INTEGRAL SYSTEMS, INC.
10-QSB
FOR QUARTER ENDING
MARCH 31, 1997
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
X Quarterly report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 1997 or
Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission file number 0-18603
INTEGRAL SYSTEMS, INC.
(Exact name of registrant as specified in its chapter)
Maryland 52-1267968
(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification No.)
5000 Philadelphia Way, Suite A, Lanham, MD 20706
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (301) 731-4233
(Former name, address and fiscal year, if changed since last report)
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes X No
As of March 31, 1997 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 $18,666,060.
Registrant had 952,846 shares of common stock outstanding as of March 31,
1997.
<PAGE>
INTEGRAL SYSTEMS, INC.
TABLE OF CONTENTS
Page No.
Part I Financial Information:
Item 1. Financial Statements
Balance Sheets - March 31, 1997, September 30, 1996 1
Statements of Operations Six Months and Three Months
Ended March 31, 1997 and March 31, 1996 3
Statement of Cash Flow Six Months Ended March 31, 1997
and March 31, 1996 4
Statement of Stockholders' Equity Six Months
Ended March 31, 1997 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 8
Part II Other Information:
Item 6. Exhibits and Reports on Form 8-K 14
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND SEPTEMBER 30, 1996
<TABLE>
<S> <C> <C>
ASSETS
March 31, September 30,
1997 1996
CURRENT ASSETS
Cash $1,612,424 $1,369,915
Accounts Receivable 6,727,426 4,874,086
Prepaid Expenses 99,138 59,956
Deferred Income Taxes 73,913 73,913
TOTAL CURRENT ASSETS 8,512,901 6,377,870
FIXED ASSETS
Electronic Equipment 794,959 728,956
Furniture & Fixtures 51,618 54,898
Leasehold Improvements 11,364 11,364
Software Purchases 124,296 50,659
SUBTOTAL 982,237 845,877
Less: Accum. Deprec. 393,122 446,769
TOTAL FIXED ASSETS 589,115 399,108
OTHER ASSETS
Software Development Costs 1,399,939 1,295,514
Deposits 7,182 7,182
TOTAL OTHER ASSETS 1,407,121 1,302,696
TOTAL ASSETS $10,509,137 $8,079,674
See Notes to Financial Statements
</TABLE>
<PAGE>
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 1997 and September 30, 1996
<TABLE>
<S> <C> <C>
LIABILITIES & STOCKHOLDERS' EQUITY
March 31, September 30,
1997 1996
CURRENT LIABILITIES
Accounts Payable $2,209,697 $ 786,701
Accrued Expenses 1,207,122 1,157,356
Notes Payable 370,000 0
Billings in Excess of Cost 392,423 128,925
Income Taxes Payable 82,610 48,060
TOTAL CURRENT LIABILITIES 4,261,852 2,121,042
LONG TERM LIABILITIES
STOCKHOLDERS' EQUITY
Common Stock, $.01 par value,
2,000,000 shares authorized, and
952,846 and 952,533 shares issued
and outstanding at March 31, 1997
and September 30, 1996, respectively 9,528 9,525
Additional Paid-in Capital 830,864 825,311
Retained Earnings 5,406,893 5,123,796
TOTAL STOCKHOLDERS' EQUITY 6,247,285 5,958,632
TOTAL LIABILITIES & $10,509,137 $8,079,674
STOCKHOLDERS' EQUITY
See Notes to Financial Statements
</TABLE>
<PAGE>
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<S> <C> <C> <C> <C>
Six Months Ended Three Months Ended
March 31, March 31,
1997 1996 1997 1996
Revenue $9,267,960 $4,932,796 $4,409,012 $2,632,781
Cost of Revenue
Direct Labor 2,106,440 1,669,193 1,114,284 878,348
Overhead Costs 1,509,492 1,256,611 699,316 622,045
Travel and
Other Direct Costs 246,293 179,201 171,500 116,527
Direct Equipment
& Subcontracts 3,652,117 341,513 1,549,232 211,655
Total Cost of Revenue 7,514,342 3,446,518 3,534,332 1,828,575
Gross Margin 1,753,618 1,486,278 874,680 804,206
Selling, General
& Administrative 940,765 896,891 541,453 465,701
Product Amortization 330,000 254,278 165,000 127,138
Income From Operations 482,853 335,109 168,227 211,367
Other Income (Expense)
Interest Income 24,578 31,749 11,360 11,295
Interest Expense (6,096) (31) (3,115) (39)
Miscellaneous, net (52,738) (46,704) (21,481) (3,429)
Total Other
Income (Expense) (34,256) (14,986) (13,236) 7,827
Income Before Income Taxes 448,597 320,123 154,991 219,194
Provision for Income Taxes 165,500 123,600 52,100 84,600
Net Income $283,097 196,523 $102,891 $134,594
Weighted Average Number
of Common Shares
Outstanding During Period 952,690 946,092 952,846 947,271
Earnings per share $0.30 $0.21 $0.11 $0.14
</TABLE>
INTEGRAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<S> <C> <C>
For the Six Months Ended
March 31,
1997 1996
Cash flows from operating activities:
Net income $283,097 $196,523
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 430,421 341,516
(Increase) decrease in:
Accounts receivable (1,853,340) (97,091)
Prepaid expenses (39,182) 26,768
(Decrease) increase in:
Accounts payable 1,422,996 157,869
Accrued expenses 49,766 (50,264)
Notes Payable 370,000 0
Billings in excess of cost 263,498 (483,708)
Income taxes payable 34,550 (79,627)
Total adjustments 678,709 (184,537)
Net cash provided (used) by operations 961,806 11,986
Cash flow from investing activities:
Acquisition of fixed assets (290,428) (184,104)
Increase in software development (434,425) (217,155)
Net cash provided (used) in
investing activities (724,853) (401,259)
Cash flow from financing activities:
Proceeds from issuance of common stock 5,556 57,023
Net cash provided by financing activities 5,556 57,023
Net increase (decrease) in cash 242,509 (332,250)
Cash - beginning of year 1,369,915 2,125,553
Cash - end of period $1,612,424 $1,793,303
</TABLE>
See Notes to Financial Statements
<PAGE>
INTEGRAL SYSTEMS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED
MARCH 31, 1997
<TABLE>
<S> <C> <C> <C> <C> <C>
Number Additional
of Common Paid-in Retained
Shares Stock Capital Earnings Total
Balance September 30, 1996 952,533 $9,525 $825,311 $5,123,796 $5,958,632
Exercise of Stock Options 313 3 5,553 - 5,556
Net income - - - 283,097 283,097
Balance March 31, 1997 952,846 $9,528 $830,864 $5,406,893 $6,247,285
</TABLE>
<PAGE>
INTEGRAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. Basis of Presentation
The interim financial statements include the accounts of Integral
Systems, Inc. (the "Company" or "ISI") and its two wholly-owned
subsidiaries, Integral Marketing, Inc. ("IMI") and InterSys, Inc.
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, 1996. 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.
During the quarter ended March 31, 1997, the Company changed an
accounting policy in order to be more conservative in the
recognition of commission revenues earned by IMI. A letter from
the Company's principal accountants, Rubino & McGeehin, is
filed as an exhibit to this Form 10-QSB. Specifically,
effective January 1, 1997, the Company recorded commission
revenues at the time the orders are shipped; prior to January 1,
1997, the Company recognized commission revenues at the time that
the orders were received. The effect of this change was to reduce
revenue by approximately $98,000 and gross profit by approximately
$48,000 for both the six months and the three months ended March
31, 1997 compared with the level of revenues that would have been
recorded if the Company had continued to record commission
revenues at the time of order receipt.
2. Accounts Receivable
Accounts receivable at March 31, 1997 and September 30, 1996
consist of the following:
Mar. 31, 1997 Sept. 30, 1996
Billed $3,252,456 $2,766,042
Unbilled 3,434,934 2,083,844
Other 50,036 24,200
Subtotal 6,737,426 4,874,086
Less: Reserve -10,000 0
Total $6,727,426 $4,874,086
The Company uses the direct write-off method for bad debts.
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 or when milestones are delivered
under fixed price contracts. All unbilled receivables are
expected to be billed and collected within one year.
<PAGE>
INTEGRAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. Line-of-Credit
The Company has a line of credit agreement with a local bank for
$2,000,000. Borrowing under the line of credit bears interest at
the bank's lending rate plus one-quarter of one percentage point
per annum. Any accrued interest is payable monthly. At March 31,
1997 and September 30, 1996 the Company had $370,000 and $0
outstanding respectively under the line of credit.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation
COMPARISON OF THE SIX MONTHS ENDED MARCH 31, 1997
TO THE SIX MONTHS ENDED MARCH 31, 1996
The components of the Company's income statement as a percentage of
revenue are depicted in the following table for the six months ended
March 31, 1997 and March 31, 1996:
% of % of
1997 Revenue 1996 Revenue
(000's omitted) (000's omitted)
Revenue $9,268 100.0 $4,933 100.0
Expenses
Cost of Revenue 7,514 81.1 3,447 69.9
SG&A 941 10.1 897 18.2
Prod. Amortization 330 3.5 254 5.1
Other 34 .4 15 .3
Income Taxes 166 1.8 123 2.5
Total Expenses 8,985 96.9 4,736 96.0
Net Income $283 3.1 $197 4.0
Revenue
The Company sells its products and services to both the Federal
Government and to commercial and international organizations. The
Company defines commercial contracts as any business opportunity that
includes, as all or part of the sale, any of its commercial off the
shelf (COTS) software products. The Company presently sells three
proprietary COTS products, namely EPOCH, OASYS, and DRS.
The Company through its wholly owned subsidiary, Integral Marketing,
Inc. (IMI), earns commissions by representing a number of electronic
product manufacturers in Maryland, Virginia and the District of
Columbia. The Company classifies IMI revenues as commercial revenues.
During the six months ended March 31, 1997, consolidated revenue
increased by over 87%, compared to the six months ended March 31, 1996,
climbing from $4.9 million to $9.3 million.
During the current period the Company derived approximately 38% of its
revenue from commercial opportunities compared to 48% of such revenue
during the comparable period last fiscal year. Despite the decrease in
the percentage of overall revenue accounted for by commercial revenue,
commercial revenues actually increased in absolute dollar terms, rising
from $2.3 million during the 1st half of fiscal year 1996 to $3.5
million during the 1st half of fiscal year 1997, an increase in absolute
terms in excess of 50%.
Gross Margin
Although the Company believes that the distinctions between Government
revenue and commercial revenue are important in understanding the
financial dynamics of its business, from a gross margin standpoint,
management believes that it is more meaningful to distinguish between
the types of revenue the Company has earned. Specifically, the Company
essentially derives revenues from the following sources:
Software licenses
Engineering services
Equipment and subcontract pass throughs
IMI commission revenues
Each of the above revenue types has different gross margin
characteristics. Generally license revenues have the greatest gross
margins, as the Company believes that this revenue type has virtually no
marginal cost associated with it. By contrast, equipment and subcontract
pass throughs have the least gross margin rates associated with them, as
the Company typically does not mark these items up by more than 15%.
Service margins for the Company typically range between 20% and 30%, but
can be less depending on specific contract pricing and/or contract
overruns. Margins for IMI are estimated at 50% of each revenue dollar
once this subsidiary's break-even point is achieved (i.e. approximately
$90,000 per quarter exclusive of non-recurring items).
Although in many instances margins on given contracts are bundled
together as part of an overall price and are therefore subject to
estimated allocation, the Company believes that the table below fairly
and accurately portrays the Company's revenue and margin results for the
six months ended March 31, 1997 and March 31, 1996.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
1997 1996
Revenue Margin % Margin Revenue Margin % Margin
Licenses $ 540 $ 540 100.0 $ 505 $ 505 100.0
Services 4,556 863 18.9 3,853 904 23.5
Equip. & Subcontracts 3,953 291 7.4 340 28 8.2
IMI 219 60 27.4 235 49 20.9
Totals $9,268 $1,754 18.9 $4,933 $1,486 30.1
</TABLE>
Overall, the Company experienced a significant decrease in gross margin
percentage between the periods being compared, falling from 30.1% to
18.9%. The reasons for the decrease are essentially twofold. First,
over 42% of the Company's fiscal year 1997 revenues were derived from
low margin equipment and subcontract pass throughs, compared to less
than 7% of such revenues last fiscal year. Most of the increase is
attributable to a material Government contract the Company received
during the 2nd half of fiscal year 1996 (the IPACS Contract with the
National Oceanic and Atmospheric Administration ["NOAA"], a copy of
which was filed as an exhibit to the Company's 1996 Annual Report on
Form 10-KSB). In fact, 2/3 of the Company's equipment and subcontract
pass through revenue for fiscal year 1997 was derived from this one
contract alone.
Furthermore, on the Company's commercial side of the business, service
margins were lower than the prior fiscal year due to operating losses on
two relatively new contracts. The Company considers such losses to be
in effect "loss leaders", as both contracts were priced to gain entrance
to certain markets, an effort which the Company believes has been
effectively achieved. In particular, the Company believes that were it
not for work performed under the loss contracts referred to above, its
current material contract with Skynet (formerly issued by AT&T
Corporation) as well as its recent multiple sales of its Low Earth
Orbiter Terminal (LEO-T) may not have been awarded.
In addition to the above, margins in the Company's IMI operation were
negatively impacted due to an accounting policy change implemented
during the current period (see Note 1 of the Notes to Financial
Statements herein). Specifically, the Company now recognizes IMI
revenue at the time that orders are shipped rather than at the time that
orders are received. This change adversely affected IMI commission
revenue by approximately $100,000 and gross margin by approximately
$50,000 for the six months ended March 31, 1997 when compared with
amounts that IMI would have recognized if it had continued to record
commission revenues at the time of order receipt.
Operating Expenses
SG&A increased by approximately $44,000 between the periods compared as
the Company continues to build an operating infrastructure to support
its commercial business. As a percentage of revenue, however, SG&A
accounted for only 10.1% of revenue in the current period compared to
18.2% last fiscal year.
Product amortization increased by approximately $76,000 between the 1st
half of fiscal year 1997 and the 1st half of fiscal year 1996,
reflecting the Company's expanding software development amortization
base. Product amortization now only pertains to the Company's EPOCH and
OASYS products as amortization for all other products was fully
recognized in fiscal year 1996.
General
During the six months ended March 31, 1997, the Company recorded its
highest revenue total in its history for any six month period.
Furthermore, despite the decrease in net income as a percentage of
revenue, net income in absolute dollar terms was approximately 44%
higher in the current period over the same period during the 1996 fiscal
year. Because of its strong 1st half performance, its current and
significant backlog, and contracts which the Company believes it will be
awarded in the near future, the Company believes that results for fiscal
year 1997 in its entirety will exceed those recorded for fiscal year
1996 for both revenue and net income.
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1997
TO THE THREE MONTHS ENDED MARCH 31, 1996
The components of the Company's income statement as a percentage of
revenue are depicted in the following table for the three months ended
March 31, 1997 and March 31, 1996:
<TABLE>
<S> <C> <C> <C> <C>
% of % of
1997 Revenue 1996 Revenue
(000's omitted) (000's omitted)
Revenue $4,409 100.0 $2,633 100.0
Expenses
Cost of Revenue 3,534 80.2 1,829 69.5
SG&A 542 12.3 465 17.7
Prod. Amortization 165 3.7 127 4.8
Other 13 .3 -8 -.3
Income Taxes 52 1.2 85 3.2
Total Expenses 4,306 97.7 2,498 94.9
Net Income $ 103 2.3 $ 135 5.1
</TABLE>
Revenue
The Company sells its products and services to both the Federal
Government and to commercial and international organizations. The
Company defines commercial contracts as any business opportunity that
includes, as all or part of the sale, any of its commercial off the
shelf (COTS) software products. The Company presently sells three
proprietary COTS products, namely EPOCH, OASYS, and DRS.
The Company through its wholly owned subsidiary, Integral Marketing,
Inc. (IMI), earns commissions by representing a number of electronic
product manufacturers in Maryland, Virginia and the District of
Columbia. The Company classifies IMI revenues as commercial revenues.
During the three months ended March 31, 1997, consolidated revenue
increased by over 67%, compared to the three months ended March 31,
1996, climbing from $2.6 million to $4.4 million During the current
quarter, the Company derived approximately 40% of its consolidated
revenue from commercial opportunities compared to 51% of such revenue
during the comparable period last fiscal year. Despite the decrease in
the percentage of overall revenue accounted for by commercial revenue,
commercial revenues actually increased in absolute dollar terms, rising
from $1.3 million during the 2nd quarter of fiscal year 1996 to $1.8
million during the 2nd quarter of fiscal year 1997, an increase in
absolute terms in excess of 30%.
Gross Margin
Although the Company believes that the distinctions between Government
revenue and commercial revenue are important in understanding the
financial dynamics of its business, from a gross margin standpoint,
management believes that is more meaningful to distinguish between the
types of revenue the Company has earned. Specifically, the Company
essentially derives revenues from the following sources:
Software licenses
Engineering services
Equipment and subcontract pass throughs
IMI commission revenue
Each of the above revenue types has different gross margin
characteristics. Generally license revenues have the greatest gross
margins, as the Company believes that this revenue type has virtually no
marginal cost associated with it. By contrast, equipment and subcontract
pass throughs have the least gross margin rates associated with them, as
the Company typically does not mark these items up by more than 15%.
Service margins for the Company typically range between 20% and 30%, but
can be less depending on specific contract pricing and/or contract
overruns. Margins for IMI are estimated at 50% of each revenue dollar
once this subsidiary's break-even point is achieved (i.e. approximately
$90,000 per quarter exclusive of non-recurring items).
Although in many instances margins on given contracts are bundled
together as part of an overall price and are therefore subject to
estimated allocation, the Company believes that the table below fairly
and accurately portrays the Company's revenue and margin results for the
three months ended March 31, 1997 and March 31, 1996.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
1997 1996
Revenue Margin % Margin Revenue Margin % Margin
Licenses $ 295 $295 100.0 $ 335 $335 100.0
Services 2,349 425 18.1 1,915 406 21.2
Equip. & Subcontracts 1,684 127 7.5 253 22 8.7
IMI 81 28 34.6 130 41 31.5
Totals $4,409 $875 19.8 $ 2,633 $804 30.5
</TABLE>
Overall, the Company experienced a significant decrease in gross margin
percentage between the periods being compared, falling from 30.5% to
19.8%. The reasons for the decrease are essentially twofold. First,
over 38% of the Company's fiscal year 1997 revenues were derived from
low margin equipment and subcontract pass throughs, compared to less
than 10% of such revenues last fiscal year. Most of the increase is
attributable to a material Government contract the Company received
during the 2nd half of fiscal year 1996 (the IPACS Contract with NOAA, a
copy of which was filed as an exhibit to the Company's 1996 Annual
Report on Form 10-KSB). In fact, 95% of the Company's equipment and
subcontract pass through revenue for fiscal year 1997 was derived from
this one contract alone.
Furthermore, on the Company's commercial side of the business, service
margins were lower than the prior fiscal year due to operating losses on
two relatively new contracts. The Company considers such losses to be
in effect "loss leaders", as both contracts were priced to gain entrance
to certain markets, an effort which the Company believes has been
effectively achieved. In particular, the Company believes that were it
not for work performed under the loss contracts referred to above, its
current material contract with Skynet (formerly issued by AT&T
Corporation) as well as its recent multiple sales of its Low Earth
Orbiter Terminal (LEO-T) may not have been awarded.
In addition to the above, margins in the Company's IMI operation were
negatively impacted due to an accounting policy change implemented
during the current period (see Note 1 of the Notes to Financial
Statements herein). Specifically, the Company now recognizes IMI
commission revenue at the time that orders are shipped rather than at
the time that orders are received. This change adversely affected IMI
revenue by approximately $100,000 and gross margin by approximately
$50,000 for the three months ended March 31, 1997, when compared with
amounts that IMI would have recognized if it had continued to record
commission revenues at the time of order receipt.
Operating Expenses
SG&A increased by approximately $77,000 between the periods compared as
the Company continues to build an operating infrastructure to support
its commercial business. As a percentage of revenue, however, SG&A
accounted for only 12.3% of revenue in the current period compared to
17.7% last fiscal year.
Product amortization increased by approximately $38,000 between the
current quarter and the 2nd quarter in fiscal year 1996, reflecting the
Company's expanding software development amortization base. Product
amortization now only pertains to the Company's EPOCH and OASYS products
as amortization for all other products was fully recognized in fiscal
year 1996.
General
During the three months ended March 31, 1997, the Company recorded its
2nd highest revenue total in its history, only surpassed by the revenue
recorded during the 1st quarter of this fiscal year. Although 2nd
quarter net income was lower in fiscal year 1997 than in fiscal year
1996, because of the strong overall performance during the past six
months of the current fiscal year, the current backlog and contracts
which the Company believes it will be awarded in the near future, the
Company believes that its revenue and net income for fiscal year 1997 in
its entirety will exceed those recorded for fiscal year 1996.
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 $2.0
million which had an outstanding balance of $370,000 at March 31, 1997.
(See Note 3 of the Notes to Financial Statements). This outstanding
amount was repaid by the Company in early April, 1997.
During the 1st six months of fiscal year 1997, the Company generated
approximately $962,000 from operating activities and used approximately
$725,000 for investing activities, including approximately $434,000 for
newly capitalized software development costs.
As a result of its current cash reserves, its unused portion of its line
of credit, its current profitability and management's internal budgeting
and planning, the Company believes it will have adequate cash resources
to meet its obligations for the foreseeable future. The Company may
from time to time avail itself of its line of credit facility to finance
its current rate of growth and the related build up of accounts
receivable.
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.
PART II. OTHER INFORMATION
6. Exhibits and Reports on Form 8-K
a. Exhibits
10. Contract, dated April 14, 1997 between
Integral Systems, Inc. and Shinawatra Public Company, LTD,
page 14. (Portions of this exhibit have been omitted
pursuant to a request for confidential treatment filed with
the Securities and Exchange Commission.)
18. Letter of Rubino & McGeehin regarding change in accounting
principles.
b. Reports on Form 8-K
There were no Form 8-Ks filed during quarter ending March 31,
1997.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
INTEGRAL SYSTEMS, INC.
(Registrant)
Date: May 15, 1997 By: /s/
Thomas L. Gough
President & Chief Operating
Officer
Date: May 15, 1997 By: /s/
Elaine M. Parfitt
Vice President & Chief
Financial Officer
<PAGE>
EXHIBIT A
10. Contract, dated April 14, 1997 between Integral Systems, Inc.
and Shinawatra Public Company, LTD, page 14. (Portions of
this exhibit have been omitted pursuant to a request for
confidential treatment filed with the Securities and Exchange
Commission.)
*IMPORTANT NOTICE
INFORMATION ON THE FOLLOWING PAGES AT THE POINTS MARKED WITH
AN ASTERISK HAS BEEN OMITTED AND FILED SEPARATELY WITH THE
COMMISSION PURSUANT TO A CONFIDENTIAL TREATMENT REQUEST.
CONTRACT
TO PROVIDE THE
BACKUP SATELLITE CONTROL FACILITY
between
Shinawatra Satellite Public Company, LTD.
and
Integral Systems, Inc.
In consideration of the agreements expressed herein,
Shinawatra Satellite Public Company, LTD. (hereafter
"Customer"), having an office at Thaicom Satellite Station,
41/103 Rattanathibet Rd., Nonthaburi 11000, Thailand, and
Integral Systems, Inc. (hereafter "Contractor"), having an
office at 5000 Philadelphia Way, Suite A, Lanham, Maryland
20706, USA, do hereby agree as follows:
Article 1 : Subject, Applicable Documents
1.1 The Contractor agrees to furnish labor and materials
required to provide the Backup Thaicom Satellite Control Facility (SCF), in
accordance with the terms and conditions of this Contract.
The Contract covers hardware, software, and services
required to implement the SCF, as specified in Exhibit
A: Statement of Work..
1.2 The following documents shall be considered to be contract
documents. In case of discrepancy or inconsistency between provision in
the various documents, priority shall be given to numerical sequence as
listed below:
1. Contract to Provide the Backup Satellite Control Facility
2. Backup Thaicom Satellite Control Facility Statement of Work
3. The Contractor's Proposal to Provide the Backup Thaicom Satellite
Control Facility.
Article 2 : Price
2.1 The total Contract Price for materials and services
according to the specifications of the Contract amounts to *. *
*.
2.2 An insurance policy shall be procured by the Contractor
to cover all risks until delivery to Customer facilities. This insurance
policy shall also cover any damage caused by the Contractor to the delivered
equipment up until the completion of On-site Final Acceptance Test. Any other
damage to equipment after delivery shall be the responsibility of the
Customer.
2.3 The above price only include taxes due at the place of
origin. All other taxes and duties shall be paid by the Customer.
*See reference legend on cover page.
<PAGE>
2.4 The Customer shall have the option of purchasing an
EPOCH/OASYS site license for a price of *. The site license shall allow the
Customer to license and run an unlimited number of copies of the EPOCH
and OASYS software for operating the Customer's satellites from
the Customer's facilities. If the site license is purchased within 18
months of system Final Acceptance, the Customer shall receive a credit for the
EPOCH and OASYS licenses already purchased under this contract.
Article 3 : Time and Place of Delivery
3.1 Place of delivery for equipment shall be :
Shinawatra Satellite Public Company, LTD.
Site of Backup Facility
Laht Loom Gaaw
(47 km Northwest of Thaicom primary facility)
Documentation shall be delivered by mail to :
Shinawatra Satellite Public Company, LTD.
Thaicom Satellite Station
41/103 Rattanathibet Rd.
Nonthaburi 11000, Thailand
3.2 The Contractor shall deliver the equipment under the
following
conditions:
b) Intermediate storage and local transport shall be
effected by the Contractor. Customs Clearance shall be the responsibility
of the Customer.
c) Date of delivery shall be arrival at Bangkok warf within
the schedule described in the Statement of Work.
d) The Contractor shall be responsible for packing the
equipment into containers. This packing shall be fit for any transshipment
during the transportation and in full conformity with the character of the
equipment concerned. The Contractor shall ensure that all equipment
shall be protected according to the character of the equipment.
Also, the equipment which must be kept from rust corrosion and wet shall be
coated sufficiently with rust resisting materials.
*See reference legend on cover page.
<PAGE>
d) Title in all equipment and parts shall pass to the
Customer upon delivery.
With the exception of damage caused by the Contractor to
equipment and parts, the Customer shall assume responsibility for all
equipment and parts after delivery on-site.
e) The Contract shall arrange "Contractor's All Risks"
insurance in the name of the Customer for the full contract value
for the time of the work done at the site and for the equipment
delivered to the site during the period
of the Contract. This insurance shall include cover against
liabilities to third parties in respect of bodily injury, death and damage
to property.
3.3 Delivery of the equipment shall be deemed to have
occurred when the following conditions are met :
the present contract has been duly signed by both parties
the documentation has been delivered
the equipment has been received at the place of delivery
specified
above and accepted in accordance with the Statement of Work.
3.4 The Contractor shall advise the Customer by telefax
prior to shipment of any equipment.
Article 4 : Representatives of the Parties
4.1 The Customer representatives are :
Contractual:
John Halter
Satellite Operations Department Manager
Shinawatra Satellite Public Company, LTD.
Thaicom Satellite Station
41/103 Rattanathibet Rd.
Nonthaburi 11000, Thailand
Tel: 66-2-591-0736, x310
Fax: 66-2-591-0705
Technical:
John Halter
Satellite Operations Department Manager
Shinawatra Satellite Public Company, LTD.
Thaicom Satellite Station
41/103 Rattanathibet Rd.
Nonthaburi 11000, Thailand
Tel: 66-2-591-0736, x310
Fax: 66-2-591-0705
4.2 The Contractor representatives are :
Contractual:
Steven A. Carchedi
Vice President
Integral Systems, Inc.
5000 Philadelphia Way, Suite A
Lanham, Maryland 20706-4417 (USA)
Tel: 301-731-4233, x160
Fax: 301-731-9606
email: [email protected]
Technical:
Dave Francis
Project Manager
Integral Systems, Inc.
5000 Philadelphia Way, Suite A
Lanham, Maryland 20706-4417 (USA)
Tel: 301-731-4233, x160
Fax: 301-731-9606
email: [email protected]
Article 5 : Payment Plan
5.1 The price set forth in Article 2 shall be paid by the
Customer to the Contractor in accordance with the Payment Conditions as
detailed hereunder.
5.2 All Contractor invoices shall be submitted to :
John Halter
Satellite Operations Department Manager
Shinawatra Satellite Public Company, LTD.
Thaicom Satellite Station
41/103 Rattanathibet Rd.
Nonthaburi 11000, Thailand
Tel: 66-2-591-0736, x310
Fax: 66-2-591-0705
5.3 Payments shall be made in accordance with the following
payment plan :
No. MILESTONE EVENT %TOTAL TOTAL $ APPROXIMATE DUE DATE
1997
1 *
2 *
3 *
4 *
5 *
TOTAL for 1997 *
1998
6 *
7 *
8 *
TOTAL for 1998 *
TOTAL for Project *
5.4 All payments shall be made in US Dollars. Invoices
shall be submitted to the customer at the completion
of the Milestone events. The amounts specified
above shall be paid within 30 days after receipt of invoice
by the customer.
*See reference legend on cover page.
<PAGE>
5.5 *
Article 6 : Subcontracts
6.1 The Customer approves that the Contractor has
subcontracted part of the work to IN-SNEC
(for baseband, RF, and Antenna subsystems). VERTEX shall
provide the Antenna Subsystem to IN-SNEC.
6.2 This subcontracting does not alter the fact that the
Contractor remains fully responsible for the performance of the contract.
Article 7 : Acceptance
The following acceptance provisions apply to all the work to
be performed under this contract.
7.1 All delivered equipment shall be subject to acceptance
tests in accordance with the Statement of Work.
7.2 The final Acceptance of the delivered equipment shall be
made at the place of delivery as defined in Article 3 hereunder.
7.3 The Customer and its authorized representative(s) shall
have access to the work in progress. the Customer and its authorized
representative(s) shall have the right to witness
all acceptance tests and to examine data resulting
from such tests.
7.4 The Contractor shall give reasonable advance notice to
the Customer as to the time such tests shall be conducted
and the nature of the tests.
7.5 The aim of the Acceptance procedure shall be to
demonstrate the full compliance of the delivered
equipment with the requirements of the documents
listed in Article 1 of the contract.
<PAGE>
Article 8 : Changes Requested by the Contractor or the
Customer
8.1 Any changes requested by the Contractor during the
performance of this contract, within the general
scope of this contract, which shall add or
delete work, affect the design of any Items deliverable hereunder,
change the method of shipment or packing, or place or time of delivery, or
shall affect any requirement of this contract, shall be submitted in writing
to the Customer sixty (60) days prior to the proposed date of the change.
If such Contractor requested change causes an increase or
decrease in the total price of this contract, the Contractor shall submit to
Customer at the time the requested change is submitted, or at a later date
agreed to by the Customer, sufficient details of such increase or decrease so
as to allow the Customer to perform a cost analysis of the claim.
8.2 The Customer shall notify the Contractor in writing
approximately thirty (30) days after receipt of the requested change and price
adjustment, if any, whether or not it agrees with and accepts such change. If
the Customer agrees with and accepts the Contractor requested change, the
Contractor shall proceed with the performance of the contract as changed and an
amendment to the contract reflecting such change, and price adjustment, if
any, shall be issued.
If the Customer does not agree with the Contractor's
requested change, the Parties shall attempts to reach
agreement on such change. In the event the
parties are unable to reach agreement on change, or price
adjustment, if any, or both, the Contractor shall proceed with the performance
of the contract, as unchanged.
8.3 For any changes requested by the Customer during the
performance of this contract, within the general scope of
this contract, which shall add or delete work, affect
the design of the equipment, change the method
of shipment or packing, or place or time of delivery, or shall affect any
other requirement of this contract, the Contractor shall respond in writing to
the Customer within thirty (30) days after such request.
If such Customer requested change causes an increase in the
total price of this contract, the Contractor shall submit to the Customer,
at the time the response to the requested change is submitted, the details
of such increase or decrease. So as to allow the Customer to perform a cost
analysis of the claim. The Customer shall notify the
Contractor in writing, within a reasonable time
after receipt of the Contractor's response, whether or not
it agrees with and accepts the Contractor's response. If the Customer agrees,
the Contractor shall proceed with the performance of the contract as
changed and an amendment to the contract reflecting such change, and price
adjustment, if any, shall be issued. In the event the Parties
are unable to reach agreement on such change,
or price adjustment, if any, or both, the Contractor shall
proceed with the performance of the contract as unchanged.
8.4 The Contractor shall not implement a recommended change
without an express written approval of the Customer.
Article 9 : Delays
9.1 The Contractor is not responsible for delay in the final
completion date due to Force Majeure.
Force Majeure shall be limited to:
fire, flood, earthquakes, storms, and epidemics,
acts of a public enemy,
acts of the Government in its sovereign capacity,
acts of war,
general strike,
which are beyond the control and without fault or negligence
of the Contractor. The delivery requirements shall be extended by
such period of time as is justified by the evidence produced.
9.2 The Contractor shall advise the Customer's Program
Manager in writing as soon as possible,
but not later than five (5) days after the
start of each such act of occurrence, and again on the termination of a
Force Majeure period. Written evidence of the occurrence of such event
shall be presented to the Customer's Program Manager.
9.3 Timely delivery being of the essence to this contract,
the Contractor agrees to exert every reasonable effort, including the
application of overtime and premium shipments at its own expense, to meet the
specified delivery dates. The Contractor agrees to notify the Customer
immediately if at any time it appears the delivery schedule may not be met.
Such notification shall include the reasons for any possible delays,
steps being taken to remedy such problems, and a proposed new
delivery date. The furnishing of such notice by
the Contractor shall not constitute a waiver of any of the
Customer rights under this contract.
Article 10 : Warranty
10.1 The Contractor warrants that:
the goods or services furnished hereunder with respect to
equipment shall be brand new, in good working order, be free from any
defects in material or workmanship, shall function substantially in
accordance with the applicable technical specification, and
conform to the requirements of this Contract during the warranty
period; all deliverables shall conform to the requirements of this
contract; all services shall be performed in a skillful and
workmanlike manner and shall conform to the requirements of this contract and
highest professional industrial standards.
10.2 The Customer shall have the right at any time during
the period of this warranty, and irrespective of prior inspections or
acceptances, to notify to Contractor that any Item does
not conform to the above warranty.
A factory warranty is provided by the Contractor under this
contract.
The Contractor's sole responsibility under this warranty shall
be to either repair or replace any Item which is discovered during
the warranty period to be defective in material or workmanship,
and to retest the repaired or replaced Items.
10.3 This warranty shall run for a period of twelve (12)
months from the date of Final Acceptance, accept for the Antenna.
The Antenna warranty period begins at the
Final Acceptance of the Antenna subsystem.
10.4 It is further agreed that all equipment provided under
this contract and which are the subject of these warranty provisions must be
stored, handled, assembled, used maintained, and operated in accordance with
good space engineering practice by the Customer within the performance
parameters for which they were designed and in accordance with the relevant
written instructions which the Contractor may have issued to the
Customer.
Article 11 : Customer Right to Terminate
11.1 The Customer, by written notice to the Contractor, may
terminate this contract in whole, or in part, for its convenience at any
time prior to completion whereupon the Contractor shall cease the Work in
accordance with the terms of said notice of termination.
In the event of such termination by the Customer, it is agreed that the
termination charges shall be negotiated but shall not exceed
the total cost incurred by the Contractor in the performance of the
terminated portion of this contract, including reasonable costs incurred with
respect to termination and settlement with vendors and Lower-Tiers
Contractors as a result of Customer termination.
11.2 The termination charges to be paid to the Contractor
shall not exceed the contract price for the terminated portion.
11.3 The Contractor agrees to advise the Customer of all
proposed settlements with vendors and Lower-Tier Contractors in the event of
termination, and the Contractor further agrees not to enter into any binding
settlement until the Customer has approved the proposed settlement
or one hundred and twenty (120) days have elapsed from the date when
such advice was furnished to the Customer.
11.4 Costs shall be determined in accordance with the
Contractor's standard accounting practice and verified by the Contractor's
independent Certified Public Accountants. Final payment shall be in
the amount of the total agreed termination charges, less the following :
a) Amounts previously paid by the Customer pursuant to this
contract
b) Amounts representing total Contractor's cost of items of
inventory not desired by the Customer which the Contractor elects to
retain for its use.
11.5 Notwithstanding anything in this Article, the
Contractor shall complete in accordance with the Contract
any part of the work not terminated as aforesaid.
Article 12 : Termination for Default
12.1 The Customer may and shall be entitled to, by written
notice of default to the Contractor, terminate the whole or any part of this
contract, if :
a) Contractor fails to deliver any Item or to perform any
required service within the time specified in this contract, or
b) Contractor fails to comply with any of the provisions of
this contract in accordance with its terms, and
c) Contractor is denied or delayed in obtaining any
necessary governmental licenses or clearances.
d) Contractor becomes insolvent or if its financial position
is such that a legal action leading towards bankruptcy may be taken against
it by its creditors.
In either of the first three circumstances, the Contractor
shall rectify such failure within a period of ten (10) days (or such longer
period as the Customer may authorize in writing) after receipt of notice
from the Customer specifying such failure.
12.2 In the event the Customer terminates this contract in
whole or in part as provided in this Article, the Customer may take over such
terminated work and prosecute the same to completion by contract or otherwise.
The Contractor shall continue the performance of this contract to the
extent not terminated under the provisions of this Article. In the event of a
partial termination for default, the payments concerning the portion of the
contract which is not terminated shall be due to the Contractor.
12.3 If this contract is terminated as provided in this
Article, the Customer may require the Contractor to
transfer to the Customer in the manner and to
the extent directed by the Customer title to and possession
of:
a) any completed Items, and
b) such partially completed items, supplies, materials,
parts, tools
In any case, the Contractor shall be paid for any item taken
into possession by the Customer according to the original contract terms.
12.4 *
Article 13: Taxes and Customs Duties
13.1 All payments shall be made in the agreed currency
without deduction based on import duties, value added taxes,
or any other taxes or withholding in or
upon importation into the Kingdom of Thailand.
*See reference legend on cover page.
<PAGE>
Article 14 : Agreement to Hold Harmless
14.1 The Contractor shall indemnify, keep indemnified and
hold harmless the Customer and their directors, officers, subsidiaries,
servants, employees and agents against all claims for damage and/or injury
(including death) to any person, or loss of or damage to property (including
equipment and software to be supplied under this contract) including
liability, costs, expenses and damages incurred by the Customer
in connection with any and all claims by third Parties that are
caused by or which arises out of the act, omission, default or
negligence of the Contractor, a Lower-Tier Contractor or their
respective employees or agents in the performance by such
persons of this subcontract.
14.2 Request for indemnification is subject to the
following:
a) Either Party having promptly notified the other in
writing of any claim, demand or allegation, and
b) Either Party taking no action without the others consent
except such as may be required by law or in order to preserve any
of its rights at law
c) Subject to the mandatory provisions of applicable law,
either Party allowing the other, at the other's request and expense, to
conduct and settle all negotiations and legal proceedings, provided the
First Party may, at its expenses, participate in such negotiations and
proceedings
d) Either Party at the other's expense, giving reasonable
assistance to the other in connection with any such negotiations or
proceedings.
14.3 The Contractor shall take all reasonable measures to
ensure at all times of the safety of the Customer's personnel and others
authorized by the Customer whilst upon the Contractor's or Lower-Tier
Contractor's premises.
14.4 The Contractors liability for any loss of or damage to
property, other than equipment, of the Customer under this contract shall
not exceed *in respect of any occurrence or series or
related occurrences.
The Contractor shall not be liable to the Customer for
special, incidental, consequential. or indirect loss or damage,
including loss of profit or revenues howsoever sustained.
14.5 The Customer shall indemnify and keep indemnified and
hold harmless the Contractor and its Lower-Tier Contractor against all claims
for any damage to property or injury (including death) to any person
caused by the Customer arising out of or in
connection with the performance of this contract by
such persons.
14.6 The Customer's liability for any loss or damage under
this contract shall not exceed * in
respect of any occurrence or series of related occurrences.
*See reference legend on cover page.
<PAGE>
14.7 The Customer shall not be liable to the Contractor for
special, consequential or indirect loss or damage, including loss of
profit or revenues howsoever sustained.
Article 15 : Applicable Law, Construction, Language and
Measurements
15.1 This contract shall be construed and the rights of the
Parties shall be determined, in all respects, according to the laws of
Thailand.
15.2 This contract and all deliverable documentation
produced under this contract shall be in the English language.
Article 16 : Arbitration
16.1 Any dispute or disagreement arising between the
Contractor and the Customer in connection with this contract, which is not
settled to the mutual satisfaction of the Contractor and the Customer within
thirty (30) calendar days from the date that either Party informs the
other in writing of such dispute or disagreement exists, shall be settled by
arbitration.
16.2 All disputes arising in connection with the present
contract shall be finally settled under the Rules of Conciliation and
Arbitration of the International Chamber of Commerce by one
or more arbitrators appointed in accordance with said Rules.
The arbitration proceedings shall take place in
Bangkok, Thailand.
16.3 In case of a dispute between the Customer arising in
connection with the present contract, the arbitral proceedings, including the
arbitral award between the Customer, shall be fully enforceable against the
Contractor, provided that the Contractor is given prompt notice of any
such proceedings and provided the Contractor is given the opportunity to
comment on any claim or supporting documentation submitted by the
Customer and is duly informed of any claim and supporting
documentation submitted by the Customer in the course
of the arbitral proceedings.
16.4 The performance of the contract shall continue in all
aspects during any dispute between Contractor and the Customer unless
otherwise notified by the Customer.
Article 17 : Assignment
17.1 Contractor shall not assign or delegate this contract
in whole or in part or any of its rights, duties, or obligations hereunder to
any other person or legal entity without the prior express written approval of
the Customer.
Article 18 : Permits and Licenses
18.1 The Contractor warrants that all necessary export
licenses have been attained prior to shipment of the equipment to the Customer.
18.2 In case of non-presentation of these licenses, and if
one or more Lower-Tier Subcontractors are for governmental
reasons unable to perform their task, the Contractor shall be
liable to the Customer for any consequence prejudicial
to this contract.
Article 19 : Infringements of the Law
19.1 The Customer shall not be responsible in any way for
the consequences, direct or indirect, of an infringement by the Contractor or
its Lower-Tier Subcontractors and their employees, of the law or statutes
of the country in which this contract is performed, or of any country
whatsoever.
In the course of doing business it may be necessary for
either party to provide proprietary information to the other. It is agreed
that any disclosure of information shall be made under the following
provisions:
Article 20: Proprietary Information
"Proprietary Information" is defined as documented
information originated by or peculiarly within the
knowledge of a disclosing party or its
suppliers.
However, information shall not be considered to be
proprietary information:
a. Unless such information is received from the other
party in writing, the proprietary portions are specified,
and disclosure is made to authorized
representative(s) of the receiving party.
b. If such information was known to the receiving party,
or otherwise publicly available prior to its receipt under this
Agreement, or to have become known to the receiving
party from a source other than the disclosing party.
c. If such information was disclosed to others by the
disclosing party with "unlimited right" or without restrictions
by the originating party.
d. If such information is independently developed by the
receiving party.
Each party is responsible for the safeguarding any
Proprietary Information rendered by the other party. Proprietary Information
received by either party shall not be disclosed to any third party.
Article 20 : Entire Agreement
20.1 This contract contains the entire agreement between
the Parties with respect to the subject matter hereunder and supersedes any
previous understanding, commitments, and agreements either oral or
written.
Changes to this contract may be only in writing and upon proper
execution by the Parties hereto.
Shinawatra Satellite Public Company, LTD.:
BY
TITLE
DATE
Integral Systems, Inc.:
BY
TITLE
DATE
<PAGE>
EXHIBIT B
18. Letter of Rubino & McGeehin regarding change in accounting
principles.
Rubino & McGeehin, Chartered
Certified Public Accountants
6905 Rutledge Drive
Suite 700
Bethesda, Maryland 20817-1818
301-564-3636
Fax 31-564-2994
May 15, 1997
Integral Systems, Inc.
5000 Philadelphia Way
Suite A
Lanham, MD 20706
We understand that Integral Systems, Inc. has changed its method
of accounting for revenue from commissions for the sale of
equipment in its consolidated financial statements, as discussed
in its Form 10-QSB for the six months ended March 31, 1997. We
have discussed with Company officials the circumstances and
business judgement upon which the decision to make the change in
accounting was made. We concur that such change represents
the adoption of a preferable accounting method.
We have not audited the consolidated financial statements of
Integral Systems, Inc. for the six months ended March 21, 1997
or 1996, and, accordingly, we do not express an opinion on the
financial information filed as part of the Form 10-QSB of which
this letter is to be an exhibit.
/s/
Rubino & McGeehin, Chartered
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<PERIOD-END> MAR-31-1997
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