Annual report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 [Fee Required] for the fiscal year ended:
June 30, 1997
Commission file number: 33-15682-LA
Name of small business issuer in its charter: Systems West, Inc.
State or other jurisdiction of incorporation or organization:
Colorado
IRS Employer Identification No.: 94-3026545
Address of principal executive offices:
3239 Imjin Road, Marina, CA 93933
Issuer's telephone number: (408) 582-1050
Securities to be registered under Section 12(b) of the Act: None
Securities to be registered under Section 12(g) of the Act: None
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 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 at least the past 90
days. Yes X
Issuer's revenues for its most recent fiscal year: $758,946
Aggregate market value of voting stock held by non-affiliates as
of September 8, 1997 (computed by using the average of the bid
and ask prices for the Company's Common Stock as quoted in the
National Quotation Bureau, Inc., commonly known as the "Pink
Sheets") (based on 691,862 shares of nonaffiliated stock
outstanding): $195,105
Shares of common stock, no par value, outstanding as of September
8, 1997: 1,066,237
Documents incorporated by reference: None
PART I
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-KSB under "Item 1. Description
of Business," "Item 6. Management's Discussion and Analysis" and
elsewhere constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995
(the "Reform Act"). Such forward-looking statements involve
known and unknown risks, uncertainties and other facts which may
cause the actual results, performance or achievements of Systems
West, Inc. (the "Company") to be materially different from any
future results, performance or achievements expressed or implied
by such forward-looking statements. Such factors include, among
others, the following: general economic and business conditions;
competition; success of operating initiatives; development and
operating costs; advertising and promotional efforts; adverse
publicity; changes in business strategy or development plans;
quality of management; availability, terms and development of
capital; business abilities and judgment of personnel; changes in
government regulations; and other factors referenced in the Form
10-KSB. The use in this Form 10-KSB of such words as "believes,"
"anticipates," "expects," "intends" and similar expressions are
intended to identify forward-looking statements, but are not the
exclusive means of identifying such statements. The success of
the Company is dependent on the efforts of the Company and its
management and personnel and the manner in which they operate.
ITEM 1. DESCRIPTION OF BUSINESS
(A) BUSINESS DEVELOPMENT.
Systems West, Inc. (the "Company" or "Systems West") is organized
under the laws of the State of Colorado and continues the
business of its predecessor, Systems West, Inc., a corporation
formed under Nevada law in December 1986. The Company's
executive offices are located at 3239 Imjin Road, Marina,
California, 93933, and its telephone number is (408) 582-1050.
Its mailing address is Post Office Box 222019, Carmel, California
93922.
The Company manufactures weather satellite ground receiving
stations. These stations receive radio transmissions directly
from weather satellites containing pictures of the earth and its
weather and convert these transmissions into high-resolution
images of and data about the earth and its atmosphere.
The Company produces a unified set of products that are delivered
in a broad range of configurations to meet specific customer
requirements for weather satellite data. Common technology is
used in all systems ranging from the low-cost Model 2080 land
ground station through the high-end Model 6000 High Resolution
Picture Transmission (HRPT) station. The use of common
technology has reduced development and production costs and
allows the Company to produce a highly competitive product that
can be tailored to specific customer needs.
In 1995, Systems West sustained a loss of $188,586 on a revenue
base of $717,608. In 1996, Systems West returned a profit of
$233,889 on a revenue base of $1,333,477. In 1997, Systems West
sustained a loss of $156,547 on a revenue base of $758,946.
Revenues of the Company are itemized in the Statement of
Operations for the Company. See "Financial Statements."
(B) BUSINESS OF ISSUER.
Systems West, Inc. produces systems that read images from weather
satellites. The Company's receivers are configured according to
the source of the transmission.
(1) Model 2080 Weather Information Processor. A desktop weather
satellite data receiving system that has become an industry
leader in its technology and reliable operation.
(2) Model 4080 Weather Information Processor. A mobile and
marine system weather satellite data receiving system that has
become popular for use on luxury yachts, fishing vessels, ocean
racing vessels, and military ships and mobile facilities.
(3) Model 5380 Digital Readout Station. A high-performance
digital system that reads out images from high-resolution
satellite systems. Systems West digital stations are installed
in Japan, the United States, and throughout Latin America.
(4) Model 6000 Digital Readout Station. A high-performance
digital system that reads out images from high-resolution
polar-orbiting satellite systems.
Satellite Technology and Weather Applications
Background. Weather satellites provide technologically-advanced
weather and ocean information to support the public safety, and
to benefit a variety of commercial operations such as aviation
and marine operations. Receipt of images from these satellites
requires receiver and computer systems to receive and process
data.
Marketplace. The Company's weather satellite ground station
systems are intended to address the need of a perceived market
niche for an integrated, affordable, high-quality satellite data
collection, computing and display system.
Technology. The Company's Digital and Analog Systems use
existing microcomputer technology, largely off-the-shelf
components, and Company-developed, proprietary computer hardware,
radio receiver hardware, and computer programs to receive and
process and display satellite data.
(1) Off-the-Shelf Technology
Personal Computer Technology. The wide use of personal computers
has resulted in the availability of powerful computing systems
capable of supporting sophisticated user applications, including
satellite image acquisition and image processing, at reasonable
costs. Presently, the power of these systems increases every
year, while the prices have continued to decline. The Company and
its customers have benefited from these price declines, allowing
the competitive marketing of its products.
(2) Company Proprietary Technology
Company proprietary technology consists of special hardware
devices designed and produced by the Company. The use of its
common technology philosophy has allowed the Company to maintain
leading-edge technology while offering competitive systems. It
has also expanded the proprietary technology base of the Company
with products that can be independently marketed.
Data Manager Card. The Data Manager Card is an intelligent
processor card designed to manage all of the major analog
satellite data streams into and out of the computer while the
computer is largely available for other tasks. The Data Manager
Card contains five micro-computers and its own memory bank, each
in the form of tiny chip-size units. The Data Manager Card is
programmed to enable the system to handle a number of data
streams simultaneously.
Digitally-Tuned Receiver. The digitally-tuned weather satellite
signals receiver provides a compact computer-tuned receiver. The
Systems West, Inc. digitally-tuned receiver has been
significantly upgraded during this fiscal year, providing a more
reliable and cost-competitive product. The digitally-tuned
receiver manufactured by the Company has become the basis of all
of the Company's systems.
Digital Signal Processing Card. This card provides for the very-
high-speed processing of the high-data-rate digital broadcasts
from advanced weather satellites. The capability of the card has
been enhanced and generalized to process data from many different
satellites. The card has been upgraded during this year, allowing
the processing of high-volume data broadcasts from the newly-
launched GOES-8 satellite.
Image Processing System. The Company has developed advanced image
processing software to interpret satellite images.
Serial Data Transfer Card. The serial data transfer card is a new
product, introduced in 1994. The card allows the capture of or
the transmission of high-speed serial data by a personal
computer. The card is designed to work with high-speed digital
telemetry applications such as T1 telephone service and satellite
digital broadcasts. The card performs as a digital data simulator
for product development, and as the primary element of a raw data
telemetry recorder using Systems West, Inc. software.
Product Development
The Company has made significant investment in new products
during the past fiscal year. The introduction of the advanced NT
operating system technology for Intel Pentium worktstations by
Microsoft is changing the PC system landscape. To keep pace with
this changing technology, the Company has invested into new
hardware and sofware to bring the power of the NT technology to
the satellite systems lines. We have ported our advanced OS/2
image capture and processing system into the NT environment, so
that we are offering our systems using the NT operating system.
The NT operating system also offers the Company the opportunity
to link its satellite systems technology with the broader
database and communications markets associated with the weather
industry. New Systems West, Inc. products which are now being
delivered include an advanced weather communications and database
system using the NT technology. The systems are designed to
couple the powerful internet capabilities with the traditional
weather data collection and exchange systems.
In hardware, the Company is introducing a new four-channel
satellite data receiver for receiving meteorological weather
reports directly via satellite. This technology extends the
Company product lines from the imaging systems into data
broadcast and relay systems. The Company has also developed and
introduced a new data manager card for receiving satellite images
with hardware interfaces specifically designed to exploit the
power and versatility of the NT operating system. The completely
re-engineered card will allow us to offer the card at a highly
competitive price on the market.
Production
Components used in the Company's products are manufactured by
third-party subcontractors. They are assembled and tested by the
Company prior to shipment.
Marketplace
The market for Company products includes national and local
governments, specialized commercial users such as shipping
companies, fishing industries, oil and mineral exploration
companies, small radio/television stations and public utility
companies.
International Weather Services. In the international weather
services market, the WMO in Geneva has a membership of 114
nations with requirements for the products currently produced by
the Company. The Company has been successful selling to this
market.
Global Fishing and Marine. Racing yachts, fishing vessels, and
open-ocean cruising vessels have been an expanding market for
Systems West, Inc. systems. The Company's systems have been
deployed on racing boats that have participated in the Whitbread
around-the-world race, the Globe Challenge around-the-world race,
and in a variety of pleasure craft involved in racing and in open
ocean cruising worldwide.
North American Market. In the North American market, users
include small television stations, public utilities and
exploration companies. Military users include the United States
Army and Canadian Navy, and weather services providers.
Military Market. Systems West, Inc. systems are gaining a strong
reputation for consistent and reliable operation in the military
market. The past year has seen a significant market growth with
the U.S. Army. The Company is also delivering product to
overseas military and naval organizations including the British
Meteorological Office for the Royal Air Force. The proven rugged
designs of Systems West, Inc. systems are believed to provide a
continued strong growth in military systems.
Competition. The Company is marketing its Series 4080 and 2080
Systems in a price range of from $15,500 to $22,750. Depending
upon the hardware and software capabilities which the customer
orders, the Company is marketing the digital systems in a price
range of $50,000 or higher.
There are at least three major suppliers of "top-end" systems for
handling satellite data. These companies are well capitalized.
They focus on systems which are much larger and much more
expensive (mostly in the $100,000 to $500,000 range) than those
of the Company. Three of these larger companies are trying to
move into the lower cost microprocessor-based market targeted by
the Company and there is no assurance that the Company will be
able to effectively compete against them. The Company strategy
has been to substantially improve the performance of its
"top-end"
products and to seek partners and alliances to improve its
market position.
Since the Company started marketing its initial products, a
number of other small companies have appeared with products which
copy the features of the Company's products, however few have
survived. Management views this competition as a beneficial
development and at the same time one for concern. The appearance
of competition helps validate the existence of the market and
assist in the development of the market. The competition also
provides additional opportunities for customer education to
create and develop the market. However, the marketplace may
become overpopulated with vendors compared to the perceived
customer base.
Manufacturing and Sources of Raw Materials
The Company has contracted with unaffiliated third parties to
manufacture component systems. The Company integrates the
manufactured components with Company-produced software products
and maintains a quality control program whereby Company personnel
test and inspect the products prior to delivery. While the
Company has multiple sources for most of its purchased materials
and components, there is some reliance on small numbers of
outside production sources and, therefore, risk of delay in the
delivery of key components.
Government Regulation
The Export Administration Act of 1979 (the "Export Act") contains
the basic provisions for U.S. export control. This act has been
amended by the Export Administration Acts of 1981 and 1985 and is
supplemented by the U.S. Export Administration Regulations issued
by the U.S. Department of Commerce. The Export Act and the
Regulations list three general policy guidelines for the use of
export controls, providing that export controls should be applied
to exports which:
1. Would make a significant contribution to the military
potential of other countries which would be detrimental to U.S.
national security;
2. Are in short supply in the United States and are in demand
abroad; or
3. Can significantly further the foreign policy of the United
States or fulfill its international obligations.
It is the stated policy of the Congress to encourage trade with
all countries with which the United States has diplomatic or
trading relations, except those countries with which trade has
been determined by the President to be against the national
interest.
The Export Administration Regulations require the Company to
apply for export licenses authorizing the export of the Company's
products to certain foreign countries. The Company has
registered with the Department of Commerce and received GTE
license D70504, effective April 22, 1987, allowing temporary
exports for use abroad of the Company's systems. Licenses for
permanent export of the Company's systems are in part covered by
General Licenses which authorize export without application, and
in part require a validated license for each specific export
issued pursuant to an application filed by the Company. An
export application is made as each new contract for the sale of
the Company's products is consummated. Thereafter, the
application review procedure takes approximately 60 days.
License approval in these cases will depend on the ultimate
consignee and the particular end use.
The Export Administration Regulations provide advisory notes as
to the likelihood of export licenses being granted for certain
commodities and destinations. It is fully expected that export
authorization will be granted for the Company's proposed systems
to all of its planned markets. Denial of an individual validated
license is not expected for the Company's currently planned
markets but even if such denial did occur, it is likely that it
would only affect a minimum number of transactions.
Patents, Trademarks and Copyrights
The Company does not have any patent or trademark protection for
its products or name. The Company relies on copyright protection
for its proprietary software.
Significant Customers
The United States Army and the Swedish Air Force are significant
customers, representing 64% of total sales.
Export Sales
Export sales volume has dropped significantly during the past
year. We attribute this drop to the very strong U.S. dollar in
the monetary market, pushing our prices to a very high limit. The
price of U.S. goods overseas has resulted in many of our
customers delaying buying decisions because the costs exceed the
planned budgets.
For the year ended June 30, 1997, revenue from foreign sales
totaled $329,677 for 43% of the total revenue. Customers
included sales to Europe, Asia, South America and Canada.
Employees
The Company currently has 8 full-time employees.
ITEM 2. PROPERTIES
The Company owns a limited inventory of parts and components,
test equipment to test and check out final systems, and
furniture, fixtures and development computer systems to support
its office and development staff. The Company moved to larger
facilities in April 1996 and presently leases 5,406 square feet
of office space from an unaffiliated party at a monthly base
rental of $3,010.
ITEM 3. LEGAL PROCEEDINGS. None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Routine election of the Board of Directors was submitted to a
vote of shareholders on May 31, 1996.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
(A) MARKET INFORMATION
The principal market on which the Registrant's Common Stock is
traded is the over-the-counter market. The Registrant's Common
Stock is quoted in the "Pink Sheets" maintained by the National
Daily Quotation Bureau, Inc.
The range of high and low bid quotations for the Company's Common
Stock on a quarterly basis is shown below. Prices are
inter-dealer
quotations as reported by the National Quotation Bureau,
Inc., and do not necessarily reflect retail markups, mark downs
or commissions, nor actual sales.
High Low
Quarter ended Bid Bid
September 30, 1995 $.0625 $.0625
December 31, 1995 $.0625 $.0625
March 31, 1996 $.09375 $.09375
June 30, 1996 $.15625 $.15625
September 30, 1996 $.315 $.125
December 31, 1996 $.315 $.125
March 31, 1997 $.315 $.189
June 30, 1997 $.189 $.125
On September 8, 1997, the bid price for a share of the Company's
Common Stock was $0.189.
(B) HOLDERS.
The number of record holders of the Company's Common Stock, no
par value, as of September 8, 1997 was 759. This number does not
include an indeterminate number of shareholders whose shares are
held by brokers in "street" name.
(C) DIVIDENDS.
The Company has not paid a dividend with respect to its Common
Stock and does not intend to pay a dividend in the foreseeable
future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION.
Special Note: Certain statements set forth below under this
caption constitute "forward-looking statements" within the
meaning of the Reform Act. See "Special Note Regarding Forward-
Looking Statements" (Part I) for additional factors relating to
such statements.
The following discussion and analysis should be read in
conjunction with the Company's Financial Statements and Notes
thereto appearing elsewhere in this Report.
Results of Operations
Fiscal Year 1996 compared to 1995
The strong performance in fiscal year 1996 resulted from an
increase in resources dedicated to marketing, resulting in
substantially more proposal opportunities from which to select
those projects best suited to the Company's products. This, in
turn, resulted in a gross margin improvement from 17% in 1995, to
54% in 1996.
Fiscal Year 1997 compared to 1996
Fiscal year 1997 has been a disappointing year for Systems West,
Inc. Revenues are down 43% to $758,946 and the company suffered a
$156,547 loss compared to a $233,889 profit in 1996.
Despite the revenue reduction, caused by delays in the award and
receipt of several major contracts, management continued to
invest heavily in marketing and product development. In pursuing
the goal of maintaining a technological lead in the industry, we
now are introducing several new products which will spearhead our
marketing in 1998. As a result, the future value of outstanding
proposals has risen to more than $10 million, which is more than
triple of that from the previous year.
Federal budget cutbacks and the strong dollar have severely
impacted the anticipated revenue in 1997. These contract
reductions, though dramatic in 1997, appear to be reversing
themselves in FY1998. As of September 8, 1997, the Company has
been advised of contract awards for contracts in excess of 1.2
million for the current fiscal year, and management expects to
achieve successful contract negotiation.
Liquidity and Capital Resources
The Company continues to be constrained by available working
capital to support effective levels of production and sales
activity. Current working capital is supplemented by export
loans guaranteed by the California Export Finance Office on our
international business.
Additional investors and/or partners are currently actively being
sought, to enable the Company to capitalize on the significant
worldwide opportunities which the currently available and proven
products offer.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Financial statements follow the signature page of this Annual
Report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
During the three most recent years, the principal independent
accountant for the Company has not resigned, declined to stand
for re-election or been dismissed.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE
ACT.
(A) (B) IDENTIFICATION OF DIRECTORS, EXECUTIVE OFFICERS AND
SIGNIFICANT EMPLOYEES.
Directors hold office until the next annual meeting of share-
holders and until a successor is elected and qualified or their
prior resignation. Executive officers are appointed annually by
the Board of Directors and hold office until their successors are
duly elected and qualified.
During the fiscal year ended June 30, 1995, Dr. William E. Hubert
retired as Chairman of the Board, but has retained his position
as Director. Mr. Douglas S. Timms was appointed by unanimous
vote of the Board as a Director and Chairman of the Board pending
formal election by the shareholders. Mr. Timms was formally
elected at the annual shareholder meeting May 31, 1996.
The directors and executive officers of the Company are as
follows:
Name Age Position
Mr. Douglas S. Timms 65 Chairman of the Board
and Director
Dr. Kenneth W. Ruggles 65 President, Treasurer
and Director
Dr. E. R. Reins 71 Vice President
Engineering,
Secretary and Director
Dr. William E. Hubert 74 Vice President Consulting
and Director
No arrangement exists between any of the above officers and
directors pursuant to which any one of those persons was elected
to such office or position.
BUSINESS EXPERIENCE OF OFFICERS, DIRECTORS AND SIGNIFICANT
EMPLOYEES.
Mr. Douglas S. Timms, Chairman of the Board and Director. Mr.
Timms has previously been President and CEO of international
engineering groups with annual sales in the $100 to $400 million
range. He has also been an outside director of a number of
smaller technology companies, where he has successfully
spearheaded their development into major international
corporations. Mr. Timms is currently Chairman of the Board of
Tyrol International, Cleveland, GA.
Dr. Kenneth W. Ruggles, President, Treasurer and Director. Dr.
Ruggles is an executive with a background in private business and
in government. He brings high-technology Company management
skills to the Company. From February 1978 to March 1986, Dr.
Ruggles was employed by Global Weather Dynamics, Inc. ("Global"),
a wholly-owned subsidiary of Ocean Data Systems, Inc. located in
Monterey, California, serving as president from June 1982 to
March 1986. Global is engaged in the business of building large
aviation and weather message switching systems (computer systems
which sort incoming wire messages and route them to appropriate
parties, i.e., in effect an electronic "post office") and
operating a computer data base service. Global markets its
products to airlines, aircraft operators, government weather
services and civil aviation authorities throughout the world.
Ocean Data Systems, Inc., the parent of Global, is also currently
engaged in the health care computer services industry through
another wholly-owned subsidiary. From April 1986 to March 1987,
Dr. Ruggles was the vice president of Ocean Data Systems, Inc.,
located in Carmel, California.
Dr. Ruggles received his Ph.D. in Meteorology from the
Massachusetts Institute of Technology located in Cambridge,
Massachusetts in 1969, a Master of Science degree in Meteorology
from the United States Naval Postgraduate School, located in
Monterey, California, in 1960 and a Bachelor of Science degree
from the United States Naval Academy, located in Annapolis,
Maryland, in 1954. Dr. Ruggles devotes 100% of his time to the
business affairs of the Company.
Dr. E. R. Reins, Vice President Engineering, Secretary and
Director. Dr. Reins has been active in systems and hardware
consulting in the fields of computer display, security and
communications for the past eight years. From July 1983 to
January 1985, Dr. Reins was chairman of the board of directors of
Codercard, Inc., located in State Line, Nevada, a company that he
helped found to manufacture and distribute a computer security
device which he invented. From September 1983 to January 1984,
Dr. Reins served as president of Codercard, Inc. Dr. Reins
resigned as president of Codercard in January 1984 and entered
into a consulting contract with Codercard, Inc. under the name of
Reins & Reins, a partnership. In August 1985, Dr. Reins resigned
as a consultant for Codercard, Inc. From 1985 to 1987 Dr. Reins
devoted time to family, travel and real estate interests.
From November 1978 to September 1983, Dr. Reins was president and
owner of Drum Systems, a sole proprietorship located in Monterey,
California. Drum Systems was founded by Dr. Reins for the
purpose of providing consulting and design services to industry
and government in the fields of computer display and
communication development. From November 1968 to October 1978,
he was the senior civilian at the Navy's Fleet Numerical Weather
Center, Monterey, California where he was director of engineering
and technical advisor to the Commanding Officer. Dr. Reins
received his Ph.D. in Human Behavior with an emphasis on
management leadership from LaJolla University in LaJolla,
California in 1982 and a Bachelor of Science degree in
Mathematics from California State Polytechnic College in San Luis
Obispo, California in 1955.
Dr. William E. Hubert, Vice President Consulting and Director.
Dr. Hubert has many years of experience in military and
commercial meteorology and oceanography. Dr. Hubert is an
internationally-known Marine Meteorologist and Oceanographer with
26 years experience as a specialist in the U.S. Naval Weather
Service. He was Commanding Officer of the Fleet Weather Central
at Pearl Harbor and had weather services responsibility for the
Pacific Ocean. In this position he was also responsible for
recovery forecasting for the Apollo missions. From August 1972
until April 1987, Dr. Hubert served as chief scientist with Ocean
Data Systems, Inc., located in Rockville, Maryland, and its
wholly-owned subsidiary Global Weather Dynamics, Inc., a weather
services firm located in Monterey, California. Dr. Hubert has
also served as senior scientist of the Navy's Fleet Numerical
Weather Center (1969 to 1972), NATO Meteorological Liaison
Officer to Europe in Oslo, Norway (1961 to 1963) and Chief
Meteorologist of the Pacific Missile Range, located in Pt. Mugu,
California (1958 to 1961). Dr. Hubert received a FILOSOFI
LICENTIAT degree (Ph.D. equivalent) in Meteorology from the
University of Stockholm in 1954 and a Master of Science degree in
Aerological Engineering from the United States Naval Postgraduate
School, located in Monterey, California in 1950.
Dr. Hubert is a recognized international expert in meteorology
and oceanography and has written many scientific works in these
areas.
(E) COMPLIANCE WITH SECTION 16A. Not applicable.
DIRECTORSHIPS.
No director of the Company serves as a director of any other
company which has a class of securities registered pursuant to
Section 12 of the Securities Exchange Act of 1934 or which is
subject to the requirements of Section 15(d) of such Act or any
company registered as an investment company under the Investment
Company Act of 1940.
(C) FAMILY RELATIONSHIPS.
There are no family relationships among any of the Company's
officers and directors.
(D) INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS.
No officer, director, significant employee, promoter or control
person of the Company has been involved in any event of the type
described in Item 401(d) of Regulation S-B during the past five
years.
ITEM 10. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table sets forth certain information regarding the
compensation paid or accrued by the Company to or for the account
of the Chief Executive Officer and each of the four other most
highly compensated Executive Officers of the Company for services
rendered in all capacities during each of the Company's fiscal
years ended June 30, 1995, 1996, 1997:
<TABLE>
<CAPTION>
Annual Compensation
Long Term Compensation
- ------------------------------------
- ----------------------------------
(a) (b) (c) (d) (e)
(f) (g) (h) (i)
Other
Annual Restricted Options/ LTIP All Other
Name and Position Year Salary Bonuses ($)
Compensation Stock Awards SARS Payouts ($)
Compensation
----------------- ---- ------ ----------
- ------------ ------------ -------- -----------
- ------------
<S> <C> <C> <C> <C>
<C> <C> <C> <C>
Mr. Douglas Timms, 1997 -- --
$12,000 -- -- -- --
Chairman of the Board 1996 -- --
$12,000 -- -- -- --
1995 -- --
$2,500 <F1> -- -- -- --
Dr. E. R. Reins, 1997 $16,762 -- --
-- -- -- --
Director 1996 $12,434 -- --
-- -- -- --
1995 $14,511 -- --
-- -- -- --
Dr. Kenneth W. Ruggles, 1997 $75,000 -- --
-- -- -- --
Chief Executive Officer 1996 $70,000 $125 --
-- -- -- --
1995 $37,187 <F2> -- --
-- -- -- --
<F3>
__________
<FN>
<F1>
Mr. Timms accepted payment of one-half his director's fee, or
$500 per month, for the period February 1995 to June 1995.
<F2>
August 1, 1994 to January 15, 1995, Dr. Ruggles worked
voluntarily at reduced compensation due to the weak performance
of the
Company.
<F3>
No executive officer of the company received compensation in
excess of $100,000 during any of the three most recent fiscal
years. No compensation was paid to Dr. Hubert during the past
three fiscal years.
</FN>
</TABLE>
DEFERRED COMPENSATION OF OFFICERS AND DIRECTORS; FORGIVENESS OF
ACCRUED COMPENSATION AS CONTRIBUTIONS TO CAPITAL
In 1988, the Company had agreed to pay salaries to Drs. Ruggles
and Reins in the amount of $80,000 each per year, plus
reimbursement of out-of-pocket expenses incurred by each. Dr.
Hubert was to receive consulting fees based on hours actually
worked for the Company. In order to preserve its cash assets,
the Company, with the agreement of Drs. Ruggles, Reins and
Hubert, deferred substantial salary and consulting fee payments
to these officers and directors over the periods from 1988
through 1990. During the fiscal year ended June 30, 1990, these
officers agreed to discontinue the accrual of salary effective
June 30, 1989, and agreed to a reduction in their compensation.
As of December 1, 1989, Dr. Ruggles' salary was temporarily
reduced to $40,000 per year pending improved cash flow, and Dr.
Reins compensation was set at the rate of $19.23 per hour. As of
June 30, 1991 and 1992, amounts representing deferred
compensation owing to officers and directors were $127,532.
During the fiscal year ended June 30, 1991, Drs. Ruggles and
Reins forgave a total of $105,000 in salaries accrued during
prior years. During the fiscal year ended June 30, 1992, Dr.
Ruggles forgave $13,333 in salary accrued during that year. The
amounts of compensation forgiven by these officers and directors
have been recorded as additional contributions to the capital of
the Company. During June 1997 Dr. Ruggles and Dr. Reins deferred
salary compensation of $3,125 and $317 respectively. As of June
30, 1997, Drs. Ruggles, Reins and Hubert had accrued salaries and
other compensation owing to them of $55,385, $52,817 and $22,532,
respectively. Mr. Timms had $1,000 in accrued director's fees
owing to him at June 30, 1997.
OPTIONS AND WARRANTS
No options or warrants were issued to Executive Officers during
fiscal year ending June 30, 1997. The following table sets forth
certain information regarding options and warrants to purchase
shares of Common Stock issued to Executive Officers of the
Company listed in the Executive Compensation Table during the
fiscal year ending June 30, 1995.
Option/Warrant Grants in 1995
% of Total
Options/
Warrants
Options/ Granted to
Warrants Employees Exercise Expiration
Name Granted in 1995 Price Date
Douglas S. Timms 120,000 100% $.18 1-23-2000
In addition to options granted to Mr. Timms in 1995, Dr. Ruggles
and Dr. Reins hold options granted to them in fiscal year 1994.
As of June 30, 1997 Dr. Ruggles holds 100,000 options at an
exercise price of $.10 per share, and Dr. Reins holds 100,000
options at an exercise price of $.10 per share. These options
expire 8-2-98. Dr. Hubert was granted 20,000 options in 1994 and
exercised his options on February 24, 1994 at a price of $.10 per
share.
AGGREGATED OPTIONS/SAR EXERCISE AND FISCAL YEAR-END OPTION/SAR
VALUE TABLE.
Aggregated Option/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Values
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at FY-End at FY-End
Shares
Acquired Value Exercisable/ Exercisable/
Name on Exercise Realized Unexercisable Unexercisable
- -----------------------------------------------------------------
K. Ruggles 0 0 100,000/0 $5,700/0
E. Reins 0 0 100,000/0 $5,700/0
D. Timms 0 0 120,000/0 0/0
LONG TERM INCENTIVE PLAN ("LTIP") AWARDS TABLE
The Company does not have any LTIP plans.
COMPENSATION OF DIRECTORS
Other than the Chairman of the Board, the directors of the
Company do not receive compensation for attendance at Board
meetings or other service to the Company in their capacity as
directors. Direct, itemized expenses incurred by directors in
attending meetings and promoting the business of the Company are
reimbursed to directors. The Chairman of the Board is
compensated at a director's fee of $1000 per month.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-
CONTROL ARRANGEMENTS.
Employment Contracts. Currently, there are no written employment
agreements between the Company and any officer or director,
except for a letter agreement with Mr. Timms at the time of his
appointment to Chairman of the Board. Compensation of officers
and directors is determined by the Company's Board of Directors
and is not subject to stockholder approval. Effective July 1,
1996 Dr. Ruggles' salary is $75,000 per year. At such time as
operating revenues are adequate, the Company has agreed to
restore Dr. Ruggles' base salary to $80,000 per year. Dr. Reins'
compensation for part-time work is $28.85 per hour. Mr. Timms'
director's fee is $1000 per month.
Termination of Employment and Change-in-Control. The Company has
no compensation plan or arrangement with respect to any executive
officer which plan or arrangement results or will result from the
resignation, retirement or any other termination of such
individual's employment with the Company. The Company has no
plan or arrangement with respect to any such persons which will
result from a change in control of the Company or a change in the
individual's responsibilities following a change in control.
REPORT ON REPRICING OF OPTIONS/SARS
Not applicable.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
(A) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS.
The following table contains information regarding those persons
known by the Company to be the beneficial owners of more than
five percent of the Company's no par value Common Stock, as of
September 8, 1997. As of September 8, 1997, there were 1,066,237
shares of Common Stock outstanding. The listed shareholders hold
the shares directly and exercise sole investment and voting
powers with regard to their respective shares:
Amount and
nature of
Name and address beneficial Percent of
Title of Class of beneficial owner ownership class (1)
- -----------------------------------------------------------------
Common Stock, Kenneth W. Ruggles 235,000 (2) 20.2
No par value 3239 Imjin Road
Marina, CA 93933
Common Stock, E. R. Reins 195,625 (3) 16.8
No par value 3239 Imjin Road
Marina, CA 93933
Common Stock, William E. Hubert 143,750 (4) 13.5
No par value 1829 Otter Pond Circle
Montrose, Co 81401
Common Stock, Douglas S. Timms 120,000 (5) 10.1
No par value One Peachtree Battle
Avenue, N.W., #13
Atlanta GA 30305
- ----------
(1) In calculating the percentage of class, shares of preferred
stock outstanding, which are convertible to shares of Common
Stock at the rate of 18 shares of Common Stock for each share of
preferred stock, have been excluded from the total number of
outstanding shares except to the extent that Dr. Ruggles' wife
owns shares of preferred stock. At September 8, 1997, there were
a total of 813 shares of Series A Preferred Stock outstanding
which are convertible into a total of 14,625 shares of Common
Stock at the option of the holders.
(2) Does not include 3,375 shares of Common Stock issuable upon
conversion of 187.5 shares of Series A Preferred Stock owned by
Dr. Ruggles' wife. Includes 100,000 shares of common stock
issuable pursuant to exercise of common stock options.
(3) Includes 100,000 shares of common stock issuable pursuant to
exercise of common stock options.
(4) Does not include 3,375 shares of Common Stock issuable upon
conversion of 187.5 shares of Series A Preferred Stock owned by
Dr. Hubert's wife as to which Dr. Hubert disclaims beneficial
ownership.
(5) All shares are common stock issuable pursuant to exercise of
common stock options.
(B) SECURITY OWNERSHIP OF MANAGEMENT.
The following table contains information, as of September 8,
1997, regarding the shares of the Company's Common Stock
beneficially owned by its directors and by all officers and
directors as a group. Each shareholder or group owns the shares
directly and exercises sole investment and voting powers over the
shares set forth opposite their name.
Amount and
nature of
Name and address of beneficial Percent of
Title of Class beneficial owner ownership class (1)
Common Stock, Kenneth W. Ruggles 235,000 (2) 20.2
No par value 3239 Imjin Road
Marina, CA 93933
Common Stock, E.R. Reins 195,625 (3) 16.8
No par value 3239 Imjin Road
Marina, CA 93933
Common Stock, William E. Hubert 143,750 (4) 13.5
No par value 1131 South 12th St.
Montrose, CO 81401
Common Stock, Douglas S. Timms 120,000 (5) 10.1
No par value 28316 Plantation Dr.
Atlanta, GA 30324
Common Stock, All officers and 694,375 (6) 50.1
No par value directors as a
group (four persons)
- ----------
(1) In calculating the percentage of class, shares of preferred
stock outstanding, which are convertible to shares of Common
Stock at the rate of 18 shares of Common Stock for each share of
preferred stock, have been excluded from the total number of
outstanding shares except to the extent that Dr. Ruggles' wife
owns shares of preferred stock. At September 8, 1997, there were
a total of 813 shares of Series A Preferred Stock outstanding
which are convertible into a total of 14,625 shares of Common
Stock at the option of the holders.
(2) Does not include 3,375 shares of Common Stock issuable upon
conversion of 187.5 shares of Series A Preferred Stock owned by
Dr. Ruggles' wife. Includes stock options which could be
converted into 100,000 shares of common stock at some future
date.
(3) Includes stock options which could be converted into 100,000
shares of common stock at some future date.
(4) Does not include 3,375 shares of Common Stock issuable upon
conversion of 187.5 shares of Series A Preferred Stock owned by
Dr. Hubert's wife as to which Dr. Hubert disclaims beneficial
ownership.
(5) All shares are common stock issuable pursuant to exercise of
common stock options.
(6) Excludes shares referred to as excluded in footnotes (1) and
(4) of this table, but includes stock options issued to
principals which at some time could be converted into common
stock.
(C) CHANGES IN CONTROL
Management is not aware of any arrangements which may lead to a
change in control of the Company in the foreseeable future.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
(A)-(C) TRANSACTIONS WITH MANAGEMENT AND OTHERS.
All material transactions between the Company and its management
or any affiliates of management during the two fiscal years ended
June 30, 1997, are described under "Item 10 - Executive
Compensation."
(D) TRANSACTIONS WITH PROMOTERS. Not applicable.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. None
(a) The following documents are filed as a part of this Form
10-KSB immediately following the signature page:
Page
number
1. Report of Independent Certified Public
Accountants F-1
Balance Sheets - June 30, 1996
and 1997 F-2
Statement of Operations - for the years ended
June 30, 1996 and 1997 F-4
Statement of Changes in Stockholders'
Equity - For the years ended
June 30, 1996 and June 30, 1997 F-5
Statement of Cash Flows - for the years
ended June 30, 1996 and 1997 F-6
Notes to Financial Statements F-8
2. Financial statement schedules have been omitted because they
are not required or the information is included in the financial
statements and notes thereto.
3. Exhibits required to be filed are listed below and, except
where incorporated by reference, immediately follow the Financial
Statements.
Number Description
3.3 Articles of Incorporation (1)
3.4 Bylaws of Systems West I, Inc. (1)
3.5 Articles of Amendment to Articles of Incorporation -
May 11, 1990 (effecting name change) (1)
4.1(a) Specimen Unit Certificate (including Specimen
Certificate for Common Stock and Specimen Certificate
for Warrant) (1)
(b) Form of Warrant Agreement (1)
4.2 Form of Underwriter's Warrant (1)
10.3 Articles of Merger (1)
10.5 Form of Agency Contract (2)
10.6 Consulting Agreement - NASA - September 27, 1988 (2)
10.7 Lease - Office - August 8, 1988 (2)
10.8 1988 Stock Option Plan (3)
- ----------
(1) Incorporated by reference from the like named exhibits to the
Registrant's Registration Statement on Form S-18, No.
33-15-682-LA.
(2) Incorporated by reference from the Registrant's Annual Report
on Form 10-K for the fiscal year ended June 30, 1988.
(3) Incorporated by reference from the Registrant's Annual Report
on Form 10-K for the fiscal year ended June 30, 1989.
- ----------
(b) During the last quarter of the period covered by this report
the Company filed no reports on Form 8-K.
(c) Required exhibits are attached hereto and are listed in Item
13(a)(3) of this Report.
<PAGE>
SIGNATURES
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.
SYSTEMS WEST, INC.
Registrant
9/15/97 Kenneth W. Ruggles, Principal
Executive Officer, Principal
Financial and Accounting
Officer and Director
(Signature)
9/15/97 E. R. Reins, Director
(Signature)
9/15/97 William E. Hubert, Director
(Signature)
9/15/97 Douglas S. Timms, Chairman
of the Board and Director
(Signature)
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Systems West, Inc.
We have audited the accompanying balance sheet of Systems
West,Inc.
as of June 30, 1996 and 1997, and the related statements of
operations, stockholders' equity (deficit) and cash flows for
the
years then ended. 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
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
West, Inc. as of June 30, 1996 and 1997, and the results of
its
operations and its cash flows for the years then ended,in
conformity
with generally accepted accounting principles.
August 15, 1997
Denver, Colorado CAUSEY DEMGEN & MOORE
INC.
F-1
<PAGE>
SYSTEMS WEST, INC.
Balance Sheet
June 30, 1996 and 1997
ASSETS
1996 1997
Current assets (Note 5):
Cash $128,199 $
85,092
Accounts receivable, less allowance
for doubtful accounts of $7,962
in 1997 ($14,735 in 1996) 134,621
2,755
Costs and estimated earnings
on long-term contracts (Note 2) 54,301
141,103
Inventories (Note 3) 78,136
97,608
Prepaid expenses 4,398
4,827
--------
- --------
Total current assets 399,655
331,385
Furniture and equipment, less
accumulated depreciation of $65,290
in 1997 ($56,707 in 1996) (Note 5) 20,662
20,683
Prototype equipment, less
accumulated depreciation of $107,375
in 1997 ($83,946 in 1996) (Note 5) 45,708
39,600
Other assets (Note 5) 4,474
8,474
--------
- --------
$470,499
400,142
========
========
See accompanying notes
F-2
<PAGE>
SYSTEMS WEST, INC.
Balance Sheet
June 30, 1996 and 1997
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
1996 1997
Current liabilities:
Note payable (Note 5) $ - $
143,400
Accounts payable 69,252
61,177
Deferred income 6,020
- -
Accrued commission expense 5,527
15,067
Accrued warranty liability 37,000
7,000
Other accrued liabilities 48,003
25,979
Payable to officers/directors (Notes
4 and 5) 140,663
143,883
Current portion of capitalized lease
obligations (Note 7) 8,701
8,284
--------
- ---------
Total current liabilities 315,166
404,790
Capitalized lease obligation (Note 7) 7,567
4,463
Commitments (Note 7)
Stockholders' equity (deficit) (Note 6):
Preferred stock, $.01 par value;
1,000,000 shares authorized,
Series A, 812.5 shares issued
and outstanding (liquidation
preference of $32,500) 8
8
Common stock, no par value;
5,000,000 shares authorized,
1,066,237 shares (1,066,749 shares
1996) issued and outstanding 1,703,746
1,703,416
Additional paid-in capital 160,435
160,435
Accumulated deficit (1,716,423)
(1,872,970)
----------
- ----------
Total stockholders' equity (deficit) 147,766
(9,111)
----------
- ----------
$ 470,499 $
400,142
==========
==========
See accompanying notes
F-3
<PAGE>
SYSTEMS WEST, INC.
Statement of operations
June 30, 1996 and 1997
1996
1997
Sales (Note 9) $1,333,477 $
758,946
Costs and expenses:
Cost of sales 614,997
301,014
Marketing 194,541
276,868
Research and development 29,592
63,001
General and administrative 252,012
270,201
Interest 8,446
4,409
----------
- ----------
1,099,588
915,493
----------
- ----------
Net income (loss) (Note 8) $ 233,889 $
(156,547)
==========
==========
Net income (loss) per
common share $ .22 $
(.15)
==========
==========
Weighted average
common shares 1,081,000
1,067,000
==========
==========
See accompanying notes
F-4
<PAGE>
SYSTEMS WEST, INC.
Statement of changes in stockholders' equity (deficit)
For the Years ended June 30, 1996 and 1997
Series A
Additional Total
preferred stock Common stock
paid-in Accumulated stockholders'
Shares Amount Shares Amount
capital deficit equity (deficit)
Balance, June 30, 1995 812.5 $ 8 1,066,749
$1,703,746 $160,435 $(1,950,312) $ (86,123)
Net income for
the year - - -
- - - 233,889 233,889
------ ------ ---------
- --------- -------- ---------- ---------
Balance, June 30, 1996 812.5 8 1,066,749
1,703,746 160,435 (1,716,423) 147,766
Common shares - - (512)
(330) - - (330)
repurchased
Net loss for
the year - - -
- - - (156,547) (156,547)
------ ------ ---------
- ---------- -------- ----------- ---------
Balance, June 30, 1997 812.5 $ 8 1,066,237
$1,703,416 $160,435 $(1,872,970) $ (9,111)
====== ====== =========
========== ======== =========== =========
See accompanying notes
F-5
<PAGE>
SYSTEMS WEST, INC.
Statement of Cash Flows
For the years ended June 30, 1996 and 1997
1996 1997
Cash flows from operating activities:
Net income (loss) $233,889
$(156,547)
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization 28,709
32,012
Decrease in receivables 164,872
131,866
Increase in costs and estimated
earnings on long-term contracts (48,192)
(86,802)
Decrease (increase) in inventories 353
(19,472)
Decrease (increase) in prepaid
expenses 3,625
(429)
Decrease in accounts payable (29,433)
(8,075)
Decrease in billings on long-term
contracts in excess of costs (35,720)
- -
Increase (decrease) in accrued
commission expense (30,456)
9,540
Increase (decrease) in other accrued
liabilities 9,458
(52,024)
Decrease in deferred income (14,280)
(6,020)
Increase in payable - officers/
directors 37
3,220
Gain on disposal of equipment (4,355)
- -
---------
- --------
Net cash provided by (used in)
operating activities 278,507
(152,731)
Cash flows from investing activities:
Acquisition of furniture and equipment (7,788)
(8,604)
Acquisition of prototype equipment (12,279)
(10,408)
Increase in other assets (3,000)
(4,000)
Proceeds from sale of fixed assets 5,181
- -
--------
- --------
Net cash used in investing activities (17,886)
(23,012)
Cash flows from financing activities:
Proceeds from line of credit 90,000
143,400
Payments on line of credit (220,000)
- -
Payments on capitalized lease
obligations (5,637)
(10,434)
Repurchase of common stock -
(330)
---------
- --------
Net cash provided by (used in)
investing activities (135,637)
132,636
---------
- --------
Net increase (decrease) in cash and cash
equivalents 124,984
(43,107)
Cash and cash equivalents at beginning
of year 3,215
128,199
--------
- ---------
Cash and cash equivalents at end of year $128,199 $
85,092
========
=========
(Continued on following page)
See accompanying notes
F-6
<PAGE>
SYSTEMS WEST, INC.
Statement of Cash Flows
For the years ended June 30, 1996 and 1997
(Continued from preceding page)
1996 1997
Supplemental disclosures of cash flow
information:
Cash paid during the period for
interest $ 8,446 $ 4,409
Supplemental Schedule of noncash investing and financing
activities:
During the years ended June 30, 1996 and 1997, the Company
entered into capital leases for prototype
equipment amounting to $13,060 and $6,913, respectively.
See accompanying notes
F-7
<PAGE>
SYSTEMS WEST, INC.
Notes To Financial Statements
June 30, 1996 and 1997
1. Summary of significant accounting policies
Organization:
Systems West, Inc. (the Company), a Colorado corporation, was
organized on December 10, 1986. The Company has developed
and is
marketing weather satellite ground receiver stations, as well
as
providing consulting services to private industry and the U.S.
Government.
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.
Revenue recognition:
Income on long-term contracts is recognized on the percentage-of-
completion method. On construction-type contracts where
the percentage-of-completion method is used, costs and estimated
earnings in excess of progress billings are shown as a current
asset. On long-term governmental consulting contracts, income
is
recognized as services are performed and billed, based on the
related costs incurred during each monthly billing period.
Advertising costs:
The Company expenses the costs of advertising as incurred.
Inventories:
Inventories are priced at the lower of cost or market, using
the first-in, first-out (FIFO) method and consist primarily of
computer and satellite parts and are subject to technical
obsolescence.
Prototype equipment:
This equipment generally consists of computer equipment used
to develop prototypes of the Company's product. It has been
capitalized at cost as it has alternative future uses, and is
depreciated using the straight-line method over 5 years. This
equipment is subject to technical obsolescence.
Research and development:
Company-sponsored research and development costs related to both
present and future products are expensed currently in accordance
F-8
<PAGE>
SYSTEMS WEST, INC.
Notes To Financial Statements
June 30, 1996 and 1997
1.Summary of significant accountind policies (continued)
with Statement of Financial Accounting Standards No.2.
Therefore,
the Company's cost of acquisition and development of
proprietary
technology is not reflected as an asset on the accompanying
balance
sheet.
Furniture and equipment:
Furniture and equipment is recorded at cost. Depreciation
commences as items are placed in service and is computed on a
straight-line method over their estimated useful lives of 5
years.
Net income (loss) per common share:
The net income (loss) per common share is computed based upon
the
weighted average shares outstanding during the period. Shares
convertible from preferred stock and warrants were not
considered
for the year ended June 30, 1997 as their effect would be
anti-dilutive.
Income taxes:
The Company provides for income taxes utilizing the liability
approach under which deferred income taxes are provided based
upon
enacted tax laws and rates applicable to the periods in which the
taxes become payable.
Cash equivalents:
For purposes of the statement of cash flows, the Company
considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
Concentrations of credit risk:
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and
trade
receivables. The Company places its cash with high quality
financial institutions. At times during the year, the balance
at any one financial institution may exceed FDIC
limits. The Company provides credit, in the normal course
of business, to customers throughout the United States and
the
world. The Company performs credit evaluations of
its customers and maintains allowances for potential credit
losses.
Fair value of financial instruments:
The carrying amount of cash and cash equivalents approximates
fair
value because of the short maturity of those instruments.
F-9
<PAGE>
SYSTEMS WEST, INC.
Notes To Financial Statements
June 30, 1996 and 1997
2. Costs incurred and estimated earnings on uncompleted
contracts
Costs incurred and estimated earning on uncompleted contracts
are
as follows at June 30, 1996 and 1997:
1996
1997
Costs incurred on uncompleted
contracts $299,339
$80,506
Estimated earnings 157,753
60,597
--------
- -------
457,092
141,103
Less billings to date (402,791)
-
--------
- -------
Total $ 54,301
$141,103
========
========
Revision in estimated contract costs are made in the year in
which
circumstances requiring the revision became known.
3. Inventories
Inventories consist of the following at June 30, 1996 and 1997:
1996
1997
Computer parts $ 63,958 $
61,524
Work-in-process 14,178
36,084
--------
- --------
$ 78,136 $
97,608
========
========
4. Related party transactions
Payable to officers/directors consists of the following at June
30,
1996 and 1997:
1996 1997
Accrued salaries $127,532
$130,974
Reimbursement of Company expenses 13,131
12,909
--------
- --------
$140,663
$143,883
========
========
F-10
<PAGE>
SYSTEMS WEST, INC.
Notes To Financial Statements
June 30, 1996 and 1997
5. Note payable
At June 30, 1997, the Company has a line of credit from a
finance
company in the amount of $250,000, obtained under a California
Export Financing Office guarantee. The line provided
pre-shipment
working capital financing against certain export purchase orders,
bears interest at the prime rate plus 2.5% (11% at June 30,
1997),
and is repayable from the assignment of proceeds from the
purchase
orders. As of June 30, 1997, the Company had borrowed $143,400
under the line of credit. The related promissory note matures
on
October 31, 1997, the finance company obtained a first lien on
all
assets of the Company, and officers of the Company had
subordinated
their loans from the Company to the promissory note.
6. Stockholders' equity (deficit)
The Series A preferred stock has a $40.00 per share
liquidation
preference and is convertible to common stock on an eighteen for
one basis at the option of the holders. The preferred stock may
be
redeemed at any time at $40.00 per share, at the election of
the
Board of Directors of the Company.
The Company has authorized but unissued shares of preferred
stock
which may be issued in such series and preferences as determined
by
the Board of Directors.
In 1989, the Company's stockholders approved the adoption of a
Key
Employee Stock Option Plan which provides for the granting to
officers, directors and key employees of the Company, options
to
purchase up to 65,000 shares of the Company's common stock.
Corporate officers who hold "insider" stock are ineligible
to
participate in the plan. As of June 30, 1995, the Company had
granted qualified options to purchase a total of 38,207 shares
of
its common stock to employees, consultants and its landlord
exercisable through February 1999 at $.40 to $8.00 per
share. During the year ended June 30, 1996, qualified options to
purchase 11,250 shares of the Company's common stock at prices
ranging from $1.00 to $8.00 per share expired. During the year
ended
June 30, 1997, the Company issued options to acquire 10,000
shares of the
Company's stock at prices ranging from $.15 to $.44 per share
and
4,500 options were canceled leaving a balance of 32,457 options
outstanding at June 30, 1997 exercisable at prices ranging
from
$.15 to $1.00 per share(weighted average exercise price of $.49
per
share). The Company has adopted the disclosure-only provisions
of
Statement of Financial Accounting Standards No.123, Accounting
for
Stock-Based Compensation. Accordingly, no compensation cost has
been recognized for the stock option plans. The amount of
compensation that would have been recorded had the
compensation
been based on the fair value of the stock options granted would
not
have been material for either the years ended June 30, 1996
or
1997.
F-11
<PAGE>
SYSTEMS WEST, INC.
Notes To Financial Statements
June 30, 1996 and 1997
6.Stockholders' equity (deficit) (continued)
On August 2, 1993, the Company granted non-qualified options
to
purchase a total of 220,000 shares of its common stock to three
officers and directors of the Company, exercisable through
August
2, 1998 at $.10 per share, of which options to purchase 20,000
shares
were exercised in February 1994. On January 23, 1995, the
Company
granted nonqualified options to purchase 120,000 shares of its
common stock to a director of the Company, exercisable through
January 23, 2000 at $.18 per share. As of June 30, 1997,
300,000
options are exercisable at a weighted average exercise price of
$.13 per share.
7. Lease commitments
Operating leases:
The Company leases office and production space under a
lease
agreement which expires July 31, 1999.
Rent expense for operating leases was approximately $38,619
and
$35,325 for the years ended June 30, 1996 and 1997, respectively.
Future minimum payments on the office lease amount to the
following
at June 30:
1998 $ 36,123
1999 36,123
2000 3,010
--------
$ 75,256
========
Capitalized lease obligations:
At June 30, 1997, the Company had capitalized leases for office
and
prototype equipment. Following is a schedule of future
minimum
rental payments, including interest, on the capitalized lease
obligations:
Year ending June 30, Amount
1998 $10,168
1999 5,287
-------
Total future minimum lease payments 15,455
Less amount representing interest 2,708
Present value of future net minimum -------
lease payments 12,747
Due within one year 8,284
-------
Due after one year $ 4,463
=======
F-12
SYSTEMS WEST, INC.
Notes To Financial Statements
June 30, 1996 and 1997
Property recorded under capital leases include the following
amounts:
1996 1997
Furniture and equipment $10,339
$10,339
Prototype equipment 13,060
19,973
-------
- -------
23,399
30,312
Accumulated amortization 5,220
13,141
-------
- -------
Net capitalized leased property $18,179
$17,171
=======
=======
8. Income taxes
The Company did not record an income tax provision for the
years ended
June 30, 1996 and 1997 due to the utilization of a tax loss
carryforward.
The Company has net operating loss carryforwards of
approximately
$1,814,000 which it may use to offset future taxable income.
The
carryforwards expire as follows:
Year 2003 $ 131,000
2004 652,000
2005 189,000
2006 314,000
2007 148,000
2009 48,000
2010 188,000
2012 144,000
----------
$1,814,000
==========
Deferred tax assets result from the accrual of warranty and
vacation expenses for financial reporting purposes which were
not
accrued for tax return parcpued for tax return purposes.
As of June 30, 1996 and 1997, total deferred tax assets
and
valuation allowance are as follows:
1996 1997
Deferred tax assets $ 25,000 $ 13,000
Deferred tax assets resulting
from loss carryforward 553,000 616,000
Valuation allowance (578,000) (629,000)
-------- --------
$ - $ -
======== ========
During the year ended June 30, 1996, the Company utilized net
operating loss carryforwards of approximately $281,000 to
offset
F-13
<PAGE>
SYSTEMS WEST, INC.
Notes To Financial Statements
June 30, 1996 and 1997
8. Income taxes (continued)
current taxable income, resulting in a current tax benefit of
$101,000.
9. Major customers and export sales
Major customers:
Customers which accounted for over 10% of revenues were as
follows
for the years ended June 30:
1996 1997
Customer A 41% 44%
Customer B - 19%
Customer C - 11%
Customer D 23% *
Customer E 13% -
* - Less than 10%
Export sales:
In 1996 and 1997 the breakdown of export sales by geographic
area
is as follows:
1996 1997
Canada/Mexico $ 13,000 $ 22,000
Europe 185,000 169,000
Asia 313,000 90,000
South America - Caribbean 176,000 49,000
-------- --------
Total export sales $687,000 $330,000
======== ========
10. Pension Plan
During December 1996, the Company adopted a Simplified
Employee
Pension Plan (the "Plan") which covers all employees of the
Company. The Company's contribution to the Plan is
discretionary,
and is subject to limitations prescribed by the Internal
Revenue
Service for qualified benefit plans. No contributions to the
plan
were made by the Company during the year ended June 30, 1997.
F-14
<PAGE>
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<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 85,092
<SECURITIES> 0
<RECEIVABLES> 10,717
<ALLOWANCES> 7,962
<INVENTORY> 97,608
<CURRENT-ASSETS> 331,385
<PP&E> 232,948
<DEPRECIATION> 172,665
<TOTAL-ASSETS> 400,142
<CURRENT-LIABILITIES> 404,790
<BONDS> 0
<COMMON> 1,703,416
0
8
<OTHER-SE> (1,712,535)
<TOTAL-LIABILITY-AND-EQUITY> 400,142
<SALES> 758,946
<TOTAL-REVENUES> 758,946
<CGS> 301,014
<TOTAL-COSTS> 911,084
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,409
<INCOME-PRETAX> (156,547)
<INCOME-TAX> 0
<INCOME-CONTINUING> (156,547)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (156,547)
<EPS-PRIMARY> (.15)
<EPS-DILUTED> (.15)
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