Annual report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 [Fee Required] for the fiscal year ended:
June 30, 1999
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: $747,003
Aggregate market value of voting stock held by non-affiliates as
of September 15, 1999 (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): $162,935
Shares of common stock, no par value, outstanding as of September
15, 1999: 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 and weather data
management. 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 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. In 1999 Systems West
sustained a loss of $182,560 on a revenue base of $747,003.
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 and web-based data server
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 top-end Intel workstations 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.
(2) Company Proprietary Technology
Company proprietary technology is built into special hardware
devices and software systems designed and manufactured by the
Company. The use of its common technology philosophy has allowed
the Company to offer 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. As satellites convert to digital
technology, however, this product will become obsolete by 2005.
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 NT-based
advanced image processing software to interpret satellite images.
Serial Data Transfer Card. The serial data transfer card allows
the capture of or the broadcast 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 continued to invest, although at reduced levels, in
new weather satellite products based on the Windows NT operating
system during the past fiscal year. Concurrently, it enhanced
the product line to include weather message switching capability,
handling international weather information for weather and
meteorological organizations worldwide. This new system is
designed to process meteorological data and provide weather
information to the Internet. The reliance on Microsoft's
development environment and SQL server products based on the
Company's existing technology provides key leverage in
accelerating new product development.
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 have 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 is
believed to be 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 Japan Weather Association and the Brazilian Meteorological
Department are significant customers, representing 76% of total
sales.
Export Sales
Export sales are key to the Company's business, and have been
disappointing. 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, 1999 revenue from foreign sales
totaled $686,000 for 92% of the total revenue. Customers
included sales to Europe, Asia, and South America.
Employees
The Company currently has 5 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 until July 1999 had been leasing
5,406 square feet of office space from an unaffiliated party.
Beginning in August 1999 the Company reduced its space at the
same location to 3,145 square feet of space.
ITEM 3. LEGAL PROCEEDINGS. None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of shareholders in the
fiscal year 1999.
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.
Quarter ended High Bid Low Bid
September 30, 1997 $.1875 $.1875
December 31, 1997 $.1875 $.1875
March 31, 1998 $.1875 $.1875
June 30, 1998 $.1875 $.1875
September 30, 1998 $.1875 $.1875
December 31, 1998 $.19 $.19
March 31, 1999 $.13 $.13
June 30, 1999 $.06 $.06
On September 15, 1999, the bid price for a share of the Company's
Common Stock was $.08.
(B) HOLDERS.
The number of record holders of the Company's Common Stock, no
par value, as of September 15, 1999 was 763. 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 1998 compared to 1997
In fiscal year 1998 the Company posted a net loss of $293,264 on
net revenues of $850,002, compared to a net loss of $156,547 on
net revenues of $758,946 for the comparable 1997 fiscal year.
Fiscal Year 1999 compared to 1998
The Company recorded another disappointing revenue performance
and an annual loss in fiscal year 1999. The Company posted a net
loss of $182,560 on net revenue of $747,003 for the fiscal year
ending June 30, 1999.
Management has undertaken to restructure and reduce the Company's
operations as a result of the year's performance caused
principally by difficulties experienced with a major Brazilian
contract. The Brazilian customer renegotiated the contract terms
reducing the revenue stream and eroding the margin significantly.
This contract was completed in fiscal year 1999 with the impact
of all related matters reflected in that period's financial
statements. Ongoing, the Brazilian project has created a working
capital deficit and caused the Company to incur additional debt.
The Company has reduced operating staff and curtailed operations
to a maintenance level where it expects to support current
business commitments, and generate modest revenue expectations
based on existing back-orders. Subsequent to June 30, 1999, the
Company did secure additional financing of $50,000 under a
subordinated two year, 8% interest note convertible at $0.50 per
share. However, significant additional capital is still required
to return the Company to more normal levels of operation.
At fiscal year end 1999, principal shareholders, representing
principally board members and officers, have agreed to write-off
liabilities totaling $164,407 of debt due shareholders to
contributed paid-in capital. This transaction did not dilute the
capital structure of the Company or its existing shareholders.
The Company's back-orders at June 30, 1999 totaled $303,000
representing European and Pacific Rim projects deliverable in the
next six months.
Liquidity and Capital Resources
At June 30, 1999, the Company had a net working capital deficit
of approximately $317,000 as compared to a working capital
deficit of $172,000 at June 30, 1998. The 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 normal levels of operating activities.
In addition to the borrowing mentioned above, the Company
continues to solicit investors and/or partners to enable it to
capitalize on its leading edge technology in the significant
worldwide market in which it operates. To date, definitive
investment or other opportunities have yet to materialize.
The Board and management have serious doubts concerning the
Company's ability to sustain successful operations and return the
operation to profitability in the future 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 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.
Dr. Ruggles, for reasons of family health, has moved to Palm
Desert, CA. Dr. Ruggles' active management in the Company has
been significantly reduced.
The directors and executive officers of the Company are as
follows:
Name Age Position
Mr. Douglas S. Timms 67 Chairman of the Board
and Director
Dr. Kenneth W. Ruggles 67 President and Director
Dr. William E. Hubert 76 Director
Dr. Lloyd L. Anderson, Jr. 47 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 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. William E. Hubert, 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.
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.
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.
(E) COMPLIANCE WITH SECTION 16A. Not applicable.
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, 1997, 1998, 1999:
<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, 1999 -- --
$11,600 -- -- -- --
Chairman of the Board 1998 -- --
$12,000 -- -- -- --
1997 -- --
$12,000 -- -- -- --
Dr. E. R. Reins, 1999 -- -- --
-- -- -- --
Director 1998 -- -- --
-- -- -- --
1997 $16,762 -- --
-- -- -- --
Dr. Kenneth W. Ruggles, 1999 $6,250 -- $4,025
-- -- -- --
Chief Executive Officer 1998 $75,000 -- --
-- -- -- --
1997 $70,000 -- --
- -- -- -- --
Dr. Lloyd L. Anderson 1999 $67,083
Vice President 1998 $52,500
<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, 1999, Drs. Ruggles, Reins and Hubert had accrued
salaries and other compensation owing to them of $99,375, $42,500
and $22,532, respectively. These accrued compensations, totaling
$164,407, were forgiven and written off to contributed paid in
capital effective as of fiscal year ending June 30, 1999.
OPTIONS AND WARRANTS
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, 1999.
Option/Warrant Grants in 1999
% of Total
Options/Warrants
Options/ Granted to
Warrants Employees Exercise Expiration
Name Granted in 1999 Price Date
Lloyd L. Anderson 25,000 100% $.22 02-27-2003
No options or warrants were issued to Executive Officers during
fiscal year ending June 30, 1998.
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. Dr.
Reins exercised his 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. Mr. Timms exercised the remaining
65,000 options on June 28, 1999, however as of September 15, 1999
the shares have not been issued and recorded.
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
- -----------------------------------------------------------------
D. Timms 65,000 0 0/0 0/0
L. Anderson 0 0 29,000/0 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, and a letter agreement with
Dr. Anderson at the time of his employment to establish a salary
schedule on achieving an agreed-upon sales base. Compensation of
officers and directors is determined by the Company's Board of
Directors and is not subject to stockholder approval. Effective
February 1, 1998 Dr. Anderson's salary is $70,000 per year.
Effective March 1, 1999 Dr. Ruggles is not paid a salary and is
compensated at a rate of $40.87 per hour for consulting work for
the Company. During fiscal year 1999 Mr. Timms' director's fee
was $1,000 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 15, 1999. As of September 15, 1999, 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 78171 Bovee Circle
Palm Desert CA 92211
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 purchased on exercise
of options June 28, 1999, but stock unissued as of September 15,
1999.
(B) SECURITY OWNERSHIP OF MANAGEMENT.
The following table contains information, as of September 15,
1999, 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 78171 Bovee Circle
Palm Desert CA 92211
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. 29,000 (5) 2.1
No par value 3239 Imjin Road
Marina, CA 93933
Common Stock, All officers and 427,750 (6) 30.2
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 15, 1999, 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 purchased on exercise
of options June 28, 1999, but stock unissued as of September 15,
1999.
(5) All shares are common stock issuable pursuant to exercise of
common stock options.
(6) Excludes shares referred to as excluded in footnotes (1),
(2) 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, 1999, 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, 1998
and 1999 F-2
Statement of Operations - for the years ended
June 30, 1998 and 1999 F-4
Statement of Changes in Stockholders'
Equity - For the years ended
June 30, 1998 and June 30, 1999 F-5
Statement of Cash Flows - for the years
ended June 30, 1998 and 1999 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
9/27/99 Kenneth W. Ruggles, Director
(Signature)
9/27/99 William E. Hubert, Director
(Signature)
9/27/99 Douglas S. Timms, Chairman
of the Board and Director
(Signature)
<PAGE>
SYSTEMS WEST, INC.
FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1999
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, 1998 and 1999, 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, 1998 and 1999, 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, 1999.
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.
September 15, 1999
Denver, Colorado CAUSEY
DEMGEN & MOORE INC.
F-1
<PAGE>
SYSTEMS WEST, INC.
BALANCE SHEET
June 30, 1998 and 1999
ASSETS
1998
1999
----
----
Current assets (Note 5):
Cash $
23,952 $ 1,200
Accounts receivable, less allowance for doubtful
accounts of $1,900 in 1999 ($2,100 in 1998)
52,615 160,402
Costs and estimated earnings on long-term contracts
(Note 2)
359,580 -
Inventories (Note 3)
123,697 86,464
Prepaid expenses
5,461 3,201
- -------- --------
Total current assets
565,305 251,267
Furniture and equipment, less accumulated depreciation
of $81,978 in 1999 ($76,596 in 1998) (Note 5)
27,954 22,571
Prototype equipment, less accumulated depreciation of
$150,903 in 1999 ($126,177 in 1998) (Note 5)
39,343 15,998
Other assets (Note 5)
3,774 3,774
- -------- --------
$636,376 $293,610
======== ========
See accompanying notes.
F-2
<PAGE>
SYSTEMS WEST, INC.
BALANCE SHEET
June 30, 1998 and 1999
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
1998
1999
----
----
Current liabilities:
Note payable (Notes 5 and 11) $
467,500 $ 209,514
Accounts payable
145,138 134,793
Deferred income
29,642 -
Accrued commission expense
38,839 71,020
Accrued warranty liability
7,000 7,000
Other accrued liabilities
29,387 109,469
Payable to officers/directors (Notes 4 and 5)
14,282 34,354
Current portion of capitalized lease obligations
(Note 7)
5,768 1,977
- --------- ---------
Total current liabilities
737,556 568,127
Capitalized lease obligations (Note 7)
6,889 4,411
Payable to officers/directors (Notes 4 and 5)
174,406 -
- --------- ---------
Total liabilities
918,851 572,538
Commitments (Notes 7 and 11)
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, 1,321,237 shares (1,221,237 shares
in 1998) issued and outstanding
1,723,316 1,745,016
Additional paid-in capital
160,435 324,842
Accumulated deficit
(2,166,234)(2,348,794)
Total stockholders' equity (deficit)
(282,475) (278,928)
- --------- ---------
$
636,376 $ 293,610
========= =========
See accompanying notes.
F-3
<PAGE>
SYSTEMS WEST, INC.
STATEMENT OF 0PERATIONS
For the Years Ended June 30, 1998 and 1999
1998
1999
----
----
Sales (Note 9) $ 850,002
$ 747,003
Costs and expenses:
Cost of sales 467,065
508,663
Marketing 225,790
126,777
Research and development 132,390
49,290
General and administrative 293,268
174,138
Interest 24,753
70,695
----------
---------
1,143,266
929,563
Net loss (Note 8) $ (293,264)
$(182,560)
==========
=========
Basic net loss per common share $ (.27)
$ (.14)
==========
=========
Weighted average common shares outstanding 1,091,000
1,313,000
=========
=========
See accompanying notes.
F-4
<PAGE>
<TABLE>
SYSTEMS WEST, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(DEFICIT)
For the years Ended June 30, 1998 and 1999
<CAPTION>
Series A
Additional Total
preferred stock Common stock
Paid-in Accumulated stockholders'
Shares Amount Shares Amount
capital deficit equity (deficit)
------ ------ ------ ------
---------- ----------- ----------------
<S> <C> <C> <C> <C>
<C> <C> <C>
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)
Stock options exercised
(Note 6) - - 100,000
21,700 - - 21,700
Contribution of payable to
officers/directors
(Note 4) - - -
- - 164,407 - 164,407
Net loss for the year - - -
- - - (182,560) (182,560)
----- --- ---------
- --------- -------- ----------- --------
Balance, June 30, 1999 812.5 $ 8 1,321,237
$1,745,016 $324,842 $(2,348,794) $(278,928)
===== === =========
========== ======== =========== =========
</TABLE>
See accompanying notes.
F-5
<PAGE>
SYSTEMS WEST, INC.
STATEMENT OF CASH FLOWS
For the Years Ended June 30, 1998 and 1999
1998
1999
----
----
Cash flows from operating activities:
Net loss $(293,264)
$(182,560)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 30,108
30,108
Increase in receivables (49,860)
(107,787)
Decrease (increase) in costs and estimated
earnings on long-term contracts (218,477)
359,580
Decrease (increase) in inventories (26,089)
37,233
Decrease (increase) in prepaid expenses (634)
2,260
Increase (decrease) in accounts payable 83,961
(10,345)
Increase in accrued commission expense 23,772
32,181
Increase in other accrued liabilities 13,308
80,082
Increase (decrease) in deferred income 29,642
(29,642)
Increase in payable - officers/directors 54,805
31,773
--------
-------
Net cash provided by (used in) operating
activities (352,728)
242,883
Cash flows from investing activities:
Acquisition of furniture and equipment (10,081)
-
Acquisition of prototype equipment (18,546)
(1,380)
Decrease in other assets 4,700
-
--------
- --------
Net cash used in investing activities (23,927)
(1,380)
Cash flows from financing activities:
Proceeds from line of credit 536,500
305,996
Payments on line of credit (212,400)
(563,982)
Proceeds from note payable - officer 50,000
-
Payments on note payable - officer (50,000)
-
Payments on capitalized lease obligations (8,585)
(6,269)
--------
- --------
Net cash provided by (used in) financing
activities 315,515
(264,255)
--------
- --------
Net decrease in cash and cash equivalents (61,140)
(22,752)
Cash and cash equivalents at beginning of year 85,092
23,952
--------
- --------
Cash and cash equivalents at end of year $ 23,952
$ 1,200
========
========
(Continued on following page)
See accompanying notes.
F-6
<PAGE>
SYSTEMS WEST, INC.
STATEMENT OF CASH FLOWS
For the Years Ended June 30, 1998 and 1999
(Continued from preceding page)
1998
1999
----
----
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 20,863
$ 72,708
========
========
Supplemental schedule of noncash investing and financing
activities:
During the year ended June 30, 1998, the Company entered into
capital leases
for prototype equipment amounting to $8,495.
During the year ended June 30, 1998 and 1999, payables to
officers/directors
were utilized to exercise stock options in an aggregate of
$19,900 and $21,700,
respectively.
During the year ended June 30, 1999, officers, directors
and significant
shareholders contributed payables to the Company in the amount of
$164,407.
See accompanying notes.
F-7
<PAGE>
SYSTEMS WEST, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 and 1999
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 markets
weather satellite
ground receiver stations, as well as provides 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
$316,860 and a stockholders' deficit of $278,928 at June
30, 1999. 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.
Advertising costs:
The Company expenses the costs of advertising as incurred.
F-8
<PAGE>
SYSTEMS WEST, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 and 1999
1. Summary of significant accounting policies (continued)
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.
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.
F-9
<PAGE>
SYSTEMS WEST, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 and 1999
1. Summary of significant accounting policies (continued)
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.
2. Costs and estimated earnings on uncompleted contracts
Costs incurred and estimated earnings on uncompleted contracts
are as follows
at June 30, 1998:
Costs incurred on uncompleted contracts $335,570
Estimated earnings 24,010
--------
359,580
Less billings to date -
--------
$359,580
========
Revisions in estimated contract costs are made in the
year in which
circumstances requiring the revisions become known.
3. Inventories
Inventories consist of the following at June 30:
1998
1999
----
----
Computer parts $ 58,823
$ 43,477
Work-in-process 64,874
42,987
--------
--------
$123,697
$ 86,464
========
========
F-10
<PAGE>
SYSTEMS WEST, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 and 1999
4. Related party transactions
Payable to officers/directors consists of the following at
June 30:
1998
1999
----
----
Accrued salaries $174,406
$ -
Reimbursement of Company expenses 14,282
34,354
--------
-------
$188,688
$34,354
========
=======
During 1998, the Company borrowed $50,000 from an
officer/director. The loan
was repaid in 1998, including interest totaling $4,400.
During 1999, officers, directors and significant
shareholders forgave
payables due them in the aggregate amount of $164,407. The
forgiveness has
been accounted for as a contribution to capital.
5. Note payable
At June 30, 1998 and 1999, the Company had a line of credit
from a finance
company obtained under a California Export Financing Office
guarantee, in the
amount of $800,000. The line provides pre-shipment working
capital financing
against certain export purchase orders, bears interest at the
prime rate plus
3% (11% at June 30, 1999), and is repayable from the
assignment of proceeds
from the purchase orders. As of June 30, 1998 and 1999,
the Company had
borrowed $467,500 and $209,514, respectively, under the line
of credit. The
related promissory note matures on October 31, 1999 (see
Note 11), 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)
Preferred stock:
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.
Stock options:
The Company has 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.
F-11
<PAGE>
SYSTEMS WEST, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 and 1999
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, and
the remaining 200,000 shares were exercised in March and
July 1998. On
January 23, 1995, the Company granted non-qualified
options to purchase
120,000 shares of its common stock at $.18 per share to a
director of the
Company, which shares were exercised during June 1998 and
June 1999, 65,000
of the shares were not physically issued at June 30, 1999;
however, they are
treated as exercised in the following tables. On December
16, 1998, the
Company granted non-qualified options to purchase 25,000
shares of its common
stock to an officer.
The following is a summary of stock option activity:
Weighted
Option price average
Number of
per share exercised
shares
------------ ---------
- ---------
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
Granted $.22 $.22
25,000
Exercised $.10 to $ .18 $.13
(165,000)
Expired $.19 to $1.00 $.90
(8,000)
------------- ----
--------
Balance June 30, 1999 $.15 to $.44 $.23
39,500
========
The following is additional information with respect to
those options
outstanding at June 30, 1999:
Weighted
average Weighted
remaining average
contractual life exercise
Number of
Option price per share in years price
shares
---------------------- ---------------- --------
- ---------
$.15 1.9 $.15
6,000
$.19 3.4 $.19
4,500
$.44 2.4 $.44
4,000
$.22 3.7 $.22
25,000
------
39,500
======
F-12
<PAGE>
SYSTEMS WEST, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 and 1999
6. Stockholders' equity (deficit) (continued)
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, 1998
or 1999.
Common stock to be issued:
As of June 30, 1999, the Company was not able to physically
issue 65,000
shares of common stock exercised pursuant to a stock option
June 28, 1999.
The shares are excluded from all disclosures of outstanding
shares in the
accompanying financial statements.
7. Lease commitments
Operating leases:
The Company leases office and production space under a lease
agreement which
expires July 31, 1999 (see Note 11).
Rent expense for operating leases was approximately $36,123
for each of the
years ended June 30, 1998 and 1999.
Capitalized lease obligations:
At June 30, 1999, 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
2000 $ 2,861
2001 2,345
2002 2,345
-------
Total future minimum lease payments 7,551
Less amount representing interest 1,163
-------
Present value of future net minimum
lease payments 6,388
Due within one year 1,977
-------
Due after one year $ 4,411
=======
F-13
<PAGE>
SYSTEMS WEST, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 and 1999
7. Lease commitments (continued)
Property recorded under capital leases include the following
amounts:
1998 1999
---- ----
Furniture and equipment $18,834 $18,834
Prototype equipment 6,913 -
------- -------
25,747 18,834
Accumulated amortization 10,837 11,333
------- -------
Net capitalized leased property $14,910 $ 7,501
======= =======
8. Income taxes
The Company has net operating loss carryforwards of
approximately
$2,301,000 which it may use to offset future taxable income.
The
carryforwards expire as follows:
Year
2003 $ 37,000
2004 746,000
2005 189,000
2006 314,000
2007 148,000
2009 48,000
2010 188,000
2012 150,000
2013 290,000
2019 191,000
----------
$2,301,000
==========
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, 1998 and 1999, total deferred tax assets
and valuation
allowance are as follows:
1998
1999
----
- ----
Deferred tax assets $ 71,000 $
10,000
Deferred tax assets resulting
from loss carryforward 716,000
782,000
Valuation allowance (787,000)
(792,000)
--------
- --------
$ - $
-
========
========
F-14
<PAGE>
SYSTEMS WEST, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 and 1999
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:
1998 1999
---- ----
Customer A 42% 50%
Customer B *% 26%
Customer C 28% * %
* - Less than 10%
Export sales:
The breakdown of export sales by geographic area is as follows
for June 30:
1998
1999
----
- ----
Canada/Mexico $ 7,000 $
- -
Europe 105,000
81,000
Asia 46,000
214,000
South America - Caribbean 369,000
391,000
-------
- -------
Total export sales $527,000
$686,000
========
========
10.Pension Plan
The Company has 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, 1998
or 1999.
11.Subsequent events
In July 1999, the Company received proceeds pursuant to
a $50,000 8%
subordinated, convertible loan. The loan and outstanding
interest are
convertible into common stock over the two year term at $.50
per share.
During August 1999, the Company renewed its lease for
reduced office and
production space effective August 1, 1999 on a
month-to-month basis with
monthly base rent of $2,005.
F-15
<PAGE>
SYSTEMS WEST, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 and 1999
11.Subsequent events (continued)
During October 1999, the Company repaid the outstanding
balance on the
existing line of credit and entered into a new $170,000 line
of credit with a
finance company under an SBA agreement. The agreement
provides for working
capital financing against certain export purchase orders,
bears interest at
the prime rate plus 3% and expires on February 29, 2000.
F-16
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
[LEGEND]
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE
REGISTRANT'S FORM 10-K FOR THE YEAR ENDED JUNE 30, 1999 AND IS
QUALIFIED IN ITS
ENTIRETY TO SUCH FORM 10-K.
[/LEGEND]
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 1,200
<SECURITIES> 0
<RECEIVABLES> 160,402
<ALLOWANCES> (1,900)
<INVENTORY> 86,464
<CURRENT-ASSETS> 251,267
<PP&E> 271,450
<DEPRECIATION> (232,881)
<TOTAL-ASSETS> 293,610
<CURRENT-LIABILITIES> 568,127
<BONDS> 0
0
8
<COMMON> 1,745,016
<OTHER-SE> (2,023,952)
<TOTAL-LIABILITY-AND-EQUITY> 293,610
<SALES> 747,003
<TOTAL-REVENUES> 747,003
<CGS> 508,663
<TOTAL-COSTS> 508,663
<OTHER-EXPENSES> 350,205
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 70,695
<INCOME-PRETAX> (182,560)
<INCOME-TAX> 0
<INCOME-CONTINUING> (182,560)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (182,560)
<EPS-BASIC> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
