INTEGRAL SYSTEMS, INC.
ANNUAL SHAREHOLDERS MEETING
COMPANY PROXY
THIS PROXY IS BEING SOLICITED BY INTEGRAL SYSTEMS, INC. (THE "COMPANY").
The Company is making this proxy solicitation solely by mail and does not
intend to use any specially engaged employees or paid solicitors to
solicit proxies. This proxy statement and form of proxy are being mailed to
shareholders on or about May 8, 1997. No Director of Integral Systems,
Inc. has advised the Company that he or she intends to oppose any action
intended to be taken by the Company as set forth in this proxy.
The undersigned shareholder hereby appoints Steven R. Chamberlain, Robert P.
Sadler, and Thomas L. Gough or each or any of them, with full power of
substitution, as proxy, to vote all shares of common stock of Integral
Systems, Inc. which the undersigned is entitled to vote at the Annual
Meeting of Shareholders to be held on Wednesday, JUNE 4, 1997 at
6:00 p.m. at the PATUXENT GREENS COUNTRY CLUB, 14415 GREENVIEW DRIVE,
LAUREL, MARYLAND and at any and all adjournments thereof, for the
transaction of such business as may properly come before the meeting,
including the items set forth below.
The Company's Board of Directors recommends a vote for the following
proposals:
1. ELECTION OF DIRECTORS:
Steven R. Chamberlain, Thomas L. Gough, Dominic A. Laiti, R. Doss McComas,
Robert P. Sadler, Bonnie K. Wachtel
FOR { } WITHHOLD { }
Additional information concerning the Board of Directors is contained on
pages 3 and 4 of this proxy statement.
You may withhold authority to vote for any individual nominee listed above.
TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE(S), WRITE THAT
NOMINEE'S NAME IN THE SPACES PROVIDED BELOW.
2. INCREASE NUMBER OF AUTHORIZED SHARES FROM 2 MILLION TO 10 MILLION.
The Company proposes to increase the number of shares of common stock which
the Company is authorized to issue from the current level of 2 million shares
of common stock to 10 million shares of common stock (an increase of 8 million
shares of common stock). Additional Information concerning the proposed
increase in the number of authorized shares is contained on page 5 of
this proxy statement.
FOR { } WITHHOLD { } ABSTAIN { }
3. ISSUE ADDITIONAL SHARES PURSUANT TO A 3-FOR-1 STOCK SPLIT.
If the shareholders authorize the Company to increase the number of
authorized shares of common stock, the Company proposes to issue additional
shares of common stock to its existing shareholders pursuant to a 3-for-1
pro rata stock split. The additional shares of common stock would bear
the same voting, dividend and other rights as the shares of the Company's
common stock currently issued and outstanding. Additional Information
concerning the proposed issuance of additional shares of common
stock is contained on pages 5 and 6 of this proxy statement.
FOR { } WITHHOLD { } ABSTAIN { }
IN THEIR DISCRETION, the Proxies are authorized to vote upon such
other business as may come up before the meeting.
THIS PROXY IS REVOCABLE AT ANY TIME BEFORE MAY 30, 1997 BY THE SHAREHOLDER.
In order to revoke this proxy,the shareholder must deliver notice in writing
to Mrs. Diane Hyde, Integral Systems, Inc., 5000 Philadelphia Way,
Suite A. Lanham, MD 20706, Fax: 301-731-9606, which notice MUST BE
RECEIVED NO LATER THAN 5:00 P.M. ON May 30, 1997.
IMPORTANT INFORMATION ABOUT VOTING PROCEDURES
In order for business to be transacted at the annual meeting, a quorum of
shareholders must be present at the meeting, either in person or by proxy.
A quorum exists if the holders of stock having a majority of the voting
power of the stock entitled to vote at the meeting are present either
in person or by proxy.
Each shareholder is entitled to ONE VOTE FOR EACH SHARE of stock owned.
There are no cumulative voting rights for the election of directors or for any
other matter. Each of the measures that are the subject of this proxy shall be
decided by the majority of the votes cast by the shareholders present in person
or by proxy. Votes will be counted by the simple counting of votes cast, and
ABSTENTIONS AND BROKER NON-VOTES WILL NOT BE COUNTED to calculate the existence
of any majority for the purposes of determining whether or not a resolution
is passed.
The shares represented by this Proxy will be voted as directed by the
shareholder. If no direction is given, this Proxy will be voted FOR the
directors and proposal detailed in the proxy statement. Shareholders of
record on MAY 7, 1997 are entitled to vote their shares.
Please print your name, address and number of shares in the spaces indicated
below, sign and date this form and return it by mail or by fax to:
Mrs. Diane Hyde, Integral Systems, Inc., 5000 Philadelphia Way, Suite A,
Lanham, Maryland 20706, Fax: (301) 731-9606
SHAREHOLDER NAME:
ADDRESS:
NO. OF SHARES:
SIGNATURE: DATE:
ELECTION OF DIRECTORS
Six directors are to be elected at the meeting, each to hold office until
the next Annual Meeting or until a successor is duly elected and qualified.
The nominees for election as Directors are:
NAME
OCCUPATION
Steven R. Chamberlain Chairman of the Board, Chief
Executive Officer, Integral Systems, Inc.
Thomas L. Gough, Jr. President and Chief Operating
Officer, Integral Systems, Inc.
Dominic A. Laiti Independent Consultant, Former
President and Director of
Globalink, Inc.; former President
of Hadron, Inc.
R. Doss McComas Chairman/Chief Executive Officer
of Plexsys, International, Vice
President of Business Development
for COMSAT RSI
Robert P. Sadler Secretary/Treasurer, Vice
President, Quality Control,
Integral Systems, Inc.
Bonnie K. Wachtel Vice President and General
Counsel, Wachtel and Company, Inc.
BACKGROUND
STEVEN R. CHAMBERLAIN, 41, a company founder, has been Chairman of the
Board and Chief Executive Officer 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, JR., 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 University of Maryland where he majored in Information
Systems Management in the School of Business and Public Administration.
DOMINIC A. LAITI, 65, was elected as a director of the company in July,
1995. Mr. Laiti is presently employed as an independent consultant and was
President and Director of Globalink, Inc. from January, 1990 to December,
1994. He has over twenty-five (25) years of experience in starting,
building and managing high-technology private and public companies with
annual revenues from two million to over 120 million dollars. Mr. Laiti
was President of Hadron, Inc. from 1979 to 1989, Vice President of Xonics,
Inc. from 1972 to 1979, and Vice President of KMS industries from 1968 to
1972. He is a former Director of United Press International, Saturn
Chemicals Company, Hadron, Inc., Telecommunications Industries, Inc.,
MAXXAM Technology, Inc. and Jupiter Technology, Inc.
R. DOSS McCOMAS, 42, has been a director since July, 1995. Mr. McComas is
currently Chairman and Chief Executive Officer of Plexsys International,
a COMSAT RSI equity investment. He also serves as the Vice President of
Business Development for COMSAT RSI. Previously at COMSAT RSI he has
served in various capacities including: General Council, Vice President of
Acquisitions, Strategic Planning and International Marketing, and Group
Vice President responsible for international operations. COMSAT RSI
supplies products and services to the wireless, satellite, air traffic
control and other specialized markets. Mr. McComas has a B. A. degree from
Virginia Polytechnic Institute, an M.B.A. from Mt. Saint Mary's College,
and a J.D. from Gonzaga University.
ROBERT P. SADLER, 46, a company founder, has been 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.
BONNIE K. WACHTEL, 41, has served as 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.
The Board of Directors appointed Mr. Thomas L. Gough and Ms. Bonnie
Wachtel to serve on the Stock Option Committee of the Board of Directors
effective December 8, 1995. The Stock Option Committee operates subject
to the authority of the Board of Directors. The Stock Option Committee's
functions encompass making determinations relating to the terms and
conditions, and the issuance, of stock options. The Stock Option Committee
formally convened once during the fiscal year ended September 30, 1996.
A total of four meetings were formally convened by the Board of
Directors since the Annual Shareholders Meeting in March, 1996.
INCREASE IN AUTHORIZED NUMBER OF SHARES
The Company is currently authorized to issue up to 2 million shares
of one class of common stock, par value $0.01 per share (the "Common
Stock"). The Company is not authorized to issue additional classes of
shares. At March 31, 1997, the Company had 952,846 shares of Common Stock
outstanding.
The Company is seeking authority to increase the number of authorized
shares of Common Stock from the current level of 2 million shares to 10
million shares (an increase of 8 million shares). The additional shares
of Common Stock would bear the same rights with respect to voting,
dividends, liquidation and other matters as all of the currently
outstanding shares of the Company's Common Stock.
The Company is seeking authority to increase the number of authorized
shares of Common Stock in order to allow the Company to issue additional
shares to existing shareholders in a pro rata 3-for-1 stock split, to
provide the Company additional flexibility to raise additional capital,
attract new talent to the Company and to facilitate potential mergers and
acquisitions activities in which the Company may wish to engage in the
future.
The increase in the number of authorized shares of Common Stock will
not, in itself, have any effect on the rights of existing security holders
of the Company. For a description of the effects of the proposed 3-for-1
stock split on existing security holders of the Company, see "Issuance of
Additional Shares Pursuant to 3-for-1 Stock Split" below. If the
shareholders do not approve the increase in the authorized number of
shares, the proposed stock split cannot be made; a vote against the
increase in authorized shares may have the effect of a vote against the
proposed stock split.
The Company does not currently have nay plans to issue additional
shares of Common Stock except for the proposed 3-for-1 stock split
described below under "Issurance of Additional Shares Pursuant to
3-for-1 Stock Split". Any future issuance of additional shares of
Common Stock, whether as a result of an effort to raise additional
capital, attract new talent, facilitate mergers and acquisitions
activities or otherwise, will be subject to the prior approval of
the Company's Board of Directors and, in some circumstances, of the
Company's shareholders. While the definitive terms and conditions
of any such future transaction are presently unknown, it is possible
that certain such transactions could dilute the percentage share
ownership of the Company's existing shareholders.
The Company is not in arrears in dividends with respect to any of the
shares of its Common Stock.
Information required by Item 13 of Schedule 14A is included in this
proxy statement under the headings "Management's Discussion and Analysis
of Financial Condition and Results of Operations", "Disagreements on
Accounting and Financial Disclosure" and "Financial Statements".
ISSUANCE OF ADDITIONAL SHARES PURSUANT TO 3-FOR-1 STOCK SPLIT
The Company is seeking authority to issue additional shares of Common
Stock to existing shareholders pursuant to a 3-for-1 stock split (the
"Stock Split"), if the shareholders authorize the Company to increase the
number of authorized shares of Common Stock from the current level of 2
million shares to 10 million shares (an increase of 8 million shares). If
the shareholders do not approve the increase in the authorized number of
shares, the proposed stock split cannot be made.
The newly-issued shares of Common Stock would bear the same rights
with respect to voting, dividends, liquidation and other matters as all of
the currently outstanding shares of the Company's Common Stock.
If the Stock Split is approved, the Company would issue, on a pro
rata basis to all existing shareholders of the Company at the time of the
Stock Split, two additional shares of Common Stock for every one share of
Common Stock held by a shareholder. As of March 31, 1997, the Company had
952,846 shares of Common Stock outstanding. Giving effect to the Stock
Split, the Company would have a total of 2,858,538 shares of Common Stock
outstanding. Because the Stock Split would be carried out on a pro rata
basis, no dilution of ownership will result directly from the Stock Split.
The Company is seeking authorization to issue additional shares
pursuant to the Stock Split in order to increase liquidity in the trading
market for the Company's Common Stock. The Company's Common Stock is
listed on NASDAQ under the symbol "ISYS". The Company believes that the
Stock Split, if approved, would increase liquidity in the trading market
for the Company's Common Stock by increasing the number of shares available
for trading. However, the trading markets for equity securities, including
the market for the Company's Common Stock, are subject to a number of
factors outside the control of the Company that can substantially impact
price, liquidity, volume and other market characteristics. No assurance
can be made that an actual increase in the liquidity of the trading market
for the Company's Common Stock will occur as a result of the Stock Split.
The Company is not in arrears in dividends with respect to any of the
shares of its Common Stock.
Information required by Item 13 of Schedule 14A is included in this
proxy statement under the headings "Management's Discussion and Analysis
of Financial Condition and Results of Operations", "Disagreements on
Accounting and Financial Disclosure" and "Financial Statements".
EXECUTIVE COMPENSATION
CASH COMPENSATION
The following table sets forth compensation received by the Company's CEO
and four highest paid executive officers who earned over $100,000 during
the fiscal year ended September 30, 1996:
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
Awards Payouts
Other
Annual Restricted All other
Name and Compen- Stock LTIP Compen-
Principal sation Award(s) Options/ Payouts sation
Position Year Salary($) Bonus($) ($)($) ($) SAR (#) ($) ($) (1)
CEO
S. R. Chamberlain 1996 $114,179 $14,000 15,000 $11,486
1995 $108,577 $14,000 7,500 $10,502
1994 $105,998 $13,975 0 $11,208
PRESIDENT
Thomas L. Gough 1996 $101,581 $ 8,000 10,000 $10,061
1995 $ 98,048 $11,000 0 $ 9,318
1994 $ 93,645 $10,980 0 $ 9,677
VP, Commercial
Systems
Steven A. 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
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% $21.50 2001
*Average price
COMPENSATION PURSUANT TO PLANS
BONUS
ISI's Board of Directors awards annual bonuses to officers and employees
based on employee performance and profits. Currently no formal plan exists
for determining bonus amounts.
PENSION PLAN
Integral Systems has in place a Profit Sharing and 401K Plan for the
benefit of substantially all employees. Contributions to the Profit
Sharing Plan consist of discretionary amounts determined each year by the
board of directors based upon net profits for the year and total
compensation paid. The 401K Plan allows employees to make elective
deferrals not to exceed 10% of compensation.
Integral Systems also has a Money Purchase Plan, which allows the employer
to contribute an additional 5% of eligible salaries. This 5% contribution
is mandatory.
STOCK OPTION PLAN
There were 85,600 option shares granted in Fiscal Year 1996, 8,787 option
shares exercised; 5,000 options were canceled.
At the close of Fiscal Year 1996, there were a total of 117,987 options
issued and outstanding. On December 1, 1995, William I. Tittley, the
Company's Vice President for Asia Pacific Operations, exercised options for
2,700 shares. On June 27, 1996, Donald F. Mack, Jr., the Company's Vice
President of Engineering, exercised options for 1,000 shares.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END
OPTION/SAR VALUES
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARS Options/SARs at
FY-End # FY-End ($)
Shares Acquired Exercisable Exercisable
Name on Exercise(#) Value Realized Unexercisable Unexercisbale
VP, Asia
Pacific
Operations
William I.
Tittley 2,700 $46,525 3,500 $65,875
(unexercisbale) (unexercisable)
COMPENSATION OF DIRECTORS
Effective July 1, 1995, outside directors who are not full-time employees
of the Company receive $5,000 per year for their services. In addition,
it is the company's practice to grant stock options up to 5,000 shares at
fair market value to outside directors upon joining the Board.
TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL TERMINATION
The company has no compensatory plan or arrangement with respect to any
individual named in the Cash Compensation Table 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.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
No person, with the exception of those set forth in the table below, known
to the Company owns beneficially more than 5% of the Company's outstanding
shares of Common Stock as of September 30, 1996:
Common Steven R. Chamberlain 79,040 7.7%
5000 Philadelphia Way, Suite A
Lanham, MD 20706
Common Thomas L. Gough 37,850 3.7%
5000 Philadelphia Way, Suite A
Lanham, MD 20706
Common Robert P. Sadler 52,340 5.1%
5000 Philadelphia Way, Suite A
Lanham, MD 20706
Common Donald F. Mack, Jr. 11,350 1.1%
5000 Philadelphia Way, Suite A
Lanham, MD 20706
Common William I. Tittley 3,800 .4%
5000 Philadelphia Way, Suite A
Lanham, MD 20706
Common Steven K. Kowal 43,346 4.2%
5000 Philadelphia Way, Suite A
Lanham, MD 20706
Common Steven A. Carchedi 26,500 2.6%
5000 Philadelphia Way, Suite A,
Lanham, MD 20706
Common Bonnie K. Wachtel 5,000 .5%
Common Dominic A. Laiti 5,000 .5%
Common R. Doss McComas 5,000 .5%
All Officers and Directors of Integral Systems as a group own 279,186
shares representing 27% of the outstanding shares of the Company.
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.
% of % of
1996 Revenue Revenue
(000's ommitted) (000's ommitted)
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
REVENUE
The Company's principal components of revenue for fiscal years 1996
and 1995 are as follows:
s>
% 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
Consolidated revenue increased by approximately $450,000 between the
fiscal year ended September 30, 1996 and the fiscal year ended
September 30, 1995, principally because of new contract awards related
to the sale of the Company's EPOCH product along with associated
integration services. Revenue increases from EPOCH related business
more than offset a $550,000 decline in the Company's Government
business. The Government decline is believed to be temporary as new
contracts in this segment received at the end of fiscal year 1996
should provide for higher revenue levels (compared to both 1996 and
1995) during fiscal year 1997. Although less than 6% of consolidated
Company revenues, Integral Marketing, Inc. (IMI) achieved
approximately 150% of revenue growth in 1996 over 1995.
During fiscal year 1996, the Company derived approximately 49% of its
revenues from the sale of its commercial products and related services
as opposed to 42% of such revenue during the prior fiscal year. The
increase correlates to the Company's conscious effort to reduce its
reliance on the Federal Government, and to utilize its recently
developed software products to gain access to organizations in order
to sell both its products and associated integration and support
services.
Although the Company believes that its full cadre of software products
is important for its future growth and prosperity, to date the
Company's largest product investment relates to the development of its
EPOCH software, a COTS (commercial off-the-shelf) product for
satellite command and control. The Company believes that it is unique
in its status as the only entity with COTS software capable of
"flying" satellites built by any satellite manufacturer in the world.
In fact during April, 1996 the Company was awarded a strategically
important contract, a copy of which has been filed herewith as an
exhibit, from AT&T Corporation to provide its COTS products (and
related integration services) to command and control a fleet of
satellites composed of spacecraft from multiple manufacturers. The
preponderance of revenue to be derived from this contract is expected
to be realized in fiscal year 1997.
During fiscal year 1996, the Company recorded approximately $4.2
million of revenue for its EPOCH product and associated services
compared to $3.5 million of revenue during fiscal year 1995. The 1996
EPOCH revenue total included approximately $465,000 of license revenue
compared to approximately $345,000 of this revenue type recorded in
1995. The Company's material agreements with Allied Signal Technical
Services Corporation with respect to a project for the
Republic of China National Space Program Office, contain
licensing provisions.
Because license revenues have nominal marginal costs associated with
them, this form of revenue is highly important to the Company's
overall profitability. Looking forward to fiscal year 1997, the
Company is encouraged that its current contract backlog includes in
excess of $500,000 of unearned license revenues for its EPOCH product.
The principal balance of the Company's commercial revenues pertain to
other proprietary products as follows: OASYS (Orbital Analysis
System); DRS (DOMSAT Receive Station); and a collection of software
pertaining to database and information system applications. During
1996, the Company recorded approximately $630,000 of revenue related
to the sale of products and services under these programs compared to
approximately $750,000 of revenue recorded last fiscal year. The
decrease principally relates to the Company's decision to cease
operations of its information and database software operation as a
discreet profit center. All software development costs associated
with this line of business have been fully amortized as of September
30, 1996.
EXPENSES
Cost of revenue as a percentage of revenue for fiscal year 1996 was
73.2% compared to 77.0% for fiscal year 1995. The improvement in
these ratios is principally attributable to gross margin gains in the
Company's EPOCH operation as well as increased margins at IMI.
SG&A increased in both absolute terms (by approximately $325,000) and
as a percentage of revenue (15.7% vs. 13.3%) in 1996 over 1995. The
increases reflect the Company's continued program to enhance and
augment its selling efforts, including a very concerted effort (and
expense) to sell its commercial products internationally.
During 1996 the Company recorded a non-recurring $233,000 bad debt
expense attributable to a customer's inability to pay. Despite this
reserve, the Company is vigorously pursuing collection of this
receivable.
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 management's internal budgeting and
planning, 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.
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
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.
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1996 AMD 1995
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
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995
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
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
INTEGRAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995
Cash flows from operating activities:
Net income $323,017 $380,703
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 705,793 677,207
Change in deferred taxes (13,194) 20,805
(Increase) decrease in:
Accounts receivable (1,366,109) (1,090,207)
Interest receivable - 10,333
Prepaid expenses and deposits 4,549 (46,815)
Employee receivable (24,200) -
Income tax receivable - 6,361
(Decrease) increase in:
Accounts payable - trade 434,706 145,031
Accrued expenses 282,108 (157,414)
Billings in excess of revenue
for contracts in progress (432,277) 337,288
Income tax payable (60,421) 108,481
Total adjustments (469,045) 11,070
Net cash (used) provided by operating activities (146,028) 391,773
Cash flows from investing activities:
Acquisition of property and equipment (306,799) (217,642)
Software development costs (431,773) (315,470)
Sale of marketable securities - 403,100
Net cash used in investing activities (738,572) (130,012)
Cash flows from financing activities:
Proceeds from issuance of common stock 128,962 60,953
Net (decrease) increase in cash (755,638) 322,714
Cash and cash equivalents, beginning of year 2,125,553 1,802,839
Cash and cash equivalents, end of year $1,369,915 $2,125,553
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
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.
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.
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
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)
Total $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.
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.
7. Commitments and Contingencies (continued)
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:
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
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:
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.
INDEPENDENT PUBLIC ACCOUNTANTS
The Company's independent public accountants for the fiscal year ended
September 30, 1996 and for the current fiscal year are Rubino & McGeehin
Chartered of Rockville, Maryland. Representatives of the Company's
independent public accountants for the fiscal year ended September 30, 1996
and for the current year are not expected to be present at the annual
meeting, or to be available to respond to questions, but will have the
opportunity to make a statement if they desire to do so.
SHAREHOLDER PROPOSALS
In order for proposals by shareholders to be included in the Company's
proxy statement, such proposals must be received by the Company not less
than 120 calendar days in advance of the date of the Company's proxy
statement released to shareholders in connection with the previous year's
annual meeting, except that if no annual meeting was held during the
previous year or the date of the Annual Meeting has been changed by more
than 30 calendar days from the date contemplated at the time of the
previous year's proxy statement, such a proposal must be received by the
Company a reasonable time before the solicitation is made.
The last date on which a shareholder proposal for the 1998 annual meeting
must be presented to the Company in order to be included in the Company's
proxy statement for the 1998 annual meeting is December 29, 1997.
SECURITIES & EXCHANGE COMMISSION FILINGS
No reports on Form S-8 have been filed during the fiscal year 1996.
DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to 14(a) of the Securities Exchange
Act of 1934 (Amendment No. 2)
Filed by the Registrant (x)
Filed by a Party other than the Registrant ( )
Check the appropriate box:
( ) Preliminary Proxy Statement
( ) Confidential, for Use of the Commission Only (as
permitted by Rule 14a-6(e)(2))
(x) Definitive Proxy Statement
( ) Definitive Additional Materials
( ) Soliciting Material Pursuant to s240.14a-11(c) or
s240.14a-12
Integral Systems, Inc.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement
if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
(x) No fee required.
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