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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
X Quarterly Report Under Section 13 or 15(d) of The Securities Exchange
- ------ Act of 1934
For the quarterly period ended March 31, 1997
- ------ Transaction Report Under Section 13 or 15(d) of the Securities
Exchange Act
For the transition period from to
--------------------------- -------------
Commission File Number 0-4169
SYS
- --------------------------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
California 95-2467354
- ---------------------------------- -------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
6363 Greenwich Drive, Suite 200, San Diego, California 92122
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices)
(619) 587-0484
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(Issuer's Telephone Number, Including Area Code)
- --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities 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 the past 90 days.
Yes X No
----- -------
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 3,021,822 shares of common
stock, without par value, as of March 31, 1997.
Transitional Small Business Disclosure Format (check one):
Yes No X
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TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION Number
Item 1. Financial Statements
Condensed Balance Sheets (unaudited)
March 31, 1997 and December 31, 1996.......................3
Condensed Statements of Operations (unaudited)
Three Months and Nine Months Ended March 31, 1997
and Three Months and Nine Months Ended March 31, 1996......4
Condensed Statements of Cash Flows (unaudited)
Nine Months Ended March 31, 1997
and Nine Months Ended March 31, 1996.......................5
Notes to Condensed Financial Statements (unaudited).............6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Description of Business....................................6
Results of Operations......................................7
Liquidity and Capital Resources............................8
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...............................................9
Item 2. Changes in Securities...........................................9
Item 3. Defaults Upon Senior Securities.................................9
Item 4. Submission of Matters to a Vote of Security Holders.............9
Item 5. Other Information..............................................10
Item 6. Exhibits and Reports on Form 8-K...............................10
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SYS
CONDENSED BALANCE SHEETS
3/31/97 12/31/96
----------- -----------
(Unaudited) (Unaudited)
ASSETS
- ----------------------------------------
Current assets:
Cash $ 13,000 $ 10,000
Contract receivables, net 1,032,000 1,563,000
Other current assets 129,000 126,000
---------- ----------
Total current assets $1,174,000 $1,699,000
Equipment, furniture and fixtures,
at cost, less accumulated
depreciation and amortization 164,000 130,000
Other assets 69,000 70,000
---------- ----------
$1,407,000 $1,899,000
---------- ----------
---------- ----------
LIABILITIES & STOCKHOLDERS' EQUITY
- ----------------------------------------
Current liabilities:
Note payable to bank $ 69,000 $ 356,000
Accounts payable 263,000 489,000
Accrued payroll and related taxes 139,000 175,000
Other accrued liabilities 183,000 172,000
Current portion of other long-term debt 87,000 79,000
Income taxes payable (13,000) 0
---------- ----------
Total current liabilities $ 728,000 $1,271,000
Other long-term debt 61,000 103,000
Stockholders' equity:
Preferred stock 55,000 55,000
Series B preference stock 96,000 140,000
Common stock 421,000 378,000
Retained earnings 46,000 (48,000)
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Total stockholders' equity $ 618,000 $ 525,000
---------- ----------
$1,407,000 $1,899,000
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SYS
CONDENSED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
March 31 March 31
-------------------------- -------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Contract revenues $2,065,000 $1,484,000 $5,381,000 $4,300,000
---------- ---------- ---------- ----------
Costs and expenses:
Contract costs $1,813,000 $1,233,000 $4,585,000 $3,611,000
General and administrative 150,000 164,000 527,000 438,000
---------- ---------- ---------- ----------
$1,963,000 $1,397,000 $5,112,000 $4,049,000
---------- ---------- ---------- ----------
Income from operations $ 102,000 $ 87,000 $ 269,000 $ 251,000
Interest expense 5,000 11,000 32,000 39,000
---------- ---------- ---------- ----------
Income (loss) before income taxes $ 97,000 $ 76,000 $ 237,000 $ 212,000
Provision for income taxes 0 1,000 0 1,000
---------- ---------- ---------- ----------
Net income (loss) $ 97,000 $ 75,000 $ 237,000 $ 211,000
Dividends on preferred shares 3,000 0 4,000 2,000
---------- ---------- ---------- ----------
Net income (loss) applicable to
common and common
equivalent shares $ 94,000 $ 75,000 $ 233,000 $ 209,000
Retained earnings at beginning
of period (48,000) (179,000) (187,000) (313,000)
---------- ---------- ---------- ----------
Retained earnings at end of period $ 46,000 $ (104,000) $ 46,000 $ (104,000)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Earning (losses) per common
and common equivalent shares $ 0.03 $ 0.03 $ 0.08 $ 0.07
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average number of
common and common
equivalent shares 2,956,000 2,822,000 2,901,000 2,822,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
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<TABLE>
<CAPTION>
SYS
CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
Nine months ended
March 31
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Operating activities:
Net income (loss) $ 237,000 $ 211,000
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization 34,000 22,000
Provision for doubtful accounts 0 0
Changes in operating assets and liabilities:
Contract receivables (45,000) 83,000
Other current assets and other assets (42,000) (30,000)
Accounts payable (52,000) (152,000)
Accrued payroll and related taxes (86,000) 21,000
Other accrued liabilities (13,000) (2,000)
----------- -----------
Net cash provided by (used for) operating activities $ 33,000 $ 153,000
Investing activities:
Acquisition of furniture and equipment 47,000 (20,000)
(Increase) decrease in other assets 0 0
----------- -----------
Net cash provided by (used in) investing activities $ 47,000 $ (20,000)
Financing activities:
Proceeds from note payable to bank 5,291,000 4,231,000
Payments on note payable to bank (5,446,000) (4,302,000)
Other notes payable 77,000 0
Payments of capital lease obligations (10,000) (9,000)
Payments of preferred stock dividends (4,000) (2,000)
Proceeds from issuance of common stock 0 0
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Net cash provided by (used in) financing activities $ (92,000) $ (82,000)
Increase (decrease) in cash (12,000) 51,000
Cash at beginning of period 25,000 3,000
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Cash at end of period $ 13,000 $ 54,000
----------- -----------
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</TABLE>
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NOTES TO CONDENSED FINANCIAL STATEMENTS
(1) In the opinion of the Registrant, the unaudited financial information in
this report reflects all adjustments, consisting only of normal recurring
accruals, which are considered necessary to a fair presentation of the results
of the periods shown. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to SEC
regulations. It is suggested that these financial statements be read in
conjunction with the audited financial statements included in the Registrant's
Report on Form 10-KSB for the fiscal year ended June 30, 1996.
(2) Income per common share is computed by dividing the net income 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 per
share in any year or quarter presented because such effects were either
immaterial or antidilutive.
(3) The results of operations for the quarter and nine-month period ended
March 31, 1997, are not necessarily indicative of the results to be expected
for the full year.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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, management consulting and
related support services. The Company also provides hardware integration and
fabrication.
The Company currently has three principle contracts with the U. S. Navy.
These prime contracts are the Underway Replenishment (UNREP); Management,
Planning and Analysis (MPA); and Naval Architecture and Marine Engineering
(NAME).
The UNREP program provides in-service engineering support to the U. S.
Navy Fleet. The Company has provided UNREP support since 1982. This four
year contract has a total value of over $8,000,000 and was issued by the U.
S. Navy's Port Hueneme Division, Naval Surface Warfare Center and is
currently in the last option year. The Company anticipates the request for
proposal (RFP) on this contract's recompete will be released by the Navy the
latter part of this fiscal year. The Company will aggressively seek to win
this contract again.
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The MPA program supports the U. S. Navy's Port Hueneme Division, Naval
Surface Warfare Center. This multiple year $16,000,000 contract accounted
for over fifty percent of the Company's revenues in this past fiscal year and
the contract ceiling was increased $1,000,000 in the base and first option
years to accommodate the workload demand. This Program had its second of
four option years exercised on February 1, 1997. 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 NAME Program is the Company's newest prime contract. This cost plus
fixed fee contract was awarded to SYS on April 22, 1996 issued by the U. S.
Navy's Port Hueneme Division, Naval Surface Warfare Center. The NAME
contract consists of a base year and four (4) option years with a total
potential value over the five years of $12,500,000. This Program had its
first of four option years exercised on November 25, 1996. SYS, together
with its Associate Subcontractor, John J. McMullen Associates, Inc. provides
a wide range of Combat Systems Engineering and weapons capabilities developed
in support of Ship Self Defense Systems (SSDS).
The Company also has two other growing business areas. The Company
provides the Naval Air Systems Command engineering and technical services
which focus on the identification and reduction of hazardous material when
providing maintenance to weapons and associated handling and shipping
equipment. The Company's Washington, D.C. operation continues to provide
important administrative financial services as a subcontractor including case
closures, all of which are in support of Foreign Military Sales Programs.
This operation was on the winning Vitro Corporation team which recently won
the recompete on this contract. This new subcontract has a base year and
four option years and will allow the Company to maintain a stable base of
operations in Washington, D.C.
The Company has an increasing backlog of proposals currently in
evaluation and is cautiously optimistic that they will contribute to the
future business growth of the Company.
RESULTS OF OPERATIONS
The Company revenues for the third quarter are approximately 39% more
than those in the same quarter in FY 1996. For the first nine months of FY
1997, revenues increased by about 25% over the prior year's same period. The
increased revenue is due to additional revenues on the UNREP and MPA
contracts and the added revenue from the new NAME contract. Net Income for
the quarter is $97,000 and for the year to date is $237,000. For the same
periods in FY 1996, the net income was $75,000 and $211,000, respectively.
The reason that the year-to-date net income results in FY 1996 are just
slightly less than FY 1997 is because General and Administrative Expenses
have been offset by about $63,000 in expenses that were written off, thus
increasing net income in FY 1996. The booked contract backlog is
approximately $5,516,000 at the end of the third quarter.
The Company's bank note decreased to $69,000 at the end of the third
quarter of FY 1997 as compared to $356,000 at the end of the second quarter.
The decreased note balance is a direct
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result of Defense Finance and Accounting Service (DFAS) catching up on the slow
payments experienced at the end of the second quarter. At the end of the third
quarter in FY 1996, the note balance was $237,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company had contract receivables (net) of $1,032,000 at the end of the
third quarter of FY 1997. For the same quarter in FY 1996, the contract
receivables (net) were $861,000. The reason FY 1997 contract receivables are
higher than the prior year is because of the increased revenue.
For FY 1997, the Company had accounts payable of $263,000 at the end of
the third quarter and $489,000 at the end of the second quarter. The
decreased accounts payable is a direct result of Defense Finance and
Accounting Service (DFAS) catching up on the slow payments experienced at the
end of the second quarter. The Company has agreements with their
subcontractors to pay them as DFAS pays the Company. Therefore, as DFAS
caught up on their payments to the Company, it allowed the Company to pay its
subcontractors and decrease accounts payable. For the same quarter in FY
1996 the accounts payable were $305,000.
Income taxes payable represents prepaid California income taxes for the
current fiscal year. Normally, these taxes would have been accrued during the
year, however the accrual was not recorded due to uncertainty over a prior year
tax issue. This issue will be settled and the accrual recorded prior to year
end.
On March 21, 1997, the Company paid $3,000 in Preferred Stock dividends
that were in arrears from prior years. All Preferred Stock dividends are now
current.
The Company maintains a $500,000 revolving credit facility with Scripps
Bank which matures on August 30, 1997. The loan is secured by all the
Company's assets including contract receivables. Scripps advances funds
requested by 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 anticipates no significant commitments for Capital
Expenditures other than required computer related hardware and software. The
Company believes that its cash flow from operations and available bank
borrowings will be sufficient to satisfy the current and anticipated capital
requirements for operations.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In November 1995, a creditor of Systems Exploration, Inc. (SEI) filed a
breach of contract action in California Superior Court against SEI, First
National Bank of San Diego and the Company. The Company maintains it has no
liability to this plaintiff with respect to this matter and is vigorously
defending this action.
ITEM 2. CHANGES IN SECURITIES
After February 28, 1997, holders of the Company's Non-Voting Series B 9%
Cumulative Convertible Callable Preference Stock (par value $1.00) could
convert each share into two shares of common stock if all conditions for
conversion were met. On March 11, 1997, the Company converted 43,068 shares
of Series B preference stock into 86,136 shares of common stock for those
Series B preference stockholders that requested conversion.
On May 7, 1997, the Company issued stock purchase options which were
authorized on January 17, 1996 by the Board of Directors for an aggregate of
75,000 shares of the Company's Common Stock (no par value) to three outside
directors (25,000 shares each) for services rendered since their date of
election to the Board of Directors. Shares vest daily over a five year period.
Those shares issued, but not vested, are subject to the Company's right to
repurchase at cost in the event that the director leaves the board. These
Common Stock purchase options were granted under a plan approved by the
Company's shareholders on March 21, 1997. These sales were made for cash and
are pursuant to Section 4(2) of the Securities Act of 1933. No broker-dealer
was used or any brokerage commission paid in connection with these sales.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
On March 21, 1997, the Company held its 1996 Annual Meeting of
Shareholders. There were 2,935,686 shares eligible as of the record date and
2,757,031 shares were represented either in person or by proxy at the meeting.
The following matters were voted on at the meeting:
(a.) Proposal to approve the appointment of J.H. Cohn LLP as the
independent certified public accountants for the corporation for its 1997 fiscal
year. This proposal was approved with a voice vote.
(b.) Proposal to approve the SYS 1997 Incentive Stock Option and
Restricted Stock Plan. This proposal was approved with a voice vote.
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(c.) Management nominated seven (7) directors for election at this
shareholder meeting. At the meeting there was a request for cumulative voting
under California law. There was an additional director nominated by a
shareholder present at the meeting. The total cumulative votes cast for all
director were 19,158,615 (2,736,945 voting shares x 7 director positions). The
results were:
Management's Shareholder Cumulative Directors
Nominees Nominee Votes Elected
-------- ------- ----- -------
Paul I. Anderson 2,826,612 Anderson
Robert E. Carroll 2,826,612 Carroll
Zoltan A. (Walt) Harasty 0
Lawrence L. Kavanau 2,826,612 Kavanau
Robert D. Mowry 2,409,120 Mowry
W. Gerald Newmin 2,791,613 Newmin
Charles H. Werner 2,598,120 Werner
Charles E. Vandeveer 2,879,926 Vandeveer
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19,158,615
ITEM 5. OTHER INFORMATION None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a.) EXHIBITS
* Exhibit No. Description
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27 Financial data schedule
(b.) FORM 8-K None
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SIGNATURES
In accordance with the requirements Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SYS
-----------------------------
(Registrant)
Date: May 13, 1997 /s/ Lawrence L. Kavanau
--------------------- -----------------------------
Lawrence L. Kavanau
Chief Executive Officer
Chief Financial Officer
(On behalf of the Registrant and as Principal Financial & Accounting Officer)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 13,000
<SECURITIES> 0
<RECEIVABLES> 1,233,000
<ALLOWANCES> 201,000
<INVENTORY> 0
<CURRENT-ASSETS> 1,174,000
<PP&E> 439,000
<DEPRECIATION> 275,000
<TOTAL-ASSETS> 1,407,000
<CURRENT-LIABILITIES> 728,000
<BONDS> 0
0
151,000
<COMMON> 421,000
<OTHER-SE> 46,000
<TOTAL-LIABILITY-AND-EQUITY> 1,407,000
<SALES> 0
<TOTAL-REVENUES> 5,381,000
<CGS> 0
<TOTAL-COSTS> 5,112,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,000
<INCOME-PRETAX> 237,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 237,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 237,000
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
