SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(mark one)
X Quarterly report pursuant to Section 13 or 15 (d) of the Securities
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Exchange Act of 1934
For the quarterly period ended December 31, 2002 or
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_____ Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to _____________
Commission file number 0-18603
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INTEGRAL SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
Maryland 52-1267968
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5000 Philadelphia Way, Lanham, MD 20706
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(Address of principal executive office (Zip Code)
Registrant's telephone number, including area code (301) 731-4233
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(Former name, address and fiscal year, if changed since last report)
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No _______
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Indicate by checkmark whether the registrant is an accelerated filer (as defined
by Rule 12b-2 of the Exchange Act).
Yes X No _______
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Registrant had 9,709,538 shares of common stock outstanding as of February 4,
2003.
INTEGRAL SYSTEMS, INC.
TABLE OF CONTENTS
Page No.
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PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Balance Sheets - December 31, 2002 (unaudited) and September 30,
2002 ................................................................................. 1
Unaudited Statements of Operations - Three Months Ended
December 31, 2002 and December 31, 2001 .............................................. 3
Unaudited Statement of Stockholders' Equity - Three Months
Ended December 31, 2002 .............................................................. 4
Unaudited Statements of Cash Flow - Three Months Ended
December 31, 2002 and December 31, 2001 .............................................. 5
Notes to Financial Statements ........................................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................................................ 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk ........................... 20
Item 4. Controls and Procedures .............................................................. 20
PART II. OTHER INFORMATION:
Item 2. Changes in Securities and Use of Proceeds ............................................ 20
Item 6. Exhibits and Reports on Form 8-K ..................................................... 21
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and September 30, 2002
ASSETS
December 31, September 30,
2002 2002
(unaudited)
---------------- -------------
CURRENT ASSETS
Cash $ 17,660,009 $ 16,064,363
Marketable Securities 31,487,833 46,885,581
Accounts Receivable 24,143,936 17,001,393
Notes Receivable 119,704 118,226
Prepaid Expenses 891,618 916,756
Inventory 630,833 0
Deferred Income Tax - Current Portion 1,221,175 887,832
Income Taxes Receivable 3,854,747 1,110,703
-------------- ------------
TOTAL CURRENT ASSETS 80,009,855 82,984,854
FIXED ASSETS
Electronic Equipment 4,076,101 4,293,779
Furniture & Fixtures 738,623 665,840
Leasehold Improvements 962,520 355,642
Software Purchases 598,783 646,009
Equip. Under Capital Lease 0 579,496
-------------- ------------
SUBTOTAL - FIXED ASSETS 6,376,027 6,540,766
Less: Accum. Depreciation 2,155,514 3,072,859
-------------- ------------
TOTAL FIXED ASSETS 4,220,513 3,467,907
OTHER ASSETS
Notes Receivable - Non-Current 258,014 288,500
Intangible Assets, net 2,386,317 437,500
Goodwill 18,227,216 2,610,180
Software Development Costs 6,325,086 6,490,640
Deposits and Deferred Charges 112,306 337,274
-------------- ------------
TOTAL OTHER ASSETS 27,308,939 10,164,094
TOTAL ASSETS $111,539,307 $ 96,616,855
============== ============
-1-
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and September 30, 2002
LIABILITIES & STOCKHOLDERS' EQUITY
December 31, September 30,
2002 2002
(unaudited)
---------------- ----------------
CURRENT LIABILITIES
Accounts Payable $ 6,800,109 $ 5,916,194
Accrued Expenses 4,208,611 3,249,323
Capital Leases Payable 30,287 29,653
Billings in Excess of Cost 5,758,358 2,625,602
---------------- ----------------
TOTAL CURRENT LIABILITIES 16,797,365 11,820,772
---------------- ----------------
LONG TERM LIABILITIES
Capital Leases Payable 84,695 92,508
Deferred Income Taxes 3,589,318 2,447,395
---------------- ----------------
TOTAL LONG TERM LIABILITIES 3,674,013 2,539,903
STOCKHOLDERS' EQUITY
Common Stock, $.01 par value,
40,000,000 shares authorized, and
9,707,864 and 9,322,783 shares issued and
outstanding at December 31, 2002
and September 30, 2002, respectively 97,079 93,228
Additional Paid-in Capital 76,701,710 65,070,787
Retained Earnings 14,375,294 17,599,042
Accumulated other comprehensive income (106,154) (506,877)
---------------- ----------------
TOTAL STOCKHOLDERS' EQUITY 91,067,929 82,256,180
---------------- ----------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $111,539,307 $96,616,855
================ ================
-2-
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended
December 31,
2002 2001
------------ ------------
Revenue $ 19,569,781 $ 10,257,457
Cost of Revenue
Direct Labor 4,186,482 2,580,362
Overhead Costs 3,171,208 1,955,220
Travel and Other Direct Costs 591,343 384,835
Direct Equipment & Subcontracts 6,004,369 2,223,267
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Total Cost of Revenue 13,953,402 7,143,684
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Gross Margin 5,616,379 3,113,773
Selling, General & Administrative 2,734,456 1,707,140
Research & Development 529,617 200,901
Product Amortization 747,231 547,250
Amortization of Intangible Assets 322,265 0
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Income From Operations 1,282,810 658,482
Other Income (Expense) (6,896) 210,110
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Income Before Income Taxes 1,275,914 868,592
Provision for Income Taxes 426,106 252,487
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Net Income $ 849,808 $ 616,105
============ ============
Weighted Avg. Number of Common Shares:
Basic 9,699,729 9,073,196
Diluted 9,743,439 9,315,690
Earnings per Share (Basic) $ 0.09 $ 0.07
Earnings per Share (Diluted) $ 0.09 $ 0.07
-3-
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED DECEMBER 31, 2002
(Unaudited)
Common Accumulated
Number Stock Additional Other
of At Par Paid-in Retained Comprehensive
Shares Value Capital Earnings Income Total
Balance September 30, 2002 9,322,783 $ 93,228 $ 65,070,787 $ 17,599,042 ($506,877) $82,256,180
Comprehensive income
Net income - - - 849,808 - 849,808
Unrealized gain on marketable
securities (net of taxes of $256,201) - - - - 400,723 400,723
------------
Total Comprehensive Income 1,250,531
Repurchased Shares (328,795) (3,288) (2,168,743) (4,073,556) (6,245,587)
Shares issued to acquire RT Logic 709,676 7,097 13,742,903 - - 13,750,000
Stock Options Exercised 4,200 42 56,763 - - 56,805
--------- ------------ ------------ ------------ --------- ------------
Balance December 31, 2002 9,707,864 $ 97,079 $ 76,701,710 $ 14,375,294 ($106,154) $ 91,067,929
========= ============ ============ ============ ========= ============
-4-
INTEGRAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended December 31, 2002 and 2001
(Unaudited)
For the Three Months Ended
December 31,
2002 2001
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Cash flows from operating activities:
Net income $ 849,808 $ 616,105
-------------- -------------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 1,444,998 838,483
Gain on sale of marketable securities (8,327) 0
Loss on disposal of fixed assets 20,968 0
Changes in operational assets and liabilities
net of effects from acquisition:
Accounts receivable and other receivables (1,631,284) 3,479,608
Prepaid expenses and deposits 315,276 (502,571)
Inventory (61,078) 0
Income taxes receivable, net 425,306 954,630
Accounts payable (188,646) (1,494,873)
Accrued expenses (466,843) (430,607)
Billings in excess of cost 1,186,660 (170,156)
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Total adjustments 1,037,030 2,674,514
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Net cash provided by operating activities 1,886,838 3,290,619
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Cash flows from investing activities:
Sale of marketable securities, net 16,063,000 9,000,000
Purchase of marketable securities 0 (19,900)
Notes receivable, net 5,153,588 (334,398)
Acquisition of fixed assets (534,559) (565,467)
Software development costs (581,677) (1,144,419)
Acquisition of RT Logic, net of cash received (13,393,393) 0
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Net cash provided by (used in) investing activities 6,706,959 6,935,816
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Cash flows from financing activities:
Proceeds from issuance of common stock 56,805 81,260
Payments on stock repurchase (6,245,587) (109,650)
Note Payable (802,190) 0
Payments on capital lease obligations (7,179) (73,140)
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Net cash provided by (used in) financing activities (6,998,151) (101,530)
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Net increase (decrease) in cash 1,595,646 10,124,905
Cash - beginning of year 16,064,363 2,379,503
-------------- -------------
Cash - end of period $ 17,660,009 $ 12,504,408
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-5-
INTEGRAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The interim financial statements include the accounts of Integral
Systems, Inc. (ISI or the Company) and its wholly owned subsidiaries,
SAT Corporation (SAT), Newpoint Technologies, Inc. (Newpoint), Real
Time Logic, Inc. (RT Logic), and Integral Systems Europe (ISI Europe).
All significant intercompany accounts and transactions have been
eliminated in consolidation.
In the opinion of management, the financial statements reflect all
adjustments consisting only of normal recurring accruals necessary for
a fair presentation of results for such periods. The financial
statements, which are condensed and do not include all disclosures
included in the annual financial statements, should be read in
conjunction with the consolidated financial statements of the Company
for the fiscal year ended September 30, 2002. The results of operations
for any interim period are not necessarily indicative of results for
the full year.
Certain accounts in the prior period financial statements have been
reclassified for comparative purposes to conform with the presentation
in the current year financial statements.
2. Accounts Receivable
Accounts receivable at December 31, 2002 and September 30, 2002 consist
of the following:
Dec. 31, 2002 Sept. 30, 2002
------------- --------------
Billed $ 11,451,415 $ 4,082,202
Unbilled 12,572,331 12,836,578
Other 120,190 82,613
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Total $ 24,143,936 $ 17,001,393
============= ==============
The Company's accounts receivable consist of amounts due on prime
contracts and subcontracts with the U.S. Government and contracts with
various private organizations. Unbilled accounts receivable consist
principally of amounts that are billed in the month following the
incurrence of cost, amounts related to indirect cost variances on cost
reimbursable type contracts or amounts related to milestones that are
delivered under fixed price contracts. All unbilled receivables are
expected to be billed and collected within one year.
During the three months ended June 30, 2002, the Company fully reserved
$315,000 against a receivable due to SAT from SSP/Litronic, Inc. (SSP
Solutions), a publicly traded company located in Irvine, California. At
the time, the Company determined that doubt existed regarding the
collection of this receivable. The Company has since collected $20,000
against this receivable during the three months ended September 30,
2002 and $60,000 during the three months ended December 31, 2002.
-6-
INTEGRAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
3. Line of Credit
The Company has a line of credit agreement with a local bank for $10.0
million for general corporate purposes. Borrowings under the line are
due on demand with interest at the London Inter-Bank Offering Rate
(LIBOR), plus a spread of 1.5 to 2.4% based on the ratio of funded debt
to earnings before interest, taxes and depreciation (EBITDA). The line
of credit is secured by the Company's billed and unbilled accounts
receivable and has certain financial covenants, including minimum net
worth and liquidity ratios. The line expires February 29, 2004. The
Company had no balance outstanding at December 31, 2002 under the line
of credit.
The Company also has access to a $2.0 million equipment lease line of
credit that had a balance of approximately $115,000 at December 31,
2002.
4. Inventory
Inventory consists of service parts and materials and is stated at the
lower of cost or market using the first-in, first-out (FIFO) method of
accounting.
5. Acquisition of RT Logic
On October 1, 2002, the Company acquired all of the issued and
outstanding stock of RT Logic pursuant to an Agreement and Plan of
Reorganization dated October 1, 2002 (the "Reorganization Agreement").
The primary reason for acquiring RT Logic was to expand the Company's
existing products into RT Logic's government client base. The initial
purchase price payable to the shareholders of RT Logic was $13.25
million in cash and 683,870 shares of the Company's common stock.
Pursuant to the Reorganization Agreement, in November 2002 the former
shareholders of RT Logic received additional consideration of $500,000
in cash and 25,806 shares of the Company's common stock. The
Reorganization Agreement further provides that the former RT Logic
shareholders will be entitled to receive contingent consideration,
which is payable in the event that RT Logic's business meets certain
earnings performance targets during a period of up to four years
following the acquisition. One half of any contingent consideration
will be payable in cash and the remainder will be payable in shares of
the Company's common stock. Any shares of the Company's common stock
issued in connection with the contingent consideration will be valued
based on a 30-trading-day average leading up to the end of each
applicable earn-out period. The contingent consideration is subject to
claims by us under the indemnification provisions of the Reorganization
Agreement.
-7-
INTEGRAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
5. Acquisition of RT Logic (continued)
The acquisition was accounted for using the purchase method of
accounting prescribed by SFAS No. 141, Business Combinations.
Accordingly, a portion of the purchase price has been allocated to
assets acquired and liabilities assumed and other identified intangible
assets based on estimated fair values on the acquisition date. The
purchase price allocation is based on preliminary estimates and is
subject to change as final valuations are made. A summary of the
purchase price allocation as of October 1, 2002 is as follows (in
thousands):
Current assets $10,231
Property, plant & equipment 615
Intangibles 2,271
Goodwill 15,616
Notes receivables 5,125
Current liabilities (5,247)
Long-term liabilities (886)
Total purchase price $27,725
The identified intangible assets relate to acquired technology
($650,000) and customer contracts ($1,621,000) and will be amortized on
a straight-line basis over an estimated useful life of 5 years and 18
months, respectively. Goodwill is not being amortized but is being
reviewed annually for impairment in accordance with SFAS No. 142
Goodwill and Other Intangible Assets. The notes receivable relate to
loans made by RT Logic to its shareholders to exercise RT Logic stock
options prior to the sale to Integral. The notes receivable were
classified in Stockholders Equity on October 1, 2002. During the first
quarter, all notes receivable were settled and the cash was received by
Integral. As a result of this transaction, Integral will realize an
income tax deduction (equal to the difference between the option
exercise price and the fair value of the stock). The resulting income
tax benefit of $3,169,000 is included in current assets in the table
above.
As RT Logic was acquired on October 1, 2002, a full quarter of its
results of its operations is included in Integral's first quarter ended
December 31, 2002. Unaudited pro forma information provided below has
been prepared to reflect the acquisition of RT Logic by the Company as
if it had occurred on October 1, 2001. The unaudited pro forma
financial information is not necessarily indicative of the results of
operations that may have actually occurred had the acquisition occurred
on the dates specified, or of the future results of the combined
companies.
Three Months Ended
December 31, 2001
(unaudited)
(in thousand, except Net
Income per Share)
---------------------------
Revenues $13,483
Net Income $ 745
Net Income per Share (Basic) .08
Net Income per Share (Diluted) .07
-8-
INTEGRAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
6. Business Segment Information
With the acquisition of RT Logic, the Company now operates in four
business segments:
. satellite ground systems;
. satellite and terrestrial communications signal
monitoring (CSM);
. equipment monitoring and control; and
. space communication systems.
Integral Systems, Inc. and ISI Europe build satellite ground systems
for command and control, integration and test, data processing, and
simulation.
Through its wholly owned subsidiary SAT, the Company offers turnkey
systems and software for satellite and terrestrial communications
signal monitoring.
The Company provides equipment monitoring and control software to
satellite operators and the telecommunications industry through its
wholly owned subsidiary, Newpoint (acquired January 2002).
Through its wholly owned subsidiary RT Logic (acquired October 2002),
the Company manufactures telemetry processing components and systems
for military applications, including tracking stations, control
centers, and range operations.
The accounting policies of the segments are the same as those described
in Note 1. The Company evaluates the performance of each segment based
on operating income. There are no inter-segment allocations of overhead
and all corporate-level expenses are included in the Satellite Ground
Systems segment.
-9-
INTEGRAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
6. Business Segment Information (continued)
Summarized financial information by business segment is as follows:
Three Months Three Months Twelve Months Twelve Months
Ended Ended Ended Ended
Dec. 31, 2002 Dec. 31, 2001 Sept. 30, 2002/1/ Sept. 30, 2001
Revenue
Satellite ground systems $ 14,627,889 $ 9,191,495 $ 44,662,897 $ 36,327,254
Satellite ground systems - intercompany $ 379,177 $ 52,260 $ 640,119 $ 163,472
Satellite & terrestrial CSM $ 485,814 $ 1,065,962 $ 3,778,011 $ 4,204,346
Satellite & terrestrial CSM - intercompany $ 753 N/A N/A N/A
Equip. monitoring & control $ 852,836 N/A $ 2,481,833 N/A
Space communication systems $ 3,603,242 N/A N/A N/A
Space communication systems - intercompany $ 731,329 N/A N/A N/A
Elimination of Interco. Sales $ (1,111,259) $ (52,260) $ (640,119) $ (163,472)
------------- ------------- ---------------- --------------
Total Revenue $ 19,569,781 $ 10,257,457 $ 50,922,741 $ 40,531,600
============= ============= ================ ==============
Operating Income
Satellite ground systems $ 883,224 $ 562,158 $ 3,657,099 $ 2,811,634
Satellite ground systems - intercompany $ (2,872) $ 57 $ 15,439 $ 1,557
Satellite & terrestrial CSM $ (582,517) $ 96,323 $ (1,121,880) $ 645,714
Equip. monitoring & control $ (164,041) N/A $ (718,148) N/A
Space communication systems $ 1,146,144 N/A N/A N/A
Space communication systems - intercompany $ (269) N/A N/A N/A
Elimination $ 3,141 (57) $ (15,439) $ (1,557)
------------- ------------- ---------------- --------------
Total Operating Income $ 1,282,810 $ 658,481 $ 1,817,071 $ 3,457,348
============= ============= ================ ==============
Income Before Income Taxes
Satellite ground systems $ 936,457 $ 738,177 $ 5,750,808 $ 5,030,429
Satellite & terrestrial CSM $ (616,053) $ 130,415 $ (1,144,647) $ 543,974
Equip. monitoring & control $ (225,588) N/A $ (835,958) N/A
Space communication systems $ 1,181,098 N/A N/A N/A
------------- ------------- ---------------- --------------
Total Income Before Income Taxes $ 1,275,914 $ 868,592 $ 3,770,203 $ 5,574,403
============= ============= ================ ==============
Total Assets
Satellite ground systems $ 76,839,984 $ 87,040,162 $ 95,078,025 $ 87.920,263
Satellite & terrestrial CSM $ 3,726,635 $ 3,590,953 $ 2,954,039 $ 3,230,604
Equip. monitoring & control $ 4,288,710 N/A $ 4,010,254 N/A
Space communication systems $ 33,757,969 N/A N/A N/A
Elimination of intercompany
accounts receivable $ (7,073,991) $ (1,247,145) $ (5,425,462) $ (737,423)
------------- ------------- ---------------- --------------
Total Assets $ 111,539,307 $ 89,383,970 $ 96,616,856 $ 90,413,444
============= ============= ================ ==============
1. Eight (8) months ended September 30, 2002 for the equipment
monitoring and control business segment.
-10-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED DECEMBER 31, 2002 AND 2001
Overview
Integral Systems, Inc. builds satellite ground systems for command and control,
integration and test, data processing, and simulation. Since its inception in
1982, the Company has provided ground systems for over 190 different satellite
missions for communications, science, meteorology, and earth resource
applications. The Company has an established domestic and international customer
base that includes government and commercial satellite operators, spacecraft and
payload manufacturers, and aerospace systems integrators.
The Company has developed innovative software products that reduce the cost and
minimize the development risk associated with traditional custom-built systems.
The Company believes that it was the first to offer a comprehensive COTS
("Commercial-Off-the-Shelf") software product line for command and control. As a
systems integrator, the Company leverages these products to provide turnkey
satellite control facilities that can operate multiple satellites from any
manufacturer. These systems offer significant cost savings for customers that
have traditionally purchased a separate custom control center for each of their
satellites.
Through its wholly owned subsidiary SAT, acquired in August 2000, the Company
also offers turnkey systems and software for satellite and terrestrial
communications signal monitoring.
In March 2001 the Company formed a wholly owned subsidiary, ISI Europe, with
headquarters in Toulouse, France. ISI Europe serves as the focal point for the
support of all of Integral's European business.
On January 30, 2002, the Company acquired Newpoint Technologies. Newpoint
provides equipment monitoring and control software to satellite operators and
the telecommunications industry.
In October 2002, the Company acquired RT Logic. RT Logic manufactures telemetry
processing components and systems for military applications, including tracking
stations, control centers, and range operations.
-11-
Results of Operations
The components of the Company's income statement as a percentage of revenue are
depicted in the following table for the three months ended December 31, 2002 and
December 31, 2001:
Three Months Ended December 31,
% of % of
2002 Revenue 2001 Revenue
---- ------- ---- -------
(in thousands) (in thousands)
Revenue $ 19,570 100.0 $ 10,257 100.0
Cost of Revenue 13,953 71.3 7,144 69.6
---------- ------ ---------- ------
Gross Margin 5,617 28.7 3,113 30.4
Operating Expenses
Selling, General & Admin. (SG&A) 2,735 14.0 1,707 16.7
Research and Development 530 2.7 201 2.0
Product Amortization 747 3.8 547 5.3
Amortization-Intangible Assets 322 1.6 0.0 0.0
---------- ------ ---------- ------
Income from Operations 1,283 6.6 658 6.4
Other Income (Expense) (net) (7) (0.1) 210 2.0
---------- ------ ---------- ------
Income Before Income Taxes 1,276 6.5 868 8.4
Income Taxes 426 2.2 252 2.4
---------- ------ ---------- ------
Net Income $ 850 4.3 $ 616 6.0
========== ====== ========== ======
Revenue
The Company earns revenue, both as a prime contractor and a subcontractor, from
sales of its products and services through contracts that are funded by the U.S.
Government as well as commercial and international organizations.
Internally, the Company classifies revenues in two separate categories on the
basis of the contracts' procurement and development requirements: (i) contracts
which require compliance with Government procurement and development standards
are classified as government revenue, and (ii) contracts conducted according to
commercial practices are classified as commercial revenue, regardless of whether
the end customer is a commercial or government entity. Sales of the Company's
COTS products are classified as commercial revenue. Revenues attributable to
SAT, Newpoint, and ISI Europe are also classified as commercial revenue.
-12-
For the three months ended December 31, 2002 and 2001, the Company's revenues
were generated from the following sources:
Three Months Ended December 31,
Revenue Type 2002 2001
------------ -------- --------
Commercial Revenue
Commercial Users 23% 48%
U.S. Government Users 0 0
-------- --------
Subtotal 23 48
Government Revenue
NOAA 27 39
Air Force 45 6
Other U.S. Government Users 5 7
-------- --------
Subtotal 77 52
Total 100% 100%
======== ========
Based on the Company's revenue categorization system, the Company classified 23%
of its revenue as commercial revenue with the remaining 77% classified as
government revenue for the three months ended December 31, 2002. For the three
months ended December 31, 2001 the Company classified 48% of its revenue as
commercial revenue with the remaining 52% classified as government revenue. By
way of comparison, if the revenues were classified strictly according to end
user (independent of the Company's internal revenue categorization system), the
U.S. Government would account for 77% and 52% of the total revenues for the
three months ended December 31, 2002 and 2001, respectively.
On a consolidated basis, revenue increased 90.8%, or $9.3 million, to $19.6
million for the three months ended December 31, 2002, from $10.3 million for the
three months ended December 31, 2001. The components of the revenue increase for
the three-month periods ending December 31 are depicted in the following table
by segment:
- ---------------------------------------------------------------------------------------------------------
Three Months Three Months
Ended Ended
December 31, December 31, Increase/
Segment 2002 2001 (Decrease)
(in thousands) (in thousands) (in thousands)
- ---------------------------------------------------------------------------------------------------------
Revenue
- ---------------------------------------------------------------------------------------------------------
Satellite Ground Systems (Integral) $15,007 $ 9,243 $ 5,764
- ---------------------------------------------------------------------------------------------------------
Satellite & terrestrial CSM (SAT) 486 1,066 (580)
- ---------------------------------------------------------------------------------------------------------
Equip. monitoring & control (Newpoint) 853 0 853
- ---------------------------------------------------------------------------------------------------------
Space communication systems (RT Logic) 4,335 0 4,335
- ---------------------------------------------------------------------------------------------------------
Elimination (1,111) (52) (1,059)
- ---------------------------------------------------------------------------------------------------------
Total Revenue $19,570 $10,257 $ 9,313
- ---------------------------------------------------------------------------------------------------------
Revenue increases in the Company's Satellite Ground Systems segment pertain to
increased sales volume as a result of the Company's new contract awards with the
U.S. Air Force (specifically the CCS-C and SCNC programs) that were made in the
Spring of 2002. Revenue decreases at SAT relate to a decreased backlog of orders
at September 30, 2002 and overall poor market conditions in the commercial
satellite market. Since December 31, 2002, bookings for new orders at SAT have
improved and as a result, the Company believes that SAT's revenues for the
second quarter of this fiscal year (i.e. the quarter ending March 31, 2003) will
exceed $1.2 million.
Both Newpoint and RT Logic were acquired subsequent to December 31, 2001, so the
Company reported no revenues for those segments for the three-month period then
ended.
-13-
Cost of Revenue/Gross Margin
The Company computes gross margin by subtracting cost of revenue from revenue.
Included in cost of revenue are direct labor expenses, overhead charges
associated with the Company's direct labor base and other costs that can be
directly related to specific contract cost objectives, such as travel,
consultants, equipment, subcontracts and other direct costs.
Gross margins on contract revenues vary depending on the type of product or
service provided. Generally, license revenues related to the sale of the
Company's COTS products have the greatest gross margins because of the minimal
associated marginal costs to produce. By contrast, gross margins rates for
equipment and subcontract pass-throughs seldom exceed 15%. Engineering service
gross margins typically range between 20% and 40%. These definitions and ratios
generally apply across all segments.
During the three months ended December 31, 2002, cost of revenue increased by
95.3%, or $6.8 million, compared to the same period during the prior year,
increasing from $7.1 million during the three months ended December 31, 2001 to
$14.0 million during the three months ended December 31, 2002. Gross margin
increased from $3.1 million to $5.6 million, an increase of $2.5 million, or
80.4%, during the periods being compared. The components of the cost of revenue
and gross margin increases for the three months ended December 31, 2002 and 2001
are shown in the following table by segment:
- ------------------------------------------------------------------------------------------------
Three Months Three Months
Ended Ended
December 31, December 31, Increase/
Segment 2002 2001 (Decrease)
(in thousands) (in thousands) (in thousands)
- ------------------------------------------------------------------------------------------------
Cost of Revenue
- ------------------------------------------------------------------------------------------------
Satellite Ground Systems (Integral) $11,957 $6,650 $ 5,307
- ------------------------------------------------------------------------------------------------
Satellite & terrestrial CSM (SAT) 250 539 (289)
- ------------------------------------------------------------------------------------------------
Equip. monitoring & control (Newpoint) 704 0 704
- ------------------------------------------------------------------------------------------------
Space communication systems (RT Logic) 2,145 0 2,145
- ------------------------------------------------------------------------------------------------
Elimination (1,103) (45) (1,058)
- ------------------------------------------------------------------------------------------------
Total Cost of Revenue $13,953 $7,144 $ 6,809
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Gross Margin
- ------------------------------------------------------------------------------------------------
Satellite Ground Systems (Integral) $ 3,050 $2,594 $ 456
- ------------------------------------------------------------------------------------------------
Satellite & terrestrial CSM (SAT) 236 527 (291)
- ------------------------------------------------------------------------------------------------
Equip. monitoring & control (Newpoint) 148 0 148
- ------------------------------------------------------------------------------------------------
Space communication systems (RT Logic) 2,190 0 2,190
- ------------------------------------------------------------------------------------------------
Elimination (8) (7) (1)
- ------------------------------------------------------------------------------------------------
Total Gross Margin $ 5,616 $3,114 $ 2,502
- ------------------------------------------------------------------------------------------------
Cost of Revenue and Gross Margin increases during the periods compared for the
Company's Satellite Ground Systems business essentially track the increases in
revenue from this segment, although gross margin as a percentage of revenue for
this segment declined from 28.1% to 20.3% as result of a high content of
equipment and subcontract pass-through business during the current quarter
compared to the three months ended December 31, 2001. The decreases in Cost of
Revenue and Gross Margin at SAT are proportionate to and related to the revenue
decline for this segment.
Both Newpoint and RT Logic were acquired subsequent to December 31, 2001, so the
Company reported no Cost of Revenue or Gross Margin for those segments for the
three-month period then ended.
-14-
Operating Expenses
Operating Expenses for the three months ended December 31, 2002 and 2001 for
each of the Company's segments are depicted in the following table:
- -------------------------------------------------------------------------------------------------
Three Months Three Months
Ended Ended
December 31, December 31, Increase/
Segment 2002 2001 (Decrease)
(in thousands) (in thousands) (in thousands)
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
Operating Expenses
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
Satellite Ground Systems (Integral)
- -------------------------------------------------------------------------------------------------
SG&A $1,543 $1,381 $ 162
- -------------------------------------------------------------------------------------------------
R&D 30 201 (171)
- -------------------------------------------------------------------------------------------------
Amortization 597 450 147
- -------------------------------------------------------------------------------------------------
Total Satellite Ground Systems 2,170 2,032 138
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
Satellite & Terrestrial CSM (SAT)
- -------------------------------------------------------------------------------------------------
SG&A 326 333 (7)
- -------------------------------------------------------------------------------------------------
R&D 342 0 342
- -------------------------------------------------------------------------------------------------
Amortization 151 97 54
- -------------------------------------------------------------------------------------------------
Total SAT 819 430 389
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
Equip. Monitoring & Control (Newpoint)
- -------------------------------------------------------------------------------------------------
SG&A 281 0 281
- -------------------------------------------------------------------------------------------------
R&D 0 0 0
- -------------------------------------------------------------------------------------------------
Amortization 31 0 31
- -------------------------------------------------------------------------------------------------
Total Newpoint 312 0 312
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
Space Communication Systems (RT Logic)
- -------------------------------------------------------------------------------------------------
SG&A 595 0 595
- -------------------------------------------------------------------------------------------------
R&D 158 0 158
- -------------------------------------------------------------------------------------------------
Amortization 291 0 291
- -------------------------------------------------------------------------------------------------
Total RT Logic 1,044 0 1,044
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
Elimination (11) (7) (4)
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
Total Operating Expenses $4,334 $2,455 $1,879
- -------------------------------------------------------------------------------------------------
In the Company's Satellite Ground Systems business, SG&A expenses increased
during the periods compared by approximately $160,000 principally because of
marketing efforts related to the Company's new SKYLIGHT product. As a percentage
of revenue for this segment, SG&A for this segment only represented 10.3% of
revenue in the current period compared to 14.9% of revenue during the three
months ended December 31, 2001. R&D expenses for the three months ended
December 31, 2001 primarily related to Air Force projects that have ended.
Product amortization has increased by almost $150,000 due to higher capitalized
development costs.
-15-
At SAT, period-to-period SG&A costs are comparable while R&D expenses have
increased from zero to more than $340,000. Current period R&D efforts relate to
new development on SAT's signal monitoring capabilities.
Both Newpoint and RT Logic were acquired subsequent to December 31, 2001, so the
Company reported no operating expenses for those segments for the three-month
period then ended. The current period amortization expenses for both Newpoint
and RT Logic relate to the amortization of intangible assets that arose from
purchase accounting entries made at the time of each company's acquisition by
the Company.
Income from Operations
Income from Operations for the three months ended December 31, 2002 and 2001 for
each of the Company's segments is depicted in the following table:
- ---------------------------------------------------------------------------------------------------
Three Months Three Months
Ended Ended
December 31, December 31, Increase/
Segment 2002 2001 (Decrease)
(in thousands) (in thousands) (in thousands)
- ---------------------------------------------------------------------------------------------------
Income from Operations
- ---------------------------------------------------------------------------------------------------
Satellite Ground Systems (Integral) $ 880 $562 $ 318
- ---------------------------------------------------------------------------------------------------
Satellite & terrestrial CSM (SAT) (582) 96 (678)
- ---------------------------------------------------------------------------------------------------
Equip. monitoring & control (Newpoint) (164) 0 (164)
- ---------------------------------------------------------------------------------------------------
Space communication systems (RT Logic) 1,146 0 1,146
- ---------------------------------------------------------------------------------------------------
Elimination 3 0 3
- ---------------------------------------------------------------------------------------------------
Total Income from Operations $1,283 $658 $ 625
- ---------------------------------------------------------------------------------------------------
Income from operations during the periods compared increased by almost $320,000
in the Company's Satellite Ground Systems segment as a result of increased
revenues principally on Air Force programs described above. Operating losses at
SAT during the three months ended December 31, 2002 have resulted from revenue
declines due to deteriorating conditions in the commercial satellite market.
Newpoint's losses are also related to overall depressed conditions in the
commercial satellite market, but its losses were not as severe as SAT's since
Newpoint's market is not as dependent on satellite operators. Although results
for RT Logic were not included with the results for the Company for the three
months ended December 31, 2001, the current quarter is one of the most
profitable in RT Logic's history.
Other
During the three months ended December 31, 2002, the Company recorded $170,000
of interest income compared to $290,000 of interest income recorded for the
three months ended December 31, 2001. The decrease is due to the general decline
in interest rates in response to recent cuts by the Federal Reserve Board and
due to the Company's reduction in interest generating capital resulting from the
repurchase of approximately $6.3 million of Company stock in September and
October of 2002 and the payment of $13.75 million of cash used to purchase RT
Logic.
Income before income taxes increased by more than $400,000 to $1.3 million from
$900,000 between the two periods being compared principally due to the increase
in operating income, which was partially offset by declines in interest income.
The Company's effective tax rate increased from 29.1% for the three months ended
December 31, 2001 to
33.4% for the three months ended December 31, 2002. The increase was primarily a
result of a lower percentage of tax-free interest income compared to operating
income recorded in the current quarter compared to the prior year's first
quarter.
-16-
As a result of the above, net income increased to approximately $850,000 during
the three months ended December 31, 2002 from approximately $620,000 during the
three months ended December 31, 2001.
OUTLOOK
This outlook section contains forward-looking statements, all of which are based
on current expectations. There is no assurance that the Company's projections
will in fact be achieved and these projections do not reflect any acquisitions
or divestitures which may occur in the future. Reference should be made to the
various important factors listed under the heading "Forward-Looking Statements"
that could cause actual future results to differ materially.
At this time, the Company has a backlog of work to be performed and it may
receive additional contract awards based on proposals in the pipeline, although
the estimated backlog under the Company's government contracts is not
necessarily indicative of revenues that will actually be realized under the
contract. Management believes that operating results for future periods will
improve based on the following assumptions:
. Demand for satellite technology and related products and services will
continue to expand; and
. Sales of its software products and engineering services will continue
to increase.
Looking forward to fiscal year 2003 in its entirety, the Company is anticipating
growth in revenue, net income, and fully diluted earnings per common share of
approximately 50% over fiscal year 2002 levels. Anticipated growth in net income
and earnings per share for fiscal year 2003 would have been much greater were it
not for fiscal year 2002 gains on marketable securities of approximately $1.2
million which are not forecasted for fiscal year 2003. It is also anticipated
that operating income for fiscal year 2003 will be almost triple the amounts
recorded in fiscal year 2002, increasing from $1.8 million in fiscal year 2002
to approximately $5.4 million in fiscal year 2003.
LIQUIDITY AND CAPITAL RESOURCES
Since the Company's inception in 1982, it has been profitable on an annual basis
and has generally financed its working capital needs through internally
generated funds, supplemented by borrowings under the Company's general line of
credit facility with a commercial bank and the proceeds from the Company's
initial public offering in 1988. In June 1999, the Company supplemented its
working capital position by raising approximately $19.7 million (net) through
the private placement of approximately 1.2 million shares of its common stock.
In February 2000, the Company raised an additional $40.9 million (net) for use
in connection with potential acquisitions and other general corporate purposes
through the private placement of 1.4 million additional shares of its common
stock.
For the three months ended December 31, 2002, the Company generated
approximately $1.9 million of cash from operating activities and $6.7 million in
investing activities. Included in the $6.7 million of investing activities is
approximately $600,000 used for newly capitalized software development costs and
$500,000 for the purchase of fixed assets. The Company also repurchased $6.2
million of its Common Stock during the period.
-17-
The Company has a line of credit agreement with a local bank for $10.0 million
for general corporate purposes. Borrowings under the line are due on demand with
interest at the London Inter-Bank Offering Rate (LIBOR), plus a spread of 1.5 to
2.4% based on the ratio of funded debt to earnings before interest, taxes and
depreciation (EBITDA). The line of credit is secured by the Company's billed and
unbilled accounts receivable and has certain financial covenants, including
minimum net worth and liquidity ratios. The line expires February 29, 2004. The
Company had no balance outstanding at December 31, 2002 under the line of
credit.
The Company also has access to a $2.0 million equipment lease line of credit
that had a balance of approximately $115,000 at December 31, 2002.
The Company currently anticipates that its current cash balances, amounts
available under its lines of credit and net cash provided by operating
activities will be sufficient to meet its working capital and capital
expenditure requirements for at least the next twelve months. The Company plans
to continue to invest in the on-going development and improvement of its current
software products, EPOCH and OASYS, as well as the development of new products
through the use of its current cash balances and cash provided by operating
activities.
The Company believes that inflation did not have a material impact on the
Company's revenues or income from operations during the three months ended
December 31, 2002 or in past fiscal years.
FORWARD LOOKING STATEMENTS
Certain of the statements contained in the Management's Discussion and Analysis
of Financial Condition and Results of Operations section, in other parts of this
10-Q, and in this section, including those under the headings "Outlook" and
"Liquidity and Capital Resources," are forward looking. In addition, from time
to time, the Company may publish forward-looking statements relating to such
matters as anticipated financial performance, business prospects, technological
developments, new products, research and development activities and similar
matters. Forward-looking statements can be identified by the use of
forward-looking terminology such as "may", "will", "believe", "expect",
"anticipate", "estimate", "continue", or other similar words, including
statements as to the intent, belief, or current expectations of the Company and
its directors, officers, and management with respect to the Company's future
operations, performance, or positions or which contain other forward-looking
information. These forward-looking statements are predictions. No assurances can
be given that the future results indicated, whether expressed or implied, will
be achieved. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. While the Company believes
that these statements are and will be accurate, a variety of factors could cause
the Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Company's statements.
The Company's business is dependent upon general economic conditions and upon
various conditions specific to its industry, and future trends cannot be
predicted with certainty. Particular risks and uncertainties that may affect the
Company's business, other than those described elsewhere herein, include the
following:
. A significant portion of the Company's revenue is derived from
contracts or subcontracts funded by the U.S. Government, which are
subject to termination without cause, government regulations and
audits, competitive bidding, and the budget and funding process of the
U.S. Government.
. The presence of competitors with greater financial resources and their
strategic response to the Company's services.
. The potential obsolescence of the Company's services due to the
introduction of new technologies.
. The response of customers to the Company's marketing strategies and
services.
-18-
. The Company's commercial contracts are subject to strict performance
and other requirements.
. The Company's ability to manage effectively any continued growth.
. The intense competition in the satellite ground system industry.
. The Company's dependency on the satellite industry for most of its
revenue.
. Risks related to the Company's acquisition strategy. In particular,
the Company may not be able to find any attractive candidates or it
may find that the acquisition terms proposed by potential acquisition
candidates are not favorable to the Company. In addition, the Company
may compete with other companies for these acquisition candidates,
which competition may make an acquisition more expensive for the
Company. If the Company is unable to identify and acquire any suitable
candidates, the Company may not be able to find alternative uses for
the cash proceeds of its previous private placements that improve the
Company's business, financial conditions, or results of operations to
the extent that an acquisition could. In addition, the integration of
the acquired business or businesses , including SAT, Newpoint and RT
Logic, may be costly and may result in a decrease in the value of the
Company's common stock for the following reasons, among others:
. the Company may not adequately assess the risks inherent in a
particular acquisition candidate or correctly assess the
candidate's potential contribution to the Company's financial
performance;
. the Company may need to divert more management resources to
integration than it planned, which may adversely affect its
ability to pursue other more profitable activities;
. the difficulties of integration may be increased by the necessity
of coordinating geographically separated organizations,
integrating personnel with disparate backgrounds and combining
different corporate cultures;
. the Company may not eliminate as many redundant costs as it
anticipated in selecting acquisition candidates; and
. an acquisition candidate may have liabilities or adverse
operating issues that the Company failed to discover through its
due diligence prior to the acquisition.
. The Company may be exposed to product liability or related claims with
respect to its products.
. The Company's products may become obsolete due to rapid technological
change in the satellite industry.
. The Company's business is subject to risks associated with
international transactions.
. The Company depends on attracting and retaining highly skilled
professional staff, and the Company depends on the services of its key
personnel.
. The Company depends on its intellectual property rights and risks
having those rights infringed.
. The market price of the Company's common stock may be volatile.
. The Company's quarterly results may vary significantly from quarter to
quarter.
. Changes in activity levels in the Company's core markets.
While sometimes presented with numerical specificity, these forward-looking
statements are based upon a variety of assumptions relating to the business of
the Company, which although considered reasonable by the Company, may not be
realized. Because of the number and range of the assumptions underlying the
Company's forward-looking statements, many of which are subject to significant
uncertainties and contingencies beyond the reasonable control of the Company,
some of the assumptions inevitably will not materialize and unanticipated events
and circumstances may occur subsequent to the date of this document.
-19-
These forward-looking statements are based on current information and
expectation, and the Company assumes no obligation to update. The actual
experience of the Company and the results achieved during the period covered by
any particular forward-looking statement may vary materially. Therefore, these
forward-looking statements should not be regarded as a representation by the
Company or any other person that these estimates will be realized. There can be
no assurance that any of these expectations will be realized or that any of the
forward-looking statements contained herein will prove to be accurate.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES
a. Evaluation of disclosure controls and procedures
As required by Rule 13a-15 under the Securities Exchange Act of 1934
(the "Exchange Act"), within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"), the Company carried out an
evaluation of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. This evaluation was
carried out under the supervision and with the participation of the
Company's management, including the Company's chief executive officer
and chief financial officer. Based upon that evaluation, the Company's
chief executive officer and chief financial officer concluded that the
Company's disclosure controls and procedures are effective. Disclosure
controls and procedures are controls and other procedures of the
Company that are designed to ensure that information required to be
disclosed in the reports that the Company files or submits under the
Exchange Act is recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and forms. Disclosure
controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed
by the Company in the reports that it files under the Exchange Act is
accumulated and communicated to the Company's management, including the
Company's chief executive officer and chief financial officer, as
appropriate to allow timely decisions regarding required disclosures.
b. Changes in internal controls
There were no significant changes in the Company's internal controls or
in other factors that could significantly affect the Company's internal
controls subsequent to the Evaluation Date, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On October 1, 2002, the Company acquired all of the issued and outstanding stock
of RT Logic pursuant to an Agreement and Plan of Reorganization dated October 1,
2002 (the "Reorganization Agreement") for an initial purchase price payable to
the shareholders that included 683,870 shares of the Company's common stock, par
value $.01 per share. Pursuant to the terms of the Reorganization Agreement, In
November 2002, the former shareholders of RT Logic received additional aggregate
consideration that included 25,806 shares of the Company's common stock. The
Company relied on Section 4(2) of the Securities Act of 1933, as amended (the
"Securities Act"), and Rule 506 under Regulation D of the Securities Act for the
exemption from registration of the sale of such shares.
-20-
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
3.1 Articles of Restatement of the Company (Incorporated by reference
to the Registration Statement on Form S-3 (File No. 333-82499)
filed with the Commission on July 8, 1999).
3.2 Amended and Restated Bylaws of the Company (Incorporated by
reference to the Company's Annual Report on Form 10-K for the
Fiscal Year ended September 30, 2000 filed with the Commission on
December 21, 2000).
11.1 Computation of Per Share Earnings.
99.1 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
b. Reports on Form 8-K
The Company filed a report on Form 8-K (dated October 16, 2002) with
the Commission on October 16, 2002 reporting its acquisition of Real
Time Logic, Inc. and the Company filed Amendment No. 1 to the report
on Form 8-K (dated October 16, 2002) with the Commission on December
16, 2002 reporting financial statements required in connection with
its acquisition of Real Time Logic, Inc.
-21-
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTEGRAL SYSTEMS, INC.
---------------------
(Registrant)
Date: February 13, 2003 By: /s/
---------------------- --------------------------
Thomas L. Gough
President & Chief Operating Officer
Date: February 13, 2003 By: /s/
---------------------- -----------------------------
Elaine M. Parfitt
Executive Vice President &
Chief Financial Officer
-22-
CHIEF EXECUTIVE OFFICER CERTIFICATION
I, Steven R. Chamberlain, Chairman and Chief Executive Officer of Integral
Systems, Inc. (the "Registrant"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of the Registrant;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) Evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the audit
committee of the Registrant's board of directors:
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the Registrant's
ability to record, process, summarize and report financial data
and have identified for the Registrant's auditors any material
weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
6. The Registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Integral Systems, Inc.
Date: February 13, 2003 \s\
-----------------------------------
Steven R. Chamberlain
Chairman and Chief Executive Officer
CHIEF FINANCIAL OFFICER CERTIFICATION
I, Elaine M. Parfitt, Chief Financial Officer of Integral Systems, Inc.
(the "Registrant"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of the Registrant;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) Evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the audit
committee of the Registrant's board of directors:
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the Registrant's
ability to record, process, summarize and report financial data
and have identified for the Registrant's auditors any material
weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
6. The Registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Integral Systems, Inc.
Date: February 13, 2003 \s\
-----------------------------------
Elaine M. Parfitt
Chief Financial Officer