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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
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SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2000
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or
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number 0-18603
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Integral Systems, Inc.
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(Name of registrant as specified in its charter)
Maryland 52-1267968
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation of organization)
5000 Philadelphia Way, Lanham, MD 20706
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (301) 731-4233
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
_____________________________________________ __________________________________________
_____________________________________________ __________________________________________
Securities registered pursuant to Section 12(g) of the Act:
Common
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(Title of class)
________________________________________________________________________________
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [_]
As of November 30, 2000, the aggregate market value of the Common Stock of the
Registrant (based upon the average bid and asked prices of the Common Stock as
reported by the market makers) held by non-affiliates of the Registrant was
$137,542,151.
As of November 30, 2000, 9,447,518 shares of the Common Stock of the Registrant
were outstanding.
For the year ended September 30, 2000, the Registrant's revenues were
$40,455,143.
INDEX
PART 1
ITEM 1. BUSINESS
Company Overview........................................................................ 1
Industry Background..................................................................... 2
The Company Solution.................................................................... 2
Company Strategy........................................................................ 3
Products................................................................................ 5
Customers............................................................................... 7
Marketing............................................................................... 8
Contract Revenue........................................................................ 8
U.S. Government Contracts............................................................... 9
Non-U.S. Government Contracts........................................................... 10
Backlog................................................................................. 11
Competition............................................................................. 12
Proprietary Rights...................................................................... 12
Employees............................................................................... 13
Research and Development................................................................ 13
Environment............................................................................. 13
Financing............................................................................... 13
Financial Information in Industry Segments.............................................. 14
ITEM 2. PROPERTIES.............................................................................. 14
ITEM 3. LEGAL PROCEEDINGS....................................................................... 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................................... 14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS................... 15
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.................................................... 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS... 16
Overview................................................................................ 16
Results of Operations................................................................... 17
Revenue................................................................................. 17
Cost of Revenue/Gross Margin............................................................ 18
Comparison of Fiscal 2000 and 1999...................................................... 18
Comparison of Fiscal 1999 and 1998...................................................... 19
Discontinued Operations................................................................. 20
Acquisition of SAT Corporation.......................................................... 20
Corporation............................................................................. 20
Outlook................................................................................. 20
Liquidity and Capital Resources......................................................... 21
Year 2000 Compliance.................................................................... 21
Forward Looking Statements.............................................................. 22
1
INDEX (CONTINUED)
ITEM 7A. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...................... 22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................... 23
ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE......... 24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............................ 25
ITEM 11. EXECUTIVE COMPENSATION........................................................ 26
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNDERS AND MANAGEMENT............... 30
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................ 31
PART IV
ITEM 14. EXHIBITS, LISTS AND REPORTS ON FORM 8-K....................................... 32
2
PART 1
ITEM 1. BUSINESS
Company Overview
Integral Systems, Inc. (the "Company") builds satellite ground systems for
command and control, integration and test, data processing, and simulation.
Since its inception in 1982, the Company has provided ground systems for over
120 different satellite missions for communications, science, meteorology and
earth resource applications. The Company has an established domestic and
international customer base that includes government and commercial satellite
operators, spacecraft and payload manufacturers and aerospace systems
integrators.
The Company has developed innovative software products that reduce the cost
and minimize the development risk associated with traditional, custom-built
systems. The Company believes that it was the first to offer a comprehensive
commercial-off-the-shelf ("COTS") software product line for command and control.
As a systems integrator, the Company leverages these products to provide turnkey
satellite control facilities that can operate multiple satellites from any
manufacturer. These systems offer significant cost savings for customers that
have traditionally purchased a separate custom control center for each of their
satellites.
For 18 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. 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 by the Company. Pursuant to the terms of the reorganization
agreement, ISI was merged with and into SAT, with SAT as the surviving entity.
At the time of the merger, SAT became a wholly owned subsidiary of the Company.
Pursuant to the reorganization agreement, the purchase price paid to the sole
shareholder of SAT by the Company in connection with the acquisition of SAT
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 as a single entity. Certain reclassifications were made to the
SAT financial statements to conform to the Company's presentations.
Integral Systems, Inc. is a Maryland corporation incorporated in 1982.
1
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
telephony, 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 $87 billion in 1999 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 1999 space infrastructure revenues were approximately $52
billion, comprising over half of the total space market. The ground sector,
which includes ground equipment, installations, and operations, accounted for
approximately $33 billion of total space infrastructure revenues.
The Company estimates that the current worldwide command and control market
represents approximately $4 billion. 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 that have been 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:
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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 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
the 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 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
3
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 emerging markets in South America and Africa. 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.
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. For example, the Company is implementing an ISO 9000 compliance
program and anticipates certification in 2001.
Acquisitions of Other Companies. The Company intends to look for
complementary businesses to acquire in order to strengthen and expand its core
business. However, the Company may not be able to find any attractive candidates
or it may find that the acquisition terms proposed by potential acquisition
candidates are not favorable to the Company. In addition, the Company may
compete with other companies for these acquisition candidates, which competition
may make an acquisition more expensive for the Company. If the Company is unable
to identify and acquire any suitable candidates, the Company may not be able to
find alternative uses for the cash proceeds of its previous private placements
that improve the Company's business, financial conditions, or results of
operations to the extent that an acquisition could. In addition, 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.
4
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 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 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 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 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, 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 software provides end-to-end telemetry
processing support, including frame decommutation, engineering unit ("EU")
conversion and limits checking.
Commanding. EPOCH 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 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 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,
5
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
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.
LEO-T, the Low Earth Orbiting Terminal, is a product developed by the
Company as an extension of its existing command and control products. The LEO-T
software provides fully automated, un-manned, remote operations of satellite
ground stations, also known as telemetry, tracking, and control ("TT&C") sites,
for low Earth orbit ("LEO") satellites. The chief difference between LEO-T and
the other COTS software products is that LEO-T involves the monitoring and
control of the ground equipment, rather than satellites themselves. The software
controls antenna positioning and tracking, RF and baseband setup, communications
path switching and management of redundant equipment. The software also provides
a mechanism for transferring data between the tracking sites and the central
satellite control facility.
The Company's wholly owned subsidiary SAT Corporation also offers a range
of software products and turnkey systems for communications signal monitoring,
including SATMON, a software product for satellite transponder monitoring, and
the E4900, a turnkey system for detecting terrestrial communications
interference.
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.
Station Automation. The Company has extended the EPOCH 2000 product line to
include the LEO-T
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software, which provides fully automated un-manned operations of remote tracking
stations for LEO satellites.
Data Processing. The Company offers software tools and custom development
services for satellite payload data acquisition and processing. The Company's
principal work in this area has been for meteorological satellites.
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 science. 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, 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.
7
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 other
science 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 America 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 2000, 1999, and 1998 are as follows:
Fiscal Year
Contract Source 2000 1999 1998
--------------- ---- ---- ----
Prime Contract 71% 67% 71%
Subcontract 29% 33% 29%
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
8
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 2000 1999 1998
------------- ---- ---- ----
Cost Plus 23% 31% 37%
Fixed Price 71% 66% 60%
Time and Materials 6% 3% 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
2000, 1999 and 1998, approximately 54%, 60%, and 59% respectively of the
Company's revenues were derived from contracts or subcontracts funded by the
U.S. Government.
NOAA, one agency, represented 41%, 43%, and 39% of revenues, respectively,
for fiscal years 2000, 1999 and 1998. The Company expects that at least 35% of
its revenue for fiscal year 2001 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 15% of the Company's
fiscal year 2001 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.
9
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
2000, 1999 and 1998 approximately 46%, 40% and 41% 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 commercial contracts are with international
organizations. For fiscal years 2000, 1999 and 1998, approximately 23%, 9%, and
7%, respectively, of the Company's revenues were derived from international
organizations. Revenues from foreign sources is discussed at 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 does not
currently have any contracts that are subject to currency fluctuations in
foreign markets. 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
10
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.
Backlog
The Company's estimated backlog is as follows:
Sept. 30, 2000 Sept. 30, 1999 Sept. 30, 1998
-------------- -------------- --------------
Outstanding Commitments (1) $27,578,292 $34,932,792 $19,727,612
General Commitments (2) 13,405,022 14,633,439 25,212,281
---------- ---------- ----------
Total $40,983,314 $49,566,231 $44,939,893
=========== =========== ===========
(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 60% of backlog as of September 30, 2000 will be completed during
fiscal year 2001. Estimated backlog includes contract options through December
31, 2004, including general commitments.
Many of the Company's contracts are multi-year contracts and contracts with
option years, and portions of these contracts are carried forward from one year
to the next as part of the Company's contract backlog. The Company's total
contract backlog represents management's estimate of the aggregate unearned
revenues expected to be earned by the Company over the life of all of its
contracts, including option periods. Because many factors affect the scheduling
of projects, there can be no assurance as to when revenues will be realized on
projects included in the Company's backlog. In addition, although contract
backlog represents only business which is considered to be firm, there can be no
assurance that cancellations or scope adjustments will not occur. The majority
of backlog represents contracts under the terms of which cancellation by the
customer would entitle the Company to all or a portion of its costs incurred and
potential fees to the date of cancellation.
However, the Company also believes that backlog is not necessarily
indicative of future revenues. The Company's backlog typically is subject to
large variations from quarter to quarter as existing contracts are renewed or
new contracts are awarded. Additionally, all U.S. Government contracts included
in backlog may be terminated at the convenience of the government.
11
Competition
The Company experiences significant competition in all of the areas in
which it does business. The Company believes it is one of four companies in the
United States that derive the major portion of their revenue from the
development of satellite ground systems. The Company competes with numerous
companies having similar capabilities, some of which are larger and have
considerably greater financial resources, including Lockheed Martin Corporation,
Boeing Satellite Systems, Loral Space & Communications Ltd., Raytheon Company,
Orbital Sciences Corporation, Honeywell International Inc. (formerly
AlliedSignal), Computer Sciences Corporation, Alcatel Espace, and Astrium. Many
of these competitors are significantly larger and have greater financial
resources than the Company. In addition, some of these competitors are divisions
or subsidiaries of large, diversified companies that have access to the
financial resources of their parent companies. As a result, 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
12
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, 2000, the Company employed approximately 228 employees of
whom 219 are full-time employees and of whom 182 are considered professionals in
engineering related disciplines. Of the engineering professionals, 86% have
undergraduate degrees in a scientific discipline and 36% of those have advanced
degrees in a scientific discipline. Approximately 81% of the engineering staff
have at least seven years 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 which 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 2000, 1999 and 1998, total capitalized software
development expenditures were $2,132,589, $1,180,643 and $693,309, 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. The Company also has a line of
credit with another bank for $425,000. This line expires on August 2, 2001. At
September 30, 2000, 1999, and 1998, the Company had no amounts outstanding under
the lines of credit.
13
The Company has access to a $2.0 million equipment lease line of credit
under which it had $714,000, $1,315,000, and $1,150,000 outstanding as of
September 30, 2000, 1999, and 1998, respectively. The outstanding balance is
payable over a 36 month period and bears interest at a rate of 8.8% per annum.
See Footnote Numbers 6 and 8 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, 2000, the Company's operations included
one reportable segment: satellite ground systems.
The Company provides satellite ground systems - computer systems for
satellite command and control, data processing, signal monitoring simulation,
and flight software validation. Customers for these systems include U.S.
Government organizations such as NASA, NOAA, and the U.S. Air Force, as well as
commercial satellite operators, both domestic and foreign.
See Footnote Number 1 of the notes to the Financial Statements included
elsewhere herein for financial information regarding this segment.
ITEM 2. PROPERTIES
The Company's headquarters occupy approximately 46,700 square feet at 5000
Philadelphia Way, Lanham, Maryland 20706. The headquarters' lease expires May
31, 2009, and the annual lease cost for this lease is approximately $471,670,
excluding operating expenses of approximately $81,725. During April 1999, the
Company contracted for 24,224 square feet at 5200 Philadelphia Way, Lanham,
Maryland 20706. This lease expires May 31, 2009 and has an annual lease cost of
$244,662, excluding operating expenses of approximately $47,237.
In addition, the Company's subsidiary SAT Corporation occupies
approximately 9,940 square feet at 1151 Sonora Court, Sunnyvale, California
94086. The lease expires June 30, 2001 and has an annual lease cost of $274,344,
excluding its prorata share of operating charges, property taxes, and property
insurance.
The Company believes that it has adequate insurance coverage to protect its
properties and assets.
ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time involved in litigation incidental to the
conduct of its business. The Company is not currently a party to any lawsuit or
proceeding which, in the opinion of management, would be likely to have a
material adverse effect on the Company's business, financial condition or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to our stockholders during the fourth quarter of
the fiscal year ended September 30, 2000.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth the high and low prices of the 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.
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
1999 Fiscal Year High Low
---------------- ---- ---
First Quarter 29.88 13.00
Second Quarter 20.38 11.50
Third Quarter 24.94 17.56
Fourth Quarter 29.00 20.88
As of September 30, 2000, there were approximately 3,441 holders of record
of the Company's Common Stock.
Historically, the Company has not paid any cash dividends. Instead, the
Company intends to invest earnings in the operations, development and growth of
its business. The payment of future dividends on the Common Stock and the rate
of such dividends, if any, will be determined in light of any applicable
contractual restrictions limiting the Company's ability to pay dividends, the
Company's earnings, financial condition, capital requirements and other factors
deemed relevant by the Board of Directors. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents summary consolidated financial data of the
Company for the years ended September 30, 2000, 1999, 1998, 1997 and 1996. The
financial data for the years ended September 30, 1998, 1999 and 2000 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 to include the combined
financial results of the Company and SAT. 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 years ended 1996 and 1997 has been derived from the Company's audited
financial statements, which have been then restated to include SAT Corporation.
For fiscal year 1996, SAT Corporation's financial information for its fiscal
year ended March 31, 1997 has been incorporated with Integral Systems' audited
financial data. In the opinion of the Company's management, the unaudited
financial statements represent a fair presentation of such information. The
following information should be read in conjunction with the Company's financial
statements and notes thereto presented elsewhere herein. See "Financial
Statements" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
15
Years Ended September 30,
-----------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
(unaudited) (unaudited)
(in thousands, except for per share data)
Statement of Operations Data:
Revenue $14,811 $23,653 $31,012 $42,937 $40,455
Gross margin 5,037 6,075 8,675 12,001 11,869
Income from operations 1,227 1,803 3,024 4,723 2,919
Net income $ 882 $ 1,188 $ 2,024 3,200 $ 4,177
Net income per common and equivalent
share--basic $ 0.14 $ 0.19 $ 0.31 $ 0.46 $ 0.47
Net income per common and equivalent
share--diluted $ 0.14 $ 0.18 $ 0.29 $ 0.43 $ 0.45
Weighted average common and equivalent
shares outstanding--basic 6,338 6,368 6,443 6,969 8,829
Weighted average common and equivalent
shares outstanding--diluted 6,478 6,558 6,883 7,423 9,284
Balance Sheet Data:
Cash and cash equivalents $ 1,370 $ 2,335 $ 4,589 $ 9,267 $17,558
Working capital 4,257 5,334 8,239 30,748 76,519
Total assets 8,080 14,438 19,166 45,280 88,911
Long-term obligations, net of current 0 0 748 714 260
Stockholders' equity 5,959 7,369 9,981 34,152 81,698
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Integral Systems, Inc. builds satellite ground systems for command and
control, integration and test, data processing, and simulation. Since its
inception in 1982, the Company has provided ground systems for over 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 to include the
combined financial results of the Company and SAT. 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.
16
Results of Operations
The Company's results of operations have been restated to include the
operations of SAT Corporation for the years ended September 30, 2000, 1999, and
1998. 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, 2000, 1999 and 1998:
Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year
2000 2000 1999 1999 1998 1998
---- ---- ---- ---- ---- ----
(in thousands) % of (in thousands) % of (in thousands) % of
Revenue Revenue Revenue
Revenue $40,455 100.0 $42,937 100.0 $31,012 100.0
Cost of revenue 28,586 70.7 30,936 72.0 22,337 72.0
------ ---- ------ ---- ------ -----
Gross margin 11,869 29.3 12,001 28.0 8,675 28.0
SG&A 7,555 18.7 6,618 15.4 4,613 14.9
Acquisition Costs 445 1.1 0 0 0 0
Product Amortization 950 2.3 660 1.6 660 2.1
Offering Expenses 0 0 0 0 378 1.2
------ ---- ------ ----- ------ -----
Income from operations 2,919 7.2 4,723 11.0 3,024 9.8
Other income (exp.) net 1,976 4.9 143 .3 -212 -.7
------ ---- ------ ----- ------ -----
Income before taxes 4,895 12.1 4,866 11.3 2,812 9.1
Income taxes 1,182 2.9 1,882 4.4 1,085 3.5
------ ---- ------ ----- ------ -----
Income from continuing
Operations 3,713 9.2 2,984 6.9 1,727 5.6
Income from
Discontinued Segment
(net of tax) 129 .3 216 .5 297 1.0
Gain on sale of
Discontinued
Segment (net of tax) 335 .8 0 0 0 0
------ ---- ------ ----- ------ -----
Net Income $ 4,177 10.3 $ 3,200 7.4 $ 2,024 6.6
====== ==== ====== ===== ====== =====
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, 2000, 1999, and 1998, the
Company's revenues were generated from the following sources:
17
Fiscal Year Fiscal Year Fiscal Year
Revenue Type 2000 1999 1998
------------ ---- ---- ----
Commercial Products & Services
Commercial Users 46% 40% 41%
U.S. Government Users 2 3 7
---- ----- -----
Subtotal 48 43 48
---- ----- -----
Government Services
NOAA 41 43 39
NASA 6 10 5
Other U.S. Government Users 5 4 8
---- ----- -----
Subtotal 52 57 52
---- ----- -----
Total 100% 100% 100%
==== ===== =====
Based on the Company's revenue categorization system, the Company
classified 48%, 43%, and 48% of its revenue as Commercial Products and Services
revenue with the remaining 52%, 57%, and 52% classified as Government Services
revenue for fiscal years ended September 30, 2000, 1999, and 1998, respectively.
By way of comparison, if the revenues were classified strictly according to
end-user (independent of the Company's internal revenue categorization system),
the U.S. Government would account for 54%, 60%, and 59% of the total revenues
for fiscal years 2000, 1999, and 1998 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 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 based ground systems to commercial clients
while also making in-roads selling EPOCH based systems to governmental clients,
especially NOAA, as U.S. Government customers increased their purchases of the
Company's EPOCH product line and related services for both command and control
applications and for I&T services.
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,
18
gross margin as a percentage of revenue increased to 29.3% during fiscal year
2000 compared to 28.0% for fiscal year 1999.
Selling, General & Administrative expenses (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 cash invested from the Company's two
private placement equity infusions 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.
Fiscal Year 1999 Compared to Fiscal Year 1998
On a consolidated basis, revenue increased 38.5%, or $11.9 million, to
$42.9 million for fiscal year 1999 from $31.0 million for fiscal year 1998. The
increase was principally due to increases in both the Company's Government
Services revenues and the Company's Commercial Products and Services revenues.
During fiscal year 1999, cost of revenue increased to $30.9 million from
$22.3 million in fiscal year 1998 due primarily to increases in direct labor and
related overhead costs necessary to staff the Company's new contracts and
revenue growth. Cost of equipment and subcontracts also increased $3.2 million
between fiscal year 1999 and fiscal year 1998. Cost of revenue expressed as a
percentage of revenues was 72.0% for fiscal year 1999 and for fiscal year 1998.
The Company's gross margin increased 38.3%, or $3.3 million, to $12.0
million for fiscal year 1999 from $8.7 million for fiscal year 1998. The
increase was principally due to margin increases in virtually all of the
Company's revenue components (i.e. licenses, engineering services, and pass-
throughs) that occurred as a result of several factors, including an increase in
revenue from high margin license sales, which nearly doubled between fiscal year
1998 and fiscal year 1999. Gross margin as a percentage of revenue was 28.0%
during fiscal year 1999 and fiscal year 1998.
SG&A increased to approximately $6.6 million in fiscal year 1999 from $4.6
million in fiscal year 1998. 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 15.4% of
revenue in fiscal year 1999 compared to 14.9% in the preceding fiscal year.
Product amortization was $660,000 for both fiscal years 1999 and 1998.
During fiscal year 1998, the Company charged approximately $380,000 to
operating expense in connection with its decision to indefinitely postpone a
secondary public offering that was registered with the Securities and Exchange
Commission (SEC) in July 1998 on Form S-1 and withdrawn in September 1998.
However, in June 1999, the Company successfully raised $19.7 million (net) in
the private placement of approximately 1.2 million shares of its common stock.
Income from operations increased 56.2% to $4.7 million for fiscal year 1999
from $3.0 million for fiscal year 1998 primarily due to increases in gross
margin dollars described above. As a percentage of revenue, income from
operations increased to 11.0% for fiscal year 1999 from 9.8% for the prior
fiscal year. This increase was principally
19
the result of a lower percentage of product amortization as a function of
revenue. Further, fiscal year 1998 offering expenses ($380,000) did not recur in
fiscal year 1999.
The Company's effective tax rate was 38.6% for both fiscal years 1999 and
1998.
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 and $297,000 in fiscal year
1998. The decrease was principally due to decreased commission revenue.
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 by the Company.
Pursuant to the terms of the reorganization agreement, ISI was merged with and
into SAT, with SAT as the surviving entity. At the time of the merger, SAT
became a wholly owned subsidiary of the Company. Pursuant to the reorganization
agreement, the purchase price paid to the sole shareholder of SAT by the Company
in connection with the acquisition of SAT 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 as a single
entity. Certain reclassifications were made to the SAT 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" and elsewhere herein 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.
Currently, the Company is estimating the results for the quarter ending
December 31, 2000 to be comparable to the fourth quarter fiscal year 2000
results, not considering the effect of discontinued operations and the one time
events described above. Looking forward to fiscal year 2001 in its entirety, the
Company is anticipating growth in revenue, operating income, net income, and
fully diluted earnings per share (excluding discontinued operations and the
non-recurring items), of 10%, 30%, 30%, and 20% respectively.
20
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 2000, the Company generated approximately $3.1 million of
cash from operating activities, and used approximately $35.2 million for
investing activities, $31.8 million of which was used to purchase short term,
tax-exempt marketable securities. Further, the Company invested approximately
$2.1 million for newly capitalized software development costs. During fiscal
year 2000, the Company also purchased approximately $1.2 million of fixed assets
(principally new computers and equipment).
During fiscal year 2000, 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 (EBITA). 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 has a line of credit with another bank for
$425,000. This line expires on August 2, 2001. At September 30, 2000, 1999 and
1998, 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 $714,000, $1,315,000, and $1,150,000 outstanding as of
September 30, 2000, 1999, and 1998, respectively. The outstanding balance is
payable over a 36 month period and bears interest at a rate of 8.8% per annum.
The Company currently anticipates that its current cash balances, amounts
available under its lease line of credit and a new line 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 2000, 1999 and 1998 to date.
YEAR 2000 COMPLIANCE
--------------------
Many currently installed computer systems, software products, and
microprocessor-dependent equipment are coded to accept only two digit entries in
the date code field. To distinguish 21st century dates from 20th century dates,
these date code fields must be able to accept four digit entries.
The Company may realize exposure and risk if our suppliers or customers are
not "year 2000 compliant". The potential areas of exposure include electronic
data exchange systems operated by third parties with whom the Company transacts
business and products purchased from third parties, such as computers, software,
telephone systems and other equipment used internally.
Although the rollover from December 31, 1999 to January 1, 2000 has
occurred, the Company still faces risks to the extent that its suppliers of
products, services, and systems or the suppliers of others with whom the Company
transacts business cannot provide the Company with products, components,
services, or systems that meet year 2000 requirements. In the event that any
such third parties cannot provide the Company with products, services, or
systems that meet the year 2000 requirements, the Company's business could be
harmed.
21
FORWARD LOOKING STATEMENTS
--------------------------
Certain of the statements contained in the Business section, in other parts
of this 10-K, and in this section, including those under the headings "Outlook"
and "Liquidity and Capital Resources," are forward looking. In addition, from
time to time, the Company may publish forward looking statements relating to
such matters as anticipated financial performance, business prospects,
technological developments, new products, research and development activities
and similar matters. Forward-looking statements can be identified by the use of
forward-looking terminology such as "may", "will", "believe", "expect",
"anticipate", "estimate", "continue", or other similar words, including
statements as to the intent, belief, or current expectations of the Company and
its directors, officers, and management with respect to the Company's future
operations, performance, or positions or which contain other forward-looking
information. These forward-looking statements are predictions. No assurances can
be given that the future results indicated, whether expressed or implied, will
be achieved. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. While the Company believes
that these statements are and will be accurate, a variety of factors could cause
the Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Company's statements.
The Company's business is dependent upon general economic conditions and upon
various conditions specific to its industry, and future trends cannot be
predicted with certainty. Particular risks and uncertainties that may effect the
Company's business, in addition to 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.
. 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. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INTEGRAL SYSTEMS, INC.
AND SUBSIDIARIES
______________
CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 30, 2000, 1999, and 1998
AND
INDEPENDENT AUDITORS' REPORT
23
Item 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Name Position with the Company
---- -------------------------
Steven R. Chamberlain Chairman of the Board,
Chief Executive Officer and Director
Thomas L. Gough President, Chief Operating Officer, and Director
Elaine M. Parfitt Vice President, Chief Financial Officer, Secretary and Treasurer
Patrick R. Woods Vice President, Government Programs
Peter J. Gaffney Vice President, Commercial Products
Bonnie K. Wachtel Outside Director
Dominic A. Laiti Outside Director
R. Doss McComas Outside Director
John R. Murphy Outside Director
Directors of the Company serve until the next annual meeting of
stockholders or until successors have been duly elected and qualified. Officers
of the Company serve at the discretion of the Board of Directors.
Steven R. Chamberlain, 45, 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 ("OAO") 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, 52, 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, 37, 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 CPA.
Patrick R. Woods, 45, 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. in Public Administration and a M.P.A. in Public
Management from Indiana University.
Peter J. Gaffney, 41, 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,
25
and 4 ground systems. Prior to joining Integral Systems, Mr. Gaffney was a
design engineer for the General Electic 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 in Electrical Engineering.
Bonnie K. Wachtel, 45, 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, 69, 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, 46, 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 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. Mr. Murphy is Chairman of the
Board of Provant, Inc., and serves on the Board of Directors of The Omnicom
Group, MSD&T Funds, Arbos Inc., 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, 2000 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: John R. Murphy, a director of the Company, inadvertently
filed late a Form 3; Steve Chamberlain, an executive officer and director of the
Company, inadvertently filed late a Form 4 for December 1999, reporting one
transaction.
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 2000 and who earned over
26
$100,000 during the fiscal year ended September 30, 2000 and one additional
individual who would have otherwise been included herein but for the fact that
he was not an executive officer of the Company at the end of fiscal year 2000:
Annual Compensation Long-Term Compensation
------------------- ----------------------
Awards Payouts
------ -------
Name and Principal Shares All Other
Position Year Salary Bonus Underlying Options Compensation (1)
-------- ---- ------ ----- ------------------ ----------------
Chief Executive Officer
Steven. R. Chamberlain 2000 $214,303 $25,000 12,000 $19,061
1999 $187,862 $65,000 20,000 $19,066
1998 $140,120 $30,000 0 $13,847
Chief Operating Officer/Pres.
Thomas L. Gough 2000 $180,648 $20,000 14,000 $18,781
1999 $167,545 $35,000 0 $16,885
1998 $125,251 $20,000 0 $12,357
Vice Pres., Government Programs
Patrick R. Woods 2000 $152,510 $10,000 2,000 $16,800
1999 $156,119 $30,000 12,000 $16,799
1998 $117,284 $15,000 0 $12,382
Former Executive Vice Pres., Business Development
Steven A. Carchedi (2) 2000 $148,693 $ 0 0 $ 9,015
1999 $162,476 $35,000 12,000 $16,092
1998 $122,432 $20,000 0 $11,092
Vice Pres., Commercial Products
Peter J. Gaffney 2000 $132,423 $15,000 7,000 $12,918
1999 $107,520 $12,000 23,000 $ 9,854
1998 $ 91,802 $10,000 0 $ 8,886
Vice Pres., Chief Financial Officer
Elaine M. Parfitt 2000 $132,169 $15,000 6,000 $13,300
1999 $106,506 $30,000 10,000 $ 9,575
1998 $ 74,134 $10,000 0 $ 6,830
(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, $594 and $584 for
fiscal years 2000, 1999 and 1998 respectively.
(2) Mr. Carchedi resigned as an officer and director of the Company on
June 30, 2000.
27
OPTION/SAR GRANTS IN LAST FISCAL YEAR
- ------------------------------------------------------------------------------------------------------------------------------
Individual Grants
- ------------------------------------------------------------------------------------------------------------------------------
Percent of Total
Number of Options/SARs
Options/ Granted to Grant Date
SARs Employees in Exercise/Base Expiration Present
Name Granted Fiscal Year Price($) Date Value(1)
- ------------------------------------------------------------------------------------------------------------------------------
CEO
Steven R. Chamberlain 12,000 5% $18.00 2006 $64,080
CHIEF OPERATING OFFICER/PRESIDENT
Thomas L. Gough 14,000 6% $18.00 2006 $74,760
VP GOVERNMENT PROGRAMS
Patrick R. Woods 2,000 1% $18.00 2006 $10,680
VP COMMERCIAL PRODUCTS
Peter G. Gaffney 7,000 3% $18.00 2006 $37,380
VP/CHIEF FINANCIAL OFFICER
Elaine M. Parfitt 6,000 3% $18.00 2006 $32,040
(1) Grant date present value is calculated on the date of the grant using the
Black Scholes option pricing model assuming the following: no dividend
yield, risk free interest rate of 6%, 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 2000, 1999, and 1998, 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 235,850 shares of Common Stock were issued and options to
purchase 213,756 shares of Common Stock were exercised during fiscal year 2000.
The Company has reserved for issuance an aggregate of 1,139,824 shares of Common
Stock, of which options to purchase 831,200 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.
28
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
Five of the executives named below exercised stock options during the fiscal
year ended September 30, 2000.
Steven R. Chamberlain exercised 45,000 Incentive Stock Options. Thomas L. Gough
exercised 6,000 Incentive Stock Options. Patrick R. Woods exercised 1,400
Incentive Stock Options. Steven A. Carchedi exercised 57,378 Incentive Stock
Options. Peter G. Gaffney exercised 9,000 Incentive Stock Options.
- -------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
- -------------------------------------------------------------------------------------------------------------------
Number of
Securities
Underlying Value of Unexercised
Unexercised Options/ In-the-Money Options/
SARS at FY end (#) SARS at FY end ($)1
Shares Acquired Exercisable/ Exercisable/
Name on Exercise (#) Value Realized Unexercisable Unexercisable
- -------------------------------------------------------------------------------------------------------------------
Chief Executive Officer 45,000 $1,318,895 78,700 $959,774
Steven R. Chamberlain (exercisable) (exercisable)
43,300 $195,917
(unexercisable) (unexercisable)
- -------------------------------------------------------------------------------------------------------------------
Chief Operating Officer/Pres. 6,000 $ 91,230 26,000 $330,330
Thomas L. Gough (exercisable) (exercisable)
26,000 $152,460
(unexercisable) (unexercisable)
- -------------------------------------------------------------------------------------------------------------------
Vice President Government 1,400 $ 32,480 1,000 $ 0
Programs (exercisable) (exercisable)
Patrick R. Woods 11,600 $ 0
(unexercisable) (unexercisable)
- -------------------------------------------------------------------------------------------------------------------
Former Executive Vice 57,378 $1,186,026 0 $ 0
President of Business (exercisable) (exercisable)
Development 0 $ 0
Steven A. Carchedi(2) (unexercisable) (unexercisable)
- -------------------------------------------------------------------------------------------------------------------
Vice President Commercial 9,000 $ 218,280 24,100 $254,378
Products (exercisable) (exercisable)
Peter G. Gaffney 29,900 $ 58,703
(unexercisable) (unexercisable)
- -------------------------------------------------------------------------------------------------------------------
Vice President, Chief ___ ___ 6,500 $ 58,703
Financial Officer (exercisable) (exercisable)
Elaine M. Parfitt 15,500 $ 19,568
(unexercisable) (unexercisable)
- -------------------------------------------------------------------------------------------------------------------
(1) Value for "In the Money" options represents the difference between the
exercise prices of outstanding options and the fair market value of
the Company's common stock of $16.625 per share at September 30, 2000.
(2) Mr. Carchedi resigned as an officer and director of the Company on
June 30, 2000.
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.
29
e. Termination of Employment and Change of Control Termination
-----------------------------------------------------------
The Company has no compensatory plan or arrangement with respect to any
individual named in the Summary Compensation Table (Item 10(a)) which results or
will result from the resignation, retirement or any other termination of such
individual's employment with the Company or its subsidiaries or from a change in
control of the Company or a change in the individual's responsibilities
following a change in control.
Item 12. Security Ownership of Certain Beneficial Owners and Management
a. Security Ownership of Certain Beneficial Owners (as of 9/30/00)
---------------------------------------------------------------
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock, par value $.01, as of September 30,
2000, 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.
Name and Address of Beneficial Owner Amount and Nature of Percent of
- ------------------------------------ -------------------- ----------
Beneficial Owner Class
---------------- -----
Chartwell Capital Investors II LP 555,556 5.9%
One Independent Drive
Suite 3120
Jacksonville, FL 32202
Herbert Pardula 650,000 6.9%
15091 Esther Drive
San Jose, CA 95124
b. Security Ownership of Management (as of 9/30/00)
------------------------------------------------
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock, par value $.01, as of September 30,
2000, 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.
30
Name and Address of Beneficial Owner Amount and Nature of Percent of
- ------------------------------------ -------------------- ----------
Beneficial Owner Class
---------------- -----
Executive Officers, Directors
Steven R. Chamberlain 415,205 (1) 4.4%
Thomas L. Gough 180,600 (2) 1.9%
Elaine M. Parfitt 14,900 (3) *
Patrick Woods 1,500 (4) *
Peter J. Gaffney 32,100 (5) *
Bonnie K. Wachtel 52,400 (6) *
1101 Fourteenth Street, N.W.
Suite 800
Washington, D.C. 20036
R. Doss McComas 16,000 (7) *
409 Biggs Drive
Front Royal, VA 22630
John R. (Reg) Murphy 7,000 (8) *
Cottage 448, West 31st Street
Sea Island, GA 31561
Dominic A. Laiti 5,000 (9) *
12525 Knoll Brook Drive
Clifton, VA 22024
All Directors and Executive Officers as a group
(9 persons). 724,705 7.5%
* Less than one percent of the Common Stock outstanding.
(1) Includes outstanding options to purchase 78,700 shares of Common Stock
which are exercisable within 60 days.
(2) Includes outstanding options to purchase 26,000 shares of Common Stock
which are exercisable within 60 days.
(3) Includes outstanding options to purchase 6,500 shares of Common Stock which
are exercisable within 60 days.
(4) Includes outstanding options to purchase 1,000 shares of Common Stock which
are exercisable within 60 days.
(5) Includes outstanding options to purchase 24,100 shares of Common Stock
which are exercisable within 60 days.
(6) Includes outstanding options to purchase 26,000 shares of Common Stock
which are exercisable within 60 days.
(7) Includes outstanding options to purchase 16,000 shares of Common Stock
which are exercisable within 60 days.
(8) Includes outstanding options to purchase 5,000 shares of Common Stock which
are exercisable within 60 days.
(9) Includes outstanding options to purchase 5,000 shares of Common Stock which
are exercisable within 60 days.
Item 13. Certain Relationships and Related Transactions
In August 2000, the Company entered into an agreement and plan of
reorganization, by and among the Company, SAT Corporation, ISI Acquisition
Corporation and Herbert Pardula, the sole shareholder of SAT Corporation. The
reorganization agreement provided for the acquisition of SAT by the Company.
Pursuant to the terms of the reorganization agreement, ISI was merged with and
into SAT, with SAT as the surviving entity. At the time of the merger, SAT
became a wholly owned subsidiary of the Company. Pursuant to the reorganization
agreement, the purchase price paid to the sole shareholder of SAT by the Company
in connection with the acquisition of SAT 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. Pursuant to the foregoing agreement, Herbert
Pardula became a beneficial owner of greater than 5% of the Company's Common
Stock.
31
PART IV
Item 14. Exhibits, Lists, and Reports on Form 8K
(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.
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
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a report on Form 8-K with the SEC on September 15, 2000
reporting its acquisition of SAT Corporation. See "Item 13. Certain
Relationships and Related Transactions."
32
Pursuant to the requirements of the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
Signature Titles Date
/s/ Chairman of the Board, Director, 12/19/00
- ----------------------------------------- ----------------
Steven R. Chamberlain Chief Executive Officer
/s/ President, Chief Operating Officer, 12/19/00
- ----------------------------------------- ----------------
Thomas L. Gough Director
/s/ Chief Financial Officer, Principal, 12/19/00
- ----------------------------------------- ----------------
Elaine M. Parfitt Accounting Officer
/s/ Director 12/19/00
- ----------------------------------------- ----------------
Dominic A. Laiti
/s/ Director 12/19/00
- ----------------------------------------- ----------------
R. Doss McComas
/s/ Director 12/19/00
- ----------------------------------------- ----------------
John R. Murphy
/s/ Director 12/19/00
- ----------------------------------------- ----------------
Bonnie K. Wachtel
33
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: 12/19/00 BY: /s/
------------- --------------------------------
Steven R. Chamberlain
Chairman of the Board and
Chief Executive Officer
DATE: 12/19/00 BY: /s/
------------- --------------------------------
Thomas L. Gough
President, Chief Operating Officer
Director
DATE: 12/19/00 BY: /s/
------------- --------------------------------
Elaine M. Parfitt
Chief Financial Officer, Principal
Accounting Officer
34
TABLE OF CONTENTS
DESCRIPTION PAGES
Independent Auditors' Report F-1
Consolidated Balance Sheets as of September 30, 2000 and 1999 F-2
Consolidated Statements of Operations for the Years Ended
September 30, 2000, 1999 and 1998 F-3
Consolidated Statements of Stockholders' Equity for the Years Ended
September 30, 2000, 1999 and 1998 F-4
Consolidated Statements of Cash Flows for the Years Ended
September 30, 2000, 1999 and 1998 F-5
Notes to Consolidated Financial Statements F-6 - F-18
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, 2000 and 1999,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for the years ended September 30, 2000, 1999 and 1998. 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, 2000 and 1999,
and their consolidated results of operations and consolidated cash flows for the
years ended September 30, 2000, 1999 and 1998, in conformity with accounting
principles generally accepted in the United States.
/s/
Rubino & McGeehin, Chartered
November 28, 2000
Bethesda, Maryland
F-1
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2000 and 1999
________________
ASSETS
2000 1999
---- ----
(restated)
Current assets
--------------
Cash and cash equivalents $ 17,558,331 $ 9,267,207
Marketable securities 49,966,000 18,136,000
Accounts receivable 13,268,632 13,561,140
Employee receivables and other receivables 233,661 63,351
Prepaid expenses 190,075 134,684
Notes receivable 600,000 -
Income taxes receivable 1,655,290 -
-------------- ---------------
Total current assets 83,471,989 41,162,382
Property and equipment, at cost, net of accumulated
depreciation and amortization 2,204,401 2,075,113
Software development costs, net of accumulated amortization 3,188,783 2,006,194
Deposits 45,724 36,528
-------------- ---------------
Total assets $ 88,910,897 $ 45,280,217
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
-------------------
Accounts payable - trade $ 1,914,985 $ 2,935,863
Accrued expenses 2,618,512 3,710,577
Capital leases payable - current portion 454,154 601,327
Billings in excess of revenue for contracts in progress 1,832,520 2,657,074
Income taxes payable - 447,176
Deferred income tax liability 132,925 62,143
-------------- ---------------
Total current liabilities 6,953,096 10,414,160
Capital leases payable - long term portion 259,951 714,106
-------------- ---------------
Total liabilities 7,213,047 11,128,266
-------------- ---------------
Commitments and contingencies
-----------------------------
Common stock, $.01 par value, 40,000,000 and 40,000,000
shares authorized, 9,427,368 and 7,813,908 shares issued
and outstanding 94,274 78,139
Additional paid-in capital 65,702,313 22,349,932
Retained earnings 15,901,263 11,723,880
-------------- ---------------
Total stockholders' equity 81,697,850 34,151,951
-------------- ---------------
Total liabilities and stockholders' equity $ 88,910,897 $ 45,280,217
============== ===============
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
September 30, 2000, 1999 and 1998
_______________
2000 1999 1998
---- ---- ----
(restated) (restated)
Revenue $ 40,455,143 $ 42,937,287 $ 31,012,028
--------------- --------------- ---------------
Cost of revenue
Direct labor 10,882,228 11,347,662 7,129,740
Direct equipment and subcontracts 7,544,122 11,759,093 8,550,655
Travel and other direct costs 1,566,665 1,155,842 967,751
Overhead costs 8,593,346 6,673,407 5,689,002
--------------- --------------- ---------------
Total cost of revenue 28,586,361 30,936,004 22,337,148
--------------- --------------- ---------------
Gross margin 11,868,782 12,001,283 8,674,880
Selling, general and administrative 7,555,177 6,618,490 4,612,553
Product amortization 950,000 660,000 660,000
Acquisition Costs 444,847 - -
Offering expenses - - 378,110
--------------- --------------- ---------------
Income from operations 2,918,758 4,722,793 3,024,217
Other income (expense)
Interest income 2,335,524 377,787 93,916
Interest expense (96,587) (121,300) (87,013)
Miscellaneous, net (262,369) (113,517) (219,588)
--------------- --------------- ---------------
Income from continuing operations before income taxes 4,895,326 4,865,763 2,811,532
Provision for income taxes 1,182,498 1,882,346 1,084,500
--------------- --------------- ---------------
Income from continuing operations 3,712,828 2,983,417 1,727,032
Discontinued operations:
Income from discontinued segment
(net of tax of $42,867, $136,500, and $186,600) 129,374 216,879 296,641
Gain on disposal of discontinued segment
(net of deferred tax of $210,895) 335,181 - -
--------------- --------------- ---------------
Net income $ 4,177,383 $ 3,200,296 $ 2,023,673
=============== =============== ===============
Weighted average number of common shares:
Basic 8,829,182 6,969,090 6,443,433
Diluted 9,283,546 7,422,601 6,882,933
Earnings per share
Basic
Continuing operations $ .42 $ .43 $ .27
Discontinued operations .01 .03 .04
Gain on disposal of discontinued segment .04 - -
--------------- --------------- ---------------
Net income $ .47 $ .46 $ .31
=============== =============== ===============
Earnings per share
Diluted
Continuing operations $ .40 $ .40 $ .25
Discontinued operations .01 .03 .04
Gain on disposal of discontinued segment .04 - -
--------------- --------------- ---------------
Net income $ .45 $ .43 $ .29
=============== =============== ===============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended September 30, 2000, 1999 and 1998
____________
Common Additional
Number Stock at Par Paid-in Retained
of Shares Value Capital Earnings Total
--------------- ---------------- ------------------ ---------------- ----------------
Balance, September 30, 1997, restated 6,374,904 $ 63,749 $ 1,168,471 $ 6,499,911 $ 7,732,131
Stock options exercised 115,080 1,150 361,201 - 362,351
Tax benefit of stock options
exercised - - 225,622 - 225,622
Net income - - - 2,023,673 2,023,673
------------ ------------ ------------- ------------ ------------
Balance, September 30, 1998, restated 6,489,984 64,899 1,755,294 8,523,584 10,343,777
Private placement offering 1,183,268 11,833 19,650,219 - 19,662,052
Stock options exercised 140,656 1,407 455,740 - 457,147
Tax benefit of stock options
exercised - - 488,679 - 488,679
Net income - - - 3,200,296 3,200,296
------------ ------------ ------------- ------------ ------------
Balance, September 30, 1999, restated 7,813,908 78,139 22,349,932 11,723,880 34,151,951
Private placement offering 1,400,000 14,000 40,933,758 - 40,947,758
Stock options exercised 213,460 2,135 982,869 - 985,004
Tax benefit of stock options
exercised - - 1,435,754 - 1,435,754
Net income - - - 4,177,383 4,177,383
------------ ------------ ------------- ------------ ------------
Balance, September 30, 2000 9,427,368 $ 94,274 $ 65,702,313 $ 15,901,263 $ 81,697,850
============ ============ ============= ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended September 30, 2000, 1999 and 1998
___________
2000 1999 1998
---- ---- ----
(restated) (restated)
Cash flows from operating activities:
Net income $ 4,177,383 $ 3,200,296 $ 2,023,673
----------- ------------- -------------
Reconciling adjustments:
Tax effect of options exercised 1,435,754 488,679 225,622
Effect of shares issued in pooling 362,812 - -
Depreciation and amortization 1,997,785 1,454,163 1,235,475
Loss on disposal of fixed assets 32,498 15,312 32,769
Deferred income taxes, net 70,782 5,936 (425,056)
(Increase) decrease in:
Accounts receivable and other receivables 122,198 (2,028,894) (2,099,013)
Prepaid expenses and deposits (64,587) (39,733) 42,460
(Decrease) increase in:
Accounts payable (1,020,878) (165,537) 164,791
Accrued expenses (1,092,065) 1,065,358 925,423
Billings in excess of cost (824,554) 1,566,493 241,971
Income taxes payable, net (2,102,466) (300,601) 572,767
----------- ------------- -------------
Total adjustments (1,082,721) 2,061,176 917,209
----------- ------------- -------------
Net cash provided by operating activities 3,094,662 5,261,472 2,940,882
----------- ------------- -------------
Cash flow from investing activities:
Marketable securities (31,830,000) (18,136,000) -
Acquisition of fixed assets (1,209,571) (972,500) (205,852)
Software development costs (2,132,589) (1,180,643) (693,309)
----------- ------------- -------------
Net cash used in investing activities (35,172,160) (20,289,143) (899,161)
----------- ------------- -------------
Cash flow from financing activities:
Issuance of notes receivable (600,000) - -
Proceeds from sale/lease back - - 500,000
Payments on line of credit - - (500,000)
Proceeds from issuance of common stock 41,569,950 20,119,199 362,351
Payments on capital lease obligations (601,328) (413,895) (149,134)
----------- ------------- -------------
Net cash provided by financing activities 40,368,622 19,705,304 213,217
----------- ------------- -------------
Net increase in cash and cash equivalents 8,291,124 4,677,633 2,254,938
Cash and cash equivalents - beginning of year 9,267,207 4,589,574 2,334,636
----------- ------------- -------------
Cash and cash equivalents - end of year $ 17,558,331 $ 9,267,207 $ 4,589,574
=========== ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 30, 2000, 1999 and 1998
__________________
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 (SAT, see Note 2) and InterSys, Inc. (InterSys). Its former
subsidiary Integral Marketing, Inc. (IMI) was 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 generally
accepted accounting principles 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
Marketable securities, comprised of variable rate State of Maryland debt
securities at September 30, 2000 and 1999, are considered available-for-
sale and are carried at estimated current value based on quoted market
prices. Current value at September 30, 2000 and 1999, approximates cost.
Contract Revenue
Revenue under cost-plus-fixed-fee contracts is recorded on the basis of
direct costs plus indirect costs incurred and an allocable portion of the
fixed fee. Revenue from fixed-price contracts is recognized on the
percentage-of-completion method, measured by the cost-to-cost method for
each contract. Revenue from time and materials contracts is recognized
based on fixed hourly rates for direct labor expended. The fixed rate
includes direct labor, indirect expenses and profits. Material or other
specified direct costs are recorded at actual cost.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance. General and administrative
costs are charged to expense as incurred. Provisions for estimated losses
on contracts in progress are made in the period in which such losses are
determined. Changes in job performance, job conditions, and estimated
profitability, including final contract settlements, may result in
revisions to costs and income and are recognized in the period in which the
revisions are determined. The Company's contracts vary in length from one
to four years.
The fees under certain government contracts may be increased or decreased
in accordance with cost or performance incentive provisions which measure
actual performance against established targets or other criteria. Such
incentive fee awards or penalties are included in revenue at the time the
amounts can be reasonably determined.
Unbilled accounts receivable represents revenue recognized in excess of
amounts billed. The liability, billings in excess of revenue for contracts
in progress, represents billings in excess of revenue recognized.
F-6
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 30, 2000, 1999 and 1998
______________
1. Summary of Significant Accounting Policies (continued)
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.
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 and the stock splits discussed in Note 12.
F-7
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 30, 2000, 1999 and 1998
_______________________
1. Summary of Significant Accounting Policies (continued)
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, 2000, 1999, and 1998, the Company's
operations included one reportable segment for satellite ground systems.
These continuing operations include all of the operations of the Company
and SAT 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 statements of cash flows
for the years ended September 30, 2000, 1999, and 1998, excludes the
addition of equipment under capital leases totaling $0, $579,496, and
$1,298,966, 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, totalled $9,319,638,
$3,893,274, and $2,102,754 for the years ended September 30, 2000, 1999,
and 1998, respectively. The Company has no significant long-lived assets
located in foreign countries.
2. Acquisitions and Dispositions
Effective August 31, 2000, in connection with the Agreement and Plan of
Reorganization, the Company issued 650,000 shares of its common stock in
exchange for all of the outstanding common stock of SAT Corporation (SAT),
a privately-held company with 4.0 million shares outstanding, for a total
value of $9.831 million. The merger qualified as a tax-free reorganization
and has been accounted for as a pooling of interests. Accordingly, the
Company's consolidated financial statements have been restated for all
periods prior to the business combination to include the combined financial
results of Integral and SAT. Net sales, income before discontinued
operations, and net income for the individual companies reported prior to
the merger are as follows:
F-8
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 30, 2000, 1999 and 1998
___________________
2. Acquisitions and Dispositions (continued)
Eleven months
Ended Year Ended Year Ended
August 31, 2000 September 30 1999 September 30 1998
--------------- ----------------- -----------------
Net Sales:
Integral $ 31,321,823 $ 38,358,415 $ 26,621,259
SAT 5,762,058 4,578,872 4,390,769
------------ ------------ ------------
Total 37,083,881 42,937,287 31,012,028
------------ ------------ ------------
Income before taxes
and discontinued item:
Integral 4,299,301 5,700,567 2,623,586
SAT 188,082 (834,804) 187,946
------------ ------------ ------------
Total 4,487,383 4,865,763 2,811,532
------------ ------------ ------------
Net income:
Integral 3,714,538 3,715,847 1,909,026
SAT 114,730 (515,551) 114,647
------------ ------------ ------------
Total $ 3,829,268 $ 3,200,296 $ 2,023,673
============ ============ ============
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 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, and its operating results are segregated and reported as
discontinued operations in the accompanying consolidated statements of
operations.
F-9
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 30, 2000, 1999 and 1998
_________________
2. Acquisitions and Dispositions (continued)
Information relating to the discontinued operations of IMI for the years
ended September 30, 2000, 1999, and 1998, are as follows:
September 30, 2000
(nine months ended
June 30, 2000) September 30, 1999 September 30, 1998
------------------ ------------------ ------------------
Net sales $ 704,204 $ 1,220,115 $ 1,414,246
Cost of sales 523,092 829,512 882,549
Gross profit 180,024 391,444 531,698
Operating costs 23,172 42,720 39,311
Non-operating costs: (14,301) (4,657) 9,147
------------ ------------ ------------
Income before taxes 172,241 353,381 483,241
Less: Income tax
provision 42,867 136,500 186,600
------------ ------------ ------------
Net income $ 129,374 $ 216,879 $ 296,641
============ ============ ============
The net assets and liabilities of the discontinued operations of IMI
included in the accompanying consolidated balance sheets as of September
30, 1999, are as follows:
Cash $ 723,669
Accounts receivable 529,852
Prepaid expenses 500
Fixed assets (net) 11,508
Deposits 1,995
-------------
Total assets 1,267,524
-------------
Accounts payable 15,095
Accrued expenses 507,902
Income taxes payable 129,977
-------------
Net assets to be disposed of $ 614,550
=============
Assets and liabilities are shown at their carrying amount on the
consolidated balance sheet.
F-10
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 30, 2000, 1999 and 1998
----------
3. Accounts Receivable and Revenue
Accounts receivable at September 30, 2000 and 1999, consist of the
following:
Billed 2000 1999
---- ----
Government services
Prime contracts $ 1,403,850 $ 1,766,729
Subcontracts 1,200,279 2,960,656
Commercial products and services 2,440,946 3,602,144
--------------- ---------------
Total billed 5,045,075 8,329,529
--------------- ---------------
Unbilled
Government services
Prime contracts 1,374,050 1,153,135
Subcontracts 4,946,143 2,311,688
Commercial products and services 1,903,364 1,766,788
--------------- ---------------
Total unbilled 8,223,557 5,231,611
--------------- ---------------
Total accounts receivable, net $ 13,268,632 $ 13,561,140
=============== ===============
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.
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, 2000, 1999 and 1998, approximately
52%, 57% and 52%, respectively, of the Company's revenue was from
government services, primarily the National Oceanic and Atmospheric
Administration (NOAA) and the National Aeronautics and Space Administration
(NASA). 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, 2000, 1999 and 1998, was 54%, 60%, and 59%, respectively. Revenue from
non-U.S. Government customers for each of the years ended September 30,
2000, and 1999 and 1998, was 46%, 40%, and 41%, respectively.
F-11
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 30, 2000, 1999 and 1998
_______________
4. Property and Equipment
Property and equipment as of September 30, 2000 and 1999, are as follows:
2000 1999
---- ----
Electronic equipment $ 1,211,231 $ 1,057,469
Furniture and fixtures 417,424 386,048
Leasehold improvements 152,857 132,110
Software 266,443 106,586
Equipment under capital lease 1,911,463 1,911,463
Control center of the future 512,420 -
--------------- ---------------
Total property and equipment 4,471,838 3,593,676
Less: accumulated depreciation and amortization (2,267,437) (1,518,563)
-------------- --------------
Property and equipment, net $ 2,204,401 $ 2,075,113
============== ==============
5. Software Development
Software development costs as of September 30, 2000 and 1999, consist of
the following:
2000 1999
---- ----
Costs incurred $ 7,288,224 $ 5,155,635
Less: accumulated amortization (4,099,441) (3,149,441)
-------------- --------------
Software development costs, net $ 3,188,783 $ 2,006,194
============== ==============
Amortization expense for the years ended September 30, 2000, 1999 and 1998,
was $950,000, $660,000 and $660,000, respectively.
6. 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 has
a line of credit with another bank for $425,000. This line expires on
August 2, 2001. The Company had no balance outstanding at September 30,
2000 and 1999 under any of its lines.
F-12
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 30, 2000, 1999 and 1998
________________
7. Accrued Expenses
Accrued expenses at September 30, 2000 and 1999, consist of the following:
2000 1999
---- ----
Accrued payroll and withholdings $ 1,035,222 $ 2,077,043
Accrued vacation 768,828 749,687
Accrued profit sharing 528,618 369,792
Accrued warranty 238,220 360,010
Other accrued expenses 47,624 154,045
-------------- --------------
Total accrued expenses $ 2,618,512 $ 3,710,577
============== ==============
8. Commitments and Contingencies
Capital Leases
During the year ended September 30, 1998, the Company secured a $2,000,000
equipment lease line of credit and entered into a sale-leaseback
arrangement. Under the arrangement, the Company sold certain electronic
equipment and leased it back for a period of three years. The leaseback has
been accounted for as a capital lease. There was no significant difference
between the book value and fair value of the equipment sold, and
accordingly, no gain or loss from the sale was recorded.
The Company also incurred additional capital lease obligations when it
entered into new leases for equipment. Capital lease additions were $0,
$579,496 and $1,298,966, for the years ended September 30, 2000, 1999 and
1998, respectively. Future payments under the capital lease obligations at
September 30, 2000, are as follows:
Years ending September 30, 2001 $ 492,307
2002 150,542
2003 38,877
2004 38,877
2005 38,877
Thereafter 29,158
----------
Total payments 788,638
Less amount representing interest at 8.8% per annum (74,533)
----------
Present value of future lease payments $ 714,105
===========
F-13
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 30, 2000, 1999 and 1998
________________
8. Commitments and Contingencies (continued)
Operating Leases
The Company leases its office space in Maryland and California. The
current leases expire in 2009 and 2001, respectively. Future minimum
lease payments under the office leases are as follows:
Years ending September 30, 2001 $ 941,000
2002 757,000
2003 780,000
2004 803,000
2005 827,000
Thereafter 3,246,000
-------------
Total payments $ 7,354,000
=============
Lease payments do not include operating expenses or utilities, which
are adjusted annually. Rent expense was $1,117,665, $869,292 and
$468,280, for the years ended September 30, 2000, 1999, and 1998,
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.
9. Income Taxes
For the years ended September 30, 2000, 1999 and 1998, the provision
for income taxes consists of the following:
2000 1999 1998
---- ---- ----
Current tax expense
Federal $ 952,280 $ 1,557,420 $ 1,252,931
State 370,331 318,990 256,625
------------- ------------ -------------
1,322,611 1,876,410 1,509,556
Deferred tax expense (benefit) (140,113) 5,936 (425,056)
------------- ------------ -------------
Total expense attributable to
continuing operations 1,182,498 1,882,346 1,084,500
Total expense attributable to
discontinued operations 253,762 136,500 186,600
------------- ------------ -------------
Total provision $ 1,436,260 $ 2,018,846 $ 1,271,100
============= ============ =============
At September 30, 2000, the Company has a net operating loss carry
forward of approximately $1,900,000 for tax purposes which expires
in 2015.
F-14
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 30, 2000, 1999 and 1998
_______________
9. Income Taxes (continued)
At September 30, 2000 and 1999, the tax effect of significant temporary
differences representing deferred tax assets and liabilities are as
follows:
Asset (Liability)
2000 1999
---- ----
Depreciation and amortization $ (1,081,909) $ (433,035)
Vacation accrual 299,843 292,378
Revenue reserve 5,850 9,215
Year 2000 reserve - 23,400
Warranty reserve 92,906 117,004
Gain on sale of subsidiary (210,895) -
Net operating loss carryforward 761,280 -
Cash-to-accrual adjustment - (288,179)
Bonus accrual - 217,074
------------ ------------
$ (132,925) $ (62,143)
============ ============
The effective income tax rates differ from the statutory U.S. income
tax rate due principally to the following:
2000 1999 1998
---- ---- ----
Federal statutory rate 34.0% 34.0% 34.0%
State tax, net of federal
income tax benefit 4.6 4.6 4.6
Tax benefit of tax free interest income (12.1) - -
Other, primarily changes in estimates ( 2.3) - -
------ ---- ----
Effective rate 24.2% 38.6% 38.6%
====== ==== ====
10. 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, 2000, 1999,
and 1998, contributions to the plans totalled $1,659,687, $1,410,426
and $989,906, respectively.
F-15
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 30, 2000, 1999 and 1998
__________________
11. Stock Option Plan
Effective May 25, 1988, as amended on January 1, 1994, 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,
2000, 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, 2000, 1999, and 1998, would have been:
2000 1999 1998
---- ---- ----
Net income:
As reported $ 4,177,383 $ 3,200,296 $ 2,023,673
Pro forma $ 2,983,688 $ 2,375,156 $ 1,626,255
Earnings per share:
As reported - basic $ .47 $ .46 $ .31
- dilutive $ .45 $ .43 $ .29
Pro forma - basic $ .34 $ .34 $ .25
- dilutive $ .32 $ .32 $ .24
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 6%, expected
volatility of 40%, and an expected term of the options of four years.
Stock option balances and activity discussed herein have been adjusted
for the stock splits discussed in Note 12.
F-16
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 30, 2000, 1999 and 1998
__________________
11. Stock Option Plan (continued)
At September 30, 2000, options to purchase stock under this plan were
outstanding to employees as follows:
Number of Exercise Price
Shares Per Share
3,950 $ 2.00 - 2.99
260,450 $ 3.00 - 3.99
49,200 $ 4.00 - 4.99
7,200 $ 5.00 - 5.99
1,200 $ 6.00 - 6.99
1,000 $ 9.00 - 9.99
4,000 $ 12.00 - 12.99
6,200 $ 13.00 - 13.99
6,700 $ 14.00 - 14.99
119,550 $ 15.00 - 15.99
9,500 $ 16.00 - 16.99
37,500 $ 17.00 - 17.99
300,250 $ 18.00 - 18.99
5,500 $ 19.00 - 19.99
6,000 $ 22.00 - 22.99
1,500 $ 23.00 - 23.99
1,500 $ 24.00 - 24.99
4,000 $ 26.00 - 26.99
1,000 $ 28.00 - 28.99
1,000 $ 35.00 - 35.99
1,000 $ 40.00 - 40.99
1,500 $ 44.00 - 44.99
1,500 $ 45.00 - 45.99
---------
831,200
=========
F-17
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended September 30, 2000, 1999 and 1998
______________________
11. Stock Option Plan (continued)
Of the options outstanding at September 30, 2000, 367,428 options are
exercisable immediately, and 463,772 options are exercisable over the next
five years. Transactions involving the plan for the years ended September
30, 2000, 1999 and 1998, were as follows:
Weighted Average
Shares Exercise Prices
Options outstanding, September 30, 1997 737,240 $ 3.40
Granted 98,308 $ 9.17
Exercised (115,080) $ 5.09
Cancelled (7,974) $ 3.26
-----------
Options outstanding, September 30, 1998 712,494 $ 4.23
Granted 296,840 $ 19.01
Exercised (140,656) $ 3.25
Cancelled (18,450) $ 13.46
-----------
Options outstanding, September 30, 1999 850,228 $ 9.36
Granted 235,850 $ 17.36
Exercised (213,756) $ 4.57
Cancelled (41,122) $ 15.75
-----------
Options outstanding September 30, 2000 831,200 $ 12.55
===========
The weighted average fair values of options granted during the years ended
September 30, 2000, 1999, and 1998, were $6.75, $7.50 and $3.62,
respectively.
12. Stock Splits and Authorized Shares
On May 29, 1998, the Company's board of directors declared a two-for-one
stock split in the form of a 100% stock dividend for stockholders of record
as of June 9, 1998. All references to number of shares, per share amounts,
stock option data, and market prices of common stock have been restated to
give retroactive recognition to the stock split.
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.
13. Supplemental Cash Flow Information
For the years ended September 30, 2000, 1999, and 1998, income taxes paid,
were $2,131,803, $2,140,496 and $538,533, respectively, and interest
expense incurred and paid was $96,587, $121,302 and $87,201, respectively.
F-18