SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
October 31, 1996 0-011228
For the Fiscal Year Ended Commission File Number:
SYSTEMS ASSURANCE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 02-0337028
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
18 West King Street, Malvern, PA 19355 19355
(Address of principal executive offices) (zip code)
(610) 647 -7840
Registrant's telephone number including area code:
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
(Title of Class)
Name of each exchange on which registered:
None
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 was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Aggregate market value of voting stock held by non-affiliates of the registrant
at January 1, 1997: $107,192
Number of shares of the Registrant's Common Stock, $.01 par value, outstanding
at October 31, 1996: 27,918,454
DOCUMENTS INCORPORATED BY REFERENCE: None
<PAGE>
PART I
Item 1. BUSINESS
Business Activities in Fiscal Year 1996
Systems Assurance Corporation, a Delaware corporation (the "Company" or "SAC")
is not presently engaged in any line of business and had no principal business
activity during the fiscal year ended October 31, 1996. Prior to fiscal year
1992, the Company had ceased the marketing and the installation of its automated
insurance processing and administration system. The system, named the Casualty
Insurers Business Information System ("CIBIS"), was a comprehensive, integrated
software system which supported the issuance and administration of insurance
policies and generated management and statistical reports. This activity was
being performed by Insurance Data Processing, Inc. ("IDP") under its assignment
and assumption agreement dated October 15, 1988 described below. The Company is
presently seeking investment opportunities but has not yet entered into any
substantive negotiations other than as described under Item 7.
Discontinuation of the Service Business for the CIBIS Customers by IDP
On October 15, 1988, the Company entered into an Assignment and Assumption
Agreement ("SAC-IDP Agreement") with IDP, pursuant to which IDP was granted an
exclusive license to market the Company's products and services, and under which
IDP assumed all responsibilities of the Company to service and support existing
CIBIS installations and for the administration, marketing, research and
development, sales and servicing pertaining to future CIBIS activities. Pursuant
to the SAC-IDP Agreement, IDP agreed to pay a royalty to the Company at the rate
of 7% of all revenue generated by IDP on account of CIBIS net of any
sublicensing fees (approximately $4,000 for each sale of each CIBIS system)
incurred in connection with the sale of CIBIS systems. Between October 15, 1988
and June 10, 1991 some royalty income had been earned by the Company; however,
an insufficient amount to remain in operation. On June 10, 1991, IDP agreed to
pay Key Bank $15,600 and return the IBM equipment used to service the CIBIS
customers in exchange for Key Bank's general release of $230,018 of indebtedness
that the Company had to Key Bank. Accordingly, IDP on December 31, 1991,
discontinued all service to CIBIS customers.
Employees
The Company currently, other than its officers, has no employees. The affairs of
the Company are administered by the Board of Directors. No officer or director
receives compensation or any other form of remuneration for his services.
Item 2. DESCRIPTION OF PROPERTY
The Company vacated its office space in Yarmouth, Maine in December 1988, and
presently does not own, lease or otherwise possess any property.
2
<PAGE>
Item 3. LEGAL PROCEEDINGS
The Company is the defendant in an action brought in Massachusetts Superior
Court, County of Suffolk, by McDevitt Recruitment Advertisement, Inc. The
complaint was served in December 1986 and alleges a breach of an oral warranty
of fitness for a particular purpose of a computer system sold to the plaintiff
in 1982, which allegedly never performed properly. Plaintiff seeks damages of
$30,000. The Company believes that it is not liable for any damages; however, in
order to save the cost of potential litigation, has offered a settlement in the
amount of $1,000 to the attorney for the plaintiff. At this date, the attorney
has not been able to locate the plaintiff.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
Until March of 1986, the Company's common stock was included on the automated
quotation system of the National Association of Securities Dealers, Inc.
("NASDAQ"). Based on the criteria for listing by NASDAQ, the company was
"de-listed" as of April 3, 1986.
As of October 31 1996, there were approximately 1,517 holders of record of the
Company's common stock.
The Company has never paid dividends and does not intend to pay any dividends in
the foreseeable future.
3
<PAGE>
Item 6. SELECTED FINANCIAL DATA
Five Year Summary of Selected Financial Data
<TABLE>
<CAPTION>
Year ended October 31,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Revenues $ -- $ -- $ -- $ -- $ --
Operating profit (loss) (20,790) (77,428) (600) (600) (7,416)
Extraordinary income -- 42,184 226,653 34,382 33,505
Net income (loss) (20,790) (33,801) 226,053 33,782 24,644
Income (loss) per share:
Extraordinary income -- -- .01 -- --
Net income (loss) -- -- .01 -- --
Cash dividends on common stock -- -- -- -- --
Balance Sheet Data:
Working capital $(50,959) $(81,136) $(47,585) $(273,638) $ (307,420)
Total assets 2,140 1,824 -- -- --
Shareholders' deficit (50,959) (81,136) (47,585) (273,638) (307,420)
Average number of common
and common equivalent
shares 26,470,509 23,374,843 23,118,454 23,118,454 23,118,454
</TABLE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
For the fiscal years ended October 31, 1996, 1995 and 1994 the Company was not
operating. Consequently, it had no net revenues. The Company has had no hardware
sales since 1991. This lack of sales existed because of the discontinuance of
service. The Company incurred general and administrative expenses totaling
$18,882, $77,428, $600 and $600 in 1996, 1995, 1994, and 1993, respectively.
Interest expense in 1996 totaled $1,908. The increase in general and
administrative expenses during 1995 was attributable to various professional
fees for legal research and accounting. Extraordinary income of $42,184 and
$226,653 in 1995 and 1994 was mainly attributable to the reduction in
liabilities due to the operation of various statutes of limitation.
On June 10, 1991, IDP agreed to pay Key Bank $15,600 and to return the IBM
equipment used to service CIBIS customers in exchange for Key Bank's general
release of $230,018 of indebtedness that the Company had to Key Bank. IDP, on
December 31, 1991, discontinued all service to CIBIS customers.
4
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Financial Condition and Liquidity
Liquidity problems persisted in 1996. At October 31, 1996, current liabilities
exceeded current assets by $50,959. The Company has not operated since 1991, at
which time recorded liabilities exceeded assets by $332,064. The working capital
deficit decreased from $307,420 in 1992 to $47,585 in 1994 as a result of the
reduction in liabilities due to the operation of applicable statutes of
limitations. This reduction in liabilities did not require the use of cash. In
1995, the working capital deficit increased to $81,136 as a result of an
increase in expenses incurred relating to Company administration. During 1996,
an affiliate corporation of certain current shareholders of the Company
representing a majority interest in the ownership of the Company assumed certain
liabilities of the Company in exchange for 3,500,000 shares of common stock. The
Company has entered into certain agreements with an investment firm to actively
seek an investment opportunity acceptable to the Company. In connection with
those agreements, the investment firm has received irrevocable proxies from
certain of the Company's shareholders to vote their shares in connection with
any recapitalization of the Company's common stock, election of members of the
Board of Directors and any proposed merger candidate that meets certain minimum
requirements. The irrevocable proxies have been extended at the option of the
investment firm through December 31, 1996. As an incentive to enter into the
above agreements, the investment firm has lent the Company $50,000 evidenced by
a Promissory Note due and payable (including interest at the rate of 7%, per
annum) on the later of February 28, 1997 or the extended expiration of the
irrevocable proxies. The investment firm has additionally agreed to assume
responsibility for certain operating costs which may be incurred.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and notes thereto as listed in the accompanying index
to financial statements (Item 14) are filed as part of this Annual Report.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
5
<PAGE>
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information about the Directors and executive
officers of the Company:
Name Age Office and Positions
William E. Chipman, Sr. 51 President and Chairman
James C. Wagner 46 Secretary and Director
Thomas R. Petree 49 Treasurer and Director
Mr. William E. Chipman, Sr. is a member of the Board of Directors of Electronic
Technology Corporation, a wireless transmission technology corporation. Mr.
Chipman has been a member of the Board of Directors of Systems Assurance
Corporation since December 31, 1994. Mr. Chipman filed personal bankruptcy in
September 1992 and emerged therefrom on December 21, 1992.
Mr. James C. Wagner is President of American Affordable Housing, Inc., a real
estate consulting company. Mr. Wagner is also a member of the Board of Directors
of Merchants Square Network, Inc., a broadcast production facility. Mr. Wagner
is also a partner in the public accounting firm of Wagner Sharer Murtaugh &
Petree. Mr. Wagner has been a member of the Board of Directors of Systems
Assurance Corporation since December 31, 1994.
Mr. Thomas R. Petree is Treasurer and member of the Board of Directors of
Merchants Square Network, Inc., a broadcast production facility. Mr. Petree is
also a partner in the public accounting firm of Wagner Sharer Murtaugh & Petree.
Mr. Petree has been a member of the Board of Directors of Systems Assurance
Corporation since December 31, 1994.
All Directors hold office until the next annual meeting of stockholders of the
Company or until their successors have been elected and qualified. Each of the
executive officers serves at the discretion of the Board of Directors.
Item 11. EXECUTIVE COMPENSATION
No executive officers received any compensation or other remuneration from the
Company during fiscal 1996, except as noted in Item 7.
1982 Stock Option and Appreciation Rights Plan
Under the Company's stock option and appreciation rights plan, the Compensation
Committee of the Board of Directors may grant incentive stock options or
non-qualified stock options to purchase shares of the Company's common stock to
officers and other key employees of the
6
<PAGE>
Item 11. EXECUTIVE COMPENSATION (continued)
Company. The exercise price may not be less than 100% of the fair market value
of the common stock on the date of the grant. The plan also provides that the
committee may issue stock appreciation rights ("Rights") in connection with the
options. A Right entitles the holder to receive the amount by which the market
value of the shares as to which the Rights are exercised exceeds the option
price for that number of shares. 900,000 shares of common stock have been
reserved under the incentive stock option plan. The Company currently has no
employees and the Compensation Committee has ceased to exist. No options or
rights are currently outstanding.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known to the Company
regarding beneficial ownership of the Company's Common Stock at October 31, 1996
of (i) each beneficial owner of more than five percent of the Company's Common
Stock, (ii) each of the Company's Directors and (iii) all directors and officers
of the Company as a group.
Amount and
Nature of
Beneficial Percent
Name Ownership of Class
William E. Chipman, Sr. * 6,199,650 22.2%
James C. Wagner * 2,479,860 8.9%
Thomas R. Petree * 1,549,913 5.6%
Barry R. Sharer 1,549,913 5.6%
Stephen C. Sadtler 1,300,000 4.7%
* All directors and officers
as a Group (3 persons) 10,229,423 36.7%
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain shareholders of the Company have provided significant accounting and
consulting services to the Company and have funded the Company with cash and
additionally have paid certain other costs incurred by the Company. For the year
ended October 31, 1995, these shareholders provided and $51,205 of accounting
and consulting services to the Company, advanced $505 to the Company and have
paid other costs incurred by the Company for various legal and other fees
aggregating $9,250 and paid $3,000 for the settlement of debt. See Note 4 to the
financial statements filed as an exhibit hereto. During 1996, an affiliate
corporation of these same shareholders assumed certain liabilities of the
Company in exchange for 3,500,000 shares of common stock. In addition, $40,000
of the proceeds from the note issued by the Company to the investment firm as
explained in Item 7 was used in payment of certain shareholder advances.
7
<PAGE>
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (continued)
In 1993, IDP forgave additional expenses paid on behalf of the Company totaling
$5,358. Reference is made to Item 1, SAC-IDP Agreement, for a description of the
SAC-IDP Agreement.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a.) (1) Financial Statements:
Report of Independent Certified Public Accountants
Balance Sheets as of October 31, 1996 and 1995
Statements of Operations for the years ended October 31, 1996,
1995 and 1994
Statements of Capital Deficit for the years ended October 31, 1996,
1995 and 1994
Statements of Cash Flows for the years ended October 31, 1996,
1995 and 1994
Notes to Financial Statements
(2) Schedules
Schedules are omitted as they are either not applicable or not required
or because the information required is contained in the financial
statements or notes thereto.
(3) Exhibits Required to be Filed by Item 601 of Regulation S-K.
a. SAC-IDP Agreement dated October 15, 1988, between Systems
Assurance Corporation and Insurance Data Processing, Inc.,
incorporated by reference to Exhibit 2.1 to the company's report
on Form 10K dated March 6, 1989.
b. Certificate of Incorporation of the company as amended,
incorporated herein by reference to Exhibit 3.1 to Registration
Statement No. 2-78947 on Form S-1 and to Exhibits 4.1 and 4.2 to
the company's report on Form 10-Q for the quarter ended April 30,
1984.
c. Certificate of Incorporation of the Company, as amended, August
29, 1986, and filed with the Secretary of State of the State of
Delaware, incorporated herein by reference to Exhibit 3.3 to the
company's annual report on Form 10-K for fiscal year 1986.
8
<PAGE>
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K (continued)
(4) a. Countersigned Commitment Letter from Key Bank of Southern Maine
("Key Bank") to the company dated April 24, 1985, as amended May
14, 1985, incorporated herein by reference to Exhibit 2.1 to the
company's current report on Form 8-K dated May 14, 1985.
b. Secured Working Capital Line of Credit Demand Note of the company
dated May 14, 1985, incorporated herein by reference to Exhibit
2.2 to the company's report on Form 8-K dated May 14, 1985.
c. Security Agreement between the company and Key Bank dated May 24,
1985, incorporated herein by reference to Exhibit 2.3 to the
company's current report on Form 8-K dated May 14, 1985.
d. Amendment dated January 20, 1986, to the Commitment Letter dated
April 24, 1985, from Key Bank to the company extending the
maturity date of the Secured Working Capital Line of Credit Demand
Note of the company, incorporated herein by reference to Exhibit
19.2 to the company's annual report on Form 10-K for fiscal year
1985.
e. 1982 Stock Option and Appreciation Rights Plan of the Company, as
amended, incorporated herein by reference to Exhibit 10.2 to the
company's annual report on Form 10-K for fiscal year 1984.
f. Stock Purchase Agreement effective as of December 31, 1994, by and
among Insurance Data Processing, Inc., Peter D. Carlino and FLC
Associates, LTD.
(b) Reports on Form 8-K
None
<PAGE>
Report of Independent Certified Public Accountants
Systems Assurance Corporation
Malvern, Pennsylvania
We have audited the accompanying balance sheets of Systems Assurance Corporation
as of October 31, 1996 and 1995 and the related statements of operations,
capital deficit and cash flows for each of the three years in the period ended
October 31,1996. These financial statements are the responsibility of the
management of Systems Assurance Corporation. Our responsibility is to express an
opinion on these financial statements based upon our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 financial position of Systems Assurance Corporation
as of october 31, 1996 and 1995 and the results of its operations and its cash
flows for each of the three years in the period ended October 31, 1996 in
conformity generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 9 to the
financial statements, the Company has suffered recurring losses from operations
and has a capital deficit. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans, regarding
these matters are discussed in Note 9. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ BDO Seidman, LLP
January 17, 1997
F-1
<PAGE>
Systems Assurance Corporation
Balance Sheets
October 31, 1996 1995
Assets
Current assets
Cash $698 $382
Income taxes refundable 1,442 1,442
----------- -----------
Total current assets 2,140 1,824
----------- -----------
$2,140 $1,824
=========== ===========
Liabilities and Capital Deficit
Current liabilities
Notes payable $50,000 $ --
Accrued expenses 3,099 19,000
Advances from stockholders -- 63,960
----------- -----------
Total current liabilities 53,099 82,960
----------- -----------
Capital deficit
Common stock, par value $.01 per share;
Authorized 30,000,000 shares
Issued and outstanding 27,918,454 and
24,418,454, respectively 279,185 244,185
Additional paid-in capital 9,802,200 9,786,233
Deficit (10,132,344) (10,111,554)
----------- -----------
Total capital deficit (50,959) (81,136)
----------- -----------
$2,140 $1,824
=========== ===========
The accompanying notes are an integral part of the financial statements.
F-2
<PAGE>
Systems Assurance Corporation
Statements of Operations
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Year ended October 31, 1996 1995 1994
Revenues $ -- $ -- $ --
General and administrative expenses 18,882 77,428 600
Interest expense 1,908 -- --
---------- ---------- ----------
(Loss) before provision for income taxes
and extraordinary income (20,790) (77,428) (600)
Provision (credit) for income taxes -- (1,443) --
---------- ---------- ----------
(Loss) before extraordinary income (20,790) (75,985) (600)
Extraordinary income
Gain on settlement of debt -- 42,184 --
Reduction in liabilities due to
statute of limitations -- -- 226,653
---------- ---------- ----------
Net (loss) income $(20,790) $(33,801) $226,053
========== ========== ==========
Income (loss) per common share
(Loss) before extraordinary income $ -- $ -- $ --
Extraordinary income $ -- $ -- $ .01
Net income (loss) $ -- $ -- $ .01
Weighted average number
of common shares 26,470,509 23,374,843 23,118,454
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
Systems Assurance Corporation
Statements of Capital Deficit
Year ended October 31,
<TABLE>
<CAPTION>
Common Stock Additional Total
Number Paid-In Capital
of Shares Amount Capital Deficit Deficit
<S> <C> <C> <C> <C>
Balance, October 31, 1993 23,118,454 $ 231,185 $ 9,798,983 $ (10,303,806) $ (273,638)
Net income - - - 226,053 226,053
---------- ---------- ------------ ------------- -----------
Balance, October 31, 1994 23,118,454 231,185 9,798,983 (10,077,753) (47,585)
Issuance of common shares 1,300,000 13,000 (12,750) - 250
Net (loss) - - - (33,801) (33,801)
---------- ---------- ------------ ------------- -----------
Balance, October 31, 1995 24,418,454 244,185 9,786,233 (10,111,554) (81,136)
Issuance of common shares 3,500,000 35,000 15,967 - 50,967
Net (loss) - - - (20,790) (20,790)
---------- ---------- ------------ ------------- -----------
Balance, October 31, 1996 27,918,454 $ 279,185 $ 9,802,200 $ (10,132,34) $ (50,959)
========== ========== ============ ============= ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
Systems Assurance Corporation
Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended October 31, 1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities
Net (loss) income $ (20,790) $ (33,801) $ 226,053
Adjustment to reconcile net (loss) income to
net cash (used) in operating activities
Gain on settlement of debt - (42,184) -
Reduction in liabilities due to statute
of limitations - - (226,653)
Expenses paid by stockholders 16,207 60,455 -
Changes in operating assets and liabilities
Income taxes refundable - (1,442) -
Accrued expenses (5,101) 16,599 600
------------ ---------- -----------
Net cash (used) in operating activities (9,684) (373) -
------------ ---------- -----------
Cash flows from financing activities
Proceeds from notes payable 50,000 - -
Stockholder advances (40,000) 505 -
Proceeds from sale of common stock - 250 -
------------ ---------- -----------
Net cash provided by financing activities 10,000 755 -
------------ ---------- -----------
Net increase in cash 316 382 -
------------ ---------- -----------
Cash, at beginning of year 382 - -
------------ ---------- -----------
Cash, at end of year $ 698 $ 382 $ -
============ ========== ===========
Supplemental disclosures of cash flow information
Issuance of common stock to satisfy stockholder
advances and assumption of liabilities
Common stock, at par value $ 35,000 $ - $ -
Additional paid-in capital $ 15,967 $ - $ -
============ ========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
Systems Assurance Corporation
Notes to Financial Statements
1. Summary of Significant Accounting Policies
Operations of the Company
Systems Assurance Corporation (the "Company") has been inactive since
October 31, 1991 and consequently has had no operating revenues since that
time. The Company is presently seeking investment opportunities but has not
yet entered into any negotiations.
Income Taxes
The Company records income taxes under the provisions of Statement of
Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income
Taxes". SFAS 109 requires the asset and liability method of accounting for
income taxes. Under the asset and liability method, deferred income taxes
are recognized for the tax consequences of temporary differences by
applying enacted statutory tax rates applicable to future years to
differences between the financial statement carrying amounts and the tax
bases of existing assets and liabilities. Under SFAS 109, the effect on
deferred taxes of a change in tax rates is recognized in income in the
period that includes the enactment date. A valuation allowance is recorded
based on a determination of the ultimate realizability of future deferred
tax assets.
Net Income (Loss) Per Share
Net income (loss) per share of Common Stock is computed by dividing net
income by the weighted average number of shares of Common Stock and Common
Stock Equivalents, if dilutive, outstanding during the year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
F-6
<PAGE>
Fair Value of Financial Instruments
The carrying amounts reported in the balance sheets, if any, for cash,
accounts receivable, miscellaneous receivables, accounts payable, accrued
liabilities and short-term debt approximate fair value because of the
immediate or short-term maturity of these financial instruments.
2. Reduction in Liabilities Due to Statute of Limitations
Certain liabilities of the Company were determined to have exceeded various
applicable states statutes of limitations and were written off by the
Company in the years in which the statutes were determined to have expired.
The effect on the statement of operations for the year ended October 31,
1994 was to increase net income by $226,653.
3. Gain on Settlement of Debt
The Company settled a note payable during the year ended October 31, 1995.
The original note was in the amount of $30,000 and had accrued interest of
$15,184 through October 31, 1994. In complete settlement of the note,
certain stockholders of the Company paid $3,000 to the noteholder on behalf
of the Company and the noteholder released the Company from all further
obligations under the note. Gain on settlement of debt amounting to $42,184
is included in the statement of operations for 1995.
4. Related Party Transactions
Certain stockholders of the Company have provided significant and
consulting services to the Company and have funded the Company with cash
and have paid certain costs incurred by the Company. For the year ended
October 31, 1995, these stockholders provided $51,205 of accounting and
consulting services to the Company, advanced $505 to the Company, paid
costs incurred by the Company for various legal and other fees aggregating
$9,250 and paid the settlement of debt referred to in Note 3, aggregating
$3,000. The total of these transactions is reflected in the accompanying
balance sheet at October 31, 1995 as advances from stockholders.
F-7
<PAGE>
Systems Assurance Corporation
Notes to Financial Statements
For the year ended October 31, 1996, the stockholders provided $6,918 of
accounting and consulting services to the Company, advanced $200 to the
Company, and paid costs incurred by the Company for various legal and audit
fees aggregating $9,090, and assumed corporate liabilities totalling
$10,800.
On April 1, 1996, the Corporation issued 3,500,000 shares of its common
stock in exchange for all stockholder advances existing at March 31, 1996
in excess of $40,000. The remaining stockholder advance balance of $40,000
was repaid using proceeds of the note payable described in Note 8.
5. Income Taxes
The Company had no deferred tax liabilities at either October 31, 1996 and
1995. Significant components of the Company's deferred tax assets at
October 31, 1996 and 1995 are as follows:
October 31, 1996 1995
Deferred tax assets
Net operating loss carryforwards $8,375 $5,300
Valuation allowance (8,375) (5,300)
------ ------
Net deferred tax assets $ -- $ --
====== ======
Due to the purchase of shares by certain individuals during the year ended
October 31, 1995, the Company exceeded the limits allowable under the Tax
Reform Act of 1986 related to changes in ownership percentage governing
future utilization of net operating and tax loss carryfowards, effectively
eliminating the utilization of any carryforwards existing at the date of
purchase. Accordingly, the related deferred tax assets have been eliminated
and the valuation allowance has been similarly reduced. The tax loss for
the years ended October 31, 1996 and 1995 are not subject to any such
limitation.
The credit for income taxes for the year ended October 31, 1995 consists of
a request for refund of alternative minimum taxes paid during the year
ended October 31, 1991.
F-8
<PAGE>
Systems Assurance Corporation
Notes to Financial Statements
6. Litigation
The Company is the defendant in an action brought in Massachusetts Superior
Court, County of Suffolk, by McDevitt Recruitment Advertisement, Inc. The
complaint was served in December 1986 and alleges a breach of an oral
warranty of fitness for a particular purpose of a computer system sold to
plaintiff in 1982, which allegedly never performed properly. Plaintiff
seeks damages of $30,000. The Company believes that it is not liable for
any damages; however, in order to save the cost of potential litigation,
has offered a settlement in the amount of $1,000 to attorneys for the
plaintiff which it believes is sufficient to settle this case. At this
date, the attorneys have not been able to locate plaintiff.
7. Incentive Stock Option Plan
Under the Company's stock option and appreciation rights plan, the Company
may grant incentive stock options or non-qualified stock options to
purchase shares of the Company's common stock to officers and other key
employees of the Company. The exercise price may not be less than 100% of
the fair market value of the common stock on the date of the grant. The
plan also provides that the committee may issue stock appreciation rights
("Rights") in connection with the options. A Right entitles the holder to
receive the amount by which the market value of the shares as to which the
Rights are exercised exceeds the option price for that number of shares.
900,000 shares of common stock have been reserved under the incentive stock
option plan.
No options or rights are currently outstanding. All previous grants made by
the Company to its employees have expired.
8. Note Payable
The Company has entered into an agreement with an investment firm to
actively seek an investment opportunity acceptable to the Company. In
connection with the agreement, the investment firm has received irrevocable
proxies from certain of the Company's stockholders to vote their shares in
connection with any recapitalization of the Company's common stock,
election of members of the Board of Directors and any proposed merger
candidate that meets certain minimum requirements. The irrevocable proxies
have been extended at the option of the investment firm through February
28, 1997. As an incentive to enter into the above agreement, the investment
firm has lent the Company $50,000 evidenced by a Promissory Note due and
payable (including interest at the rate of 7%, per annum) on the expiration
of
F-9
<PAGE>
the irrevocable proxies. The investment firm has additionally agreed to
assume responsibility for certain operating costs which may be incurred.
9. Going Concern
The Company has suffered recurring losses, has not current expectations of
revenue and has a capital deficit. Although management intends to seek
funding for normal operating expenses and is presently seeking investment
opportunities, it is not certain that such opportunities or funding will
become available, or if available, that it will be on acceptable terms.
10. Subsequent Event
The Board of Directors of the Company adopted and declared the advisability
of a resolution to effect a one-for-seventy reverse stock split of the
Systems Assurance Corporation Common Stock (the "Reverse Stock Split").
Pursuant to the Reverse Stock Split, each share of the Company's Common
Stock outstanding immediately prior to the date of the Reverse Stock Split
shall be combined into one validly issued, fully paid and non-assessable
share of Common Stock, $.01 par value of the Company. The Reverse Stock
Split will require the affirmative vote of a majority of the outstanding
shares of Systems Assurance Corporation Common Stock at a Special Meeting
of the Company's stockholders to be held on January 24, 1997.
F-10
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report be signed on its behalf
by the undersigned, thereunto duly authorized.
SYSTEMS ASSURANCE CORPORATION
Date:
By: /s/William E. Chipman, Sr.
William E. Chipman, Sr.
President
Pursuant to the requirements of the Securities Exchange Act of 1934, 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 Title Date
/s/William E. Chipman, Sr. President 01/24/97
William E. Chipman, Sr. (A Principal Executive and Director)
/s/James C. Wagner Secretary 01/24/97
James C. Wagner (A Principal Executive and Director)
/s/Thomas R. Petree Treasurer 01/24/97
Thomas R. Petree (Principal Financial Officer and Director)
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<NAME> SYSTEMS INSURANCE CORPORATION
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