ITEM 1. BUSINESS
Company Overview
Integral Systems, Inc. (the "Company") builds satellite ground systems for command and control, integration and test, data processing, and simulation. Since its inception in 1982, the Company has provided ground systems for over 120 different satellite missions for communications, science, meteorology and earth resource applications. The Company has an established domestic and international customer base that includes government and commercial satellite operators, spacecraft and payload manufacturers and aerospace systems integrators.
The Company has developed innovative software products that reduce the cost and minimize the development risk associated with traditional, custom-built systems. The Company believes that it was the first to offer a comprehensive commercial-off-the-shelf ("COTS") software product line for command and control. As a systems integrator, the Company leverages these products to provide turnkey satellite control facilities that can operate multiple satellites from any manufacturer. These systems offer significant cost savings for customers that have traditionally purchased a separate custom control center for each of their satellites.
For 19 years, the Company has provided flexible, reliable and affordable ground system solutions. This has allowed the Company to stay ahead of the competition and perform well in an industry that has traditionally been dominated by much larger aerospace firms. The Company believes that it has a unique combination of competitive advantages, including the following:
. Experience. More experience with different types of satellites and operational scenarios than any competitor.
. Technology. Internationally recognized and proven COTS products that were first to market and that continue to lead the competition in functionality.
. Capabilities. Turnkey systems for customers who need a comprehensive range of products and services.
. Delivery schedule and price. Ability to deliver systems faster and at a lower cost than the competition.
Through its wholly owned subsidiary SAT Corporation, acquired in August 2000, the Company also offers turnkey systems and software for satellite and terrestrial communications signal monitoring. The acquisition was accounted for as a pooling of interests. All prior period consolidated financial statements presented herein have been restated to include the results of operations, financial position and cash flows of the Company and SAT Corporation as a single entity. Certain reclassifications were made to the SAT Corporation financial statements to conform those financial statements to the Company's presentations.
Integral Systems, Inc. is a Maryland corporation incorporated in 1982.
Industry Background
The space industry can be broken down into the following industry sectors: infrastructure, communications, emerging applications, and support services. Each of these sectors is funded by both government and commercial investments. Space infrastructure encompasses the development, manufacture and procurement of hardware and related systems for both space assets (i.e., satellites and payloads) and ground assets (i.e., satellite ground systems). The Company's business is focused in the ground system component of the infrastructure sector. The communications sector of the space industry includes revenue generated by satellite systems for commercial telecommunications services and government and military communications. Satellite technology has become critical
to supporting many aspects of telecommunications infrastructure, including long-distance telephone, personal communications systems, and private networks. The emerging applications market includes space technologies utilized for new applications such as global positioning systems and remote sensing. Support services for the space industry include technical support, engineering, finance and consulting, which facilitate growth in space-related markets.
According to a recent study by the International Space Business Council, space industry revenues were $96 billion in 2000 and will grow at a rate of approximately 10% per year. Industry growth is supported by a study cited in Space News predicting that nearly 1,700 satellites will be launched over the next 10 years. The 2000 space infrastructure revenues were approximately $54 billion, comprising over half of the total space market. The ground sector, which includes ground equipment, installations, and operations, accounted for approximately $35 billion of total space infrastructure revenues.
The Company estimates that the current worldwide command and control market represents approximately $4 billion in annual revenues. However, the Company also believes that the increasing acceptance of COTS products will lead to substantial price reductions and a subsequent decrease in market volume. The Company believes that its COTS software products leave it well positioned to capitalize on this market trend, resulting in an increase in both its revenues and market share.
The space industry exhibits certain general characteristics. First, the space industry is by nature global. There is a trend towards privatization and deregulation in the communications and space industries which has engendered numerous opportunities for private concerns to become players in these traditionally government dominated markets. Opportunities in the space industry have also been generated by the rapid growth in the information technology industry.
Second, there is an increasing demand for satellite-based applications. Improvements in space and communications technologies have resulted in modern communications satellites with power, capacity, switching capabilities and longevity significantly greater than those of their predecessors. These improvements in performance, together with satellites' inherent geographic coverage and technical advantages, have made satellite-based communications increasingly competitive with other communications technologies, broadening the market for satellite support services.
Third, government and business organizations are increasingly demanding that satellite ground systems be designed for interoperability with computer hardware and software products and that such products be usable with existing legacy systems. In addition, concerns over excessive development costs and the rapid pace of technological change have led both government and business organizations to demand flexible systems created by adapting COTS software and hardware, rather than systems built to customized specifications. This emphasis on system flexibility using readily available commercial products creates extensive opportunities for flexible COTS products and for systems integration.
The Company Solution
The Company offers satellite ground systems that provide low-cost, efficient and flexible operations. The principal characteristics of the Company's approach are as follows:
Open Systems and Ease of Integration. The Company's family of products addresses the dynamic environment of satellite operation through a commitment to open systems architecture. The Company's products are implemented as open systems with full adherence to industry hardware and software standards. The Company's software can be hosted on any UNIX or Windows NT/2000 platform. The open architecture of the Company's products allows interoperability with existing systems. Although the Company's software components are typically sold as bundled products, they may be purchased and operated separately or integrated with existing command and control software.
Advanced Architecture. Unlike the traditional host-based approach, the Company's ground systems are fully distributed, consisting of a set of workstations all communicating via a local area network ("LAN") backbone. Any
software function can be performed on any workstation, eliminating the host computer bottleneck and allowing the processing and network loading to be fine-tuned by reallocation of logical processes to physical hardware. This approach also provides more reliable operations by eliminating single points of failure.
Depth of Functionality. The Company's command and control software supports all aspects of satellite operation through a bundle of four inter-operable software products: a real-time package; an off-line package; an orbit analysis package; and a database package. The Company's real-time package performs daily and routine satellite operations, including commanding, telemetry processing and fault detection and correction. The off-line package supports sustaining engineering functions, including trending and statistical analysis of data archived by the real-time system. The orbit analysis package performs orbit determination and prediction functions to monitor and control the position of a satellite in space. The database package tailors the performance of the other three packages, which are general in scope, to the specific requirements of each satellite mission. That is, the database defines the telemetry and command characteristics and the desired orbital elements and tolerances.
Flexibility/Adaptability. A critical element to achieving initial operator acceptance of a new system and facilitating rapid implementation is the ability of the Company's software to serve the needs of particular satellite systems. All of the Company's software is database driven, allowing it to support satellite design changes or different series of satellites, without modifying the underlying software. Similarly, the software also supports a wide range of COTS hardware, including antenna, radio frequency ("RF") and baseband equipment, allowing the total system to be delivered in the most efficient configuration for each mission. Finally, the software is platform independent and can run on any UNIX or Windows NT/2000 computer. This platform independence makes it possible for the Company and its customers to take full advantage of rapidly declining computer costs.
Superior Price/Performance. The Company seeks to achieve superior price/performance by providing comprehensive solutions within the budgetary needs of its customers. The Company believes that its COTS software products provide advanced yet cost-effective solutions for satellite operators. These COTS software products eliminate the need for expensive development services, thereby substantially reducing the overall cost of a ground system. The Company's database driven software allows satellites to be added over time, which permits the initial system acquisition costs to be amortized over years of operations. The Company believes its software products exceed industry expectations in functionality, technical sophistication and ease of use.
Company Strategy
The Company is currently a leading provider of satellite command and control systems, providing systems for a wide variety of satellites. The Company intends to extend its leadership and to expand its market share in world command and control solutions for users of all satellite types. Primary elements of the Company's strategy include:
Technological Leadership. The Company intends to continue to commit substantial resources to further develop the next generation of its off-the-shelf software products. In addition, because the satellite infrastructure industry is increasingly requiring standards compliance, the Company intends to adhere to existing and future industry standards and participate in the further development of such standards.
Strategic Alliances and Partnerships. In addition to its own development and marketing organization, the Company has and will continue to establish partnerships with select third parties, primarily satellite and hardware manufacturers, to assist the Company in successfully integrating its software products, implementing total solution command and control systems and developing customer relationships.
Integration with Complementary Products. The Company believes that its ability to offer command and control software products that can integrate seamlessly with all satellite types and ground system components is a key competitive advantage. The Company also intends to integrate its software products with complementary products, including visualization tools, scheduling engines and decision support aids in order to maintain its competitive advantage and provide maximum flexibility for its customers.
Sales, Support, Service and Marketing Organizations. The Company currently sells and supports its command and control software through direct sales to satellite operators and systems integrators in North America, Europe and Asia. The Company plans to invest significantly in expanding its sales, support and service capabilities in these geographic regions while simultaneously gaining entry into other international emerging markets. In 2001 the Company formed a wholly owned European subsidiary, Integral Systems Europe S.A.S., with headquarters in Toulouse, France. This company provides sales, marketing, support, and engineering services to the European market. The Company also intends to augment its direct marketing efforts with U.S. Government organizations to capitalize on the growing acceptance of COTS solutions in the government sphere. As part of this strategy, the company opened an office in Colorado Springs, Colorado to serve as the focal point for the Company's support of its services, products and operations provided to the U.S. Air Force.
In addition to expanding its market share in its core business, the Company intends to draw on its capabilities and reputation in the command and control area to develop opportunities in related areas. The key aspects of this growth strategy are as follows:
New Suite of Off-the-Shelf Applications. The Company intends to continue to broaden its COTS line beyond command and control to include other applications currently utilizing customized solutions. These applications, which include payload data processing, payload integration and test ("I&T") and ground equipment monitoring and control, have overlapping functionality with the Company's command and control applications and provide significant market growth opportunities. To date, the Company has delivered more than a dozen systems for payload data processing and satellite I&T.
Professional Services Capabilities. The Company believes that providing comprehensive services and a high level of customer support is critical to its ability to maintain its leading position in command and control systems and to expand into new markets. Therefore, the Company intends to expand its professional services organization in areas such as hardware testing, pre- and post-sale software support, quality assurance, project installation management and training. The Company is implementing an ISO 9000 compliance program and is in the final stages of obtaining certification.
. Acquisitions of Other Companies. The Company intends to look for complementary businesses to acquire in order to strengthen and expand its core business.
Products
Most of the Company's sales involve a combination of COTS software and hardware products together with development services for mission-specific requirements and system integration as summarized below.
Command and Control Software.
EPOCH 2000, the Company's COTS software solution for satellite command and control, is designed to operate a variety of satellites with a minimum of personnel. EPOCH 2000's success has placed the Company at the forefront of replacing antiquated satellite control centers with smaller systems that can fly multiple satellites produced by any manufacturer. EPOCH 2000's open architecture, in combination with a graphical user interface and automated monitoring and control features, allows operators to monitor and control both their satellites and ground systems.
EPOCH 2000 features a modern, distributed architecture consisting of a series of user workstations interconnected via an Ethernet LAN. This approach provides better performance than traditional mini-computer based ground systems at a lower cost. EPOCH 2000 provides end-to-end satellite command and control capabilities, including telemetry processing and display, commanding and command verification ("CV"), ground station automation, alarm/event processing and data archive and retrieval. These functions are driven by the EPOCH 2000 database, allowing the system to support multiple satellites solely through database updates, without modifying the run-time software. This results in lower maintenance and operations costs throughout the lifecycle.
The typical EPOCH 2000 installation consists of a front-end processor which provides the interface to the front-end hardware (e.g., bit syncs, command encoders) and a series of user analysis workstations, all interconnected via the LAN. The front-end processor executes a real-time version of UNIX and services all the time-critical requirements. The analyst stations, operating under either UNIX or Windows NT/2000, provide the mechanism for users to control and monitor the satellite and the ground equipment. With this approach, the processing burden is distributed across the network. The system can be expanded indefinitely (up to the capacity of the network) by adding new workstation nodes. Even the network capacity limitations can be overcome by dividing the system into subnets inter-connected by bridges and routers. Thus, additional users can be accommodated during peak loads with no degradation in system response times.
Functionally, the software addresses all of the requirements for real-time satellite control, including:
Telemetry Processing. The EPOCH 2000 software provides end-to-end telemetry processing support, including frame decommutation, engineering unit ("EU") conversion and limits checking.
Commanding. EPOCH 2000 provides full support for satellite commanding and CV. The commanding software is mnemonic-based; the user can transmit a command to the satellite by typing in the mnemonic from a pull-down list arranged alphabetically or by spacecraft subsystem.
Automation. Routine satellite and ground system control procedures can be fully automated via the EPOCH 2000 Satellite Test and Operations Language ("STOL"). STOL allows frequently used command and configuration sequences to be stored in ASCII procedure files for automatic execution.
Alarms/Events. EPOCH 2000 provides a centralized alarm/events processor for detecting and optionally correcting the following conditions: command or telemetry verification failure, telemetry out-of-limits condition, front-end processor failure or network communication problems.
Data Archive and Retrieval. A built-in archive capability provides a permanent record of all significant ground system activity for long-term trending and analysis.
OASYS, the Company's mission-planning software, provides full spectrum support for spacecraft orbit determination and control, including measurement set reductions, orbit determination, ephemeris propagation, maneuver planning and orbit events/reports. OASYS allows the user to manage a single spacecraft or a fleet in any Earth orbit, including low Earth, geosynchronous and Molniya-type orbits.
ABE, the Company's offline analysis package, provides trending and statistical analysis of the information recorded in the real-time EPOCH 2000 archives. ABE supports automatic data extraction of key data, along with summary-level statistics (i.e., daily and seasonal minimums and maximums), advanced statistical processing techniques (i.e., covariance, convolution and regression) and graphical data visualization.
All of these applications are tailored to specific customer requirements through a fourth package, the database. The database application is based on a commercial package for Relational Data Base Management System ("RDBMS"), with a top-level user interface and functional extensions developed by the Company. The database provides "fill-in-the-blank" menu edit forms allowing the operator to specify every relevant operational characteristic and threshold for the satellite, its orbit and the associated ground equipment.
The Company's wholly owned subsidiary SAT Corporation also offers a range of software products and turnkey systems for communications signal monitoring, including MONICS, a family of software products for stand-alone and distributed satellite transponder monitoring, and the E4900, a turnkey system for detecting terrestrial communications interference.
Image Data Reception, Processing and Distribution.
SKYLIGHT, the Company's first turnkey product for image data processing, provides automatic, un-manned acquisition, processing, and distribution of satellite imagery to the scientific, meteorological, and military
communities. The SKYLIGHT bundle of hardware and software automatically tracks satellites of interest, captures their images, performs first order data processing, and distributes the processed images over the internet.
Development Services and Systems Integration.
The Company provides services to support mission-specific requirements for both government and commercial customers. Most of the Company's ground system contracts have a service component. Depending on the application, the services may include tailoring of COTS software products, integration of third-party hardware and software and/or custom software development. The Company also provides post-delivery warranty and maintenance service for most of its systems. The Company believes that its expertise and experience in satellite systems and operations, computer software and hardware, engineering/mathematical analysis and end-user applications allow it to provide ground systems that exceed traditional expectations on system performance, cost and implementation schedule. The Company's experience, together with its innovative COTS software products and software tools, reduce the risks and lead time associated with ground systems development.
Applications.
The Company believes that it has strengthened its position in the marketplace by developing a business base in certain critical application areas that offer continued growth potential. The Company provides products and services in different combinations in order to deliver systems for the following applications:
Command and Control. The Company's EPOCH 2000 product line provides the complete spectrum of capabilities for operating satellites from any manufacturer. The Company sells the EPOCH 2000 software as a stand-alone product or bundled as a turnkey system with third-party hardware (e.g. antenna, RF, baseband and computer equipment).
Integration and Test. The Company provides I&T systems for the spacecraft bus and payload. The I&T systems are based on the EPOCH 2000 product line and software tools developed by the Company for data visualization and analysis for payload I&T.
Data Processing. The Company's SKYLIGHT product provides acquisition and processing of satellite image data. The Company has also built custom systems for meteorological data processing.
Simulation. The Company builds satellite simulators which are used for ground systems checkout, training, spacecraft anomaly resolution and flight software validation.
Signal Monitoring. The Company's subsidiary SAT Corporation manufactures software and systems for monitoring of space-based and terrestrial communications.
Customers
In general, there are three major applications for satellites: communications, remote sensing, and scientific research. The Company has customers in each of these areas. The Company believes that the combination of its proven COTS software products and its strength as a systems integrator has positioned it to serve as an end-to-end provider of total solutions for all of these applications.
Communications.
The Company provides satellite command and control products for a variety of communications satellites. One of the principal advantages that the Company's products offer in the commercial sector is the ability to operate fleets of satellites from multiple vendors. This capability allows operators to reduce costs by consolidating their control centers and using a single software package to operate their satellites.
The Company's products are currently flying communications satellites from most of the major satellite manufacturers, including Boeing, Lockheed Martin, Space Systems Loral, Orbital Sciences, Astrium, and Alcatel. The Company's customers include NewSkies, Echostar, GE Americom, Loral Skynet, Shin Satellite, Binariang Satellite Systems, Orbital Sciences, PanAmSat, Cable & Wireless Optus, and ChinaSat. All of these operators have purchased the Company's products to operate their fleets of geosynchronous Earth orbit ("GEO") communications satellites.
Remote Sensing and Meteorology.
The Company builds command and control systems as well as payload and image data processing systems for meteorological satellites. Since its inception, the Company has provided ground systems for the U.S. National Oceanic and Atmospheric Administration ("NOAA"), including both their Geostationary Operational Environmental Satellite ("GOES") Program and the Television Infrared Observational Satellite ("TIROS") programs. The Company's systems support mission operations, instrument data processing, simulation and flight software validation. The Company also built the complete command and control system for the U.S. Air Force Defense Meteorological Satellite Program ("DMSP"), whose operations were recently transitioned to civilian control under NOAA's aegis. Since 1982, the Company has also been under contract to provide the DMSP program with satellite simulators used for training, ground system checkout and flight software analysis.
High-performance ground systems are required to support Earth resource satellites that provide military and civilian customers with accurate image data. The Company has provided such command and control subsystems to Space Imaging/EOSAT and other operators.
Scientific Research.
The Company has supported a variety of diverse and complex science missions. The Company has supported more than a dozen missions for the National Aeronautics and Space Administration ("NASA"), including the Small Explorer ("SMEX") missions, International Solar-Terrestrial Physics ("ISTP") missions, X-ray Timing Explorer ("XTE") and Tropical Rainfall Measuring Mission ("TRMM"). Projects range from the development of distributed command and control systems to validation of complex embedded flight software.
The Company was selected by the Johns Hopkins University Applied Physics Laboratory to support the first NASA Discovery Mission, the Near Earth Asteroid Rendezvous Program ("NEAR"). NEAR is the first in a series of low-cost, small-planet exploratory missions designed to gather data about asteroids in the solar system. The Company's EPOCH 2000 product forms the core of the mission's command and control ground system and also supports the spacecraft I&T. The Applied Physics Laboratory is also using the Company's products for their next series of scientific missions for NASA. These include the Contour, Solar Stereo, and Messenger missions.
The National Space Program Office ("NSPO") for the Republic of China selected the Company to provide the complete multi-mission command and control system for their ROCSAT series of satellites. The Company also supports small satellite missions in the United States such as Orbital Sciences Corporation's SeaStar and Microlab programs.
Marketing
The Company relies upon senior corporate management, project managers and senior technical staff to carry out its marketing program, including the development and execution of marketing plans, proposal presentations and the performance of related tasks. These individuals collect information concerning requirements of current and potential customers in the course of contract performance and formal and informal briefings, from published literature and through participation in professional and industry organizations. Senior management evaluates this information, identifies potential business opportunities and coordinates proposal efforts. The primary source of business in the Company's existing markets is by referral from existing customers. Additionally, the Company advertises periodically in Space News Magazine and other industry publications.
The Company seeks business believed to be of long-term benefit based on considerations such as technical sophistication, favorable market positioning and potential product spin-offs. One of the Company's primary marketing strategies is to anticipate and understand the changing needs of its customers and then to be prepared to meet those needs as they arise in new programs or in new program functions. This approach to marketing is mirrored in the Company's products that are highly adaptable to growth and change in the requirements of each user.
Contract Revenue
The Company earns revenues from sales of its products and services through contracts that are funded by the U.S. Government as well as commercial and international organizations. The Company may be either a prime contractor directly to the end-user of its products and services or it may act as a subcontractor under a contract with another company.
The percentages of revenues received by the Company from prime contracts and subcontracts for fiscal years 2001, 2000, and 1999 are as follows:
Fiscal Year Contract Source 2001 2000 1999 --------------- ---- ---- ---- Prime Contract 76% 71% 67% Subcontract 24% 29% 33%
For a given contract, the revenue mix may include the Company's COTS software products, pass-through of third-party hardware and software, and services provided by the Company or its subcontractors.
The Company generates revenue under three types of contracts: cost plus, fixed price, and time and material ("T&M") contracts. Under a cost plus contract, the Company is reimbursed for allowable costs within the contractual terms and conditions and is paid a negotiated fee. The fee may be fixed or based on performance incentives. Revenue recognition under a cost plus contract is based upon actual costs incurred and a pro rata amount of the negotiated fee. Under a fixed price contract, the Company is paid a stipulated price for services or products and bears the risk of increased or unexpected costs. Revenue under a fixed price contract is recognized using the percentage of completion method of accounting based on costs incurred in relation to total estimated costs. Under a T&M contract, the Company receives fixed hourly rates intended to cover salary costs attributable to work performed on the contract and related overhead expenses, reimbursement for other direct costs and a profit. Revenue is recognized under a T&M contract at the contractual rates as labor hours and direct expenses are incurred. A considerable amount of the Company's revenue is earned under cost plus contracts. To date, the vast majority of contracts for the purchase of the Company's COTS software products have been fixed priced in nature, either firm fixed price contracts or T&M fixed labor rate contracts.
The following table summarizes the percentage of revenues attributable to each contract type for the period indicated:
Fiscal Year Contract Type 2001 2000 1999 ------------- ---- ---- ---- Cost Plus 14% 23% 31% Fixed Price 77% 71% 66% Time and Materials 9% 6% 3%
U.S. Government Contracts
Company revenues from U.S. Government contracts are derived from a combination of contracts with the U.S. Government and subcontracts with other companies that have prime contracts with the U.S. Government. For fiscal years 2001, 2000, and 1999 approximately 55%, 54%, and 60%, respectively, of the Company's revenues were derived from contracts or subcontracts funded by the U.S. Government.
NOAA, one agency, represented 38%, 41%, and 43% of revenues, respectively, for fiscal years 2001, 2000, and 1999. The Company expects that at least 30% of its revenue for fiscal year 2002 will be derived from NOAA contracts. The loss of any one of these NOAA contracts could significantly affect the Company's performance. Similarly, the expiration, or termination for convenience, of any major contract could significantly affect the Company's performance if not renewed or replaced by contracts of similar value. It is estimated that the single largest NOAA contract will represent approximately 10% of the Company's fiscal year 2002 revenue. This contract is to develop the ground system used to operate the next generation of geosynchronous weather satellites at NOAA.
U.S. Government contracts are awarded by formal advertising or procurement by negotiation. Negotiated procurements may, but do not necessarily, involve the solicitation of competitive proposals. If competitive proposals are solicited, the U.S. Government selects the proposal most advantageous to it and then conducts negotiations with the selected bidder.
Many of the U.S. Government programs in which the Company participates as a contractor or subcontractor extend for several years but are funded only on an annual basis. Accordingly, the Company's contracts and subcontracts are subject to termination, reduction or modification in the event of changes in the government's requirements or budgetary constraints. Additionally, when the Company participates in a project as a subcontractor, it is subject to the risk that the prime contractor may fail or be unable to perform the prime contract.
All of the Company's U.S. Government contracts and subcontracts are also subject to termination for "convenience", which means termination without cause. Should a contract be so terminated, the Company would be reimbursed for allowable costs to the date of termination and would be paid a proportionate amount of the stipulated profits or fees attributable to the work actually performed.
The Company's books and records are subject to audit by the Defense Contract Audit Agency ("DCAA"). Such audits can result in adjustments to contract costs and fees. Although the Company thus far has not been required to make any material audit adjustments, the possibility that such adjustments will be required always exists. Management is of the opinion that any such audit adjustments would not have a material adverse effect on the financial position or results of operations of the Company. The Company has been audited by DCAA through fiscal year 1999.
The Company's contracts and subcontracts with federal government agencies are subject to competition and awarded on the basis of technical merit, personnel qualifications, experience and price. The Company's business, financial condition and results of operations could be materially affected by changes in procurement policies, a reduction in funds available for the services provided by it and other risks generally associated with federal government contracts. New government contract awards also are subject to protest by competitors at the time of award that can result in the re-opening of the competition or evaluation process, or the award of a contract to a competitor. The Company considers such bid protests to be a customary element in the process of procuring government contracts.
In addition to the right to terminate, U.S. Government contracts are conditioned upon the continuing availability of congressional appropriations and are typically subject to modification or termination in the event of changes in funding. Congress usually appropriates funds on a fiscal year basis even though contract performance may take several years. Consequently, at the outset of a major program, the contract is usually incrementally funded, and additional funds are normally committed to the contract by the procuring agency as appropriations are made by Congress for future fiscal years. In addition, contractors often experience revenue uncertainties during the first quarter of the government's fiscal year, which begins October 1, until differences between budget requests and appropriations are resolved. To date, Congress has funded all years of the multi-year major program contracts for which the Company has served as prime contractor or a subcontractor, although there can be no assurance that this will be the case in the future.
Non-U.S. Government Contracts
In addition to having contracts with the U.S. Government, the Company also has contracts with commercial and international organizations. For fiscal years 2001, 2000, and 1999 approximately 45%, 46%, and 40%, respectively, of the Company's revenues were derived from non-U.S. Government contracts. These contracts are typically with commercial satellite operators, satellite manufacturers, aerospace systems integrators and foreign governments.
Some of the Company's non-U.S. Government contracts are with international organizations. For fiscal years 2001, 2000, and 1999 approximately 23%, 23%, and 9%, respectively, of the Company's revenues were derived from international organizations. Revenues from foreign sources are discussed in Footnote Number 1 of the Notes to the Financial Statements included elsewhere herein. Operations in numerous countries outside the United States carry substantial managerial, operational, legal, and political uncertainties. These operations are subject to changes in government regulations and telecommunications standards, tariffs or taxes, and other trade barriers. In addition, the Company's agreements relating to foreign operations may be enforceable only in foreign jurisdictions so that it may be difficult for the Company to enforce its rights. The Company currently has one contract that is subject to currency fluctuations in foreign markets, which is not material. However, there can be no assurance that the Company will not enter into these types of contracts in the future. In addition, various agencies and departments of the U.S. government regulate the Company's ability to pursue business opportunities outside the United States. Exports of space-related products, services, and technical information require licenses granted by the U.S. government. The Company does not currently have blanket authorization for export of its products or services and cannot assure that it will be able to obtain necessary licenses or approvals on a per transaction basis.
Most of the Company's non-U.S. Government contracts are awarded competitively and are performed on a fixed price basis. Typically, these contracts are for turnkey systems that are delivered by the Company in six to eighteen months. Payment is most often based on delivery milestones established in the Company's contract. In addition, the contracts may include a system warranty period that lasts one to two years. The Company also offers extended support for the system on a fixed-price or T&M basis.
For certain of the Company's non-U.S. Government contracts, the Company often has terms in its contracts under which the customer can enforce performance of the Company or seek damages in case the Company does not perform as agreed to in the contract. Contracts may require the Company to post a performance bond, establish an irrevocable letter of credit, or agree to pay liquidated damages in the event of late delivery. In addition, although a significant portion of the Company's revenues are generated from the sale of its services and products in commercial markets, the Company cannot assure that it will continue to compete successfully in these markets. Many of the Company's commercial contracts are for a fixed price. This subjects the Company to substantial risks relating to unexpected cost increases and other factors outside of its control. In addition, the Company may fail to anticipate technical problems, estimate costs accurately, or control costs during performance of a fixed-price contract.
Sale of Software Products
Most of the Company's contracts include the sale of proprietary software products. Sales of the Company's software products take many forms. The Company sells (i) software only (a "Software-Only Sale"), (ii) software and services together, or (iii) software, services and hardware together. In addition, depending on a customer's requirements, the Company may or may not provide post-contract customer support ("PCS").
The Company's recognition of revenue for sales of Company software products depends on customer requirements and the nature of the contracts involved. For a Software-Only Sale, the Company recognizes revenue upon shipment. In situations where software is sold together with services and/or hardware, the Company recognizes software license revenue on a percentage of completion basis.
With respect to PCS, the Company recognizes PCS revenue on a percentage of completion basis when PCS is part of a broader fixed price contract that includes software and services. Alternatively, when PCS services (i.e. software maintenance and support) are awarded to the Company under a separate maintenance contract, the Company recognizes PCS revenue on a straight-line basis pro rata over the term of the maintenance contract.
Backlog
The Company's estimated backlog is as follows:
Sept. 30, 2001 Sept. 30, 2000 Sept. 30, 1999 -------------- -------------- -------------- Outstanding Commitments (1) $37,884,159 $27,578,292 $34,932,792 General Commitments (2) 5,126,065 13,405,022 14,633,439 ----------- ----------- ----------- Total $43,010,224 $40,983,314 $49,566,231 =========== =========== ===========
(1) Represents orders that are firm and funded. (2) Represents orders that are firm but not yet funded and contracts awarded but not yet signed.
Under outstanding commitments, the Company agrees to provide specific services, frequently over an extended period of time, with continued performance of those services contingent upon the customer's year-to-year decision to fund the contract.
General commitments consist of contract options and sole source business that management believes likely to be exercised or awarded in connection with existing contracts. Contract options are the Company's contractual agreement to perform specifically defined services only in the event the customer thereafter requests the Company to do so. Sole source business refers to contract work which the Company reasonably expects to be awarded based on its unique expertise in a specific area or because it has previously done all such work in that area for the customer or prime contractor who will award the contract. The Company estimates that 80% of backlog as of September 30, 2001 will be completed during fiscal year 2002. Estimated backlog includes contract options through July 13, 2004, including general commitments.
Many of the Company's contracts are multi-year contracts and contracts with option years, and portions of these contracts are carried forward from one year to the next as part of the Company's contract backlog. The Company's total contract backlog represents management's estimate of the aggregate unearned revenues expected to be earned by the Company over the life of all of its contracts, including option periods. Because many factors affect the scheduling of projects, there can be no assurance as to when revenues will be realized on projects included in the Company's backlog. In addition, although contract backlog represents only business which is considered to be firm, there can be no assurance that cancellations or scope adjustments will not occur. The majority of backlog represents contracts under the terms of which cancellation by the customer would entitle the Company to all or a portion of its costs incurred and potential fees to the date of cancellation.
However, the Company also believes that backlog is not necessarily indicative of future revenues. The Company's backlog typically is subject to large variations from quarter to quarter as existing contracts are renewed or new contracts are awarded. Additionally, all U.S. Government contracts included in backlog may be terminated at the convenience of the government.
Competition
The Company experiences significant competition in all of the areas in which it does business. The Company believes it is one of four companies in the United States that derive the major portion of their revenue from the development of satellite ground systems. The Company competes with numerous companies having similar capabilities, some of which are larger and have considerably greater financial resources, including Lockheed Martin Corporation, Boeing Satellite Systems, Loral Space & Communications Ltd., Raytheon Company, Orbital Sciences Corporation, Honeywell International Inc. (formerly AlliedSignal), Computer Sciences Corporation, Alcatel Espace, and Astrium. Many of these competitors are significantly larger and have greater financial resources than the Company. In addition, some of these competitors are divisions or subsidiaries of large, diversified companies that have access to the financial resources of their parent companies. Some of our competitors are also current or potential customers. In addition, several smaller companies have specialized capabilities in similar areas. In general, the markets in which the Company competes are not dominated by a single company; instead, a large number of companies offer services that overlap and are competitive with those offered by the Company. There can be no assurance that the Company will be able to compete successfully.
Because its command and control business is specialized and the Company is a leader in COTS software products, the market for this business is somewhat less competitive. In the command and control software market, the Company competes against other companies in the space industry. The Company's products also face competition from certain government off-the-shelf, or "GOTS", products for satellite command and control. In its other business areas, ground equipment and systems integration, the Company competes against systems integrators and product manufacturers.
The Company believes that the principal competitive factors in the businesses in which it operates are technical understanding, management capability, past contract performance, personnel qualifications, and price.
The Company principally obtains contracts and subcontracts through competitive procurements offered by the U.S. Government or commercial enterprises. Because of its size, the Company often joins with a larger company in pursuing major procurements. It is not unusual for the Company to compete with a company for a contract while simultaneously joining with the same company in pursuit of another contract.
It is not possible to predict how the Company's competitive position may be affected by changing economic or competitive conditions, customer requirements or technological developments.
Proprietary Rights
The Company regards its products as proprietary trade secrets and confidential information. The Company has made the strategic decision after discussion with intellectual property counsel not to seek patent protection for its software, hardware, or systems. None of the Company's software, hardware, or systems is patented. The Company relies on a combination of common law copyright and trade secret laws, third party nondisclosure agreements and other industry standard methods for protecting ownership of its proprietary software, hardware and systems. The Company has begun the process of registering many of its trademarks and the copyrights with respect to new versions of its software as they are developed. There can be no assurance, however, that in spite of these precautions, an unauthorized third party will not obtain and use information that the Company considers proprietary. In addition, the laws of some foreign countries do not protect the Company's proprietary rights to the same extent as the laws of the United States. Moreover, the Company does not have non-competition agreements with any of its employees or confidentiality agreements with any of its employees hired before mid-December, 2000. There can be no assurance that the mechanisms used by the Company to protect its software will be adequate or that the Company's competitors will not independently develop software products that are substantially equivalent or superior to the Company's products. The Company believes that it has all necessary rights to market its products, although there can be no assurance third parties will not assert infringement claims in the future.
The Company believes that, due to the nature of its products, the skill of personnel, knowledge and experience of management, and familiarity with the operation of the Company's products are more important in maintaining a leadership position in the industry than the protection of intellectual property rights.
Employees
The Company believes that its employees and their knowledge and capabilities are a major asset. The Company has been successful in attracting and retaining employees skilled in its core business competencies. The Company intends to continue to employ highly skilled personnel, as well as personnel knowledgeable concerning the needs and operations of its major customers.
As of November 2, 2001, the Company had approximately 260 employees including employees of SAT Corporation in Sunnyvale, California. Of the 260 employees, 248 are full-time employees of whom 214 are considered professionals in engineering related disciplines. Of the engineering professionals, 90% have undergraduate degrees in a scientific discipline and 35% of those have advanced degrees in a scientific discipline. Approximately 82% of the engineering staff have at least seven years relevant experience.
The Company believes that its relations with its employees are good. None of the Company's employees are covered by collective bargaining agreements.
There is significant competition for employees with the computer, engineering and information technology skills required to perform the services the Company offers. In addition, the Company must often comply with provisions in government contracts that require specified levels of education, work experience, and security clearances for our employees. The Company cannot assure that it will be successful in attracting or retaining a sufficient number of highly skilled and qualified employees in the future. The Company's success will depend in part upon the Company's ability to attract, retain, train and motivate highly skilled employees.
Research and Development
The Company is continually engaged in research and development activities both to improve its existing software products as well as probe additional product areas for the future growth and development of the Company. Currently, the Company is focusing its research and development efforts primarily on developing and improving the user interface systems for its COTS software products. In fiscal years 2001, 2000, and 1999, total capitalized software development expenditures were $3.3 million, $2.1 million and $1.2 million, respectively. Research and development expense for the years ended September 30, 2001, 2000, and 1999 was $200,000, $540,000 and $0, respectively.
Environment
No material effects on the Company's expenditures, earnings, or competitive position are anticipated as a result of compliance with federal, state, and local provisions which have been enacted or adopted regulating the discharge of material into the environment, or otherwise related to the protection of the environment.
Financing
The Company has a line of credit agreement with a local bank for $9,000,000 for operating purposes and has an additional line of credit with the bank amounting to $6,000,000, which can be used for corporate acquisitions. The lines of credit are secured by the Company's billed and unbilled accounts receivable and have certain financial covenants, including minimum net worth and liquidity ratios. The lines expire February 28, 2002. At September 30, 2001, 2000, and 1999, the Company had no amounts outstanding under the lines of credit.
The Company has access to a $2.0 million equipment lease line of credit under which it had $260,000, $714,000, and $1,315,000, outstanding as of September 30, 2001, 2000, and 1999, respectively. The outstanding balance is payable over a 57-month period from lease inception and bears interest at a rate of 8.8% per annum.
See Footnote Numbers 7 and 9 of the notes to the Financial Statements included elsewhere herein for further information regarding these matters.
Financial Information in Industry Segments
During the year ended September 30, 2001, the Company's operations included one reportable segment: satellite ground systems.
The Company provides satellite ground systems - computer systems for satellite command and control, data processing, signal monitoring, simulation, and flight software validation. Customers for these systems include U.S. Government organizations such as NASA, NOAA, and the U.S. Air Force, as well as commercial satellite operators, both domestic and foreign.
See Footnote Number 1 of the notes to the Financial Statements included elsewhere herein for financial information regarding this segment.
ITEM 2.
ITEM 2. PROPERTIES
The Company's headquarters occupy approximately 46,700 square feet at 5000 Philadelphia Way, Lanham, Maryland 20706. The headquarters' lease expires May 31, 2009.
During April 1999, the Company contracted for 24,224 square feet and during July 2001, the Company contracted for an additional 1,050 square feet at 5200 Philadelphia Way, Lanham, Maryland 20706. This lease expires May 31, 2009.
The Company opened offices in Colorado Springs, Colorado in March 2001, occupying 3,651 square feet at 1330 Iverness Drive, One Gateway Plaza, Suite 500, Colorado Springs, Colorado 80903. The lease for the office in Colorado Springs expires March 14, 2002.
During September 2000, the Company contracted for 157.73 square meters at High Tech Buro, Bat. C, Voie 3, Labege, France. The lease for the offices in France expires September 14, 2009.
The Company's subsidiary SAT Corporation occupies approximately 9,940 square feet at 1151 Sonora Court, Sunnyvale, California 94086. This lease expires July 15, 2004.
The Company believes that it has adequate insurance coverage to protect its properties and assets.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time involved in litigation incidental to the conduct of its business. The Company is not currently a party to any lawsuit or proceeding which, in the opinion of management, would be likely to have a material adverse effect on the Company's business, financial condition or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to our stockholders during the fourth quarter of the fiscal year ended September 30, 2001.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth the high and low sales prices of the Company's common stock as reported by The Nasdaq National Market, where the common stock trades under the Symbol "ISYS." The prices reported have been adjusted to give retroactive effect to changes resulting from stock dividends and stock splits.
2001 Fiscal Year High Low ---------------- ---- --- First Quarter 17.56 10.81 Second Quarter 17.50 12.81 Third Quarter 24.50 15.50 Fourth Quarter 23.14 15.75
2000 Fiscal Year High Low ---------------- ---- --- First Quarter 45.25 23.25 Second Quarter 56.00 33.00 Third Quarter 45.00 13.00 Fourth Quarter 19.00 13.50
As of September 30, 2001, there were approximately 2,494 holders of record of the Company's common stock.
Historically, the Company has not paid any cash dividends. Instead, the Company intends to invest earnings in the operations, development and growth of its business. The payment of future dividends on the common stock and the rate of such dividends, if any, will be determined in light of any applicable contractual restrictions limiting the Company's ability to pay dividends, the Company's earnings, financial condition, capital requirements and other factors deemed relevant by the Board of Directors. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources."
ITEM 6.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents summary consolidated financial data of the Company for the fiscal years ended September 30, 2001, 2000, 1999, 1998, and 1997. The financial data for the fiscal years ended September 30, 1998, 1999 2000 and 2001 has been derived from the financial statements of the Company which have been audited by Rubino & McGeehin, Chartered, independent public accountants, as set forth in the financial statements and notes thereto presented elsewhere herein. The consolidated financial statements of the Company presented herein have been restated for all periods prior to the acquisition of SAT Corporation to include the combined financial results of the Company and SAT Corporation. Net sales, income before discontinued operations and net income for the individual companies reported prior to the acquisition are set forth in Footnote Number 2 to the Financial Statements included elsewhere herein. The unaudited historical financial data for the fiscal year ended 1997 has been derived from the Company's audited financial statements, which have been restated to include SAT Corporation. In the opinion of the Company's management, the unaudited financial statements represent a fair presentation of such information. The following information should be read in conjunction with the Company's financial statements and notes thereto presented elsewhere herein. See "Financial Statements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company builds satellite ground systems for command and control, integration and test, data processing, and simulation. Since its inception in 1982, the Company has provided ground systems for over 120 different satellite missions for communications, science, meteorology, and earth resource applications. The Company has an established domestic and international customer base that includes government and commercial satellite operators, spacecraft and payload manufacturers, and aerospace systems integrators.
The Company has developed innovative software products that reduce the cost and minimize the development risk associated with traditional custom-built systems. The Company believes that it was the first to offer a comprehensive COTS software product line for command and control. As a systems integrator, the Company leverages these products to provide turnkey satellite control facilities that can operate multiple satellites from any manufacturer. These systems offer significant cost savings for customers that have traditionally purchased a separate custom control center for each of their satellites.
The consolidated financial statements of the Company presented herein have been restated for all periods prior to the acquisition of SAT Corporation to include the combined financial results of the Company and SAT Corporation. Net sales, income before discontinued operations, and net income for the individual companies reported prior to the acquisition are set forth in Footnote Number 2 to the Financial Statements included elsewhere herein.
Results of Operations
The Company's results of operations have been restated to include the operations of SAT Corporation for the fiscal years ended September 30, 2001, 2000 and 1999. The components of the Company's income statement as a percentage of revenue are depicted in the following table for the fiscal years ended September 30, 2001, 2000 and 1999:
Revenue
The Company earns revenue from sales of its products and services through contracts that are funded by the U.S. Government, both as a prime contractor or a subcontractor, as well as commercial and international organizations
Internally, the Company classifies revenues in two separate categories on the basis of the contracts' procurement and development requirements: (i) contracts which require compliance with Government procurement and development standards ("Government Services") are classified as government revenue, and (ii) contracts conducted according to commercial practices ("Commercial Products and Services") are classified as commercial revenue, regardless of whether the end customer is a commercial or government entity. Sales of the Company's COTS products are classified as Commercial Products and Services revenue.
For the fiscal years ended September 30, 2001, 2000, and 1999, the Company's revenues were generated from the following sources:
Based on the Company's revenue categorization system, the Company classified 46%, 48%, and 43% of its revenue as Commercial Products and Services revenue with the remaining 54%, 52%, and 57% classified as Government Services revenue for fiscal years ended September 30, 2001, 2000, and 1999, respectively. By way of comparison, if the revenues were classified strictly according to end-user (independent of the Company's internal revenue categorization system), the U.S. Government would account for 55%, 54%, and 60%, of the total revenues for fiscal years 2001, 2000, and 1999 respectively.
Cost of Revenue/Gross Margin
The Company computes gross margin by subtracting cost of revenue from revenue. Included in cost of revenue are direct labor expenses, overhead charges associated with the Company's direct labor base and other costs that can be directly related to specific contract cost objectives, such as travel, consultants, equipment, subcontracts, and other direct costs.
Gross margins on contract revenues vary depending on the type of product or service provided. Generally, license revenues related to the sale of the Company's COTS products have the greatest gross margins because of the minimal associated marginal costs to produce. By contrast, gross margins rates for equipment and subcontract pass-throughs seldom exceed 15%. Engineering service gross margins typically range between 20% and 35%.
Fiscal Year 2001 Compared to Fiscal Year 2000
On a consolidated basis, revenue was essentially flat at $40.5 million for both periods. Although revenue at SAT Corporation decreased by approximately $2.1 million in fiscal year 2001 compared to fiscal year 2000, this decrease was offset by gains in the remainder of the Company's Commercial Products and Services revenues and the Company's Government Services revenues.
During fiscal year 2001, cost of revenue was also flat compared to fiscal year 2000 increasing slightly to $28.7 million from $28.6 million. Generally, the components of cost of revenue (direct labor, overhead, travel, other direct costs, direct equipment and subcontracts) in fiscal year 2001 were also comparable to amounts recorded in fiscal year 2000. There was no cost of revenue component that varied more than 5% between the two fiscal periods. Cost of revenue expressed as a percentage of revenues increased insignificantly to 70.8% for fiscal year 2001 from 70.7% for fiscal year 2000.
The Company's gross margin decreased by less than 1%, or $40,000, to $11.8 million for fiscal year 2001 from $11.9 million for fiscal year 2000. As a percentage of revenue, gross margin decreased to 29.2% during fiscal year 2001 compared to 29.3% for fiscal year 2000. The gross margin percentages for both fiscal year 2001 and fiscal year 2000 are reasonably representative of the Company's gross margin profile.
Selling, general & administrative expenses ("SG&A") decreased to approximately $7.0 million in fiscal year 2001 from $7.6 million in fiscal year 2000. The change was primarily due to decreases in the Company's bid and proposal expenses. As a percentage of revenue, SG&A accounted for 17.3% of revenue in fiscal year 2001 compared to 18.7% in 2000. Product amortization was $1,370,000 in fiscal year 2001 compared to $950,000 in fiscal year 2000 resulting from an increased capitalized cost base. In addition, the Company recorded one time acquisition costs amounting to approximately $445,000 in fiscal year 2000, principally related to the acquisition of SAT Corporation and a previously reported unsuccessful acquisition attempt of an unrelated entity. Such acquisition costs did not recur in fiscal year 2001.
Income from continuing operations increased 18.4% to $3.5 million for fiscal year 2001 from $2.9 million for fiscal year 2001. As a percentage of revenue, income from continuing operations was 8.5% for fiscal year 2001 up from 7.2% in fiscal year 2000. This increase was principally the result of lower SG&A expenses and the elimination of one time acquisition related costs, partially offset by higher product amortization expenses in fiscal year 2001 versus fiscal year 2000.
During fiscal year 2001, the Company recorded $2.5 million of interest income ($2.3 million in fiscal year 2000), which was principally derived from investments of the cash proceeds from the Company's two private equity placements that occurred in June 1999 and February 2000. Since a significant portion of such investment was related to tax-free debt securities, the Company's effective tax rate was only 28.0% for fiscal year 2001 and 24.2% for fiscal year 2000.
Fiscal Year 2000 Compared to Fiscal Year 1999
On a consolidated basis, revenue decreased 5.8%, or $2.5 million, to $40.5 million for fiscal year 2000 from $42.9 million for fiscal year 1999. The decrease in revenue in fiscal year 2000 from fiscal year 1999 was principally due to a decrease in the Company's equipment and subcontract revenue (approximately $5.1 million). During fiscal year 2000, the Company continued to make progress in selling its EPOCH 2000 based ground systems to commercial clients while also making in-roads selling EPOCH 2000 based systems to governmental clients, especially NOAA, as U.S. Government customers increased their purchases of the Company's EPOCH 2000 product line and related services for both command and control applications and for I&T services.
During fiscal year 2000, cost of revenue decreased to $28.6 million from $30.9 million in fiscal year 1999. The decrease in fiscal year 2000 was primarily due to a decrease in direct equipment and subcontract costs which dropped $4.2 million between fiscal year 2000 and fiscal year 1999. Cost of revenue expressed as a percentage of revenues declined to 70.7% for fiscal year 2000 from 72.0% for fiscal year 1999.
The Company's gross margin decreased 1.3%, or $100,000, to $11.9 million for fiscal year 2000 from $12.0 million for fiscal year 1999. The decrease was principally due to margin decreases in the Company's equipment pass through component. The gross margin decline for pass through revenue resulted from the shipment of $5.1 million less pass through revenue in fiscal year 2000 compared to fiscal year 1999. The service revenue margin would have been higher were it not for a one time unanticipated contract overrun that negatively impacted margins by almost $300,000 recorded during the fourth quarter of the current year. Despite the decline in gross margin dollars, gross margin as a percentage of revenue increased to 29.3% during fiscal year 2000 compared to 28.0% for fiscal year 1999.
SG&A increased to approximately $7.6 million in fiscal year 2000 from $6.6 million in fiscal year 1999. The change was primarily due to increases in the Company's selling and marketing infrastructure costs combined with increased bid and proposal expenses. As a percentage of revenue, SG&A accounted for 18.7% of revenue in fiscal year 2000 compared to 15.4% in 1999. Product amortization was $950,000 in fiscal year 2000 and $660,000 in
fiscal year 1999. In addition, the Company recorded one time acquisition costs amounting to approximately $440,000 in fiscal year 2000, principally related to the acquisition of SAT Corporation and a previously reported unsuccessful acquisition attempt of an unrelated entity.
Income from continuing operations decreased 38.2% to $2.9 million for fiscal year 2000 from $4.7 million for fiscal year 1999. As a percentage of revenue, income from continuing operations was 7.2% for fiscal year 2000 down from 11.0% in fiscal year 1999. This decrease was principally the result of an increased percentage of operating expenses (i.e. SG&A, amortization and acquisition costs) against revenue in the current year.
During fiscal year 2000, the Company recorded $2.3 million of interest income, which was principally derived from investments of the cash proceeds from the Company's two private equity placements that occurred in June 1999 and February 2000. Since a significant portion of such investment was related to tax-free debt securities, the Company's effective tax rate was only 24.2% for fiscal year 2000 compared to 38.6% for fiscal year 1999.
Discontinued Operations
On July 5, 2000, the Company announced its plan to divest its wholly owned subsidiary Integral Marketing, Inc. Integral Marketing earned commission revenue by representing a number of electronic product manufacturers in Maryland, Virginia and the District of Columbia, principally in space-related markets. The sale of Integral Marketing was effective July 1, 2000 and closed on August 31, 2000 (see Footnote Number 2 of Notes to the Consolidated Financial Statements). As a result of this sale, the results of operations for Integral Marketing have been reported as discontinued operations (the "Discontinued Operations") and previously reported financial statements have been restated.
Income from Discontinued Operations decreased $87,000 to $130,000 for fiscal year 2000 from $217,000 for fiscal year 1999. The decrease was principally due to decreased commission revenue. There was no income from Discontinued Operations recorded in fiscal year 2001.
Acquisition of SAT Corporation
In August 2000, the Company entered into an agreement and plan of reorganization, by and among the Company, SAT Corporation, ISI Acquisition Corporation and Herbert Pardula, the sole shareholder of SAT Corporation. The reorganization agreement provided for the acquisition of SAT Corporation by the Company. Pursuant to the terms of the reorganization agreement, ISI was merged with and into SAT Corporation, with SAT Corporation as the surviving entity. At the time of the merger, SAT Corporation became a wholly owned subsidiary of the Company. Pursuant to the reorganization agreement, the purchase price paid to the sole shareholder by the Company in connection with the acquisition of SAT Corporation consisted of 650,000 shares of the Company's common stock, par value $.01 per share. The acquisition was accounted for as a pooling of interests. All prior period consolidated financial statements presented herein have been restated to include the results of operations, financial position and cash flows of the Company and SAT Corporation as a single entity. Certain reclassifications were made to the SAT Corporation financial statements to conform to the Company's presentations.
OUTLOOK -------
This outlook section contains forward-looking statements, all of which are based on current expectations. There is no assurance that the Company's projections will in fact be achieved and these projections do not reflect any acquisitions or divestitures, which may occur in the future. Reference should be made to the various important factors listed under the heading "Forward-Looking Statements" that could cause actual future results to differ materially.
At this time, the Company has a backlog of work to be performed and it may receive additional contract awards based on proposals in the pipeline. Management believes that operating results for future periods will improve based on the following assumptions:
. Demand for satellite technology and related products and services will continue to expand; and
. Sales of its software products and engineering services will continue to increase.
Looking forward to fiscal year 2002 in its entirety, the Company is anticipating growth in revenue, operating income, net income, and fully diluted earnings per common and equivalent share, of 15%, 25%, 20%, and 20% respectively.
Liquidity and Capital Resources
Since the Company's inception in 1982, it has been profitable on an annual basis and has generally financed its working capital needs through internally generated funds, supplemented by borrowings under the Company's general line of credit facility with a commercial bank and the proceeds from the Company's initial public offering in 1988. In June 1999, the Company supplemented its working capital position by raising approximately $19.7 million (net) through the private placement of approximately 1.2 million shares of its common stock. In February 2000, the Company raised an additional $40.9 million (net) for use in connection with potential acquisitions and other general corporate purposes through the private placement of 1.4 million additional shares of it common stock.
For fiscal year 2001, the Company generated approximately $6.2 million of cash from operating activities, and used approximately $13.5 million for investing activities, $8.4 million of which was used to purchase marketable securities. Further, the Company invested approximately $3.3 million for newly capitalized software development costs. During fiscal year 2001, the Company also purchased approximately $1.9 million of fixed assets (principally new computers and equipment).
During fiscal year 2001, the Company had access to a general line of credit facility through which it could borrow up to $9.0 million for operating purposes and an additional line of credit with the bank amounting to $6.0 million, which can be used for corporate acquisitions. Borrowings under the line are due on demand with interest at the London Inter-Bank Offering Rate (LIBOR), plus a spread of 1.5 to 2.4% based on the ratio of funded debt to earnings before interest, taxes and depreciation (EBITDA). The lines of credit are secured by the Company's billed and unbilled accounts receivable and have certain financial covenants, including minimum net worth and liquidity ratios. The lines expire February 28, 2002. The Company also had a line of credit with another bank for $425,000. This line expired on August 2, 2001. At September 30, 2001, 2000, and 1999, the Company had no amounts outstanding under the lines of credit.
The Company's general line of credit facility prohibits the declaration or payment of dividends by the Company until all of its obligations under the facility are paid in full or performed.
The Company also has access to a $2.0 million equipment lease line of credit under which it had $260,000 outstanding as of September 30, 2001. The outstanding balance is payable over a 57-month period from lease inception and bears interest at a rate of 8.8% per annum.
The Company currently anticipates that its current cash balances, amounts available under its lines of credit and net cash provided by operating activities will be sufficient to meet its working capital and capital expenditure requirements for at least the next twelve months. The Company believes that inflation did not have a material impact on the Company's revenues or income from operations in fiscal years 2001, 2000, and 1999.
FORWARD-LOOKING STATEMENTS --------------------------
Certain of the statements contained in the Business section, in other parts of this 10-K, and in this section, including those under the headings "Outlook" and "Liquidity and Capital Resources," are forward looking. In addition, from time to time, the Company may publish forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, research and development activities and similar matters. Forward-looking statements can be identified by the use of forward-looking terminology such as "may", "will", "believe", "expect", "anticipate", "estimate", "continue", or other similar words, including statements as to the intent, belief, or current expectations of the Company and its directors, officers, and management with respect to the Company's future operations, performance, or positions or which contain other forward-looking information. These forward-looking statements are predictions. No assurances can be given that the future results indicated, whether expressed or implied, will be achieved. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. While the Company believes that these statements are and will be accurate, a variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's statements. The Company's business is dependent upon general economic conditions and upon various conditions specific to its industry, and future trends cannot be predicted with certainty. Particular risks and uncertainties that may effect the Company's business, other than those described elsewhere herein, include the following:
. A significant portion of the Company's revenue is derived from contracts or subcontracts funded by the U.S. Government, which are subject to termination without cause, government regulations and audits, competitive bidding, and the budget and funding process of the U.S. Government.
. The presence of competitors with greater financial resources and their strategic response to the Company's new services.
. The potential obsolescence of the Company's services due to the introduction of new technologies.
. The response of customers to the Company's marketing strategies and services.
. The Company's commercial contracts are subject to strict performance and other requirements.
. The intense competition in the satellite ground system industry could harm our financial performance.
. Risks related to the Company's acquisition strategy. In particular, the Company may not be able to find any attractive candidates or it may find that the acquisition terms proposed by potential acquisition candidates are not favorable to the Company. In addition, theCompany may compete with other companies for these acquisition candidates, which competition may make an acquisition more expensive for the Company. If the Company is unable to identify and acquire any suitable candidates, the Company may not be able to find alternative uses for the cash proceeds of its previous private placements that improve the Company's business, financial conditions, or results of operations to the extent that an acquisition could. In addition, if the Company is able to identify and acquire one or more businesses (as it did with SAT Corporation), the integration of the acquired business or businesses may be costly and may result in a decrease in the value of the Company's common stock for the following reasons, among others:
. the Company may not adequately assess the risks inherent in a particular acquisition candidate or correctly assess the candidate's potential contribution to the Company's financial performance;
. the Company may need to divert more management resources to integration than it planned, which may adversely affect its ability to pursue other more profitable activities;
. the difficulties of integration may be increased by the necessity of coordinating geographically separated organizations, integrating personnel with disparate backgrounds and combining different corporate cultures;
. the Company may not eliminate as many redundant costs as it anticipated in selecting acquisition candidates; and an acquisition candidate may have liabilities or adverse operating issues that the Company failed to discover through its due diligence prior to the acquisition.
. Changes in activity levels in the Company's core markets.
While sometimes presented with numerical specificity, these forward-looking statements are based upon a variety of assumptions relating to the business of the Company, which although considered reasonable by the Company, may not be realized. Because of the number and range of the assumptions underlying the Company's forward-looking statements, many of which are subject to significant uncertainties and contingencies beyond the reasonable control of the Company, some of the assumptions inevitably will not materialize and unanticipated events and circumstances may occur subsequent to the date of this document. These forward-looking statements are based on current information and expectation, and the Company assumes no obligation to update. Therefore, the actual experience of the Company and the results achieved during the period covered by any particular forward-looking statement should not be regarded as a representation by the Company or any other person that these estimates will be realized, and actual results may vary materially. There can be no assurance that any of these expectations will be realized or that any of the forward-looking statements contained herein will prove to be accurate.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
______________________
CONSOLIDATED FINANCIAL STATEMENTS Years Ended September 30, 2001, 2000, and 1999 AND INDEPENDENT AUDITORS' REPORT
Rubino & McGeehin, Chartered Certified Public Accountants 6905 Rockledge Drive, Suite 700 Bethesda, MD 20817-1818
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders Integral Systems, Inc.
We have audited the accompanying consolidated balance sheets of Integral Systems, Inc. and its subsidiaries as of September 30, 2001 and 2000, and the related consolidated statements of operations, stockholders' equity, and cash flows for the years ended September 30, 2001, 2000 and 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Integral Systems, Inc. and its subsidiaries as of September 30, 2001 and 2000, and their consolidated results of operations and consolidated cash flows for the years ended September 30, 2001, 2000 and 1999, in conformity with accounting principles generally accepted in the United States.
/s/ Rubino & McGeehin, Chartered
November 21, 2001 Bethesda, Maryland
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS September 30, 2001 and 2000
________________
The accompanying notes are an integral part of these consolidated financial statements.
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended September 30, 2001, 2000 and 1999
The accompanying notes are an integral part of these consolidated financial statements.
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended September 30, 2001, 2000 and 1999
The accompanying notes are an integral part of these consolidated financial statements.
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS] Years Ended September 30, 2001, 2000 and 1999
_________________
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended September 30, 2001, 2000 and 1999
______________
1. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Integral Systems, Inc. (the Company) and its wholly owned subsidiaries, SAT Corporation (see Note 2), ISI Europe and InterSys, Inc. (InterSys). The assets of the Company's former subsidiary Integral Marketing, Inc. (IMI) were disposed of during the year ended September 30, 2000 (see Note 2) and is presented as discontinued operations in the consolidated statement of operations. All significant intercompany transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities, and changes therein, and disclosure of contingent assets and liabilities. Actual results could differ from those estimates.
Marketable Securities
The Company classifies its investments in marketable equity and debt securities as available for sale in accordance with the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The Investments are carried at fair market value, with unrealized gains and losses reported in stockholders' equity as a component of accumulated other comprehensive income (loss), net of any related tax effect.
Contract Revenue
Revenue under cost-plus-fixed-fee contracts is recorded on the basis of direct costs plus indirect costs incurred and an allocable portion of the fixed fee. Revenue from fixed-price contracts is recognized on the percentage-of-completion method, measured by the cost-to-cost method for each contract. Revenue from time and materials contracts is recognized based on fixed hourly rates for direct labor expended. The fixed rate includes direct labor, indirect expenses and profits. Material or other specified direct costs are recorded at actual cost.
Contract costs include all direct material and labor costs and those indirect costs related to contract performance. General and administrative costs are charged to expense as incurred. Provisions for estimated losses on contracts in progress are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability, including final contract settlements, may result in revisions to costs and income and are recognized in the period in which the revisions are determined. The Company's contracts vary in length from one to four years.
The fees under certain government contracts may be increased or decreased in accordance with cost or performance incentive provisions which measure actual performance against established targets or other criteria. Such incentive fee awards or penalties are included in revenue at the time the amounts can be reasonably determined.
Unbilled accounts receivable represents revenue recognized in excess of amounts billed. The liability, billings in excess of revenue for contracts in progress, represents billings in excess of revenue recognized.
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended September 30, 2001, 2000 and 1999
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1. Summary of Significant Accounting Policies (continued)
Sale of Software Products
Most of the Company's contracts include the sale of proprietary software products. Sales of the Company's software products take many forms. The Company sells (i) software only (a "Software-Only Sale"), (ii) software and services together, or (iii) software, services and hardware together. In addition, depending on a customer's requirements, the Company may or may not provide post-contract customer support ("PCS").
The Company's recognition of revenue for sales of Company software products depends on customer requirements and the nature of the contracts involved. For a Software-Only Sale, the Company recognizes revenue upon shipment. In situations where software is sold together with services and/or hardware, the Company recognizes software license revenue on a percentage of completion basis.
With respect to PCS, the Company recognizes PCS revenue on a percentage of completion basis when PCS is part of a broader fixed price contract that includes software and services. Alternatively, when PCS services (i.e. software maintenance and support) are awarded to the Company under a separate maintenance contract, the Company recognizes PCS revenue on a straight-line basis pro rata over the term of the maintenance contract.
Depreciation and Amortization
Property and equipment are stated at cost. The Company provides for depreciation and amortization by charges, using the straight-line method, to operating expenses at rates based on estimated useful lives as follows:
Classification Estimated Useful Lives Electronic equipment 3 Years Furniture and fixtures 5 Years Leasehold improvements Life of lease Software 3 Years
Maintenance and repair costs are charged to expense as incurred. Replacements and betterments are capitalized. At the time properties are retired or otherwise disposed of, the property and related accumulated depreciation or amortization accounts are relieved of the applicable amounts and any gain or loss is credited or charged to income.
Software Development Costs
The Company has capitalized costs related to the development of certain software products. In accordance with Statement of Financial Accounting Standards No. 86, capitalization of costs begins when technological feasibility has been established and ends when the product is available for general release to customers. Amortization is computed on an individual product basis and has been recognized for those products available for market based on the products' estimated economic lives of three to five years. Due to inherent technological changes in software development, however, the period over which such capitalized costs is being amortized may have to be modified.
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended September 30, 2001, 2000 and 1999
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1. Summary of Significant Accounting Policies (continued)
Earnings Per Share
Basic earnings per share is computed using the weighted average number of shares outstanding during the period. The only reconciling item between the shares used for basic and diluted earnings per share related to outstanding stock options. No reconciling items existed between the net income used for basic and diluted earnings per share. The earnings per share computations have been adjusted retroactively where appropriate for the pooling of interest discussed in Note 2.
Cash Concentrations and Cash Equivalents
The Company considers all highly-liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Cash accounts are maintained primarily with one federally insured financial institution. Balances usually exceed insured limits, but management does not consider this to be a significant concentration of credit risk.
Segment Information
In 1999, the Company adopted Statement of Financial Accounting Standard (SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related Information". SFAS No. 131 supercedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise". Under the new standard, the Company is required to use the "management" approach to reporting its segments. The management approach designates the internal organization, used by management for making operating decisions and assessing performance, as the source of the Company's segments. The adoption of SFAS No. 131 had no impact on the Company's consolidated financial position, results of operations or cash flows.
During the years ended September 30, 2001, 2000, and 1999, the Company's operations included one reportable segment for satellite ground systems. These continuing operations include all of the operations of the Company, SAT Corporation and ISI Europe for the years then ended. The equipment marketing operations of IMI are included in discontinued operations for the years above. The Company provides satellite ground systems - computer systems for satellite command and control, data processing, simulation, and flight software validation and signal monitoring. Customers for these systems include U.S. Government organizations such as National Aeronautics and Space Administration (NASA), the National Oceanic and Atmospheric Administration (NOAA), and the U.S. Air Force, as well as commercial satellite operators, both domestic and foreign.
There were no significant intercompany sales. Satellite ground systems capital expenditures included in the consolidated statement of cash flows for the years ended September 30, 2001, 2000 and 1999, excludes the addition of equipment under capital leases totaling $0, $0 and $579,496, respectively.
Major customer information and revenue by customer category is discussed in Note 3. Revenue from foreign sources, primarily with corporations located in France, the Netherlands, Thailand, and Mexico, totaled $9,408,532, $9,319,638, and $3,893,274, for the years ended September 30, 2001, 2000, and 1999, respectively. The Company has no significant long-lived assets located in foreign countries.
Reclassifications
Certain reclassifications have been made to prior year balances in order to conform to the current year presentation.
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended September 30, 2001, 2000 and 1999
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1. Summary of Significant Accounting Policies (continued)
Recent Accounting Pronouncements
In June 2001, the FASB issued Statement of Financial Accounting Standards No. 141 "Business Combinations" ("SFAS 141") and Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires all business combinations to be accounted for using the purchase method of accounting and is effective for all business combinations initiated after June 30, 2001. SFAS 142 requires goodwill to be tested for impairment under certain circumstances, and written off when impaired, rather than being amortized as previous standards required. SFAS 142 is effective for fiscal years beginning after December 15, 2001. Early application is permitted for entities with fiscal years beginning after March 15, 2001 provided that the first interim period financial statements have not been previously issued. SFAS 141 and 142 will affect the accounting and reporting for only future business combinations, if any, of the Company.
In June 2001, the FASB issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143 provides guidance on the initial measurement and subsequent accounting for obligations associated with the sale, abandonment, or other type of disposal of long-lived tangible assets. SFAS 143 is effective for fiscal years beginning after June 15, 2002. Management does not expect a material impact of SFAS 143 on its results of operations and financial condition.
In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment of Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 provides updated guidance concerning the recognition and measurement of an impairment loss for certain types of long-live assets. SFAS 144 also expands the scope of a discontinued operation to include a component of an entity, and it eliminates the current exemption to consolidation when control over a subsidiary is likely to be temporary. SFAS 144 is effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. Management does not expect a material impact of SFAS 144 of its results of operations and financial condition.
2. Acquisitions and Dispositions
Effective August 31, 2000, in connection with the Agreement and Plan of Reorganization, the Company issued 650,000 shares of its common stock in exchange for all of the outstanding common stock of SAT Corporation (SAT), a privately-held company with 4.0 million shares outstanding, for a total value of $9.831 million. The merger qualified as a tax-free reorganization and has been accounted for as a pooling of interests. Accordingly, the Company's consolidated financial statements have been restated for all periods prior to the business combination to include the combined financial results of Integral and SAT. Net sales, income before discontinued operations, and net income for the individual companies reported prior to the merger are as follows:
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended September 30, 2001, 2000 and 1999 __________________
2. Acquisitions and Dispositions (continued)
Eleven months Ended Year Ended August 31, 2000 September 30, 1999 --------------- ------------------ Net Sales: Integral $ 31,321,823 $ 38,358,415 SAT 5,762,058 4,578,872 -------------- --------------- Total 37,083,881 42,937,287 -------------- ---------------
Income before taxes and discontinued item: Integral 4,299,301 5,700,567 SAT 188,082 (834,804) -------------- --------------- Total 4,487,383 4,865,763 -------------- ---------------
Net income: Integral 3,714,538 3,715,847 SAT 114,730 (515,551) -------------- --------------- Total $ 3,829,268 $ 3,200,296 ============== ===============
The consolidated financial information presented above reflects no adjustments to net income or shareholder's equity resulting from the conforming of the SAT accounting practices to those of ISI. There were no significant intercompany transactions between ISI and SAT.
In July 2000, the Company announced a plan to sell the assets of its wholly-owned subsidiary Integral Marketing, Inc. (IMI). IMI acts as a manufacturer's representative, selling electronic test instrumentation and equipment to customers primarily in Maryland, Virginia and the District of Columbia. On August 31, 2000, the sale was completed, effective July 1, 2000, for $1,300,000 comprised of $700,000 in cash and $600,000 in the form of a secured note due in quarterly installments through October 15, 2005 with interest at 5%. The net assets sold consisted primarily of cash, accounts receivable, and property and equipment.
The disposal of IMI has been accounted for as a discontinued operation and, accordingly, its operating results are segregated and reported as discontinued operations in the accompanying consolidated statements of operations.
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended September 30, 2001, 2000 and 1999
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2. Acquisitions and Dispositions (continued)
Information relating to the discontinued operations of IMI for the years ended September 30, 2000 and 1999 are as follows:
September 30, 2000 (nine months ended June 30, 2000) September 30, 1999 -------------- ------------------
Net sales $ 704,204 $ 1,220,115 Cost of sales 523,092 829,512 Gross profit 180,024 391,444 Operating costs 23,172 42,720 Non-operating costs: (14,301) (4,657) -------------- ------------- Income before taxes 172,241 353,381 Less: Income tax Provision 42,867 136,500 -------------- ------------- Net income $ 129,374 $ 216,879 ============== =============
3. Accounts Receivable and Revenue
Accounts receivable at September 30, 2001 and 2000, consist of the following:
Unbilled accounts receivable include amounts arising primarily from the use of the percentage-of-completion or other methods of recognizing revenue that differ from contractual billing terms. Substantially all unbilled receivables are expected to be billed and collected in one year.
The Company earns revenue, both as a prime contractor and a subcontractor, from sales of its products and services through contracts funded by the U.S. Government, as well as commercial and international organizations.
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended September 30, 2001, 2000 and 1999 __________
3. Accounts Receivable and Revenue (continued)
Internally, the Company classifies contract revenues in two separate categories on the basis of the contract's procurement and development requirements: (i) contracts which require compliance with government procurement and development standards are classified as government revenue (government services) and (ii) contracts conducted according to commercial practices are classified as commercial revenue (commercial products and services), regardless of whether the end customer is a commercial or government entity. Sales of the Company's commercial off-the-shelf software products are classified as commercial products and services revenue.
During the years ended September 30, 2001, 2000 and 1999, approximately 54%, 52%, and 57%, respectively, of the Company's revenue was from government services, primarily the National Oceanic and Atmospheric Administration (NOAA) and the United States Air Force (USAF). The remaining revenue is from commercial products and services as defined above.
By the way of comparison, if revenues were reclassified according to end customer, the Company's revenue from U.S. Government customers, both as a prime contractor and a subcontractor, for each of the years ended September 30, 2001, 2000 and 1999, was 55%, 54% and 60%, respectively. Revenue from non-U.S. Government customers for each of the years ended September 30, 2001, 2000, and 1999, was 45%, 46% and 40%, respectively.
4. Marketable Securities
The following summarizes the Company's investments in debt and equity securities at September 30, 2001:
At September 30, 2000, the Company held $49,966,000 in variable rate State of Maryland debt securities, which were carried at cost, which approximates fair market value.
The investments in variable rate State of Maryland debt securities and Banc of America Preferred Funding Corporation "Dividends Received Eligible Auction Market" preferred stock ("DREAMS") are carried at cost which approximates fair market value. The investment in common stock is based on quoted market price. At September 30, 2001, the unrealized loss of $421,325 from the investment in common stock is reported in stockholders' equity as other comprehensive income (loss), net of deferred tax benefit of $164,317.
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended September 30, 2001, 2000 and 1999 _____________
5. Property and Equipment
Property and equipment as of September 30, 2001 and 2000 are as follows:
Amortization expense for the years ended September 30, 2001, 2000 and 1999, was $1,370,000, $950,000, and $660,000, respectively. Research and development expense for the years ended September 30, 2001, 2000, and 1999, was $199,987, $536,177 and $0, respectively.
7. Line of Credit
The Company has a line of credit agreement with a local bank for $9,000,000 for operating purposes and an additional line of credit with the bank for $6,000,000 to be used for corporate acquisitions. Borrowings under the line are due on demand with interest at the London Inter-Bank Offering Rate (LIBOR), plus a spread of 1.5 to 2.4%, based on the ratio of funded debt to earnings before interest, taxes and depreciation (EBITDA). The lines of credit are secured by the Company's billed and unbilled accounts receivable and have certain financial covenants, including minimum net worth and liquidity ratios. The lines expire February 28, 2002. The Company also had a line of credit with another bank for $425,000. This line expired on August 2, 2001. The Company had no balance outstanding at September 30, 2001, 2000 and 1999 under any of its lines.
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended September 30, 2001, 2000 and 1999 _________
8. Accrued Expenses
Accrued expenses at September 30, 2001 and 2000, consist of the following
9. Commitments and Contingencies
Capital Leases
The Company has a $2,000,000 equipment lease line of credit under which the Company can sell equipment and lease it back for a period of three years.
The Company incurred capital lease obligations when it entered into new leases for equipment. Capital lease additions were $0, $0 and $579,496 for the years ended September 30, 2001, 2000 and 1999, respectively. Future payments under the capital lease obligations at September 30, 2001, are as follows:
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended September 30, 2001, 2000 and 1999
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9. Commitments and Contingencies (continued)
Operating Leases
The Company leases its office space in Maryland, Colorado, California and Toulouse, France. The current leases expire in 2009, 2002, 2004 and 2009 respectively. Future minimum lease payments under the office leases are as follows:
Years ending September 30, 2002 $ 1,121,000 2003 1,123,000 2004 1,064,000 2005 869,000 2006 895,000 Thereafter 2,520,000 ---------------
Total payments $ 7,592,000 ===============
Lease payments do not include operating expenses or utilities, which are adjusted annually. Rent expense was $1,252,880, $1,117,665 and $869,292 for the years ended September 30, 2001, 2000 and 1999, respectively.
Government Contracts
A significant portion of the Company's revenues represent payments made by the U.S. Government and by contractors that have prime contracts with the U.S. Government. These revenues are subject to adjustment upon audit by the Defense Contract Audit Agency (DCAA). Audits by the DCAA have been completed on the Company's contracts and subcontracts through the year ended September 30, 1999. Management is of the opinion that any disallowances of costs for subsequent fiscal years by the government auditors, other than amounts already provided, will not materially affect the Company's financial statements.
10. Income Taxes
For the years ended September 30, 2001, 2000 and 1999, the provision for income taxes consists of the following:
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended September 30, 2001, 2000 and 1999
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10. Income Taxes (continued)
At September 30, 2001 and 2000, the tax effect of significant temporary differences representing deferred tax assets and liabilities are as follows:
The September 30, 2000 presentation of the deferred tax asset and liability has been reclassified to conform to the current year presentation.
The effective income tax rates differ from the statutory U.S. income tax rate due principally to the following:
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended September 30, 2001, 2000 and 1999
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11. Profit Sharing and Employee Benefits Plans
The Company has a profit sharing and 401(k) plan for the benefit of substantially all employees. Profit sharing contributions consist of discretionary amounts determined each year by the Board of Directors of the Company based upon net profits for the year and total compensation paid. The 401(k) feature allows employees to make elective deferrals not to exceed 10% of compensation. The Company also has a money purchase plan, which obligates the Company to contribute 5% of eligible salaries under the plan. For the years ended September 30, 2001, 2000 and 1999, contributions to the plans totaled $1,607,976, $1,659,687 and $1,410,426, respectively.
12. Stock Option Plan
Effective May 25, 1988, as amended on January 1, 1994 and May 8, 1998, the Company established a stock option plan to create additional incentives for the Company's employees, consultants and directors to promote the financial success of the Company. The Board of Directors has sole authority to select full-time employees, directors or consultants to receive awards of options for the purchase of stock under this plan. At September 30, 2001, the maximum number of shares of common stock which may be issued pursuant to the stock option plan is 1,800,000. The price of each option is set at the stock's bid price on the date of the Board of Directors meeting at which the option is granted. Options expire no later than ten years from the date of grant (five years for greater-than-10% owners) or when employment ceases, whichever comes first, and vest from one to five years.
The stock option plan is accounted for under Accounting Principles Board (APB) Opinion No. 25. Accordingly, no compensation has been recognized for the plan. Had compensation cost for the plans been determined based on the estimated fair value of the options at the grant dates consistent with the method of Statement of Financial Accounting Standards (SFAS) No. 123, the Company's net income and earnings per share for the years ended September 30, 2001, 2000 and 1999, would have been:
The fair value of the options granted is estimated on the date of the grant using the Black-Scholes options pricing model assuming the following: no dividend yield, risk-free interest rate of 5% for 2001 and 6% for prior years, expected volatility of 40%, and an expected term of the options of four years.
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended September 30, 2001, 2000 and 1999 _____________
12. Stock Option Plan (continued)
At September 30, 2001, options to purchase stock under this plan were outstanding to employees as follows:
Number of Exercise Price Shares Per Share
1,700 $ 2.00 - 2.99 206,650 $ 3.00 - 3.99 34,600 $ 4.00 - 4.99 5,200 $ 5.00 - 5.99 1,000 $ 9.00 - 9.99 2,000 $ 12.00 - 12.99 6,200 $ 13.00 - 13.99 7,000 $ 14.00 - 14.99 111,300 $ 15.00 - 15.99 28,000 $ 16.00 - 16.99 33,250 $ 17.00 - 17.99 294,250 $ 18.00 - 18.99 5,000 $ 19.00 - 19.99 1,000 $ 20.00 - 20.99 182,950 $ 21.00 - 21.99 14,500 $ 22.00 - 22.99 3,000 $ 23.00 - 23.99 3,000 $ 24.00 - 24.99 3,500 $ 26.00 - 26.99 500 $ 28.00 - 28.99 1,000 $ 35.00 - 35.99 1,000 $ 40.00 - 40.99 1,500 $ 44.00 - 44.99 1,000 $ 45.00 - 45.99 ---------
949,100 =========
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended September 30, 2001, 2000 and 1999 ___________
12. Stock Option Plan (continued)
Of the options outstanding at September 30, 2001, 462,340 options are exercisable immediately, and 486,760 options are exercisable over the next five years. Transactions involving the plan for the years ended September 30, 2001, 2000 and 1999, were as follows:
The weighted average fair values of options granted during the years ended September 30, 2001, 2000 and 1999, were $7.85, $6.75 and $7.50, respectively.
13. Stockholder's Equity Transactions
In June 1999, the Company issued stock under a private placement. The Company received approximately $20 million from this offering. The costs associated with this private placement are included as a direct reduction to paid in capital.
In February 2000, the Company issued stock under a private placement. The Company received approximately $41 (net) million from this offering. The costs associated with this private placement are included as a direct reduction to paid-in capital.
In August 2000, the Company issued 650,000 shares of common stock to acquire SAT Corporation. The acquisition was accounted for as pooling of interests as discussed in Note 2
In September 2001, the Company reacquired 420,015 shares of its stock for a total cost of $7,748,135.
14. Supplemental Cash Flow Information
For the years ended September 30, 2001, 2000 and 1999, income taxes paid, were $562,277, $2,131,803 and $2,140,496, respectively, and interest expense incurred and paid was $50,675, $96,587 and $121,302, respectively.
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended September 30, 2001, 2000 and 1999
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15. Quarterly Financial Data (unaudited)
Integral Systems first three quarters in fiscal 2001 ended on December 31, 2000, March 31, 2001 and June 30, 2001. The fourth quarter ended on September 30, 2001.
The following tables contain selected unaudited Consolidated Statement of Operations data for each quarter of fiscal years 2001 and 2000 (in thousands, except per share amounts). Quarterly information for fiscal year 2000 reflects the business combination with SAT Corporation, discussed in Note 2, accounted for as pooling of interest.
ITEM 9.
ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Name Position with the Company ---- -------------------------
Steven R. Chamberlain Chairman of the Board, Chief Executive Officer and Director Thomas L. Gough President, Chief Operating Officer, and Director Elaine M. Parfitt Vice President, Chief Financial Officer, Secretary and Treasurer Patrick R. Woods Vice President, Government Programs Peter J. Gaffney Vice President, Commercial Products Bonnie K. Wachtel Outside Director Dominic A. Laiti Outside Director R. Doss McComas Outside Director John R. Murphy Outside Director
Directors of the Company serve until the next annual meeting of stockholders or until successors have been duly elected and qualified. Officers of the Company serve at the discretion of the Board of Directors.
Steven R. Chamberlain, 46, a Company founder, has been Chairman of the Board since June 1992, President since May 1988, and a Director since 1982. He served as Vice President from 1982 until he became President. From 1978 to 1982, OAO Corporation employed Mr. Chamberlain where he progressed from Systems Analyst to Manager of the Offutt Air Force Base field support office. Mr. Chamberlain holds a B.S. degree in Physics from Memphis State University and has done graduate work in Physics and Mathematics at Memphis State and the University of Maryland.
Thomas L. Gough, 53, became a member of the Company's staff in January 1984. In March 1996, he was elected to the Board of Directors of the Company. He has served as President and Chief Operating Officer of the Company since June 1992. For three years before being named President, he served as Vice President and Chief Financial Officer. Prior to joining the Company, he was employed by Business and Technological Systems, Inc., where he managed the Software Systems Division. From 1972 to 1977, he was employed by Computer Sciences Corporation, where he progressed from Programmer Analyst to Section Manager. Mr. Gough earned a B.S. degree from the University of Maryland with a major in Information Systems Management in the School of Business and Public Administration.
Elaine M. Parfitt, 38, joined the Company in 1983. She served as Staff Accountant/Personnel Administrator until January 1995, when she was promoted to Controller/Director of Accounting. In March 1997, Ms. Parfitt was appointed Vice President and Chief Financial Officer. In February 2000, she was appointed Secretary and Treasurer. She holds a B.S. degree in Accounting from the University of Maryland and is a Certified Public Accountant.
Patrick R. Woods, 46, joined the Company in 1995, and has been Vice President, Government Programs since May 1998. From 1996 to April 1998, Mr. Woods served as Vice President, NOAA Programs. From 1994 to 1995, he worked for Space Systems/Loral (SS/L), and from 1985 to 1994, he worked for the Lockheed Martin Corporation (formerly Loral Aerospace). Mr. Woods served as the Director of Mission Operations for both SS/L and the AeroSys Division of Loral Aerospace. While at Loral Aerospace, Mr. Woods received the NASA Public Service Group Achievement Award from NASA Administrator Admiral Richard Truly for his management of the Hubble Space Telescope control center development and launch support. Mr. Woods holds a B.S. degree in Public Administration and a M.P.A. in Public Management from Indiana University.
Peter J. Gaffney, 42, joined the Company in 1986. In February 2000, Mr. Gaffney was appointed Vice President, Commercial Products. From May 1999 until February 2000, Mr. Gaffney served as Vice President, Commercial Division. From 1986 to 1992, he worked on simulators for the Company's DMSP and Tiros programs. In 1992, he became a project manager for EPOCH 2000 ground systems programs, which included the Command and Range Generator project for GE Americom, the Loral Skynet Telstar 3, 4, and 5 ground systems, and the Echostar 1, 2, 3, and 4 ground systems. Prior to joining Integral Systems, Mr. Gaffney was a design engineer for the General Electric Co., where he worked on the DSCS, Milstar, Landsat, and Spot satellite programs. Mr. Gaffney graduated from the University of Maryland in 1981 with a BS degree in Electrical Engineering.
Bonnie K. Wachtel, 46, has served as an outside director since May 1988. Since 1984, she has been Vice President, General Counsel, and a Director of Wachtel & Co., Inc., an investment-banking firm in Washington, DC. Ms. Wachtel serves as a Director of several corporations, including VSE Corporation and Information Analysis, Inc. She holds a B.A. and M.B.A. from the University of Chicago and a J.D. from the University of Virginia, and is a Certified Financial Analyst.
Dominic A. Laiti, 70, has served as an outside director of the Company since July 1995. Mr. Laiti is presently employed as an independent consultant and was President and Director of Globalink, Inc. from January 1990 to December 1994. He has over 26 years of experience in starting, building, and managing high-technology private and public companies with annual revenues from $2 million to over $120 million. Mr. Laiti was President of Hadron, Inc. from 1979 to 1989; Vice President of Xonics, Inc. from 1972 to 1979; and Vice President of KMS Industries from 1968 to 1972. He is a Director of Energy Recovery, Inc. and former Director of United Press International, Saturn Chemicals Company, Hadron, Inc., Telecommunications Industries, Inc., MAXXAM Technology, Inc., and Jupiter Technology, Inc.
R. Doss McComas, 47, joined the Board as an outside director in July 1995. He is President of e-Community Calendar Inc. a supplier of sponsor/advertising supported community information and a manufacturer and integrator of internet, cellular, and President of IWS wireless local loop systems. Previously, he was Chairman of Plexsys International, President of Fortel Technologies, Inc., and held positions with COMSAT RSI and Radation Systems, Inc., including Group Vice President, Vice President of Acquisitions, Strategic Planning and International Marketing, and General Counsel. He holds a B.A. degree from Virginia Polytechnic Institute; an M.B.A. from Mt. Saint Mary's; and a J.D. from Gonzaga University.
John R. (Reg) Murphy, 66, was elected to the Board as an outside director in February 2000. He is Vice Chairman of the National Geographic Society based in Washington, DC. He was President and CEO of the Society from 1995 to 1998. Prior to National Geographic, he was the publisher and CEO of the Baltimore Sun and a member of the Times Mirror Management Committee. Mr. Murphy has also been the Editor of the Atlanta Constitution and Editor and Publisher of the San Francisco Examiner. He is a past President of the United States Golf Association and Chairman of its Centennial Celebration Committee, and serves on the Board of Directors of The Omnicom Group, MSD&T Funds, Saxotech, and e-Motion, Inc. He is also President of Caves Valley Golf Club in Baltimore, Maryland and a Trustee of Mercer and Brenau Universities.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE -------------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), requires the Company's officers and directors, and persons who own more than 10% of the Company's Common Stock, to file reports of ownership and changes in ownership of the Company's Common Stock with the Securities and Exchange Commission and Nasdaq. Based on a review of the copies of such reports, the Company believes that during the fiscal year ending September 30, 2001 its executive officers, directors and greater than ten percent stockholders filed on a timely basis all reports due under Section 16(a) of the Exchange Act, with the following exceptions: Thomas L. Gough, an executive officer and director of the Company, inadvertently filed late a Form 4 for May 2001, reporting four transactions and inadvertently filed late a Form 4 for June 2001, reporting one transaction; Patrick R. Woods an executive officer of the Company, inadvertently filed late a Form 4 for May 2001, reporting two transactions.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
a. Summary Compensation Table
The following table sets forth compensation received by the Company's CEO and four highest paid executive officers who were serving as executive officers of the Company at the end of fiscal year 2001 and who earned over $100,000 during the fiscal year ended September 30, 2001:
(1) All Other Compensation represents employer pension contributions. It does not include the value of insurance premiums paid by or on behalf of the Company with respect to term life insurance for the benefit of each identified individual in the amounts of $745, $745 and $594 for fiscal years 2001, 2000 and 1999 respectively.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(1) Grant date present value is calculated on the date of the grant using the Black-Scholes options pricing model assuming the following: no dividend yield, risk-free interest rate of 5%, expected volatility of 40%, and an expected term of the option of four years. This value is then multiplied by the number of options granted.
b. Compensation Pursuant to Plans ------------------------------
The Company's Board of Directors awards annual bonuses to officers and employees on a discretionary basis. Currently, no formal plan exists for determining bonus amounts.
Effective October 1, 1987, the Company established a 401(K) pension and profit sharing plan (the "Plan") under Section 401 of the Internal Revenue Code (the "Code"). Under the Plan the Company contributes annually an amount equal to 5% of an eligible employee's salary, and may make additional contributions of up to 7.0% of an eligible employee's salary. The employee may contribute up to an additional 10% as salary deferral. In fiscal years 2001, 2000, and 1999 the Company contributed a total of 11% of eligible employees' salaries to the plans.
c. Stock Option Plan -----------------
Effective May 25, 1988, the Company established a stock option plan, as amended and restated in 1994 and 1998 (the "Stock Option Plan"), to create additional incentives for the Company's employees, consultants and directors to promote the financial success of the Company. The Stock Option Committee has the authority to select full-time employees, directors or consultants to receive awards of options for the purchase of stock of the Company under this plan. The maximum number of shares of Common Stock which may be issued pursuant to the Stock Option Plan was increased from 300,000 to 1,200,000 during fiscal year 1994. At the Annual Meeting of stockholders of the Company held on July 22, 1998, the stockholders approved an amendment and restatement of the Stock Option Plan which, among other changes, increased the number of shares subject to options under the Stock Option Plan from 1,200,000 to 1,800,000 shares. Options to purchase a total of 226,300 shares of Common Stock
were issued and options to purchase 63,760 shares of Common Stock were exercised during fiscal year 2001. The Company has reserved for issuance an aggregate of 1,076,064 shares of Common Stock, of which options to purchase 949,100 shares are outstanding. Pursuant to the Stock Option Plan, options may be incentive stock options within the meaning of Section 422 of the Code or nonstatutory stock options, although incentive stock options may be granted only to employees.
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
One of the executives named below exercised stock options during the fiscal year ended September 30, 2001.
Thomas L. Gough exercised 12,000 Incentive Stock Options.
(1) Value for "In the Money" options represents the difference between the exercise prices of outstanding options and the fair market value of the Company's common stock of $18.04 per share at September 30, 2001.
d. Compensation of Directors -------------------------
Directors who are employees of the Company do not receive any compensation for their service as directors. The Company pays each director who is not an employee of the Company an aggregate of $10,000 per year for their services, which amount is paid in equal quarterly installments. Outside directors are also annually granted options to purchase 5,000 shares of the Company's common stock pursuant to the Stock Option Plan.
e. Termination of Employment and Change of Control Termination -----------------------------------------------------------
The Company has no compensatory plan or arrangement with respect to any individual named in the Summary Compensation Table (Item 10(a)) which results or will result from the resignation, retirement or any other termination of such individual's employment with the Company or its subsidiaries or from a change in control of the Company or a change in the individual's responsibilities following a change in control.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
a. Security Ownership of Certain Beneficial Owners (as of 9/30/01) ---------------------------------------------------------------
The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock, par value $.01, as of September 30, 2001, by each person (other than directors and executive officers of the Company) known by the Company to beneficially own 5% or more of the outstanding shares of Common Stock of the Company.
Name and Address of Beneficial Owner Amount and Nature of Percent of - ------------------------------------ -------------------- ---------- Beneficial Owner Class ---------------- ----- Ashford Capital Management, Inc 614,600 6.8% 3801 Kennett Pike Drive Wilmington, DE 19807
Chartwell Capital Investors II LP 455,556 5.0% One Independent Drive Suite 3120 Jacksonville, FL 32202
b. Security Ownership of Management (as of 9/30/01) ------------------------------------------------
The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock, par value $.01, as of September 30, 2001, by (i) each director and executive officer of the Company and (ii) all directors and executive officers as a group. Except as indicated in the table, the address of the below-named directors and executive officers is that of the Company's principal executive offices.
* Less than one percent of the Common Stock outstanding. (1) Includes outstanding options to purchase 100,400 shares of Common Stock which are exercisable within 60 days. (2) Includes outstanding options to purchase 22,800 shares of Common Stock which are exercisable within 60 days. (3) Includes outstanding options to purchase 11,200 shares of Common Stock which are exercisable within 60 days. (4) Includes outstanding options to purchase 3,800 shares of Common Stock which are exercisable within 60 days. (5) Includes outstanding options to purchase 34,600 shares of Common Stock which are exercisable within 60 days. (6) Includes outstanding options to purchase 37,000 shares of Common Stock which are exercisable within 60 days. (7) Includes outstanding options to purchase 10,000 shares of Common Stock which are exercisable within 60 days. (8) Includes outstanding options to purchase 10,000 shares of Common Stock which are exercisable within 60 days. (9) Includes outstanding options to purchase 10,000 shares of Common Stock which are exercisable within 60 days.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In August 2000, the Company entered into an agreement and plan of reorganization, by and among the Company, SAT Corporation, ISI Acquisition Corporation and Herbert Pardula, the sole shareholder of SAT Corporation. The reorganization agreement provided for the acquisition of SAT Corporation by the Company. Pursuant to the terms of the reorganization agreement, ISI was merged with and into SAT Corporation, with SAT Corporation as the surviving entity. At the time of the merger, SAT Corporation became a wholly owned subsidiary of the Company. Pursuant to the reorganization agreement, the purchase price paid to the sole shareholder of SAT Corporation by the Company in connection with the acquisition of SAT Corporation consisted of 650,000 shares of the Company's common stock, par value $.01 per share. The acquisition was accounted for as a pooling of interests. Upon the closing of the acquisition, Herbert Pardula became a beneficial owner of greater than 5% of the outstanding shares of the Company's Common Stock. Currently, Mr. Pardula owns less than 5% of the outstanding shares of the Company's Common Stock.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, LISTS, AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Articles of Restatement of the Company (Incorporated by reference to the Registration Statement on Form S-3 (File No. 333-82499) filed with the Commission on July 8, 1999.
3.2 Amended and Restated By-Laws of the Company (Incorporated by reference to the Company's September 30, 2000 Annual Report on Form 10-K filed by the Company on December 21, 2000).
4.1 Specimen Common Stock Certificate (Incorporated by reference to the Registration Statement on Form S-1 (File No. 333-58453) filed by the Company with the Commission on July 2, 1998).
10.1 1988 Stock Plan (Incorporated by reference to the Registration Statement on Form S-8 (File No. 333- 61559) filed by the Company with the Commission on August 14, 1998).
10.2 Contract effective May 17, 1996 between Integral Systems Inc. and the U.S. National Oceanic and Atmospheric Administration (Incorporated by reference to the Company's Annual Report on Form 10-KSBA filed by the Company with the Commission on July 10, 1997). (Portions of this exhibit have been omitted pursuant to an order for confidential treatment granted by the Commission).
10.3 Lease dated June 1, 1999, between Integral Systems Inc. and ASP Washington, L.L.C. (Incorporated by reference to the Company's June 30, 1999 10-QSB filed by the Company on August 11,1999).
10.4 Master Equipment Lease Agreement dated December 3, 1997 between NationsBanc Leasing Corporation and Integral Systems Inc. (Incorporated by reference to the Registration Statement on Form S-1 (File No. 333-58453) filed by the Company with the Commission on July 2, 1998).
10.5 Loan Agreement and Security Agreement dated December 9, 1999 between Bank of America N.A. and Integral Systems, Inc. (Incorporated by reference to the Company's December 31, 1999 10-Q filed by the Company with the Commission on February 14, 2000).
10.6 Subcontract (J8-759124-C3JP) between Hughes Space and Communications Company and Integral Systems, Inc. dated March 3, 1999 (Incorporated by reference to the Company's June 30, 1999 10-QSB filed by the Company on August 11, 1999). (Portions of this exhibit have been omitted pursuant to a request for confidential treatment filed with the commission).
11.1 Computation of Per Share Earnings
21.1 List of Subsidiaries of the Registrant
23.1 Consent of Rubino & McGeehin, Chartered
(b) Reports on Form 8-K
None.
Pursuant to the requirements of the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
INTEGRAL SYSTEMS, INC.
DATE: 12/21/01 BY: /s/ Steven R. Chamberlain ------------- __________________________________ Steven R. Chamberlain Chairman of the Board and Chief Executive Officer
DATE: 12/21/01 BY: /s/ Thomas L. Gough ------------- __________________________________ Thomas L. Gough President, Chief Operating Officer Director
DATE: 12/21/01 BY: /s/ Elaine M. Parfitt ------------- __________________________________ Elaine M. Parfitt Chief Financial Officer, Principal Accounting Officer