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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2001
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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
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INTEGRAL SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
Maryland 52-1267968
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation of organization)
5000 Philadelphia Way, Lanham, MD 20706
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (301) 731-4233
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- -------------------------------------- -----------------------------------------
- -------------------------------------- -----------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
Common
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(Title of class)
________________________________________________________________________________
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No____
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Indicated by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [_]
As of November 30, 2001, the aggregate market value of the Common Stock of the
Registrant (based upon the average bid and asked prices of the Common Stock as
reported by the market makers) held by non-affiliates of the Registrant was
$182,567,115.
As of November 30, 2001, 9,068,113 shares of the Common Stock of the Registrant
were outstanding.
INDEX
PART 1
ITEM 1. BUSINESS
Company Overview..................................................................................1
Industry Background...............................................................................1
The Company Solution..............................................................................2
Company Strategy..................................................................................3
Products..........................................................................................4
Customers.........................................................................................6
Marketing.........................................................................................7
Contract Revenue..................................................................................8
U.S. Government Contracts.........................................................................8
Non-U.S. Government Contracts....................................................................10
Sale of Software Products........................................................................10
Backlog..........................................................................................11
Competition......................................................................................12
Proprietary Rights...............................................................................12
Employees........................................................................................13
Research and Development.........................................................................13
Environment......................................................................................13
Financing........................................................................................13
Financial Information in Industry Segments.......................................................14
ITEM 2. PROPERTIES.......................................................................................14
ITEM 3. LEGAL PROCEEDINGS................................................................................14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..............................................14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS..............................................................................15
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.............................................................15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS........................................................................16
Overview.........................................................................................16
Results of Operations............................................................................17
Revenue..........................................................................................17
Cost of Revenue/Gross Margin.....................................................................18
Fiscal Year 2001 Compared to Fiscal Year 2000....................................................18
Fiscal Year 2000 Compared to Fiscal Year 1999....................................................19
Discontinued Operations..........................................................................20
Acquisition of SAT Corporation...................................................................20
Outlook..........................................................................................20
Liquidity and Capital Resources..................................................................21
Forward-Looking Statements.......................................................................22
i
PART 1
ITEM 1. BUSINESS
Company Overview
Integral Systems, Inc. (the "Company") 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
commercial-off-the-shelf ("COTS") 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.
For 19 years, the Company has provided flexible, reliable and affordable
ground system solutions. This has allowed the Company to stay ahead of the
competition and perform well in an industry that has traditionally been
dominated by much larger aerospace firms. The Company believes that it has a
unique combination of competitive advantages, including the following:
. Experience. More experience with different types of satellites and
operational scenarios than any competitor.
. Technology. Internationally recognized and proven COTS products that
were first to market and that continue to lead the competition in
functionality.
. Capabilities. Turnkey systems for customers who need a comprehensive
range of products and services.
. Delivery schedule and price. Ability to deliver systems faster and at a
lower cost than the competition.
Through its wholly owned subsidiary SAT Corporation, acquired in August
2000, the Company also offers turnkey systems and software for satellite and
terrestrial communications signal monitoring. The acquisition was accounted for
as a pooling of interests. All prior period consolidated financial statements
presented herein have been restated to include the results of operations,
financial position and cash flows of the Company and SAT Corporation as a single
entity. Certain reclassifications were made to the SAT Corporation financial
statements to conform those financial statements to the Company's presentations.
Integral Systems, Inc. is a Maryland corporation incorporated in 1982.
Industry Background
The space industry can be broken down into the following industry sectors:
infrastructure, communications, emerging applications, and support services.
Each of these sectors is funded by both government and commercial investments.
Space infrastructure encompasses the development, manufacture and procurement of
hardware and related systems for both space assets (i.e., satellites and
payloads) and ground assets (i.e., satellite ground systems). The Company's
business is focused in the ground system component of the infrastructure sector.
The communications sector of the space industry includes revenue generated by
satellite systems for commercial telecommunications services and government and
military communications. Satellite technology has become critical
1
to supporting many aspects of telecommunications infrastructure, including
long-distance telephone, personal communications systems, and private networks.
The emerging applications market includes space technologies utilized for new
applications such as global positioning systems and remote sensing. Support
services for the space industry include technical support, engineering, finance
and consulting, which facilitate growth in space-related markets.
According to a recent study by the International Space Business Council,
space industry revenues were $96 billion in 2000 and will grow at a rate of
approximately 10% per year. Industry growth is supported by a study cited in
Space News predicting that nearly 1,700 satellites will be launched over the
next 10 years. The 2000 space infrastructure revenues were approximately $54
billion, comprising over half of the total space market. The ground sector,
which includes ground equipment, installations, and operations, accounted for
approximately $35 billion of total space infrastructure revenues.
The Company estimates that the current worldwide command and control market
represents approximately $4 billion in annual revenues. However, the Company
also believes that the increasing acceptance of COTS products will lead to
substantial price reductions and a subsequent decrease in market volume. The
Company believes that its COTS software products leave it well positioned to
capitalize on this market trend, resulting in an increase in both its revenues
and market share.
The space industry exhibits certain general characteristics. First, the
space industry is by nature global. There is a trend towards privatization and
deregulation in the communications and space industries which has engendered
numerous opportunities for private concerns to become players in these
traditionally government dominated markets. Opportunities in the space industry
have also been generated by the rapid growth in the information technology
industry.
Second, there is an increasing demand for satellite-based applications.
Improvements in space and communications technologies have resulted in modern
communications satellites with power, capacity, switching capabilities and
longevity significantly greater than those of their predecessors. These
improvements in performance, together with satellites' inherent geographic
coverage and technical advantages, have made satellite-based communications
increasingly competitive with other communications technologies, broadening the
market for satellite support services.
Third, government and business organizations are increasingly demanding
that satellite ground systems be designed for interoperability with computer
hardware and software products and that such products be usable with existing
legacy systems. In addition, concerns over excessive development costs and the
rapid pace of technological change have led both government and business
organizations to demand flexible systems created by adapting COTS software and
hardware, rather than systems built to customized specifications. This emphasis
on system flexibility using readily available commercial products creates
extensive opportunities for flexible COTS products and for systems integration.
The Company Solution
The Company offers satellite ground systems that provide low-cost,
efficient and flexible operations. The principal characteristics of the
Company's approach are as follows:
Open Systems and Ease of Integration. The Company's family of products
addresses the dynamic environment of satellite operation through a commitment to
open systems architecture. The Company's products are implemented as open
systems with full adherence to industry hardware and software standards. The
Company's software can be hosted on any UNIX or Windows NT/2000 platform. The
open architecture of the Company's products allows interoperability with
existing systems. Although the Company's software components are typically sold
as bundled products, they may be purchased and operated separately or integrated
with existing command and control software.
Advanced Architecture. Unlike the traditional host-based approach, the
Company's ground systems are fully distributed, consisting of a set of
workstations all communicating via a local area network ("LAN") backbone. Any
2
software function can be performed on any workstation, eliminating the host
computer bottleneck and allowing the processing and network loading to be
fine-tuned by reallocation of logical processes to physical hardware. This
approach also provides more reliable operations by eliminating single points of
failure.
Depth of Functionality. The Company's command and control software supports
all aspects of satellite operation through a bundle of four inter-operable
software products: a real-time package; an off-line package; an orbit analysis
package; and a database package. The Company's real-time package performs daily
and routine satellite operations, including commanding, telemetry processing and
fault detection and correction. The off-line package supports sustaining
engineering functions, including trending and statistical analysis of data
archived by the real-time system. The orbit analysis package performs orbit
determination and prediction functions to monitor and control the position of a
satellite in space. The database package tailors the performance of the other
three packages, which are general in scope, to the specific requirements of each
satellite mission. That is, the database defines the telemetry and command
characteristics and the desired orbital elements and tolerances.
Flexibility/Adaptability. A critical element to achieving initial operator
acceptance of a new system and facilitating rapid implementation is the ability
of the Company's software to serve the needs of particular satellite systems.
All of the Company's software is database driven, allowing it to support
satellite design changes or different series of satellites, without modifying
the underlying software. Similarly, the software also supports a wide range of
COTS hardware, including antenna, radio frequency ("RF") and baseband equipment,
allowing the total system to be delivered in the most efficient configuration
for each mission. Finally, the software is platform independent and can run on
any UNIX or Windows NT/2000 computer. This platform independence makes it
possible for the Company and its customers to take full advantage of rapidly
declining computer costs.
Superior Price/Performance. The Company seeks to achieve superior
price/performance by providing comprehensive solutions within the budgetary
needs of its customers. The Company believes that its COTS software products
provide advanced yet cost-effective solutions for satellite operators. These
COTS software products eliminate the need for expensive development services,
thereby substantially reducing the overall cost of a ground system. The
Company's database driven software allows satellites to be added over time,
which permits the initial system acquisition costs to be amortized over years of
operations. The Company believes its software products exceed industry
expectations in functionality, technical sophistication and ease of use.
Company Strategy
The Company is currently a leading provider of satellite command and
control systems, providing systems for a wide variety of satellites. The Company
intends to extend its leadership and to expand its market share in world command
and control solutions for users of all satellite types. Primary elements of the
Company's strategy include:
Technological Leadership. The Company intends to continue to commit
substantial resources to further develop the next generation of its
off-the-shelf software products. In addition, because the satellite
infrastructure industry is increasingly requiring standards compliance, the
Company intends to adhere to existing and future industry standards and
participate in the further development of such standards.
Strategic Alliances and Partnerships. In addition to its own development
and marketing organization, the Company has and will continue to establish
partnerships with select third parties, primarily satellite and hardware
manufacturers, to assist the Company in successfully integrating its software
products, implementing total solution command and control systems and developing
customer relationships.
Integration with Complementary Products. The Company believes that its
ability to offer command and control software products that can integrate
seamlessly with all satellite types and ground system components is a key
competitive advantage. The Company also intends to integrate its software
products with complementary products, including visualization tools, scheduling
engines and decision support aids in order to maintain its competitive advantage
and provide maximum flexibility for its customers.
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Sales, Support, Service and Marketing Organizations. The Company currently
sells and supports its command and control software through direct sales to
satellite operators and systems integrators in North America, Europe and Asia.
The Company plans to invest significantly in expanding its sales, support and
service capabilities in these geographic regions while simultaneously gaining
entry into other international emerging markets. In 2001 the Company formed a
wholly owned European subsidiary, Integral Systems Europe S.A.S., with
headquarters in Toulouse, France. This company provides sales, marketing,
support, and engineering services to the European market. The Company also
intends to augment its direct marketing efforts with U.S. Government
organizations to capitalize on the growing acceptance of COTS solutions in the
government sphere. As part of this strategy, the company opened an office in
Colorado Springs, Colorado to serve as the focal point for the Company's support
of its services, products and operations provided to the U.S. Air Force.
In addition to expanding its market share in its core business, the Company
intends to draw on its capabilities and reputation in the command and control
area to develop opportunities in related areas. The key aspects of this growth
strategy are as follows:
New Suite of Off-the-Shelf Applications. The Company intends to continue to
broaden its COTS line beyond command and control to include other applications
currently utilizing customized solutions. These applications, which include
payload data processing, payload integration and test ("I&T") and ground
equipment monitoring and control, have overlapping functionality with the
Company's command and control applications and provide significant market growth
opportunities. To date, the Company has delivered more than a dozen systems for
payload data processing and satellite I&T.
Professional Services Capabilities. The Company believes that providing
comprehensive services and a high level of customer support is critical to its
ability to maintain its leading position in command and control systems and to
expand into new markets. Therefore, the Company intends to expand its
professional services organization in areas such as hardware testing, pre- and
post-sale software support, quality assurance, project installation management
and training. The Company is implementing an ISO 9000 compliance program and is
in the final stages of obtaining certification.
. Acquisitions of Other Companies. The Company intends to look for
complementary businesses to acquire in order to strengthen and
expand its core business.
Products
Most of the Company's sales involve a combination of COTS software and
hardware products together with development services for mission-specific
requirements and system integration as summarized below.
Command and Control Software.
EPOCH 2000, the Company's COTS software solution for satellite command and
control, is designed to operate a variety of satellites with a minimum of
personnel. EPOCH 2000's success has placed the Company at the forefront of
replacing antiquated satellite control centers with smaller systems that can fly
multiple satellites produced by any manufacturer. EPOCH 2000's open
architecture, in combination with a graphical user interface and automated
monitoring and control features, allows operators to monitor and control both
their satellites and ground systems.
EPOCH 2000 features a modern, distributed architecture consisting of a
series of user workstations interconnected via an Ethernet LAN. This approach
provides better performance than traditional mini-computer based ground systems
at a lower cost. EPOCH 2000 provides end-to-end satellite command and control
capabilities, including telemetry processing and display, commanding and command
verification ("CV"), ground station automation, alarm/event processing and data
archive and retrieval. These functions are driven by the EPOCH 2000 database,
allowing the system to support multiple satellites solely through database
updates, without modifying the run-time software. This results in lower
maintenance and operations costs throughout the lifecycle.
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The typical EPOCH 2000 installation consists of a front-end processor which
provides the interface to the front-end hardware (e.g., bit syncs, command
encoders) and a series of user analysis workstations, all interconnected via the
LAN. The front-end processor executes a real-time version of UNIX and services
all the time-critical requirements. The analyst stations, operating under either
UNIX or Windows NT/2000, provide the mechanism for users to control and monitor
the satellite and the ground equipment. With this approach, the processing
burden is distributed across the network. The system can be expanded
indefinitely (up to the capacity of the network) by adding new workstation
nodes. Even the network capacity limitations can be overcome by dividing the
system into subnets inter-connected by bridges and routers. Thus, additional
users can be accommodated during peak loads with no degradation in system
response times.
Functionally, the software addresses all of the requirements for real-time
satellite control, including:
Telemetry Processing. The EPOCH 2000 software provides end-to-end telemetry
processing support, including frame decommutation, engineering unit ("EU")
conversion and limits checking.
Commanding. EPOCH 2000 provides full support for satellite commanding and
CV. The commanding software is mnemonic-based; the user can transmit a command
to the satellite by typing in the mnemonic from a pull-down list arranged
alphabetically or by spacecraft subsystem.
Automation. Routine satellite and ground system control procedures can be
fully automated via the EPOCH 2000 Satellite Test and Operations Language
("STOL"). STOL allows frequently used command and configuration sequences to be
stored in ASCII procedure files for automatic execution.
Alarms/Events. EPOCH 2000 provides a centralized alarm/events processor for
detecting and optionally correcting the following conditions: command or
telemetry verification failure, telemetry out-of-limits condition, front-end
processor failure or network communication problems.
Data Archive and Retrieval. A built-in archive capability provides a
permanent record of all significant ground system activity for long-term
trending and analysis.
OASYS, the Company's mission-planning software, provides full spectrum
support for spacecraft orbit determination and control, including measurement
set reductions, orbit determination, ephemeris propagation, maneuver planning
and orbit events/reports. OASYS allows the user to manage a single spacecraft or
a fleet in any Earth orbit, including low Earth, geosynchronous and Molniya-type
orbits.
ABE, the Company's offline analysis package, provides trending and
statistical analysis of the information recorded in the real-time EPOCH 2000
archives. ABE supports automatic data extraction of key data, along with
summary-level statistics (i.e., daily and seasonal minimums and maximums),
advanced statistical processing techniques (i.e., covariance, convolution and
regression) and graphical data visualization.
All of these applications are tailored to specific customer requirements
through a fourth package, the database. The database application is based on a
commercial package for Relational Data Base Management System ("RDBMS"), with a
top-level user interface and functional extensions developed by the Company. The
database provides "fill-in-the-blank" menu edit forms allowing the operator to
specify every relevant operational characteristic and threshold for the
satellite, its orbit and the associated ground equipment.
The Company's wholly owned subsidiary SAT Corporation also offers a range
of software products and turnkey systems for communications signal monitoring,
including MONICS, a family of software products for stand-alone and distributed
satellite transponder monitoring, and the E4900, a turnkey system for detecting
terrestrial communications interference.
Image Data Reception, Processing and Distribution.
SKYLIGHT, the Company's first turnkey product for image data processing,
provides automatic, un-manned acquisition, processing, and distribution of
satellite imagery to the scientific, meteorological, and military
5
communities. The SKYLIGHT bundle of hardware and software automatically tracks
satellites of interest, captures their images, performs first order data
processing, and distributes the processed images over the internet.
Development Services and Systems Integration.
The Company provides services to support mission-specific requirements for
both government and commercial customers. Most of the Company's ground system
contracts have a service component. Depending on the application, the services
may include tailoring of COTS software products, integration of third-party
hardware and software and/or custom software development. The Company also
provides post-delivery warranty and maintenance service for most of its systems.
The Company believes that its expertise and experience in satellite systems and
operations, computer software and hardware, engineering/mathematical analysis
and end-user applications allow it to provide ground systems that exceed
traditional expectations on system performance, cost and implementation
schedule. The Company's experience, together with its innovative COTS software
products and software tools, reduce the risks and lead time associated with
ground systems development.
Applications.
The Company believes that it has strengthened its position in the
marketplace by developing a business base in certain critical application areas
that offer continued growth potential. The Company provides products and
services in different combinations in order to deliver systems for the following
applications:
Command and Control. The Company's EPOCH 2000 product line provides the
complete spectrum of capabilities for operating satellites from any
manufacturer. The Company sells the EPOCH 2000 software as a stand-alone product
or bundled as a turnkey system with third-party hardware (e.g. antenna, RF,
baseband and computer equipment).
Integration and Test. The Company provides I&T systems for the spacecraft
bus and payload. The I&T systems are based on the EPOCH 2000 product line and
software tools developed by the Company for data visualization and analysis for
payload I&T.
Data Processing. The Company's SKYLIGHT product provides acquisition and
processing of satellite image data. The Company has also built custom systems
for meteorological data processing.
Simulation. The Company builds satellite simulators which are used for
ground systems checkout, training, spacecraft anomaly resolution and flight
software validation.
Signal Monitoring. The Company's subsidiary SAT Corporation manufactures
software and systems for monitoring of space-based and terrestrial
communications.
Customers
In general, there are three major applications for satellites:
communications, remote sensing, and scientific research. The Company has
customers in each of these areas. The Company believes that the combination of
its proven COTS software products and its strength as a systems integrator has
positioned it to serve as an end-to-end provider of total solutions for all of
these applications.
Communications.
The Company provides satellite command and control products for a variety
of communications satellites. One of the principal advantages that the Company's
products offer in the commercial sector is the ability to operate fleets of
satellites from multiple vendors. This capability allows operators to reduce
costs by consolidating their control centers and using a single software package
to operate their satellites.
6
The Company's products are currently flying communications satellites from
most of the major satellite manufacturers, including Boeing, Lockheed Martin,
Space Systems Loral, Orbital Sciences, Astrium, and Alcatel. The Company's
customers include NewSkies, Echostar, GE Americom, Loral Skynet, Shin Satellite,
Binariang Satellite Systems, Orbital Sciences, PanAmSat, Cable & Wireless Optus,
and ChinaSat. All of these operators have purchased the Company's products to
operate their fleets of geosynchronous Earth orbit ("GEO") communications
satellites.
Remote Sensing and Meteorology.
The Company builds command and control systems as well as payload and image
data processing systems for meteorological satellites. Since its inception, the
Company has provided ground systems for the U.S. National Oceanic and
Atmospheric Administration ("NOAA"), including both their Geostationary
Operational Environmental Satellite ("GOES") Program and the Television Infrared
Observational Satellite ("TIROS") programs. The Company's systems support
mission operations, instrument data processing, simulation and flight software
validation. The Company also built the complete command and control system for
the U.S. Air Force Defense Meteorological Satellite Program ("DMSP"), whose
operations were recently transitioned to civilian control under NOAA's aegis.
Since 1982, the Company has also been under contract to provide the DMSP program
with satellite simulators used for training, ground system checkout and flight
software analysis.
High-performance ground systems are required to support Earth resource
satellites that provide military and civilian customers with accurate image
data. The Company has provided such command and control subsystems to Space
Imaging/EOSAT and other operators.
Scientific Research.
The Company has supported a variety of diverse and complex science
missions. The Company has supported more than a dozen missions for the National
Aeronautics and Space Administration ("NASA"), including the Small Explorer
("SMEX") missions, International Solar-Terrestrial Physics ("ISTP") missions,
X-ray Timing Explorer ("XTE") and Tropical Rainfall Measuring Mission ("TRMM").
Projects range from the development of distributed command and control systems
to validation of complex embedded flight software.
The Company was selected by the Johns Hopkins University Applied Physics
Laboratory to support the first NASA Discovery Mission, the Near Earth Asteroid
Rendezvous Program ("NEAR"). NEAR is the first in a series of low-cost,
small-planet exploratory missions designed to gather data about asteroids in the
solar system. The Company's EPOCH 2000 product forms the core of the mission's
command and control ground system and also supports the spacecraft I&T. The
Applied Physics Laboratory is also using the Company's products for their next
series of scientific missions for NASA. These include the Contour, Solar Stereo,
and Messenger missions.
The National Space Program Office ("NSPO") for the Republic of China
selected the Company to provide the complete multi-mission command and control
system for their ROCSAT series of satellites. The Company also supports small
satellite missions in the United States such as Orbital Sciences Corporation's
SeaStar and Microlab programs.
Marketing
The Company relies upon senior corporate management, project managers and
senior technical staff to carry out its marketing program, including the
development and execution of marketing plans, proposal presentations and the
performance of related tasks. These individuals collect information concerning
requirements of current and potential customers in the course of contract
performance and formal and informal briefings, from published literature and
through participation in professional and industry organizations. Senior
management evaluates this information, identifies potential business
opportunities and coordinates proposal efforts. The primary source of business
in the Company's existing markets is by referral from existing customers.
Additionally, the Company advertises periodically in Space News Magazine and
other industry publications.
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The Company seeks business believed to be of long-term benefit based on
considerations such as technical sophistication, favorable market positioning
and potential product spin-offs. One of the Company's primary marketing
strategies is to anticipate and understand the changing needs of its customers
and then to be prepared to meet those needs as they arise in new programs or in
new program functions. This approach to marketing is mirrored in the Company's
products that are highly adaptable to growth and change in the requirements of
each user.
Contract Revenue
The Company earns revenues from sales of its products and services through
contracts that are funded by the U.S. Government as well as commercial and
international organizations. The Company may be either a prime contractor
directly to the end-user of its products and services or it may act as a
subcontractor under a contract with another company.
The percentages of revenues received by the Company from prime contracts
and subcontracts for fiscal years 2001, 2000, and 1999 are as follows:
Fiscal Year
Contract Source 2001 2000 1999
--------------- ---- ---- ----
Prime Contract 76% 71% 67%
Subcontract 24% 29% 33%
For a given contract, the revenue mix may include the Company's COTS
software products, pass-through of third-party hardware and software, and
services provided by the Company or its subcontractors.
The Company generates revenue under three types of contracts: cost plus,
fixed price, and time and material ("T&M") contracts. Under a cost plus
contract, the Company is reimbursed for allowable costs within the contractual
terms and conditions and is paid a negotiated fee. The fee may be fixed or based
on performance incentives. Revenue recognition under a cost plus contract is
based upon actual costs incurred and a pro rata amount of the negotiated fee.
Under a fixed price contract, the Company is paid a stipulated price for
services or products and bears the risk of increased or unexpected costs.
Revenue under a fixed price contract is recognized using the percentage of
completion method of accounting based on costs incurred in relation to total
estimated costs. Under a T&M contract, the Company receives fixed hourly rates
intended to cover salary costs attributable to work performed on the contract
and related overhead expenses, reimbursement for other direct costs and a
profit. Revenue is recognized under a T&M contract at the contractual rates as
labor hours and direct expenses are incurred. A considerable amount of the
Company's revenue is earned under cost plus contracts. To date, the vast
majority of contracts for the purchase of the Company's COTS software products
have been fixed priced in nature, either firm fixed price contracts or T&M fixed
labor rate contracts.
The following table summarizes the percentage of revenues attributable to
each contract type for the period indicated:
Fiscal Year
Contract Type 2001 2000 1999
------------- ---- ---- ----
Cost Plus 14% 23% 31%
Fixed Price 77% 71% 66%
Time and Materials 9% 6% 3%
U.S. Government Contracts
Company revenues from U.S. Government contracts are derived from a
combination of contracts with the U.S. Government and subcontracts with other
companies that have prime contracts with the U.S. Government. For fiscal years
2001, 2000, and 1999 approximately 55%, 54%, and 60%, respectively, of the
Company's revenues were derived from contracts or subcontracts funded by the
U.S. Government.
8
NOAA, one agency, represented 38%, 41%, and 43% of revenues, respectively,
for fiscal years 2001, 2000, and 1999. The Company expects that at least 30% of
its revenue for fiscal year 2002 will be derived from NOAA contracts. The loss
of any one of these NOAA contracts could significantly affect the Company's
performance. Similarly, the expiration, or termination for convenience, of any
major contract could significantly affect the Company's performance if not
renewed or replaced by contracts of similar value. It is estimated that the
single largest NOAA contract will represent approximately 10% of the Company's
fiscal year 2002 revenue. This contract is to develop the ground system used to
operate the next generation of geosynchronous weather satellites at NOAA.
U.S. Government contracts are awarded by formal advertising or procurement
by negotiation. Negotiated procurements may, but do not necessarily, involve the
solicitation of competitive proposals. If competitive proposals are solicited,
the U.S. Government selects the proposal most advantageous to it and then
conducts negotiations with the selected bidder.
Many of the U.S. Government programs in which the Company participates as a
contractor or subcontractor extend for several years but are funded only on an
annual basis. Accordingly, the Company's contracts and subcontracts are subject
to termination, reduction or modification in the event of changes in the
government's requirements or budgetary constraints. Additionally, when the
Company participates in a project as a subcontractor, it is subject to the risk
that the prime contractor may fail or be unable to perform the prime contract.
All of the Company's U.S. Government contracts and subcontracts are also
subject to termination for "convenience", which means termination without cause.
Should a contract be so terminated, the Company would be reimbursed for
allowable costs to the date of termination and would be paid a proportionate
amount of the stipulated profits or fees attributable to the work actually
performed.
The Company's books and records are subject to audit by the Defense
Contract Audit Agency ("DCAA"). Such audits can result in adjustments to
contract costs and fees. Although the Company thus far has not been required to
make any material audit adjustments, the possibility that such adjustments will
be required always exists. Management is of the opinion that any such audit
adjustments would not have a material adverse effect on the financial position
or results of operations of the Company. The Company has been audited by DCAA
through fiscal year 1999.
The Company's contracts and subcontracts with federal government agencies
are subject to competition and awarded on the basis of technical merit,
personnel qualifications, experience and price. The Company's business,
financial condition and results of operations could be materially affected by
changes in procurement policies, a reduction in funds available for the services
provided by it and other risks generally associated with federal government
contracts. New government contract awards also are subject to protest by
competitors at the time of award that can result in the re-opening of the
competition or evaluation process, or the award of a contract to a competitor.
The Company considers such bid protests to be a customary element in the process
of procuring government contracts.
In addition to the right to terminate, U.S. Government contracts are
conditioned upon the continuing availability of congressional appropriations and
are typically subject to modification or termination in the event of changes in
funding. Congress usually appropriates funds on a fiscal year basis even though
contract performance may take several years. Consequently, at the outset of a
major program, the contract is usually incrementally funded, and additional
funds are normally committed to the contract by the procuring agency as
appropriations are made by Congress for future fiscal years. In addition,
contractors often experience revenue uncertainties during the first quarter of
the government's fiscal year, which begins October 1, until differences between
budget requests and appropriations are resolved. To date, Congress has funded
all years of the multi-year major program contracts for which the Company has
served as prime contractor or a subcontractor, although there can be no
assurance that this will be the case in the future.
9
Non-U.S. Government Contracts
In addition to having contracts with the U.S. Government, the Company also
has contracts with commercial and international organizations. For fiscal years
2001, 2000, and 1999 approximately 45%, 46%, and 40%, respectively, of the
Company's revenues were derived from non-U.S. Government contracts. These
contracts are typically with commercial satellite operators, satellite
manufacturers, aerospace systems integrators and foreign governments.
Some of the Company's non-U.S. Government contracts are with international
organizations. For fiscal years 2001, 2000, and 1999 approximately 23%, 23%, and
9%, respectively, of the Company's revenues were derived from international
organizations. Revenues from foreign sources are discussed in Footnote Number 1
of the Notes to the Financial Statements included elsewhere herein. Operations
in numerous countries outside the United States carry substantial managerial,
operational, legal, and political uncertainties. These operations are subject to
changes in government regulations and telecommunications standards, tariffs or
taxes, and other trade barriers. In addition, the Company's agreements relating
to foreign operations may be enforceable only in foreign jurisdictions so that
it may be difficult for the Company to enforce its rights. The Company currently
has one contract that is subject to currency fluctuations in foreign markets,
which is not material. However, there can be no assurance that the Company will
not enter into these types of contracts in the future. In addition, various
agencies and departments of the U.S. government regulate the Company's ability
to pursue business opportunities outside the United States. Exports of
space-related products, services, and technical information require licenses
granted by the U.S. government. The Company does not currently have blanket
authorization for export of its products or services and cannot assure that it
will be able to obtain necessary licenses or approvals on a per transaction
basis.
Most of the Company's non-U.S. Government contracts are awarded
competitively and are performed on a fixed price basis. Typically, these
contracts are for turnkey systems that are delivered by the Company in six to
eighteen months. Payment is most often based on delivery milestones established
in the Company's contract. In addition, the contracts may include a system
warranty period that lasts one to two years. The Company also offers extended
support for the system on a fixed-price or T&M basis.
For certain of the Company's non-U.S. Government contracts, the Company
often has terms in its contracts under which the customer can enforce
performance of the Company or seek damages in case the Company does not perform
as agreed to in the contract. Contracts may require the Company to post a
performance bond, establish an irrevocable letter of credit, or agree to pay
liquidated damages in the event of late delivery. In addition, although a
significant portion of the Company's revenues are generated from the sale of its
services and products in commercial markets, the Company cannot assure that it
will continue to compete successfully in these markets. Many of the Company's
commercial contracts are for a fixed price. This subjects the Company to
substantial risks relating to unexpected cost increases and other factors
outside of its control. In addition, the Company may fail to anticipate
technical problems, estimate costs accurately, or control costs during
performance of a fixed-price contract.
Sale of Software Products
Most of the Company's contracts include the sale of proprietary software
products. Sales of the Company's software products take many forms. The Company
sells (i) software only (a "Software-Only Sale"), (ii) software and services
together, or (iii) software, services and hardware together. In addition,
depending on a customer's requirements, the Company may or may not provide
post-contract customer support ("PCS").
The Company's recognition of revenue for sales of Company software products
depends on customer requirements and the nature of the contracts involved. For a
Software-Only Sale, the Company recognizes revenue upon shipment. In situations
where software is sold together with services and/or hardware, the Company
recognizes software license revenue on a percentage of completion basis.
With respect to PCS, the Company recognizes PCS revenue on a percentage of
completion basis when PCS is part of a broader fixed price contract that
includes software and services. Alternatively, when PCS services (i.e. software
maintenance and support) are awarded to the Company under a separate maintenance
contract, the Company recognizes PCS revenue on a straight-line basis pro rata
over the term of the maintenance contract.
10
Backlog
The Company's estimated backlog is as follows:
Sept. 30, 2001 Sept. 30, 2000 Sept. 30, 1999
-------------- -------------- --------------
Outstanding Commitments (1) $37,884,159 $27,578,292 $34,932,792
General Commitments (2) 5,126,065 13,405,022 14,633,439
----------- ----------- -----------
Total $43,010,224 $40,983,314 $49,566,231
=========== =========== ===========
(1) Represents orders that are firm and funded.
(2) Represents orders that are firm but not yet funded and contracts
awarded but not yet signed.
Under outstanding commitments, the Company agrees to provide specific
services, frequently over an extended period of time, with continued performance
of those services contingent upon the customer's year-to-year decision to fund
the contract.
General commitments consist of contract options and sole source business
that management believes likely to be exercised or awarded in connection with
existing contracts. Contract options are the Company's contractual agreement to
perform specifically defined services only in the event the customer thereafter
requests the Company to do so. Sole source business refers to contract work
which the Company reasonably expects to be awarded based on its unique expertise
in a specific area or because it has previously done all such work in that area
for the customer or prime contractor who will award the contract. The Company
estimates that 80% of backlog as of September 30, 2001 will be completed during
fiscal year 2002. Estimated backlog includes contract options through July 13,
2004, including general commitments.
Many of the Company's contracts are multi-year contracts and contracts with
option years, and portions of these contracts are carried forward from one year
to the next as part of the Company's contract backlog. The Company's total
contract backlog represents management's estimate of the aggregate unearned
revenues expected to be earned by the Company over the life of all of its
contracts, including option periods. Because many factors affect the scheduling
of projects, there can be no assurance as to when revenues will be realized on
projects included in the Company's backlog. In addition, although contract
backlog represents only business which is considered to be firm, there can be no
assurance that cancellations or scope adjustments will not occur. The majority
of backlog represents contracts under the terms of which cancellation by the
customer would entitle the Company to all or a portion of its costs incurred and
potential fees to the date of cancellation.
However, the Company also believes that backlog is not necessarily
indicative of future revenues. The Company's backlog typically is subject to
large variations from quarter to quarter as existing contracts are renewed or
new contracts are awarded. Additionally, all U.S. Government contracts included
in backlog may be terminated at the convenience of the government.
11
Competition
The Company experiences significant competition in all of the areas in
which it does business. The Company believes it is one of four companies in the
United States that derive the major portion of their revenue from the
development of satellite ground systems. The Company competes with numerous
companies having similar capabilities, some of which are larger and have
considerably greater financial resources, including Lockheed Martin Corporation,
Boeing Satellite Systems, Loral Space & Communications Ltd., Raytheon Company,
Orbital Sciences Corporation, Honeywell International Inc. (formerly
AlliedSignal), Computer Sciences Corporation, Alcatel Espace, and Astrium. Many
of these competitors are significantly larger and have greater financial
resources than the Company. In addition, some of these competitors are divisions
or subsidiaries of large, diversified companies that have access to the
financial resources of their parent companies. Some of our competitors are also
current or potential customers. In addition, several smaller companies have
specialized capabilities in similar areas. In general, the markets in which the
Company competes are not dominated by a single company; instead, a large number
of companies offer services that overlap and are competitive with those offered
by the Company. There can be no assurance that the Company will be able to
compete successfully.
Because its command and control business is specialized and the Company is
a leader in COTS software products, the market for this business is somewhat
less competitive. In the command and control software market, the Company
competes against other companies in the space industry. The Company's products
also face competition from certain government off-the-shelf, or "GOTS", products
for satellite command and control. In its other business areas, ground equipment
and systems integration, the Company competes against systems integrators and
product manufacturers.
The Company believes that the principal competitive factors in the
businesses in which it operates are technical understanding, management
capability, past contract performance, personnel qualifications, and price.
The Company principally obtains contracts and subcontracts through
competitive procurements offered by the U.S. Government or commercial
enterprises. Because of its size, the Company often joins with a larger company
in pursuing major procurements. It is not unusual for the Company to compete
with a company for a contract while simultaneously joining with the same company
in pursuit of another contract.
It is not possible to predict how the Company's competitive position may be
affected by changing economic or competitive conditions, customer requirements
or technological developments.
Proprietary Rights
The Company regards its products as proprietary trade secrets and
confidential information. The Company has made the strategic decision after
discussion with intellectual property counsel not to seek patent protection for
its software, hardware, or systems. None of the Company's software, hardware, or
systems is patented. The Company relies on a combination of common law copyright
and trade secret laws, third party nondisclosure agreements and other industry
standard methods for protecting ownership of its proprietary software, hardware
and systems. The Company has begun the process of registering many of its
trademarks and the copyrights with respect to new versions of its software as
they are developed. There can be no assurance, however, that in spite of these
precautions, an unauthorized third party will not obtain and use information
that the Company considers proprietary. In addition, the laws of some foreign
countries do not protect the Company's proprietary rights to the same extent as
the laws of the United States. Moreover, the Company does not have
non-competition agreements with any of its employees or confidentiality
agreements with any of its employees hired before mid-December, 2000. There can
be no assurance that the mechanisms used by the Company to protect its software
will be adequate or that the Company's competitors will not independently
develop software products that are substantially equivalent or superior to the
Company's products. The Company believes that it has all necessary rights to
market its products, although there can be no assurance third parties will not
assert infringement claims in the future.
12
The Company believes that, due to the nature of its products, the skill of
personnel, knowledge and experience of management, and familiarity with the
operation of the Company's products are more important in maintaining a
leadership position in the industry than the protection of intellectual property
rights.
Employees
The Company believes that its employees and their knowledge and
capabilities are a major asset. The Company has been successful in attracting
and retaining employees skilled in its core business competencies. The Company
intends to continue to employ highly skilled personnel, as well as personnel
knowledgeable concerning the needs and operations of its major customers.
As of November 2, 2001, the Company had approximately 260 employees
including employees of SAT Corporation in Sunnyvale, California. Of the 260
employees, 248 are full-time employees of whom 214 are considered professionals
in engineering related disciplines. Of the engineering professionals, 90% have
undergraduate degrees in a scientific discipline and 35% of those have advanced
degrees in a scientific discipline. Approximately 82% of the engineering staff
have at least seven years relevant experience.
The Company believes that its relations with its employees are good. None
of the Company's employees are covered by collective bargaining agreements.
There is significant competition for employees with the computer,
engineering and information technology skills required to perform the services
the Company offers. In addition, the Company must often comply with provisions
in government contracts that require specified levels of education, work
experience, and security clearances for our employees. The Company cannot assure
that it will be successful in attracting or retaining a sufficient number of
highly skilled and qualified employees in the future. The Company's success will
depend in part upon the Company's ability to attract, retain, train and motivate
highly skilled employees.
Research and Development
The Company is continually engaged in research and development activities
both to improve its existing software products as well as probe additional
product areas for the future growth and development of the Company. Currently,
the Company is focusing its research and development efforts primarily on
developing and improving the user interface systems for its COTS software
products. In fiscal years 2001, 2000, and 1999, total capitalized software
development expenditures were $3.3 million, $2.1 million and $1.2 million,
respectively. Research and development expense for the years ended September 30,
2001, 2000, and 1999 was $200,000, $540,000 and $0, respectively.
Environment
No material effects on the Company's expenditures, earnings, or competitive
position are anticipated as a result of compliance with federal, state, and
local provisions which have been enacted or adopted regulating the discharge of
material into the environment, or otherwise related to the protection of the
environment.
Financing
The Company has a line of credit agreement with a local bank for $9,000,000
for operating purposes and has an additional line of credit with the bank
amounting to $6,000,000, which can be used for corporate acquisitions. 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. At September 30, 2001, 2000, and
1999, the Company had no amounts outstanding under the lines of credit.
13
The Company has access to a $2.0 million equipment lease line of credit
under which it had $260,000, $714,000, and $1,315,000, outstanding as of
September 30, 2001, 2000, and 1999, respectively. The outstanding balance is
payable over a 57-month period from lease inception and bears interest at a rate
of 8.8% per annum.
See Footnote Numbers 7 and 9 of the notes to the Financial Statements
included elsewhere herein for further information regarding these matters.
Financial Information in Industry Segments
During the year ended September 30, 2001, the Company's operations
included one reportable segment: satellite ground systems.
The Company provides satellite ground systems - computer systems for
satellite command and control, data processing, signal monitoring, simulation,
and flight software validation. Customers for these systems include U.S.
Government organizations such as NASA, NOAA, and the U.S. Air Force, as well as
commercial satellite operators, both domestic and foreign.
See Footnote Number 1 of the notes to the Financial Statements included
elsewhere herein for financial information regarding this segment.
ITEM 2. PROPERTIES
The Company's headquarters occupy approximately 46,700 square feet at 5000
Philadelphia Way, Lanham, Maryland 20706. The headquarters' lease expires May
31, 2009.
During April 1999, the Company contracted for 24,224 square feet and during
July 2001, the Company contracted for an additional 1,050 square feet at 5200
Philadelphia Way, Lanham, Maryland 20706. This lease expires May 31, 2009.
The Company opened offices in Colorado Springs, Colorado in March 2001,
occupying 3,651 square feet at 1330 Iverness Drive, One Gateway Plaza, Suite
500, Colorado Springs, Colorado 80903. The lease for the office in Colorado
Springs expires March 14, 2002.
During September 2000, the Company contracted for 157.73 square meters at
High Tech Buro, Bat. C, Voie 3, Labege, France. The lease for the offices in
France expires September 14, 2009.
The Company's subsidiary SAT Corporation occupies approximately 9,940
square feet at 1151 Sonora Court, Sunnyvale, California 94086. This lease
expires July 15, 2004.
The Company believes that it has adequate insurance coverage to protect its
properties and assets.
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time involved in litigation incidental to the
conduct of its business. The Company is not currently a party to any lawsuit or
proceeding which, in the opinion of management, would be likely to have a
material adverse effect on the Company's business, financial condition or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to our stockholders during the fourth quarter of
the fiscal year ended September 30, 2001.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The following table sets forth the high and low sales prices of the
Company's common stock as reported by The Nasdaq National Market, where the
common stock trades under the Symbol "ISYS." The prices reported have been
adjusted to give retroactive effect to changes resulting from stock dividends
and stock splits.
2001 Fiscal Year High Low
---------------- ---- ---
First Quarter 17.56 10.81
Second Quarter 17.50 12.81
Third Quarter 24.50 15.50
Fourth Quarter 23.14 15.75
2000 Fiscal Year High Low
---------------- ---- ---
First Quarter 45.25 23.25
Second Quarter 56.00 33.00
Third Quarter 45.00 13.00
Fourth Quarter 19.00 13.50
As of September 30, 2001, there were approximately 2,494 holders of record
of the Company's common stock.
Historically, the Company has not paid any cash dividends. Instead, the
Company intends to invest earnings in the operations, development and growth of
its business. The payment of future dividends on the common stock and the rate
of such dividends, if any, will be determined in light of any applicable
contractual restrictions limiting the Company's ability to pay dividends, the
Company's earnings, financial condition, capital requirements and other factors
deemed relevant by the Board of Directors. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents summary consolidated financial data of the
Company for the fiscal years ended September 30, 2001, 2000, 1999, 1998, and
1997. The financial data for the fiscal years ended September 30, 1998, 1999
2000 and 2001 has been derived from the financial statements of the Company
which have been audited by Rubino & McGeehin, Chartered, independent public
accountants, as set forth in the financial statements and notes thereto
presented elsewhere herein. The consolidated financial statements of the Company
presented herein have been restated for all periods prior to the acquisition of
SAT Corporation to include the combined financial results of the Company and SAT
Corporation. Net sales, income before discontinued operations and net income for
the individual companies reported prior to the acquisition are set forth in
Footnote Number 2 to the Financial Statements included elsewhere herein. The
unaudited historical financial data for the fiscal year ended 1997 has been
derived from the Company's audited financial statements, which have been
restated to include SAT Corporation. In the opinion of the Company's management,
the unaudited financial statements represent a fair presentation of such
information. The following information should be read in conjunction with the
Company's financial statements and notes thereto presented elsewhere herein. See
"Financial Statements" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
15
Years Ended September 30,
---------------------------------------------------------
1997 1998 1999 2000 2001
------ ------ ------ ------ -------
(unaudited)
(in thousands, except for per share data)
Statement of Operations Data:
Revenue $23,653 $31,012 $42,937 $40,455 $40,532
Gross margin 6,075 8,675 12,001 11,869 11,826
Income from operations 1,803 3,024 4,723 2,919 3,457
Income from continuing operations 1,122 1,727 2,983 3,713 4,011
Net income $ 1,188 $ 2,024 $ 3,200 $ 4,177 $ 4,011
Income from continuing operations per common
and equivalent share--basic $ 0.18 $ 0.27 $ 0.43 $ 0.42 $ 0.42
Income from continuing operations per common
and equivalent share--diluted $ 0.17 $ 0.25 $ 0.41 $ 0.40 $ 0.41
Net income per common and equivalent
share--basic $ 0.19 $ 0.31 $ 0.46 $ 0.47 $ 0.42
Net income per common and equivalent
share--diluted $ 0.18 $ 0.29 $ 0.43 $ 0.45 $ 0.41
Weighted average common and equivalent
shares outstanding--basic 6,368 $ 6,443 6,969 8,829 9,462
Weighted average common and equivalent
shares outstanding--diluted 6,558 6,883 7,423 9,284 9,673
Balance Sheet Data:
Cash and cash equivalents $ 2,335 $ 4,589 $ 9,267 $17,558 $ 2,380
Working capital 5,334 8,239 30,748 77,080 71,427
Total assets 14,438 19,166 45,280 89,858 90,413
Long-term obligations, net of current 0 748 714 1,340 2,005
Stockholders' equity 7,369 9,981 34,152 81,698 78,177
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
The Company 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 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.
16
The consolidated financial statements of the Company presented herein have
been restated for all periods prior to the acquisition of SAT Corporation to
include the combined financial results of the Company and SAT Corporation. Net
sales, income before discontinued operations, and net income for the individual
companies reported prior to the acquisition are set forth in Footnote Number 2
to the Financial Statements included elsewhere herein.
Results of Operations
The Company's results of operations have been restated to include the
operations of SAT Corporation for the fiscal years ended September 30, 2001,
2000 and 1999. The components of the Company's income statement as a percentage
of revenue are depicted in the following table for the fiscal years ended
September 30, 2001, 2000 and 1999:
Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year
2001 2001 2000 2000 1999 1999
---- ---- ---- ---- ---- ----
(in thousands) % of (in thousands) % of (in thousands) % of
Revenue Revenue Revenue
Revenue $40,532 100.0 $40,455 100.0 $42,937 100.0
Cost of revenue 28,706 70.8 28,586 70.7 30,936 72.0
------- ---- ------- ----- ------- -----
Gross margin 11,826 29.2 11,869 29.3 12,001 28.0
SG&A 6,999 17.3 7,555 18.7 6,618 15.4
Acquisition Costs 0 0 445 1.1 0 0
Product Amortization 1,370 3.4 950 2.3 660 1.6
------- ---- ------- ----- ------- -----
Income from operations 3,457 8.5 2,919 7.2 4,723 11.0
Other income (exp.) net 2,117 5.2 1,976 4.9 143 .3
------- ---- ------- ----- ------- -----
Income before taxes 5,574 13.7 4,895 12.1 4,866 11.3
Income taxes 1,563 3.8 1,182 2.9 1,882 4.4
------- ---- ------- ----- ------- -----
Income from continuing
Operations 4,011 9.9 3,713 9.2 2,984 6.9
Income from Discontinued
Segment (net of tax) 0 0 129 .3 216 .5
Gain on sale of Discontin.
Segment (net of tax) 0 0 335 .8 0 0
------- ---- ------- ----- ------- -----
Net Income $ 4,011 9.9 $ 4,177 10.3 $ 3,200 7.4
======= ==== ======- ====- ======= =====
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.
17
For the fiscal years ended September 30, 2001, 2000, and 1999, the
Company's revenues were generated from the following sources:
Fiscal Year Fiscal Year Fiscal Year
Revenue Type 2001 2000 1999
------------ ---- ---- ----
Commercial Products & Services
Commercial Users 45% 46% 40%
U.S. Government Users 1 2 3
----- ----
Subtotal 46 48 43
----- ---- ------
Government Services
NOAA 38 41 43
USAF 10 3 2
Other U.S. Government Users 6 8 12
---- ---- ------
Subtotal 54 52 57
---- ---- ------
Total 100% 100% 100%
==== ==== ======
Based on the Company's revenue categorization system, the Company
classified 46%, 48%, and 43% of its revenue as Commercial Products and Services
revenue with the remaining 54%, 52%, and 57% classified as Government Services
revenue for fiscal years ended September 30, 2001, 2000, and 1999, 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 55%, 54%, and 60%, of the total revenues
for fiscal years 2001, 2000, and 1999 respectively.
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%.
Fiscal Year 2001 Compared to Fiscal Year 2000
On a consolidated basis, revenue was essentially flat at $40.5 million for
both periods. Although revenue at SAT Corporation decreased by approximately
$2.1 million in fiscal year 2001 compared to fiscal year 2000, this decrease was
offset by gains in the remainder of the Company's Commercial Products and
Services revenues and the Company's Government Services revenues.
During fiscal year 2001, cost of revenue was also flat compared to fiscal
year 2000 increasing slightly to $28.7 million from $28.6 million. Generally,
the components of cost of revenue (direct labor, overhead, travel, other direct
costs, direct equipment and subcontracts) in fiscal year 2001 were also
comparable to amounts recorded in fiscal year 2000. There was no cost of revenue
component that varied more than 5% between the two fiscal periods. Cost of
revenue expressed as a percentage of revenues increased insignificantly to 70.8%
for fiscal year 2001 from 70.7% for fiscal year 2000.
18
The Company's gross margin decreased by less than 1%, or $40,000, to $11.8
million for fiscal year 2001 from $11.9 million for fiscal year 2000. As a
percentage of revenue, gross margin decreased to 29.2% during fiscal year 2001
compared to 29.3% for fiscal year 2000. The gross margin percentages for both
fiscal year 2001 and fiscal year 2000 are reasonably representative of the
Company's gross margin profile.
Selling, general & administrative expenses ("SG&A") decreased to
approximately $7.0 million in fiscal year 2001 from $7.6 million in fiscal year
2000. The change was primarily due to decreases in the Company's bid and
proposal expenses. As a percentage of revenue, SG&A accounted for 17.3% of
revenue in fiscal year 2001 compared to 18.7% in 2000. Product amortization was
$1,370,000 in fiscal year 2001 compared to $950,000 in fiscal year 2000
resulting from an increased capitalized cost base. In addition, the Company
recorded one time acquisition costs amounting to approximately $445,000 in
fiscal year 2000, principally related to the acquisition of SAT Corporation and
a previously reported unsuccessful acquisition attempt of an unrelated entity.
Such acquisition costs did not recur in fiscal year 2001.
Income from continuing operations increased 18.4% to $3.5 million for
fiscal year 2001 from $2.9 million for fiscal year 2001. As a percentage of
revenue, income from continuing operations was 8.5% for fiscal year 2001 up from
7.2% in fiscal year 2000. This increase was principally the result of lower SG&A
expenses and the elimination of one time acquisition related costs, partially
offset by higher product amortization expenses in fiscal year 2001 versus fiscal
year 2000.
During fiscal year 2001, the Company recorded $2.5 million of interest
income ($2.3 million in fiscal year 2000), which was principally derived from
investments of the cash proceeds from the Company's two private equity
placements that occurred in June 1999 and February 2000. Since a significant
portion of such investment was related to tax-free debt securities, the
Company's effective tax rate was only 28.0% for fiscal year 2001 and 24.2% for
fiscal year 2000.
Fiscal Year 2000 Compared to Fiscal Year 1999
On a consolidated basis, revenue decreased 5.8%, or $2.5 million, to $40.5
million for fiscal year 2000 from $42.9 million for fiscal year 1999. The
decrease in revenue in fiscal year 2000 from fiscal year 1999 was principally
due to a decrease in the Company's equipment and subcontract revenue
(approximately $5.1 million). During fiscal year 2000, the Company continued to
make progress in selling its EPOCH 2000 based ground systems to commercial
clients while also making in-roads selling EPOCH 2000 based systems to
governmental clients, especially NOAA, as U.S. Government customers increased
their purchases of the Company's EPOCH 2000 product line and related services
for both command and control applications and for I&T services.
During fiscal year 2000, cost of revenue decreased to $28.6 million from
$30.9 million in fiscal year 1999. The decrease in fiscal year 2000 was
primarily due to a decrease in direct equipment and subcontract costs which
dropped $4.2 million between fiscal year 2000 and fiscal year 1999. Cost of
revenue expressed as a percentage of revenues declined to 70.7% for fiscal year
2000 from 72.0% for fiscal year 1999.
The Company's gross margin decreased 1.3%, or $100,000, to $11.9 million
for fiscal year 2000 from $12.0 million for fiscal year 1999. The decrease was
principally due to margin decreases in the Company's equipment pass through
component. The gross margin decline for pass through revenue resulted from the
shipment of $5.1 million less pass through revenue in fiscal year 2000 compared
to fiscal year 1999. The service revenue margin would have been higher were it
not for a one time unanticipated contract overrun that negatively impacted
margins by almost $300,000 recorded during the fourth quarter of the current
year. Despite the decline in gross margin dollars, gross margin as a percentage
of revenue increased to 29.3% during fiscal year 2000 compared to 28.0% for
fiscal year 1999.
SG&A increased to approximately $7.6 million in fiscal year 2000 from $6.6
million in fiscal year 1999. The change was primarily due to increases in the
Company's selling and marketing infrastructure costs combined with increased bid
and proposal expenses. As a percentage of revenue, SG&A accounted for 18.7% of
revenue in fiscal year 2000 compared to 15.4% in 1999. Product amortization was
$950,000 in fiscal year 2000 and $660,000 in
19
fiscal year 1999. In addition, the Company recorded one time acquisition costs
amounting to approximately $440,000 in fiscal year 2000, principally related to
the acquisition of SAT Corporation and a previously reported unsuccessful
acquisition attempt of an unrelated entity.
Income from continuing operations decreased 38.2% to $2.9 million for
fiscal year 2000 from $4.7 million for fiscal year 1999. As a percentage of
revenue, income from continuing operations was 7.2% for fiscal year 2000 down
from 11.0% in fiscal year 1999. This decrease was principally the result of an
increased percentage of operating expenses (i.e. SG&A, amortization and
acquisition costs) against revenue in the current year.
During fiscal year 2000, the Company recorded $2.3 million of interest
income, which was principally derived from investments of the cash proceeds from
the Company's two private equity placements that occurred in June 1999 and
February 2000. Since a significant portion of such investment was related to
tax-free debt securities, the Company's effective tax rate was only 24.2% for
fiscal year 2000 compared to 38.6% for fiscal year 1999.
Discontinued Operations
On July 5, 2000, the Company announced its plan to divest its wholly owned
subsidiary Integral Marketing, Inc. Integral Marketing earned commission revenue
by representing a number of electronic product manufacturers in Maryland,
Virginia and the District of Columbia, principally in space-related markets. The
sale of Integral Marketing was effective July 1, 2000 and closed on August 31,
2000 (see Footnote Number 2 of Notes to the Consolidated Financial Statements).
As a result of this sale, the results of operations for Integral Marketing have
been reported as discontinued operations (the "Discontinued Operations") and
previously reported financial statements have been restated.
Income from Discontinued Operations decreased $87,000 to $130,000 for
fiscal year 2000 from $217,000 for fiscal year 1999. The decrease was
principally due to decreased commission revenue. There was no income from
Discontinued Operations recorded in fiscal year 2001.
Acquisition of SAT Corporation
In August 2000, the Company entered into an agreement and plan of
reorganization, by and among the Company, SAT Corporation, ISI Acquisition
Corporation and Herbert Pardula, the sole shareholder of SAT Corporation. The
reorganization agreement provided for the acquisition of SAT Corporation by the
Company. Pursuant to the terms of the reorganization agreement, ISI was merged
with and into SAT Corporation, with SAT Corporation as the surviving entity. At
the time of the merger, SAT Corporation became a wholly owned subsidiary of the
Company. Pursuant to the reorganization agreement, the purchase price paid to
the sole shareholder by the Company in connection with the acquisition of SAT
Corporation consisted of 650,000 shares of the Company's common stock, par value
$.01 per share. The acquisition was accounted for as a pooling of interests. All
prior period consolidated financial statements presented herein have been
restated to include the results of operations, financial position and cash flows
of the Company and SAT Corporation as a single entity. Certain reclassifications
were made to the SAT Corporation financial statements to conform to the
Company's presentations.
OUTLOOK
-------
This outlook section contains forward-looking statements, 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.
20
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
. Sales of its software products and engineering services will continue to
increase.
Looking forward to fiscal year 2002 in its entirety, the Company is
anticipating growth in revenue, operating income, net income, and fully diluted
earnings per common and equivalent share, of 15%, 25%, 20%, and 20%
respectively.
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 it common
stock.
For fiscal year 2001, the Company generated approximately $6.2 million of
cash from operating activities, and used approximately $13.5 million for
investing activities, $8.4 million of which was used to purchase marketable
securities. Further, the Company invested approximately $3.3 million for newly
capitalized software development costs. During fiscal year 2001, the Company
also purchased approximately $1.9 million of fixed assets (principally new
computers and equipment).
During fiscal year 2001, the Company had access to a general line of
credit facility through which it could borrow up to $9.0 million for operating
purposes and an additional line of credit with the bank amounting to $6.0
million, which can be used for corporate acquisitions. Borrowings under the line
are due on demand with interest at the London Inter-Bank Offering Rate (LIBOR),
plus a spread of 1.5 to 2.4% based on the ratio of funded debt to earnings
before interest, taxes and depreciation (EBITDA). The lines of credit are
secured by the Company's billed and unbilled accounts receivable and have
certain financial covenants, including minimum net worth and liquidity ratios.
The lines expire February 28, 2002. The Company also had a line of credit with
another bank for $425,000. This line expired on August 2, 2001. At September 30,
2001, 2000, and 1999, the Company had no amounts outstanding under the lines of
credit.
The Company's general line of credit facility prohibits the declaration or
payment of dividends by the Company until all of its obligations under the
facility are paid in full or performed.
The Company also has access to a $2.0 million equipment lease line of
credit under which it had $260,000 outstanding as of September 30, 2001. The
outstanding balance is payable over a 57-month period from lease inception and
bears interest at a rate of 8.8% per annum.
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 in fiscal years 2001, 2000, and 1999.
21
FORWARD-LOOKING STATEMENTS
--------------------------
Certain of the statements contained in the Business section, in other
parts of this 10-K, and in this section, including those under the headings
"Outlook" and "Liquidity and Capital Resources," are forward looking. In
addition, from time to time, the Company may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, technological developments, new products, research and development
activities and similar matters. Forward-looking statements can be identified by
the use of forward-looking terminology such as "may", "will", "believe",
"expect", "anticipate", "estimate", "continue", or other similar words,
including statements as to the intent, belief, or current expectations of the
Company and its directors, officers, and management with respect to the
Company's future operations, performance, or positions or which contain other
forward-looking information. These forward-looking statements are predictions.
No assurances can be given that the future results indicated, whether expressed
or implied, will be achieved. The Company's actual results may differ
significantly from the results discussed in the forward-looking statements.
While the Company believes that these statements are and will be accurate, a
variety of factors could cause the Company's actual results and experience to
differ materially from the anticipated results or other expectations expressed
in the Company's statements. The Company's business is dependent upon general
economic conditions and upon various conditions specific to its industry, and
future trends cannot be predicted with certainty. Particular risks and
uncertainties that may effect the Company's business, other than those described
elsewhere herein, include the following:
. 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 our financial performance.
. Risks related to the Company's acquisition strategy. In particular,
the Company may not be able to find any attractive candidates or it
may find that the acquisition terms proposed by potential acquisition
candidates are not favorable to the Company. In addition, theCompany
may compete with other companies for these acquisition candidates,
which competition may make an acquisition more expensive for the
Company. If the Company is unable to identify and acquire any suitable
candidates, the Company may not be able to find alternative uses for
the cash proceeds of its previous private placements that improve the
Company's business, financial conditions, or results of operations to
the extent that an acquisition could. In addition, if the Company is
able to identify and acquire one or more businesses (as it did with
SAT Corporation), the integration of the acquired business or
businesses may be costly and may result in a decrease in the value of
the Company's common stock for the following reasons, among others:
. the Company may not adequately assess the risks inherent in
a particular acquisition candidate or correctly assess the
candidate's potential contribution to the Company's
financial performance;
. the Company may need to divert more management resources to
integration than it planned, which may adversely affect its
ability to pursue other more profitable activities;
. the difficulties of integration may be increased by the
necessity of coordinating geographically separated
organizations, integrating personnel with disparate
backgrounds and combining different corporate cultures;
. the Company may not eliminate as many redundant costs as it
anticipated in selecting acquisition candidates; and an
acquisition candidate may have liabilities or adverse
operating issues that the Company failed to discover through
its due diligence prior to the acquisition.
. Changes in activity levels in the Company's core markets.
22
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INTEGRAL SYSTEMS, INC.
AND SUBSIDIARIES
______________________
CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 30, 2001, 2000, and 1999
AND
INDEPENDENT AUDITORS' REPORT
24
TABLE OF CONTENTS
DESCRIPTION PAGES
Independent Auditors' Report F-1
Consolidated Balance Sheets as of September 30, 2001 and 2000 F-2
Consolidated Statements of Operations for the Years Ended
September 30, 2001, 2000 and 1999 F-3
Consolidated Statements of Stockholders' Equity for the Years Ended
September 30, 2001, 2000 and 1999 F-4
Consolidated Statements of Cash Flows for the Years Ended
September 30, 2001, 2000 and 1999 F-5
Notes to Consolidated Financial Statements F-6 - F18
Rubino & McGeehin, Chartered
Certified Public Accountants
6905 Rockledge Drive, Suite 700
Bethesda, MD 20817-1818
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Integral Systems, Inc.
We have audited the accompanying consolidated balance sheets of
Integral Systems, Inc. and its subsidiaries as of September 30, 2001 and 2000,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for the years ended September 30, 2001, 2000 and 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Integral Systems, Inc. and its subsidiaries as of September 30, 2001 and 2000,
and their consolidated results of operations and consolidated cash flows for the
years ended September 30, 2001, 2000 and 1999, in conformity with accounting
principles generally accepted in the United States.
/s/
Rubino & McGeehin, Chartered
November 21, 2001
Bethesda, Maryland
F-1
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2001 and 2000
________________
ASSETS
2001 2000
---- ----
Current assets
--------------
Cash and cash equivalents $ 2,379,503 $ 17,558,331
Marketable securities 57,890,170 49,966,000
Accounts receivable, net 18,245,423 13,268,632
Employee receivables and other receivables 139,460 233,661
Prepaid expenses 340,677 190,075
Notes receivable - current portion 112,495 80,778
Deferred income tax - current portion 611,395 946,937
Income taxes receivable 1,940,573 1,655,290
-------------- --------------
Total current assets 81,659,696 83,899,704
Property and equipment, at cost, net of accumulated
depreciation and amortization 3,193,690 2,204,401
Notes Receivable - long term portion 406,727 519,222
Software development costs, net of accumulated amortization 5,080,629 3,188,783
Deposits 72,702 45,724
-------------- --------------
Total assets $ 90,413,444 $ 89,857,834
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
-------------------
Accounts payable - trade $ 5,131,229 $ 1,914,985
Accrued expenses 2,926,443 2,618,512
Capital leases payable - current portion 137,791 454,154
Billings in excess of revenue for contracts in progress 2,036,795 1,832,520
--------------- -------------
Total current liabilities 10,232,258 6,820,171
Capital leases payable - long - term portion 122,161 259,951
Deferred income taxes - long - term portion 1,882,384 1,079,862
--------------- -------------
Total liabilities 12,236,803 8,159,984
--------------- -------------
Stockholders' Equity
--------------------
Common stock, $.01 par value, 40,000,000 shares authorized, and
9,071,113 and 9,427,368 shares issued and outstanding 90,711 94,274
Additional paid-in capital 63,246,985 65,702,313
Retained earnings 15,095,953 15,901,263
Accumulated other comprehensive income (257,008) 0
---------------- -------------
Total stockholders' equity 78,176,641 81,697,850
--------------- -------------
Total liabilities and stockholders' equity $ 90,413,444 $ 89,857,834
================ =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended September 30, 2001, 2000 and 1999
1999
2001 2000 (restated)
---- ---- ----------
Revenue 40,531,600 40,455,143 42,937,287
Cost of Revenue
Direct Labor 10,648,052 10,882,228 11,347,662
Overhead Costs 7,555,391 7,544,122 11,759,093
Travel and Other Direct Costs 1,508,543 1,566,665 1,155,842
Direct Equipment & Subcontracts 8,993,849 8,593,346 6,673,407
---------------- -------------- ----------------
Total Cost of Revenue 28,705,835 28,586,361 30,936,004
---------------- -------------- ----------------
Gross Margin 11,825,765 11,868,782 12,001,283
Selling, General & Administrative 6,998,417 7,555,177 6,618,490
Terminated Acquisition Costs 0 444,847 0
Product Amortization 1,370,000 950,000 660,000
---------------- -------------- ----------------
Income From Operations 3,457,348 2,918,758 4,722,793
Other Income (Expense)
Interest Income 2,480,113 2,335,524 377,787
Interest Expense (50,671) (96,587) (121,300)
Miscellaneous, net (312,387) (262,369) (113,517)
---------------- -------------- ----------------
Total Other Income 2,117,055 1,976,568 142,970
Income from continuing operations before income
taxes 5,574,403 4,895,326 4,865,763
Provision for Income Taxes 1,563,283 1,182,498 1,882,346
---------------- -------------- ----------------
Income from Continuing Operations 4,011,120 3,712,828 2,983,417
Discontinued Operations
Income From Discontinued Segment
(net of tax of $42,867 and $136,500) 0 129,374 216,879
Gain on disposal of Discontinued Segment
(net of deferred tax of $210,895) 0 335,181 0
---------------- -------------- ----------------
Net Income 4,011,120 4,177,383 3,200,296
================ ============== ================
Weighted Avg. Number of Common Shares:
Basic 9,462,166 8,829,182 6,969,090
Diluted 9,672,833 9,283,546 7,422,601
Earnings per Share (Basic)
Continuing Operations $ 0.42 $ 0.42 $ 0.43
Discontinued Operations $ 0.00 $ 0.01 $ 0.03
Gain on disposal of Discontinued Segment $ 0.00 $ 0.04 $ 0.00
---------------- -------------- ----------------
Net Income $ 0.42 $ 0.47 $ 0.46
================ ============== ================
Earnings per Share (Diluted)
Continuing Operations $ 0.41 $ 0.40 $ 0.40
Discontinued Operations $ 0.00 $ 0.01 $ 0.03
Gain on disposal of Discontinued Segment $ 0.00 $ 0.04 $ 0.00
----------------- -------------- ----------------
Net Income $ 0.41 $ 0.45 $ 0.43
================= ============== ================
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended September 30, 2001, 2000 and 1999
Common Accumulated
Number Stock Additional Other
Of at Par Paid-in Retained Comprehensive
Shares Value Capital Earnings Income Total
---------- ----------- -------------- ------------ ----------------- -----------
Balance September 30, 1998 6,489,984 $ 64,899 $ 1,755,294 $ 8,523,584 $ 10,343,777
Private placement offering 1,183,268 11,833 19,650,219 - 19,662,052
Stock options exercised 140,656 1,407 455,740 - 457,147
Tax benefit of stock options exercised - - 488,679 488,679
Net income - - - 3,200,296 3,200,296
---------- ----------- -------------- ------------ ----------------- ------------
Balance September 30, 1999 7,813,908 78,139 22,349,932 11,723,880 34,151,951
Private placement offering 1,400,000 14,000 40,933,758 - 40,947,758
Stock options exercised 213,460 2,135 982,869 - 985,004
Tax benefit of stock options exercised - - 1,435,754 1,435,754
Net income - - - 4,177,383 4,177,383
---------- ----------- -------------- ------------ ----------------- ------------
Balance September 30, 2000 9,427,368 94,274 65,702,313 15,901,263 - 81,697,850
Comprehensive income
Net income - - - 4,011,120 - 4,011,120
Unrealized loss on marketable
securities
(net of deferred tax benefit of
$164,317) - - - - (257,008) (257,008)
---------- ----------- -------------- ------------ ----------------- ------------
Comprehensive Income - - - 4,011,120 (257,008) 3,754,112
Repurchased shares (420,015) (4,200) (2,927,505) (4,816,430) - (7,748,135)
Stock options exercised 63,760 637 287,288 - - 287,925
Tax benefit of stock options exercised - - 184,889 - - 184,889
---------- ----------- -------------- ------------ ----------------- ------------
Balance September 30, 2001 9,071,113 $90,711 $63,246,985 $15,095,953 ($257,008) $ 78,176,641
========== =========== ============== ============ ================= ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS]
Years Ended September 30, 2001, 2000 and 1999
_________________
2001 2000 1999
---- ---- ----
(restated)
Cash flows from operating activities:
Net income $ 4,011,120 $ 4,177,383 $ 3,200,296
------------- ------------- -------------
Reconciling adjustments:
Tax effect of options exercised 184,889 1,435,754 488,679
Effect of shares issued in pooling - 362,812 -
Gain on disposal of discontinued segment - (335,181) -
Depreciation and amortization 2,326,920 1,997,785 1,454,163
Loss on disposal of fixed assets 2,229 32,498 15,312
Disposal of non-cash assets of discontinued segment - (53,924) -
Deferred income taxes, net 1,302,382 (140,113) 5,936
(Increase) decrease in:
Accounts receivable and other receivables (4,882,590) 122,198 (2,028,894)
Prepaid expenses and deposits (177,580) (64,587) (39,733)
(Decrease) increase in:
Accounts payable 3,216,244 (1,020,878) (165,537)
Accrued expenses 307,930 (1,092,065) 1,065,358
Billings in excess of cost 204,275 (824,554) 1,566,493
Income taxes receivable, net (285,283) (2,102,466) (300,601)
------------- ------------- -------------
Total adjustments 2,199,416 (1,682,721) 2,061,176
------------- ------------- -------------
Net cash provided by operating activities 6,210,536 2,494,662 5,261,472
------------- ------------ ------------
Cash flow from investing activities:
Purchases of marketable securities, net (7,390,000) (31,830,000) (18,136,000)
Purchase of common stock (955,495) - -
Proceeds from payments on notes receivable 80,778 - -
Acquisition of fixed assets (1,948,438) (1,209,571) (972,500)
Software development costs (3,261,846) (2,132,589) (1,180,643)
------------- ------------- -------------
Net cash used in investing activities (13,475,001) (35,172,160) (20,289,143)
------------- ------------- -------------
Cash flow from financing activities:
Proceeds from issuance of common stock 287,925 41,569,950 20,119,199
Payments on stock repurchase (7,748,135) - -
Payments on capital lease obligations (454,153) (601,328) (413,895)
------------- ------------- -------------
Net cash provided (used) by financing activities (7,914,363) 40,968,622 19,705,304
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents (15,178,828) 8,291,124 4,677,633
Cash and cash equivalents - beginning of year 17,558,331 9,267,207 4,589,574
------------- ------------- -------------
Cash and cash equivalents - end of year $ 2,379,503 $ 17,558,331 $ 9,267,207
============= ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 30, 2001, 2000 and 1999
______________
1. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of Integral Systems, Inc. (the Company) and its wholly owned
subsidiaries, SAT Corporation (see Note 2), ISI Europe and InterSys,
Inc. (InterSys). The assets of the Company's former subsidiary Integral
Marketing, Inc. (IMI) were disposed of during the year ended September
30, 2000 (see Note 2) and is presented as discontinued operations in
the consolidated statement of operations. All significant intercompany
transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management
to make estimates and assumptions that affect certain reported amounts
of assets and liabilities, and changes therein, and disclosure of
contingent assets and liabilities. Actual results could differ from
those estimates.
Marketable Securities
The Company classifies its investments in marketable equity and debt
securities as available for sale in accordance with the provisions of
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." The Investments are
carried at fair market value, with unrealized gains and losses reported
in stockholders' equity as a component of accumulated other
comprehensive income (loss), net of any related tax effect.
Contract Revenue
Revenue under cost-plus-fixed-fee contracts is recorded on the basis of
direct costs plus indirect costs incurred and an allocable portion of
the fixed fee. Revenue from fixed-price contracts is recognized on the
percentage-of-completion method, measured by the cost-to-cost method
for each contract. Revenue from time and materials contracts is
recognized based on fixed hourly rates for direct labor expended. The
fixed rate includes direct labor, indirect expenses and profits.
Material or other specified direct costs are recorded at actual cost.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance. General and
administrative costs are charged to expense as incurred. Provisions for
estimated losses on contracts in progress are made in the period in
which such losses are determined. Changes in job performance, job
conditions, and estimated profitability, including final contract
settlements, may result in revisions to costs and income and are
recognized in the period in which the revisions are determined. The
Company's contracts vary in length from one to four years.
The fees under certain government contracts may be increased or
decreased in accordance with cost or performance incentive provisions
which measure actual performance against established targets or other
criteria. Such incentive fee awards or penalties are included in
revenue at the time the amounts can be reasonably determined.
Unbilled accounts receivable represents revenue recognized in excess of
amounts billed. The liability, billings in excess of revenue for
contracts in progress, represents billings in excess of revenue
recognized.
F-7
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 30, 2001, 2000 and 1999
______________
1. Summary of Significant Accounting Policies (continued)
Sale of Software Products
Most of the Company's contracts include the sale of proprietary
software products. Sales of the Company's software products take many
forms. The Company sells (i) software only (a "Software-Only Sale"),
(ii) software and services together, or (iii) software, services and
hardware together. In addition, depending on a customer's requirements,
the Company may or may not provide post-contract customer support
("PCS").
The Company's recognition of revenue for sales of Company software
products depends on customer requirements and the nature of the
contracts involved. For a Software-Only Sale, the Company recognizes
revenue upon shipment. In situations where software is sold together
with services and/or hardware, the Company recognizes software license
revenue on a percentage of completion basis.
With respect to PCS, the Company recognizes PCS revenue on a percentage
of completion basis when PCS is part of a broader fixed price contract
that includes software and services. Alternatively, when PCS services
(i.e. software maintenance and support) are awarded to the Company
under a separate maintenance contract, the Company recognizes PCS
revenue on a straight-line basis pro rata over the term of the
maintenance contract.
Depreciation and Amortization
Property and equipment are stated at cost. The Company provides for
depreciation and amortization by charges, using the straight-line
method, to operating expenses at rates based on estimated useful lives
as follows:
Classification Estimated Useful Lives
Electronic equipment 3 Years
Furniture and fixtures 5 Years
Leasehold improvements Life of lease
Software 3 Years
Maintenance and repair costs are charged to expense as incurred.
Replacements and betterments are capitalized. At the time properties
are retired or otherwise disposed of, the property and related
accumulated depreciation or amortization accounts are relieved of the
applicable amounts and any gain or loss is credited or charged to
income.
Software Development Costs
The Company has capitalized costs related to the development of certain
software products. In accordance with Statement of Financial Accounting
Standards No. 86, capitalization of costs begins when technological
feasibility has been established and ends when the product is available
for general release to customers. Amortization is computed on an
individual product basis and has been recognized for those products
available for market based on the products' estimated economic lives of
three to five years. Due to inherent technological changes in software
development, however, the period over which such capitalized costs is
being amortized may have to be modified.
F-8
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 30, 2001, 2000 and 1999
_________________
1. Summary of Significant Accounting Policies (continued)
Earnings Per Share
Basic earnings per share is computed using the weighted average number
of shares outstanding during the period. The only reconciling item
between the shares used for basic and diluted earnings per share
related to outstanding stock options. No reconciling items existed
between the net income used for basic and diluted earnings per share.
The earnings per share computations have been adjusted retroactively
where appropriate for the pooling of interest discussed in Note 2.
Cash Concentrations and Cash Equivalents
The Company considers all highly-liquid debt instruments purchased with
a maturity of three months or less to be cash equivalents. Cash
accounts are maintained primarily with one federally insured financial
institution. Balances usually exceed insured limits, but management
does not consider this to be a significant concentration of credit
risk.
Segment Information
In 1999, the Company adopted Statement of Financial Accounting
Standard (SFAS) No. 131, "Disclosures about Segments of an Enterprise
and Related Information". SFAS No. 131 supercedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise". Under the
new standard, the Company is required to use the "management" approach
to reporting its segments. The management approach designates the
internal organization, used by management for making operating
decisions and assessing performance, as the source of the Company's
segments. The adoption of SFAS No. 131 had no impact on the Company's
consolidated financial position, results of operations or cash flows.
During the years ended September 30, 2001, 2000, and 1999, the
Company's operations included one reportable segment for satellite
ground systems. These continuing operations include all of the
operations of the Company, SAT Corporation and ISI Europe for the years
then ended. The equipment marketing operations of IMI are included in
discontinued operations for the years above. The Company provides
satellite ground systems - computer systems for satellite command and
control, data processing, simulation, and flight software validation
and signal monitoring. Customers for these systems include U.S.
Government organizations such as 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.
There were no significant intercompany sales. Satellite ground systems
capital expenditures included in the consolidated statement of cash
flows for the years ended September 30, 2001, 2000 and 1999, excludes
the addition of equipment under capital leases totaling $0, $0 and
$579,496, respectively.
Major customer information and revenue by customer category is
discussed in Note 3. Revenue from foreign sources, primarily with
corporations located in France, the Netherlands, Thailand, and Mexico,
totaled $9,408,532, $9,319,638, and $3,893,274, for the years ended
September 30, 2001, 2000, and 1999, respectively. The Company has no
significant long-lived assets located in foreign countries.
Reclassifications
Certain reclassifications have been made to prior year balances in
order to conform to the current year presentation.
F-9
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 30, 2001, 2000 and 1999
_________________
1. Summary of Significant Accounting Policies (continued)
Recent Accounting Pronouncements
In June 2001, the FASB issued Statement of Financial Accounting
Standards No. 141 "Business Combinations" ("SFAS 141") and Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). SFAS 141 requires all business combinations to be
accounted for using the purchase method of accounting and is effective
for all business combinations initiated after June 30, 2001. SFAS 142
requires goodwill to be tested for impairment under certain
circumstances, and written off when impaired, rather than being
amortized as previous standards required. SFAS 142 is effective for
fiscal years beginning after December 15, 2001. Early application is
permitted for entities with fiscal years beginning after March 15, 2001
provided that the first interim period financial statements have not
been previously issued. SFAS 141 and 142 will affect the accounting and
reporting for only future business combinations, if any, of the
Company.
In June 2001, the FASB issued Statement of Financial Accounting
Standards No. 143, "Accounting for Asset Retirement Obligations" ("SFAS
143"). SFAS 143 provides guidance on the initial measurement and
subsequent accounting for obligations associated with the sale,
abandonment, or other type of disposal of long-lived tangible assets.
SFAS 143 is effective for fiscal years beginning after June 15, 2002.
Management does not expect a material impact of SFAS 143 on its results
of operations and financial condition.
In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment of Disposal of
Long-Lived Assets" ("SFAS 144"). SFAS 144 provides updated guidance
concerning the recognition and measurement of an impairment loss for
certain types of long-live assets. SFAS 144 also expands the scope of a
discontinued operation to include a component of an entity, and it
eliminates the current exemption to consolidation when control over a
subsidiary is likely to be temporary. SFAS 144 is effective for fiscal
years beginning after December 15, 2001, and interim periods within
those fiscal years. Management does not expect a material impact of
SFAS 144 of its results of operations and financial condition.
2. Acquisitions and Dispositions
Effective August 31, 2000, in connection with the Agreement and Plan of
Reorganization, the Company issued 650,000 shares of its common stock
in exchange for all of the outstanding common stock of SAT Corporation
(SAT), a privately-held company with 4.0 million shares outstanding,
for a total value of $9.831 million. The merger qualified as a tax-free
reorganization and has been accounted for as a pooling of interests.
Accordingly, the Company's consolidated financial statements have been
restated for all periods prior to the business combination to include
the combined financial results of Integral and SAT. Net sales, income
before discontinued operations, and net income for the individual
companies reported prior to the merger are as follows:
F-10
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 30, 2001, 2000 and 1999
__________________
2. Acquisitions and Dispositions (continued)
Eleven months Ended Year Ended
August 31, 2000 September 30, 1999
--------------- ------------------
Net Sales:
Integral $ 31,321,823 $ 38,358,415
SAT 5,762,058 4,578,872
-------------- ---------------
Total 37,083,881 42,937,287
-------------- ---------------
Income before taxes
and discontinued item:
Integral 4,299,301 5,700,567
SAT 188,082 (834,804)
-------------- ---------------
Total 4,487,383 4,865,763
-------------- ---------------
Net income:
Integral 3,714,538 3,715,847
SAT 114,730 (515,551)
-------------- ---------------
Total $ 3,829,268 $ 3,200,296
============== ===============
The consolidated financial information presented above reflects no
adjustments to net income or shareholder's equity resulting from the
conforming of the SAT accounting practices to those of ISI. There were
no significant intercompany transactions between ISI and SAT.
In July 2000, the Company announced a plan to sell the assets of its
wholly-owned subsidiary Integral Marketing, Inc. (IMI). IMI acts as a
manufacturer's representative, selling electronic test instrumentation
and equipment to customers primarily in Maryland, Virginia and the
District of Columbia. On August 31, 2000, the sale was completed,
effective July 1, 2000, for $1,300,000 comprised of $700,000 in cash
and $600,000 in the form of a secured note due in quarterly
installments through October 15, 2005 with interest at 5%. The net
assets sold consisted primarily of cash, accounts receivable, and
property and equipment.
The disposal of IMI has been accounted for as a discontinued operation
and, accordingly, its operating results are segregated and reported as
discontinued operations in the accompanying consolidated statements of
operations.
F-11
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 30, 2001, 2000 and 1999
_______________
2. Acquisitions and Dispositions (continued)
Information relating to the discontinued operations of IMI for the
years ended September 30, 2000 and 1999 are as follows:
September 30, 2000
(nine months ended
June 30, 2000) September 30, 1999
-------------- ------------------
Net sales $ 704,204 $ 1,220,115
Cost of sales 523,092 829,512
Gross profit 180,024 391,444
Operating costs 23,172 42,720
Non-operating costs: (14,301) (4,657)
-------------- -------------
Income before taxes 172,241 353,381
Less: Income tax
Provision 42,867 136,500
-------------- -------------
Net income $ 129,374 $ 216,879
============== =============
3. Accounts Receivable and Revenue
Accounts receivable at September 30, 2001 and 2000, consist of the
following:
Billed 2001 2000
---- ----
Government services
Prime contracts $ 1,653,784 $ 1,406,350
Subcontracts 5,338,782 1,200,279
Commercial products and services 3,160,284 2,453,446
Allowance for doubtful accounts (71,361) (15,000)
------------- -------------
Total billed 10,081,489 5,045,075
------------- -------------
Unbilled
Government services
Prime contracts 3,631,661 1,374,050
Subcontracts 489,899 4,946,143
Commercial products and services 4,042,374 1,903,364
------------- -------------
Total unbilled 8,163,934 8,223,557
------------- -------------
Total accounts receivable, net $ 18,245,423 $ 13,268,632
============= =============
Unbilled accounts receivable include amounts arising primarily from the
use of the percentage-of-completion or other methods of recognizing
revenue that differ from contractual billing terms. Substantially all
unbilled receivables are expected to be billed and collected in one
year.
The Company earns revenue, both as a prime contractor and a
subcontractor, from sales of its products and services through
contracts funded by the U.S. Government, as well as commercial and
international organizations.
F-12
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 30, 2001, 2000 and 1999
__________
3. Accounts Receivable and Revenue (continued)
Internally, the Company classifies contract revenues in two separate
categories on the basis of the contract's procurement and development
requirements: (i) contracts which require compliance with government
procurement and development standards are classified as government
revenue (government services) and (ii) contracts conducted according to
commercial practices are classified as commercial revenue (commercial
products and services), regardless of whether the end customer is a
commercial or government entity. Sales of the Company's commercial
off-the-shelf software products are classified as commercial products
and services revenue.
During the years ended September 30, 2001, 2000 and 1999, approximately
54%, 52%, and 57%, respectively, of the Company's revenue was from
government services, primarily the National Oceanic and Atmospheric
Administration (NOAA) and the United States Air Force (USAF). The
remaining revenue is from commercial products and services as defined
above.
By the way of comparison, if revenues were reclassified according to
end customer, the Company's revenue from U.S. Government customers,
both as a prime contractor and a subcontractor, for each of the years
ended September 30, 2001, 2000 and 1999, was 55%, 54% and 60%,
respectively. Revenue from non-U.S. Government customers for each of
the years ended September 30, 2001, 2000, and 1999, was 45%, 46% and
40%, respectively.
4. Marketable Securities
The following summarizes the Company's investments in debt and equity
securities at September 30, 2001:
Gross Unrealized
Cost Losses Fair Market Value
---- ------ -----------------
State Debt Securities $ 47,356,000 $ -- $ 47,356,000
Preferred Stock 10,000,000 -- 10,000,000
Common Stock 955,495 (421,325) 534,170
------------ ----------- ------------
Total $ 58,311,495 $ (421,325) $ 57,890,170
============ ----------- ------------
At September 30, 2000, the Company held $49,966,000 in variable rate
State of Maryland debt securities, which were carried at cost, which
approximates fair market value.
The investments in variable rate State of Maryland debt securities and
Banc of America Preferred Funding Corporation "Dividends Received
Eligible Auction Market" preferred stock ("DREAMS") are carried at cost
which approximates fair market value. The investment in common stock is
based on quoted market price. At September 30, 2001, the unrealized
loss of $421,325 from the investment in common stock is reported in
stockholders' equity as other comprehensive income (loss), net of
deferred tax benefit of $164,317.
F-13
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 30, 2001, 2000 and 1999
_____________
5. Property and Equipment
Property and equipment as of September 30, 2001 and 2000 are as
follows:
2001 2000
---- ----
Electronic equipment $ 3,318,309 $ 1,723,651
Furniture and fixtures 523,324 417,424
Leasehold improvements 237,133 152,857
Software 396,107 266,443
Equipment under capital lease 1,378,461 1,911,463
-------------- --------------
Total property and equipment 5,853,334 4,471,838
Less: accumulated depreciation and amortization (2,659,644) (2,267,437)
-------------- --------------
Property and equipment, net $ 3,193,690 $ 2,204,401
============== ==============
6. Software Development
Software development costs as of September 30, 2001 and 2000,
consist of the following:
2001 2000
---- ----
Costs incurred $ 10,550,070 $ 7,288,224
Less: accumulated amortization (5,469,441) (4,099,441)
-------------- --------------
Software development costs, net $ 5,080,629 $ 3,188,783
=============== ==============
Amortization expense for the years ended September 30, 2001, 2000 and
1999, was $1,370,000, $950,000, and $660,000, respectively. Research
and development expense for the years ended September 30, 2001, 2000,
and 1999, was $199,987, $536,177 and $0, respectively.
7. Line of Credit
The Company has a line of credit agreement with a local bank for
$9,000,000 for operating purposes and an additional line of credit with
the bank for $6,000,000 to be used for corporate acquisitions.
Borrowings under the line are due on demand with interest at the London
Inter-Bank Offering Rate (LIBOR), plus a spread of 1.5 to 2.4%, based
on the ratio of funded debt to earnings before interest, taxes and
depreciation (EBITDA). The lines of credit are secured by the Company's
billed and unbilled accounts receivable and have certain financial
covenants, including minimum net worth and liquidity ratios. The lines
expire February 28, 2002. The Company also had a line of credit with
another bank for $425,000. This line expired on August 2, 2001. The
Company had no balance outstanding at September 30, 2001, 2000 and 1999
under any of its lines.
F-14
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 30, 2001, 2000 and 1999
_________
8. Accrued Expenses
Accrued expenses at September 30, 2001 and 2000, consist of the
following
2001 2000
---- ----
Accrued payroll and withholdings $ 1,222,145 $ 1,035,222
Accrued vacation 939,994 768,828
Accrued profit sharing 618,111 528,618
Accrued warranty 135,000 238,220
Other accrued expenses 11,193 47,624
-------------- --------------
Total accrued expenses $ 2,926,443 $ 2,618,512
============== ==============
9. Commitments and Contingencies
Capital Leases
The Company has a $2,000,000 equipment lease line of credit under which
the Company can sell equipment and lease it back for a period of three
years.
The Company incurred capital lease obligations when it entered into new
leases for equipment. Capital lease additions were $0, $0 and $579,496
for the years ended September 30, 2001, 2000 and 1999, respectively.
Future payments under the capital lease obligations at September 30,
2001, are as follows:
Years ending September 30, 2002 $ 153,782
2003 38,877
2004 38,877
2005 38,877
2006 29,158
--------------
Total payments 299,571
Less amount representing interest at 8.8% per annum (39,619)
--------------
Present value of future lease payments $ 259,952
==============
F-15
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 30, 2001, 2000 and 1999
_______________
9. Commitments and Contingencies (continued)
Operating Leases
The Company leases its office space in Maryland, Colorado, California
and Toulouse, France. The current leases expire in 2009, 2002, 2004 and
2009 respectively. Future minimum lease payments under the office
leases are as follows:
Years ending September 30, 2002 $ 1,121,000
2003 1,123,000
2004 1,064,000
2005 869,000
2006 895,000
Thereafter 2,520,000
---------------
Total payments $ 7,592,000
===============
Lease payments do not include operating expenses or utilities, which
are adjusted annually. Rent expense was $1,252,880, $1,117,665 and
$869,292 for the years ended September 30, 2001, 2000 and 1999,
respectively.
Government Contracts
A significant portion of the Company's revenues represent payments made
by the U.S. Government and by contractors that have prime contracts
with the U.S. Government. These revenues are subject to adjustment upon
audit by the Defense Contract Audit Agency (DCAA). Audits by the DCAA
have been completed on the Company's contracts and subcontracts through
the year ended September 30, 1999. Management is of the opinion that
any disallowances of costs for subsequent fiscal years by the
government auditors, other than amounts already provided, will not
materially affect the Company's financial statements.
10. Income Taxes
For the years ended September 30, 2001, 2000 and 1999, the provision
for income taxes consists of the following:
2001 2000 1999
---- ---- ----
Current tax expense
Federal $ 195,678 $ 952,280 $ 1,557,420
State 65,223 370,331 318,990
------------- -------------- --------------
260,901 1,322,611 1,876,410
Deferred tax expense (benefit) 1,302,382 (140,113) 5,936
-------------- -------------- --------------
Total expense attributed to
Continuing operations 1,563,283 1,182,498 1,882,346
Total expense attributable to
discontinued operations 0 253,762 136,500
-------------- -------------- --------------
Total provision $ 1,563,283 $ 1,436,260 $ 2,018,846
============== ============== ==============
F-16
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 30, 2001, 2000 and 1999
___________________
10. Income Taxes (continued)
At September 30, 2001 and 2000, the tax effect of significant temporary
differences representing deferred tax assets and liabilities are as
follows:
Asset (Liability)
2001 2000
---- ----
Depreciation and amortization $ (1,882,384) $ (1,079,862)
Vacation accrual 366,598 299,843
Revenue reserve 27,830 5,850
Warranty reserve 52,650 92,906
Gain on sale of subsidiary - (212,942)
Unrealized loss on marketable securities 164,317 -
Net operating loss carryforward - 761,280
--------------- ---------------
Net $ (1,270,989) $ (132,925)
=============== ===============
The temporary differences are presented in the balance sheet as
follows:
Asset (Liability)
2001 2000
---- ----
Deferred income tax asset - current portion $ 611,395 $ 1,121,437
Deferred income tax liability - long term portion (1,882,384) (1,254,362)
--------------- ---------------
Net $ (1,270,989) $ (132,925)
=============== ===============
The September 30, 2000 presentation of the deferred tax asset and
liability has been reclassified to conform to the current year
presentation.
The effective income tax rates differ from the statutory U.S. income
tax rate due principally to the following:
2001 2000 1999
---- ---- ----
Federal statutory rate 34.0% 34.0% 34.0%
State tax, net of federal
income tax benefit 4.6 4.6 4.6
Tax benefit of tax free investment income (11.3) (12.1) -
Other, primarily changes in estimates .7 (2.3) -
-------- ------- --------
Effective rate 28.0% 24.2% 38.6%
======== ======= ========
F-17
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 30, 2001, 2000 and 1999
__________________
11. Profit Sharing and Employee Benefits Plans
The Company has a profit sharing and 401(k) plan for the benefit of
substantially all employees. Profit sharing contributions consist of
discretionary amounts determined each year by the Board of Directors
of the Company based upon net profits for the year and total
compensation paid. The 401(k) feature allows employees to make
elective deferrals not to exceed 10% of compensation. The Company also
has a money purchase plan, which obligates the Company to contribute
5% of eligible salaries under the plan. For the years ended September
30, 2001, 2000 and 1999, contributions to the plans totaled
$1,607,976, $1,659,687 and $1,410,426, respectively.
12. Stock Option Plan
Effective May 25, 1988, as amended on January 1, 1994 and May 8, 1998,
the Company established a stock option plan to create additional
incentives for the Company's employees, consultants and directors to
promote the financial success of the Company. The Board of Directors has
sole authority to select full-time employees, directors or consultants
to receive awards of options for the purchase of stock under this plan.
At September 30, 2001, the maximum number of shares of common stock
which may be issued pursuant to the stock option plan is 1,800,000. The
price of each option is set at the stock's bid price on the date of the
Board of Directors meeting at which the option is granted. Options
expire no later than ten years from the date of grant (five years for
greater-than-10% owners) or when employment ceases, whichever comes
first, and vest from one to five years.
The stock option plan is accounted for under Accounting Principles Board
(APB) Opinion No. 25. Accordingly, no compensation has been recognized
for the plan. Had compensation cost for the plans been determined based
on the estimated fair value of the options at the grant dates consistent
with the method of Statement of Financial Accounting Standards (SFAS)
No. 123, the Company's net income and earnings per share for the years
ended September 30, 2001, 2000 and 1999, would have been:
2001 2000 1999
---- ---- ----
Net income:
As reported $ 4,011,120 $ 4,177,383 $ 3,200,296
Pro forma $ 2,461,546 $ 2,983,688 $ 2,375,156
Earnings per share:
As reported - basic $ .42 $ .47 $ .46
- dilutive $ .41 $ .45 $ .43
Pro forma - basic $ .26 $ .34 $ .34
- dilutive $ .25 $ .32 $ .32
The fair value of the options granted is estimated on the date of the
grant using the Black-Scholes options pricing model assuming the
following: no dividend yield, risk-free interest rate of 5% for 2001 and
6% for prior years, expected volatility of 40%, and an expected term of
the options of four years.
F-18
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 30, 2001, 2000 and 1999
_____________
12. Stock Option Plan (continued)
At September 30, 2001, options to purchase stock under this plan were
outstanding to employees as follows:
Number of Exercise Price
Shares Per Share
1,700 $ 2.00 - 2.99
206,650 $ 3.00 - 3.99
34,600 $ 4.00 - 4.99
5,200 $ 5.00 - 5.99
1,000 $ 9.00 - 9.99
2,000 $ 12.00 - 12.99
6,200 $ 13.00 - 13.99
7,000 $ 14.00 - 14.99
111,300 $ 15.00 - 15.99
28,000 $ 16.00 - 16.99
33,250 $ 17.00 - 17.99
294,250 $ 18.00 - 18.99
5,000 $ 19.00 - 19.99
1,000 $ 20.00 - 20.99
182,950 $ 21.00 - 21.99
14,500 $ 22.00 - 22.99
3,000 $ 23.00 - 23.99
3,000 $ 24.00 - 24.99
3,500 $ 26.00 - 26.99
500 $ 28.00 - 28.99
1,000 $ 35.00 - 35.99
1,000 $ 40.00 - 40.99
1,500 $ 44.00 - 44.99
1,000 $ 45.00 - 45.99
---------
949,100
=========
F-19
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 30, 2001, 2000 and 1999
___________
12. Stock Option Plan (continued)
Of the options outstanding at September 30, 2001, 462,340 options are
exercisable immediately, and 486,760 options are exercisable over the
next five years. Transactions involving the plan for the years ended
September 30, 2001, 2000 and 1999, were as follows:
Weighted Average
Shares Exercise Prices
Options outstanding, September 30, 1998 712,494 $ 4.23
Granted 296,840 $ 19.01
Exercised (140,656) $ 3.25
Cancelled (18,450) $ 13.46
-----------
Options outstanding, September 30, 1999 850,228 $ 9.36
Granted 235,850 $ 17.36
Exercised (213,756) $ 4.57
Cancelled (41,122) $ 15.75
-----------
Options outstanding, September 30, 2000 831,200 $ 12.55
Granted 226,300 $ 20.66
Exercised (63,760) $ 4.51
Cancelled (44,640) $ 14.07
-----------
Options outstanding September 30, 2001 949,100 $ 14.95
===========
The weighted average fair values of options granted during the years
ended September 30, 2001, 2000 and 1999, were $7.85, $6.75 and $7.50,
respectively.
13. Stockholder's Equity Transactions
In June 1999, the Company issued stock under a private placement. The
Company received approximately $20 million from this offering. The
costs associated with this private placement are included as a direct
reduction to paid in capital.
In February 2000, the Company issued stock under a private placement.
The Company received approximately $41 (net) million from this
offering. The costs associated with this private placement are included
as a direct reduction to paid-in capital.
In August 2000, the Company issued 650,000 shares of common stock to
acquire SAT Corporation. The acquisition was accounted for as pooling
of interests as discussed in Note 2
In September 2001, the Company reacquired 420,015 shares of its stock
for a total cost of $7,748,135.
14. Supplemental Cash Flow Information
For the years ended September 30, 2001, 2000 and 1999, income taxes
paid, were $562,277, $2,131,803 and $2,140,496, respectively, and
interest expense incurred and paid was $50,675, $96,587 and $121,302,
respectively.
F-20
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 30, 2001, 2000 and 1999
_______________
15. Quarterly Financial Data (unaudited)
Integral Systems first three quarters in fiscal 2001 ended on December
31, 2000, March 31, 2001 and June 30, 2001. The fourth quarter ended on
September 30, 2001.
The following tables contain selected unaudited Consolidated Statement
of Operations data for each quarter of fiscal years 2001 and 2000 (in
thousands, except per share amounts). Quarterly information for fiscal
year 2000 reflects the business combination with SAT Corporation,
discussed in Note 2, accounted for as pooling of interest.
Fiscal 2001 Quarter Ended
------------------------------------------------------
December 31 March 31 June 30 September 30
----------- -------- ------- -----------
Revenue 8,469 9,545 10,392 12,126
Gross margin 2,871 2,749 2,676 3,530
Income from Operations 635 502 964 1,356
Net Income 1,052 788 1,006 1,165
Earnings per share - basic 0.11 0.08 0.11 0.12
Earnings per share - diluted 0.11 0.08 0.10 0.12
Weighted average common and equivalent
shares outstanding - basic 9,441 9,452 9,465 9,490
Weighted average common and equivalent
shares outstanding - diluted 9,564 9,609 9,690 9,743
Fiscal 2000 Quarter Ended
------------------------------------------------------
December 31 March 31 June 30 September 30
----------- -------- ------- ------------
Revenue 12,525 11,102 8,520 8,308
Gross margin 4,188 2,668 2,431 2,582
Income from Operations 1,951 436 246 286
Discontinued Operations
Income From Operations of Discontinued
Segment (net of tax) 83 33 4 9
Gain on Disposal of Discontinued 0 0 0 335
Net Income 1,466 737 834 1,140
Earnings per share - basic
Continuing Operations 0.18 0.08 0.09 0.08
Discontinued Operations 0.01 0.01 0.00 0.00
Gain on Disposal of Discontinued Segment 0.00 0.00 0.00 0.04
----------------------------------------------------
Net income 0.19 0.09 0.09 0.12
Earnings per share - diluted
Continuing Operations 0.16 0.08 0.09 0.08
Discontinued Operations 0.01 0.00 0.00 0.00
Gain on Disposal of Discontinued Segment 0.00 0.00 0.00 0.04
----------------------------------------------------
Net income 0.17 0.08 0.09 0.12
Weighted average common and equivalent
shares outstanding - basic 7,866 8,620 9,405 9,426
Weighted average common and equivalent
shares outstanding - diluted 8,412 9,159 9,708 9,599
F-21
ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Name Position with the Company
---- -------------------------
Steven R. Chamberlain Chairman of the Board,
Chief Executive Officer and Director
Thomas L. Gough President, Chief Operating Officer,
and Director
Elaine M. Parfitt Vice President, Chief Financial
Officer, Secretary and Treasurer
Patrick R. Woods Vice President, Government Programs
Peter J. Gaffney Vice President, Commercial Products
Bonnie K. Wachtel Outside Director
Dominic A. Laiti Outside Director
R. Doss McComas Outside Director
John R. Murphy Outside Director
Directors of the Company serve until the next annual meeting of
stockholders or until successors have been duly elected and qualified. Officers
of the Company serve at the discretion of the Board of Directors.
Steven R. Chamberlain, 46, a Company founder, has been Chairman of the Board
since June 1992, President since May 1988, and a Director since 1982. He served
as Vice President from 1982 until he became President. From 1978 to 1982, OAO
Corporation employed Mr. Chamberlain where he progressed from Systems Analyst to
Manager of the Offutt Air Force Base field support office. Mr. Chamberlain holds
a B.S. degree in Physics from Memphis State University and has done graduate
work in Physics and Mathematics at Memphis State and the University of Maryland.
Thomas L. Gough, 53, became a member of the Company's staff in January 1984. In
March 1996, he was elected to the Board of Directors of the Company. He has
served as President and Chief Operating Officer of the Company since June 1992.
For three years before being named President, he served as Vice President and
Chief Financial Officer. Prior to joining the Company, he was employed by
Business and Technological Systems, Inc., where he managed the Software Systems
Division. From 1972 to 1977, he was employed by Computer Sciences Corporation,
where he progressed from Programmer Analyst to Section Manager. Mr. Gough earned
a B.S. degree from the University of Maryland with a major in Information
Systems Management in the School of Business and Public Administration.
Elaine M. Parfitt, 38, joined the Company in 1983. She served as Staff
Accountant/Personnel Administrator until January 1995, when she was promoted to
Controller/Director of Accounting. In March 1997, Ms. Parfitt was appointed Vice
President and Chief Financial Officer. In February 2000, she was appointed
Secretary and Treasurer. She holds a B.S. degree in Accounting from the
University of Maryland and is a Certified Public Accountant.
Patrick R. Woods, 46, joined the Company in 1995, and has been Vice President,
Government Programs since May 1998. From 1996 to April 1998, Mr. Woods served as
Vice President, NOAA Programs. From 1994 to 1995, he worked for Space
Systems/Loral (SS/L), and from 1985 to 1994, he worked for the Lockheed Martin
Corporation (formerly Loral Aerospace). Mr. Woods served as the Director of
Mission Operations for both SS/L and the AeroSys Division of Loral Aerospace.
While at Loral Aerospace, Mr. Woods received the NASA Public Service Group
Achievement Award from NASA Administrator Admiral Richard Truly for his
management of the Hubble Space Telescope control center development and launch
support. Mr. Woods holds a B.S. degree in Public Administration and a M.P.A. in
Public Management from Indiana University.
26
Peter J. Gaffney, 42, joined the Company in 1986. In February 2000, Mr. Gaffney
was appointed Vice President, Commercial Products. From May 1999 until February
2000, Mr. Gaffney served as Vice President, Commercial Division. From 1986 to
1992, he worked on simulators for the Company's DMSP and Tiros programs. In
1992, he became a project manager for EPOCH 2000 ground systems programs, which
included the Command and Range Generator project for GE Americom, the Loral
Skynet Telstar 3, 4, and 5 ground systems, and the Echostar 1, 2, 3, and 4
ground systems. Prior to joining Integral Systems, Mr. Gaffney was a design
engineer for the General Electric Co., where he worked on the DSCS, Milstar,
Landsat, and Spot satellite programs. Mr. Gaffney graduated from the University
of Maryland in 1981 with a BS degree in Electrical Engineering.
Bonnie K. Wachtel, 46, has served as an outside director since May 1988. Since
1984, she has been Vice President, General Counsel, and a Director of Wachtel &
Co., Inc., an investment-banking firm in Washington, DC. Ms. Wachtel serves as a
Director of several corporations, including VSE Corporation and Information
Analysis, Inc. She holds a B.A. and M.B.A. from the University of Chicago and a
J.D. from the University of Virginia, and is a Certified Financial Analyst.
Dominic A. Laiti, 70, has served as an outside director of the Company since
July 1995. Mr. Laiti is presently employed as an independent consultant and was
President and Director of Globalink, Inc. from January 1990 to December 1994. He
has over 26 years of experience in starting, building, and managing
high-technology private and public companies with annual revenues from $2
million to over $120 million. Mr. Laiti was President of Hadron, Inc. from 1979
to 1989; Vice President of Xonics, Inc. from 1972 to 1979; and Vice President of
KMS Industries from 1968 to 1972. He is a Director of Energy Recovery, Inc. and
former Director of United Press International, Saturn Chemicals Company, Hadron,
Inc., Telecommunications Industries, Inc., MAXXAM Technology, Inc., and Jupiter
Technology, Inc.
R. Doss McComas, 47, joined the Board as an outside director in July 1995. He is
President of e-Community Calendar Inc. a supplier of sponsor/advertising
supported community information and a manufacturer and integrator of internet,
cellular, and President of IWS wireless local loop systems. Previously, he was
Chairman of Plexsys International, President of Fortel Technologies, Inc., and
held positions with COMSAT RSI and Radation Systems, Inc., including Group Vice
President, Vice President of Acquisitions, Strategic Planning and International
Marketing, and General Counsel. He holds a B.A. degree from Virginia Polytechnic
Institute; an M.B.A. from Mt. Saint Mary's; and a J.D. from Gonzaga University.
John R. (Reg) Murphy, 66, was elected to the Board as an outside director in
February 2000. He is Vice Chairman of the National Geographic Society based in
Washington, DC. He was President and CEO of the Society from 1995 to 1998. Prior
to National Geographic, he was the publisher and CEO of the Baltimore Sun and a
member of the Times Mirror Management Committee. Mr. Murphy has also been the
Editor of the Atlanta Constitution and Editor and Publisher of the San Francisco
Examiner. He is a past President of the United States Golf Association and
Chairman of its Centennial Celebration Committee, and serves on the Board of
Directors of The Omnicom Group, MSD&T Funds, Saxotech, and e-Motion, Inc. He is
also President of Caves Valley Golf Club in Baltimore, Maryland and a Trustee of
Mercer and Brenau Universities.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
-------------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's officers and directors, and persons who
own more than 10% of the Company's Common Stock, to file reports of ownership
and changes in ownership of the Company's Common Stock with the Securities and
Exchange Commission and Nasdaq. Based on a review of the copies of such reports,
the Company believes that during the fiscal year ending September 30, 2001 its
executive officers, directors and greater than ten percent stockholders filed on
a timely basis all reports due under Section 16(a) of the Exchange Act, with the
following exceptions: Thomas L. Gough, an executive officer and director of the
Company, inadvertently filed late a Form 4 for May 2001, reporting four
transactions and inadvertently filed late a Form 4 for June 2001, reporting one
transaction; Patrick R. Woods an executive officer of the Company, inadvertently
filed late a Form 4 for May 2001, reporting two transactions.
27
ITEM 11. EXECUTIVE COMPENSATION
a. Summary Compensation Table
The following table sets forth compensation received by the Company's CEO
and four highest paid executive officers who were serving as executive officers
of the Company at the end of fiscal year 2001 and who earned over $100,000
during the fiscal year ended September 30, 2001:
Annual Compensation Long-Term Compensation
------------------- ----------------------
Awards Payouts
------ -------
Name and Principal Shares All Other
Position Year Salary Bonus Underlying Options Compensation (1)
-------- ---- ------ ----- ------------------ ----------------
Chief Executive Officer
Steven. R. Chamberlain 2001 $235,251 $25,000 12,000 $21,125
2000 $214,303 $25,000 12,000 $19,061
1999 $187,862 $65,000 20,000 $19,066
Chief Operating Officer/Pres.
Thomas L. Gough 2001 $195,494 $20,000 7,000 $20,137
2000 $180,648 $20,000 14,000 $18,781
1999 $167,545 $35,000 0 $16,885
Vice Pres., Government Programs
Patrick R. Woods 2001 $167,338 $12,500 7,000 $17,169
2000 $152,510 $10,000 2,000 $16,800
1999 $156,119 $30,000 12,000 $16,799
Vice Pres., Commercial Products
Peter J. Gaffney 2001 $155,012 $15,000 7,000 $15,456
2000 $132,423 $15,000 7,000 $12,918
1999 $107,520 $12,000 23,000 $ 9,854
Vice Pres., Chief Financial Officer
Elaine M. Parfitt 2001 $155,012 $15,000 7,000 $15,511
2000 $132,169 $15,000 6,000 $13,300
1999 $106,506 $30,000 10,000 $ 9,575
(1) All Other Compensation represents employer pension contributions. It
does not include the value of insurance premiums paid by or on behalf
of the Company with respect to term life insurance for the benefit of
each identified individual in the amounts of $745, $745 and $594 for
fiscal years 2001, 2000 and 1999 respectively.
28
OPTION/SAR GRANTS IN LAST FISCAL YEAR
====================================================================================================================
Individual Grants
====================================================================================================================
Percent of Total
Number of Options/SARs
Options/ Granted to Grant Date
SARs Employees in Exercise/Base Expiration Present
Name Granted Fiscal Year Price($) Date Value(1)
- --------------------------------------------------------------------------------------------------------------------
CEO
Steven R. Chamberlain 12,000 5% $21.13 2007 $96,120
CHIEF OPERATING OFFICER/PRESIDENT
Thomas L. Gough 7,000 3% $21.13 2007 $56,070
VP GOVERNMENT PROGRAMS
Patrick R. Woods 7,000 3% $21.13 2007 $56,070
VP COMMERCIAL PRODUCTS
Peter J. Gaffney 7,000 3% $21.13 2007 $56,070
VP/CHIEF FINANCIAL OFFICER
Elaine M. Parfitt 7,000 3% $21.13 2007 $56,070
(1) Grant date present value is calculated on the date of the grant using
the Black-Scholes options pricing model assuming the following: no
dividend yield, risk-free interest rate of 5%, expected volatility of
40%, and an expected term of the option of four years. This value is
then multiplied by the number of options granted.
b. Compensation Pursuant to Plans
------------------------------
The Company's Board of Directors awards annual bonuses to officers and
employees on a discretionary basis. Currently, no formal plan exists for
determining bonus amounts.
Effective October 1, 1987, the Company established a 401(K) pension and
profit sharing plan (the "Plan") under Section 401 of the Internal Revenue Code
(the "Code"). Under the Plan the Company contributes annually an amount equal to
5% of an eligible employee's salary, and may make additional contributions of up
to 7.0% of an eligible employee's salary. The employee may contribute up to an
additional 10% as salary deferral. In fiscal years 2001, 2000, and 1999 the
Company contributed a total of 11% of eligible employees' salaries to the plans.
c. Stock Option Plan
-----------------
Effective May 25, 1988, the Company established a stock option plan, as
amended and restated in 1994 and 1998 (the "Stock Option Plan"), to create
additional incentives for the Company's employees, consultants and directors to
promote the financial success of the Company. The Stock Option Committee has the
authority to select full-time employees, directors or consultants to receive
awards of options for the purchase of stock of the Company under this plan. The
maximum number of shares of Common Stock which may be issued pursuant to the
Stock Option Plan was increased from 300,000 to 1,200,000 during fiscal year
1994. At the Annual Meeting of stockholders of the Company held on July 22,
1998, the stockholders approved an amendment and restatement of the Stock Option
Plan which, among other changes, increased the number of shares subject to
options under the Stock Option Plan from 1,200,000 to 1,800,000 shares. Options
to purchase a total of 226,300 shares of Common Stock
29
were issued and options to purchase 63,760 shares of Common Stock were exercised
during fiscal year 2001. The Company has reserved for issuance an aggregate of
1,076,064 shares of Common Stock, of which options to purchase 949,100 shares
are outstanding. Pursuant to the Stock Option Plan, options may be incentive
stock options within the meaning of Section 422 of the Code or nonstatutory
stock options, although incentive stock options may be granted only to
employees.
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
One of the executives named below exercised stock options during the fiscal year
ended September 30, 2001.
Thomas L. Gough exercised 12,000 Incentive Stock Options.
- ------------------------------- ------------------ ----------------- ---------------------- -------------------------
(a) (b) (c) (d) (e)
- ------------------------------- ------------------ ----------------- ---------------------- -------------------------
Number of
Securities
Securities Underlying Value of Unexercised
Unexercised Options/ In-the-Money Options/
SARS at FY end (#) SARS at FY end ($)/1/
Shares Acquired Exercisable/ Exercisable/
Name on Exercise (#) Value Realized Unexercisable Unexercisable
- ------------------------------- ------------------ ----------------- ---------------------- -------------------------
Chief Executive Officer ___ ___ 100,400 $1,283,136
Steven R. Chamberlain (exercisable) (exercisable)
33,600 $384
(unexercisable) (unexercisable)
- ------------------------------- ------------------ ----------------- ---------------------- -------------------------
Chief Operating Officer/Pres. 12,000 $192,540 22,800 $282,512
Thomas L. Gough (exercisable) (exercisable)
18,200 $448
(unexercisable) (unexercisable)
- ------------------------------- ------------------ ----------------- ---------------------- -------------------------
Vice President Government ___ ___ 3,800 $16
Programs (exercisable) (exercisable)
Patrick R. Woods 15,800 $64
(unexercisable) (unexercisable)
- ------------------------------- ------------------ ----------------- ---------------------- -------------------------
Vice President Commercial ___ ___ 34,600 $347,096
Products (exercisable) (exercisable)
Peter J. Gaffney 26,400 $224
(unexercisable) (unexercisable)
- ------------------------------- ------------------ ----------------- ---------------------- -------------------------
Vice President, Chief ___ ___ 11,200 $86,808
Financial Officer (exercisable) (exercisable)
Elaine M. Parfitt 17,800 $192
(unexercisable) (unexercisable)
- ------------------------------- ------------------ ----------------- ---------------------- -------------------------
(1) Value for "In the Money" options represents the difference between the
exercise prices of outstanding options and the fair market value of the
Company's common stock of $18.04 per share at September 30, 2001.
d. Compensation of Directors
-------------------------
Directors who are employees of the Company do not receive any compensation
for their service as directors. The Company pays each director who is not an
employee of the Company an aggregate of $10,000 per year for their services,
which amount is paid in equal quarterly installments. Outside directors are also
annually granted options to purchase 5,000 shares of the Company's common stock
pursuant to the Stock Option Plan.
30
e. Termination of Employment and Change of Control Termination
-----------------------------------------------------------
The Company has no compensatory plan or arrangement with respect to any
individual named in the Summary Compensation Table (Item 10(a)) which results or
will result from the resignation, retirement or any other termination of such
individual's employment with the Company or its subsidiaries or from a change in
control of the Company or a change in the individual's responsibilities
following a change in control.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
a. Security Ownership of Certain Beneficial Owners (as of 9/30/01)
---------------------------------------------------------------
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock, par value $.01, as of September 30,
2001, by each person (other than directors and executive officers of the
Company) known by the Company to beneficially own 5% or more of the outstanding
shares of Common Stock of the Company.
Name and Address of Beneficial Owner Amount and Nature of Percent of
- ------------------------------------ -------------------- ----------
Beneficial Owner Class
---------------- -----
Ashford Capital Management, Inc 614,600 6.8%
3801 Kennett Pike Drive
Wilmington, DE 19807
Chartwell Capital Investors II LP 455,556 5.0%
One Independent Drive
Suite 3120
Jacksonville, FL 32202
b. Security Ownership of Management (as of 9/30/01)
------------------------------------------------
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock, par value $.01, as of September 30,
2001, by (i) each director and executive officer of the Company and (ii) all
directors and executive officers as a group. Except as indicated in the table,
the address of the below-named directors and executive officers is that of the
Company's principal executive offices.
31
Name and Address of Beneficial Owner Amount and Nature of Percent of
- ------------------------------------ -------------------- ----------
Beneficial Owner Class
---------------- -----
Executive Officers, Directors
Steven R. Chamberlain 436,905 (1) 4.8%
Thomas L. Gough 185,400 (2) 2.0%
Elaine M. Parfitt 19,600 (3) *
Patrick Woods 4,800 (4) *
Peter J. Gaffney 42,600 (5) *
Bonnie K. Wachtel 63,400 (6) *
1101 Fourteenth Street, N.W.
Suite 800
Washington, D.C. 20036
R. Doss McComas 10,000 (7) *
409 Biggs Drive
Front Royal, VA 22630
John R. (Reg) Murphy 12,000 (8) *
Cottage 448, West 31st Street
Sea Island, GA 31561
Dominic A. Laiti 10,000 (9) *
12525 Knoll Brook Drive
Clifton, VA 22024
All Directors and Executive Officers as a group
(9 persons). 784,705 8.4%
* Less than one percent of the Common Stock outstanding.
(1) Includes outstanding options to purchase 100,400 shares of Common Stock
which are exercisable within 60 days.
(2) Includes outstanding options to purchase 22,800 shares of Common Stock
which are exercisable within 60 days.
(3) Includes outstanding options to purchase 11,200 shares of Common Stock
which are exercisable within 60 days.
(4) Includes outstanding options to purchase 3,800 shares of Common Stock
which are exercisable within 60 days.
(5) Includes outstanding options to purchase 34,600 shares of Common Stock
which are exercisable within 60 days.
(6) Includes outstanding options to purchase 37,000 shares of Common Stock
which are exercisable within 60 days.
(7) Includes outstanding options to purchase 10,000 shares of Common Stock
which are exercisable within 60 days.
(8) Includes outstanding options to purchase 10,000 shares of Common Stock
which are exercisable within 60 days.
(9) Includes outstanding options to purchase 10,000 shares of Common Stock
which are exercisable within 60 days.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In August 2000, the Company entered into an agreement and plan of
reorganization, by and among the Company, SAT Corporation, ISI Acquisition
Corporation and Herbert Pardula, the sole shareholder of SAT Corporation. The
reorganization agreement provided for the acquisition of SAT Corporation by the
Company. Pursuant to the terms of the reorganization agreement, ISI was merged
with and into SAT Corporation, with SAT Corporation as the surviving entity. At
the time of the merger, SAT Corporation became a wholly owned subsidiary of the
Company. Pursuant to the reorganization agreement, the purchase price paid to
the sole shareholder of SAT Corporation by the Company in connection with the
acquisition of SAT Corporation consisted of 650,000 shares of the Company's
common stock, par value $.01 per share. The acquisition was accounted for as a
pooling of interests. Upon the closing of the acquisition, Herbert Pardula
became a beneficial owner of greater than 5% of the outstanding shares of the
Company's Common Stock. Currently, Mr. Pardula owns less than 5% of the
outstanding shares of the Company's Common Stock.
32
PART IV
ITEM 14. EXHIBITS, LISTS, 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 By-Laws of the Company (Incorporated by
reference to the Company's September 30, 2000 Annual Report on
Form 10-K filed by the Company on December 21, 2000).
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 Plan (Incorporated by reference to the Registration
Statement on Form S-8 (File No. 333- 61559) filed by the Company
with the Commission on August 14, 1998).
10.2 Contract effective May 17, 1996 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 the 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 June 1, 1999, between Integral Systems Inc. and ASP
Washington, L.L.C. (Incorporated by reference to the Company's
June 30, 1999 10-QSB filed by the Company on August 11,1999).
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 and Security Agreement dated December 9, 1999
between Bank of America N.A. and Integral Systems, Inc.
(Incorporated by reference to the Company's December 31, 1999 10-Q
filed by the Company with the Commission on February 14, 2000).
10.6 Subcontract (J8-759124-C3JP) between Hughes Space and
Communications Company and Integral Systems, Inc. dated March 3,
1999 (Incorporated by reference to the Company's June 30, 1999
10-QSB filed by the Company on August 11, 1999). (Portions of this
exhibit have been omitted pursuant to a request for confidential
treatment filed with the commission).
11.1 Computation of Per Share Earnings
21.1 List of Subsidiaries of the Registrant
23.1 Consent of Rubino & McGeehin, Chartered
(b) Reports on Form 8-K
None.
33
Pursuant to the requirements of the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
Signature Titles Date
_________________________________________ Chairman of the Board, Director, 12/21/01
Steven R. Chamberlain Chief Executive Officer ----------------
_________________________________________ President, Chief Operating Officer, 12/21/01
Thomas L. Gough Director ----------------
_________________________________________ Chief Financial Officer, Principal, 12/21/01
Elaine M. Parfitt Accounting Officer ----------------
_________________________________________ Director 12/21/01
Dominic A. Laiti ----------------
_________________________________________ Director 12/21/01
R. Doss McComas ----------------
_________________________________________ Director 12/21/01
John R. Murphy ----------------
_________________________________________ Director 12/21/01
Bonnie K. Wachtel ----------------
34
Pursuant to the requirements of Section 13 or 15(d) 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.
DATE: 12/21/01 BY: /s/ Steven R. Chamberlain
------------- __________________________________
Steven R. Chamberlain
Chairman of the Board and
Chief Executive Officer
DATE: 12/21/01 BY: /s/ Thomas L. Gough
------------- __________________________________
Thomas L. Gough
President, Chief Operating Officer
Director
DATE: 12/21/01 BY: /s/ Elaine M. Parfitt
------------- __________________________________
Elaine M. Parfitt
Chief Financial Officer, Principal
Accounting Officer
35