Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(mark one)
[X] Quarterly report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2003 or
[ ] Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from ___________ to ___________
Commission file number 0-18603
INTEGRAL SYSTEMS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 52-1267968
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5000 Philadelphia Way, Lanham, MD 20706
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (301) 731-4233
- --------------------------------------------------------------------------------
(Former name, address and fiscal year, if changed since last report)
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by checkmark whether the registrant is an accelerated filer (as defined
by Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
Registrant had 9,713,762 shares of common stock outstanding as of April 25,
2003.
INTEGRAL SYSTEMS, INC.
TABLE OF CONTENTS
Page No.
--------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Balance Sheets - March 31, 2003 (unaudited) and September 30, 2002.................1
Unaudited Statements of Operations - Three and Six Months Ended
March 31, 2003 and March 31, 2002..................................................3
Unaudited Statement of Stockholders' Equity - Six Months
Ended March 31, 2003...............................................................4
Unaudited Statements of Cash Flow - Six Months Ended
March 31, 2003 and March 31, 2002..................................................5
Notes to Financial Statements......................................................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................................12
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................27
Item 4. Controls and Procedures...........................................................28
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K..................................................28
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2003 AND SEPTEMBER 30, 2002
ASSETS
March 31,
2003 September 30,
(unaudited) 2002
-------------- --------------
CURRENT ASSETS
Cash $ 20,452,437 $ 16,064,363
Marketable Securities 31,118,588 46,885,581
Accounts Receivable 23,848,764 17,001,393
Notes Receivable 121,201 118,226
Prepaid Expenses 824,905 916,756
Inventory 304,188 0
Deferred Income Tax - Current Portion 1,221,175 887,832
Income Taxes Receivable 398,483 1,110,703
-------------- --------------
TOTAL CURRENT ASSETS 78,289,741 82,984,854
FIXED ASSETS
Electronic Equipment 4,248,754 4,293,779
Furniture & Fixtures 748,919 665,840
Leasehold Improvements 929,715 355,642
Software Purchases 646,857 646,009
Equip. Under Capital Lease 0 579,496
-------------- --------------
SUBTOTAL - FIXED ASSETS 6,574,245 6,540,766
Less: Accum. Depreciation 2,544,696 3,072,859
-------------- --------------
TOTAL FIXED ASSETS 4,029,549 3,467,907
OTHER ASSETS
Notes Receivable - Non-Current 227,147 288,500
Intangible Assets, net 2,064,052 437,500
Goodwill 17,686,294 2,610,180
Software Development Costs 6,184,947 6,490,640
Deposits and Deferred Charges 113,151 337,274
-------------- --------------
TOTAL OTHER ASSETS 26,275,591 10,164,094
TOTAL ASSETS $ 108,594,881 $ 96,616,855
============== ==============
- 1 -
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2003 AND SEPTEMBER 30, 2002
LIABILITIES & STOCKHOLDERS' EQUITY
March 31,
2003 September 30,
(unaudited) 2002
-------------- --------------
CURRENT LIABILITIES
Accounts Payable $ 4,073,508 $ 5,916,194
Accrued Expenses 4,453,958 3,249,323
Capital Leases Payable 30,934 29,653
Billings in Excess of Cost 5,094,792 2,625,602
-------------- --------------
TOTAL CURRENT LIABILITIES 13,653,192 11,820,772
-------------- --------------
LONG TERM LIABILITIES
Capital Leases Payable 76,714 92,508
Deferred Income Taxes 2,480,902 2,447,395
-------------- --------------
TOTAL LONG TERM LIABILITIES 2,557,616 2,539,903
STOCKHOLDERS' EQUITY
Common Stock, $.01 par value,
40,000,000 shares authorized, and
9,712,038 and 9,322,783 shares issued and
outstanding at March 31, 2003
and September 30, 2002, respectively 97,120 93,228
Additional Paid-in Capital 76,761,961 65,070,787
Retained Earnings 15,856,384 17,599,042
Accumulated other comprehensive income (331,392) (506,877)
-------------- --------------
TOTAL STOCKHOLDERS' EQUITY 92,384,073 82,256,180
-------------- --------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 108,594,881 $ 96,616,855
============== ==============
- 2 -
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenue $ 19,956,596 $ 10,557,529 $ 39,526,377 $ 20,814,986
Cost of Revenue
Direct Labor 4,514,164 3,171,993 8,700,646 5,752,355
Overhead Costs 3,199,103 2,279,745 6,370,311 4,234,965
Travel and Other Direct Costs 579,698 399,087 1,171,041 783,922
Direct Equipment & Subcontracts 4,789,988 1,655,825 10,794,357 3,879,092
------------ ------------ ------------ ------------
Total Cost of Revenue 13,082,953 7,506,650 27,036,355 14,650,334
------------ ------------ ------------ ------------
Gross Margin 6,873,643 3,050,879 12,490,022 6,164,652
Selling, General & Administrative 2,936,196 2,346,786 5,670,652 4,053,926
Research & Development 578,885 5,218 1,108,502 206,119
Product Amortization 747,231 547,276 1,494,462 1,094,526
Intangible Asset Amortization 322,265 0 644,530 0
------------ ------------ ------------ ------------
Income From Operations 2,289,066 151,599 3,571,876 810,081
Other Income 77,318 556,126 70,422 766,236
------------ ------------ ------------ ------------
Income Before Income Tax 2,366,384 707,725 3,642,298 1,576,317
Provision for Income Taxes 881,630 274,126 1,307,736 526,613
------------ ------------ ------------ ------------
Net Income $ 1,484,754 $ 433,599 $ 2,334,562 $ 1,049,704
============ ============ ============ ============
Weighted Avg. Number of Common Shares:
Basic 9,710,205 9,120,763 9,705,717 9,096,980
Diluted 9,758,275 9,316,743 9,751,072 9,296,883
Earnings per Share (Basic) $ 0.15 $ 0.05 $ 0.24 $ 0.12
Earnings per Share (Diluted) $ 0.15 $ 0.05 $ 0.24 $ 0.11
- 3 -
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED MARCH 31, 2003
(Unaudited)
COMMON ACCUMULATED
NUMBER STOCK ADDITIONAL OTHER
OF AT PAR PAID-IN RETAINED COMPREHENSIVE
SHARES VALUE CAPITAL EARNINGS INCOME TOTAL
------------ ------------ ------------ ------------ ------------- ------------
Balance September 30, 2002 9,322,783 $ 93,228 $ 65,070,787 $ 17,599,042 $ (506,877) $ 82,256,180
Comprehensive Income
Net Income - - - 2,334,562 - 2,334,562
Unrealized Gain on Marketable
Securities (net of deferred
tax of $112,495) - - - - 175,485 175,485
------------
Total Comprehensive Income 2,510,047
Repurchased Shares (329,121) (3,292) (2,171,132) (4,077,220) - (6,251,644)
Shares Issued to Acquire RT Logic 709,676 7,097 13,742,903 - - 13,750,000
Stock Options Exercised 8,700 87 119,403 - - 119,490
------------ ------------ ------------ ------------ ------------- ------------
Balance March 31, 2003 9,712,038 $ 97,120 $ 76,761,961 $ 15,856,384 $ (331,392) $ 92,384,073
============ ============ ============ ============ ============= ============
- 4 -
INTEGRAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED MARCH 31, 2003 AND 2002
(Unaudited)
For the Six Months Ended
March 31,
2003 2002
------------ ------------
Cash flows from operating activities:
Net income $ 2,334,562 $ 1,049,704
------------ ------------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 2,904,086 1,707,252
Gain on sale of marketable securities (8,327) (386,599)
Loss on disposal of fixed assets 22,396 0
Changes in operational assets and liabilities,
net of effects from acquisition:
Accounts receivable and other receivables (1,336,112) 2,198,421
Prepaid expenses and deposits 381,144 (463,071)
Inventory 265,568 0
Income taxes receivable, net 3,472,284 1,215,293
Accounts payable (2,915,247) (4,668,019)
Accrued expenses (221,496) (171,990)
Billings in excess of cost 523,094 (742,974)
------------ ------------
Total adjustments 3,087,390 (1,311,687)
------------ ------------
Net cash provided by (used in) operating activities 5,421,952 (261,983)
------------ ------------
Cash flows from investing activities:
Sale of marketable securities, net 16,063,000 7,035,045
Notes receivable, net 5,182,958 55,549
Acquisition of fixed assets (734,614) (656,446)
Software development costs (1,188,769) (2,022,808)
Acquisition of RT Logic, net of cash received (13,407,596) 0
Net advances to Newpoint Technologies 0 (448,332)
Acquisition of Newpoint Technologies 0 (118,749)
------------ ------------
Net cash provided by (used in) investing activities 5,914,979 3,844,259
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock 119,490 349,852
Stock repurchases (6,251,644) (109,650)
Note Payable (802,190) 0
Capital lease obligation payments (14,513) (92,305)
------------ ------------
Net cash provided by (used in) financing activities (6,948,857) 147,897
------------ ------------
Net increase (decrease) in cash 4,388,074 3,730,173
Cash - beginning of year 16,064,363 2,379,503
------------ ------------
Cash - end of period $ 20,452,437 $ 6,109,676
============ ============
- 5 -
INTEGRAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The interim financial statements include the accounts of Integral
Systems, Inc. (ISI or the Company) and its wholly owned subsidiaries,
SAT Corporation (SAT), Newpoint Technologies, Inc. (Newpoint), Real
Time Logic, Inc. (RT Logic), and Integral Systems Europe (ISI Europe).
All significant intercompany accounts and transactions have been
eliminated in consolidation.
In the opinion of management, the financial statements reflect all
adjustments consisting only of normal recurring accruals necessary for
a fair presentation of results for such periods. The financial
statements, which are condensed and do not include all disclosures
included in the annual financial statements, should be read in
conjunction with the consolidated financial statements of the Company
for the fiscal year ended September 30, 2002. The results of operations
for any interim period are not necessarily indicative of results for
the full year.
Certain accounts in the prior period financial statements have been
reclassified for comparative purposes to conform with the presentation
in the current year financial statements.
2. Accounts Receivable
Accounts receivable at March 31, 2003 and September 30, 2002 consist of
the following:
March 31, 2003 Sept. 30, 2002
-------------------- --------------------
Billed $ 6,599,641 $ 4,082,202
Unbilled 17,099,962 12,836,578
Other 149,161 82,613
-------------------- --------------------
Total $ 23,848,764 $ 17,001,393
==================== ====================
The Company's accounts receivable consist of amounts due on prime
contracts and subcontracts with the U.S. Government and contracts with
various private organizations. Unbilled accounts receivable consist
principally of amounts that are billed in the month following the
incurrence of cost, amounts related to indirect cost variances on cost
reimbursable type contracts or amounts related to milestones that are
delivered under fixed price contracts. All unbilled receivables are
expected to be billed and collected within one year.
During the three months ended June 30, 2002, the Company fully reserved
$315,000 against a receivable due to SAT from SSP/Litronic, Inc. (SSP
Solutions), a publicly traded company located in Irvine, California. At
the time, the Company determined that doubt existed regarding the
collection of this receivable. The Company has since collected $20,000
against this receivable during the three months ended September 30,
2002 and $120,000 during the six months ended March 31, 2003.
- 6 -
INTEGRAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
3. Line of Credit
The Company has a line of credit agreement with a local bank for $10.0
million for general corporate purposes. Borrowings under the line are
due on demand with interest at the London Inter-Bank Offering Rate
(LIBOR), plus a spread of 1.5 to 2.4% based on the ratio of funded debt
to earnings before interest, taxes and depreciation (EBITDA). The line
of credit is secured by the Company's billed and unbilled accounts
receivable and has certain financial covenants, including minimum net
worth and liquidity ratios. The line expires February 29, 2004. The
Company had no balance outstanding at March 31, 2003 under the line of
credit.
The Company also has access to a $2.0 million equipment lease line of
credit that had a balance of approximately $108,000 at March 31, 2003.
4. Inventory
Inventory consists of service parts and materials and is stated at the
lower of cost or market using the first-in, first-out (FIFO) method of
accounting.
5. Acquisition of RT Logic
On October 1, 2002, the Company acquired all of the issued and
outstanding stock of RT Logic pursuant to an Agreement and Plan of
Reorganization dated October 1, 2002 (the "Reorganization Agreement").
The primary reason for acquiring RT Logic was to expand the Company's
existing products into RT Logic's government client base. The initial
purchase price payable to the shareholders of RT Logic was $13.25
million in cash and 683,870 shares of the Company's common stock.
Pursuant to the Reorganization Agreement, in November 2002 the former
shareholders of RT Logic received additional consideration of $500,000
in cash and 25,806 shares of the Company's common stock. The
Reorganization Agreement further provides that the former RT Logic
shareholders will be entitled to receive contingent consideration,
which is payable in the event that RT Logic's business meets certain
earnings performance targets during a period of up to four years
following the acquisition. One half of any contingent consideration
will be payable in cash and the remainder will be payable in shares of
the Company's common stock. Any shares of the Company's common stock
issued in connection with the contingent consideration will be valued
based on a 30-trading-day average leading up to the end of each
applicable earn-out period. The contingent consideration is subject to
claims by us under the indemnification provisions of the Reorganization
Agreement.
- 7 -
INTEGRAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
5. Acquisition of RT Logic (continued)
The acquisition was accounted for using the purchase method of
accounting prescribed by SFAS No. 141, Business Combinations.
Accordingly, a portion of the purchase price has been allocated to
assets acquired and liabilities assumed and other identified intangible
assets based on estimated fair values on the acquisition date. The
purchase price allocation is based on preliminary estimates and is
subject to change as final valuations are made. A summary of the
purchase price allocation as of October 1, 2002 is as follows (in
thousands):
Current assets $ 9,821
Property, plant & equipment 615
Intangibles 2,271
Goodwill 15,061
Notes receivables 5,125
Long-term assets 79
Current liabilities (5,247)
Total purchase price $ 27,725
The identified intangible assets relate to acquired technology
($650,000) and customer contracts ($1,621,000) and will be amortized on
a straight-line basis over an estimated useful life of 5 years and 18
months, respectively. Goodwill is not being amortized but is being
reviewed annually for impairment in accordance with SFAS No. 142
Goodwill and Other Intangible Assets. The notes receivable relate to
loans made by RT Logic to its shareholders to exercise RT Logic stock
options prior to the sale to Integral. The notes receivable were
classified in Stockholders Equity on October 1, 2002. During the first
quarter ended December 31, 2002, all notes receivable were settled and
the cash was received by Integral. As a result of this transaction,
Integral realized an income tax deduction (equal to the difference
between the option exercise price and the fair value of the stock). The
resulting income tax benefit of $2,760,000 is included in current
assets in the table above.
As RT Logic was acquired on October 1, 2002, the full results of its
operations have been included in Integral's statements of operation for
the three months and six months ended March 31, 2003 respectively.
Unaudited pro forma information provided below has been prepared to
reflect the acquisition of RT Logic by the Company as if it had
occurred on October 1, 2001. The unaudited pro forma financial
information is not necessarily indicative of the results of operations
that may have actually occurred had the acquisition occurred on the
dates specified, or of the future results of the combined companies.
Three Months Ended Six Months Ended
March 31, 2002 March 31, 2002
(unaudited) (unaudited)
(in thousands, except (in thousands, except
Net Income per Share) Net Income per Share)
---------------------- ----------------------
Revenues $ 13,875 $ 27,358
Net Income $ 268 $ 1,070
Net Income per Share (Basic) $ 0.03 $ 0.12
Net Income per Share (Diluted) $ 0.03 $ 0.11
- 8 -
INTEGRAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
6. Stock-Based Compensation
The Company recognizes expense for stock-based compensation
arrangements in accordance with the provisions of Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations. Accordingly, compensation cost is recognized
for the excess of the estimated fair value of the stock at the grant
date over the exercise price, if any.
In accordance with SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure (SFAS 148), the effect on net
income and earnings per share if the Company had applied the fair value
recognition provisions of SFAS No. 123 to stock-based employee
compensation is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, MARCH 31,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net income, as reported $ 1,484,754 $ 433,599 $ 2,334,562 $ 1,049,704
Deduct: Total stock-based employee
compensation expense determined under fair
value-based method for all awards 430,211 254,810 841,433 495,949
Add: Stock-based employee compensation included
in net income 0 0 0 0
Pro forma net income $ 1,054,543 $ 178,789 $ 1,493,129 $ 553,755
Earnings per share:
As reported - basic $ 0.15 $ 0.05 $ 0.24 $ 0.12
- dilutive $ 0.15 $ 0.05 $ 0.24 $ 0.11
Pro forma - basic $ 0.11 $ 0.02 $ 0.15 $ 0.06
- dilutive $ 0.11 $ 0.02 $ 0.15 $ 0.06
These proforma amounts are not necessarily indicative of future effects
of applying the fair value-based method due to, among other things, the
vesting period of the stock options and the fair value of the
additional stock options issued in future years.
7. Business Segment Information
With the acquisition of RT Logic, the Company now operates in four
business segments:
. satellite ground systems;
. satellite and terrestrial communications signal monitoring
(CSM);
. equipment monitoring and control; and
. space communication systems.
Integral Systems, Inc. and ISI Europe build satellite ground systems
for command and control, integration and test, data processing, and
simulation.
Through its wholly owned subsidiary SAT, the Company offers turnkey
systems and software for satellite and terrestrial communications
signal monitoring.
- 9 -
INTEGRAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
7. Business Segment Information (continued)
The Company provides equipment monitoring and control software to
satellite operators and the telecommunications industry through its
wholly owned subsidiary, Newpoint (acquired January 2002).
Through its wholly owned subsidiary RT Logic (acquired October 2002),
the Company manufactures telemetry processing components and systems
for military applications, including tracking stations, control
centers, and range operations.
The accounting policies of the segments are the same as those described
in Note 1. The Company evaluates the performance of each segment based
on operating income. There are no inter-segment allocations of overhead
and all corporate-level expenses are included in the Satellite Ground
Systems segment.
Summarized financial information by business segment is as follows:
- 10 -
INTEGRAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
7. Business Segment Information (continued)
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
March 31, 2003 March 31, 2002/1/ March 31, 2003 March 31, 2002/1/
Revenue
Satellite ground systems $ 14,087,008 $ 8,906,995 $ 28,714,897 $ 18,098,490
Satellite ground systems - intercompany 257,053 155,723 636,230 207,983
Satellite & terrestrial CSM 1,103,723 1,043,130 1,589,537 2,109,092
Satellite & terrestrial CSM - intercompany N/A N/A 753 N/A
Equip. monitoring & control 521,161 607,404 1,373,997 607,404
Space communication systems 4,244,704 N/A 7,847,946 N/A
Space communication systems -
intercompany 675,416 N/A 1,406,745 N/A
Elimination of Interco. Sales (932,469) (155,723) (2,043,728) (207,983)
-------------- -------------- -------------- --------------
Total Revenue $ 19,956,596 $ 10,557,529 $ 39,526,377 $ 20,814,986
============== ============== ============== ==============
Operating Income
Satellite ground systems $ 1,338,277 $ 584,469 $ 2,221,501 $ 1,146,628
Satellite ground systems - intercompany 5,684 166 2,812 223
Satellite & terrestrial CSM (253,259) (293,622) (835,776) (197,299)
Equip. monitoring & control (183,453) (139,248) (347,494) (139,248)
Space communication systems 1,387,501 N/A 2,533,645 N/A
Space communication systems -
intercompany 259 N/A (10) N/A
Elimination of intercompany (5,943) (166) (2,802) (223)
-------------- -------------- -------------- --------------
Total Operating Income $ 2,289,066 $ 151,599 $ 3,571,876 $ 810,081
============== ============== ============== ==============
Income Before Income Taxes
Satellite ground systems $ 1,471,220 $ 1,188,668 $ 2,407,677 $ 1,926,845
Satellite & terrestrial CSM (282,968) (314,167) (899,021) (183,752)
Equip. monitoring & control (232,734) (166,776) (458,322) (166,776)
Space communication systems 1,410,866 N/A 2,591,964 N/A
-------------- -------------- -------------- --------------
Total Income Before Income Taxes $ 2,366,384 $ 707,725 $ 3,642,298 $ 1,576,317
============== ============== ============== ==============
Total Assets
Satellite ground systems $ 75,477,595 $ 86,416,068
Satellite & terrestrial CSM 3,613,305 4,333,443
Equip. monitoring & control 4,358,534 4,166,063
Space communication systems 33,792,760 N/A
Elimination of intercompany
accounts receivable (8,647,313) (4,660,306)
-------------- --------------
Total Assets $ 108,594,881 $ 90,255,268
============== ==============
/1/. Includes two (2) months ended March 31, 2002 for the equipment
monitoring and control business segment.
- 11 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Integral Systems, Inc. builds satellite ground systems for command and control,
integration and test, data processing, and simulation. Since its inception in
1982, the Company has provided ground systems for over 190 different satellite
missions for communications, science, meteorology, and earth resource
applications. The Company has an established domestic and international customer
base that includes government and commercial satellite operators, spacecraft and
payload manufacturers, and aerospace systems integrators.
The Company has developed innovative software products that reduce the cost and
minimize the development risk associated with traditional custom-built systems.
The Company believes that it was the first to offer a comprehensive COTS
(Commercial Off-the-Shelf) software product line for command and control. As a
systems integrator, the Company leverages these products to provide turnkey
satellite control facilities that can operate multiple satellites from any
manufacturer. These systems offer significant cost savings for customers that
have traditionally purchased a separate custom control center for each of their
satellites.
Through its wholly owned subsidiary SAT, acquired in August 2000, the Company
also offers turnkey systems and software for satellite and terrestrial
communications signal monitoring.
In March 2001 the Company formed a wholly owned subsidiary, ISI Europe, with
headquarters in Toulouse, France. ISI Europe serves as the focal point for the
support of all of Integral's European business.
On January 30, 2002, the Company acquired Newpoint. Newpoint provides equipment
monitoring and control software to satellite operators and the
telecommunications industry.
In October 2002, the Company acquired RT Logic. RT Logic manufactures telemetry
processing components and systems for military applications, including tracking
stations, control centers, and range operations.
- 12 -
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
RESULTS OF OPERATIONS
The components of the Company's income statement as a percentage of revenue are
depicted in the following table for the three months ended March 31, 2003 and
March 31, 2002:
THREE MONTHS ENDED MARCH 31,
% OF % OF
2003 REVENUE 2002 REVENUE
-------------- -------------- -------------- --------------
(IN THOUSANDS) (IN THOUSANDS)
Revenue $ 19,957 100.0 $ 10,558 100.0
Cost of Revenue 13,083 65.6 7,507 71.1
-------------- -------------- -------------- --------------
Gross Margin 6,874 34.4 3,051 28.9
Operating Expenses
Selling, General & Admin. (SG&A) 2,936 14.7 2,347 22.2
Research and Development 579 2.9 5 0.1
Product Amortization 747 3.7 547 5.2
Amortization-Intangible Assets 323 1.6 0 0.0
-------------- -------------- -------------- --------------
Income from Operations 2,289 11.5 152 1.4
Other Income (Expense) (net) 78 0.4 556 5.3
-------------- -------------- -------------- --------------
Income Before Income Taxes 2,367 11.9 708 6.7
Income Taxes 882 4.5 274 2.6
-------------- -------------- -------------- --------------
Net Income $ 1,485 7.4 $ 434 4.1
============== ============== ============== ==============
REVENUE
The Company earns revenue, both as a prime contractor and a subcontractor, from
sales of its products and services through contracts that are funded by the U.S.
Government as well as commercial and international organizations.
Internally, the Company classifies revenues in two separate categories on the
basis of the contracts' procurement and development requirements: (i) contracts
which require compliance with Government procurement and development standards
are classified as government revenue, and (ii) contracts conducted according to
commercial practices 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 revenue. Revenues attributable to
SAT, Newpoint, and ISI Europe are also classified as commercial revenue.
- 13 -
For the three months ended March 31, 2003 and 2002, the Company's revenues were
generated from the following sources:
THREE MONTHS ENDED MARCH 31,
REVENUE TYPE 2003 2002
------------ ------------ ------------
COMMERCIAL REVENUE
Commercial Users 26% 49%
U.S. Government Users 0 0
------------ ------------
Subtotal 26 49
GOVERNMENT REVENUE
NOAA 15 38
Air Force 49 7
Other U.S. Government Users 10 6
------------ ------------
Subtotal 74 51
Total 100% 100%
============ ============
Based on the Company's revenue categorization system, the Company classified 26%
of its revenue as commercial revenue with the remaining 74% classified as
government revenue for the three months ended March 31, 2003. For the three
months ended March 31, 2002 the Company classified 49% of its revenue as
commercial revenue with the remaining 51% classified as government revenue. By
way of comparison, if the revenues were classified strictly according to end
user (independent of the Company's internal revenue categorization system), the
U.S. Government would account for 74% and 51% of the total revenues for the
three months ended March 31, 2003 and 2002, respectively.
On a consolidated basis, revenue increased 89.0%, or $9.4 million, to $20.0
million for the three months ended March 31, 2003, from $10.6 million for the
three months ended March 31, 2002. Revenue for the three-month periods ending
March 31, 2003 and 2002 for each of the Company's segments is shown in the
following table:
THREE MONTHS ENDED THREE MONTHS ENDED INCREASE/
MARCH 31, 2003 MARCH 31, 2002/1/ (DECREASE)
SEGMENT (IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS)
- --------------------------------------------------- ------------------ ------------------- ----------------
REVENUE
Satellite Ground Systems (Integral) $ 14,344 $ 9,064 $ 5,280
Satellite & Terrestrial CSM (SAT) 1,104 1,043 61
Equip. Monitoring & Control (Newpoint) 521 607 (86)
Space Communication Systems (RT Logic) 4,920 0 4,920
Elimination (933) (156) (777)
Total Revenue $ 19,956 $ 10,558 $ 9,398
/1/. Includes only two (2) months of revenue for the equipment monitoring
and control business segment because Newpoint was acquired by the
Company on January 31, 2002.
Revenue increases in the Company's Satellite Ground Systems segment pertain to
increased sales volume as a result of the Company's contract awards with the
U.S. Air Force (specifically the CCS-C and SCNC programs) that were made in the
Spring of 2002. Revenue levels for SAT and Newpoint were relatively comparable
quarter to quarter. However, last year's second quarter included only two months
of activity for Newpoint, which was acquired by the Company on January 31, 2002.
RT Logic was acquired subsequent to March 31, 2002, so the Company reported no
revenue for this segment for the three-month period then ended.
- 14 -
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 40%. These definitions and ratios
generally apply across all segments.
During the three months ended March 31, 2003, cost of revenue increased by
74.3%, or $5.6 million, compared to the same period during the prior year,
increasing from $7.5 million during the three months ended March 31, 2002 to
$13.1 million during the three months ended March 31, 2003. Gross margin
increased from $3.1 million to $6.9 million, an increase of $3.8 million, or
125.3%, during the periods being compared. Cost of revenue and gross margin for
the three months ended March 31, 2003 and 2002 for each of the Company's
segments are shown in the following table:
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31, INCREASE/
2003 2002/1/ (DECREASE)
SEGMENT (IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS)
- ---------------------------------------------------- --------------- --------------- ---------------
COST OF REVENUE
Satellite Ground Systems (Integral) $ 10,707 $ 6,316 $ 4,391
Satellite & Terrestrial CSM (SAT) 632 853 (221)
Equip. Monitoring & Control (Newpoint) 367 473 (106)
Space Communication Systems (RT Logic) 2,289 0 2,289
Elimination (912) (136) (776)
Total Cost of Revenue $ 13,083 $ 7,506 $ 5,577
GROSS MARGIN
Satellite Ground Systems (Integral) $ 3,637 $ 2,747 $ 890
Satellite & Terrestrial CSM (SAT) 472 190 282
Equip. Monitoring & Control (Newpoint) 155 134 21
Space Communication Systems (RT Logic) 2,631 0 2,631
Elimination (21) (20) (1)
Total Gross Margin $ 6,874 $ 3,051 $ 3,823
/1/. Includes only two (2) months of activity for the equipment monitoring
and control business segment because Newpoint was acquired by the
Company on January 31, 2002.
Cost of Revenue and Gross Margin increases during the periods compared for the
Company's Satellite Ground Systems business essentially track the increases in
revenue from this segment, although gross margin as a percentage of revenue for
this segment declined from 30.3% to 25.4% as result of a higher content of
equipment and subcontract pass-through business principally on the Company's Air
Force contracts during the current quarter compared to the three months ended
March 31, 2002. The increases in Gross Margin at SAT are related to last year's
overruns on two fixed price contracts that did not recur during the current
period.
RT Logic was acquired subsequent to March 31, 2002, so the Company reported no
costs of revenue or gross margin for this segment for the three-month period
then ended.
- 15 -
OPERATING EXPENSES
Operating Expenses for the three months ended March 31, 2003 and 2002 for each
of the Company's segments are shown in the following table:
THREE MONTHS THREE MONTHS
ENDED ENDED INCREASE/
MARCH 31, 2003 MARCH 31, 2002/1/ (DECREASE)
SEGMENT (IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS)
- ---------------------------------------------------- --------------- ------------------ ---------------
OPERATING EXPENSES
Satellite Ground Systems (Integral)
SG&A $ 1,658 $ 1,706 $ (48)
R&D 38 5 33
Amortization 596 451 145
Total Satellite Ground Systems (Integral) 2,292 2,162 130
Satellite & Terrestrial CSM (SAT)
SG&A 301 388 (87)
R&D 274 0 274
Amortization 150 97 53
Total Satellite & Terrestrial CSM (SAT) 725 485 240
Equip. Monitoring & Control (Newpoint)
SG&A 307 273 34
R&D 0 0 0
Amortization 32 0 32
Total Equip. Monitoring & Control (Newpoint) 339 273 66
Space Communication Systems (RT Logic)
SG&A 685 0 685
R&D 267 0 267
Amortization 291 0 291
Total Space Communication Systems (RT Logic) 1,243 0 1,243
Elimination (15) (20) 5
Total Operating Expenses $ 4,584 $ 2,900 $ 1,684
/1/. Includes only two (2) months of activity for the equipment monitoring
and control business segment because Newpoint was acquired by the
Company on January 31, 2002.
In the Company's Satellite Ground Systems business, SG&A expenses were
comparable during the periods compared. However, as a percentage of revenue,
SG&A for this segment only represented 11.6% of revenue in the current period
compared to 18.8% of revenue during the three months ended March 31, 2002. SG&A
expenses were essentially flat while revenue for the segment increased by almost
$5.3 million. R&D expenses for this segment were immaterial for both three-month
periods. Product amortization has increased by almost $150,000 during the three
months ended March 31, 2003 as compared to the three months ended March 31, 2002
due to higher capitalized development costs related to the Company's EPOCH
product line. At SAT, period-to-period SG&A costs are down slightly while R&D
expenses have increased from zero to more than $270,000. The increase in current
period R&D expenses was due to efforts related to new development on SAT's
signal monitoring capabilities. Costs associated with such efforts had been
capitalized last fiscal year. Product amortization increased by more than
$50,000 during the periods compared due to higher capitalized development costs.
- 16 -
Newpoint's current period SG&A expenses were up slightly over last year's
amounts during the comparable period. However, last year's amounts included only
two months of activity because Newpoint was acquired by the Company on January
31, 2002.
RT Logic was acquired subsequent to March 31, 2002, so the Company reported no
operating expenses for this segment for the three-month period then ended.
The current period amortization expenses for both Newpoint and RT Logic relate
to the amortization of intangible assets that arose from purchase accounting
entries made at the time of each company's acquisition by the Company.
INCOME FROM OPERATIONS
Income from Operations for the three months ended March 31, 2003 and 2002 for
each of the Company's segments is shown in the following table:
THREE MONTHS THREE MONTHS
ENDED ENDED INCREASE/
MARCH 31, 2003 MARCH 31, 2002/1/ (DECREASE)
SEGMENT (IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS)
- ---------------------------------------------------- --------------- ------------------ ---------------
INCOME FROM OPERATIONS
Satellite Ground Systems (Integral) $ 1,344 $ 585 $ 759
Satellite & Terrestrial CSM (SAT) (254) (294) 40
Equip. Monitoring & Control (Newpoint) (183) (139) (44)
Space Communication Systems (RT Logic) 1,388 0 1,388
Elimination (6) 0 (6)
Total Income from Operations $ 2,289 $ 152 $ 2,137
/1/. Includes only two (2) months of activity for the equipment monitoring
and control business segment because Newpoint was acquired by the
Company on January 31, 2002.
Income from operations during the periods compared increased by almost $760,000
in the Company's Satellite Ground Systems segment as a result of increased
revenues principally due to the Air Force programs described above. Operating
losses at SAT during the three months ended March 31, 2003 have resulted from
increased R&D and amortization expenses and overall depressed conditions in the
commercial satellite market. Newpoint's operating losses are related to overall
depressed conditions in the commercial satellite market, and resultant low
revenue levels. Although results for RT Logic were not included with the results
for the Company for the three months ended March 31, 2002, the current quarter
is the most profitable in RT Logic's history. For comparison purposes, RT logic
recorded approximately $62,000 of operating income during the three months ended
March 31, 2002. Overall, operating income increases at the Company's Satellite
Ground Systems segment coupled with the operating income posted by RT Logic,
allowed the Company to post a fifteen fold increase in operating income during
the periods being compared.
OTHER INCOME
During the three months ended March 31, 2003, the Company recorded $139,000 of
interest income compared to $240,000 of interest income recorded for the three
months ended March 31, 2002. The decrease is due to the general decline in
interest rates in response to cuts by the Federal Reserve Board and due to the
Company's reduction in interest generating capital resulting from the repurchase
of approximately $6.3 million of Company stock in September and October of 2002
and the payment of $13.75 million of cash used to purchase RT Logic. Further,
the Company recorded approximately $390,000 of gains on the sale of marketable
equity securities during the three months ended March 31, 2002, which gains did
not recur in the current three-month period.
- 17 -
Income before income taxes increased by approximately $1.7 million to $2.4
million from $700,000 between the two periods being compared principally due to
the increase in operating income, which was partially offset by declines in
other income described above.
The Company's effective tax rate slightly decreased from 38.7% for the three
months ended March 31, 2002 to 37.3% for the three months ended March 31, 2003.
As a result of the above, net income increased to approximately $1.5 million
during the three months ended March 31, 2003 from approximately $435,000 during
the three months ended March 31, 2002.
- 18 -
COMPARISON OF THE SIX MONTHS ENDED MARCH 31, 2003 AND 2002
RESULTS OF OPERATIONS
The components of the Company's income statement as a percentage of revenue are
depicted in the following table for the six months ended March 31, 2003 and
March 31, 2002:
SIX MONTHS ENDED MARCH 31,
% OF % OF
2003 REVENUE 2002 REVENUE
-------------- -------------- -------------- --------------
(IN THOUSANDS) (IN THOUSANDS)
Revenue $ 39,526 100.0 $ 20,815 100.0
Cost of Revenue 27,036 68.4 14,650 70.4
-------------- -------------- -------------- --------------
Gross Margin 12,490 31.6 6,165 29.6
Operating Expenses
Selling, General & Admin.(SG&A) 5,671 14.4 4,054 19.5
Research and Development 1,109 2.8 206 1.0
Product Amortization 1,494 3.8 1,094 5.2
Amortization-Intangible Assets 644 1.6 0.0 0.0
-------------- -------------- -------------- --------------
Income from Operations 3,572 9.0 811 3.9
Other Income (Expense)(net) 71 0.2 766 3.7
-------------- -------------- -------------- --------------
Income Before Income Taxes 3,643 9.2 1,577 7.6
Income Taxes 1,308 3.3 527 2.6
-------------- -------------- -------------- --------------
Net Income $ 2,335 5.9 $ 1,050 5.0
============== ============== ============== ==============
For the six months ended March 31, 2003 and 2002, the Company's revenues were
generated from the following sources:
SIX MONTHS ENDED MARCH 31,
REVENUE TYPE 2003 2002
------------ ------------ ------------
COMMERCIAL REVENUE
Commercial Users 24% 48%
U.S. Government Users 0 1
------------ ------------
Subtotal
24 49
GOVERNMENT REVENUE
NOAA 21 38
Air Force 47 7
Other U.S. Government Users 8 6
------------ ------------
Subtotal 76 51
Total 100% 100%
============ ============
Based on the Company's revenue categorization system, the Company classified 24%
of its revenue as commercial revenue with the remaining 76% classified as
government revenue for the six months ended March 31, 2003. For the six months
ended March 31, 2002 the Company classified 49% of its revenue as commercial
revenue with the remaining 51% classified as government revenue. By way of
comparison, if the revenues were classified strictly according to end user
(independent of the Company's internal revenue categorization system), the U.S.
Government would account for 76% and 52% of the total revenues for the six
months ended March 31, 2003 and 2002, respectively.
- 19 -
On a consolidated basis, revenue increased 89.9%, or $18.7 million, to $39.5
million for the six months ended March 31, 2003, from $20.8 million for the six
months ended March 31, 2002. Revenue for the six-month periods ending March 31,
2003 and 2002 for each of the Company's segments is shown in the following
table:
SIX MONTHS ENDED SIX MONTHS ENDED INCREASE/
MARCH 31, 2003 MARCH 31, 2002/1/ (DECREASE)
SEGMENT (IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS)
- ------------------------------------------- ---------------- ----------------- --------------
REVENUE
Satellite Ground Systems (Integral) $ 29,351 $ 18,307 $ 11,044
Satellite & Terrestrial CSM (SAT) 1,590 2,109 (519)
Equip. Monitoring & Control (Newpoint) 1,374 607 767
Space Communication Systems (RT Logic) 9,255 0 9,255
Elimination (2,044) (208) (1,836)
Total Revenue $ 39,526 $ 20,815 $ 18,711
/1/. Includes only two (2) months of revenue for the equipment monitoring
and control business segment because Newpoint was acquired by the
Company on January 31, 2002.
Revenue increases in the Company's Satellite Ground Systems segment pertain to
increased sales volume as a result of the Company's contract awards with the
U.S. Air Force (specifically the CCS-C and SCNC programs) that were made in the
Spring of 2002. Revenue decreases at SAT relate to a decreased backlog of orders
at September 30, 2002 and overall poor market conditions in the commercial
satellite market. Since December 31, 2002, bookings for new orders at SAT have
improved but not enough to bring year-to-date revenue in line with last year's
amounts.
Current period revenue for Newpoint is for a six-month duration while last
year's revenue for Newpoint, which was acquired by the Company on January 31,
2002, only involved two months of activity. Newpoint revenue is essentially flat
on a year-to-year basis if we were to prorate last year's results.
RT Logic was acquired subsequent to March 31, 2002, so the Company reported no
revenues for this segment for the six-month period then ended.
- 20 -
COST OF REVENUE/GROSS MARGIN
During the six months ended March 31, 2003, cost of revenue increased by 84.5%,
or $12.4 million, compared to the same period during the prior year, increasing
from $14.7 million during the six months ended March 31, 2002 to $27.0 million
during the six months ended March 31, 2003. Gross margin increased from $6.2
million to $12.5 million, an increase of $6.3 million, or 102.6%, during the
periods being compared. Cost of revenue and gross margin for the six months
ended March 31, 2003 and 2002 for each of the Company's segments are shown in
the following table:
SIX MONTHS ENDED SIX MONTHS ENDED INCREASE/
MARCH 31, 2003 MARCH 31, 2002/1/ (DECREASE)
SEGMENT (IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS)
- ------------------------------------------- ---------------- ----------------- --------------
COST OF REVENUE
Satellite Ground Systems (Integral) $ 22,664 $ 12,966 $ 9,698
Satellite & Terrestrial CSM (SAT) 882 1,392 (510)
Equip. Monitoring & Control (Newpoint) 1,071 473 598
Space Communication Systems (RT Logic) 4,434 0 4,434
Elimination (2,015) (181) (1,834)
Total Cost of Revenue $ 27,036 $ 14,650 $ 12,386
GROSS MARGIN
Satellite Ground Systems (Integral) $ 6,687 $ 5,341 $ 1,346
Satellite & Terrestrial CSM (SAT) 708 717 (9)
Equip. Monitoring & Control (Newpoint) 303 134 169
Space Communication Systems (RT Logic) 4,821 0 4,821
Elimination (29) (27) (2)
Total Gross Margin $ 12,490 $ 6,165 $ 6,325
/1/. Includes only two (2) months activity for the equipment monitoring and
control business segment because Newpoint was acquired by the Company
on January 31, 2002.
Cost of Revenue and Gross Margin increases during the periods compared for the
Company's Satellite Ground Systems business essentially track the increases in
revenue from this segment, although gross margin as a percentage of revenue for
this segment declined from 29.2% to 22.8% as result of a higher content of
equipment and subcontract pass-through business principally on the Company's Air
Force contracts during the current six-month period compared to the six months
ended March 31, 2002. The decreases in Cost of Revenue at SAT during the periods
compared are related to the revenue decline for this segment. Gross Margins at
SAT improved during the period ended March 31, 2003 as compared to the period
ended March 31, 2002 as overruns on two fixed price contracts that this segment
experienced last year did not recur this year. Cost of Revenue and Gross Margin
increases at Newpoint are proportionate to the revenue increases posted at this
segment.
RT Logic was acquired subsequent to March 31, 2002, so the Company reported no
costs of revenue or gross margin for this segment for the six-month period then
ended.
- 21 -
OPERATING EXPENSES
Operating Expenses for the six months ended March 31, 2003 and 2002 for each of
the Company's segments are depicted in the following table:
SIX MONTHS SIX MONTHS
ENDED ENDED INCREASE/
MARCH 31, 2003 MARCH 31, 2002/1/ (DECREASE)
SEGMENT (IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS)
- -------------------------------------------------- ---------------- ------------------ --------------
OPERATING EXPENSES
Satellite Ground Systems (Integral)
SG&A $ 3,201 $ 3,087 $ 114
R&D 68 206 (138)
Amortization 1,193 901 292
Total Satellite Ground Systems 4,462 4,194 268
Satellite & Terrestrial CSM (SAT)
SG&A 627 721 (94)
R&D 616 0 616
Amortization 301 194 107
Total Satellite & Terrestrial CSM (SAT) 1,544 915 629
Equip. Monitoring & Control (Newpoint)
SG&A 588 273 315
R&D 0 0 0
Amortization 63 0 63
Total Equip. Monitoring & Control (Newpoint) 651 273 378
Space Communication Systems (RT Logic)
SG&A 1,280 0 1,280
R&D 425 0 425
Amortization 582 0 582
Total Space Communication Systems (RT Logic) 2,287 0 2,287
Elimination (26) (27) 1
Total Operating Expenses $ 8,918 $ 5,355 $ 3,563
/1/. Includes only two (2) months activity for the equipment monitoring and
control business segment because Newpoint was acquired by the Company
on January 31, 2002.
In the Company's Satellite Ground Systems segment, SG&A expenses increased
during the periods compared by approximately $110,000 principally because of
marketing efforts related to the Company's new SKYLIGHT product. However, as a
percentage of revenue, SG&A for this segment only represented 10.9% of revenue
in the current period compared to 16.9% of revenue during the six months ended
March 31, 2002. SG&A expenses increased insignificantly while revenue for the
segment increased by almost $11.0 million. R&D expenses for the six months ended
March 31, 2002 primarily related to Air Force projects that have ended, while
current period R&D expenses relate to SKYLIGHT efforts. Product amortization has
increased by almost $300,000 due to higher capitalized development costs related
to the Company's EPOCH product line.
At SAT, period-to-period SG&A costs are down more than $90,000 due to cost
reductions implemented at the end of last fiscal year while R&D expenses have
increased from zero to more than $610,000. The increase in current period R&D
expenses was due to efforts related to new development on SAT's signal
monitoring capabilities. Costs associated with such efforts had been capitalized
last fiscal year. Product
- 22 -
amortization increased by more than $100,000 during the periods compared due to
higher capitalized development costs.
SG&A expenses at Newpoint are for six months in the current period, but only for
two months in the prior year's period, because Newpoint was acquired by the
Company on January 31, 2002.
RT Logic was acquired subsequent to March 31, 2002, so the Company reported no
operating expenses for this segment for the six-month period then ended.
The current period amortization expenses for both Newpoint and RT Logic relate
to the amortization of intangible assets that arose from purchase accounting
entries made at the time of each company's acquisition by the Company.
INCOME FROM OPERATIONS
Income from Operations for the six months ended March 31, 2003 and 2002 for each
of the Company's segments is shown in the following table:
SIX MONTHS SIX MONTHS
ENDED ENDED INCREASE/
MARCH 31, 2003 MARCH 31, 2002/1/ (DECREASE)
SEGMENT (IN THOUSANDS) (IN THOUSANDS) (IN THOUSANDS)
- -------------------------------------------------- ---------------- ------------------ --------------
INCOME FROM OPERATIONS
Satellite Ground Systems (Integral) $ 2,224 $ 1,147 $ 1,077
Satellite & Terrestrial CSM (SAT) (836) (198) (638)
Equip. Monitoring & Control (Newpoint) (347) (139) (208)
Space Communication Systems (RT Logic) 2,534 0 2,534
Elimination (3) 0 (3)
Income from Operations $ 3,572 $ 810 $ 2,762
/1/. Includes only two (2) months activity for the equipment monitoring and
control business segment because Newpoint was acquired by the Company
on January 31, 2002.
Income from operations during the periods compared increased by approximately
$1.1 million in the Company's Satellite Ground Systems segment as a result of
increased revenues principally due to the Air Force programs described above.
Operating losses at SAT during the six months ended March 31, 2003 have resulted
from revenue declines due to depressed conditions in the commercial satellite
market and increased R&D and amortization expenses period to period. Newpoint's
losses are also related to overall depressed conditions in the commercial
satellite market, but its losses were not as severe as SAT's since Newpoint's
market is not as dependent on satellite operators. Although results for RT Logic
were not included with the results for the Company for the six months ended
March 31, 2002, the current six month period is the most profitable in RT
Logic's history. For comparison purposes, RT logic recorded approximately
$783,000 of operating income during the six months ended March 31, 2002.
OTHER INCOME
During the six months ended March 31, 2003, the Company recorded $300,000 of
interest income compared to $470,000 of interest income recorded for the six
months ended March 31, 2002. The decrease is due to the general decline in
interest rates in response to cuts by the Federal Reserve Board and due to the
Company's reduction in interest generating capital resulting from the repurchase
of approximately $6.3 million of Company stock in September and October of 2002
and the payment of $13.75 million of cash used to purchase RT Logic. Further,
the Company recorded approximately $390,000 of gains on the sale of marketable
equity securities during the six months ended March 31, 2002, and only recorded
approximately $10,000 of such gains during the current six month period.
- 23 -
Income before income taxes increased by approximately $2.1 million to $3.7
million from $1.6 million between the two periods being compared principally due
to the increase in operating income, which was partially offset by declines in
other income described above.
The Company's effective tax rate increased from 33.4% for the six months ended
March 31, 2002 to 35.9% for the six months ended March 31, 2003. The increase
was primarily a result of a lower percentage of tax-free interest income
compared to operating income recorded in the current six-month period compared
to the prior year's first six-month period.
As a result of the above, net income increased to approximately $2.3 million
during the six months ended March 31, 2003 from approximately $1.1 million
during the six months ended March 31, 2002.
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.
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, although
the estimated backlog under the Company's government contracts is not
necessarily indicative of revenues that will actually be realized under the
contract. 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 2003 in its entirety, the Company has reported
anticipated growth in revenue, net income, and fully diluted earnings per common
share of approximately 50% over fiscal year 2002 levels. Anticipated growth in
net income and earnings per share for fiscal year 2003 would have been much
greater were it not for fiscal year 2002 gains on marketable securities of
approximately $1.2 million which are not forecasted for fiscal year 2003. The
Company has anticipated that operating income for fiscal year 2003 would be
almost triple the amounts recorded in fiscal year 2002, increasing from $1.8
million in fiscal year 2002 to approximately $5.4 million in fiscal year 2003.
Based on operating results through the half point of the fiscal year (i.e.,
through March 31, 2003), the Company believes that results for the full fiscal
year ending September 30, 2003 will be no less than the results anticipated
above.
- 24 -
LIQUIDITY AND CAPITAL RESOURCES
Since the Company's inception in 1982, it has been profitable on an annual basis
and has generally financed its working capital needs through internally
generated funds, supplemented by borrowings under the Company's general line of
credit facility with a commercial bank and the proceeds from the Company's
initial public offering in 1988. In June 1999, the Company supplemented its
working capital position by raising approximately $19.7 million (net) through
the private placement of approximately 1.2 million shares of its common stock.
In February 2000, the Company raised an additional $40.9 million (net) for use
in connection with potential acquisitions and other general corporate purposes
through the private placement of 1.4 million additional shares of its common
stock. With respect to the capital raised in the private placements, at March
31, 2003, $19.4 million was invested in variable rate State of Maryland debt
securities, $10 million was invested in Banc of America Preferred Funding
Corporation "Dividends Received Eligible Auction Market" preferred stock
("DREAMS"), and $1.7 million was invested in common stock.
For the six months ended March 31, 2003, the Company generated approximately
$5.4 million of cash from operating activities and $5.9 million in investing
activities. Included in the $5.9 million of investing activities is
approximately $1.2 million used for newly capitalized software development costs
and $700,000 for the purchase of fixed assets. The Company also repurchased $6.3
million of its common stock during the period.
The Company has a line of credit agreement with a local bank for $10.0 million
for general corporate purposes. Borrowings under the line are due on demand with
interest at the London Inter-Bank Offering Rate (LIBOR), plus a spread of 1.5 to
2.4% based on the ratio of funded debt to earnings before interest, taxes and
depreciation (EBITDA). The line of credit is secured by the Company's billed and
unbilled accounts receivable and has certain financial covenants, including
minimum net worth and liquidity ratios. The line expires February 29, 2004. The
Company had no balance outstanding at March 31, 2003 under the line of credit.
The Company also has access to a $2.0 million equipment lease line of credit
that had a balance of approximately $108,000 at March 31, 2003.
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 plans
to continue to invest in the on-going development and improvement of its current
software products, EPOCH and OASYS, as well as the development of new products
through the use of its current cash balances and cash provided by operating
activities.
The Company believes that inflation did not have a material impact on the
Company's revenues or income from operations during the six months ended March
31, 2003 or in past fiscal years.
- 25 -
FORWARD LOOKING STATEMENTS
Certain of the statements contained in the Management's Discussion and Analysis
of Financial Condition and Results of Operations section, in other parts of this
10-Q, and in this section, including those under the headings "Outlook" and
"Liquidity and Capital Resources," are forward looking. In addition, from time
to time, the Company may publish forward-looking statements relating to such
matters as anticipated financial performance, business prospects, technological
developments, new products, research and development activities and similar
matters. Forward-looking statements can be identified by the use of
forward-looking terminology such as "may", "will", "believe", "expect",
"anticipate", "estimate", "continue", or other similar words, including
statements as to the intent, belief, or current expectations of the Company and
its directors, officers, and management with respect to the Company's future
operations, performance, or positions or which contain other forward-looking
information. These forward-looking statements are predictions. No assurances can
be given that the future results indicated, whether expressed or implied, will
be achieved. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. While the Company believes
that these statements are and will be accurate, a variety of factors could cause
the Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Company's statements.
The Company's business is dependent upon general economic conditions and upon
various conditions specific to its industry, and future trends cannot be
predicted with certainty. Particular risks and uncertainties that may affect the
Company's business, other than those described elsewhere herein or in our other
filings with the Securities and Exchange Commission (the "Commission" or the
"SEC"), 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 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 Company's ability to manage effectively any continued growth.
. The intense competition in the satellite ground system industry.
. The Company's dependency on the satellite industry for most of its
revenue.
. Risks related to the Company's acquisition strategy. In particular,
the Company may not be able to find any attractive candidates or it
may find that the acquisition terms proposed by potential acquisition
candidates are not favorable to the Company. In addition, the Company
may compete with other companies for these acquisition candidates,
which competition may make an acquisition more expensive for the
Company. If the Company is unable to identify and acquire any suitable
candidates, the Company may not be able to find alternative uses for
the cash proceeds of its previous private placements that improve the
Company's business, financial conditions, or results of operations to
the extent that an acquisition could. In addition, the integration of
the acquired business or businesses, including SAT, Newpoint and RT
Logic, 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;
- 26 -
. 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.
. The Company may be exposed to product liability or related claims with
respect to its products.
. The Company's products may become obsolete due to rapid technological
change in the satellite industry.
. The Company's business is subject to risks associated with
international transactions.
. The Company depends on attracting and retaining highly skilled
professional staff, and the Company depends on the services of its key
personnel.
. The Company depends on its intellectual property rights and risks
having those rights infringed.
. The market price of the Company's common stock may be volatile.
. The Company's quarterly results may vary significantly from quarter to
quarter.
. Changes in activity levels in the Company's core markets.
While sometimes presented with numerical specificity, these forward-looking
statements are based upon a variety of assumptions relating to the business of
the Company, which although considered reasonable by the Company, may not be
realized. Because of the number and range of the assumptions underlying the
Company's forward-looking statements, many of which are subject to significant
uncertainties and contingencies beyond the reasonable control of the Company,
some of the assumptions inevitably will not materialize and unanticipated events
and circumstances may occur subsequent to the date of this document. These
forward-looking statements are based on current information and expectation, and
the Company assumes no obligation to update. The actual experience of the
Company and the results achieved during the period covered by any particular
forward-looking statement may vary materially. Therefore, these forward-looking
statements should not be regarded as a representation by the Company or any
other person that these estimates will be realized. There can be no assurance
that any of these expectations will be realized or that any of the
forward-looking statements contained herein will prove to be accurate.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
During fiscal 2003, the Company had two contracts in denominated in Euros. While
the Company currently does not have significant European operations, our
customer base is expanding outside the U.S. and therefore certain contracts now
and in the future will likely be denominated in currencies other than the U.S.
dollar. As a result, the Company's financial results could be affected by
factors such as foreign currency exchange rates for contracts denominated in
currencies other than the U.S. dollar. To mitigate the effect of changes in
foreign currency exchange rates, the Company may hedge this risk by entering
into forward foreign currency contracts. As of March 31, 2003, virtually all of
our contracts were denominated in U.S. dollars, and we only had one contract
denominated in Euros that was hedged. The second contract denominated in Euros
was hedged in the subsequent quarter. As we enter into new foreign currency
based contracts in the future, we may employ similar hedging contracts. The fair
value of our hedge at March 31, 2003 was de minimus.
- 27 -
ITEM 4. CONTROLS AND PROCEDURES
a. Evaluation of disclosure controls and procedures
As required by Rule 13a-15 under the Securities Exchange Act of 1934
(the "Exchange Act"), within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"), the Company carried out an
evaluation of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. This evaluation was
carried out under the supervision and with the participation of the
Company's management, including the Company's chief executive officer
and chief financial officer. Based upon that evaluation, the Company's
chief executive officer and chief financial officer concluded that the
Company's disclosure controls and procedures are effective. Disclosure
controls and procedures are controls and other procedures of the
Company that are designed to ensure that information required to be
disclosed in the reports that the Company files or submits under the
Exchange Act is recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and forms. Disclosure
controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed
by the Company in the reports that it files under the Exchange Act is
accumulated and communicated to the Company's management, including the
Company's chief executive officer and chief financial officer, as
appropriate to allow timely decisions regarding required disclosures.
b. Changes in internal controls
There were no significant changes in the Company's internal controls or
in other factors that could significantly affect the Company's internal
controls subsequent to the Evaluation Date, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
3.1 Articles of Restatement of the Company (Incorporated by reference
to the Registration Statement on Form S-3 (File No. 333-82499)
filed with the Commission on July 8, 1999).
3.2 Amended and Restated Bylaws of the Company (Incorporated by
reference to the Company's Annual Report on Form 10-K for the
Fiscal Year ended September 30, 2000 filed with the Commission on
December 21, 2000).
10.1 Indemnification Agreements
11.1 Computation of Per Share Earnings.
99.1 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
b. Reports on Form 8-K
The Company filed a report on Form 8-K (dated May 13, 2003) with the
Commission on May 13, 2003, reporting its earnings for the quarter and
six months ended March 31, 2003.
- 28 -
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTEGRAL SYSTEMS, INC.
----------------------
(Registrant)
Date: May 14, 2003 By: /s/
--------------------------------
Thomas L. Gough
President & Chief Operating Officer
Date: May 14, 2003 By: /s/
--------------------------------
Elaine M. Parfitt
Executive Vice President &
Chief Financial Officer
- 29 -
CHIEF EXECUTIVE OFFICER CERTIFICATION
I, Steven R. Chamberlain, Chairman and Chief Executive Officer of Integral
Systems, Inc. (the "Registrant"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of the Registrant;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) Evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the audit
committee of the Registrant's board of directors:
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the Registrant's
ability to record, process, summarize and report financial data
and have identified for the Registrant's auditors any material
weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
6. The Registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Integral Systems, Inc.
Date: May 14, 2003 /s/
-------------------------------------
Steven R. Chamberlain
Chairman and Chief Executive Officer
- 30 -
CHIEF FINANCIAL OFFICER CERTIFICATION
I, Elaine M. Parfitt, Chief Financial Officer of Integral Systems, Inc.
(the "Registrant"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of the Registrant;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) Evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the audit
committee of the Registrant's board of directors:
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the Registrant's
ability to record, process, summarize and report financial data
and have identified for the Registrant's auditors any material
weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
6. The Registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Integral Systems, Inc.
Date: May 14, 2003 /s/
-----------------------------------
Elaine M. Parfitt
Chief Financial Officer
- 31 -
EXHIBIT 10.1
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT (this "Agreement"), effective as of
December 4, 2002, is made and entered into by and between Integral Systems,
Inc., a Maryland corporation (the "Company"), and ________________ [a/an
director/officer/employee] of the Company ("Indemnitee").
RECITALS
WHEREAS, It is essential to the Company to retain and attract as
directors, officers and employees the most capable persons available;
WHEREAS, Indemnitee is [a/an director/officer/employee] of the Company;
WHEREAS, Both the Company and Indemnitee recognize the increased risk
of litigation and other claims being asserted against directors of public
companies; and
WHEREAS, In recognition of Indemnitee's need for substantial protection
against personal liability and in order to maintain Indemnitee's continued
service to the Company in an effective manner and to provide Indemnitee with
specific contractual assurance that such protection will be available to
Indemnitee, the Company desires to provide in this Agreement for the
indemnification of and the advancement of expenses to Indemnitee to the fullest
extent (whether partial or complete) permitted by the Maryland General
Corporation Law, in effect as of the date hereof (the "Maryland Law"), as set
forth in this Agreement and, to the extent officers' and directors' liability
insurance is maintained by the Company, to provide for the continued coverage of
Indemnitee under the Company's officers' and directors' liability insurance
policies.
NOW, THEREFORE, in consideration of the mutual agreements herein
set forth and of Indemnitee's continuing service to the Company, the parties
hereto hereby agree as follows:
1. Indemnification of Indemnitee; Expenses; Insurance.
(a) The Company shall indemnify Indemnitee to the fullest
extent permitted by Maryland Law against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by Indemnitee in the event
Indemnitee has been made, or is threatened to be made, a party to an action,
suit, arbitration, alternative dispute resolution mechanism, administrative
hearing or other proceeding, whether civil, criminal, administrative,
investigative, or otherwise (including an action, suit, arbitration, alternative
dispute resolution mechanism, administrative hearing, or other proceeding by or
in the right of the Company) (each a "Proceeding"), by reason of Indemnitee's
present or prior service as a director, officer or employee of the Company, as
the case may be, or present or prior service at the request of the Company as a
director, officer or employee or as a fiduciary of an employee benefit plan, or
as an employee or agent of another corporation, partnership, joint venture,
trust or other enterprise (such present or prior service, "Corporate Service").
Notwithstanding anything in this Agreement to the contrary, prior to a Change in
Control (as defined below) Indemnitee shall not be entitled to indemnification
pursuant to this Agreement in connection with any Proceeding initiated by
Indemnitee against the Company or any director or officer of the Company unless
the Company has joined in or consented to the initiation of such Proceeding.
(b) The Company shall advance or reimburse all reasonable
expenses actually incurred by or on behalf of Indemnitee to the maximum extent
permitted by Maryland Law, in connection
- 1 -
with any Proceeding to which Indemnitee has been, or is threatened to be, made a
party, by reason of Indemnitee's Corporate Service, after the receipt by the
Company of a written statement or statements from such person requesting such
payment from time to time, whether prior to or after final disposition of such
Proceeding. Such statement or statements shall reasonably evidence the expenses
actually incurred or to be incurred by Indemnitee in connection with such
Proceeding and shall include or be preceded or accompanied by a written
affirmation by Indemnitee of Indemnitee's good faith belief that the standard of
conduct necessary for indemnification by the Company as authorized by law has
been met and a written undertaking by or on behalf of such person to repay any
costs or expenses paid for by the Company if it shall ultimately be determined
that such standard of conduct has not been met.
(c) To the extent the Company maintains an insurance policy or
policies providing director, officer and/or employee liability insurance,
Indemnitee shall be covered by such policy or policies, in accordance with its
or their terms, to the maximum extent of the coverage available for any
director, officer or employee (as the case may be) of the Company. The Company
shall not be liable under this Agreement to make any payment to Indemnitee to
the extent Indemnitee has otherwise actually received payment (under any
insurance policy, the Company's Articles of Incorporation, as amended (the
"Charter") or the Company's Bylaws or otherwise) of the amounts otherwise
indemnifiable.
2. Action by Company. The Company will use commercially
reasonable efforts to take, or cause to be taken, all action necessary to
fulfill any requirements to providing indemnification as contemplated by this
Agreement, including, but not limited to, any actions required by Maryland Law.
3. Presumptions. For purposes of this Agreement, the termination
of any Proceeding:
(a) by judgement, order or settlement (whether with or without
court approval) will not in and of itself create a presumption that Indemnitee
did not meet the requisite standard of conduct provided by Maryland Law, and
(b) by conviction, or upon a plea of nolo contendere or its
equivalent, or an entry of an order of probation prior to judgment, will create
a rebuttable presumption that Indemnitee did not meet the requisite standard of
conduct provided by Maryland Law.
4. Non-Exclusivity, Etc. The rights of Indemnitee hereunder will
be in addition to any other rights Indemnitee may have under the Company's
Charter, the Company's Bylaws, Maryland Law or otherwise; provided, however,
that to the extent that any change is made to Maryland Law (whether by
legislative action or judicial decision), the Company's Charter and/or the
Company's Bylaws which permits any greater right to indemnification than that
provided under this Agreement as of the date hereof, Indemnitee will be deemed
to have such greater right hereunder. The Company will not adopt any amendment
to its Charter or Bylaws the effect of which would be to deny, diminish or
encumber Indemnitee's right to indemnification under its Charter, its Bylaws,
Maryland Law or otherwise as applied to any act or failure to act occurring in
whole or in part prior to the date upon which the amendment was approved by the
Company's Board of Directors and/or its stockholders, as the case may be.
5. Change in Control.
(a) The Company agrees that if there is a Change in Control,
then with respect to all matters thereafter arising concerning the rights of
Indemnitee to indemnity payments and expense advances under this Agreement or
any other agreement, the Company's Articles of Incorporation, or the Company's
Bylaws in effect relating to any Proceeding to which Indemnitee has been, or is
threatened to be, made a party, by reason of Indemnitee's Corporate Service, the
Company shall seek legal advice only from a "Special Independent Counsel"
selected by Indemnitee, having prior experience with indemnification claims
under Maryland Law and approved by the Company (which approval shall not be
unreasonably withheld or delayed), and who has not otherwise performed services
for the Company or Indemnitee within the last five years (other than in
connection with such matters). Such Special Independent Counsel, among
- 2 -
other things, shall render his, her or its written opinion to the Company and
Indemnitee as to whether and to what extent Indemnitee would be permitted to be
indemnified under applicable Maryland Law. The Company agrees to pay the
reasonable fees of the Special Independent Counsel referred to above and shall
fully indemnify such Special Independent Counsel against any and all expenses
(including attorneys' fees), claims, liabilities and damages arising out of or
relating to this Agreement.
(b) For purposes of this Agreement, a "Change in Control"
occurs if (i) any person becomes the direct or indirect beneficial owner of
securities constituting 40% or more of the total voting power of the Company's
outstanding voting securities without the consent of the Company's Board of
Directors, (ii) within any two consecutive year period, individuals who at the
beginning of such period constitute the Board of Directors of the Company and
any new director(s) appointed or nominated for election to the Board of
Directors by a majority of the directors then still in office who either were
directors at the beginning of such period or whose appointment or nomination was
previously so approved cease for any reason to constitute a majority of the
Board of Directors, or (iii) the stockholders of the Company approve a merger, a
consolidation, a plan of complete liquidation of the Company or the sale or
disposition of all or substantially all the Company's assets (in one transaction
or a series of transactions) without the consent of the Board of Directors.
6. Successors and Binding Agreement. The Company will use
commercially reasonable efforts to cause any successor (whether direct or
indirect, by purchase, merger, consolidation, reorganization or otherwise) to
all or substantially all of the business or assets of the Company to assume and
agree to perform this Agreement in the same manner and to the same extent the
Company would be required to perform if no such succession had taken place. This
Agreement will be binding upon and inure to the benefit of the Company and any
successor to the Company, including, without limitation, any person acquiring
directly or indirectly all or substantially all of the business or assets of the
Company whether by purchase, merger, consolidation, reorganization or otherwise
(and such successor will thereafter be deemed the "Company" for purposes of this
Agreement), but will not otherwise be assignable, transferable or delegable by
the Company. This Agreement will inure to the benefit of and be enforceable by
Indemnitee and Indemnitee's personal or legal representatives, executors,
administrators, successors, heirs, distributees and legatees.
7. Counterparts. This Agreement may be executed in any number
of counterparts and any party hereto may execute any such counterpart, each of
which when executed and delivered shall be deemed to be an original and all of
which counterparts taken together shall constitute but one and the same
instrument.
8. Governing Law. This Agreement shall be governed by and
construed, interpreted and enforced in accordance with the laws of the State of
Maryland without giving effect to the principles of conflicts of laws.
9. Severability. The provisions of this Agreement shall be
severable in the event that any of the provisions hereof (including any
provision within a single section, paragraph or sentence) are held by a court of
competent jurisdiction to be invalid, void or otherwise unenforceable in any
respect, and the validity and enforceability of any such provision in every
other respect and of the remaining provisions shall not be in any way impaired,
and shall remain enforceable to the fullest extent permitted by Maryland Law.
10. No Third Party Beneficiaries. Except as expressly provided
herein, no provision of this Agreement is intended, nor will be interpreted, to
provide or create any third party beneficiary rights or any other rights of any
kind in any client, customer, affiliate, shareholder, employee or partner of
Indemnitee (as the case may be) or any other person or entity.
11. Headings; Section References. The headings and other captions
in this Agreement are for convenience and reference only and shall not be used
in interpreting, construing or enforcing any of the provisions of this
Agreement.
- 3 -
12. Miscellaneous. No provision of this Agreement may be waived,
modified or discharged unless such waiver, modification or discharge is agreed
to in a writing signed by Indemnitee and the Company. No waiver by either party
hereto at any time of any breach by the other party hereto or compliance with
any condition or provision of this Agreement to be performed by such other party
will be deemed a waiver of similar or dissimilar provisions or conditions at the
same or at any prior or subsequent time.
*****
Signature Page Follows.
- 4 -
IN WITNESS WHEREOF, the parties to this Agreement have executed this
Agreement as of the date first above written.
INTEGRAL SYSTEMS, INC.
By:
------------------------
Name:
------------------------
Title:
------------------------
INDEMNITEE
-----------------------------
-----------------------------
Name:
- 5 -
Form of Indemnification Agreement
Each of the persons listed below entered into an Indemnification Agreement with
Integral Systems, Inc. substantially identical in all material respects to the
Form of Indemnification Agreement to which this Schedule is attached, except as
to the parties thereto, the dates of execution, and the other details set forth
below. The material details in which each such Indemnification Agreement differ
from the Form of Indemnification Agreement are set forth below. The
Indemnification Agreements are not filed as separate documents in accordance
with Item 601 (Instruction 2) of Regulation S-K.
PERSON DATE POSITION OF PERSON
------ ---- ------------------
Steven Chamberlain Dec. 4, 2002 Chief Executive Officer
Peter Gaffney Dec. 4, 2002 Executive Vice President, Products
Thomas Gough Dec. 4, 2002 President
Dominic Laiti Dec. 4, 2002 Director
R. Doss McComas Dec. 4, 2002 Director
Elaine Parfitt Dec. 4, 2002 Executive Vice President, C.F.O.
Gary Prince Dec. 4, 2002 Director of Mergers and Acquisitions
Bonnie Wachtel Dec. 4, 2002 Director
Patrick Woods Dec. 4, 2002 Executive Vice President, Government Division
- 6 -
EXHIBIT 11.1
INTEGRAL SYSTEMS INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
Three Months Ended Six Months Ended
March 31, March 31,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Numerator:
Net Income $ 1,484,754 $ 433,599 $ 2,334,562 $ 1,049,704
Denominator:
Denominator for basic earnings
per share-weighted-average shares 9,710,205 9,120,763 9,705,717 9,096,980
Effect of dilutive securities:
Employee stock options 48,070 195,980 45,355 199,903
Denominator for diluted earnings per
share adjusted weighted-average
shares and assumed conversions 9,758,275 9,316,743 9,751,072 9,296,883
Basic earnings per share $ 0.15 $ 0.05 $ 0.24 $ 0.12
Diluted earnings per share $ 0.15 $ 0.05 $ 0.24 $ 0.11
EXHIBIT 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Integral Systems, Inc.
(the "Company") on Form 10-Q for the quarter ending March 31, 2003, as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Steven R. Chamberlain the Chief Executive Officer of the Company, certify,
pursuant to and for purposes of 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operations of the Company.
\s\
- ---------------------------
Steven R. Chamberlain
Chief Executive Officer
Date: May 14, 2003
EXHIBIT 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Integral Systems, Inc.
(the "Company") on Form 10-Q for the quarter ending March 31, 2003, as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Elaine M. Parfitt, the Chief Financial Officer of the Company, certify,
pursuant to and for purposes of 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operations of the Company.
\s\
- ---------------------------
Elaine M. Parfitt
Chief Financial Officer
Date: May 14, 2003