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, 1996
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 {No Fee Required}
For the transition period from to
Commission file number 0-18603
Integral Systems, Inc.
(Name of small business issuer in its charter)
Maryland 52-1267968
(State or other jurisdiction of (I.R.S.
incorporation of organization Employer Identification No.)
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)
<PAGE>
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant to file such
reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
As of November 30, 1996, the aggregate market value of the Common
Stock of the Registrant (based upon the average bid and ask
prices of the Common Stock as reported by the market makers) held
by non-affiliates of the Registrant was $19,588,322.
As of November 30, 1996, 952,533 shares of the Common Stock of
the Registrant were outstanding.
<PAGE>
PART 1
Item 1. Business
General
Integral Systems, Inc. (the "Company") is a leading provider of
satellite ground systems: computer systems for satellite command
and control, data processing, simulation, and flight software
validation. Customers for these systems include US Government
organizations such as National Aeronautics and Space
Administration (NASA), the National Oceanic and Atmospheric
Administration (NOAA), and the US Air Force, as well as
commercial satellite operators, both domestic and foreign.
Integral Systems supports satellite missions for scientific
research, remote sensing, meteorology, and communications
applications. In addition, the Company offers ground system
products explicitly for real-time environmental monitoring via
satellite.
The Company has one active wholly owned subsidiary, Integral
Marketing, Inc. (IMI). IMI specializes in the sale and marketing
of electronic equipment primarily for the telemetry, data
acquisition and test communities.
Satellite Ground Systems
The Company offers off-the-shelf products as well as custom
development services for satellite ground systems. The customers
for the Company's products include government and commercial
satellite operators, spacecraft manufacturers, and systems
integrators. Typical sales involve a combination of off-the-
shelf software and hardware products together with development
services for mission specific requirements and system
integration.
The Company's flagship commercial product is the EPOCH 2000
software which includes real-time command and control functions
as well as off-line orbit analysis and mission planning
functions. This product has gained international recognition and
is currently used as a solution on a number of Government and
commercial satellite programs. EPOCH 2000 components and turnkey
systems (software and hardware) have been sold to a number of
customers, including ChinaSat in the Peoples Republic of China,
the National Space Program Office in Taiwan (ROCSAT), EOSAT,
Earthwatch, Johns Hopkins University Applied Physics Laboratory,
AT&T, GE Americom, APT Satellite Company, Loral, TRW, Orbital
Sciences Corporation, the US Air Force, and the US Navy.
Integral Systems has ongoing systems engineering work under
contract to NASA at the Goddard Space Flight Center. This work
is in support of NASA's science satellites and includes
development projects for telemetry and command systems and
simulation as well as software verification and validation. The
Company developed the first workstation-based satellite command
and control system for NASA Goddard and has supported over a
dozen different NASA space missions.
For NOAA, Integral Systems builds command and control systems as
well as payload and image data processing systems for
meteorological satellites. The Company has had extensive
involvement in the both the TIROS and GOES satellite programs.
Recently, the company was awarded a large contract by NOAA to
provide the command and control system for the Air Force's DMSP
(Defense Meteorological) satellite fleet. Integral Systems has
also built several generations of the DMSP hardware-in-the-loop
simulator and provided the satellite manufacturer with a
workstation-based flight software test facility. The Company
provides the Air Force with ongoing services for independent
verification and validation of the DMSP flight software using
this simulator.
<PAGE>
Integral Systems also provides a product, called the DOMSAT
Receive Station (DRS), which facilitates the collection, storage,
and analysis of environmental data. The DRS is a PC-based system
which includes an antenna, receiver, and processing software
which allows customers to take advantage of the complete NOAA
GOES Data Collection System. The Company has sold over 60 DRS
systems to customers including the Army Corps of Engineers, the
US Geological Survey, and a variety of state and local
governments. The applications include meteorology, water
control, and pollution monitoring, as well as research in
geomagnetism and hydrology.
Integral Marketing, Inc.
Through it's wholly-owned subsidiary, Integral Marketing, Inc.
(IMI), the Company acts as a manufacturer's representative,
selling electronic test instrumentation and equipment to
customers in Maryland, D.C., and Virginia. IMI currently
represents 14 manufacturers.
Contract Revenue
Integral Systems'commercial revenue as a percentage of total
revenue increased from 42% to 49% between fiscal year 1995 and
fiscal year 1996. The Company is continuing to focus its
marketing efforts on commercial opportunities. The Company's
revenue for fiscal years 1996 and 1995 was generated from the
following sources:
<TABLE>
<S> <C> <C>
Fiscal Year
Customer 1996 1995
Commercial 49 42
NOAA 22 30
Air Force 17 12
NASA 12 16
</TABLE>
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.
<PAGE>
The percentage of revenues derived by the Company under
these different types of contracts for the fiscal years ended
September 30, 1996 and 1995 is as follows:
<TABLE>
<S> <C> <C>
Fiscal Year
Contract Type 1996 1995
Cost Plus 39 43
Fixed Price 56 53
Time and Materials 5 4
</TABLE>
Government Contracts
Company revenues from US Government contracts are derived
from a combination of contracts with the US Government and
subcontracts with other companies that have prime contracts with
the US Government. The percentage of revenues received by the
Company from prime contracts and subcontracts with the Government
for fiscal years 1996 and 1995 are as follows:
<TABLE>
<S> <C> <C>
Fiscal Year
Contract Source 1996 1995
Prime Contract 59 46
Subcontract 41 54
</TABLE>
US Government contracting procedures may be categorized by
formal advertising or procurement by negotiation. Negotiated
procurements may, but do not necessarily, involve the
solicitation of competitive proposals. If competitive proposals
are solicited, the US Government selects the proposal most
advantageous to it and then conducts negotiations with the
selected bidder. Most contracts awarded to the Company or to
other prime contractors for whom the Company served as a
subcontractor were awarded on the basis of competitive
procurements.
Many of the programs in which ISI participates as a
contractor or subcontractor extend for several years, but are
funded only on an annual basis. Accordingly, the Company's
contracts and subcontracts are subject to termination, reduction
or modification in the event of changes in the Government's
requirements or budgetary constraints. Additionally, when ISI
participates in a project as a subcontractor, it is subject to
the risk that the prime contractor may fail or be unable to
perform the prime contract.
All of the Company's US Government contracts and
subcontracts are also subject to termination for "convenience".
Should a contract be so terminated, the Company would be
reimbursed for allowable costs to the date of termination and
would be paid a proportionate amount of the stipulated profits or
fees attributable to the work actually performed. To date, no
ISI contract has been terminated for convenience.
The Company expects that 53% of revenue for the current
fiscal year (fiscal year 1997) will be derived from five major US
Government contracts and subcontracts. It is estimated that the
largest single contract will represent approximately 27% of the
Company's revenue and the smallest approximately 3%. The loss or
termination of any one of these contracts due to funding cuts or
contract termination could significantly affect the Company's
performance. Similarly, the expiration of any major contract
could significantly affect the Company's performance if not
renewed or replaced by contracts of similar value. In addition,
<PAGE>
since a significant portion of revenue for the current fiscal
year is derived from subcontracts, loss of those subcontracts due
to termination of the subcontract or of the direct prime contract
could also affect the Company's performance. During fiscal year
1996, approximately 56% of ISI's revenue was performed under
fixed-price contracts and subcontracts. Under those contracts,
an unanticipated increase in the Company's cost or expenses may
reduce or eliminate the profitability of those contracts, thereby
adversely affecting the Company's financial performance.
ISI's books and records are subject to audit by the Defense
Contract Audit Agency. Such audits can result in adjustments to
contract costs and fees. No audits are currently in process.
Although the Company thus far has not been required to make any
material audit adjustments, the possibility that such adjustments
will be required always exists. Management is of the opinion
that any such audit adjustments would not have a material effect
on the financial position or results of operations of the
Company.
Employees
As of December 19, 1996, the Company employed 92 full time
employees, 79 of whom are considered professionals in engineering
related disciplines. Of the engineering professionals, 97% have
undergraduate degrees in a scientific discipline, and 34% of
those have advanced degrees in a scientific discipline.
Approximately 84% of the engineering staff have at least seven
years experience, and 13% have three to eight years experience.
Approximately 18% of the engineering staff specialize in digital
hardware development, although many of these individuals have
analytic and software development expertise as well. The
remaining 82% of the engineering staff are analysts and software
developers.
Employees are not represented by any union or collective
bargaining group, and employee relations are considered good.
Since inception, ISI has experienced minimal turnover in
engineering staff.
Marketing
The Company relies upon senior corporate management, project
managers and senior technical staff to carry out its marketing
program. These individuals collect information concerning
requirements of current and potential customers in the course of
contract performance, formal and informal briefings, from
published literature, and through participation in professional
and industry organizations. Senior management evaluates this
information, identifies potential business opportunities and
coordinates proposal efforts. As sources of business within
existing markets are exhausted, new markets are explored. The
Company seeks business believed to be of long term benefit based
on considerations such as technical sophistication required,
favorable market positioning and potential product spin-offs.
<PAGE>
Backlog
The Company's estimated backlog as of September 30, 1996 and
September 30, 1995 is as follows:
<TABLE>
<S> <C> <C>
September 30, 1996 September 30, 1995
Outstanding Commitments $18,162,147 $ 9,596,273
General Commitments $ 9,489,563 $14,784,770
Total $27,651,710 $24,381,043
</TABLE>
Under outstanding commitments, the Company agrees to provide
specific services, frequently over an extended period of time,
with continued performance of those services contingent upon the
customer's year-to-year decision to fund the contract. General
commitments consist of contract options and sole source business
that management believes likely to be exercised or awarded in
connection with existing contracts. Contract options are the
Company's contractual agreement to perform specifically defined
services only in the event the customer thereafter requests the
Company to do so. Sole source business refers to contract work
which the Company reasonable expects to be awarded based on its
unique expertise in a specific area or because it has previously
done all such work in that area for the customer or prime
contractor who will award the contract. The Company estimates
that 54% of backlog as of September 30, 1996 will be completed
during fiscal year 1997. Estimated backlog includes contract
options through September 30, 2002, including general
commitments.
Competition
The Company principally obtains contracts and subcontracts
through competitive procurements offered by the US Government or
commercial enterprises. ISI competes with numerous companies
having similar capabilities, some of which are larger and have
considerably greater financial resources. In addition, many
smaller companies have specialized capabilities in similar areas.
Because of its size, ISI often joins with a larger company
in pursuing major procurements. It is not unusual for ISI to
compete with a company for a contract while simultaneously
joining with the same company in pursuit of another contract.
The Company has entered into such joint bidding relations with
Martin Marietta, Space Systems/Loral Corporation; Computer
Sciences Corporation, and AlliedSignal Aerospace/Bendix Field
Engineering Corporation.
It is not possible to predict how ISI's competitive position
may be affected by changing economic or competitive conditions,
customer requirements or technological developments. The
principal competitive factors for the Company's business are
reputation and relationship with customers and competitors,
quality of services and products, pricing, responsiveness, and a
demonstrable record of delivering work on time and within budget.
<PAGE>
Software Products and Development
In the second quarter of 1991, ISI undertook several
internal software development efforts, which have resulted in
products which the Company is offering commercially. The DOMSAT
Receive Station (DRS) product is a hardware/software system that
allows users to gather environmental telemetry data via a
commercial communications satellite. In fiscal year 1996,
Integral Systems recognized approximately $229,000 in revenue on
the DRS product.
The EPOCH 2000 product is a hardware/software system that
allows users to command and control satellites. The product was
formally announced in the second quarter of 1992. EPOCH related
revenue (license fees and associated services) amounted to $4.2
million in fiscal year 1996.
The Company has also developed other software intensive
products. OASYS, a spacecraft orbit determination product, can
be sold as a stand-alone package or as a subsystem under the
EPOCH 2000 product. OASYS related revenue for fiscal year 1996
was $384,000.
The Company continues to develop new versions of EPOCH and
OASYS and plans to capitalize development costs as appropriate in
fiscal year 1997.
Environment
No material effects on the Company's expenditures, earnings,
or competitive position are anticipated as a result of compliance
with federal, state, and local provisions which have been enacted
or adopted regulating the discharge of material into the
environment, or otherwise related to the protection of the
environment.
Financing
On July 28, 1988, ISI sold 110,000 of its common shares (par
value $.01) in its initial public offering for $5.00 per share.
ISI also has a line of credit agreement with NationsBank for
$1,200,000. Borrowings under the line of credit bear interest at
the bank's prime rate plus one-quarter (1/4) percentage point per
annum. Any accrued interest is payable monthly. At September
30, 1996 the Company had no amounts outstanding under the line of
credit.
<PAGE>
Financial Information in Industry Segments
During the year ended September 30, 1996, the Company's
operations included two reportable segments: Satellite ground
systems and electronic test instrumentation and equipment
marketing.
The Company provides satellite ground systems - computer
systems for satellite command and control, data processing,
simulation, and flight software validation. Customers for these
systems include US Government organizations such as National
Aeronautics and Space Administration (NASA), the National Oceanic
and Atmospheric Administration (NOAA), and the US Air Force, as
well as commercial satellite operators, both domestic and
foreign.
Through it's wholly-owned subsidiary, Integral Marketing,
Inc. (IMI), the Company acts as a manufacturer's representative,
selling electronic test instrumentation and equipment to
customers primarily in Maryland, Virginia and the District of
Columbia. (The Company's other wholly-owned subsidiary,
InterSys, Inc. provides consulting services for satellite design
and procurement, but is presently inactive.)
See Footnote Number 12 of the notes to the Financial
Statements for financial information regarding these segments.
Item 2. Properties
As of March, 1994, ISI renegotiated its lease which
obligated the Company for an additional five years, for an
aggregate of 25,600 square feet of office space at its principal
location at 5000 Philadelphia Way, Suite A, Lanham, Maryland
20706-4417. The annual lease cost, including operating expenses,
for the facility, is approximately $242,374.
Item 3. Legal Proceeding
During the fiscal year ended September 30, 1996 the Company
sold certain of its software products along with specified
hardware to a Federal Government agency. The procurement
required the Company to sell these items through an intermediary
prime contractor. The value of the contract to the Company was
$232,708.
The Company fully complied with the terms of its contract
and although the third party prime contractor has been paid in
full by the Federal Government, Integral Systems has received no
payments to date. In August, 1996 the Company filed a complaint
in the Second Judicial District Court of the State of New Mexico
against the prime contractor and its principal owner individually
for breach of contract in an attempt to recover the value of its
contract. Based on discovery received, the Company later filed a
motion for summary judgment against the defendants in December,
1996.
In late September, 1996 the defendants filed a counterclaim
against the Company alleging defamation, intentional interference
with contractual relations and the prima facie tort of extortion.
The Company believes the counterclaim is without merit and will
not have a materially adverse effect on its financial statements.
Although the Company has fully reserved the receivable due
under this contract ($232,708), it continues to vigorously pursue
all legal remedies available to it.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
On March 28, 1996, Integral Systems held their annual
shareholders meeting. A Board of Directors was elected, and is
made up of the following individuals: Steven R. Chamberlain,
Robert P. Sadler, Bonnie K. Wachtel, Louis Brown, Thomas L.
Gough, Dominic A. Laiti, and R. Doss McComas. In September,
1996, Mr. Louis Brown announced his resignation as a member of
the board.
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder's Matters
Effective May, 1990, Integral Systems' over-the-counter
stock began trading on NASDAQ. The Company's NASDAQ trading
symbol is ISYS. The range of high and low transaction prices as
reported by NASDAQ and the market makers for each quarterly
period during the fiscal years ended September 30, 1996 and 1995,
are shown below:
<TABLE>
<S> <C> <C>
1996 Fiscal Year High Low
First Quarter 28 1/4 22
Second Quarter 27 19
Third Quarter 29 1/2 21 1/2
Fourth Quarter 2 1/2 2 1/2
1995 Fiscal Year High Low
First Quarter 17 3/4 16 3/4
Second Quarter 23 1/2 17 1/2
Third Quarter 28 25 3/4
Fourth Quarter 31 26 1/2
</TABLE>
As of September 30, 1996, there were approximately 436
holders of record of the Company's Common Stock.
No cash dividends have been paid during the Company's
existence, and none are expected to be declared during the
forthcoming 1997 fiscal year.
<PAGE>
Item 6. Management's Discussion And Analysis Of Financial
Condition And Results Of Operations
COMPARISON OF FISCAL YEAR 1996
TO FISCAL YEAR 1995
The components of the Company's income statement as a
percentage of revenue are depicted in the following table for
fiscal years 1996 and 1995. Certain classifications and
presentations from fiscal year 1995 have been changed to be
consistent with fiscal year 1996 formats.
<TABLE>
<S> <C> <C> <C> <C>
% of % of
1996 Revenue 1995 Revenue
(000's omitted) (000's omitted)
Revenue $11,217 100.0 $10,771 100.0
Expenses
Cost of Revenue 8,217 73.2 8,290 77.0
Selling, General
& Admin. 1,758 15.7 1,434 13.3
Bad Debt Expense 233 2.1 - -
Prod.
Amortization 509 4.5 509 4.7
Other -2 - -38 -.3
Income Taxes 179 1.6 195 1.8
Total Expenses 10,894 97.1 10,390 96.5
Net income $323 2.9 $381 3.5
</TABLE>
Revenue
The Company's principal components of revenue for fiscal years
1996 and 1995 are as follows:
<TABLE>
<S> <C> <C> <C> <C>
% of % of
1996 Revenue 1995 Revenue
(000's omitted) (000's omitted)
Government Revenue $5,686 50.7 $6,239 57.9
Commercial Revenue
EPOCH 4,240 37.8 3,512 32.6
OASYS, DRS, Other 629 5.6 753 7.0
IMI 662 5.9 267 2.5
Total 5,531 49.3 4,532 42.1
Total Consolidated
Revenue $11,217 100.0 $10,771 100.0
</TABLE>
<PAGE>
Consolidated revenue increased by approximately $450,000
between the fiscal year ended September 30, 1996 and the fiscal
year ended September 30, 1995, principally because of new
contract awards related to the sale of the Company's EPOCH
product along with associated integration services. Revenue
increases from EPOCH related business more than offset a $550,000
decline in the Company's Government business. The Government
decline is believed to be temporary as new contracts in this
segment received at the end of fiscal year 1996 should provide
for higher revenue levels (compared to both 1996 and 1995) during
fiscal year 1997. Although less than 6% of consolidated Company
revenues, Integral Marketing, Inc. (IMI) achieved approximately
150% of revenue growth in 1996 over 1995.
During fiscal year 1996, the Company derived approximately
49% of its revenues from the sale of its commercial products and
related services as opposed to 42% of such revenue during the
prior fiscal year. The increase correlates to the Company's
conscious effort to reduce its reliance on the Federal
Government, and to utilize its recently developed software
products to gain access to organizations in order to sell both
its products and associated integration and support services.
Although the Company believes that its full cadre of
software products is important for its future growth and
prosperity, to date the Company's largest product investment
relates to the development of its EPOCH software, a COTS
(commercial off-the-shelf) product for satellite command and
control. The Company believes that it is unique in its status as
the only entity with COTS software capable of "flying" satellites
built by any satellite manufacturer in the world. In fact during
April, 1996 the Company received a strategically important
contract to provide its COTS products (and related integration
services) to command and control a fleet of satellites composed
of spacecraft from multiple manufacturers. The preponderance of
revenue to be derived from this contract is expected to be
realized in fiscal year 1997.
During fiscal year 1996, the Company recorded approximately
$4.2 million of revenue for its EPOCH product and associated
services compared to $3.5 million of revenue during fiscal year
1995. The 1996 EPOCH revenue total included approximately
$465,000 of license revenue compared to approximately $345,000 of
this revenue type recorded in 1995.
Because license revenues have nominal marginal costs
associated with them, this form of revenue is highly important to
the Company's overall profitability. Looking forward to fiscal
year 1997, the Company is encouraged that its current contract
backlog includes in excess of $500,000 of unearned license
revenues for its EPOCH product.
The principal balance of the Company's commercial revenues
pertain to other proprietary products as follows: OASYS (Orbital
Analysis System); DRS (DOMSAT Receive Station); and a collection
of software pertaining to database and information system
applications. During 1996, the Company recorded approximately
$630,000 of revenue related to the sale of products and services
under these programs compared to approximately $750,000 of
revenue recorded last fiscal year. The decrease principally
relates to the Company's decision to cease operations of its
information and database software operation as a discreet profit
center. All software development costs associated with this line
of business have been fully amortized as of September 30, 1996.
<PAGE>
Expenses
Cost of revenue as a percentage of revenue for fiscal year
1996 was 73.2% compared to 77.0% for fiscal year 1995. The
improvement in these ratios is principally attributable to gross
margin gains in the Company's EPOCH operation as well as
increased margins at IMI.
SG&A increased in both absolute terms (by approximately
$325,000) and as a percentage of revenue (15.7% vs. 13.3%) in
1996 over 1995. The increases reflect the Company's continued
program to enhance and augment its selling efforts, including a
very concerted effort (and expense) to sell its commercial
products internationally.
During 1996 the Company recorded a non-recurring $233,000
bad debt expense attributable to a customer's inability to pay.
Despite this reserve, the Company is vigorously pursuing
collection of this receivable. (See Item 3 - Legal Proceedings).
General
Overall, net income as a percentage of revenue was 2.9% in
fiscal year 1996 compared to 3.5% in fiscal year 1995, while
pretax income was approximately $75,000 lower in 1996 compared to
1995. Were it not for the bad debt expense described above,
pretax income would have been 28% greater in 1996 over 1995.
Further the Company's fourth quarter of fiscal year 1996 included
its highest ever quarterly revenue total ($3.9 million) and its
second highest ever pretax profit level ($448,000). Because of
its fourth quarter performance, its current and significant
backlog, and contracts to be imminently received, the Company
believes that results for fiscal year 1997 will exceed those
recorded in fiscal year 1996 for both revenue and profitability.
Liquidity and Capital Resources
The Company has been profitable on an annual basis since
inception and has been able to generate adequate cash flow from
operations to fund its operating and capital expenses. To
supplement operating cash flows, the Company has access to a line
of credit facility in the amount of $1.2 million which is
currently unused. (See Note 5 of the Notes to Financial
Statements). During fiscal year 1996, the Company used
approximately $146,000 for operating activities and used an
additional $739,000 for investing activities, including
approximately $432,000 for newly capitalized software development
costs.
As a result of its current cash reserves, its unused line of
credit, its current profitability and its projected profitability
for fiscal year 1997, the Company believes it will have adequate
cash resources to meet its obligations for the foreseeable
future. Although operating and investing activities consumed
significant sums of cash during 1996, the Company does not
believe it will have to rely on external sources of cash (i.e.
its line of credit) to fund its growth and future software
development in fiscal year 1997.
In terms of capital purchases, historically the Company has
funded such items through operating cash flow or capital lease.
The Company currently has no plans for major capital purchases in
the ensuing twelve month period, although the Company plans to
continue to invest in the continued development and improvement
of its principal software products, EPOCH and OASYS.
<PAGE>
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.
<PAGE>
PART III
Item 9. Directors and Executive Officers, Promoters and Control
Persons, Compliance With Section 16(a) of the Exchange
Act.
Name Position with the Company
Steven R. Chamberlain Chairman of the Board
and Chief Executive Officer
Thomas L. Gough President Chief Operating Officer
and Director
Robert P. Sadler Vice President, Quality Control,
Secretary; Treasurer; and Director
Steven K. Kowal Vice President, Engineering
Manufacturing
Steven A. Carchedi Vice President of Commercial Systems
Donald F. Mack, Jr. Vice President of Engineering
Kimberly A. Chamberlain Vice President, Chief Financial
Officer
William I. Tittley Vice President, Asia Pacific
Operations
Bonnie K. Wachtel Outside Director
Dominic A. Laiti Outside Director
R. Doss McComas Outside Director
Directors serve until the next annual meeting of
stockholders or until successors have been elected and qualified.
Officers serve at the discretion of the Board of Directors.
Steven R. Chamberlain, 41, a Company founder, has been
Chairman of the Board since June, 1992, President since May 1988
and a Director since 1982. He served as Vice President from 1982
until he became President. From 1978 to 1982, Mr. Chamberlain
was employed by OAO Corporation where he progressed from Systems
Analyst to Manager of the Offutt Air Force Base field support
office. Mr. Chamberlain holds a B.S. degree in Physics from
Memphis State University and has done graduate work in Physics
and Mathematics at Memphis State and the University of Maryland.
Thomas L. Gough, 48, became a member of ISI's staff in
January, 1984. In March of 1996 he was elected to the Board of
Directors of Integral Systems having served as President and
Chief Operating Officer since June, 1992. For three years before
being named President he served as Vice President and Chief
Financial Officer. Prior to joining ISI he was employed by
Business and Technological Systems, Inc., serving initially as a
Project Leader and later as the Software Systems Division
Manager. From 1972 to 1977 he was employed by Computer Sciences
Corporation where he progressed from programmer/analyst to
section manager. Mr. Gough earned a BS degree from the
University of Maryland where he majored in Information Systems
Management in the School of Business and Public Administration.
Robert P. Sadler, 46, a Company founder, has been a
Director, Secretary, and Treasurer since 1982. In May 1988, he
was appointed Vice President of Administration, in June, 1992, he
was appointed Vice President, Quality Control. From 1976 to
1982, Mr. Sadler was employed at OAO Corporation where he
progressed from Computer Analyst to Project Manager. Mr. Sadler
obtained a B.S. in Mathematics and a B.S. in Computer Sciences
from Pennsylvania State University and a M.S. in Management of
Information Systems Technology from George Washington University.
<PAGE>
Steve K. Kowal, 43, a Company founder, has been with ISI
since 1982. In May 1988 he was appointed Vice President of
Engineering Manufacturing. From 1979 to 1982, Mr. Kowal was
employed by OAO Corporation where he was a manager of hardware
development on several of OAO's major systems. Mr. Kowal holds a
B.S. degree in Electrical Engineering from the University of
Delaware.
Steven A. Carchedi, 45, joined the Company in 1991 and is
Vice President of Commercial Systems. Before joining Integral
Systems as a full-time employee in 1991, Mr. Carchedi worked with
the company for two years as an independent business development
consultant. Previously, he worked for Computational Engineering,
Inc., where he held positions as a Mathematician, Program
Manager, Corporate Director, and Vice President of Business
Development. Mr. Carchedi holds a B.S. Degree in Mathematics
from Wake Forest University and a M.A. Degree in Mathematics from
the University of Maryland.
Donald F. Mack, Jr., 43, joined the company in 1986. In
July of 1989, he was appointed Vice President of Engineering.
From 1979 to 1986, Mr. Mack was employed by General Electric
Corporation's Space Systems Division where he progressed from
design engineer to a Senior Project Supervisor for systems
development. Mr. Mack holds a B.S. degree in Electrical
Engineering from Northeastern University and a M.S. degree in
Electrical Engineering from Johns Hopkins University.
Kimberly A. Chamberlain, 40, was appointed Vice President
and Chief Financial Officer in April, 1995 and has been with the
company since 1983. Ms. Chamberlain graduated from the
University of Maryland, with a B.S. degree in Business Management
in 1985. Before coming to Integral Systems, Ms. Chamberlain
worked at OAO Corporation.
William I. Tittley, 53, joined the company in 1992,
performing as Project Manager on the first EPOCH 2000 sale to the
Chinese Government. In March, 1995, Mr. Tittley was made Vice
President, Asia Pacific, to oversee the Company's operations in
the Asian region. Formerly, Mr. Tittley was with the OAO
Corporation (from 1977 through 1992), where he performed duties
as Director, Space System Programs, in charge of the technical
and financial direction of aerospace systems programs. Mr.
Tittley holds a B.S. in Aerospace Vehicle Design from the State
University of New York, and a M.S. in Engineering from the
California Coast University.
Bonnie K. Wachtel, 42, has served as a Director since May
1988. Since 1984 she has been Vice President, General Counsel
and a Director of Wachtel & Co., Inc., an investment banking firm
in Washington, D.C. Ms. Wachtel serves as a Director of several
corporations including SSE Telecom, Inc. and VSE Corporation. She
holds a B.A. and M.B.A. from the University of Chicago and a J.D.
from the University of Virginia, and is a Certified Financial
Analyst.
Dominic A. Laiti, 65, was elected director of the Company in
July, 1995. Mr. Laiti is presently employed as an independent
consultant and was President and Director of Globalink, Inc. from
January 1990 to December 1994. He has over twenty-five (25)
years of experience in starting, building, and managing high-
technology private and public companies with annual revenues from
two million to over 120 million dollars. Mr. Laiti was President
of Hadron, Inc. from 1979 to 1989, Vice President of Xonics Inc.
from 1972 to 1979 and Vice President of KMS Industries from 1968
to 1972. He is a former Director of United Press International,
Saturn Chemicals Company, Hadron, Inc., Telecommunications
Industries, Inc., MAXXAM Technology, Inc., and Jupiter
Technology, Inc.
<PAGE>
R. Doss McComas, 42, joined the Board in July, 1995. Since
1982 he has had various positions with COMSAT RSI, a business
unit of COMSAT supplying products and services to the wireless,
satellite, air traffic control and other specialized markets
worldwide. These positions included General Counsel, Vice
President of Acquisitions, Strategic Planning and International
Marketing, as well as Group Vice President, responsible for the
company's international operations. Currently he is Chairman and
Chief Executive Officer of Plexsys International, a COMSAT RSI
equity investment, and Vice President, Business Development, for
COMSAT RSI. He holds a B.A. degree from Virginia Polytechnic
Institute, an M.B.A. from Mt. Saint Mary's, and a J.D. from
Gonzaga University.
Item 10. Executive Compensation
a. Summary Compensation Table
The following table sets forth compensation received by the
Company's CEO and four highest paid executive officers who earned
over $100,000 during the fiscal year ended September 30, 1996:
<TABLE>
<S> <C> <C> <C> <C> <C>
SUMMARY COMPENSATION TABLE
Long-Term Compensation
Annual Compensation Awards Payouts
Other
Annual Restricted All other
Compen- Stock LTIP Compen-
sation Award(s)Options/ Payouts sation
Year Salary($)Bonus($)($) ($) SAR(#) ($) ($)(1)
CEO
S. R. Chamberlain 1996 $114,179 $14,000 15,000 $11,486
1995 $108,577 $14,000 7,500 $10,502
1994 $105,998 $13,975 0 $11,208
PRESIDENT
Thomas L. Gough 1996 $101,581 $ 8,000 10,000 $10,061
1995 $ 98,048 $11,000 0 $ 9,318
1994 $ 93,645 $10,980 0 $ 9,677
VP,
Commercial
Systems
Steve Carchedi 1996 $ 97,771 $12,000 10,000 $ 9,572
1995 $ 94,926 $12,000 2,000 $ 8,944
1994 $ 91,896 $ 9,479 0 $ 9,479
VP, Engineering
Manufacturing
Steven K. Kowal 1996 $ 97,771 $ 9,000 4,000 $ 9,572
1995 $ 94,926 $ 9,500 0 $ 8,944
1994 $ 91,896 $ 9,479 0 $ 9,452
VP, Asia
Pacific
Operations
William I. Tittley 1996 $ 98,891 $26,456 1,000 $10,684
1995 $ 96,050 $ 7,000 5,000 $ 9,046
1994 $ 93,006 $ 6,018 0 $ 9,779
(1) Employer Pension Contributions
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Individual Grants
Percent of Total
Number of Options/SARs
Options/ Granted to
SARs Employees in Exercise/Base Expiration
Name Granted Fiscal Year Price ($) Date
CEO
S.R. Chamberlain 15,000 18% *$22.50 2001
PRESIDENT
Thomas L. Gough 10,000 12% $23.50 2001
VP, COMMERCIAL SYSTEMS
Steven A.Carchedi 10,000 12% *$22.50 2001
VP, ENGINEERING
MANUFACTURING
Steven K. Kowal 4,000 5% $21.50 2001
VP, ASIA PACIFIC
OPERATIONS
William I. Tittley 1,000 1% $21.50 2001
*Average Price
</TABLE>
b. Compensation Pursuant to Plans
ISI's Board of Directors awards annual bonuses to officers
and employees on a discretionary basis. Currently no formal plan
exists for determining bonus amounts.
Effective October 1, 1987, the Company established a 401K
pension and profit sharing plan under Section 401 of the Internal
Revenue Code. Under the plan the Company contributes annually an
amount equal to 5% of an eligible employee's salary, and may make
additional contributions of up to 7.5% of an eligible employee's
salary. The employee may contribute up to an additional 10% as
salary deferral. In fiscal years 1996 and 1995, the Company
contributed a total of 11% of eligible employees salaries to both
plans.
c. Stock Option Plan
Effective May 25, 1988, ISI established a stock option plan
to create additional incentives for the Company's employees,
consultants and directors to promote the financial success of the
Company. ISI's Board of Directors has sole authority to select
full-time employees, directors, or consultants to receive awards
of options for the purchase of stock under this plan. The
maximum number of shares of ISI Common Stock which may be issued
pursuant to the stock plan was increased from 50,000 to 200,000
during fiscal year 1994.
<PAGE>
A total of 85,600 options were issued and 8,787 options were
exercised during fiscal year 1996; 5,000 options were canceled.
Total options issued and outstanding as of September, 1996 are
117, 987.
Compensation of Directors
Presently outside directors who are not employees of the
Company receive $5,000 per year for their services.
e. Termination of Employment and Change of Control
Termination
The Company has no compensatory plan nor arrangement with
respect to any individual named in the Cash Compensation Table
(Item 11(a)) which results or will result from the resignation,
retirement or any other termination of such individual's
employment with the Company or its subsidiaries or from a change
in control of the Company or a change in the individual's
responsibilities following a change in control.
Item 11. Security Ownership of Certain Beneficial Owners and
Management
a. Security Ownership of Certain Beneficial Owners (as of
9/30/96)
None
b. Security Ownership of Management (as of 9/30/96)
<TABLE>
<S> <C> <C>
Name of Owner (1)Shares Percentage of Total Shares Owned
Steven R. Chamberlain 79,040 7.7%
Thomas L. Gough 37,850 3.7%
Robert P. Sadler 52,340 5.1%
Kimberly A. Chamberlain 10,460 1.0%
Donald F. Mack, Jr. 11,350 1.1%
Steven K. Kowal 43,346 4.2%
Steven A. Carchedi 26,500 2.6%
William Tittley 3,800 .4%
(1) Includes Options
</TABLE>
<PAGE>
Item 12. Certain Relationships and Related Transactions
Bonnie K. Wachtel is Vice President, General Counsel and
Director of Wachtel & Co., Inc., one of the Underwriters of ISI's
initial public offering.
Item 13. Exhibits, Financial Statement Schedules, and Reports
on Form 8K
(a) (1) Financial Statements
Independent Auditors' Report - page 1
Balance Sheets as of September 30, 1996 - page 2
Statements of Operations for the Years Ended September 30, 1996,
and 1995 - page 3
Statement of Stockholders' Equity for Years Ended September 30,
1996 and 1995 - page 4
Statements of Cash Flows for the Years Ended September 30, 1996
and 1995 - page 5
Notes to Financial Statements - pages 6 - 15
All other schedules are omitted since the required information is
not present or is not present in amounts sufficient to require
submission of the schedule, or because the information required
is included in the financial statements and notes thereto.
(b) Reports on Form 8-K
There were no Form 8-Ks filed during fiscal year 1996.
<PAGE>
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: January 15, 1997
BY: /s/
Thomas L. Gough
President, Chief Operating
Officer, Director
DATE: January 15, 1997
BY: /s/
Elaine M. Parfitt
Controller/Principal
Accounting Officer
DATE: January 15, 1997
<PAGE>
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
Signature Titles Date
/s/ Chairman of the Board, Director, 1/15/97
Steven R. Chamberlain Chief Executive Officer
/s/ President, Chief Operating Officer, 1/15/97
Thomas L. Gough Director
/s/ Vice President of Quality Control, 1/15/97
Robert P. Sadler Secretary & Treasurer; Director
/s/ Director 1/15/97
Bonnie K. Wachtel
/s/ Director 1/15/97
Dominic A. Laiti
/s/ Director 1/15/97
R. Doss McComas
<PAGE>
INTEGRAL SYSTEMS, INC. PRIVATE
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended September 30, 1996 and 1995
AND
INDEPENDENT AUDITORS' REPORT
TABLE OF CONTENTS
DESCRIPTION PAGES
Independent Auditors' Report................................ 1
Consolidated Balance Sheet as of September 30, 1996........ 2
Consolidated Statements of Operations for the Years
Ended September 30, 1996 and 1995.......................... 3
Consolidated Statements of Stockholders' Equity for
the Years Ended September 30, 1996 and 1995................. 4
Consolidated Statements of Cash Flows for the Years
Ended September 30, 1996 and 1995........................... 5
Notes to Consolidated Financial Statements.................. 6-15
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Integral Systems, Inc.
We have audited the accompanying consolidated balance sheet of
Integral Systems, Inc. and its subsidiaries as of September 30,
1996, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the years ended September 30, 1996 and 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Integral Systems, Inc. and its subsidiaries as of September 30,
1996, and the consolidated results of their operations and their
consolidated cash flows for the years ended September 30, 1996 and 1995, in
conformity with generally accepted accounting principles.
November 20, 1996
Bethesda, Maryland
<PAGE>
INTEGRAL SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
September 30, 1996
ASSETS
Current assets
Cash and cash equivalents $ 1,369,915
Accounts receivable 4,849,886
Employee receivables 24,200
Prepaid expenses 59,956
Deferred income taxes 73,913
Total current assets 6,377,870
Property and equipment, at cost,
net of accumulated depreciation
and amortization of $446,769 399,108
Other assets
Deposits 7,182
Software development costs, net
of accumulated amortization
of $1,463,779 1,295,514
Total assets $ 8,079,674
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable - trade $ 786,701
Accrued expenses 1,157,356
Billings in excess of revenue for
contracts in progress 128,925
Income tax payable 48,060
Total current liabilities 2,121,042
Commitments and contingencies
Common stock, $.01 par value,
2,000,000 shares authorized, 952,533
shares issued and outstanding 9,525
Additional paid-in capital 825,311
Retained earnings 5,123,796
Total stockholders' equity 5,958,632
Total liabilities and
stockholders' equity $8,079,674
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
INTEGRAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended September 30, 1996 and 1995
<TABLE>
<S> <C> <C>
1996 1995
Revenue $11,217,148 $10,770,661
Cost of revenue
Direct labor 3,617,255 3,526,899
Direct equipment and subcontracts 1,567,215 2,218,243
Travel and other direct costs 302,373 159,992
Overhead costs 2,729,793 2,385,043
Total cost of revenue 8,216,636 8,290,177
Gross margin 3,000,512 2,480,484
Selling, general and administrative 1,758,248 1,434,296
Product amortization 509,477 508,556
Bad debt expense 232,708 -
Income from operations 500,079 537,632
Other income (expense)
Interest income 65,396 76,222
Interest expense (2,320) (2,529)
Miscellaneous, net (60,787) (35,139)
Income before income taxes 502,368 576,186
Provision for income taxes 179,351 195,483
Net income $ 323,017 $ 380,703
Weighted average number of common shares 948,021 942,155
Earnings per share:
Net income $ .34 $ .40
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<TABLE>
<S> <C> <C> <C> <S> <C>
INTEGRAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended September 30, 1996 and 1995
Common
Stock at Additional
Number of Par Paid-in Retained
Shares Value Capital Earnings Total
Balance, September 30, 1994 938,020 $ 9,380 635,541 $ 4,420,076 $ 5,064,997
Stock options exercised 5,726 57 60,896 - 60,953
Net income - - - 380,703 380,703
Balance, September 30, 1995 943,746 9,437 696,437 4,800,779 5,506,653
Stock options exercised 8,787 88 128,874 - 128,962
Net income - - - 323,017 323,017
Balance, September 30, 1996 952,533 $ 9,525 $ 825,311 $ 5,123,796 $ 5,958,632
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
INTEGRAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended September 30, 1996 and 1995
<TABLE>
<C> <C>
1996 1995
Cash flows from operating activities:
Net income $ 323,017 $ 380,703
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 705,793 677,207
Change in deferred taxes (13,194) 20,805
(Increase) decrease in:
Accounts receivable (1,366,109) (1,090,207)
Interest receivable - 10,333
Prepaid expenses and deposits 4,549 (46,815)
Employee receivable (24,200) -
Income tax receivable - 6,361
(Decrease) increase in:
Accounts payable - trade 434,706 145,031
Accrued expenses 282,108 (157,414)
Billings in excess of revenue
for contracts in progress (432,277) 337,288
Income tax payable (60,421) 108,481
Total adjustments (469,045) 11,070
Net cash (used) provided by
operating activities (146,028) 391,773
Cash flows from investing activities:
Acquisition of property and equipment (306,799) (217,642)
Software development costs (431,773) (315,470)
Sale of marketable securities - 403,100
Net cash used in investing activities (738,572) (130,012)
Cash flows from financing activities:
Proceeds from issuance of common stock 128,962 60,953
Net (decrease) increase in cash (755,638) 322,714
Cash and cash equivalents, beginning of year 2,125,553 1,802,839
Cash and cash equivalents, end of year $1,369,915 $2,125,553
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
1. Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include
the accounts of Integral Systems, Inc. (the Company) and its
wholly owned subsidiaries, Integral Marketing, Inc. (IMI) and InterSys, Inc.
(InterSys). All significant intercompany transactions have been
eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect certain reported amounts and
disclosures. Accordingly, actual results could differ from those estimates.
Revenue Recognition
Revenue under cost-plus-fixed-fee contracts is recorded on
the basis of direct costs plus indirect costs incurred and an allocable
portion of the fixed fee. Revenue from fixed-price contracts
is recognized on the percentage-of-completion method, measured by
the cost-to-cost method for each contract. Revenue from time
and materials contracts is recognized based on fixed hourly rates
for direct labor expended. The fixed rate
includes direct labor, indirect expenses and profits. Material
or other specified direct costs are recorded at actual cost.
Contract costs include all direct material and labor costs
and those indirect costs related to contract performance. General and
administrative costs are charged to expense as incurred. Provisions for
estimated losses on contracts in progress are made in the period in which
such losses are determined. Changes in job performance, job
conditions, and estimated profitability, including final contract settlements,
may result in revisions to costs and income and are recognized in the period
in which the revisions are determined. The Company's contracts vary
in length from one to four years.
The fees under certain government contracts may be increased
or decreased in accordance with cost or performance incentive provisions
which measure actual performance against established targets or
other criteria. Such incentive fee awards or penalties are included
in revenue at the time the amounts can be reasonably determined.
1. Summary of Significant Accounting Policies (continued)
Unbilled accounts receivable represents revenue recognized in excess of
amounts billed. The liability, billings in excess of revenue for
contracts in progress, represents billings in excess of revenue
recognized.
Revenue from commissions for the sale of equipment is
recognized when customer orders are submitted. A reserve is made for possible
reductions in or cancellations of customer orders.
Depreciation and Amortization
Property and equipment are stated at cost. The Company
follows the policy of providing depreciation and amortization by charges, on
the straight-line method, to operating expenses at rates based on
estimated useful lives as follows:
Classification Estimated Useful Lives
Electronic equipment 3 Years
Furniture and fixtures 5 Years
Leasehold improvements Life of lease
Software 3 Years
Maintenance and repair costs are charged to expense as
incurred. Replacements and betterments are capitalized. At the time
properties are retired or otherwise disposed of, the property and related
accumulated depreciation or amortization accounts are relieved of the
applicable amounts and any gain or loss is credited or charged to income.
Software Development Costs
The Company has capitalized costs related to the development
of certain software products. In accordance with Statement of Financial
Accounting Standards No. 86, capitalization of costs begins when
technological feasibility has been established and ends when the product is
available for general release to customers. Amortization is computed on an
individual product basis and has been recognized for those products
available for market based on the products' estimated economic lives
which average five years. Due to inherent technological changes
in software development, however, the period over which such
capitalized costs is being amortized may have to be modified.
1. Summary of Significant Accounting Policies (continued)
Earnings Per Share
Earnings per share computations are based on the weighted
average number of common shares outstanding during each year and have been
adjusted where appropriate for stock splits. The exercise of outstanding
stock options would not result in a material dilution of earnings per
share.
Cash Concentrations and Cash Equivalents
The Company considers all highly-liquid debt instruments
purchased with a maturity of three months or less to be cash equivalents.
Cash accounts are maintained primarily with one federally insured financial
institution. Balances usually exceed insured limits, but management does
not consider this to be a significant concentration of credit risk.
Included in the cash balance is $89,057 held in a foreign bank
account.
Reclassification
Certain accounts in the prior year financial statements have
been reclassified for comparative purposes to conform with the
presentation in the current year financial statements.
2. Accounts Receivable and Revenue
Accounts receivable at September 30, 1996 consists of the
following:
Billed
Government - prime contracts $ 669,556
Government - subcontractors 440,871
Commercial customers 1,655,615
Subtotal 2,766,042
Unbilled
Government - prime contracts 827,637
Government - subcontractors 91,269
Commercial customers 1,164,938
Subtotal 2,083,844
Total $ 4,849,886
2. Accounts Receivable and Revenue (continued)
Unbilled accounts receivable include amounts arising from
the use of the percentage-of-completion or other methods of
recognizing revenue that differ from contractual billing terms.
Substantially all unbilled receivables are expected to be
collected in one year.
During the years ended September 30, 1996 and 1995,
approximately 51% and 58%, respectively, of the Company's revenue
was from prime contracts and subcontracts with departments and
agencies of the U.S. Government. The remaining revenue consists
of commercial contracts and sales of commercial products.
For each of the years ended September 30, 1996 and
1995, commercial revenue included one customer which provided
revenue in excess of 10% of total revenue.
3. Property and Equipment
Property and equipment as of September 30, 1996, are as
follows:
Electronic equipment $ 728,956
Furniture and fixtures 54,898
Leasehold improvements 11,365
Software 50,658
Total property and equipment 845,877
Less: accumulated
depreciation and
amortization (446,769)
$ 399,108
4. Software Development
Software development costs at September 30, 1996, consist of
the following:
Costs incurred $ 2,759,293
Less: accumulated amortization (1,463,779)
$ 1,295,514
The total amortization expense for the year ended September
30, 1996 is $509,477.
5. Line of Credit
The Company has a line of credit agreement with a bank at
September 30, 1996 for $1,200,000. Borrowings under the line of credit bear
interest at the bank's prime lending rate plus one-quarter of one
percentage point per annum. Any accrued interest is payable monthly. The
line of credit is secured by the Company's billed accounts receivable.
The line also has certain financial covenants, including minimum net worth
and liquidity ratios. The line expires February 28, 1998. At
September 30, 1996, the Company had no outstanding balance under the line of
credit.
6. Accrued expenses
Accrued expenses at September 30, 1996, consist of the
following:
Accrued payroll $ 544,974
Accrued vacation 253,950
Payroll taxes 171,054
Retirement plan payable 158,897
Other 28,481
$ 1,157,356
7. Commitments and Contingencies
Leases
The Company is leasing office space for a five-year period
that commenced March 15, 1994. Future minimum lease payments through March 14,
1999 are as follows:
Years ending September 30, 1997 $219,520
1998 226,048
1999 105,131
$550,699
Lease payments do not include operating expenses, which are
adjusted annually, or utilities. Rent expense was $254,327 and $248,944,
for the years ended September 30, 1996 and 1995, respectively.
7. Commitments and Contingencies (continued)
Government Contracts
A significant portion of the revenues of the Company
represent payments made by the U.S. Government and by contractors that
have prime contracts with the U.S. Government. These revenues are subject to
adjustment upon audit by the Defense Contract Audit Agency (DCAA).
Audits by the DCAA have been completed on the Company's contracts
and subcontracts through the year ended September 30, 1994. Management
is of the opinion that any disallowances by the Government auditors, other
than amounts already provided, will not materially affect the Company's
financial statements.
Litigation
During the fiscal year ended September 30, 1996, the Company
sold certain of its software products along with specified hardware to a U.S.
Government agency. The procurement required the Company to sell
these items through an intermediary prime contractor. The value of the
contract to the Company was $232,708.
The Company fully complied with the terms of its contract,
and although the third party prime contractor has been paid in full by the
U.S. Government, the Company has received no payments to date. In
August 1996, the Company filed a complaint in the Second Judicial
District Court of the State of New Mexico against the prime contractor
and its principal owner individually for breach of contract in an attempt to
recover the value of its contract. Based on discovery received, the Company
subsequently filed a motion for summary judgment against the
defendants.
In September 1996, the defendants filed a counterclaim
against the Company alleging defamation, intentional interference with
contractual relations and the prima facie tort of extortion. The Company
believes the counterclaim is without merit and will not have a materially
adverse effect on its financial statements.
Although the Company has fully reserved the receivable due
under this contract ($232,708), it continues to vigorously pursue all legal
remedies available to it.
8. Income Taxes
For the years ended September 30, 1996 and 1995, the
provision for income taxes consisted of the following:
1996 1995
Current tax expense
Federal $ 154,910 $ 142,972
State 37,635 31,706
192,545 174,678
Deferred tax
(benefit) expense (13,194) 20,805
Total provision $ 179,351 $ 195,483
At September 30, 1996, the tax effect of significant
temporary differences representing deferred tax assets and liabilities
are as follows:
Asset
(Liability)
Depreciation and amortization $ (36,827)
Vacation accrual 99,040
Revenue reserve 11,700
Net deferred income tax asset $ 73,913
The effective income tax rates differ from the statutory
United States income tax rate due principally to the following:
1996 1995
Federal statutory rate 34.0% 34.0%
State tax, net of federal
income tax benefit 4.6 4.6
Tax-exempt interest - (0.8)
Tax deductible stock
option compensation (2.8) (4.1)
Other, primarily change in estimate (0.1) 0.2
Effective rate 35.7% 33.9%
9. Profit Sharing and Employee Benefits Plans
The Company has a profit sharing and 401(k) plan for the
benefit of substantially all employees. Profit sharing contributions
consist of discretionary amounts determined each year by the Board of
Directors of the Company based upon net profits for the year and total
compensation paid. The 401(k) feature allows employees to make elective
deferrals not to exceed 10% of compensation. Effective January 1, 1995, the
separate profit sharing and 401(k) plans were combined into one plan.
The Company also has a money purchase plan. For the years
ended September 30, 1996 and 1995, the money purchase plan obligated
the Company to contribute 5% of eligible salaries under the plan.
For the years ended September 30, 1996 and 1995,
contributions to the plans totalled $473,552 and $455,269, respectively.
10. Stock Option Plan
Effective May 25, 1989, as amended on January 1, 1994, the
Company established a stock option plan to create additional incentives
for the Company's employees, consultants and directors to promote the
financial success of the Company. The Board of Directors has sole
authority to select full-time employees, directors or consultants to receive
awards of options for the purchase of stock under this plan. The maximum
number of shares of common stock which may be issued pursuant to the stock
option plan is 200,000. The price of the options is set at the stock's
bid price on the date of the Board of Directors meeting at which the option
is granted. Options expire no later than ten years from the date of
grant (five years for greater than ten percent owners) or when
employment ceases, whichever comes first, and vest over three years.
Stock option transactions under the plan for the years
ended September 30, 1996 and 1995, are summarized as follows:
<TABLE>
<S> <C> <C>
1996 1995
Options outstanding, beginning of year 46,174 30,800
Granted 85,600 21,100
Exercised (8,787) (5,726)
Cancelled (5,000 -
Options outstanding, end of year 117,987 46,174
Option price range $ 21.50 to $ 17.75 to
$ 29.00 $ 26.00
Options exercisable, end of year 19,012 15,714
Options available, end of year 51,850 132,450
</TABLE>
10. Stock Option Plan (continued)
The Company applies APB Opinion No. 25 in accounting for its
stock option plan, and, accordingly, no compensation cost has been recognized
for the plan. FASB Statement No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123), is effective for fiscal years beginning after
December 15, 1995. Adoption of SFAS 123 is optional; however, proforma
disclosures as if the Company adopted the cost recognition requirements under
SFAS 123 will be required in the Company's financial statements for its
fiscal year ending September 30, 1997.
11. Supplemental Cash Flow Information
For the years ended September 30, 1996 and 1995, income
taxes paid, net of refunds, were $410,076 and $81,012, respectively.
For the years ended September 30, 1996 and 1995, interest expense
incurred and paid was $2,320 and $2,529, respectively.
12. Business Segment Information
During the year ended September 30, 1996, the Company's
operations included two reportable segments: Satellite ground systems and
electronic test instrumentation and equipment marketing.
The Company provides satellite ground systems - computer
systems for satellite command and control, data processing, simulation, and
flight software validation. Customers for these systems include U.S.
Government organizations such as National Aeronautics and Space
Administration (NASA), the National Oceanic and Atmospheric Administration
(NOAA), and the U.S. Air Force, as well as commercial satellite operators,
both domestic and foreign.
Through its wholly-owned subsidiary, IMI, the Company acts a
manufacturer's representative, selling electronic test
instrumentation and equipment to customers primarily in Maryland,
Virginia and the District of Columbia. (The Company's other
wholly-owned subsidiary, InterSys, provides consulting services for
satellite design and procurement, but is presently inactive.)
12. Business Segment Information (continued)
Summarized financial information is as follows:
<TABLE>
<S> <C> <C>
1996 1995
Net sales
Satellite ground systems $10,555,371 $10,503,423
Marketing 661,777 267,238
Income before taxes
Satellite ground systems 343,797 615,413
Marketing 158,571 (39,227)
Identifiable assets
Satellite ground systems 6,139,157 4,981,702
Marketing 405,351 163,918
Capital expenditures
Satellite ground systems 305,220 216,896
Marketing 1,579 746
Depreciation and amortization
Satellite ground systems 192,838 165,551
Marketing 3,478 3,100
Identifiable assets of the respective segments include
accounts receivable, property and equipment, and software development
costs. Cash and cash equivalents and the remaining assets are considered
corporate assets. There were no significant intercompany sales.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000718130
<NAME> K. CHAMBERLAIN
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,369,915
<SECURITIES> 0
<RECEIVABLES> 4,874,086
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 6,244,001
<PP&E> 3,746,221
<DEPRECIATION> 1,910,548
<TOTAL-ASSETS> 8,079,674
<CURRENT-LIABILITIES> 2,121,042
<BONDS> 0
<COMMON> 9,525
0
0
<OTHER-SE> 5,949,107
<TOTAL-LIABILITY-AND-EQUITY> 8,079,647
<SALES> 0
<TOTAL-REVENUES> 11,217,148
<CGS> 8,216,636
<TOTAL-COSTS> 3,000,512
<OTHER-EXPENSES> 2,495,824
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,320
<INCOME-PRETAX> 502,368
<INCOME-TAX> 179,351
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 323,017
<EPS-PRIMARY> .34
<EPS-DILUTED> .34
</TABLE>
