Annual report under Section 13 or 15(d) of the Securities Exchange Act of 1934
[Fee Required] for the fiscal year ended: June 30, 2000
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: $437,694
Aggregate market value of voting stock held by non-affiliates as of October 5,
2000 (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 9,874,870,
post-split, shares of non-affiliated stock outstanding): $2,172,471
Shares of common stock, no par value, outstanding as of October 5, 2000:
13,862,370
Documents incorporated by reference: None
<PAGE>
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.
2
<PAGE>
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. In 2000 Systems West sustained a loss of $94,329 on a revenue base of
$437,694.
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.
3
<PAGE>
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 begin phasing out in 2001 and 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.
4
<PAGE>
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 or
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, to solidify the
baseline NT weather satellite products and WeatherWeb Server products introduced
during the past fiscal year. 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
Third-party subcontractors manufacture components used in the Company's
products. They are assembled and tested by the Company prior to shipment.
Marketplace
The market for Company products includes national and local governments, defense
forces, 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 the National
Weather Service, 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. The Company is also
delivering product to overseas military and naval organizations including the
British Meteorological Office for the Royal Air Force, 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.
5
<PAGE>
Competition. The Company is marketing its Series 2000 and 4000 Systems in a
price range of from $6,000 to $25,000. Depending upon the hardware and software
capabilities that 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 that 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.
During the next 10 years, there will be a transition of the present analog
low-resolution satellite broadcasts to digital low rate broadcasts. The
transition will have a direct and potentially large impact on the existing and
planned weather satellite ground receiving equipment. The Company views this
both as a modernization challenge, and a marketing opportunity. The nearly
10,000 existing analog low-resolution systems will be discontinued, modernized
to the new digital low rate systems or upgraded to high-resolution digital
systems. The Company anticipates offering systems to address the needs created
by the transition.
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 reliance on small numbers of outside production sources
and, therefore, risk of delay in the delivery of key components.
6
<PAGE>
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.
7
<PAGE>
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 Swedish Defence Forces are significant
customers, representing 69% of total sales.
Export Sales
Export sales have been the focus of the Company's business, and have been
disappointing. Asian export sales, which were key to achieving business goals,
have been seriously impacted by the continuing weakness of these economies.
Several significant business opportunities in Japan, and in South America in
cooperation with major Japanese companies, have been indefinitely delayed. The
Company has actively pursued other export opportunities in Canada, Sweden, and
South America, but they have yet to be consummated at this time.
For the year ended June 30, 2000 revenue from foreign sales totaled $428,465 for
98% of the total revenue. Customers included sales to Europe, Asia, and North
(non-US) and South America.
Employees
The Company currently has 6 part-time employees. Its Chairman of the Board works
full-time on behalf of the Company but is not an employee.
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.
From July 1999 to March 2000, the Company had been leasing 3,145 square feet of
space from an unaffiliated party. Beginning March 1, 2000 the Company reduced
its space at the same location to 2,098 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
2000.
8
<PAGE>
A Special Meeting of Shareholders was held on September 15, 2000. Two proposals
were voted on, and approved, by the shareholders at this meeting. A proposal
(Proposal #1) to increase the authorized Common Stock to 200,000,000 shares, no
par value, and thereafter provide for a ten-for-one forward stock split of the
Company's Common Stock. A proposal (Proposal #2) to amend the 1988 Stock Option
Plan to allow issuance of options to founders who are in the employ of the
Company, to increase the total number of shares under the Plan from 65,000 to
40,000,000 and eliminate restrictions on the number of options issuable to the
directors individually and collectively.
There were 803,013 shares represented at the meeting, comprising 57.93% of the
outstanding voting shares of the Company. Votes were cast as follows: Proposal
#1: 795,560 votes For; 7,403 votes Against, and 50 votes Abstain. Proposal #2:
794,954 votes For; 7958 votes Against, and 101 votes Abstain.
The ten-for-one forward stock split of the Company's Common Stock took effect on
September 26, 2000.
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). As of September 26, 2000, after the ten-for-one forward
stock split, the Registrant's stock symbol is SYWI.
The range of high and low bid quotations for the Company's Common Stock on a
quarterly basis is shown below. Prices do not reflect the stock split referred
to above and 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, 1998 $.1875 $.1875
December 31, 1998 $.19 $.19
March 31, 1999 $.13 $.13
June 30, 1999 $.06 $.06
September 30, 1999 $.08 $.08
December 31, 1999 $.08 $.08
March 31, 2000 $.28 $.28
June 30, 2000 $.26 $.26
9
<PAGE>
On October 5, 2000, the post-split bid price for a share of the Company's Common
Stock was $.21.
(B) HOLDERS.
The number of record holders of the Company's Common Stock, no par value, as of
October 5, 2000 was 751. 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 1999 compared to 1998
In fiscal year 1999 the Company posted a net loss of $182,560 on net revenues of
$747,003, compared to a net loss of $293,264 on net revenues of $850,002 for the
comparable 1998 fiscal year.
Fiscal Year 2000 compared to 1999
The Company recorded another disappointing revenue performance and an annual
loss in fiscal year 2000. The Company posted a net loss of $94,329 on net
revenue of $437,694 for the fiscal year ending June 30, 2000.
The Company has suffered again from the lack of working capital with which to
extend its marketing activities. Awards of three major international consortium
bids valued at over $1,500,000 were delayed indefinitely.
10
<PAGE>
The Company's major markets of Asia and South America continued to show
financial weaknesses and currency devaluation, with an adverse effect on
business for the year.
Management has significantly reduced the operating expenses of the business,
both in personnel and facilities, to cope with the downturn in business.
Proposal activity remains at a high level and provides cautious optimism for the
new year.
Management is taking steps to address the working capital problem as well as
looking for strategic acquisition and partnership opportunities to enable the
Company to achieve a critical mass vital for the success of the business.
Liquidity and Capital Resources
At June 30, 2000, the Company had a net working capital deficit of approximately
$393,000 as compared to a working capital deficit of $317,000 at June 30, 1999.
The Company continues to be severely constrained by shortfalls in working
capital needed to support normal levels of operating activities.
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.
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.
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.
11
<PAGE>
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 shareholders 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.
Mr. Timms has been appointed as CEO to replace Dr. Ruggles.
The directors and executive officers of the Company are as follows:
Name Age Position
Mr. Douglas S. Timms 68 Chairman of the Board
and Director
Dr. Kenneth W. Ruggles 68 President and Director
Dr. William E. Hubert 77 Director
Dr. Lloyd L. Anderson, Jr. 48 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.
12
<PAGE>
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.
13
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(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, 1998, 1999, 2000:
<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, 2000 -- -- $12,000 -- -- -- --
Chairman of the Board 1999 -- -- $11,600 -- -- -- --
1998 -- -- $12,000 -- -- -- --
Dr. Kenneth W. Ruggles, 2000 -- $ 5,851 -- -- -- --
Chief Executive Officer 1999 $ 6,250 -- $ 4,025 -- -- -- --
1998 $75,000 (2) -- -- -- -- -- --
Dr. Lloyd L. Anderson 2000 $65,896
Vice President 1999 $67,083
1998 $52,500
(1)
----------
(1) 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.
(2) From July 1997 to January 1998 Dr. Ruggles deferred salary compensation of
$43,750. This accrued compensation was forgiven and written off to contributed
paid in capital effective as of fiscal year ending June 30, 1999.
</TABLE>
14
<PAGE>
DEFERRED COMPENSATION OF OFFICERS AND DIRECTORS; FORGIVENESS OF ACCRUED
COMPENSATION AS CONTRIBUTIONS TO CAPITAL
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.
As of June 30, 2000 Dr. Anderson, Dr. Ruggles and Mr. Timms had accrued fees and
other compensation owing to them of $29,896, $9,859 and $9,000 respectively.
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, 2000.
Option/Warrant Grants in 2000
% of Total
Options/Warrants
Options/ Granted to
Warrants Employees Exercise Expiration
Name Granted in 2000 Price Date
Lloyd L. Anderson 110,000 36% $.0165 11-13-2004
In fiscal year ending June 30, 1999, Dr. Anderson was granted 250,000 options at
an exercise price of $.022 per share. In fiscal year ending June 30, 1997, Dr.
Anderson was granted a total of 40,000 options at an exercise price of $.0435
per share.
In fiscal year 1994, Drs. Ruggles and Reins were each granted 1,000,000 options
at an exercise price of $.01 per share and Dr. Hubert was granted 200,000
options at an exercise price of $.01 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 1,200,000 options at an exercise
price of $.018 per share. Mr. Timms exercised 550,000 options on May 10, 1998.
Mr. Timms exercised the remaining 650,000 options on June 28, 1999.
15
<PAGE>
On September 22, 2000, Mr. Timms was granted 2,500,000 options at an exercise
price of $.055 per share and Dr. Ruggles was granted 1,000,000 options at an
exercise price of $.055 per share.
AGGREGATED OPTIONS/SAR EXERCISE AND FISCAL YEAR-END OPTION/SAR VALUE TABLE.
Aggregated Option/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Values
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at FY-End at FY-End
Shares
Acquired Value Exercisable/ Exercisable/
Name on Exercise Realized Unexercisable Unexercisable
----------------------------------------------------------------------------
L. Anderson 0 0 400,000/0 $2,045/0
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 December 1, 1999 Dr. Anderson is
compensated at a rate of $39.43 per hour. 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 2000 Mr. Timms' director's fee was
$1,000 per month.
16
<PAGE>
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, giving effect to a ten-for-one forward
stock split effective September 26, 2000, 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 October 5, 2000. As of October 5, 2000, there
were 13,862,370 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 2,350,000 (2) 15.8
No par value 78171 Bovee Circle
Palm Desert CA 92211
Common Stock, E. R. Reins 1,956,250 14.1
No par value 25585 Hidden Mesa Rd.
Monterey CA 93940
Common Stock, William E. Hubert 1,437,500 (3) 10.4
No par value 1829 Otter Pond Circle
Montrose, Co 81401
Common Stock, Douglas S. Timms 3,700,000 (4) 22.6
No par value 2460 Peachtree Rd., NE
Atlanta GA 30305
----------
17
<PAGE>
(1) In calculating the percentage of class, shares of preferred stock
outstanding, which are convertible to shares of Common Stock at the rate of 180
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 October 5, 2000, there were a
total of 813 shares of Series A Preferred Stock outstanding which are
convertible into a total of 146,250 shares of Common Stock at the option of the
holders.
(2) Does not include 33,750 shares of Common Stock issuable upon conversion of
187.5 shares of Series A Preferred Stock owned by Dr. Ruggles' wife. Includes
1,000,000 shares of common stock issuable pursuant to exercise of common stock
options.
(3) Does not include 33,750 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 2,500,000 shares of common stock issuable pursuant to exercise of
common stock options.
(B) SECURITY OWNERSHIP OF MANAGEMENT.
The following table contains information, giving effect to a ten-for-one forward
stock split effective September 26, 2000, as of October 5, 2000, 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 2,350,000 (2) 15.8
No par value 78171 Bovee Circle
Palm Desert CA 92211
Common Stock, William E. Hubert 1,437,500 (3) 10.4
No par value 1829 Otter Pond Circle
Montrose, CO 81401
Common Stock, Douglas S. Timms 3,700,000 (4) 22.6
No par value 2460 Peachtree Rd. NE
Atlanta, GA 30305
Common Stock, Lloyd L. Anderson, Jr. 400,000 (5) 2.8
No par value Rt 2, Box 87A
Killeen TX 76542
Common Stock, All officers and 7,887,500 (6) 44.4
No par value directors as a
group (four persons)
----------
18
<PAGE>
(1) In calculating the percentage of class, shares of preferred stock
outstanding, which are convertible to shares of Common Stock at the rate of 180
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 October 5, 2000, there were a
total of 813 shares of Series A Preferred Stock outstanding which are
convertible into a total of 146,250 shares of Common Stock at the option of the
holders.
(2) Does not include 33,750 shares of Common Stock issuable upon conversion of
187.5 shares of Series A Preferred Stock owned by Dr. Ruggles' wife. Includes
1,000,000 shares of common stock issuable pursuant to exercise of common stock
options.
(3) Does not include 33,750 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 2,500,000 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), (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, 2000, are
described under "Item 10 - Executive Compensation."
(D) TRANSACTIONS WITH PROMOTERS. Not applicable.
19
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(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, 1999
and 2000 F-2
Statement of Operations - for the years ended
June 30, 1999 and 2000 F-4
Statement of Changes in Stockholders'
Equity - For the years ended
June 30, 1999 and June 30, 2000 F-5
Statement of Cash Flows - for the years
ended June 30, 1999 and 2000 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)
20
<PAGE>
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.
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
10/10/00 Kenneth W. Ruggles, Director
(Signature)
10/10/00 William E. Hubert, Director
(Signature)
10/10/00 Douglas S. Timms, Chairman
of the Board and Director
(Signature)
21
<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, 1999 and 2000, 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, 1999 and 2000, 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, 2000.
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.
October 6, 2000 /s/ CAUSEY DEMGEN & MOORE INC.
Denver, Colorado CAUSEY DEMGEN & MOORE INC.
F-1
<PAGE>
SYSTEMS WEST, INC.
BALANCE SHEET
June 30, 1999 and 2000
ASSETS
1999 2000
---- ----
Current assets (Note 5):
Cash $ 1,200 $ 1,934
Accounts receivable, less allowance for doubtful
accounts of $1,900 in 1999 and 2000 160,402 150
Inventories (Note 3) 86,464 69,607
Prepaid expenses 3,201 2,623
------- --------
Total current assets 251,267 74,314
Furniture and equipment, less accumulated depreciation
of $94,446 in 2000 ($81,978 in 1999) (Note 5) 22,571 31,134
Prototype equipment, less accumulated depreciation of
$166,901 in 2000 ($150,903 in 1999) (Note 5) 15,998 -
Other assets (Note 5) 3,774 4,363
-------- --------
$293,610 $109,811
======== ========
See accompanying notes.
F2
<PAGE>
SYSTEMS WEST, INC.
BALANCE SHEET
June 30, 1999 and 2000
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
1999 2000
---- ----
Current liabilities:
Note payable (Notes 5 and 11) $209,514 $ 50,000
Accounts payable 134,793 134,308
Deferred income - 4,800
Accrued commission expense 71,020 86,904
Accrued warranty liability 7,000 10,000
Other accrued liabilities 109,469 78,173
Payable to officers/directors (Notes 4 and 5) 34,354 96,515
Current portion of capitalized lease obligations
(Note 7) 1,977 6,979
--------- ---------
Total current liabilities 568,127 467,679
Capitalized lease obligations (Note 7) 4,411 15,389
--------- ---------
Total liabilities 572,538 483,068
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; 200,000,000 shares
authorized, 13,862,370 shares (13,212,370 shares
in 1999) issued and outstanding 1,745,016 1,745,016
Additional paid-in capital 324,842 324,842
Accumulated deficit (2,348,794) (2,443,123)
---------- ----------
Total stockholders' equity (deficit) (278,928) (373,257)
---------- ----------
$ 293,610 $ 109,811
========== ==========
See accompanying notes.
F3
<PAGE>
SYSTEMS WEST, INC.
STATEMENT OF OPERATIONS
For the Years Ended June 30, 1999 and 2000
1999 2000
---- ----
Sales (Note 9) $ 747,003 $ 437,694
Costs and expenses:
Cost of sales 508,663 275,640
Marketing 126,777 73,713
Research and development 49,290 6,238
General and administrative 174,138 156,283
Interest 70,695 20,149
---------- ----------
929,563 532,023
---------- ----------
Net loss (Note 8) $ (182,560) $ (94,329)
========== ==========
Basic net loss per common share $ (.01) $ (.01)
========== ==========
Weighted average common shares outstanding 13,130,000 13,675,000
========== ==========
See accompanying notes.
F4
<PAGE>
<TABLE>
<CAPTION>
SYSTEMS WEST, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the Years Ended June 30, 1999 and 2000
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, 1998 812.5 $ 8 12,212,370 $1,723,316 $160,435 $(2,166,234) $(282,475)
Stock options exercised (Note 6) - - 1,000,000 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 13,212,370 1,745,016 324,842 (2,348,794) (278,928)
Stock options exercised (Note 6) - - 650,000 - - - -
Net loss for the year - - - - - (94,329) (94,329)
----- --- ---------- ---------- --------- ----------- ---------
Balance, June 30, 2000 812.5 $ 8 13,862,370 $1,745,016 $324,842 $(2,443,123) $(373,257)
===== === ========== ========== ======== =========== =========
See accompanying notes.
F5
</TABLE>
<PAGE>
SYSTEMS WEST, INC.
STATEMENT OF CASH FLOWS
For the Years Ended June 30, 1999 and 2000
1999 2000
---- ----
Cash flows from operating activities:
Net loss $(182,560) $(94,329)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 30,108 28,466
Changes in assets and liabilities:
Accounts receivable (107,787) 160,252
Costs and estimated earnings on long-term
contracts 359,580 -
Inventories 37,233 16,857
Prepaid expenses 2,260 578
Accounts payable (10,345) (485)
Accrued commission expense 32,181 15,884
Other accrued liabilities 80,082 (28,296)
Deferred income (29,642) 4,800
Payable - officers/directors 31,773 62,161
--------- ---------
Net cash provided by operating
activities 242,883 165,888
Cash flows from investing activities:
Acquisition of furniture and equipment - (4,191)
Acquisition of prototype equipment (1,380) -
Decrease in other assets - (589)
--------- ---------
Net cash used in investing activities (1,380) (4,780)
Cash flows from financing activities:
Proceeds from line of credit 305,996 169,999
Payments on line of credit (563,982) (379,513)
Proceeds from note payable - 50,000
Payments on capitalized lease obligations (6,269) (860)
--------- --------
Net cash used in financing
activities (264,255) (160,374)
--------- ---------
Net increase (decrease) in cash and cash equivalents (22,752) 734
Cash and cash equivalents at beginning of year 23,952 1,200
--------- ---------
Cash and cash equivalents at end of year $ 1,200 $ 1,934
========= =========
See accompanying notes.
F6
<PAGE>
SYSTEMS WEST, INC.
STATEMENT OF CASH FLOWS
For the Years Ended June 30, 1999 and 2000
1999 2000
---- ----
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 72,708 $20,149
======== =======
Supplemental schedule of noncash investing and financing activities:
During the year ended June 30, 2000, the Company entered into capital leases
for furniture and equipment amounting to $16,840.
During the year ended June 30, 1999, payables to officers/directors were
utilized to exercise stock options in an aggregate of $21,700.
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.
F7
<PAGE>
SYSTEMS WEST, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999 and 2000
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 $393,365 and a stockholders' deficit of $373,257 at June 30,
2000. 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. Subsequent to June 30, 2000, two of the directors of the
Company have paid bills on the Company's behalf of $17,348. The financial
statements do not include any adjustment relating to the recoverability and
classifica- tion 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.
See accompanying notes.
F8
<PAGE>
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.
See accompaying notes.
F9
<PAGE>
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, 2000:
Costs incurred on uncompleted contracts $ 98,817
Estimated earnings 21,183
---------
120,000
Less billings to date (120,000)
---------
$ --
=========
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:
1999 2000
---- ----
Computer parts $ 43,477 $ 41,953
Work-in-process 42,987 27,654
-------- --------
$ 86,464 $ 69,607
======== ========
See accompanying notes.
F10
<PAGE>
4. Related party transactions
Payable to officers/directors consists of the following at June 30:
1999 2000
---- ----
Accrued salaries $ - $ 48,755
Reimbursement of Company expenses 34,354 96,515
-------- --------
$ 34,354 $ 66,619
======== ========
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, 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, 1999, the
Company had borrowed $209,514 under the line of credit. The related
promissory note matured on October 31, 1999, 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.
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 expired on February 29, 2000.
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 $.05 per share.
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 180 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.
See accompanying notes.
F11
<PAGE>
6. Stockholders' equity (deficit) (continued)
Commom stock:
On September 15, 2000, shareholders of the Company approved an increase in
the authorized number of common shares to 200,000,000 shares and also
approved a ten-to-one forward stock split. All number of shares and
per-share references have been retroactively adjusted to reflect this
change.
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 40,000,000 shares of the Company's common stock.
On August 2, 1993, the Company granted non-qualified options to purchase a
total of 2,200,000 shares of its common stock to three officers and
directors of the Company, exercisable through August 2, 1998 at $.01 per
share, of which options to purchase 200,000 shares were exercised in
February 1994, and the remaining 2,000,000 shares were exercised in March
and July 1998. On January 23, 1995, the Company granted non-qualified
options to purchase 1,200,000 shares of its common stock at $.018 per share
to a director of the Company, which shares were exercised during June 1998
and June 1999, 650,000 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
250,000 shares of its common stock to an officer. On November 13, 1999, the
Company granted non- qualified options to purchase 305,000 shares of its
common stock to an officer and two employees.
The following is a summary of stock option activity:
Weighted
Option price average Number of
per share exercised price shares
-----------------------------------------
Balance June 30, 1998 $.01 to $.10 $.017 1,875,000
Granted $.022 $.022 250,000
Exercised $.01 to $.018 $.013 (1,650,000)
Expired $.019 to $.10 $.09 (80,000)
-----------------------------------------
Balance June 30, 1999 $.015 to $.044 $.023 395,000
Granted $.0165 $.0165 305,000
-----------------------------------------
Balance June 30, 2000 $.015 to $.044 $.02 700,000
=========
See accompanying notes.
F12
<PAGE>
6. Stockholders' equity (deficit) (continued)
The following is additional information with respect to those options
outstanding at June 30, 2000:
Weighted
average
remaining Weighted
contractual life average exercise Number of
Option price per share in years price shares
---------------------- ---------------- ---------------- ---------
$.015 .9 $.015 60,000
$.019 2.4 $.019 45,000
$.044 1.4 $.044 40,000
$.022 2.7 $.022 250,000
$.017 4.4 $.017 305,000
-------
700,000
=======
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, 1999 or 2000.
Common stock to be issued:
As of June 30, 1999, the Company was not able to physically issue 650,000
shares of common stock exercised pursuant to a stock option June 28, 1999.
The shares were excluded from all disclosures of outstanding shares in the
accompanying financial statements until they were physically issued during
the year ended June 30, 2000.
7. Lease commitments
Operating leases:
The Company leases office and production space under a month-to-month lease
agreement.
During March 2000, the Company renewed its lease for reduced office and
production space effective March 1, 2000 on a month-to-month basis with
monthly base rent of $1,951.
Rent expense for operating leases was $36,123 and $24,379 for each of the
years ended June 30, 1999 and 2000, respectively.
See accompanying notes.
F13
<PAGE>
7. Lease commitments (continued)
Capitalized lease obligations:
At June 30, 2000, the Company had capitalized leases for office equipment.
Following is a schedule of future minimum rental payments, including
interest, on the capitalized lease obligations:
Year ending June 30, Amount
-------------------- ------
2001 $ 9,417
2002 9,417
2003 7,844
-------
Total future minimum lease payments 26,678
Less amount representing interest 4,310
-------
Present value of future net minimum
lease payments 22,368
Due within one year 6,979
-------
Due after one year $15,389
=======
Property recorded under capital leases include the following amounts:
1999 2000
---- ----
Furniture and equipment $18,834 $35,674
Accumulated amortization 11,333 19,110
------- -------
Net capitalized leased property $ 7,501 $16,564
======= =======
8. Income taxes
The Company has net operating loss carryforwards of approximately
$2,389,000 which it may use to offset future taxable income. The
carryforwards expire as follows:
See accompanying notes.
F14
<PAGE>
8. Income taxes (continued)
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
2020 88,000
----------
$2,389,000
==========
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, 1999 and 2000, total deferred tax assets and valuation
allowance are as follows:
1999 2000
---- ----
Deferred tax assets $ 10,000 $ 10,000
Deferred tax assets resulting from
loss carryforward 782,000 846,000
Valuation allowance (792,000) (856,000)
-------- --------
$ - $ -
======== ========
9. Major customers and export sales
Major customers:
Customers which accounted for over 10% of revenues were as follows for the
years ended June 30:
See accompanying notes.
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<PAGE>
9. Major customers and export sales (continued)
1999 2000
---- ----
Customer A 50% 0%
Customer B 26% 27%
Customer C * % 41%
* - Less than 10%
Export sales:
The breakdown of export sales by geographic area is as follows for the
years ended June 30:
1999 2000
---- ----
Canada/Mexico $ - $ 68,000
Europe 81,000 185,000
Asia 214,000 129,000
South America - Caribbean 391,000 46,000
-------- --------
Total export sales $ 686,000 $428,000
========= ========
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, 1999 or 2000.
11. Subsequent events
Subsequent to June 30, 2000, two directors of the Company have paid bills
on the Company's behalf if $17,348.
On September 22, 2000, two directors of the Company were granted an
aggregate of 3,500,000 options to purchase common stock of the Company at
an exercise price of $.055 per share.
See accompanying notes.
F16
