal revenue categorization system), the U.S. Government would
account for 76% and 63% of the total revenues for the six months ended March 31,
1999 and 1998, respectively.
On a consolidated basis, revenue increased 41%, or $5.1 million, to $17.5
million for the six months ended March 31, 1999 from $12.4 million for the six
months ended March 31, 1998. The increase was due to increases in the Company's
Government Services revenues (an increase of approximately $6.3 million) as U.S.
Government customers increased their purchases of the Company's EPOCH product
line and related services for both command and control applications and for I&T
services.
Commercial Products and Services revenues decreased approximately $1.2 million
during the six months ended March 31, 1999 compared to the six months ended
March 31, 1998. This decline was attributable to a decrease of approximately
$1.5 million in lower margin equipment pass-through revenue in the first half of
fiscal year 1999 than in the first half of fiscal year 1998. Despite the
declines in commercial equipment pass-through revenues, commercial license and
service revenues increased approximately 18% between the periods being compared.
Sales for IMI declined approximately $150,000 between the two periods.
COST OF REVENUE/GROSS MARGIN
During the six months ended March 31, 1999, cost of revenue increased to $13.0
million from $9.3 million during the six months ended March 31, 1998 due
primarily to increases in direct labor and related overhead costs necessary to
staff the Company's new contracts and revenue growth. Direct equipment and
subcontract costs also increased by approximately $500,000 between these
periods.
Cost of revenue expressed as a percentage of revenues decreased to 74.1% for the
six months ended March 31, 1999 from 75.0% for the six months ended March 31,
1998 primarily due to a lower percentage of equipment and subcontract costs in
the fiscal year 1999 cost of revenue mix.
12
<PAGE>
The Company's gross margin increased 47%, or $1.4 million, to $4.5 million for
the six months ended March 31, 1999 from $3.1 million for the six months ended
March 31, 1998. The increase was principally due to higher product license
revenues coupled with revenue growth.
Gross margin as a percentage of revenue was 25.9% during the six months ended
March 31, 1999 compared to 25.0% for the six months ended March 31, 1998. The
increase is principally attributable to the decreased percentage of lower margin
direct equipment and subcontract pass-through revenue in the Company's current
half revenue mix. Specifically, direct equipment and subcontract revenues
comprised approximately 27% of total revenue for the six months ended March 31,
1999 compared to approximately 34% of total revenue for the six months ended
March 31, 1998. The Company also experienced somewhat lower margins in the first
half of fiscal year 1999 compared to the first half of fiscal year 1998 for
engineering service revenues and IMI revenue, neither of which is considered by
management to be material or trend setting.
OPERATING EXPENSES/ INCOME FROM OPERATIONS
SG&A increased to approximately $2.0 million during the six months ended March
31, 1999 from $1.4 million during the six months ended March 31, 1998. The
change was primarily due to increases in the Company's selling and marketing
infrastructure costs combined with increased management labor costs and expenses
associated with the implementation of a new accounting and management
information system. As a percentage of revenue, SG&A accounted for 11.4% of
revenue the six months ended March 31, 1999 compared to 11.0% in the six months
ended March 31, 1998. Product amortization was $330,000 for both the six months
ended March 31, 1999 and the six months ended March 31, 1998.
Income from operations increased 57% to $2.2 million for the six months ended
March 31, 1999 from $1.4 million for the six months ended March 31, 1998
primarily due to increases in gross margin dollars described above. As a
percentage of revenue, income from operations increased to 12.6% for the six
months ended March 31, 1999 from 11.3% for the first half of fiscal year 1998.
This increase was principally the result of higher gross margin rates offset by
a higher percentage of SG&A expenses against revenue.
The Company's effective tax rate was 38.6% for both the six months ended March
31, 1999 and the six months ended March 31, 1998.
OUTLOOK
The Company's strong first half results represent a continued trend from prior
fiscal years of increased sales and profitability on those sales. At this time,
the Company has a backlog of work to be performed and it may receive additional
contract awards based on proposals in the pipeline. Management believes that
operating results for future periods will continue to improve based on the
following assumptions:
. Demand for satellite technology and related products and services will
continue to expand
. Sales of its software products and engineering services
will continue to increase
. Sales from its IMI subsidiary will continue to grow
13
<PAGE>
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.
For the six months ended March 31, 1999, the Company used approximately $250,000
of cash from operating activities and used approximately $530,000 for investing
activities, including approximately $510,000 for newly capitalized software
development costs. The Company anticipates that it will spend more money for
software development in fiscal year 1999 than in fiscal year 1998, as it
completes the development of NT versions of its software products. During the
six months ended March 31, 1999, the Company also purchased approximately
$500,000 of electronic equipment under capital lease.
The Company has access to a general line of credit facility through which it can
borrow up to $3.0 million. Borrowings under the line of credit bear interest at
the Eurodollar Rate plus 1.9% per annum. Any accrued interest is payable
monthly. The line of credit is secured by the Company's billed and unbilled
accounts receivable. The line also has certain financial covenants, including
minimum net worth and liquidity ratios. The line expires July 31, 1999. At March
31, 1999, the Company had no amounts outstanding under the line of credit.
The Company also has access to a $2.0 million equipment lease line of credit
under which it had $1.4 million outstanding as of March 31, 1999. The balance is
payable over 36 months and bears interest at a rate of 8.8% per annum. The
unused portion of the line of credit will be used to finance future equipment
purchases under substantially similar terms.
The Company currently anticipates that its current cash balances, amounts
available under its credit facilities and net cash provided by operating
activities will be sufficient to meet its working capital and capital
expenditure requirements for at least the next twelve months. The Company
believes that inflation did not have a material impact on the Company's revenues
or income from operations during the six months ended March 31, 1999 or in past
fiscal years.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. To distinguish 21st
century dates from 20th century dates, these date code fields must be able to
accept four digit entries. The Company has evaluated its information technology
infrastructure and its software products for Year 2000 compliance. The Company
does not expect that the cost to modify its information technology
infrastructure or its software products to be Year 2000 compliant will be
material to its business, financial condition or results of operations. The
Company does not anticipate any material disruption in its operations as a
result of any failure by the Company to be in compliance. No assurance can be
given, however, that unanticipated or undiscovered Year 2000 compliance problems
would not have a material adverse effect on the Company's business, financial
condition or results of operations.
In addition, the Company has limited information concerning the compliance
status of its suppliers. Although the Company is not dependent on any one
supplier or any group of suppliers, in the event that any of the Company's
significant suppliers do not successfully and timely achieve Year 2000
compliance, the Company's business, financial condition or results of operations
could be materially adversely affected.
14
<PAGE>
FORWARD LOOKING STATEMENTS
Certain of the statements contained in this section, including those under the
headings "Outlook" and "Liquidity and Capital Resources" are forward looking. In
addition, from time to time, the Company may publish forward looking statements
relating to such matters as anticipated financial performance, business
prospects, technological developments, new products, research and development
activities and similar matters. 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
including the following:
. The presence of competitors with greater financial resources and their
strategic response to the Company's new services.
. The potential obsolescence of the Company's services due to the
introduction of new technologies.
. The response of customers to the Company's marketing strategies and
services.
. Changes in activity levels in the Company's core markets.
15
<PAGE>
PART II. OTHER INFORMATION
- ---------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
--------
3.1 Articles of Restatement of the Company (Incorporated by
reference to the Company's Annual Report on Form 10-KSB
filed by the Company with the Commission on December 29,
1998).
3.2 By-Laws of the Company (Incorporated by reference to the
Company's Annual Report on Form 10-KSB filed by the Company
with the Commission on December 29, 1998).
4.1 Specimen Common Stock Certificate (Incorporated by
reference to the Registration Statement on Form S-1 (File
No. 333-58453) filed by the Company with the Commission on
July 2, 1998).
10.1 1988 Stock Option Plan (Incorporated by reference to the
Registration Statement on Form S-1 (File No. 333-61559)
filed by the Company with the Commission on August 14,
1998).
10.2 Contract, effective 5/17/96, between Integral Systems, Inc.
and the U.S. National Oceanic and Atmospheric
Administration (Incorporated by reference to the Company's
Annual Report on Form 10-KSBA filed by he Company with the
Commission on July 10, 1997) (Portions of this exhibit have
been omitted pursuant to an order for confidential
treatment granted by the Commission).
10.3 Lease dated April 1, 1987, as amended, between Integral
Systems, Inc. and Washington Business Park Associates
(Incorporated by reference to the Company's Annual Report
on Form 10-KSB filed by the Company with the Commission on
December 29, 1998).
10.4 Master Equipment Lease Agreement dated December 3, 1997
between NationsBanc Leasing Corporation and Integral
Systems Inc. (Incorporated by reference to the Registration
Statement on Form S-1 (File No. 333-58453) filed by the
Company with the Commission on July 2, 1998).
10.5 Loan Agreement dated November 14, 1997 between NationsBank,
N.A. and Integral Systems, Inc. and Promissory Note dated
November 14, 1997 by Integral Systems, Inc. in favor of
NationsBank, N.A. (Incorporated by reference to the
Registration Statement on Form S-1 (File No. 333-58453)
filed by the Company with the Commission on July 2, 1998).
11.1 Computation of Per Share Earnings.
27.1 Financial Data Schedule.
b. Reports on Form 8-K
-------------------
No reports on Form 8-K were filed during the three month period
ending March 31, 1999.
16
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTEGRAL SYSTEMS, INC.
----------------------
(REGISTRANT)
Date: May 14, 1999 By: /s/
------------ ---------------------------
Thomas L. Gough
President and Chief Operating Officer
Date: May 14, 1999 By: /s/
------------ ---------------------------
Elaine M. Parfitt
Vice President and Chief Financial
Officer
17
<PAGE>
EXHIBIT 11.1
INTEGRAL SYSTEMS INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
Basic: 1999 1998 1999 1998
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Weighted average number of
common shares 5,910,394 5,781,836 5,857,499 5,762,786
Net income $ 828,226 $ 517,582 $ 1,285,167 $ 791,205
Earnings per share $ 0.14 $ 0.09 $ .22 $ .14
Diluted:
Weighted average number of 6,283,722 6,216,684 6,289,785 6,132,469
common shares
Net income $ 828,226 $ 517,582 $ 1,285,167 $ 791,205
Earnings per share $ 0.13 $ 0.08 $ .20 $ .13
</TABLE>
-18-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 2,751,034
<SECURITIES> 228,879<F1>
<RECEIVABLES> 13,380,852
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 16,360,765
<PP&E> 3,961,270<F2>
<DEPRECIATION> 907,918
<TOTAL-ASSETS> 19,414,117
<CURRENT-LIABILITIES> 8,793,634<F3>
<BONDS> 0
0
0
<COMMON> 59,263
<OTHER-SE> 10,561,220
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 17,504,479
<TOTAL-REVENUES> 17,504,479
<CGS> 12,962,175
<TOTAL-COSTS> 4,542,304
<OTHER-EXPENSES> 2,380,383
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 68,054
<INCOME-PRETAX> 2,093,867
<INCOME-TAX> 808,700
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,285,167
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0.20
<FN>
<F1>Does not represent securities. Includes Prepaid expenses @ $46,188. Deferred
income tax @ $182,691.
<F2>Includes PP&E @ $2,282,208 + S/W dev. costs @ $1,667,391 + Misc. deposits @
$11,671.
<F3>Includes Capital Leases Payable/Long-Term @ $863,803
</FN>
</TABLE>
