<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
(Mark One)
X Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of
- --- 1934
(Fee Required) For the Fiscal Year Ended June 30, 1996
OR
Transition Report Under Section 13 or 15(d) of the Securities Exchange
- --- Act of 1934
(No Fee Required) For the Transition Period From to
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Commission File Number 0-4169
SYS
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(Name of Small Business Issuer in Its charter)
California 95-2467354
- ------------------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
6363 Greenwich Drive, San Diego, California 92122
- ------------------------------------------- -------------------
(Address of Principal Executive Offices) (Zip Code)
(619) 587-0484
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(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Act:
Common Stock, No Par Value
Preferred Stock, $.50 Par Value
Indicate by check mark whether the issuer: (1) filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act 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 past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-B is not in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements by reference in Part III of this Form 10-KSB or any
amendment to this form 10-KSB. ( )
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Revenues for the fiscal year ended June 30, 1996 were $5,942,000.
The approximate aggregate market value of the voting stock held by
non-affiliates computed by reference to the price at which the stock was
sold, or the average bid and asked prices of such stock on June 30, 1996:
$297,368.
As of June 30, 1996, the Issuer had outstanding 2,827,186 shares of
common stock, no par value, 110,000 shares of preferred stock, $0.50 par
value, and 139,561 shares of Preference Series B stock, $1.00 par value.
Documents incorporated by reference: None
Traditional Small Business Disclosure Format (check one): Yes X No
--- ---
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SYS
FOR FISCAL YEAR ENDED JUNE 30, 1996
FORM 10-KSB ANNUAL REPORT
INDEX
PART I Page
- ------ ----
Item 1. Description of Business 4
Item 2. Description of Property 7
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security-Holders 7
PART II
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Item 5. Market for Common Equity and Related Stockholder Matters 8
Item 6. Management's Discussion and Analysis or Plan of Operation 9
Selected Financial Data 9
Item 7. Financial Statements 12
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 26
PART III
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Item 9. Directors, Executive Officers, Promoters and
Control Persons; Compliance with Section 16(a) of
the Exchange Act 26
Item 10. Executive Compensation 29
Item 11. Security Ownership of Certain Beneficial Owners and
Management 30
Item 12. Certain Relationships and Related Transactions 32
Item 13. Exhibits, List and Reports on Form 8-K 32
SIGNATURES
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
DESCRIPTION OF BUSINESS
The Company provides management and technical services in systems
planning, management and analysis, systems engineering, naval architecture,
marine engineering, ordnance engineering, logistics analysis and engineering,
operations analysis, design development, reliability engineering and
analysis, hazardous materials reduction studies, computer systems analysis,
office automation, information management systems and related support
services. The Company also provides hardware integration and fabrication.
The Company was formed and incorporated in the State of California in
1966 as Systems Associates, Inc. It became a public corporation in 1968, and
engaged in systems analysis, systems engineering, computer services and
software for Government and industry. In addition to providing these
services, the Company conducted other business activities in computer network
operations and software applications, water resources development and
management, and in engineering services for sanitary waste development and
construction management, which it subsequently (1975) sold to other
companies. The Company changed its name to Systems Associates, Inc. of
California on December 4, 1979, and, as of March 18, 1985, it was changed to
SYS. The Company corporate offices were moved to San Diego, California in
February 19, 1984, from Long Beach, California.
PRODUCTS AND SERVICES
The Company provides support services (engineering, technical, and
management) to agencies of the United States Government as a prime contractor
and as a subcontractor to other government prime contractors. The company
also acts as prime contractor to subcontractors. These services are
primarily in the fields of:
Systems Planning Computer Hardware and Software Integration
Management and Analysis Software Development
Office Automation Operations Analysis
Information Management Systems Computer System Analysis
Design Development Systems Engineering
Marine Engineering Naval Architecture
Ordnance Engineering Reliability Engineering and Analysis
Logistics Analysis and Engineering Hazardous Materials Reduction Studies
Hardware Integration and Fabrication Computer and Computer Equipment Sales
BUSINESS DEVELOPMENTS
Company revenues for Fiscal Year 1996 increased approximately 25% over
the previous fiscal year and its contracted backlog including negotiated
options, grew approximately 4%.
The Underway Replenishment (UNREP) Program was extended into the second
of three option years on September 1, 1995. UNREP provides in-service
engineering support to the U.S. Navy fleet. Revenues exceeded expectations
due to an unanticipated research and development project to design and build
a full size ship mock-up of a missile rearming system. An Aegis Cruiser
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Vertical Launch Test System was fitted with a full scale mock-up capable of
demonstrating the rearming and strikedown system feasibility for replenishing
the Navy Standard Missile and the shipboard Tomahawk missile system while
underway at sea. This project, along with increased shipboard technical
assistance, accounted for a better than expected year and provides the basis
for continued business confidence in the coming year.
The Management, Planning and Analysis (MPA) Program had its first of
four option years exercised on February 1, 1996. This program supports the
U.S. Navy's Port Hueneme Division, Naval Surface Warfare Center. This
$16,000,000 contract accounted for over fifty percent of the Company's
revenues in this past year and the contract ceiling was increased $1,000,000
in the base year to accommodate the workload demand. The Statement of Work
provides a broad and flexible scope of work which allows a wide range of
tasking. SYS has developed work competencies in such areas as Management
Consulting, Information Services, Human Resource Services, Combat Systems
Engineering, and Facilities Engineering. The MPA program has received customer
recognition for its high standards of excellence and professionalism. Continued
growth of this Program area is anticipated.
The Company became the successful competitor for the Naval Architecture
and Marine Engineering (NAME) Program when it was awarded the new
multiple-year prime contract on April 22, 1996. This contract was issued by
the U.S. Navy's Port Hueneme Division, Naval Surface Warfare Center and will
run into the year 2001. This cost plus fixed fee contract consists of a base
year and four (4) option years with a total potential value over the five
years of $12,500,000. SYS will provide a wide range of Combat Systems
Engineering and weapons capabilities developed in support of Ship Self
Defense Systems (SSDS). This award was a result of a strategic teaming
effort with John J. McMullen Associates, Inc. Naval Architects and Marine
Engineers. The next year's outlook for this new contract is good.
The Company also continued its support to the Naval Air Systems Command
providing engineering and technical services focusing on the identification
and reduction of hazardous material when providing maintenance to weapons and
associated handling and shipping equipment.
Washington Operations continued its work as subcontractor for providing
administrative support to Foreign Military Sales Programs. The Company's
sales of Sun computers and equipment continued at a reduced level.
CONTRACT BACKLOG AND CUSTOMERS
As of June 30, 1996, the Company's contract backlog, including
negotiated contract options, was approximately $24,841,000, compared with
approximately $23,849,000 on June 30, 1995. Contract value backlog is
converted to revenues by performance on funded delivery orders or contracted
tasks within each contract or subcontract. Specific work activity is
defined, scheduled and priced by individual delivery orders (D.O.s) or
contracted tasks (C.T.s). The actual D.O. and C.T. backlog on June 30, 1996
was approximately $2,801,000, as compared with approximately $1,968,000 on
June 30, 1995.
The majority of the Company's total revenues were derived from contracts
with the United States Government, principally agencies of the Department of
Defense. Nearly all of these revenues were from contracts with the United
States Navy. Should changes in procurement policies or further reductions in
government expenditures occur, revenue and the income of the Company could be
adversely affected. Government contracts are not seasonal, however,
variations may occur due to funding from time to time.
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COMPETITIVE CONDITIONS
Nearly all of the Company's business is awarded through competitive
procurements. The engineering and management services industry consists of
hundreds of companies with which the Company competes and who can provide the
same type of services. A great many of the Company's competitors are larger
and have greater financial resources than the Company. The Company obtains
much of its business on the basis of proposals to new and existing customers.
Competition usually centers on successful past performance, technical
capability, management, personnel experience and price.
EMPLOYEES
The Company had 49 full-time and 34 part-time employees on June 30,
1996, compared to 65 full-time and 7 part-time employees on June 30, 1995.
FACTORS WHICH MAY AFFECT FUTURE RESULTS
Information contained in this Form 10-KSB should be studied carefully by
any potential investor while considering the following risk factors to the
Company.
1. LACK OF BUSINESS DIVERSIFICATION Essentially all the Company's
business at the present time is with the U.S. Navy. Even though the level of
business with its customers is growing and the Company has negotiated
multiple-year contracts, there is no certainty that budget changes in
Congress or the Defense Department will not seriously affect the Company.
2. DEPENDENCE ON KEY PERSONNEL The Company has a few key management,
project and technical personnel that are intimately involved in their
functions and have day to day relationships with critical customers. The
Company is not able to afford extra standby staff. As a result, at its
current size, it would be affected in an uncertain way if any of these
personnel are lost to the company.
3. COMPETITION The Company has many competitors who vie for the same
customers as SYS. They are competent, experienced and continuously working
to take work projects away from the Company.
4. PRIOR OPERATING HISTORY AND LACK OF TIMELY SEC FILINGS Until last
year, the Company had not had an independent audit for SEC purposes since FY
1991. The Company rescinded a major acquisition effort in 1992 which caused
substantial losses for the Company. As a result of this action, the Company
was previously involved in various expensive lawsuits which prevented the
Company from applying its talents and resources toward the Company's
profitable growth.
5. LIMITED ASSETS OF THE COMPANY The Company has very limited assets
upon which to rely on for adjusting to business variations and for growing
new businesses. While the Company is likely to look for new funding to
assist in the acquisition of other profitable businesses, it is uncertain
whether such funds will be available.
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ITEM 2. DESCRIPTION OF PROPERTY
The business and operations of the Company are now conducted in the
following office spaces:
APPROX.
LOCATION SQ. FEET LEASE TERM RENTAL
- -------- -------- ---------- ------
6363 Greenwich Drive 4,245 Expires July 1, 1997 $4,623/mo.
San Diego, CA 92122 (Optional 1 Year Extension)
2011 Crystal Drive 4,979 Expires July 31, 1997 $3,473/mo.
One Crystal Park (Optional 1 Year Extension)
Arlington, VA 22202
1721 Pacific Avenue 7,117 Expires March 31, 1998 $7,921/mo.
Oxnard, CA 93033 (Cancelable with 6 months
prior written notice)
ITEM 3. LEGAL PROCEEDINGS
The Company filed a lawsuit against Gray, Cary, Ames & Frye (GCAF), its
former general counsel, for legal malpractice and for breach of fiduciary
duty arising during the Company's acquisition of SEI assets and its
subsequent rescission. The jury returned a verdict that GCAF, the defendant,
was negligent, and awarded damages to the Company of approximately $4,000.
Under California law, Section 998, the defendant was then able to file
post-trial motions that sought to assess the Company. The court ruled in
July 1996 that the Company was liable for approximately $145,000 of the
Defendant's costs. On June 14, 1996, the Company filed a Notice of Appeal
from the Judgement and Order on the Jury Verdict of April 3, 1996.
In November 1995, a creditor of Systems Exploration, Inc. (SEI) filed a
breach of contract action against the Company in California Superior Court.
The Company maintains it has no liability to this plaintiff with respect to
this matter and intends to vigorously defend this action.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
No matter was submitted to a vote of security holders through the
solicitation of proxies or otherwise during the final quarter of Fiscal Year
1996.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) The Company's Common Stock is traded in the over-the-counter
market. The ranges of bid and asked quotations during the Company's three
most recent fiscal years are as follows:
FISCAL YEAR 1994 BID ASK
---------------- --- ---
First Quarter 1/64 3/16
Second Quarter 1/64 3/16
Third Quarter 1/64 3/16
Fourth Quarter 1/64 3/16
FISCAL YEAR 1995 BID ASK
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First Quarter 1/64 3/16
Second Quarter 1/64 3/16
Third Quarter 1/64 3/16
Fourth Quarter 1/64 3/16
FISCAL YEAR 1996 BID ASK
---------------- --- ---
First Quarter 1/64 3/16
Second Quarter 1/64 3/16
Third Quarter 1/64 3/16
Fourth Quarter 1/64 3/16
The sources of these quotations are stock brokerages that make a market
in the Company's stock, other brokerages representing both bidders and
sellers, and bidders which have made direct contact with the Company. The
brokers have indicated that there has been no trading in the Company's Common
Stock for the past two years.
(b) As of June 30, 1996, there were approximately 469 record holders of
the Company's Common Stock.
(c) No cash dividends have been paid on the Company's Common Stock
during the Company's two most recent fiscal years, and the Company does not
intend to pay cash dividends on its Common Stock in the immediate future.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
SELECTED FINANCIAL DATA:
The data that follows summarizes financial information about the Company that
is further discussed below.
FOR THE FISCAL YEARS ENDED JUNE 30
(thousands except per share amounts)
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
OPERATING RESULTS:
- ------------------
Contract revenues $5,942 $4,751 $4,692 $5,302 $4,341
Costs and expenses:
Contract costs 4,933 3,969 3,904 4,410 3,716
General and administrative 680 573 435 609 842
Income (loss) from operations 329 209 353 283 (217)
Other expenses:
SEI related expenses 156 309 51 51 492
Interest related to SEI debt 0 80 130 133 0
Other interest 44 40 46 51 88
Income (loss) before
income taxes 129 (220) 126 48 (797)
Provision for income taxes 1 1 9 6 1
Net income (loss) 128 (221) 117 42 (798)
Net income (loss) applicable to
common stock 126 (223) 116 42 (800)
Net income (loss) per
common share 0.04 (0.08) 0.04 0.02 (0.29)
AT YEAR END:
- ------------
Total assets 1,310 1,180 2,151 2,682 3,061
Current bank obligations 98 346 1,384 1,618 1,968
Long-term obligations 63 37 24 14 26
Stockholders' equity 381 115 338 220 178
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RESULTS OF OPERATIONS
FISCAL YEAR 1996 VS. FISCAL YEAR 1995
The Company's revenues from government contracts were $5,821,000 and
$4,620,000, respectively for 1996 and 1995. Total revenues for 1996 were
$5,942,000 compared to $4,751,000 for 1995.
During 1996, the Company's Income From Operations was $329,000, compared
to $209,000 in 1995. During 1996, the Company had net income of $128,000,
compared to a net loss of $221,000 in 1995. Earnings were negatively
impacted by SEI related expenses of $156,000 in 1996 and $309,000 in 1995.
The improvement in the Company's Revenues, Income From Operations and
Net Income were primarily related to approximate increases of $1,275,000,
$142,000 and $181,000 from MPA, UNREP and Washington Operations contract
sales, respectively. The increases occurred despite the loss of a NAVAIR
contract that generated sales of $339,000 in 1995 but no sales in 1996.
Other contract sales remained relatively stable.
Essentially all the Company's contracts are of the cost reimbursable
plus fee type. Contract costs increased to $4,933,000 in 1996 from
$3,969,000 in 1995 and general and administrative expenses increased to
$680,000 in 1996 from $573,000 in 1995 primarily as a result of the increase
in sales. Costs and expenses include $140,000 in 1996 for employee
compensation through the issuance of both Common shares and 9% Series B
Preference shares.
Other expenses in 1996 include SEI related expenses of $156,000 arising
from a court order attributable to the GCAF litigation and in 1995 of
$389,000 attributable to the combined cost of litigation, interest on the SEI
loan and other SEI related expenses. SEI related expenses of $389,000 in
1995 were reduced by SEI related income of $80,000. The bank note related to
the SEI debt was assumed by a third party in 1995 thereby eliminating those
related costs in 1996. Management does not believe that the Company will
incur any material additional expenses related to the rescission subsequent
to June 30, 1996.
As a result of the availability of net operating loss carryforwards, the
provision for income taxes in 1996 and the credit for income taxes in 1995
were substantially below the amounts expected (a provision of $43,000 in 1996
and a benefit of $73,000 in 1995) based on statutory rates. At June 30,
1996, the Company still had federal and state net operating loss
carryforwards of approximately $305,000 and $250,000 available to offset
future taxable income.
Net income per common share was $0.04 in 1996 compared to a net loss of
$0.08 in 1995. The weighted average number of shares was the same in each
year.
FISCAL YEAR 1995 VS. FISCAL YEAR 1994
The Company's revenues from government contracts were $4,620,000 and
$4,542,000, respectively for 1995 and 1994. Total revenues for 1995 were
$4,751,000 compared to $4,692,000 for 1994. Sales on the Company's various
contracts remained relatively steady over these two years.
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During 1995, the Company's Income From Operations was $209,000, compared
to $353,000 in 1994. During 1995, the Company had a net loss of $221,000,
compared to a net profit of $17,000 in 1994. Earnings were impacted by
$389,000 in SEI related expenses, and $80,000 in interest related to SEI debt
in 1995. The SEI related expenses of $389,000 were reduced by $80,000 of SEI
related income for a total of $309,000. Income From Operations and Net
Income were positively impacted in 1994 by the receipt of $148,000 that had
previously been written off. The Accounts Receivable Reserve was increased
from $131,000 in 1994 to $201,000 in 1995.
LIQUIDITY AND WORKING CAPITAL
The Company had working capital of $287,000 at June 30, 1996 compared to
$52,000 at June 30, 1995. Contract receivables decreased by approximately
$43,000 during 1996 despite the increase in sales. The Company was able to
reduce its line of credit borrowings by $210,000 in 1996 while its total
accounts payable and accrued expenses remained at the same approximate amount
as at the end of 1995. The Company's net worth increased by $266,000 in 1996
to $381,000. These improvements were primarily attributable to the net
income of $128,000 generated in 1996 and the issuance of the 9% Series B
Preference shares with a fair value of $140,000 as compensation to employees.
Purchases of furniture and equipment increased to $45,000 in 1996 from
$22,000 in 1995.
The Company's primary source of liquidity had been its $500,000
revolving line of credit facility under a loan agreement with First National
Bank (FNB) that expired on September 3, 1996. The loan was secured by all
the Company's assets including contract receivables. FNB advanced funds to
the Company of up to 80% of the Company's billed contract receivables which
were less than 90 days old. FNB charged an interest rate of 3.750% over
prime.
On August 29, 1996, the Company signed a new loan agreement with Scripps
Bank. The loan is a $500,000 revolving credit facility which matures on
August 30, 1997. The loan is secured by all the Company's assets including
contract receivables. Scripps advances funds to the Company of up to 75% of
the Company's billed contract receivables which are less than 90 days old.
Scripps charges an interest rate of 1.5% over prime.
The Company also finances a portion of its operations through leases.
At June 30, 1996, the Company had non-cancelable operating leases for its
offices which expire at various dates through March 1998. The Company also
leases certain computer and office equipment under capital leases expiring at
various dates through June 1999.
Annual future minimum lease payments under capital leases with initial
terms of one year or more as of June 30, 1996 totaled $51,000, $29,000, and
$1,000 for the years ending June 30, 1997, 1998 and 1999, respectively.
Annual future minimum lease payments under operating leases with initial
terms of one year or more as of June 30, 1996 totaled $198,000 and $67,000
for the years ending June 30, 1997 and 1998, respectively.
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Management believes that the Company will have sufficient cash flow from
operations and funds available under the revolving credit agreement with
Scripps Bank to finance its operating and capital requirements through at
least the fiscal year ending June 30, 1997.
ITEM 7. FINANCIAL STATEMENTS
(a) The following documents are filed as part of this report.
FINANCIAL STATEMENTS PAGE NO.
-------------------- --------
Report of J.H. Cohn LLP, Independent Public Accountants 13
Report of Ernst & Young LLP, Independent Auditors 14
Balance Sheets at June 30, 1996 and 1995 15
Statements of Operations for the years ended
June 30, 1996, 1995 and 1994 16
Statements of Stockholders' Equity for the years ended
June 30, 1996, 1995 and 1994 17
Statements of Cash Flows for the years ended
June 30, 1996, 1995 and 1994 18
Notes to Financial Statements 19
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Stockholders
SYS
We have audited the accompanying balance sheet of SYS as of June 30, 1996,
and the related statements of operations, stockholders' equity and cash flows
for the year 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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 audit provides 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 SYS as of June 30, 1996, and
its results of operations and cash flows for the year then ended, in
conformity with generally accepted accounting principles.
/s/ J.H. COHN LLP
-----------------
J.H. COHN LLP
San Diego, California
September 5, 1996
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REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
SYS
We have audited the accompanying balance sheet of SYS as of June 30, 1995 and
the related statements of operations, shareholders' equity and cash flows for
each of the two years in the period 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 audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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 SYS at June 30, 1995, and
the results of its operations and its cash flows for each of the two years in
the period then ended in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
Ernst & Young LLP
San Diego, California
March 11, 1996,
except for Note 10, as to which the date is
March 25, 1996.
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SYS
BALANCE SHEETS
JUNE 30, 1996 AND 1995
ASSETS 1996 1995
------ ---------- ----------
Current assets:
Cash $ 25,000 $ 3,000
Contract receivables, net of allowance for
doubtful accounts of $201,000 987,000 944,000
Other receivables 70,000 46,000
Other current assets 71,000 52,000
---------- ----------
Total current assets 1,153,000 1,045,000
Furniture and equipment, less accumulated
depreciation and amortization of $394,000
and $554,000 142,000 99,000
Other assets 15,000 36,000
---------- ----------
Totals $1,310,000 $1,180,000
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Note payable to bank under line of credit $ 98,000 $ 308,000
Accounts payable 301,000 457,000
Accrued payroll and related taxes 225,000 178,000
Other accrued liabilities 196,000 23,000
Current portion of capital lease obligations 45,000 26,000
Income taxes payable 1,000 1,000
---------- ----------
Total current liabilities 866,000 993,000
Other notes payable 35,000 35,000
Capital lease obligations, net of current portion 28,000 37,000
---------- ----------
Total liabilities 929,000 1,065,000
---------- ----------
Commitments and contingencies
Stockholders' equity:
4% convertible preferred stock, $.50 par
value; 250,000 shares authorized; 110,000
shares issued and outstanding 55,000 55,000
9% convertible Series B preference stock,
$1.00 par value; 2,000,000 shares
authorized; 139,561 shares issued and
outstanding in 1996 140,000
Common stock, no par value; 6,000,000
shares authorized; 2,827,186 and 2,822,086
shares issued and outstanding 373,000 373,000
Accumulated deficit (187,000) (313,000)
---------- ----------
Total stockholders' equity 381,000 115,000
---------- ----------
Totals $1,310,000 $1,180,000
========== ==========
See Notes to Financial Statements.
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SYS
STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
1996 1995 1994
---------- ---------- ----------
Contract revenues $5,942,000 $4,751,000 $4,692,000
---------- ---------- ----------
Costs and expenses:
Contract costs 4,933,000 3,969,000 3,904,000
General and administrative
expenses 680,000 573,000 435,000
---------- ---------- ----------
Totals 5,613,000 4,542,000 4,339,000
---------- ---------- ----------
Income from operations 329,000 209,000 353,000
---------- ---------- ----------
Other expenses:
SEI related expenses 156,000 309,000 51,000
Interest on SEI related debt 80,000 130,000
Other interest 44,000 40,000 46,000
---------- ---------- ----------
Totals 200,000 429,000 227,000
---------- ---------- ----------
Income (loss) before income taxes 129,000 (220,000) 126,000
Provision for income taxes 1,000 1,000 9,000
---------- ---------- ----------
Net income (loss) $ 128,000 $ (221,000) $ 117,000
========== ========== ==========
Net income (loss) applicable to
common stock $ 126,000 $ (223,000) $ 116,000
========== ========== ==========
Net income (loss) per common share $.04 $(.08) $.04
==== ===== ====
Weighted average number of common
shares outstanding 2,822,086 2,822,086 2,755,000
========== ========== ==========
See Notes to Financial Statements.
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SYS
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
CONVERTIBLE
CONVERTIBLE SERIES B
PREFERRED STOCK PREFERENCE STOCK COMMON STOCK
----------------- ------------------ -------------------- ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT DEFICIT TOTAL
------- ------- ------ -------- --------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1993 110,000 $55,000 2,722,086 $371,000 $(206,000) $220,000
Issuance of common stock 100,000 2,000 2,000
Cash dividends on 4%
convertible preferred
stock at $.01 per share (1,000) (1,000)
Net income 117,000 117,000
------- ------- --------- -------- ---------- --------
Balance, June 30, 1994 110,000 55,000 2,822,086 373,000 (90,000) 338,000
Cash dividends on 4%
convertible preferred
stock at $.02 per share (2,000) (2,000)
Net loss (221,000) (221,000)
------- ------- --------- -------- ---------- --------
Balance, June 30, 1995 110,000 55,000 2,822,086 373,000 (313,000) 115,000
Cash dividends on 4%
convertible preferred
stock at $.02 per share (2,000) (2,000)
Issuance of 9% convertible
Series B preference
stock and common stock
as compensation 139,561 $140,000 5,100 140,000
Net income 128,000 128,000
------- ------- ------- -------- --------- -------- ---------- --------
Balance, June 30, 1996 110,000 $55,000 139,561 $140,000 2,827,186 $373,000 $(187,000) $381,000
======= ======= ======= ======== ========= ======== ========= ========
</TABLE>
See Notes to Financial Statements.
-17-
<PAGE>
SYS
STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Operating activities:
Net income (loss) $ 128,000 $(221,000) $ 117,000
Adjustments to reconcile net
income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 49,000 50,000 55,000
Provision for doubtful accounts 70,000 34,000
Issuance of capital stock as compensation 140,000
Changes in operating assets and liabilities:
Contract receivables (43,000) (155,000) 260,000
Other receivables (24,000) (30,000) (2,000)
Other current assets (19,000) (38,000) 5,000
Accounts payable (156,000) 257,000 (341,000)
Accrued payroll and related taxes
and income taxes payable 47,000 6,000 (2,000)
Other accrued liabilities 173,000 3,000 (3,000)
--------- --------- ---------
Net cash provided by (used in)
operating activities 295,000 (58,000) 123,000
--------- --------- ---------
Investing activities:
Acquisition of furniture and equipment (45,000) (22,000) (28,000)
(Increase) decrease in other assets 21,000 31,000 (54,000)
--------- --------- ---------
Net cash provided by (used in)
investing activities (24,000) 9,000 (82,000)
--------- --------- ---------
Financing activities:
Proceeds from line of credit borrowings 5,361,000 4,512,000 4,568,000
Payments of line of credit borrowings (5,571,000) (4,483,000) (4,592,000)
Proceeds from other notes payable 35,000
Payment of capital lease obligations (37,000) (16,000) (19,000)
Payment of preferred stock dividends (2,000) (2,000) (1,000)
Proceeds from issuance of common stock 2,000
--------- --------- ---------
Net cash provided by (used in)
financing activities (249,000) 46,000 (42,000)
--------- --------- ---------
Net increase (decrease) in cash 22,000 (3,000) (1,000)
Cash, beginning of year 3,000 6,000 7,000
--------- --------- ---------
Cash, end of year $ 25,000 $ 3,000 $ 6,000
========== ========= ==========
Supplemental disclosure of cash flow data:
Interest paid $ 44,000 $ 40,000 $ 46,000
========== ========= ==========
Income taxes paid $ 1,000 $ 1,000 $ 9,000
========== ========= ==========
Supplemental disclosure of noncash
investing and financing activities:
Capital lease obligations incurred
for furniture and equipment $ 47,000 $ 43,000 $ 28,000
========== ========= ==========
SEI debt assumed by and accounts
receivable assigned to a third party $1,105,000
==========
</TABLE>
See Notes to Financial Statements.
-18-
<PAGE>
SYS
NOTES TO FINANCIAL STATEMENTS
Note 1 - Organization and summary of significant accounting policies:
Organization:
SYS (the "Company") was incorporated in 1966 in the State of
California. The Company provides management and technical services in
systems planning, management and analysis, systems engineering, naval
architecture, marine engineering, ordinance engineering, logistics
analysis and engineering, operations analysis, design development,
reliability engineering and analysis, hazardous materials reduction
studies, computer systems analysis, office automation, information
management systems and related support services. The Company also
provides hardware integration and fabrication.
Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
Revenue recognition:
Substantially all revenues are derived from contracts with the United
States Government. Revenues on fixed-price contracts are recorded on
the percentage of completion method in the ratio that costs incurred
bear to total estimated costs at completion. Revenues on cost-
reimbursement contracts are recorded as costs are incurred and include
estimated earned fees in the proportion that costs or hours incurred
to date bear to total estimated costs or hours, respectively, as
specified by each contract. Provisions for estimated losses on
contracts are recorded as such losses become known.
Furniture and equipment:
Furniture and equipment are carried at cost. Depreciation is provided
using the straight-line method over the estimated useful lives of the
related assets, which range from 3 to 10 years. Leasehold improvements
are amortized over the shorter of the useful lives of the assets or
the lease term. Furniture and equipment include assets under capital
leases with a cost of $261,000 and $289,000 and accumulated
amortization of $186,000 and $234,000 at June 30, 1996 and 1995,
respectively.
Asset impairment:
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of," ("SFAS No. 121"), effective for fiscal years beginning
after December 15, 1995. SFAS No. 121 requires impairment losses to be
recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the
-19-
<PAGE>
SYS
NOTES TO FINANCIAL STATEMENTS
Note 1 - Organization and summary of significant accounting policies
(concluded):
Asset impairment (concluded):
assets' carrying amount. SFAS No. 121 also addresses the accounting
for long-lived assets that are expected to be disposed of. Management
believes, based on current circumstances, that the adoption of SFAS
No. 121 will not have a material impact on the Company's financial
statements.
Income (loss) per common share:
Income (loss) per common share is computed by dividing the net income
or loss for the year, as adjusted for preferred dividend requirements,
by the weighted average number of common shares and any dilutive
common equivalent shares outstanding. The effects of the assumed
conversion of the 4% convertible preferred stock, which is a common
stock equivalent, and the 9% convertible preference stock have not
been included in the computation of income (loss) per share in any
year presented because such effects were either immaterial or
antidilutive.
Income taxes:
The Company accounts for income taxes pursuant to the asset and
liability method which requires deferred income tax assets and
liabilities to be computed annually for differences between the
financial statement and tax bases of assets and liabilities that will
result in taxable or deductible amounts in the future based on enacted
laws and rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount
expected to be realized. The income tax provision or credit is the tax
payable or refundable for the period plus or minus the change during
the period in deferred tax assets and liabilities.
Note 2 - Contract receivables:
Contract receivables consist of the following at June 30, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
-------- -------
<S> <C> <C>
Amounts billed, less allowance for doubtful accounts of $54,000 $446,000 $490,000
Recoverable costs and accrued profit on progress completed - not billed 348,000 269,000
Retentions, due upon completion of contracts 138,000 94,000
Unrecovered costs subject to future negotiation - not billed, less
allowance for doubtful accounts of $147,000 55,000 91,000
------- --------
Totals $987,000 $944,000
======== ========
</TABLE>
-20-
<PAGE>
SYS
NOTES TO FINANCIAL STATEMENTS
Note 2 - Contract receivables (concluded):
At June 30, 1996, recoverable costs and accrued profit on progress
completed - not billed consist of amounts billed in July 1996. The balances
comprising receivables pursuant to retainage provisions will be due upon
completion of the contracts and acceptance by the customer; based on the
Company's experience with similar contracts in recent years, the balances
at June 30, 1996 are expected to be collected in fiscal 1997 and 1998.
Unrecovered costs subject to future negotiation - not billed consist
primarily of revenues recognized on specific delivery orders within certain
contracts whereby the costs incurred have exceeded the current funding
limitation for the specific delivery order; however, the Company has not
exceeded the cost limitations for the entire contract as a whole. The costs
incurred in excess of specific funding limitations arose primarily as a
result of actual indirect expense rates exceeding the bid rates. However,
after an audit by the Defense Contract Audit Agency has been completed, the
Company intends to request that the cost limitation on certain delivery
orders be increased to cover the actual indirect expenses incurred and the
cost limitations on completed delivery orders with funds still available
within the same contract be decreased to the amount of costs actually
incurred. Even though the government contracting officer is not legally
obligated to abide by the Company's request, management believes that the
amounts will be collected.
Note 3 - Effects of termination of acquisition agreement:
During fiscal 1992, the Company entered into an agreement to purchase,
among other items, certain contracts and related assets and liabilities of
System Exploration, Inc. ("SEI"). The purchase of assets was contingent
upon novation by the United States Government of a number of SEI's in
process government contracts, proposals and lines of business. During the
pendency of the novation process, the Company agreed to consolidate its
bank line of credit with the bank debt of SEI. The consolidated loan was
secured by the assets of both the Company and SEI. Due to incorrect
representations on the part of SEI to the bank and the Company, the
purchase agreement was rescinded by the Company in June 1992. During July
1992, the terms of the bank borrowings were amended to convert the
outstanding debt into two loans that were originally due on December 21,
1992. One loan was provided to the Company through a $500,000 revolving
line of credit that was renewed pursuant to subsequent agreements with the
bank through September 3, 1996 (see Note 4). The second loan was for
$1,777,000, which was related to the SEI assets (the "SEI asset loan"). The
terms of the SEI asset loan were further amended to provide for its
repayment from the proceeds collected from SEI's accounts receivable and
contract claims,
-21-
<PAGE>
SYS
NOTES TO FINANCIAL STATEMENTS
Note 3 - Effects of termination of acquisition agreement (concluded):
net of collection costs incurred by the Company. All SEI
related assets held by the Company were pledged as collateral to secure the
SEI asset loan.
During the period from July 1992 to January 1995, the Company administered
the collection of the SEI receivables for the benefit of the bank and
reduced the total SEI asset loan to $1,105,000 at January 1995. During
January 1995, the SEI asset loan and the security interest in the SEI
accounts receivable and contract claims were, with agreement by the bank,
assumed by an unrelated third party, without recourse to the Company and
the Company agreed to continue to collect the receivables on a best efforts
basis for a fee.
The rescission of this purchase agreement caused the Company to incur
substantial continuing legal related expenses and interest expense on debt
not related to the Company's on-going business operations. Rescission
related expenses of $156,000 attributable to the results of litigation
in 1996 and rescission related expenses of $389,000 and $181,000 in 1995
and 1994, respectively, attributable to the cost of litigation and interest
on the SEI loan are included in other expenses in the accompanying
statements of operations. Management does not believe that the Company will
incur any material additional expenses related to the rescission subsequent
to June 30, 1996.
Note 4 - Note payable to bank under line of credit:
At June 30, 1996, the Company had outstanding borrowings of $98,000 under a
$500,000 revolving line of credit provided by a bank which was due to
expire on July 3, 1996 and was extended to September 3, 1996. Interest on
outstanding borrowings was payable at 3.75% above a specified prime rate
(an effective rate of 12% at June 30, 1996). Borrowings under the line of
credit were limited to 80% of qualifying contract receivables and
collateralized by substantially all of the assets of the Company.
On August 29, 1996, the Company obtained a new $500,000 revolving line of
credit from another bank which will expire on August 30, 1997. Interest on
outstanding borrowings will be payable at 1.5% above a specified prime
rate. Borrowings under the new line of credit will also be collateralized
by substantially all of the assets of the Company. Among other things, the
terms of the new line of credit agreement require the Company to maintain a
ratio of total liabilities to tangible net worth of less than 9.5 and a
ratio of current assets to current liabilities in excess of 1.0.
-22-
<PAGE>
SYS
NOTES TO FINANCIAL STATEMENTS
Note 5 - Leases:
The Company has noncancelable operating leases for its offices which expire
at various dates through March 1998. Certain leases provide for increases
in the minimum lease payments based on fluctuations in various price
indices. Rent expense under all operating leases totaled $184,000, $278,000
and $213,000 in 1996, 1995 and 1994, respectively.
The Company also leases certain computer and office equipment under capital
leases which expire at various dates through June 1999.
Annual future minimum lease payments under noncancelable operating and
capital leases with initial terms of one year or more as of June 30, 1996
are as follows:
Operating Capital
Leases Leases
-------- -------
1997 $198,000 $51,000
1998 67,000 29,000
1999 1,000
-------- -------
Totals $265,000 81,000
========
Less amounts representing interest 8,000
-------
Present value of net minimum lease payments 73,000
Less current portion 45,000
-------
Long-term portion of capital lease
obligations $28,000
=======
Note 6 - Stockholders' equity:
At June 30, 1996, the Company had been authorized to issue up to 250,000
shares of nonvoting convertible preferred stock, with a par value of $0.50
per share, of which 110,000 shares had been issued. Cumulative dividends on
such shares are payable at the annual rate of 4%. Each share is convertible
into one share of common stock upon the payment of $6.50 per share and
redeemable at the option of the Company at its par value plus accrued
dividends. At June 30, 1996, cumulative dividends in arrears on the
preferred stock totaled $3,000 ($0.03 per share). In the event of the
Company's liquidation, the holders of the preferred stock are entitled to
$0.50 per share plus all accumulated and unpaid dividends.
The payments of cash dividends on the preferred stock, which totaled $2,000
in both 1996 and 1995 and $1,000 in 1994, were made outside the provisions
of California law. However, the individual members of the Board of
Directors have personally agreed to pay to the Company, on a pro rata
basis, any amounts
-23-
<PAGE>
SYS
NOTES TO FINANCIAL STATEMENTS
Note 6 - Stockholders' equity (concluded):
the Company is legally obligated to recover due to the payment of the
dividends.
At June 30, 1996, the Company issued 139,561 shares of Non-Voting
Convertible Callable Series B 9% Preference with a par value of $1.00
per share, along with 5,100 shares of Common Stock in 1996 as compensation
to employees; such shares had an estimated fair value of approximately
$140,000. Cumulative dividends on such shares are payable semi-annually
at the rate of 9% per annum; however, the right of a holder to receive
dividends on the 9% preference stock is subordinate to the right of a
holder to receive dividends on the 4% Preferred Stock. Each Preference
Share is convertible into two shares of Common Stock up to a maximum of
139,561 Common Shares and redeemable at the option of the Company at its
par value plus accrued dividends. At June 30, 1996, there were no
cumulative dividends in arrears on the Preference Stock. In the event of
the Company's liquidation, the holders of the Preferred Stock are entitled
to $1.00 per share plus all accumulated and unpaid dividends.
Note 7 - Income taxes:
At June 30, 1996, the Company had Federal and state income tax net
operating loss carryforwards of approximately $305,000 and $250,000,
respectively. The difference between the Federal and state net operating
loss carryforwards is primarily attributable to the 50% annual limit
imposed by California on the amount of loss incurred that may be carried
forward. The Federal and state tax loss carryforwards will begin to expire
in 2008 and 1999, respectively, unless previously utilized. Pursuant to the
provisions of the Internal Revenue Code, the utilization of Federal net
operating loss carryforwards in future years may be subject to substantial
annual limitations if a change of more than 50% in the ownership of the
Company occurs.
Significant components of the Company's deferred tax assets (there were no
significant deferred tax liabilities) and a related valuation allowance as
of June 30, 1996 and 1995 are shown below:
1996 1995
-------- --------
Deferred tax assets:
Net operating loss carryforwards $121,000 $237,000
Other 164,000 91,000
-------- --------
Total deferred tax assets 285,000 328,000
Valuation allowance for deferred tax assets (285,000) (328,000)
-------- --------
Net deferred tax assets $ - $ -
======== ========
-24-
<PAGE>
SYS
NOTES TO FINANCIAL STATEMENTS
Note 7 - Income taxes (concluded):
The Company has offset the deferred tax assets by an equivalent valuation
allowance due to the uncertainties related to the extent and timing of its
future taxable income.
The expected Federal income tax provision (benefit), computed based on the
Company's pre-tax income (loss) in 1996, 1995 and 1994 and the statutory
Federal income tax rate, is reconciled to the actual tax provision
reflected in the accompanying financial statements as follows:
1996 1995 1994
-------- -------- -------
Expected tax provision (benefit)
at statutory rates $43,000 $(73,000) $43,000
Increase (decrease) resulting
primarily from change in valu-
ation allowance for benefits
from net operating loss carry-
forwards (42,000) 74,000 34,000
------- -------- -------
Totals $ 1,000 $ 1,000 $ 9,000
======= ======== =======
Note 8 - Retirement plan:
The Company sponsors a deferred savings and profit sharing plan under
Section 401(k) of the Internal Revenue Code. Substantially all of its
employees may participate in and make voluntary contributions to this
defined contribution plan after they meet certain eligibility requirements.
The Company has agreed to match 50% of each employee's contributions,
provided the matching amount does not exceed 3% of the employee's annual
compensation. The Board of Directors can authorize additional discretionary
contributions by the Company. Contributions to the plan by the Company
totaled approximately $36,000, $22,000 and $9,000 in 1996, 1995 and 1994,
respectively.
Note 9 - Recovery of note receivable:
During 1992, the Company wrote-off a note receivable totalling $95,000
which it considered uncollectible. During 1994, the amount written off,
plus interest of $53,000, was collected and recorded as income.
Note 10- Contingencies:
The Company is a party to various legal proceedings. In the opinion of
management, these actions are routine in nature and will not have any
material adverse effect on the Company's financial statements in subsequent
years.
* * *
-25-
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The directors and executive officers of the Company are as follows:
(1) Dr. Lawrence L. Kavanau, age 69, is the Founder and served as
President of the Company from the Company's formation in 1966 until June 1975.
He has been a Director of the Company continuously since 1966. He was elected
Chairman of the Board, Chief Executive Officer and Chief Financial Officer by
the Board of Directors on November 19, 1993. From June 1975 to November 1993,
he was a business and management consultant and Principal Associate of Kavanau &
Associates. He served as Corporate Secretary for the Company from June 25, 1992
to November 19, 1993. From January 1989 to December 1992, he was President of
Golf Lake Development, Inc. He was Chairman and Chief Executive Officer of Team
Austin, Inc., a computer software and contract programming company located in
San Diego, until December 1988. From February 1978 to February 1980, Dr.
Kavanau also was Executive Vice President and Chief Financial Officer of
Spatial, Inc., a manufacturer of pre-amplifiers. From August 1978 to January
1985, Dr. Kavanau was President of SKC Research, Inc., a company engaged in
contracted research. Dr. Kavanau was a member of the Board of Directors of SKC
Research, Inc. from August 1978 to February 1986. He was a member of the group
which, in 1956, formed Aeronutronics Division of Ford Motor Company. He
subsequently served in the Department of Defense responsible for DOD's interests
in space research and development activities and was the Departments principal
liaison with NASA. Prior to his founding of the Company, he was Executive Vice
President - Technical of the North American Aviation (now Rockwell
International) Space and Information Systems Division, and Assistant to the
President, North American Aviation.
(2) Mr. Robert E. Carroll, age 74, was elected to the Board of Directors
as of October 19, 1993. Mr. Carroll is a Consultant on Corporate and Program
Management, Professional Seminar Leader on Government Contracting and Chairman
and CEO of Sedona Cultural Park, Inc. He was President, Chief Executive
Officer, Chief Financial Officer and a Director of the Company from March 1984
to March 1989. Prior to joining the Company, he served as President of the
Systems Management and Engineering Corporation (SMEC), a Burroughs company. In
1978, he formed that organization as the Energy and Environment Division of the
System Development Corporation (SDC). From 1962 to 1978, he had been Vice
President and President of other SDC operations. Mr. Carroll has over 40 years
of industrial and government management experience, including a number of
successive Vice President assignments at North American Rockwell, Space
Division; and procurement, pricing and other management executive positions with
Sperry Utah Company (Sperry-Rand) and the Hughes Aircraft Company. Prior to
that, he served as the Civilian Executive Officer and Principal Contracting
Officer of the Pittsburgh Ordnance District of the United States Army. He
received his Bachelors degree from Duquesne University and his Doctor of
Jurisprudence degree from the University of Pittsburgh and was a practicing
attorney in the Commonwealth of Pennsylvania.
-26-
<PAGE>
(3) Mr. W. Gerald Newmin, age 59, was elected to the Board of Directors
as of October 19, 1993. Mr. Newmin is the principal of Newmin Associates
specializing in mergers and acquisitions and the operational management of
turnaround companies. Mr. Newmin is currently Chairman and Chief Executive
Officer of Exten Industries, Inc., a publicly held bio-medical company and
serves on the Board of Directors of Occu-Med, Inc., a managed health care
company and Greene International West, Inc., an industrial manufacturing
company. He was President of HealthAmerica Corp. which grew to over $500
million annually and the company was the first in its industry to be listed on
the New York Stock Exchange. Mr. Newmin was President of the International
Silver Company, a diversified multi-national manufacturing company which he
restructured. He was Vice President and Regional Director for American
Medicorp, Inc. In this capacity Mr. Newmin was responsible for the management
of 23 acute care hospitals located throughout the Western United States. Mr.
Newmin was instrumental in Whittaker Corporation's entry into both the United
States and International health care markets. At Whittaker, Mr. Newmin has held
various other senior executive positions, including those of Chief Executive
Officer of Whittaker's Production Steel Company, Whittaker Textiles Corporation,
Trojan Yacht Corporation and Anson Automotive Corporation. Mr. Newmin holds a
Bachelors degree in Accounting from Michigan State University.
(4) Mr. Zoltan A. "Walt" Harasty, age 67, was elected to the Board of
Directors as of April 14, 1994. Mr. Harasty is a Corporate Counsel with
in-depth experience of over 36 years in securities transactions, SEC filings,
stock exchanges listings, corporate financing and in almost every area of
security law. His experience was gained both as a Corporate General Counsel
and as a partner in Tremaine and Shenk and Managing Partner of Mcdonald,
Halsted & Laybourne. He has been special counsel to Collins Foods
International (Sizzler Restaurants and the largest franchise of KFC). He was
General Counsel of Malibu Grand Prix Corporation with 42 subsidiaries
operating nationwide amusements centers featuring miniature racing cars,
video games and miniature golf. Malibu also acquired Pioneer Chicken as a
turnaround situation. With his knowledge of NASD, SEC, security dealers,
financing, public offerings, registrations, real estate, 10K(s), 10Q(s) and
private placements, Mr. Harasty brings significant expertise to the Company's
Board of Directors and helps in its growth.
(5) Charles H. Werner, age 69, was elected to the Board of Directors as of
March 6, 1989. From March 1989 to December 1991 Mr. Werner served as President,
Chief Executive Officer, and Chief Financial Officer. In January 1992 Mr.
Werner became President of the Company and in August 1992 became the Company's
Chief Operating Officer until November 19, 1993, when his title became
President, Administration. Mr. Werner resigned from his position of President -
Administration in July 1995. He remained on the Board of Directors. Prior to
joining the Company, he served as Executive Vice President of Arrowsmith
Industries, Inc., a wholly owned subsidiary of KDT Industries, Inc., of Austin,
Texas. In 1986 and 1987, Mr. Werner served as a consultant to the Strategic
Defense Initiative Organization in Washington, D.C. Previously, he had been a
management consultant; Vice President of Marketing and Advanced Programs for
Convair, San Diego, CA; Executive Vice President, Defense Systems, Emerson
Electric Company; and Vice President and Chief Operating Officer of SSP
Industries, Inc., Burbank, CA. He received his engineering degrees from
Washington University in St. Louis and Ohio State University in Columbus, OH.
(6) Charles E. Vandeveer, age 55, is Vice President, Director of
Operations of the Oxnard office and Senior Program Manager of the Company's
contractual endeavors with the United States Navy. Mr. Vandeveer has held
various management, supervisory, administrative and project positions since he
joined the Company is 1987. He is a retired Commander, United States Navy,
Supply Corps.
-27-
<PAGE>
Mr. Vandeveer served as a Director of Naval Supply Centers and Supply
Annexes, managing material operations and ship repairable programs. He was
also a Ship Superintendent/Type Desk Officer, responsible for coordinating
Naval Shipyard repairs and overhauls. Mr. Vandeveer has brought his valuable
Navy experience to the Company and has put it to work expanding the Company's
presence in the Oxnard area. He has organized and directed large scale
management studies and supervised subcontractors with various firms. Mr.
Vandeveer received his Bachelors degree in Agricultural Industries from
Southern Illinois University in 1963.
(7) Michael W. Fink, age 39, is Vice President - Administration at the
Corporate offices. Mr. Fink joined the Company in July of 1995. He is
responsible for the administrative functions of the Company, including finance,
accounting, human resources, contracts and other management areas. He was
President of SANDAIRE before being hired by the Company. SANDAIRE is an
engineering firm specializing in the aerospace industry. Mr. Fink received a
Bachelor of Science degree in Business Administration (Accounting) from San
Diego State University (SDSU). He has also attended Graduate School at SDSU
where he studied mechanical engineering.
CERTAIN SIGNIFICANT EMPLOYEES
(8) Larry W. Moe, age 44, is the Program Manager for the Management,
Planning and Analysis Contract in the Oxnard office. Mr. Moe joined SYS in 1991
continuing his support of Navy Management at Port Hueneme. He began consulting
with the Navy in 1989. Prior to that, he spent seven years in the
insurance/investment field in both sales and management. He started his career
spending 10 years with a Fortune 500 Printing Company where he gained management
and marketing experience. He continues building a team of management consulting
experts and personally consulting with executive level management. Mr. Moe
received his Bachelor of Science degree in Education from St. Cloud State
University, Minnesota in 1973.
(9) James H. Baker, age 62, is the Manager of the Arlington Office and the
Program Manager for the AEGIS Foreign Military Sales (FMS) support effort. Mr.
Baker joined SYS in March 1991. Prior to joining SYS, Mr. Baker was the
Director of Operations for Operations Systems, Inc. (OSI). Prior to OSI, Mr.
Baker was the Senior Project Manager for EG&G, Inc.. He is a retired Commander,
United States Navy, Supply Corps having completed over 24 years of active
service with the U.S. Navy. Mr. Baker has brought his expertise in DOD
contracting, DOD Financial management and FMS to the Company and has put it to
work expanding the Company's presence in the Washington DC Metropolitan Area.
Mr. Baker received his Master of Management Science in Contracting from the U.S.
Navy Postgraduate School, Monterey in 1968 and Bachelors degree in Statistics
from Oklahoma University, Norman in 1958.
OFFICERS OR DIRECTORS RESIGNING OR TERM ENDING IN 1996:
Charles H. Werner, age 69, was elected to the Board of Directors as of
March 6, 1989. From March 1989 to December 1991 Mr. Werner served as President,
Chief Executive Officer, and Chief Financial Officer. In January 1992 Mr.
Werner became President of the Company and in August 1992 became the Company's
Chief Operating Officer until November 19, 1993, when his title became President
- - Administration. Mr. Werner resigned from his position of President -
Administration in July 1995. He remained on the Board of Directors.
-28-
<PAGE>
There is no family relationship among any of the directors and executive
officers of the Company. The term of office for a director runs until the next
annual meeting of shareholders and until a successor has been elected and
qualified. The term of office for each executive officer runs until removal by
the Board of Directors or election and qualification of his successor.
None of the organizations described in paragraphs (1) through (9) above is
affiliated with the Company.
All Director's Forms 3, 4 and 5 are current at this time.
ITEM 10. EXECUTIVE COMPENSATION
The following is a table showing the remuneration paid by the Company
during its fiscal years ended June 30, 1996, 1995 and 1994 for services in all
capacities to each officer, the sum of whose cash and cash-equivalent forms of
remuneration during such year exceeded $100,000, and the remuneration paid
during such year to all executive officers as a group (number):
ANNUAL COMPENSATION
---------------------
NAME AND PRINCIPAL, FISCAL SALARY OTHER
POSITION YEAR
- --------------------------------------------------------------------------
Lawrence L. Kavanau
Chairman and Chief Executive Officer 1996 $84,817 $6,000
- --------------------------------------------------------------------------
All Executive Officers as a Group (4) 1996 $229,397 $17,300
- --------------------------------------------------------------------------
Lawrence L. Kavanau
Chairman and Chief Executive Officer 1995 $80,017 $6,000
- --------------------------------------------------------------------------
All Executive Officers as a Group (3) 1995 $155,021 $18,000
- --------------------------------------------------------------------------
Lawrence L. Kavanau
Chairman and Chief Executive Officer 1994 $68,308 $6,000
- --------------------------------------------------------------------------
All Executive Officers as a Group (4) 1994 $156,353 $19,000
- --------------------------------------------------------------------------
Each Director of the Company (excluding full time executive officers)
receives a fee in the amount of $500.00 plus approved expenses per month.
During the last year, the Board of Directors of the Company has been meeting
on an average of once per month. Directors serve as chairmen or members of
standing committees of the Board of Directors and may meet in these
capacities at times other than those designated for meetings of the Board.
-29-
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS (as of June 30, 1996)
(Source of Information: Records of the Company's Transfer Agent):
<TABLE>
<CAPTION>
Amount and Nature
Name and Address of of Beneficial Percent of
Title Of Class Beneficial Owner Owner 1/ Class 2/
- -------------- --------------------- ----------------- ----------
<S> <C> <C> <C>
Common Stock Lawrence L. Kavanau 324,703 (Direct) 17.2%
Without Par 3320-140 Caminito East Bluff 162,333 (As Trustee
Value La Jolla, CA 92037 or Executor, With
Voting Rights)
Robert E. Carroll 310,000 11.0%
110 Painted Cliffs Drive
Sedona, AZ 86336
W. Gerald Newmin 246,679 8.7%
3223-18 Caminito East Bluff
La Jolla, CA 92037
Charles H. Werner 199,385 7.1%
P.O. Box 1966
Rancho Santa Fe, CA 92067
Citicorp Venture 188,800 6.8%
Capital, Ltd.
399 Park Avenue
New York, NY 10022
Camp Dresser & 150,000 5.3%
McKee, Inc.
One Cambridge Center
Cambridge, MA 01242
</TABLE>
1/ To the best knowledge of the Company, each of the beneficial owners listed
herein has direct ownership of and sole voting power and sole investment
power with respect to the shares of the Company's Common Stock, except as
set forth herein.
2/ A total of 2,827,186 shares of Common Stock of the Company have been
considered to be outstanding pursuant to SEC Rule 13d-3(d)(1) for purposes
of Item 12 of this Form 10-KSB.
-30-
<PAGE>
(b) SECURITY OWNERSHIP OF MANAGEMENT (as of June 30, 1996) (Source of
Information: Records of the Company's Transfer Agent):
<TABLE>
<CAPTION>
Amount and Nature
Name and Address of of Beneficial Percent of
Title Of Class Beneficial Owner Owner 1/ Class 2/
- -------------- --------------------- ----------------- ----------
<S> <C> <C> <C>
Common Stock Lawrence L. Kavanau 324,703 (Direct) 17.2%
Without Par (Chairman, Chief Executive 162,333 (As Trustee
Value Officer, Chief Financial or Executor, with
Officer, Director) Voting Rights)
Charles H. Werner 199,385 7.1%
(Director)
Robert E. Carroll 310,000 11.0%
(Director)
Zoltan A. Harasty 1,907 ---
(Director)
W. Gerald Newmin 246,679 8.7%
(Director)
Charles E. Vandeveer 50,100 1.8%
(Vice President - Oxnard Operations)
All Directors and 1,295,107 45.8%
Officers as a Group
Series B
Preference Stock Lawrence L. Kavanau 4,243 3.0%
$1.00 Par Value (Chairman, Chief Executive
Officer Chief Financial
Officer, Director)
Michael W. Fink 2,697 1.9%
(Vice President - Administration)
Charles E. Vandeveer 9,758 7.0%
(Vice President - Oxnard Operations)
All Directors and 16,698 11.9%
Officers as a Group
</TABLE>
1/ To the best knowledge of the Company, each of the beneficial owners listed
herein has direct ownership of and sole voting power and sole investment
power with respect to the shares of the Company's Common Stock, except as
set forth herein.
-31-
<PAGE>
2/ A total of 2,827,186 shares of Common Stock and 139,561 shares of Series B
Preference Stock of the Company have been considered to be outstanding
pursuant to SEC Rule 13d-3(d)(1) for purposes of Item 12 of this
Form 10-KSB.
No director or officer of the Company is the beneficial owner of any shares
of the Company's Preferred Stock, $.50 par value.
(c) CHANGES IN CONTROL. Not applicable.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Not applicable.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) EXHIBITS
1.1 Copy of Certificate of Determination of Preferences of Preferred
Shares of Systems Associates, Inc., filed by the Company with the
California Secretary of State on July 28, 1968, filed as Exhibit
3.2 to the Company's Form 10-K for the fiscal year ended June 30,
1981, and incorporated by this reference.
1.2 Copy of Certificate of Determination of Preferences of Preference
Shares of Systems Associates, Inc., filed by the Company with the
California Secretary of State on December 27, 1968, filed as
Exhibit 3.3 to the Company's Form 10-K for the fiscal year ended
June 30, 1981, and incorporated by this reference.
1.3 Copy of Certificate of Ownership filed with the California
Secretary of State on November 28, 1979, filed as Exhibit 2.1 to
the Company's Form 10-K for the fiscal year ended June 30, 1979,
and incorporated by this reference.
1.4 Copy of Bylaws of Systems Associates, Inc., filed as Exhibit 3.5
to the Company's Form 10-K for the fiscal year ended June 30,
1981, and incorporated by this reference.
1.5 Copy of Certificate of Ownership filed with the California
Secretary of State on March 18, 1985, incident to change of name
of the Company, filed as Exhibit 3.6 to this Company's Form 10-K
for the fiscal year ended June 30, 1985, and incorporated by this
reference.
(b) Exhibits to this Form 10-K are listed in subsection (1) above.
(c) 1. A Form 8-K was filed on August 6, 1996, reporting that SYS had
dismissed their independent auditors, Ernst & Young LLP. It also
states that SYS has retained the firm of J.H. Cohn LLP as the
Company's independent auditors for the fiscal year ended June 30,
1996.
-32-
<PAGE>
SIGNATURE
Pursuant to the requirement of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
DATED: September 19, 1996 /s/ LAWRENCE L. KAVANAU
------------------------------------
Lawrence L. Kavanau
Chairman and
Chief Executive Officer
Chief Financial Officer
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.
DATED: September 24, 1996 /s/ ROBERT E. CARROLL
------------------------------------
Robert E. Carroll
Director
DATED: September 20, 1996 /s/ ZOLTAN A. (WALT) HARASTY
------------------------------------
Zoltan A. (Walt) Harasty
Director
DATED: September 19, 1996 /s/ LAWRENCE L. KAVANAU
------------------------------------
Lawrence L. Kavanau
Director
DATED: September 25, 1996 /s/ W. GERALD NEWMIN
------------------------------------
W. Gerald Newmin
Director
Corporate Secretary
DATED: September 25, 1996 /s/ CHARLES H. WERNER
------------------------------------
Charles H. Werner
Director
-33-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 25,000
<SECURITIES> 0
<RECEIVABLES> 1,188,000
<ALLOWANCES> 201,000
<INVENTORY> 0
<CURRENT-ASSETS> 1,153,000
<PP&E> 536,000
<DEPRECIATION> 394,000
<TOTAL-ASSETS> 1,310,000
<CURRENT-LIABILITIES> 866,000
<BONDS> 0
0
195,000
<COMMON> 373,000
<OTHER-SE> (187,000)
<TOTAL-LIABILITY-AND-EQUITY> 1,310,000
<SALES> 0
<TOTAL-REVENUES> 5,942,000
<CGS> 0
<TOTAL-COSTS> 5,613,000
<OTHER-EXPENSES> 156,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 44,000
<INCOME-PRETAX> 129,000
<INCOME-TAX> 1,000
<INCOME-CONTINUING> 128,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 128,000
<EPS-PRIMARY> 0.04
<EPS-DILUTED> 0.04
</TABLE>
