SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
(Mark One)
X ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 {Fee Required}
For the fiscal year ended September 30, 1996
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 {No Fee Required}
For the transition period from to
Commission file number 0-18603
Integral Systems, Inc.
(Name of small business issuer in its charter)
Maryland 52-1267968
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation of organization)
5000 Philadelphia Way, Suite A, Lanham, MD 20706
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (301) 731-4233
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
Securities registered under Section 12(g) of the Exchange Act:
Common
(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 to file such reports),
and (2) has been subject to such filing requirements for the past
90 days.
Yes X No
As of November 30, 1996, the aggregate market value of the Common
Stock of the Registrant (based upon the average bid and ask prices
of the Common Stock as reported by the market makers) held by non-
affiliates of the Registrant was $19,588,322.
As of November 30, 1996, 952,533 shares of the Common Stock of the
Registrant were outstanding.
For the year ended September 30, 1996, the Registrant's revenues
were $11,217,148.
<PAGE>
PART 1
Item 1. Business
General
Integral Systems, Inc. (the "Company") is a leading provider of
satellite ground systems: computer systems for satellite command
and control, data processing, simulation, and flight software
validation. The Company believes it is the only provider that
offers "commercial-off-the-shelf" ("COTS") software for satellites
that is actually used in satellite operations. The Company's
proprietary COTS products, the EPOCH 2000 system and the OASYS
system, offer satellite operators a low-cost, highly-adaptable
system that can be used for any currently operating satellite
with minimal modification.
Customers for these systems include US Government organizations
such as National Aeronautics and Space Administration (NASA), the
National Oceanic and Atmospheric Administration (NOAA), and the US
Air Force, as well as commercial satellite operators, both domestic
and foreign. Integral Systems supports satellite missions for
scientific research, remote sensing, meteorology, and
communications applications. In addition, the Company offers
ground system products explicitly for real-time environmental
monitoring via satellite.
The Company has one active wholly owned subsidiary, Integral
Marketing, Inc. (IMI). IMI specializes in the sale and marketing
of electronic equipment primarily for the telemetry, data
acquisition and test communities.
Satellite Ground Systems
The Company offers off-the-shelf products as well as custom
development services for satellite ground systems. The customers
for the Company's products include government and commercial
satellite operators, spacecraft manufacturers, and systems
integrators. Typical sales involve a combination of off-the-shelf
software and hardware products together with development services
for mission specific requirements and system integration.
The Company's flagship commercial product is the EPOCH 2000
software which includes real-time command and control functions as
well as off-line orbit analysis and mission planning functions.
This product has gained international recognition and is currently
used as a solution on a number of Government and commercial
satellite programs. EPOCH 2000 components and turnkey systems
(software and hardware) have been sold to a number of customers,
including ChinaSat in the Peoples Republic of China, the National
Space Program Office in Taiwan (ROCSAT), EOSAT, Earthwatch, Johns
Hopkins University Applied Physics Laboratory, AT&T, GE Americom,
APT Satellite Company, Loral, TRW, Orbital Sciences Corporation,
the US Air Force, and the US Navy.
Integral Systems has ongoing systems engineering work under
contract to NASA at the Goddard Space Flight Center. This work is
in support of NASA's science satellites and includes development
projects for telemetry and command systems and simulation as well
as software verification and validation. The Company developed the
first workstation-based satellite command and control system for
NASA Goddard and has supported over a dozen different NASA space
missions.
For NOAA, Integral Systems builds command and control systems as
well as payload and image data processing systems for
meteorological satellites. The Company has had extensive
involvement in the both the TIROS and GOES satellite programs.
Recently, the company was awarded a large contract by NOAA to
provide the command and control system for the Air Force's DMSP
(Defense Meteorological) satellite fleet. Integral Systems has
also built several generations of the DMSP hardware-in-the-loop
simulator and provided the satellite manufacturer with a
workstation-based flight software test facility. The Company
provides the Air Force with ongoing services for independent
verification and validation of the DMSP flight software using this
simulator.
Integral Systems also provides a product, called the DOMSAT Receive
Station (DRS), which facilitates the collection, storage, and
analysis of environmental data. The DRS is a PC-based system which
includes an antenna, receiver, and processing software which allows
customers to take advantage of the complete NOAA GOES Data
Collection System. The Company has sold over 60 DRS systems to
customers including the Army Corps of Engineers, the US Geological
Survey, and a variety of state and local governments. The
applications include meteorology, water control, and pollution
monitoring, as well as research in geomagnetism and hydrology.
Integral Marketing, Inc.
Through it's wholly-owned subsidiary, Integral Marketing, Inc.
(IMI), the Company acts as a manufacturer's representative, selling
electronic test instrumentation and equipment to customers in
Maryland, D.C., and Virginia. IMI currently represents 14
manufacturers.
Contract Revenue
Integral Systems'commercial revenue as a percentage of total
revenue increased from 42% to 49% between fiscal year 1995 and
fiscal year 1996. The Company is continuing to focus its marketing
efforts on commercial opportunities. The Company's revenue for
fiscal years 1996 and 1995 was generated from the following
sources:
Fiscal Year
Customer 1996 1995
Commercial 49% 42%
NOAA 22% 30%
Air Force 17% 12%
NASA 12% 16%
ISI's services are principally performed under cost-plus-
fixed-fee contracts, fixed price, and time-and-material contracts
and subcontracts. Under cost-plus-fixed-fee contracts, the Company
is reimbursed for allowable costs within the contractual terms and
conditions and is paid a negotiated fee. Under fixed-price
contracts, ISI is paid a stipulated price for services or products
and bears the risk of increased or unexpected costs. Under time-
and-materials contracts, 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 stipulated profit. All contracts include
specified objectives and performance periods ranging from a few
weeks to several years, with most of the contracts providing for
terms of 4 years or less.
The percentage of revenues derived by the Company under these
different types of contracts for the fiscal years ended September
30, 1996 and 1995 is as follows:
Fiscal Year
Contract Type 1996 1995
Cost Plus 39% 43%
Fixed Price 56% 53%
Time and Materials 5% 4%
Government Contracts
Company revenues from US Government contracts are derived from
a combination of contracts with the US Government and subcontracts
with other companies that have prime contracts with the US
Government. The percentage of revenues received by the Company
from prime contracts and subcontracts with the Government for
fiscal years 1996 and 1995 are as follows:
Fiscal Year
Contract Source 1996 1995
Prime Contract 59% 46%
Subcontract 41% 54%
US Government contracting procedures may be categorized 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 US Government selects the proposal most advantageous to it and
then conducts negotiations with the selected bidder. Most contracts
awarded to the Company or to other prime contractors for whom the
Company served as a subcontractor were awarded on the basis of
competitive procurements.
Many of the programs in which ISI 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 ISI 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 US Government contracts and subcontracts
are also subject to termination for "convenience". 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. To date, no ISI contract has been
terminated for convenience.
The Company expects that 53% of revenue for the current fiscal
year (fiscal year 1997) will be derived from five major US
Government contracts and subcontracts. It is estimated that the
largest single contract will represent approximately 27% of the
Company's revenue and the smallest approximately 3%. The loss or
termination of any one of these contracts due to funding cuts or
contract termination could significantly affect the Company's
performance. Similarly, the expiration of any major contract could
significantly affect the Company's performance if not renewed or
replaced by contracts of similar value. In addition, since a
significant portion of revenue for the current fiscal year is
derived from subcontracts, loss of those subcontracts due to
termination of the subcontract or of the direct prime contract
could also affect the Company's performance. During fiscal year
1996, approximately 56% of ISI's revenue was performed under fixed-
price contracts and subcontracts. Under those contracts, an
unanticipated increase in the Company's cost or expenses may reduce
or eliminate the profitability of those contracts, thereby
adversely affecting the Company's financial performance.
ISI's books and records are subject to audit by the Defense
Contract Audit Agency. Such audits can result in adjustments to
contract costs and fees. No audits are currently in process.
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 effect on the
financial position or results of operations of the Company.
Employees
As of December 19, 1996, the Company employed 92 full time
employees, 79 of whom are considered professionals in engineering
related disciplines. Of the engineering professionals, 97% have
undergraduate degrees in a scientific discipline, and 34% of those
have advanced degrees in a scientific discipline. Approximately
84% of the engineering staff have at least seven years experience,
and 13% have three to eight years experience. Approximately 18% of
the engineering staff specialize in digital hardware development,
although many of these individuals have analytic and software
development expertise as well. The remaining 82% of the
engineering staff are analysts and software developers.
Employees are not represented by any union or collective
bargaining group, and employee relations are considered good.
Since inception, ISI has experienced minimal turnover in
engineering staff.
Marketing
The Company relies upon senior corporate management, project
managers and senior technical staff to carry out its marketing
program. These individuals collect information concerning
requirements of current and potential customers in the course of
contract performance, 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. As sources of business within existing markets
are exhausted, new markets are explored. The Company seeks
business believed to be of long term benefit based on
considerations such as technical sophistication required, favorable
market positioning and potential product spin-offs.
Backlog
The Company's estimated backlog as of September 30, 1996 and
September 30, 1995 is as follows:
<TABLE>
September 30, 1996 September 30,1995
<S> <C> <C>
Outstanding Commitments $18,162,147 $9,596,273
General Commitments $9,489,563 $14,784,770
Total $27,651,710 $24,381,043
</TABLE>
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 reasonable 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
54% of backlog as of September 30, 1996 will be completed during
fiscal year 1997. Estimated backlog includes contract options
through September 30, 2002, including general commitments.
Competition
The Company principally obtains contracts and subcontracts
through competitive procurements offered by the US Government or
commercial enterprises. ISI competes with numerous companies
having similar capabilities, some of which are larger and have
considerably greater financial resources. In addition, many
smaller companies have specialized capabilities in similar areas.
Because of its size, ISI often joins with a larger company in
pursuing major procurements. It is not unusual for ISI to compete
with a company for a contract while simultaneously joining with the
same company in pursuit of another contract. The Company has
entered into such joint bidding relations with Martin Marietta,
Space Systems/Loral Corporation; Computer Sciences Corporation, and
AlliedSignal Aerospace/Bendix Field Engineering Corporation.
It is not possible to predict how ISI's competitive position
may be affected by changing economic or competitive conditions,
customer requirements or technological developments. The principal
competitive factors for the Company's business are reputation and
relationship with customers and competitors, quality of services
and products, pricing, responsiveness, and a demonstrable record of
delivering work on time and within budget.
Software Products
In the second quarter of 1991, ISI undertook several internal
software development efforts, which have resulted in products which
the Company is offering commercially. The DOMSAT Receive Station
(DRS) product is a hardware/software system that allows users to
gather environmental telemetry data via a commercial communications
satellite. In fiscal year 1996, Integral Systems recognized
approximately $229,000 in revenue on the DRS product.
The EPOCH 2000 product is a hardware/software system that
allows users to command and control satellites. The product was
formally announced in the second quarter of 1992. EPOCH related
revenue (license fees and associated services) amounted to $4.2
million in fiscal year 1996.
The Company has also developed other software intensive
products. OASYS, a spacecraft orbit determination product, can be
sold as a stand-alone package or as a subsystem under the EPOCH
2000 product. OASYS related revenue for fiscal year 1996 was
$384,000.
Research and Development
The Company is continually engaged in research and development
activities both to improve its existing EPOCH and OASYS 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 a new version of its EPOCH 2000 command and control
software for satellites and on improving the user interface systems
for its COTS software products. In fiscal 1996, total capitalized
software development costs were $431,773.
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
On July 28, 1988, ISI sold 110,000 of its common shares (par
value $.01) in its initial public offering for $5.00 per share.
ISI also has a line of credit agreement with NationsBank for
$1,200,000. Borrowings under the line of credit bear interest at
the bank's prime rate plus one-quarter (1/4) percentage point per
annum. Any accrued interest is payable monthly. At September 30,
1996 the Company had no amounts outstanding under the line of
credit.
Financial Information in Industry Segments
During the year ended September 30, 1996, the Company's
operations included two reportable segments: Satellite ground
systems and electronic test instrumentation and equipment
marketing.
The Company provides satellite ground systems - computer
systems for satellite command and control, data processing,
simulation, and flight software validation. Customers for these
systems include US Government organizations such as National
Aeronautics and Space Administration (NASA), the National Oceanic
and Atmospheric Administration (NOAA), and the US Air Force, as
well as commercial satellite operators, both domestic and foreign.
Through its wholly-owned subsidiary, Integral Marketing, Inc.
(IMI), the Company acts as a manufacturer's representative, selling
electronic test instrumentation and equipment to customers
primarily in Maryland, Virginia and the District of Columbia. (The
Company's other wholly-owned subsidiary, InterSys, Inc. provides
consulting services for satellite design and procurement, but is
presently inactive.)
See Footnote Number 12 of the notes to the Financial
Statements for financial information regarding these segments.
Item 2. Properties
As of March, 1994, ISI renegotiated its lease which obligated
the Company for an additional five years, for an aggregate of
25,600 square feet of office space at its principal location at
5000 Philadelphia Way, Suite A, Lanham, Maryland 20706-4417. The
annual lease cost, including operating expenses, for the facility,
is approximately $242,374.
Item 3. Legal Proceeding
In August 1996 the Company sued International Systems
Integrators, Inc. ("Integrators"), a New Mexico company which had
failed to pay a $232,708 invoice from the Company in respect of
certain software and hardware products sold by the Company to
Integrators and subsequently resold by Integrators to the United
States Air Force. Integrators acted as the prime contractor for
the Air Force and the Company acted as a subcontractor to
Integrators.
The Company believes that it fully complied with the terms of
its subcontract with Integrators. However, Integrators failed to
pay the Company's invoice for the products supplied to Integrators
by the Company under the subcontract. Integrators was paid by the
Air Force for the products supplied by the Company.
The Company sued Integrators, and its principal owner,
Bernadette L. Mares (together with Integrators, the "Defendants"),
for breach of contract, and is seeking to recover the $232,708, the
amount owed under the Company's subcontract with Integrators.
In September 1996, the Defendants filed a counterclaim against
the Company alleging defamation, interference with contractual
relations and extortion, seeking damages from the Company in an
unspecified amount. The Company believes that the Defendants'
counterclaim is entirely without merit and intends to contest it
vigorously. The Company does not believe that the Defendants'
counterclaim will have a material adverse effect on its financial
condition or operations.
In October 1996, the Company filed an answer to the
Defendants' counterclaims. In December 1996 the Company filed a
motion for summary judgment with respect to its claims. In March
1997, the Company's motion for summary judgment was denied by the
court. Discovery is continuing in the case and a trial date has
not yet been set.
Although the Company has fully reserved the receivable it
believes is due under its contract with Integrators, it continues
to pursue vigorously all legal remedies available to it with
respect to this matter
Item 4. Submission of Matters to a Vote of Security Holders
On March 28, 1996, Integral Systems held their annual
shareholders meeting. A Board of Directors was elected, and is
made up of the following individuals: Steven R. Chamberlain,
Robert P. Sadler, Bonnie K. Wachtel, Louis Brown, Thomas L. Gough,
Dominic A. Laiti, and R. Doss McComas. In September, 1996, Mr.
Louis Brown announced his resignation as a member of the board.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder's Matters
Effective May, 1990, Integral Systems' over-the-counter stock
began trading on NASDAQ. The Company's NASDAQ trading symbol is
ISYS. The range of high and low transaction prices as reported by
NASDAQ and the market makers for each quarterly period during the
fiscal years ended September 30, 1996 and 1995, are shown below:
<TABLE>
<S> <C> <C>
1996 Fiscal Year High Low
First Quarter 28 1/4 22
Second Quarter 27 19
Third Quarter 29 1/2 21 1/2
Fourth Quarter 28 1/2 20 1/2
1995 Fiscal Year High Low
First Quarter 17 3/4 16 3/4
Second Quarter 23 1/2 17 1/2
Third Quarter 28 25 3/4
Fourth Quarter 31 26 1/2
</TABLE>
As of September 30, 1996, there were approximately 436 holders
of record of the Company's Common Stock.
No cash dividends have been paid during the Company's
existence, and none are expected to be declared during the
forthcoming 1997 fiscal year.
Item 6. Management's Discussion And Analysis Of Financial
Condition And Results Of Operations
COMPARISON OF FISCAL YEAR 1996
TO FISCAL YEAR 1995
The components of the Company's income statement as a
percentage of revenue are depicted in the following table for
fiscal years 1996 and 1995. Certain classifications and
presentations from fiscal year 1995 have been changed to be
consistent with fiscal year 1996 formats.
<TABLE>
<S> <C> <C> <C> <C>
% of % of
1996 Revenue 1995 Revenue
(000's omitted) (000's omitted)
Revenue $11,217 100.0 $10,771 100.0
Expenses
Cost of Revenue 8,217 73.2 8,290 77.0
Selling, General & Admin. 1,758 15.7 1,434 13.3
Bad Debt Expense 233 2.1 - -
Prod. Amortization 509 4.5 509 4.7
Other -2 - -38 -.3
Income Taxes 179 1.6 195 1.8
Total Expenses 10,894 97.1 10,390 96.5
Net income $323 2.9 $381 3.5
</TABLE>
Revenue
The Company's principal components of revenue for fiscal years
1996 and 1995 are as follows:
<TABLE>
<S> <C> <C> <C> <C>
% of % of
1996 Revenue 1995 Revenue
(000's omitted) (000's omitted)
Government Revenue $5,686 50.7 $6,239 57.9
Commercial Revenue
EPOCH 4,240 37.8 3,512 32.6
OASYS/DRS/Other 629 5.6 753 7.0
IMI 662 5.9 267 2.5
Total 5,531 49.3 4,532 42.1
Total Consolidated Revenue $11,217 100.0 $10,771 100.0
</TABLE>
Consolidated revenue increased by approximately $450,000
between the fiscal year ended September 30, 1996 and the fiscal
year ended September 30, 1995, principally because of new contract
awards related to the sale of the Company's EPOCH product along
with associated integration services. Revenue increases from EPOCH
related business more than offset a $550,000 decline in the
Company's Government business. The Government decline is believed
to be temporary as new contracts in this segment received at the
end of fiscal year 1996 should provide for higher revenue levels
(compared to both 1996 and 1995) during fiscal year 1997. Although
less than 6% of consolidated Company revenues, Integral Marketing,
Inc. (IMI) achieved approximately 150% of revenue growth in 1996
over 1995.
During fiscal year 1996, the Company derived approximately 49%
of its revenues from the sale of its commercial products and
related services as opposed to 42% of such revenue during the prior
fiscal year. The increase correlates to the Company's conscious
effort to reduce its reliance on the Federal Government, and to
utilize its recently developed software products to gain access to
organizations in order to sell both its products and associated
integration and support services.
Although the Company believes that its full cadre of software
products is important for its future growth and prosperity, to date
the Company's largest product investment relates to the development
of its EPOCH software, a COTS (commercial off-the-shelf) product
for satellite command and control. The Company believes that it is
unique in its status as the only entity with COTS software capable
of "flying" satellites built by any satellite manufacturer in the
world. In fact during April, 1996 the Company was awarded a
strategically important contract, a copy of which has been filed
herewith as an exhibit, from AT&T Corporation to provide its COTS
products (and related integration services) to command and control
a fleet of satellites composed of spacecraft from multiple
manufacturers. The preponderance of revenue to be derived from
this contract is expected to be realized in fiscal year 1997.
During fiscal year 1996, the Company recorded approximately
$4.2 million of revenue for its EPOCH product and associated
services compared to $3.5 million of revenue during fiscal year
1995. The 1996 EPOCH revenue total included approximately $465,000
of license revenue compared to approximately $345,000 of this
revenue type recorded in 1995. The Company'a material agreements
with AT&T Corporation and the Republic of China National Space
Program Office, which are filed herewith as Exhibits, contain
licensing provisions.
Because license revenues have nominal marginal costs
associated with them, this form of revenue is highly important to
the Company's overall profitability. Looking forward to fiscal
year 1997, the Company is encouraged that its current contract
backlog includes in excess of $500,000 of unearned license revenues
for its EPOCH product.
The principal balance of the Company's commercial revenues
pertain to other proprietary products as follows: OASYS (Orbital
Analysis System); DRS (DOMSAT Receive Station); and a collection of
software pertaining to database and information system
applications. During 1996, the Company recorded approximately
$630,000 of revenue related to the sale of products and services
under these programs compared to approximately $750,000 of revenue
recorded last fiscal year. The decrease principally relates to the
Company's decision to cease operations of its information and
database software operation as a discreet profit center. All
software development costs associated with this line of business
have been fully amortized as of September 30, 1996.
Expenses
Cost of revenue as a percentage of revenue for fiscal year
1996 was 73.2% compared to 77.0% for fiscal year 1995. The
improvement in these ratios is principally attributable to gross
margin gains in the Company's EPOCH operation as well as increased
margins at IMI.
SG&A increased in both absolute terms (by approximately
$325,000) and as a percentage of revenue (15.7% vs. 13.3%) in 1996
over 1995. The increases reflect the Company's continued program
to enhance and augment its selling efforts, including a very
concerted effort (and expense) to sell its commercial products
internationally.
During 1996 the Company recorded a non-recurring $233,000 bad
debt expense attributable to a customer's inability to pay.
Despite this reserve, the Company is vigorously pursuing collection
of this receivable. (See Item 3 - Legal Proceedings).
General
Overall, net income as a percentage of revenue was 2.9% in
fiscal year 1996 compared to 3.5% in fiscal year 1995, while pretax
income was approximately $75,000 lower in 1996 compared to 1995.
Were it not for the bad debt expense described above, pretax income
would have been 28% greater in 1996 over 1995. Further the
Company's fourth quarter of fiscal year 1996 included its highest
ever quarterly revenue total ($3.9 million) and its second highest
ever pretax profit level ($448,000). Because of its fourth quarter
performance, its current and significant backlog, and contracts to
be imminently received, the Company believes that results for
fiscal year 1997 will exceed those recorded in fiscal year 1996 for
both revenue and profitability.
Liquidity and Capital Resources
The Company has been profitable on an annual basis since
inception and has been able to generate adequate cash flow from
operations to fund its operating and capital expenses. To
supplement operating cash flows, the Company has access to a line
of credit facility in the amount of $1.2 million which is currently
unused. (See Note 5 of the Notes to Financial Statements). During
fiscal year 1996, the Company used approximately $146,000 for
operating activities and used an additional $739,000 for investing
activities, including approximately $432,000 for newly capitalized
software development costs.
As a result of its current cash reserves, its unused line of
credit, its current profitability and its projected profitability
for fiscal year 1997, the Company believes it will have adequate
cash resources to meet its obligations for the foreseeable future.
Although operating and investing activities consumed significant
sums of cash during 1996, the Company does not believe it will have
to rely on external sources of cash (i.e. its line of credit) to
fund its growth and future software development in fiscal year
1997.
In terms of capital purchases, historically the Company has
funded such items through operating cash flow or capital lease.
The Company currently has no plans for major capital purchases in
the ensuing twelve month period, although the Company plans to
continue to invest in the continued development and improvement of
its principal software products, EPOCH and OASYS.
Item 7. Financial Statements and Supplementary Data
The information required by this item is set forth under item
13(a), which information is incorporated herein by reference.
Item 8. Disagreements on Accounting and Financial Disclosure
Not Applicable.
PART III
Item 9. Directors and Executive Officers, Promoters and Control
Persons, Compliance With Section 16(a) of the Exchange Act.
Name Position with the Company
Steven R. Chamberlain Chairman of the Board
and Chief Executive Officer
Thomas L. Gough President, Chief Operating Officer
and Director
Robert P. Sadler Vice President, Quality Control,
Secretary; Treasurer; and Director
Steven K. Kowal Vice President, Engineering
Manufacturing
Steven A. Carchedi Vice President of Commercial
Systems
Donald F. Mack, Jr. Vice President of Engineering
Kimberly A. Chamberlain Vice President, Chief Financial
Officer
William I. Tittley Vice President, Asia Pacific
Operations
Bonnie K. Wachtel Outside Director
Dominic A. Laiti Outside Director
R. Doss McComas Outside Director
Directors serve until the next annual meeting of stockholders
or until successors have been elected and qualified. Officers
serve at the discretion of the Board of Directors.
Steven R. Chamberlain, 41, 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, Mr. Chamberlain was
employed by OAO Corporation 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. Mr.
Chamberlain is married to Kimberly A. Chamberlain, who was, at
September 30, 1996, the Vice President and Chief Financial Officer
of the Company. On February 28, 1997, Ms. Chamberlain resigned as
Vice President and Chief Financial Officer of the Company.
Thomas L. Gough, 48, became a member of ISI's staff in
January, 1984. In March of 1996 he was elected to the Board of
Directors of Integral Systems having served as President and Chief
Operating Officer since June, 1992. For three years before being
named President he served as Vice President and Chief Financial
Officer. Prior to joining ISI he was employed by Business and
Technological Systems, Inc., serving initially as a Project Leader
and later as the Software Systems Division Manager. From 1972 to
1977 he was employed by Computer Sciences Corporation where he
progressed from programmer/analyst to section manager. Mr. Gough
earned a BS degree from the University of Maryland where he majored
in Information Systems Management in the School of Business and
Public Administration.
Robert P. Sadler, 46, a Company founder, has been a Director,
Secretary, and Treasurer since 1982. In May 1988, he was appointed
Vice President of Administration, in June, 1992, he was appointed
Vice President, Quality Control. From 1976 to 1982, Mr. Sadler was
employed at OAO Corporation where he progressed from Computer
Analyst to Project Manager. Mr. Sadler obtained a B.S. in
Mathematics and a B.S. in Computer Sciences from Pennsylvania State
University and a M.S. in Management of Information Systems
Technology from George Washington University.
Steve K. Kowal, 43, a Company founder, has been with ISI since
1982. In May 1988 he was appointed Vice President of Engineering
Manufacturing. From 1979 to 1982, Mr. Kowal was employed by OAO
Corporation where he was a manager of hardware development on
several of OAO's major systems. Mr. Kowal holds a B.S. degree in
Electrical Engineering from the University of Delaware.
Steven A. Carchedi, 45, joined the Company in 1991 and is Vice
President of Commercial Systems. Before joining Integral Systems
as a full-time employee in 1991, Mr. Carchedi worked with the
company for two years as an independent business development
consultant. Previously, he worked for Computational Engineering,
Inc., where he held positions as a Mathematician, Program Manager,
Corporate Director, and Vice President of Business Development.
Mr. Carchedi holds a B.S. Degree in Mathematics from Wake Forest
University and a M.A. Degree in Mathematics from the University of
Maryland.
Donald F. Mack, Jr., 43, joined the company in 1986. In July
of 1989, he was appointed Vice President of Engineering. From 1979
to 1986, Mr. Mack was employed by General Electric Corporation's
Space Systems Division where he progressed from design engineer to
a Senior Project Supervisor for systems development. Mr. Mack
holds a B.S. degree in Electrical Engineering from Northeastern
University and a M.S. degree in Electrical Engineering from Johns
Hopkins University.
Kimberly A. Chamberlain, 40, was appointed Vice President and
Chief Financial Officer in April, 1995 and has been with the
company since 1983. Ms. Chamberlain graduated from the University
of Maryland, with a B.S. degree in Business Management in 1985.
Before coming to Integral Systems, Ms. Chamberlain worked at OAO
Corporation. Ms. Chamberlain is married to Steven R. Chamberlain,
the Chairman of the Board and Chief Executive Officer of the
Company. On February 28, 1997, Ms. Chamberlain resigned as Vice
President and Chief Financial Officer of the Company.
William I. Tittley, 53, joined the company in 1992, performing
as Project Manager on the first EPOCH 2000 sale to the Chinese
Government. In March, 1995, Mr. Tittley was made Vice President,
Asia Pacific, to oversee the Company's operations in the Asian
region. Formerly, Mr. Tittley was with the OAO Corporation (from
1977 through 1992), where he performed duties as Director, Space
System Programs, in charge of the technical and financial direction
of aerospace systems programs. Mr. Tittley holds a B.S. in
Aerospace Vehicle Design from the State University of New York, and
a M.S. in Engineering from the California Coast University.
Bonnie K. Wachtel, 42, has served as a 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, D.C. 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, 65, was elected director of the Company in
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 twenty-five (25) years
of experience in starting, building, and managing high-technology
private and public companies with annual revenues from two million
to over 120 million dollars. 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 former Director of United Press International, Saturn Chemicals
Company, Hadron, Inc., Telecommunications Industries, Inc., MAXXAM
Technology, Inc., and Jupiter Technology, Inc.
R. Doss McComas, 42, joined the Board in July, 1995. Since
1982 he has had various positions with COMSAT RSI, a business unit
of COMSAT supplying products and services to the wireless,
satellite, air traffic control and other specialized markets
worldwide. These positions included General Counsel, Vice
President of Acquisitions, Strategic Planning and International
Marketing, as well as Group Vice President, responsible for the
company's international operations. Currently, he is Chairman and
Chief Executive Officer of Plexsys International, a COMSAT RSI
equity investment. He holds a B.A. degree from Virginia
Polytechnic Institute, a M.B.A. from Mt. Saint Mary's, and a J.D.
from Gonzaga University.
Item 10. 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 earned
over $100,000 during the fiscal year ended September 30, 1996:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
SUMMARY COMPENSATION TABLE
Long-Term Compensation
Annual Compensation Awards Payouts
Other All other
Annual Restricted
Name and Compen- Stock LTIP Compen-
Principal sation Award(s) Options/Payouts sation
Position Year Salary($) Bonus($)($)($)($) SAR(#) ($) ($)(1)
CEO
S. R. Chamberlain 1996 $114,179 $14,000 15,000 $11,486
1995 $108,577 $14,000 7,500 $10,502
1994 $105,998 $13,975 0 $11,208
PRESIDENT
Thomas L. Gough 1996 $101,581 $ 8,000 10,000 $10,061
1995 $ 98,048 $11,000 0 $ 9,318
1994 $ 93,645 $10,980 0 $ 9,677
VP,
Commercial Systems
Steve Carchedi 1996 $ 97,771 $12,000 10,000 $ 9,572
1995 $ 94,926 $12,000 2,000 $ 8,944
1994 $ 91,896 $ 9,479 0 $ 9,479
VP, Engineering
Manufacturing
Steven K. Kowal 1996 $ 97,771 $ 9,000 4,000 $ 9,572
1995 $ 94,926 $ 9,500 0 $ 8,944
1994 $ 91,896 $ 9,479 0 $ 9,452
VP, Asia
Pacific
Operations
William I. Tittley 1996 $ 98,891 $26,456 1,000 $10,684
1995 $ 96,050 $ 7,000 5,000 $ 9,046
1994 $ 93,006 $ 6,018 0 $ 9,779
(1) Employer Pension Contributions
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Percent of Total
Number of Options/SARs
Options/ Granted to
SARS Employees in Exercise Base Expiration
Name Granted Fiscal Year Price($) Date
CEO
S.R. Chamberlain 15,000 18% *$22.50 2001
PRESIDENT
Thomas L. Gough 10,000 12% $23.50 2001
VP, COMMERCIAL SYSTEMS
Steven A.Carchedi 10,000 12% *$22.50 2001
VP, ENGINEERING
MANUFACTURING
Steven K. Kowal 4,000 5% $21.50 2001
VP, ASIA PACIFIC
OPERATIONS
William I. Tittley 1,000 1% $21.50 2001
*Average Price
</TABLE>
b. Compensation Pursuant to Plans
ISI'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 401K
pension and profit sharing plan under Section 401 of the Internal
Revenue 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 7.5% of an eligible employee's
salary. The employee may contribute up to an additional 10% as
salary deferral. In fiscal years 1996 and 1995, the Company
contributed a total of 11% of eligible employees salaries to both
plans.
c. Stock Option Plan
Effective May 25, 1988, ISI 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. ISI's 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. The maximum
number of shares of ISI Common Stock which may be issued pursuant
to the stock plan was increased from 50,000 to 200,000 during
fiscal year 1994.
A total of 85,600 options were issued and 8,787 options were
exercised during fiscal year 1996; 5,000 options were canceled.
Total options issued and outstanding as of September, 1996 are
117,987. On December 1, 1995, William I. Tittley, the Company's
Vice President for Asia Pacific Operations, exercised options for
2,700 shares. On June 27, 1996, Donald F. Mack, Jr., the Company's
Vice President of Engineering, exercised options for 1,000 shares.
d. Compensation of Directors
Presently outside directors who are not employees of the
Company receive $5,000 per year for their services.
e. Termination of Employment and Change of Control
Termination
The Company has no compensatory plan nor arrangement with
respect to any individual named in the Cash Compensation Table
(Item 11(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 11. Security Ownership of Certain Beneficial Owners and
Management
a. Security Ownership of Certain Beneficial Owners (as of
9/30/96)
None
b. Security Ownership of Management (as of 9/30/96)
<TABLE>
<S> <C> <C>
Name of Owner (1)(2)Shares Percentage of Total Shares
Owned
Steven R. Chamberlain 79,040 7.7%
Thomas L. Gough 37,850 3.7%
Robert P. Sadler 52,340 5.1%
Kimberly A. Chamberlain 10,460 1.0%
Donald F. Mack, Jr. 11,350 1.1%
Steven K. Kowal 43,346 4.2%
Steven A. Carchedi 26,500 2.6%
William Tittley 3,800 .4%
Bonnie K. Wachtel 5,000 .5%
Dominic A. Laiti 5,000 .5%
R. Doss McComas 4,500 .4%
</TABLE>
Officers and Directors as a group 279,186 27.0%
(1) Includes Options
(2) There are no shares issuable to the individuals named in this
table within 60 days.
Item 12. Certain Relationships and Related Transactions
Bonnie K. Wachtel is Vice President, General Counsel and
Director of Wachtel & Co., Inc., one of the Underwriters of ISI's
initial public offering.
Item 13. Exhibits, Financial Statement Schedules, and Reports
on Form 8K
(a) (1) Financial Statements
Independent Auditors' Report - page 1
Balance Sheets as of September 30, 1996 - page 2
Statements of Operations for the Years Ended September 30, 1996,
and 1995 - page 3
Statement of Stockholders' Equity for Years Ended September 30,
1996 and 1995 - page 4
Statements of Cash Flows for the Years Ended September 30, 1996 and
1995 - page 5
Notes to Financial Statements - pages 6 - 15
(2) Material Contracts
Contract, dated 9/27/90 between Integral Systems, Inc. and the U.S.
National Oceanic and Atmospheric Administration, page 36.
(Portions of this exhibit have been omitted pursuant to a request
for confidential treatment filed with the Securities and Exchange
Commission.)
Contract, dated 12/22/94, between Integral Systems, Inc. and the
Republic of China National Space Program Office, page 104.
(Portions of this exhibit have been omitted pursuant to a request
for confidential treatment filed with the Securities and Exchange
Commission.)
Contract, dated 5/17/96, between Integral Systems, Inc. and the U.S.
National Oceanic and Atmospheric Administration, page 164.
(Portions of this exhibit have been omitted pursuant to a request
for confidential treatment filed with the Securities and Exchange
Commission.)
Contract, dated 4/8/96, between Integral Systems, Inc. and AT&T
Corporation, page 421. (Portions of this exhibit have been
omitted pursuant to a request for confidential treatment filed with
the Securities and Exchange Commission.)
All other schedules are omitted since the required information is
not present or is not present in amounts sufficient to require
submission of the schedule, or because the information required is
included in the financial statements and notes thereto.
(b) Reports on Form 8-K
There were no Form 8-Ks filed during fiscal year 1996.
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant caused this report
to be signed on its behalf by the undersigned, thereunto duly
authorized.
INTEGRAL SYSTEMS, INC.
BY: /s/
Steven R. Chamberlain
Chairman of the Board and
Chief Executive Officer
DATE: 4/2/97
BY: /s/
Thomas L. Gough
President, Chief Operating
Officer
Director
DATE: 4/2/97
BY: /s/
Elaine M. Parfitt
Chief Financial Officer,
Principal Accounting Officer
DATE: 4/2/97
<PAGE>
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature Titles Date
Chairman of the Board, Director, Chief Executive Officer
Steven R. Chamberlain 4/1/97
President, Chief Operating Officer, Director
Thomas L. Gough 4/1/97
Vice President of Quality Control,
Secretary & Treasurer; Director
Robert P. Sadler 4/1/97
Director
Bonnie K. Wachtel 3/31/97
Director
Dominic A. Laiti 4/1/97
Director
R. Doss McComas 4/1/97
<PAGE>
INTEGRAL SYSTEMS, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended September 30, 1996 and 1995
AND
INDEPENDENT AUDITORS' REPORT
TABLE OF CONTENTS
DESCRIPTION PAGES
Independent Auditors' Report 1
Consolidated Balance Sheet as of September 30, 1996 2
Consolidated Statements of Operations for the Years
Ended September 30, 1996 and 1995 3
Consolidated Statements of Stockholders' Equity for
the Years Ended September 30, 1996 and 1995 4
Consolidated Statements of Cash Flows for the Years
Ended September 30, 1996 and 1995 5
Notes to Consolidated Financial Statements 6-15
RUBINO & McGEEHIN CHARTERED
CERTIFIED PUBLIC ACCOUNTANTS
6905 ROCKLEDGE DRIVE, SUITE 700
BETHESDA, MARYLAND 20817-1818
301-564-3636
FAX 301-564-2994
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Integral Systems, Inc.
We have audited the accompanying consolidated balance sheet of
Integral Systems, Inc. and its subsidiaries as of September 30, 1996,
and the related consolidated statements of operations, stockholders'
equity, and cash flows for the years ended September 30, 1996 and
1995. 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 generally accepted
auditing standards. 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, 1996, and the consolidated results of their operations
and their consolidated cash flows for the years ended September 30,
1996 and 1995, in conformity with generally accepted accounting
principles.
RUBINO & McGEEHIN
November 20, 1996
Bethesda, Maryland
<PAGE>
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996
ASSETS
Current assets
Cash and cash equivalents $1,369,915
Accounts receivable 4,849,886
Employee receivables 24,200
Prepaid expenses 59,956
Deferred income taxes 73,913
Total current assets 6,377,870
Property and equipment, at cost, net of accumulated
depreciation and amortization of $446,769 399,108
Other assets
Deposits 7,182
Software development costs, net of accumulated
amortization of $1,463,779 1,295,514
Total assets $8,079,674
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable - trade $786,701
Accrued expenses 1,157,356
Billings in excess of revenue for contracts
in progress 128,925
Income tax payable 48,060
Total current liabilities 2,121,042
Commitments and contingencies
Common stock, $.01 par value, 2,000,000 shares
authorized, 952,533 shares issued
and outstanding 9,525
Additional paid-in capital 825,311
Retained earnings 5,123,796
Total stockholders' equity 5,958,632
Total liabilities and stockholders' equity $8,079,674
The accompanying notes are an integral part of the these
consolidated financial statements.
<PAGE>
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended September 30, 1996 and 1995
<TABLE>
<S> <C> <C>
Revenue $11,217,148 $10,770,661
Cost of revenue
Direct labor 3,617,255 3,526,899
Direct equipment and subcontracts 1,567,215 2,218,243
Travel and other direct costs 302,373 159,992
Overhead costs 2,729,793 2,385,043
Total cost of revenue 8,216,636 8,290,177
Gross margin 3,000,512 2,480,484
Selling, general and administrative 1,758,248 1,434,296
Product amortization 509,477 508,556
Bad debt expense 232,708 -
Income from operations 500,079 537,632
Other income (expense)
Interest income 65,396 76,222
Interest expense (2,320) (2,529)
Miscellaneous, net (60,787) (35,139)
Income before income taxes 502,368 576,186
Provision for income taxes 179,351 195,483
Net income $323,017 $380,703
Weighted average number of common shares 948,021 942,155
Earnings per share:
Net income $ .34 $ .40
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended September 30, 1996 and 1995
<TABLE>
<S> <C> <C> <C> <C> <C>
Common
Stock at Additional
Number of Par Paid-in Retained
Shares Value Capital Earnings Total
Balance, September 30, 1994 938,020 $ 9,380 $ 635,541 $4,420,076 $5,064,997
Stock options exercised 5,726 57 60,896 - 60,953
Net income - - - 380,703 380,703
Balance, September 30, 1995 943,746 9,437 696,437 4,800,779 5,506,653
Stock options exercised 8,787 88 128,874 - 128,962
Net income - - - 323,017 323,017
Balance, September 30, 1996 952,533 $ 9,525 $ 825,311 $5,123,796 $5,958,632
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended September 30, 1996 and 1995
<TABLE>
<S> <C> <C>
1996 1995
Cash flows from operating activities:
Net income $323,017 $380,703
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 705,793 677,207
Change in deferred taxes (13,194) 20,805
(Increase) decrease in:
Accounts receivable (1,366,109) (1,090,207)
Interest receivable - 10,333
Prepaid expenses and deposits 4,549 (46,815)
Employee receivable (24,200) -
Income tax receivable - 6,361
(Decrease) increase in:
Accounts payable - trade 434,706 145,031
Accrued expenses 282,108 (157,414)
Billings in excess of revenue
for contracts in progress (432,277) 337,288
Income tax payable (60,421) 108,481
Total adjustments (469,045) 11,070
Net cash (used) provided by operating activities (146,028) 391,773
Cash flows from investing activities:
Acquisition of property and equipment (306,799) (217,642)
Software development costs (431,773) (315,470)
Sale of marketable securities - 403,100
Net cash used in investing activities (738,572) (130,012)
Cash flows from financing activities:
Proceeds from issuance of common stock 128,962 60,953
Net (decrease) increase in cash (755,638) 322,714
Cash and cash equivalents, beginning of year 2,125,553 1,802,839
Cash and cash equivalents, end of year $1,369,915 $2,125,553
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<PAGE>
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, Integral Marketing, Inc. (IMI) and
InterSys, Inc. (InterSys). 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 and disclosures. Accordingly, actual
results could differ from those estimates.
Revenue Recognition
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.
1. Summary of Significant Accounting Policies (continued)
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.
Revenue from commissions for the sale of equipment is
recognized when customer orders are submitted. A reserve is
made for possible reductions in or cancellations of customer
orders.
Depreciation and Amortization
Property and equipment are stated at cost. The Company
follows the policy of providing depreciation and amortization
by charges, on 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 which average 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.
1. Summary of Significant Accounting Policies (continued)
Earnings Per Share
Earnings per share computations are based on the weighted
average number of common shares outstanding during each year
and have been adjusted where appropriate for stock splits.
The exercise of outstanding stock options would not result in
a material dilution of earnings per share.
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. Included
in the cash balance is $89,057 held in a foreign bank
account.
Reclassification
Certain accounts in the prior year financial statements have
been reclassified for comparative purposes to conform with
the presentation in the current year financial statements.
2. Accounts Receivable and Revenue
Accounts receivable at September 30, 1996 consists of the
following:
Billed
Government - prime contracts $ 669,556
Government - subcontractors 440,871
Commercial customers 1,655,615
Subtotal 2,766,042
Unbilled
Government - prime contracts 827,637
Government - subcontractors 91,269
Commercial customers 1,164,938
Subtotal 2,083,844
Total $4,849,886
2. Accounts Receivable and Revenue (continued)
Unbilled accounts receivable include amounts arising 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 collected in one year.
During the years ended September 30, 1996 and 1995,
approximately 51% and 58%, respectively, of the Company's
revenue was from prime contracts and subcontracts with
departments and agencies of the U.S. Government. The
remaining revenue consists of commercial contracts and sales
of commercial products. For each of the years ended
September 30, 1996 and 1995, commercial revenue included one
customer which provided revenue in excess of 10% of total
revenue.
3. Property and Equipment
Property and equipment as of September 30, 1996, are as
follows:
Electronic equipment $728,956
Furniture and fixtures 54,898
Leasehold improvements 11,365
Software 50,658
Total property and equipment 845,877
Less: accumulated depreciation
and amortization (446,769)
$399,108
4. Software Development
Software development costs at September 30, 1996, consist of
the following:
Costs incurred $2,759,293
Less: accumulated amortization (1,463,779)
$1,295,514
The total amortization expense for the year ended September
30, 1996 is $509,477.
5. Line of Credit
The Company has a line of credit agreement with a bank at
September 30, 1996 for $1,200,000. Borrowings under the
line of credit bear interest at the bank's prime lending
rate plus one-quarter of one percentage point per annum.
Any accrued interest is payable monthly. The line of credit
is secured by the Company's billed accounts receivable. The
line also has certain financial covenants, including minimum
net worth and liquidity ratios. The line expires February
28, 1998. At September 30, 1996, the Company had no
outstanding balance under the line of credit.
6. Accrued expenses
Accrued expenses at September 30, 1996, consist of the
following:
Accrued payroll $544,974
Accrued vacation 253,950
Payroll taxes 171,054
Retirement plan payable 158,897
Other 28,481
$ 1,157,356
7. Commitments and Contingencies
Leases
The Company is leasing office space for a five-year period
that commenced March 15, 1994. Future minimum lease payments
through March 14, 1999 are as follows:
Years ending September 30, 1997 $219,520
1998 226,048
1999 105,131
$550,699
Lease payments do not include operating expenses, which are
adjusted annually, or utilities. Rent expense was $254,327
and $248,944, for the years ended September 30, 1996 and
1995, respectively.
7. Commitments and Contingencies (continued)
Government Contracts
A significant portion of the revenues of the Company
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, 1994.
Management is of the opinion that any disallowances by the
Government auditors, other than amounts already provided,
will not materially affect the Company's financial
statements.
Litigation
During the fiscal year ended September 30, 1996, the Company
sold certain of its software products along with specified
hardware to a U.S. Government agency. The procurement
required the Company to sell these items through an
intermediary prime contractor. The value of the contract to
the Company was $232,708.
The Company fully complied with the terms of its contract,
and although the third party prime contractor has been paid
in full by the U.S. Government, the Company has received no
payments to date. In August 1996, the Company filed a
complaint in the Second Judicial District Court of the State
of New Mexico against the prime contractor and its principal
owner individually for breach of contract in an attempt to
recover the value of its contract. Based on discovery
received, the Company subsequently filed a motion for summary
judgment against the defendants.
In September 1996, the defendants filed a counterclaim
against the Company alleging defamation, intentional
interference with contractual relations and the prima facie
tort of extortion. The Company believes the counterclaim is
without merit and will not have a materially adverse effect
on its financial statements.
Although the Company has fully reserved the receivable due
under this contract ($232,708), it continues to vigorously
pursue all legal remedies available to it.
8. Income Taxes
For the years ended September 30, 1996 and 1995, the
provision for income taxes consisted of the following:
1996 1995
Current tax expense
Federal $154,910 $142,972
State 37,635 31,706
192,545 174,678
Deferred tax (benefit) expense (13,194) 20,805
Total provision $179,351 $195,483
At September 30, 1996, the tax effect of significant
temporary differences representing deferred tax assets and
liabilities are as follows:
Asset
(Liability)
Depreciation and amortization $(36,827)
Vacation accrual 99,040
Revenue reserve 11,700
Net deferred income tax asset $ 73,913
The effective income tax rates differ from the statutory
United States income tax rate due principally to the
following:
1996 1995
Federal statutory rate 34.0% 34.0%
State tax, net of federal
income tax benefit 4.6 4.6
Tax-exempt interest - (0.8)
Tax deductible stock option compensation (2.8) (4.1)
Other, primarily change in estimate 0.1) 0.2
Effective rate 35.7% 33.9%
9. 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. Effective January 1,
1995, the separate profit sharing and 401(k) plans were
combined into one plan.
The Company also has a money purchase plan. For the years
ended September 30, 1996 and 1995, the money purchase plan
obligated the Company to contribute 5% of eligible salaries
under the plan.
For the years ended September 30, 1996 and 1995,
contributions to the plans totalled $473,552 and $455,269,
respectively.
10. Stock Option Plan
Effective May 25, 1989, 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. The
maximum number of shares of common stock which may be issued
pursuant to the stock option plan is 200,000. The price of
the options 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 ten percent
owners) or when employment ceases, whichever comes first, and
vest over three years.
Stock option transactions under the plan for the years ended
September 30, 1996 and 1995, are summarized as follows:
<TABLE>
<S> <C> <C>
1996 1995
Options outstanding, beginning of year 46,174 30,800
Granted 85,600 21,100
Exercised (8,787) (5,726)
Cancelled (5,000) -
Options outstanding, end of year 117,987 46,174
Option price range $21.50 to $17.75 to
$29.00 $26.00
Options exercisable, end of year 19,012 15,714
Options available, end of year 51,850 132,450
</TABLE>
10. Stock Option Plan (continued)
The Company applies APB Opinion No. 25 in accounting for its
stock option plan, and, accordingly, no compensation cost has
been recognized for the plan. FASB Statement No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123), is
effective for fiscal years beginning after December 15, 1995.
Adoption of SFAS 123 is optional; however, proforma
disclosures as if the Company adopted the cost recognition
requirements under SFAS 123 will be required in the Company's
financial statements for its fiscal year ending September 30,
1997.
11. Supplemental Cash Flow Information
For the years ended September 30, 1996 and 1995, income taxes
paid, net of refunds, were $410,076 and $81,012,
respectively. For the years ended September 30, 1996 and
1995, interest expense incurred and paid was $2,320 and
$2,529, respectively.
12. Business Segment Information
During the year ended September 30, 1996, the Company's
operations included two reportable segments: Satellite
ground systems and electronic test instrumentation and
equipment marketing.
The Company provides satellite ground systems - computer
systems for satellite command and control, data processing,
simulation, and flight software validation. 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.
Through its wholly-owned subsidiary, IMI, the Company acts as
a manufacturer's representative, selling electronic test
instrumentation and equipment to customers primarily in
Maryland, Virginia and the District of Columbia. (The
Company's other wholly-owned subsidiary, InterSys, provides
consulting services for satellite design and procurement, but
is presently inactive.)
12. Business Segment Information (continued)
Summarized financial information is as follows:
<TABLE>
<S> <C> <C>
1996 1995
Net sales
Satellite ground systems $10,555,371 $10,503,423
Marketing 661,777 267,238
Income before taxes
Satellite ground systems 343,797 615,413
Marketing 158,571 (39,227)
Identifiable assets
Satellite ground systems 6,139,157 4,981,702
Marketing 405,351 163,918
Capital expenditures
Satellite ground systems 305,220 216,896
Marketing 1,579 746
Depreciation and amortization
Satellite ground systems 192,838 165,551
Marketing 3,478 3,100
</TABLE>
Identifiable assets of the respective segments include
accounts receivable, property and equipment, and software
development costs. Cash and cash equivalents and the
remaining assets are considered corporate assets. There were
no significant intercompany sales.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000718130
<NAME> E. PARFITT
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,510,966
<SECURITIES> 0
<RECEIVABLES> 4,874,086
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,385,052
<PP&E> 3,605,170
<DEPRECIATION> 1,910,548
<TOTAL-ASSETS> 8,079,674
<CURRENT-LIABILITIES> 2,121,042
<BONDS> 0
<COMMON> 9,525
0
0
<OTHER-SE> 6,949,107
<TOTAL-LIABILITY-AND-EQUITY> 8,070,149
<SALES> 0
<TOTAL-REVENUES> 11,217,148
<CGS> 8,216,636
<TOTAL-COSTS> 3,000,512
<OTHER-EXPENSES> 2,495,824
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,320
<INCOME-PRETAX> 502,368
<INCOME-TAX> 179,351
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 323,017
<EPS-PRIMARY> .34
<EPS-DILUTED> .34
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