Annual report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 [Fee Required] for the fiscal year ended:
June 30, 1998
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: (831) 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: $850,002
Aggregate market value of voting stock held by non-affiliates as
of September 4, 1998 (computed by using the average of the bid
and ask prices for the Company's Common Stock as quoted in the
OTC Bulletin Board (OTCBB) (based on 987,487 shares of non-
affiliated stock outstanding): $266,621
Shares of common stock, no par value, outstanding as of September
4, 1998: 1,321,237
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 (831) 582-1050.
The Company manufactures weather satellite ground receiving
stations and weather information processing systems.
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 2000 series
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 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. In 1998 Systems West
sustained a loss of $293,264 on a revenue base of $850,002.
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 2000 (series) Weather Information Processor.
A Windows NT-based desktop weather satellite data receiving
system that has become an industry leader in its technology and
reliable operation.
(2) Model 4000 (series) Weather Information Processor.
A Windows NT-based 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 5000 (series) Digital Readout Station.
A Windows NT-based 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 (series) Digital Readout Station.
A Windows NT-based high-performance digital system that reads out
images from high-resolution polar-orbiting satellite systems.
(5) Systems West, Inc. WeatherWeb Server.
A unified weather message switch compliant with the World
Meteorological Organization's specifications for message
switching systems. The WeatherWeb server provides a wide variety
of product enhancements to the traditional message switch,
providing operating features that integrate internet and intranet
applications and WebServer functions.
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 integrated, affordable, high-quality satellite data and
weather information collection, computing and display systems.
Technology. The Company designs and manufactures its own
receivers and special electronics plug-in boards. It uses
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 Microsoft Windows NT operating
system used with powerful personal computers has resulted in the
availability of powerful computing systems capable of supporting
sophisticated user applications, including satellite image
acquisition and image processing and database management, 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 is built into special hardware
devices designed and manufactured 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 has been redesigned to optimize its function with the
Windows NT operating system.
Digitally-Tuned Receiver. The digitally-tuned weather satellite
signals receiver provides a compact computer-tuned receiver. 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 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 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,
based on the Windows NT operating system, during the past fiscal
year. The introduction of the advanced NT operating system
technology for Intel Pentium workstations by Microsoft is
changing the PC system landscape. To keep pace with this changing
technology, the Company has invested into new hardware and
software to bring the power of the NT technology to the satellite
systems lines. Moving into the new fiscal year, the Company has
been able to introduce a completely new line of product
reflecting the latest underlying technology in Windows operating
systems.
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 World Meteorological Organization (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.
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. We continue to expand the U.S. military business base.
The Company is also delivering product to overseas military and
naval organizations including the British Meteorological Office
for the Royal Air Force, NATO, and the Swedish Defence Forces.
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 4000 and 2000
Systems in a price range of from $6,000 to $25,000. Depending
upon the hardware and software capabilities which the customer
orders, the Company is marketing the digital systems in a price
range of $30,000 and up.
There are at least three major suppliers of "top-end" systems for
handling satellite data. These larger companies are trying to
move into the lower cost microprocessor-based market targeted by
the Company. 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. When required, 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
requirement and approval 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, however the recent ban on export of selected commodities
to India and Pakistan has resulted in a delay in closing business
in that part of the world.
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 Brazilian Meteorological
Department are significant customers, representing 70% of total
sales.
Export Sales
Asian export sales which were key to achieving business goals
have been seriously impacted by the collapse of the Asian
economies. An existing contract was canceled in Korea, several
business opportunities in Japan have been delayed indefinitely,
and active business opportunities being pursued by Systems West,
Inc. in Malaysia, Indonesia, and Taiwan have been withdrawn.
For the year ended June 30, 1998 revenue from foreign sales
totaled $527,000 for 62% of the total revenue. Customers
included sales to Europe, Asia, South America and Canada.
Employees
The Company currently has 11 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 June 12, 1998.
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 OTC Bulletin Board (OTCBB) and its stock
symbol is SWTI.
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 Over The Counter Bulletin
Board (OTCBB) and do not necessarily reflect retail markups, mark
downs or commissions, nor actual sales.
High Low
Quarter ended Bid Bid
September 30, 1996 $.315 $.125
December 31, 1996 $.315 $.125
March 31, 1997 $.315 $.189
June 30, 1997 $.189 $.125
September 30, 1997 $.1875 $.1875
December 31, 1997 $.1875 $.1875
March 31, 1998 $.1875 $.125
June 30, 1998 $.1875 $.125
On September 4, 1998, the bid price for a share of the Company's
Common Stock was $.19.
(B) HOLDERS.
The number of record holders of the Company's Common Stock, no
par value, as of September 4, 1998 was 767. 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 1997 compared to 1996
Despite a 43% revenue reduction over the previous year, caused by
delays in 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, new products were introduced to spearhead
marketing into 1998.
Fiscal Year 1998 compared to 1997
Fiscal year 1998 represents the second consecutive year of
disappointing earnings performance by Systems West, Inc. The
Company posted a net loss of $293,264 on net revenues of $850,002
for the fiscal year ending June 30, 1998, compared to a net loss
of $156,547 on net revenues of $758,946 for the comparable 1997
fiscal year.
The software and hardware engineering development work required
to update the Company's products to operate within the Windows NT
environment absorbed much of the Company's resources. These
developments were necessary to meet ongoing market requirements
and for a major South American project, as well as providing
state-of-the-art products for the Company's future.
Legal and contractual negotiations in the finalization of the
South American contract caused delays of approximately six (6)
months in the commencement of this million dollar plus project.
This resulted in only a third of its revenue being recognized in
the 1998 fiscal year.
The collapse of the Japanese and South-East Asian markets caused
further delays in the receipt of known contract awards, which
were the result of heavy Company investment in marketing in those
areas during the 1998 fiscal year.
In summary, the revenue from other contracts was below
expectations and was not sufficient to cover the development and
the manufacturing expenses associated with the South American
contract.
The Company's backlog at June 30, 1998 was $926,000, most of
which is the South American project, and all of which is
deliverable during the next six (6) months.
Management has refocused its marketing efforts on the domestic
markets and remains optimistic that the fiscal year 1999 will
show significant improvement in both revenue and earnings
performance.
Liquidity and Capital Resources
At June 30, 1998, the Company had a net working capital deficit
of approximately $(172,000) as compared to working capital of
approximately $58,000 at June 30, 1997. Current working capital
requirements are supplemented by export loans guaranteed by the
Small Business Administration. However, the Company continues to
be severely constrained by shortfalls in working capital needed
to support progressive levels of production and marketing
activities.
The Company continues to solicit investors and/or merger partners
to enable it to capitalize on its leading edge technology in the
significant worldwide market in which it operates. Definitive
investment interest has not at this time materialized.
The Board and Management have serious uncertainty concerning the
Company's ability to sustain current operations and return to
profitability in fiscal year 1999, without a material capital
infusion.
Impact of the Year 2000 Issue
The Year 2000 issue is the result of certain computer programs
being written using two digits rather than four to indicate the
applicable year. As a result, computer programs with date-
sensitive software may incorrectly recognize a date using "00" as
the year 1900 rather than the year 2000. Such an error could
result in a system failure or miscalculations resulting in
disruptions of operations, including a temporary inability to
process normal business transactions.
The Company has recently examined its products, production and
and internal administrative system for Year 2000 issues. As a
result of that review, the Company has determined that no
significant modifications will be required to make their systems
Year 2000 compliant and does not expect that any modifications
that will be required will have a material impact on its
business, operations or financial condition.
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.
Effective October 20, 1997, Dr. Edward R. Reins resigned his
position on the Board of Directors and as an officer of Systems
West, Inc. Dr. Lloyd L. Anderson, Jr. was appointed by the Board
of Directors on January 23, 1998 as Vice President and Corporate
Secretary of Systems West, Inc.
Mr. Timms, Dr. Ruggles and Dr. Hubert were re-elected to the
Board of Directors at the Annual Meeting of Shareholders held on
June 12, 1998.
The directors and executive officers of the Company are as
follows:
Name Age Position
Mr. Douglas S. Timms 66 Chairman of the Board
and Director
Dr. Kenneth W. Ruggles 66 President, Treasurer
and Director
Dr. William E. Hubert 75 Vice President
and Director
Dr. Lloyd L. Anderson, Jr. 46 Vice President and
Secretary
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.
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. 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 devoted 100% of his time to the
business affairs of the Company through FY 1998.
Dr. William E. Hubert, Vice President 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.
Dr. Lloyd L. Anderson, Jr., Vice President and Secretary. Dr.
Anderson is General Manager of Operations at Systems West, Inc.
He has more than twenty years of military management experience
in atmospheric and space environment systems.
Prior to joining Systems West, Inc., Dr. Anderson held various
command and management positions in the United States Air Force.
He has been involved in centralized weather facility computer
applications and scientific software; meteorology/oceanography
support to military aviation, space, and ground operations; and
represented the government on source selections and projects for
meteorological satellite programs. He has instructed graduate
level remote sensing courses and undergraduate statistics and
general meteorology courses for several universities.
(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, 1996, 1997, 1998:
<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, 1998 -- -- $12,000 --
-- -- --
Chairman of the Board 1997 -- -- $12,000 --
-- -- --
1996 -- -- $12,000 --
-- -- --
Dr. E. R. Reins, 1998 -- -- -- --
-- -- --
Director 1997 $16,762 -- -- --
-- -- --
1996 $12,434 -- -- --
-- -- --
Dr. Kenneth W. Ruggles, 1998 $75,000 -- -- --
-- -- --
Chief Executive Officer 1997 $75,000 -- -- --
-- -- --
1996 $70,000 $125 -- -- --
-- --
Dr. Lloyd L. Anderson 1998 $52,500
Vice President
<F1>
__________
<FN>
<F1>
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. From July 1997 to
January 1998 Dr. Ruggles deferred salary compensation of $43,750.
As of June 30, 1998, Drs. Ruggles, Reins and Hubert had accrued
salaries and other compensation owing to them of $99,375, $52,500
and $22,532, respectively. Mr. Timms had $1,100 in accrued
directors fees owing to him at June 30, 1998.
OPTIONS AND WARRANTS
No options or warrants were issued to Executive Officers during
fiscal year ending June 30, 1998. 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, 1997.
Option/Warrant Grants in 1997
% of Total
Options/
Warrants
Options/ Granted to
Warrants Employees Exercise Expiration
Name Granted in 1997 Price Date
Lloyd L. Anderson 4,000 100% $.435 12-6-2001
In fiscal year 1994, Drs. Ruggles and Reins were each granted
100,000 options at an exercise price of $.10 per share and Dr.
Hubert was granted 20,000 options at an exercise price of $.10
per share. Dr. Hubert exercised his options on February 24, 1994
and Dr. Ruggles exercised his options on March 30, 1998. As of
June 30, 1998, Dr. Reins held 100,000 options, however he
exercised these options on July 28, 1998.
In fiscal year 1995, Mr. Timms was granted 120,000 options at an
exercise price of $.18 per share. Mr. Timms exercised 55,000
options on May 10, 1998. As of June 30, 1998, Mr. Timms holds
65,000 options at an exercise price of $.18 per share. These
options expire January 23, 2000.
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 100,000 $5,625 0/0 0/0
E. Reins 0 0 100,000/0 $5,625/0
D. Timms 55,000 0 65,000/0 0/0
L. Anderson 0 0 4,000/0 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 was $75,000 per year. 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 4, 1998. As of September 4, 1998, there were 1,321,237
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 135,000 (2) 10.2
No par value 3239 Imjin Road
Marina, CA 93933
Common Stock, E. R. Reins 195,625 14.8
No par value 25585 Hidden Mesa Rd.
Monterey CA 93940
Common Stock, William E. Hubert 143,750 (3) 10.9
No par value 1829 Otter Pond Circle
Montrose, Co 81401
Common Stock, Douglas S. Timms 120,000 (4) 8.7
No par value Bennington Towers
2460 Peachtree Rd., NE
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 4, 1998, 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.
(3) 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.
(4) Includes 65,000 shares of common stock issuable pursuant to
exercise of common stock options.
(B) SECURITY OWNERSHIP OF MANAGEMENT.
The following table contains information, as of September 4,
1998, 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 135,000 (2) 10.2
No par value 3239 Imjin Road
Marina, CA 93933
Common Stock, William E. Hubert 143,750 (3) 10.9
No par value 1829 Otter Pond Circle
Montrose, CO 81401
Common Stock, Douglas S. Timms 120,000 (4) 8.7
No par value 2460 Peachtree Rd. NE
Atlanta, GA 30305
Common Stock, Lloyd L. Anderson, Jr. 4,000 (5) .3
No par value 3239 Imjin Road
Marina, CA 93933
Common Stock, All officers and 402,750 (6) 28.9
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 4, 1998, 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.
(3) 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.
(4) Includes 65,000 shares of common stock issuable pursuant to
exercise of common stock options.
(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
(3) 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, 1998, are described under "Item 10 - Executive
Compensation."
(D) TRANSACTIONS WITH PROMOTERS. Not applicable.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. During the fiscal
year Systems West, Inc. filed Form 8-K to report the resignation
of E. R. Reins who resigned as officer and director on 10/20/97.
(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, 1997
and 1998 F-2
Statement of Operations - for the years ended
June 30, 1997 and 1998 F-4
Statement of Changes in Stockholders'
Equity - For the years ended
June 30, 1997 and June 30, 1998 F-5
Statement of Cash Flows - for the years
ended June 30, 1997 and 1998 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
9/15/98 Kenneth W. Ruggles, Principal
Executive Officer, Principal
Financial and Accounting
Officer and Director
(Signature)
9/15/98 William E. Hubert, Director
(Signature)
9/15/98 Douglas S. Timms, Chairman
of the Board and Director
(Signature)
<PAGE>
SYSTEMS WEST, INC.
FINANCIAL STATEMENTS
JUNE 30, 1997 AND 1998
WITH
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
<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, 1997 and 1998, 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, 1997 and 1998, and the results of its operations and its cash flows for the
years then ended, in conformity with 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 1 to the
financial statements, the Company has incurred substantial losses resulting in
negative working capital and a stockholders' deficit at June 30, 1998. These
conditions raise substantial doubt about its ability to continue as a going
concern. Management's plans regarding those matters also are described in Note
1. The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
August 7, 1998
Denver, Colorado CAUSEY DEMGEN & MOORE INC.
F-1
<PAGE>
SYSTEMS WEST, INC.
BALANCE SHEET
JUNE 30, 1997 AND 1998
ASSETS
1997 1998
---- ----
Current assets: (Note 5):
Cash $ 85,092 $ 23,952
Accounts receivable, less allowance for doubtful
accounts of $2,100 in 1998 ($7,962 in 1997) 2,755 52,615
Costs and estimated earnings on long-term contracts
(Note 2) 141,103 359,580
Inventories (Note 3) 97,608 123,697
Prepaid expenses 4,827 5,461
-------- --------
Total current assets 331,385 565,305
Furniture and equipment, less accumulated depreciation of
$76,596 in 1998 ($65,290 in 1997) (Note 5) 20,683 27,954
Prototype equipment, less accumulated depreciation of
$126,177 in 1998 ($107,375 in 1997) (Note 5) 39,600 39,343
Other assets (Note 5) 8,474 3,774
-------- --------
$400,142 $636,376
======== ========
See accompanying notes.
F-2
<PAGE>
SYSTEMS WEST, INC.
BALANCE SHEET
JUNE 30, 1997 AND 1998
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
1997 1998
---- ----
Current liabilities:
Note payable (Note 5) $ 143,400 $ 467,500
Accounts payable 61,177 145,138
Deferred income - 29,642
Accrued commission expense 15,067 38,839
Accrued warranty liability 7,000 7,000
Other accrued liabilities 25,979 29,387
Payable to officers/directors (Notes 4, 5 and 11) 12,909 14,282
Current portion of capitalized lease obligations
(Note 7) 8,284 5,768
---------- ----------
Total current liabilities 273,816 737,556
Capitalized lease obligations (Note 7) 4,463 6,889
Payable to officers/directors (Notes 4, 5 and 11) 130,974 174,406
---------- ----------
Total liabilities 409,253 918,851
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, 1,221,237 shares (1,066,237 shares
1997) issued and outstanding 1,703,416 1,723,316
Additional paid-in capital 160,435 160,435
Accumulated deficit (1,872,970)(2,166,234)
Total stockholders' equity (deficit) (9,111) (282,475)
---------- ----------
$ 400,142 $ 636,376
========== ==========
See accompanying notes.
F-3
<PAGE>
SYSTEMS WEST, INC.
STATEMENT OF OPERATIONS
For the Years Ended June 30, 1997 and 1998
1997 1998
---- ----
Sales (Note 9) $ 758,946 $ 850,002
Costs and expenses:
Cost of sales 301,014 467,065
Marketing 276,868 225,790
Research and development 63,001 132,390
General and administrative 270,201 293,268
Interest 4,409 24,753
---------- ----------
915,493 1,143,266
Net loss (Note 8) $ (156,547) $ (293,264)
=========== ===========
Basic net loss per common share $ (0.15) $ (0.27)
========== ==========
Weighted average common shares outstanding 1,067,000 1,091,000
========== ==========
See accompanying notes.
F-4
<PAGE>
<TABLE>
SYSTEMS WEST, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the Years Ended June 30, 1997 and 1998
<CAPTION>
Series A
Total
preferred stock Common stock
Additional Accumulated
stockholders'
Shares Amount Shares Amount
paid-in capital deficit equity
(deficit)
<S> <C> <C> <C> <C> <C>
<C> <C>
Balance, June 30, 1996 812.5 $ 8 1,066,749 $1,703,746 $
160,435 $
$(1,716,423) $ 147,766
Common shares repurchased - - (512) (330)
- - (330)
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)
Stock options exercised (Note 6) - - 155,000 19,900
- -
19,900
Net loss for the year - - - -
- (293,264) (293,264)
---- ---- --------- ----------
- --------- ----------- ---------
Balance, June 30, 1998 812.5 $ 8 1,221,237 $1,723,316 $
160,435
$(2,166,234) $ (282,475)
====== ==== ========== ==========
=========
=========== ==========
</TABLE>
See accompanying notes.
F-5
<PAGE>
SYSTEMS WEST, INC.
STATEMENT OF CASH FLOWS
For the Years Ended June 30, 1997 and 1998
1997 1998
---- ----
Cash flows from operating activities:
Net loss $ (156,547) $ (293,264)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 32,012 30,108
Decrease (increase) in receivables 131,866 (49,860)
Increase in costs and estimated earnings on
long-term contracts (86,802) (218,477)
Increase in inventories (19,472) (26,089)
Increase in prepaid expenses (429) (634)
Increase (decrease) in accounts payable (8,075) 83,961
Increase in accrued commission expense 9,540 23,772
Increase (decrease) in other accrued liabilitie (52,024) 13,308
Increase (decrease) in deferred income (6,020) 29,642
Increase in payable - officers/directors 3,220 54,805
------ ------
Net cash used in operating activities (152,731) (352,728)
Cash flows from investing activities:
Acquisition of furniture and equipment (8,604) (10,081)
Acquisition of prototype equipment (10,408) (18,546)
Decrease (increase) in other assets (4,000) 4,700
------- -----
Net cash used in investing activities (23,012) (23,927)
Cash flows from financing activities:
Proceeds from line of credit 143,400 536,500
Payments on line of credit - (212,400)
Proceeds from note payable - officer - 50,000
Payments on note payable - officer - (50,000)
Payments on capitalized lease obligations (10,434) (8,585)
Repurchase of common stock (330) -
----- -----
Net cash provided by financing activities 132,636 315,515
------- -------
Net decrease in cash and cash equivalents (43,107) (61,140)
Cash and cash equivalents at beginning of year 128,199 85,092
------- ------
Cash and cash equivalents at end of year $ 85,092 $ 23,952
======== ========
(Continued on following page)
See accompanying notes.
F-6
<PAGE>
SYSTEMS WEST, INC.
STATEMENT OF CASH FLOWS
For the Years Ended June 30, 1997 and 1998
(Continued from preceding page)
1997 1998
---- ----
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 4,409 $ 20,863
======== ========
Supplemental schedule of noncash investing and financing activities:
During the years ended June 30, 1997 and 1998, the Company entered into
capital leases for prototype equipment amounting to $6,913 and $8,495,
respectively.
During the year ended June 30, 1998, payables to officers/directors were
utilized to exercise stock options in an aggregate of $19,900.
See accompanying notes.
F-7
<PAGE>
SYSTEMS WEST, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1997 and 1998
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.
Continuing operations:
The financial statements have been prepared on a going-concern basis which
contemplates continuity of operations, realization of assets and
liquidation of liabilities in the normal course of business. Since 1995,
the Company has incurred substantial losses, resulting in negative working
capital of $172,251 and a stockholders' deficit of $282,475 at June 30,
1998. The Company's continued existence is dependent on its ability to
achieve profitable operations, obtain additional debt or equity funding,
locate a partner, or consummate a business combination providing additional
equity funding. The financial statements do not include any adjustment
relating to the recoverability and classification of recorded asset amounts
or the amount and classification of liabilities or other adjustments that
might be necessary should the Company be unable to continue as a
going-concern in its present form.
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.
F-8
<PAGE>
SYSTEMS WEST, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1997 and 1998
1. Summary of significant accounting policies (continued)
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 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.
Basic net loss per common share:
The basic net loss per common share is computed based upon the weighted
average shares outstanding during the periods. Shares convertible from
preferred stock and warrants were not considered 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.
F-9
<PAGE>
SYSTEMS WEST, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1997 and 1998
1. Summary of significant accounting policies (continued)
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 and notes payable
approximates fair value because of the short maturity of those instruments.
Reclassifications:
Certain reclassifications have been made to the 1997 financial statements
to conform to the 1998 financial statement presentation.
2. Costs and estimated earnings on uncompleted contracts
Costs incurred and estimated earning on uncompleted contracts are as
follows at June 30, 1997 and 1998:
1997 1998
---- ----
Costs incurred on uncompleted contracts $ 80,506 $335,570
Estimated earnings 60,597 24,010
-------- --------
141,103 359,580
Less billings to date - -
-------- --------
$141,103 $359,580
======== ========
Revision in estimated contract costs are made in the year in which
circumstances requiring the revision became known.
F-10
<PAGE>
SYSTEMS WEST, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1997 and 1998
3. Inventories
Inventories consist of the following at June 30, 1997 and 1998:
1997 1998
---- ----
Computer parts $ 61,524 $ 58,823
Work-in-process 36,084 64,874
------- --------
$ 97,608 $123,697
========= ========
4. Related party transactions
Payable to officers/directors consists of the following at June 30, 1997
and 1998:
1997 1998
---- ----
Accrued salaries $130,974 $174,406
Reimbursement of Company expenses 12,909 14,282
------- --------
$143,883 $188,688
======== ========
During 1998, the Company borrowed $50,000 from an officer/director. The
loan was repaid in 1998, including interest totaling $4,400.
5. Note payable
At June 30, 1997 and 1998, the Company had lines of credit from a finance
company obtained under a California Export Financing Office guarantee, in
the amounts of $250,000 and $800,000, respectively. The lines provided
pre-shipment working capital financing against certain export purchase
orders, bear interest at the prime rate plus 3% (11.5% at June 30, 1998),
and are repayable from the assignment of proceeds from the purchase orders.
As of June 30, 1997 and 1998, the Company had borrowed $143,400 and
$467,500, respectively, under the lines of credit. The related promissory
note matures on December 31, 1998, 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.
F-11
<PAGE>
SYSTEMS WEST, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1997 and 1998
6. Stockholders' equity (deficit) (continued)
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.
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 non-qualified 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.
The following is a summary of stock option activity:
Weighted
option price average Number of
per share exercise price shares
------------ -------------- ---------
Balance June 30, 1996 $.10 to $1.00 $.17 346,957
Canceled $.40 to $1.00 $.67 (4,500)
Granted $.15 to $.44 $.26 10,000
-------------- ---- ------
Balance June 30, 1997 $.10 to $1.00 $.16 352,457
Canceled $.40 $.40 (15,457)
Granted $.19 $.19 5,500
Exercised $.18 $.13 (155,000)
---- ---- --------
Balance June 30, 1998 $.10 to $1.00 $.17 187,500
========
F-12
<PAGE>
SYSTEMS WEST, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1997 and 1998
6. Stockholders' equity (deficit) (continued)
The following is additional information with respect to those options
outstanding at June 30, 1998:
Weighted
average
remaining Weighted
contractual live average exercise Number of
Option price per share in years price shares
$.10 .1 $.10 100,000
$.15 to $.19 1.7 $.17 76,500
$.44 3.5 $.44 4,000
$1.00 .5 $1.00 7,000
-----
187,500
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, 1997 or 1998.
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 $35,325 and $36,123 for
the years ended June 30, 1997 and 1998, respectively.
F-13
<PAGE>
SYSTEMS WEST, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1997 and 1998
7. Lease commitments (continued)
Future minimum payments on the office lease amount to the following at June
30:
1999 $ 36,123
2000 3,010
--------
$ 39,133
Capitalized lease obligations:
At June 30, 1998, 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
1999 $ 7,631
2000 2,345
2001 2,345
2002 2,345
2003 1,953
-------
Total future minimum lease payments 16,619
Less amount representing interest 3,962
------
Present value of future net minimum
lease payments 12,657
Due within one year 5,768
Due after one year $ 6,889
=======
Property recorded under capital leases include the following amounts:
1997 1998
---- ----
Furniture and equipment $ 10,339 $ 18,834
Prototype equipment 19,973 6,913
-------- --------
30,312 25,747
Accumulated amortization 13,141 10,837
-------- --------
Net capitalized leased property 17,171 $ 14,910
======== ========
F-14
<PAGE>
SYSTEMS WEST, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1997 and 1998
8. Income taxes
The Company has net operating loss carryforwards of approximately
$2,107,000 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
2018 293,000
----------
$2,107,000
==========
Deferred tax assets result from the accrual of warranty, vacation expenses
and accrued salaries to officers/directors for financial reporting purposes
which were not accrued for tax return purposes.
As of June 30, 1997 and 1998, total deferred tax assets and valuation
allowance are as follows:
1997 1998
Deferred tax assets $ 54,000 $ 71,000
Deferred tax assets resulting from loss
carryforward 616,000 716,000
Valuation allowance 670,000) (787,000)
-------- --------
$ - $ -
======== ========
F-15
<PAGE>
SYSTEMS WEST, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1997 and 1998
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:
1997 1998
Customer A - 42%
Customer B 44% 28%
Customer C 19% *%
Customer D 11% -
* - Less than 10%
Export sales:
In 1997 and 1998 the breakdown of export sales by geographic area is as
follows:
1997 1998
Canada/Mexico $ 22,000 $ 7,000
Europe 169,000 105,000
Asia 90,000 46,000
South America - Caribbean 49,000 369,000
------- -------
Total export sales $ 330,000 $ 527,000
========= =========
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 years ended
June 30, 1997 or 1998.
11. Subsequent events
In July 1998, a prior officer/director of the Company exercised stock
options to acquire 100,000 shares of the Company's common stock in exchange
for $10,000 of accrued salaries due him.
During July 1998, the Company received additional advances under a line of
credit from a finance company totaling $182,500.
F-16
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<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 23,952
<SECURITIES> 0
<RECEIVABLES> 414,295
<ALLOWANCES> (2,100)
<INVENTORY> 123,697
<CURRENT-ASSETS> 565,305
<PP&E> 270,070
<DEPRECIATION> (202,773)
<TOTAL-ASSETS> 636,376
<CURRENT-LIABILITIES> 737,556
<BONDS> 0
<COMMON> 1,723,316
0
8
<OTHER-SE> 160,435
<TOTAL-LIABILITY-AND-EQUITY> 636,376
<SALES> 850,002
<TOTAL-REVENUES> 850,002
<CGS> 467,065
<TOTAL-COSTS> 467,065
<OTHER-EXPENSES> 651,448
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,753
<INCOME-PRETAX> (293,264)
<INCOME-TAX> 0
<INCOME-CONTINUING> (293,264)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (293,264)
<EPS-PRIMARY> (.27)
<EPS-DILUTED> (.27)
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