SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(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, 1997
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
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form10-KSB. [X]
For the year ended September 30, 1997, the Registrant's revenues were
$20,058,984.
As of September 30, 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
$24,340,302.
As of November 30, 1997, 2,868,952 shares of the Common Stock of the
Registrant were outstanding.
PART 1
Item 1. Business
General
Integral Systems, Inc. (hereinafter referred to as "ISI" or the "Company") was
incorporated in the state of Maryland in 1982. ISI is a leading provider of
satellite ground systems for satellite command and control, orbit analysis,
data processing, simulation, and flight software validation. EPOCH 2000, the
Company's flagship product line for satellite control, offers satellite
operators a low-cost, highly-adaptable system that can be used to operate
satellites from any manufacturer, without changing the software. The Company
believes that EPOCH 2000 was the first "Commercial Off The Shelf" (COTS)
product of its type and that it continues to be the only product with proven
operational capabilities over a wide range of satellite missions.
Customers for satellite ground 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. ISI 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 and has delivered ground systems for over 90 different satellite
missions. 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 has the capability to
deliver turnkey systems which include antenna, RF and baseband equipment as
well as computer hardware and application software.
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 (i.e. ISI's OASYS product). 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,
Shinawatra Satellite Public Co. in Thailand, the National Space Program Office
in Taiwan (ROCSAT), EOSAT, Earthwatch, the Johns Hopkins University Applied
Physics Laboratory, the Jet Propulsion Laboratory, Loral Skynet, GE Americom,
TRW, Lockheed-Martin, Hughes, Boeing, Orbital Sciences Corporation, NASA,
NOAA, the US Air Force, and the US Navy.
ISI 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, ISI builds command and control systems as well as payload and image
data processing systems for meteorological satellites. The Company has had
extensive involvement in both the TIROS and GOES satellite programs.
The Company also has a major contract with NOAA to provide the command and
control system for the Air Force's DMSP (Defense Meteorological) satellite
fleet. ISI has 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.
ISI 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 its 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 18 manufacturers.
Contract Revenue
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, 1997 and 1996 is as
follows:
Fiscal Year
Contract Type 1997 1996
Cost Plus 51% 39%
Fixed Price 46% 56%
Time and Materials 3% 5%
During fiscal year 1997 approximately 46% 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.
The Company sells its products and services to both the Federal Government and
to commercial and international organizations, including governmental
organizations. The Company defines commercial revenues as any business that
includes as all or part of the sale, any of its COTS software products.
Government contract revenues arise from the sale of services and products
other than the Company's COTS products to Federal Government agencies.
The Company's revenues for fiscal years 1997 and 1996 were generated from the
following sources:
Fiscal Year
Customer 1997 1996
Commercial 43% 49%
NOAA 41% 22%
Air Force and Other 7% 17%
NASA 9% 12%
Commercial Contracts
Revenues from commercial contracts increased by approximately 55% between
fiscal year 1996 and fiscal year 1997, increasing from $5.5 million to $8.6
million. Despite this increase, commercial revenue as a percentage of total
revenue decreased from 49% to 43% between fiscal year 1996 and fiscal year
1997.
The vast majority of the Company's commercial contracts are fixed price in
nature.
The Company expects that 32% of revenue for the current fiscal year (fiscal
year 1998) will be derived from five major commercial contracts. It is
estimated that the largest single contract will represent approximately 9% of
the Company's revenue and the smallest approximately 4%. The loss of any one
of these contracts 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.
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 1997 and 1996 are as follows:
Fiscal Year
Contract Source 1997 1996
Prime Contract 79% 59%
Subcontract 21% 41%
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 38% of revenue for the current fiscal year (fiscal
year 1998) will be derived from four major US Government contracts and
subcontracts. It is estimated that the largest single contract will represent
approximately 24% 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.
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 8, 1997, the Company employed 122 full time employees, 98 of
whom are considered professionals in engineering related disciplines. Of the
engineering professionals, 97% have undergraduate degrees in a scientific
discipline, and 35% of those have advanced degrees in a scientific discipline.
Approximately 84% of the engineering staff have at least seven years
experience, and 14% 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, 1997 and September 30,
1996 is as follows:
September 30, September 30,
1997 1996
Outstanding Commitments $14,010,477 $18,162,147
General Commitments 12,490,050 9,489,563
Total $26,500,527 $27,651,710
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 77% of
backlog as of September 30, 1997 will be completed during fiscal year 1998.
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 Lockheed-Martin, Space Systems/Loral Corporation; Computer Sciences
Corporation, Allied-Signal, Boeing Corporation, and Hughes Electronics.
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.
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 to
probe additional product areas for the future growth and development of the
Company. Currently, the Company is focusing its research and development
efforts primarily on developing and improving the user interface systems for
its COTS software products. In fiscal years 1997 and 1996, total capitalized
software development costs were $816,730 and $431,773 respectively.
Environment
No material effects on the Company's expenditures, earnings, or competitive
position are anticipated as a result of compliance with federal, state, and
local provisions which have been enacted or adopted regulating the discharge
of material into the environment, or otherwise related to the protection of
the environment.
Financing
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.
In November, 1997, ISI increased its line of credit agreement with Nations
Bank from $2,000,000 to $3,000,000. Borrowings under the line of credit bear
interest at the Eurodollar Rate plus 1.90 percent per annum. Any accrued
interest is payable monthly. At September 30, 1997 the Company had $500,000
outstanding under the line of credit.
See Footnote Number 5 of the notes to the Financial Statements for further
information regarding these matters.
Financial Information in Industry Segments
During the year ended September 30, 1997, 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 13 of the notes to the Financial Statements for financial
information regarding these segments.
Item 2. Properties
In March, 1994, ISI renegotiated its lease for office space at its principal
location at 5000 Philadelphia Way, Suite A, Lanham, Maryland 20706-4417 for an
additional five years. The annual lease cost for this 25,600 square feet of
space is approximately $226,000 excluding operating expenses.
During fiscal year 1997 the Company contracted for an additional 17,638 square
feet of space at 4200 Forbes Blvd. Lanham, Maryland 20706. This second lease
expires in April, 1999 and has an annual lease cost excluding operating
expenses of approximately $148,000.
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 $232,708, the amount owed under the Company's subcontract
with Integrators, plus interest and costs.
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, which was denied in March 1997. Discovery has been
completed in the case, but a trial date has not yet been set. The Company
believes the trial will occur during calendar year 1998.
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 June 4, 1997, 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, Thomas L. Gough,
Dominic A. Laiti, and R. Doss McComas.
In addition, the shareholders approved an increase to the Company's authorized
shares from 2.0 million to 10.0 million and also authorized a three for one
stock split which became effective in July, 1997.
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, 1997 and 1996,
are shown below (as adjusted for the stock split which occurred in July,
1997):
1997 Fiscal Year High Low
First Quarter 10 5/16 6 1/2
Second Quarter 10 3/16 7 5/16
Third Quarter 11 3/16 7 3/16
Fourth Quarter 12 9
1996 Fiscal Year High Low
First Quarter 9 7/16 7 5/16
Second Quarter 9 6 5/16
Third Quarter 9 13/16 7 3/16
Fourth Quarter 9 1/2 6 13/16
As of September 30, 1997, there were approximately 495 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 1998 fiscal year.
Item 6. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
COMPARISON OF FISCAL YEAR 1997
TO FISCAL YEAR 1996
The components of the Company's income statement as a percentage of revenue
are depicted in the following table for fiscal years 1997 and 1996. Certain
classifications and presentations from fiscal year 1996 have been changed to
be consistent with fiscal year 1997 formats.
<TABLE>
<S> <C> <C> <C> <C>
% of % of
1997 Revenue 1996 Revenue
(000's omitted) (000's omitted)
Revenue $20,059 100.0 $11,217 100.0
Expenses
Cost of Revenue 16,020 79.9 8,217 73.2
Selling, General & Admin. 2,303 11.5 1,758 15.7
Bad Debt Expense - - 233 2.1
Prod. Amortization 660 3.3 509 4.5
Other 64 .3 -2 -
Income Taxes 383 1.9 179 1.6
Total Expenses 19,430 96.9 10,894 97.1
Net income $ 629 3.1 $ 323 2.9
</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 electronic product
manufacturers in Maryland, Virginia and the District of Columbia. The Company
classifies IMI revenues as commercial revenues.
During fiscal year 1997, consolidated revenue increased by almost 80% compared
to fiscal year 1996, climbing from $11.2 million to $20.1 million. During
fiscal year 1997, the Company derived approximately 43% of its consolidated
revenue from commercial opportunities compared to 49% of such revenue last
fiscal year. Although the percentage of overall revenue accounted for by
commercial revenues declined, commercial revenues actually increased in
absolute dollar terms, rising from $5.5 million in fiscal year 1996 to $8.6
million in fiscal year 1997, an increase of approximately 55%.
Gross Margin
Although management believes that the distinctions between Government revenue
and commercial revenue are important in understanding the financial dynamics
of its business, management believes that it is also important to analyze 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 generally does not mark
these items up by more than 15%.
Service margins for the Company typically range between 20% and 30% of
revenue, but can be less depending on specific contract pricing and/or
contract overruns. Margins for IMI vary considerably depending on sales
volume achieved.
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 gross margin results for fiscal years 1997 and 1996.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
1997 1996
Revenue Margin % Margin Revenue Margin % Margin
(000's omitted) (000's omitted)
Licenses $ 1,411 $ 1,411 100.0 $ 728 $ 728 100.0
Services 9,824 1,838 18.7 8,106 1,953 24.1
Equip. & Subcontracts 8,286 619 7.5 1,721 138 8.0
IMI 538 171 31.8 662 181 27.3
Totals $20,059 $4,039 20.1 $11,217 $3,000 26.7
</TABLE>
Overall, the Company experienced a decrease in gross margin percentage between
the periods being compared, falling from 26.7% to 20.1%. The reasons for the
decrease are essentially twofold. First, over 41% of the Company's fiscal
year 1997 revenues were derived from low margin equipment and subcontract pass
throughs, compared to approximately 15% 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 (i.e., 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 over 55% 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, which the Company believes it has since effectively achieved. In
particular, the Company believes that were it not for work performed under the
contracts referred to above, its current contract with Skynet (originally
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
second quarter of fiscal year 1997, (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 orders are received.
The Company does not consider the effect of the change to be material to its
financial statements.
Operating Expenses
SG&A increased by approximately $545,000 between the periods compared as the
Company continues to build an operating infrastructure to support its
commercial business. Bid and proposal expenses for the Company's Government
operation were also significantly higher in the current period compared to
last fiscal year. As a percentage of revenue, however, SG&A accounted for
only 11.5% of revenue in the current period compared to 15.7% last fiscal
year.
Product amortization increased by approximately $150,000 between fiscal year
1997 and 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.
Fiscal year 1996 expenses included a $233,000 provision for bad debt expense
which did not recur in fiscal year 1997.
Outlook
Overall, net income as a percentage of revenue was 3.1% in fiscal year 1997
compared to 2.9% in fiscal year 1996, although 1996 net income would have been
approximately $150,000 greater (i.e. 1.3% of revenue more) were it not for the
bad debt expense described above. The Company's fourth quarter of fiscal year
1997 included its highest ever quarterly revenue total ($5.9 million) with a
net income of $199,000 or $.07 per share. Because of its fourth quarter
performance, its current and significant backlog, its outstanding proposal
pipeline and contracts believed to be imminent, the Company believes that
results for fiscal year 1998 will exceed those recorded in fiscal year 1997
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 $3.0 million which had an
outstanding balance of $500,000 at September 30, 1997. (See Note 5 of the
Notes to Financial Statements). During fiscal year 1997, the Company
generated approximately $650,000 from operating activities and used $1,540,000
for investing activities, including approximately $817,000 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. Currently, the Company is
negotiating a lease line of credit facility with a subsidiary of its principal
bank in the amount of $1.0 million to fund capital equipment purchases,
including the sale leaseback of $500,000 of equipment purchased in late fiscal
year 1997.
With respect to software development the Company plans to continue to invest
in the continued development and improvement of its principal software
products, EPOCH and OASYS at amounts approximately commensurate with fiscal
year 1997 spending levels.
Inflation
Although management believes that inflation has not had a material effect on
the results of operations during the past several fiscal years, there can be
no assurance that the Company's results of operations in the future will not
be affected by inflation in the future.
Forward-Looking Statements
Certain of the statements contained in this section, including those under the
headings "Outlook" and "Liquidity and Capital Resources" are forward-looking.
In addition from time to time, the Company may publish forward-looking
statements relating to such matters as anticipated financial performance,
business prospects, technological developments, new products, research and
development activities and similar matters. While the Company believes that
these statements are and will be accurate, a variety of factors could cause
the Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Company's
statements. The Company's business is dependent upon general economic
conditions and upon various conditions specific to its industry, and future
trends cannot be predicted with certainty. Particular risks and uncertainties
that may effect the Company's business include the following:
- - The presence of competitors with greater financial resources and their
strategic response to the Company's new services.
- - The potential obsolescence of the Company's services due to the
introduction of new technologies.
- - The response of customers to the Company's marketing strategies and
services.
- - Activity levels in the Company's core markets.
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
William I. Tittley Vice President, Asia Pacific Operations
Elaine M. Parfitt Vice President and Chief Financial Officer
Patrick R. Woods Vice President of NOAA Programs
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 duly elected and qualified. Officers of the Company
serve at the discretion of the Board of Directors.
Steven R. Chamberlain, 42, 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 the Company's Vice President and Chief Financial Officer until her
resignation in February, 1997.
Thomas L. Gough, 49, became a member of ISI's staff in January, 1984. In
March of 1996, he was elected to the Board of Directors of ISI 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 B.S. degree from the University of Maryland where
he majored in Information Systems Management in the School of Business and
Public Administration.
Robert P. Sadler, 47, 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 by 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.
Steven K. Kowal, 44, a Company founder, has been with ISI since 1982. In May,
1988, he was appointed Vice President of Engineering Manufacturing. Mr. Kowal
is the Chairman of the Board of Integral Marketing, Inc., a wholly-owned
subsidiary of ISI. 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 ISI 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., 44, joined the Company in 1986. In July, 1989, he was
appointed Vice President of Engineering. He is currently developing new
business areas for the Company. From 1979 to 1986, Mr. Mack was employed by
General Electric Corporation's Space Systems Division where he progressed from
Design Engineer to 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.
William I. Tittley, 54, 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 Operations, to oversee
the Company's operations and business development in that region. Formerly,
Mr. Tittley was with OAO Corporation (from 1977 through 1992), where he
performed duties as Director of Space Systems Programs in charge of the
technical and financial direction of aerospace programs. Mr. Tittley holds a
B.S. equivalent in Aerospace Vehicle Design from the Academy of Aeronautics
(State University of New York), and has graduate studies in Astronomy from the
University of Maryland, and Engineering from the California Coast University.
Elaine M. Parfitt, 34, joined the Company in 1983. She served as Staff
Accountant/Personnel Administrator until January, 1995, when she was promoted
to Controller/Director of Accounting. In March, 1997, Ms. Parfitt was
appointed Vice President and Chief Financial Officer. She holds a B.S. degree
in Accounting from the University of Maryland.
Patrick R. Woods, 42, joined the Company in 1995, and is the Vice President of
NOAA Programs. From 1994 to 1995, he worked for Space Systems/Loral (SS/L),
and from 1985 to 1994, he worked for the Lockheed Martin Corporation (formerly
Loral Aerospace). Mr. Woods served as the Director of Mission Operations for
both SS/L and the AeroSys Division of Loral Aerospace. While at Loral
Aerospace, Mr. Woods received the NASA Public Service Group Achievement Award
from NASA Administrator Admiral Richard Truly for his management of the Hubble
Space Telescope control center development and launch support. Mr. Woods hold
a B.S. in Public Administration and a M.P.A. in Public Management from Indiana
University.
Bonnie K. Wachtel, 42, has served as an outside Director since May, 1988.
Since 1984, she has been Vice President, General Counsel, and a Director of
Wachtel & Co., Inc., an investment banking firm in Washington, DC. Ms.
Wachtel serves as a Director of several corporations, including VSE
Corporation and Information Analysis, Inc. She holds a B.A. and M.B.A. from
the University of Chicago, and a J.D. from the University of Virginia, and is
a Certified Financial Analyst.
Dominic A. Laiti, 66, 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 26 years of experience in starting, building, and managing high-
technology private and public companies with annual revenues from 2 million to
over 120 million 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, 43, joined the Board in July, 1995. Since 1982, he has held
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 COMSAT's
international operations. Currently, Mr. McComas 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 $100,000 during the
fiscal year ended September 30, 1997:
<TABLE>
SUMMARY COMPENSATION TABLE
<S> <C> <C> <C> <C> <C>
Long-Term Compensation
Annual Compensation Awards/Payouts
Other All
Annual Restricted other
Name and Compen- Stock LTIP Compen-
Principal sation Award(s) Options/ Payouts sation
Position Year Salary($) Bonus($) ($)($) ($) SAR(#) ($) ($) (1)
CEO
Steven R. Chamberlain
1997 $117,088 $13,000 0 $11,639
1996 $114,179 $14,000 45,000 $11,486
1995 $108,577 $14,000 22,500 $10,502
President
Thomas L. Gough
1997 $106,242 $11,000 0 $10,508
1996 $101,581 $8,000 30,000 $10,061
1995 $98,048 $11,000 0 $9,318
VP, Commercial Systems
Steven A. Carchedi
1997 $103,701 $11,000 0 $10,136
1996 $97,771 $12,000 30,000 $9,572
1995 $94,926 $12,000 6,000 $8,944
VP, Engineering Manufacturing
Steven K. Kowal
1997 $102,257 $10,000 0 $10,001
1996 $97,771 $9,000 12,000 $9,572
1995 $94,926 $9,500 0 $8,944
VP, Asia Pacific Operations
William I. Tittley (2)
1997 $101,966 $31,623 0 $8,784
1996 $98,891 $26,456 3,000 $10,684
1995 $96,050 $7,000 15,000 $9,046
</TABLE>
(1) Employer Pension Contributions
(2) Includes Overseas Assignment Bonuses of $26,623 and $19,956 in 1997 and
1996 respectively
<TABLE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Individual Grants
<S> <C> <C> <C> <C>
Percent of Total
Number of Options/SARs
Options/ Granted to
SARs Employees in Exercise/Base Expiration
Name Granted Fiscal Year Price ($) Date
CEO
Steven R. Chamberlain 0 0% N/A N/A
PRESIDENT
Thomas L. Gough 0 0% N/A N/A
VP, COMMERCIAL SYSTEMS
Steven A.Carchedi 0 0% N/A N/A
VP, ENGINEERING
MANUFACTURING
Steven K. Kowal 0 0% N/A N/A
VP, ASIA PACIFIC
OPERATIONS
William I. Tittley 0 0% N/A N/A
*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 1997 and 1996, 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 150,000 to 600,000 during fiscal year 1994.
A total of 19,512 option shares were issued and 4,853 option shares were
exercised during fiscal year 1997. Total option shares issued and outstanding
as of September, 1997 are 368,620.
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR
Values
<TABLE>
<C> <C> <C> <C> <C>
(a) (b) (c) (d) (e)
Number of
Securities Underlying Value of Unexercised
Unexercised Options/ In-the-Money Options/
SARS at FY-End (#) SARS at FY End ($)
Shares Acquired Value Exercisable Exercisable
Name on Exercise (#) Realized Unexercisable Unexercisable
None by N/A N/A N/A N/A
Named Executive
Officers
</TABLE>
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 or arrangement with respect to any
individual named in the Summary 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 9/30/97)
None
b. Security Ownership of Management (as of 9/30/97)
<TABLE>
<S> <C> <C>
Name of Owner (1)(2)Shares Percentage of Total Shares Owned
Steven R. Chamberlain 234,120 7.6%
Thomas L. Gough 109,550 3.5%
Robert P. Sadler 134,970 4.4%
Elaine M. Parfitt 12,450 .4%
Donald F. Mack, Jr. 33,300 1.1%
Steven K. Kowal 124,038 4.0%
Steven A. Carchedi 79,500 2.6%
William Tittley 11,400 .4%
Bonnie K. Wachtel 13,500 .4%
Dominic A. Laiti 15,000 .5%
R. Doss McComas 15,000 .5%
Officers and Directors as a group 782,828 25.3%
(1) Includes Options
(2) There are no shares issuable to the individuals named in this table within
60 days.
</TABLE>
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 Sheet as of September 30, 1997 - page 2
Statements of Operations for the Years Ended September 30, 1997, and 1996 -
page 3
Statement of Stockholders' Equity for Years Ended September 30, 1997 and 1996
- - page 4
Statements of Cash Flows for the Years Ended September 30, 1997 and 1996 -
page 5
Notes to Financial Statements - pages 6 - 15
(2) Material Contracts
None
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
A form 8-K was filed on July 1, 1997 announcing the consummation of a three
for one stock split to all shareholders of record as of that date.
INTEGRAL SYSTEMS, INC. PRIVATE
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended September 30, 1997 and 1996
AND
INDEPENDENT AUDITORS' REPORT
TABLE OF CONTENTS
DESCRIPTION PAGES
Independent Auditors' Report 1
Consolidated Balance Sheet as of September 30, 1997 2
Consolidated Statements of Operations for the Years
Ended September 30, 1997 and 1996 3
Consolidated Statements of Stockholders' Equity for
the Years Ended September 30, 1997 and 1996 4
Consolidated Statements of Cash Flows for the Years
Ended September 30, 1997 and 1996 5
Notes to Consolidated Financial Statements 6-16
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, 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for the years ended September 30, 1997 and 1996. 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, 1997, and the
consolidated results of their operations and their consolidated cash flows for
the years ended September 30, 1997 and 1996, in conformity with generally
accepted accounting principles.
November 21, 1997
Rubino & McGeehin, Chartered
Certified Public Accountants
6905 Rockledge Drive, Suite 700
Bethesda, MD 20817-1818
<TABLE>
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
September 30, 1997
<S> <C>
ASSETS
Current assets
Cash and cash equivalents $ 1,006,614
Accounts receivable 9,068,407
Employee receivables 1,200
Prepaid expenses 106,230
Deferred income taxes 44,324
Total current assets 10,226,775
Property and equipment, at cost, net of accumulated
depreciation and amortization of $610,206 801,805
Other assets
Deposits 10,142
Software development costs, net of accumulated
amortization of $1,829,443 1,452,242
Total assets $ 12,490,964
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable - trade $ 2,887,419
Accrued expenses 1,503,321
Notes payable 500,000
Billings in excess of revenue for contracts in progress 803,181
Income tax payable 175,010
Total current liabilities 5,868,931
Commitments and contingencies
Common stock, $.01 par value, 10,000,000 shares
authorized, 2,862,452 shares issued and outstanding 28,624
Additional paid-in capital 840,784
Retained earnings 5,752,625
Total stockholders' equity 6,622,033
Total liabilities and stockholders' equity $12,490,964
</TABLE>
<TABLE>
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended September 30, 1997 and 1996
<S> <C> <C>
1997 1996
Revenue $ 20,058,984 $ 11,217,148
Cost of revenue
Direct labor 4,514,765 3,617,255
Direct equipment and subcontracts 7,614,788 1,567,215
Travel and other direct costs 628,598 302,373
Overhead costs 3,261,652 2,729,793
Total cost of revenue 16,019,803 8,216,636
Gross margin 4,039,181 3,000,512
Selling, general and administrative 2,303,294 1,758,248
Product amortization 660,000 509,477
Bad debt expense - 232,708
Income from operations 1,075,887 500,079
Other income (expense)
Interest income 45,169 65,396
Interest expense (10,509) (2,320)
Miscellaneous, net (98,375) (60,787)
Income before income taxes 1,012,172 502,368
Provision for income taxes 383,343 179,351
Net income $ 628,829 $ 323,017
Weighted average number of common shares 2,859,030 2,844,063
Earnings per share:
Net income $ .22 $ .11
</TABLE>
<TABLE>
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended September 30, 1997 and 1996
<S> <C> <C> <C> <C> <C>
Common
Stock at Additional
Number of Par Paid-in Retained
Shares Value Capital Earnings Total
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
Stock Split
(see Note 11) 1,905,066 19,050 (19,050) - -
Stock options exercised 4,853 49 24,916 - 24,965
Tax benefit of
stock options - - 9,607 - 9,607
Net income - - - 628,829 628,829
Balance, September
30, 1997 2,862,452 $ 28,624 $ 840,784 $ 5,752,625 $ 6,622,033
</TABLE>
<TABLE>
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended September 30, 1997 and 1996
<S> <C> <C>
1997 1996
Cash flows from operating activities:
Net income $ 628,829 $ 323,017
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 997,536 705,793
Change in deferred taxes 29,589 (13,194)
Tax effect of stock options 9,607 -
(Increase) decrease in:
Accounts receivable (4,218,521) (1,366,109)
Prepaid expenses and deposits (49,234) 4,549
Employee receivables 23,000 (24,200)
Income tax receivable - -
(Decrease) increase in:
Accounts payable - trade 2,100,718 434,706
Accrued expenses 345,965 282,108
Billings in excess of revenue
for contracts in progress 674,256 (432,277)
Income tax payable 126,950 (60,421)
Total adjustments 19,866 (469,045)
Net cash provided (used) by operating activities 648,695 (146,028)
Cash flows from investing activities:
Acquisition of property and equipment (720,233) (306,799)
Software development costs (816,728) (431,773)
Net cash used in investing activities (1,536,961) (738,572)
Cash flows from financing activities:
Proceeds from line of credit 500,000 -
Proceeds from exercise of stock options 24,965 128,962
Net cash provided by financing activities 524,965 128,962
Net decrease in cash (363,301) (755,638)
Cash and cash equivalents, beginning of year 1,369,915 2,125,553
Cash and cash equivalents, end of year $ 1,006,614 $ 1,369,915
</TABLE>
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended September 30, 1997 and 1996
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.
Contract Revenue
Revenue under cost-plus-fixed-fee contracts is recorded on the basis of
direct costs plus indirect costs incurred and an allocable portion of the
fixed fee. Revenue from fixed-price contracts is recognized on the
percentage-of-completion method, measured by the cost-to-cost method for
each contract. Revenue from time and materials contracts is recognized
based on fixed hourly rates for direct labor expended. The fixed rate
includes direct labor, indirect expenses and profits. Material or other
specified direct costs are recorded at actual cost.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance. General and administrative
costs are charged to expense as incurred. Provisions for estimated losses
on contracts in progress are made in the period in which such losses are
determined. Changes in job performance, job conditions, and estimated
profitability, including final contract settlements, may result in revisions
to costs and income and are recognized in the period in which the revisions
are determined. The Company's contracts vary in length from one to four
years.
The fees under certain government contracts may be increased or decreased in
accordance with cost or performance incentive provisions which measure
actual performance against established targets or other criteria. Such
incentive fee awards or penalties are included in revenue at the time the
amounts can be reasonably determined.
Unbilled accounts receivable represents revenue recognized in excess of
amounts billed. The liability, billings in excess of revenue for contracts
in progress, represents billings in excess of revenue recognized.
Change in Accounting for Commission Revenues
During the fiscal year ended September 30, 1997, the Company elected to
record commission revenues earned by IMI at the time orders are shipped.
Previously, the Company recorded commission revenues at the time orders were
received. The effect of this change was not material to the financial
statements.
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended September 30, 1997 and 1996
1. Summary of Significant Accounting Policies (continued)
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.
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
retroactively where appropriate for the stock split discussed in Notes 10
and 11. The exercise of outstanding stock options would not result in a
material dilution of earnings per share.
The earnings per share calculations have been computed in accordance with
Accounting Principles Board (APB) Opinion No. 15. The Financial Accounting
Standards Board has issued Statement 128 which supersedes APB Opinion No.
15, but is effective for fiscal periods ending after December 15, 1997, and
early application is not permitted.
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 $23,284 held in a foreign bank account.
1. Summary of Significant Accounting Policies (continued)
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, 1997, consists of the following:
Billed
Government - prime contracts $ 946,647
Government - subcontractors 523,795
Commercial customers 2,657,018
Subtotal 4,127,460
Unbilled
Government - prime contracts 1,371,270
Government - subcontractors 210,533
Commercial customers 3,359,144
Subtotal 4,940,947
Total $9,068,407
Unbilled accounts receivable include amounts arising primarily from the use
of the percentage-of-completion or other methods of recognizing revenue that
differ from contractual billing terms. Substantially all unbilled
receivables are expected to be billed and collected in one year.
During the years ended September 30, 1997 and 1996, approximately 57% and
51%, respectively, of the Company's revenue was from prime contracts and
subcontracts with departments and agencies of the U.S. government. The
remaining revenue is from commercial contracts and sales of commercial
products. For each of the years ended September 30, 1997 and 1996,
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, 1997, are as follows:
Electronic equipment $ 1,163,082
Furniture and fixtures 80,618
Leasehold improvements 11,365
Software 156,946
Total property and equipment 1,412,011
Less: accumulated depreciation and amortization (610,206)
$ 801,805
4. Software Development
Software development costs at September 30, 1997, consist of the following:
Costs incurred $ 3,281,685
Less: accumulated amortization (1,829,443)
$ 1,452,242
Amortization expense for the year ended September 30, 1997, is $660,000.
5. Line of Credit
The Company has a line of credit agreement with a bank at September 30,
1997, for $2,000,000. Borrowings under the line of credit bear interest at
the bank's prime lending rate plus 1/4% 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, 1999. At September 30, 1997, the Company has a $500,000 outstanding
balance under the line of credit.
Subsequent to September 30, 1997, the Company negotiated an increase in its
line of credit from $2,000,000 to $3,000,000. Borrowings under the line
bear interest at the Eurodollar Rate plus 1.9% per annum. Any accrued
interest is paid monthly. The line of credit is secured by the Company's
billed and unbilled accounts receivable. The line also has certain
financial covenants, including minimum net worth and liquidity ratios. The
new line of credit is effective November 14, 1997 and expires February 28,
1999.
6. Accrued expenses
Accrued expenses at September 30, 1997, consist of the following:
Accrued payroll $ 651,808
Accrued vacation 345,202
Payroll taxes 233,971
Retirement plan payable 249,143
Other 23,197
$ 1,503,321
7. Commitments and Contingencies
Leases
The Company leases office space under two leases which expire in 1999.
Future minimum lease payments under these operating leases are as follows:
Years ending September 30, 1998 $ 374,000
1999 190,000
$ 564,000
Lease payments do not include operating expenses or utilities, which are
adjusted annually. Rent expense was $306,111 and $254,327, for the years
ended September 30, 1997 and 1996, 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.
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 $232,708, the amount owed under the Company's
subcontract with Integrators, plus interest and costs.
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, which was denied. Discovery has been
completed in the case but a trial date has not yet been set. The Company
believes the trial will occur during calendar year 1998.
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.
8. Income Taxes
For the years ended September 30, 1997 and 1996, the provision for income
taxes consists of the following:
1997 1996
Current tax expense
Federal $ 289,617 $ 154,910
State 64,138 37,635
353,755 192,545
Deferred tax expense (benefit) 29,588 (13,194)
Total provision $ 383,343 $ 179,351
At September 30, 1997, the tax effect of significant temporary differences
representing deferred tax assets and liabilities are as follows:
Asset
(Liability)
Depreciation and amortization $ (94,205)
Vacation accrual 134,629
Revenue reserve 3,900
Net deferred income tax asset $ 44,324
The effective income tax rates differ from the statutory United States
income tax rate due principally to the following:
1997 1996
Federal statutory rate 34.0% 34.0%
State tax, net of federal
income tax benefit 4.6 4.6
Tax deductible stock option compensation - (2.8)
Other (0.7) (0.1)
Effective rate 37.9% 35.7
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, 1997 and 1996, the money purchase plan obligated the Company to
contribute 5% of eligible salaries under the plan.
For the years ended September 30, 1997 and 1996, contributions to the plans
totalled $570,829 and $473,552, 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
600,000. 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 from one to five years.
The stock option plan is accounted for under Accounting Principles Board
(APB) Opinion No. 25. Accordingly, no compensation has been recognized for
the plan. Had compensation cost for the plans been determined based on the
estimated fair value of the options at the grant dates consistent with the
method of Statement of Financial Accounting Standards (SFAS) No. 123, the
Company's net income and earnings per share for the years ended September
30, 1997 and 1996, would have been:
1997 1996
Net income As reported $ 628,829 $ 323,017
Pro forma $ 358,991 $ 65,631
Income per share As reported $ .22 $ .11
Pro forma $ .13 $ .02
The fair value of the options granted in 1997 is estimated on the date of
the grant using the Black-Scholes options - pricing model assuming the
following: no dividend yield, risk-free interest rate of 6%, expected
volatility of 40 percent, and an expected term of the options of four years.
Stock option balances and activity discussed herein have been adjusted for
the stock split discussed in Note 11.
10. Stock Option Plan
At September 30, 1997, options to purchase stock under this plan were
outstanding to employees as follows:
Number of Exercise Price
Shares Per Share
56,397 $ 3.00 - 3.99
50,311 $ 5.00 - 5.99
211,212 $ 7.00 - 7.99
42,600 $ 8.00 - 8.99
5,400 $ 9.00 - 9.99
1,700 $ 10.00 - 10.99
1,000 $ 9.00 - 9.99
368,620
Of these 368,620 options, 188,257 options are exercisable immediately, and
180,363 options are exercisable over the next four years. Transactions
involving the plan for the years ended September 30, 1997 and 1996, were as
follows:
1997 1996
Weighted Weighted
Shares Average Prices Shares Average Prices
Outstanding,
beginning of year 353,961 $6.66 138,522 $4.72
Granted 19,512 $8.77 256,800 $7.64
Exercised (4,853) $5.14 (26,361) $4.89
Canceled - N/A (15,000) $8.67
Options outstanding,
end of year 368,620 $6.79 353,961 $6.66
Weighted average fair
value of options granted
during the year $3.01 $3.45
11. Stock Split
On June 4, 1997, the Company's shareholders approved an increase to the
Company's authorized shares from 2.0 million to 10.0 million and also
authorized a three for one stock split which became effective in July 1997.
12. Supplemental Cash Flow Information
For the years ended September 30, 1997 and 1996, income taxes paid, net of
refunds, were $214,360 and $410,076, respectively. For the years ended
September 30, 1997 and 1996, interest expense incurred and paid was $10,509
and $2,320, respectively.
13. Business Segment Information
During the years ended September 30, 1997 and 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.)
Summarized financial information is as follows:
1997 1996
Net sales
Satellite ground systems $19,521,353 $10,555,371
Marketing 537,631 661,777
Income before taxes
Satellite ground systems 882,483 343,797
Marketing 129,689 158,571
Identifiable assets
Satellite ground systems 11,130,040 6,139,157
Marketing 192,414 405,351
Capital expenditures
Satellite ground systems 705,146 305,220
Marketing 15,087 1,579
Depreciation and amortization
Satellite ground systems 312,706 192,838
Marketing 4,830 3,478
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.
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
/s/ Chairman of the Board, Director, 12/29/97
Steven R. Chamberlain Chief Executive Officer
/s/ President, Chief Operating Officer, 12/29/97
Thomas L. Gough Director
/s/ Vice President of Quality Control, 12/29/97
Robert P. Sadler Secretary & Treasurer; Director
/s/ Director 12/29/97
Bonnie K. Wachtel
/s/ Director 12/29/97
Dominic A. Laiti
/s/ Director 12/29/97
R. Doss McComas
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: 12/29/97
BY: /s/
Thomas L. Gough
President, Chief Operating Officer
Director
DATE: 12/29/97
BY: /s/
Elaine M. Parfitt
Chief Financial Officer, Principal
Accounting Officer
DATE: 12/29/97
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<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
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<F2>Includes PP&E @ $1,412,011 + S/W dev. costs @ $1,412,242 + Misc. deposits
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